Black Thursday 1929, What Happened, and What Caused It
The First Day of the Worst Stock Market Crash in U.S. History
Even before the New York Stock Exchange opened, investors were panicky. The Dow Jones Industrial Average had fallen 4.6 percent the day before. The Washington Post headline screamed, "Huge Selling Wave Creates Near-Panic as Stocks Collapse." The market opened at 305.85. It immediately fell 11 percent during intra-day trading. That's one percent more than a stock market correction.
That worried Wall Street bankers. The stock market had already fallen almost 20 percent since its record close of 381.2 on September 3, 1929. Even worse, trading volume was 12.9 million shares or three times the normal amount. The three leading banks at that time were Morgan Bank, Chase National Bank, and National City Bank of New York. They bought stocks to restore confidence in the markets. The intervention seemed to work. The Dow recovered a bit, closing 2 percent down, at 299.47.
On Friday, the Dow closed higher, at 301.22. But on Black Monday, it fell in light trading, to 260.64. That triggered an all-out panic on Black Tuesday. By the end of the day, the Dow had fallen to 230.07, a 12 percent loss.
After the crash, the Dow continued sliding for three more years. It finally bottomed on July 8, 1932, closing at 41.22. All told, it lost almost 90 percent of its value since its high on September 3, 1929. In fact, it didn't reach that high again for 25 years, until November 23, 1954. Losses from the stock market crash helped create the Great Depression.
During the Roaring 20s, investing in the stock market became a national pastime. From 1922 until right before the crash, the stock market value increased by 218 percent. That was 20 percent a year for seven years.
Those who didn't have the cash to invest could borrow from their stockbroker "on margin." That meant they only had to put 10-20 percent down. The stories of everyone from maids to teachers making millions fueled irrational exuberance.
Some banks even invested their depositors' savings without telling them. Their misuse of funds created the run on the banks that was a hallmark of the Great Depression. Banks didn't have enough to honor depositors' withdrawals. Many people only received 10 cents for every dollar. In response, President Roosevelt created the Federal Deposit Insurance Corporation. It guaranteed their savings as part of the New Deal.
There were some warning signals in the spring of 1929. In March, the Dow dropped. Bankers reassured investors and restored confidence. On August 8, the Federal Reserve Bank of New York increased the discount rate from 5 to 6 percent. On September 26, the Bank of England followed. It needed to slow the loss of its gold reserves to Wall Street investors. Like all other developed countries, England was on the gold standard. That meant it had to honor any payments, if asked, with its value in gold.
On September 29, newspapers reported that Clarence Hatry bought United Steel with fraudulent collateral. His company collapsed and investors lost billions. That hammered the British stock market and made U.S. investors even more jittery.
On October 3, England's Chancellor of the Exchequer called America's stock market "a perfect orgy of speculation." On October 4, the Wall Street Journal and the New York Times agreed in editorials. U.S. Secretary of the Treasury Andrew Mellon said investors "acted as if the price of securities would infinitely advance."
The media reported significant stock market declines on October 3, 4, and 16. That contributed to the market's instability. On October 19 and 20, the Washington Post focused on a sell-off of utility stocks.
On Monday, October 21, the market went down again. On October 22, The New York Times blamed stock speculators for the previous day's losses. They named margin sellers, short-selling, and the disappearance of foreign investors.
On October 23, the market sold off. The Times headline screeched "Prices of Stocks Crash in Heavy Liquidation." The Washington Post said, “Huge Selling Wave Creates Near-Panic as Stocks Collapse.” The alarming media coverage helped set the stage for Black Thursday.