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% 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% during intra-day trading. That's 1% more than a stock market correction.
That worried Wall Street bankers. The stock market had already fallen almost 20% 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% 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% 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% 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.
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% 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%. 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. As interest rates rose, financing for stockbroker margin loans fell.
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.
The Bottom Line
Black Thursday marked the day the Roaring 20s stock market bubble finally burst. This event ended a decade of rapid expansion of the U.S. stock market branded by wild speculation. At this point, stocks of companies were valued way over their actual worth in the face of declining production, low employment, and large debts. That day ushered in the worst economic disaster in U.S. history: the Great Depression.
Black Thursday and the subsequent stock market crash of 1929 led to the complete revamp of regulations on the U.S. securities industry. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to protect investors. These checks and balances are still in force today.