Stock Market Crash of 1929

What Was the Stock Market Crash of 1929?

The stock market crash of 1929 began on Oct. 24. While it is remembered for the panic selling in the first week, the largest falls occurred in the following two years as the Great Depression emerged. In fact, the Dow Jones Industrial Average (DJIA) did not bottom out until July 8, 1932, by which time it had fallen 89% from its Sept. 1929 peak, making it the biggest bear market in Wall Street’s history. The Dow Jones did not return to its 1929 high until Nov. 1954.

Understanding the Stock Market Crash of 1929

The stock market crash of 1929 followed a bull market that had seen the Dow Jones rise 400% in five years. But with industrial companies trading at price-to-earnings ratios (P/E ratios) of 15, valuations did not appear unreasonable after a decade of record productivity growth in manufacturing — that is, until you take into account the public utility holding companies.

By 1929, thousands of electricity companies had been consolidated into holding companies that were themselves owned by other holding companies, which controlled about two-thirds of the American industry. Ten layers separated the top and bottom of some of these complex, highly leveraged pyramids. As the Federal Trade Commission (FTC) reported in 1928, the unfair practices these holding companies were involved in — like bilking subsidiaries through service contracts and fraudulent accounting involving depreciation and inflated property values — were a “menace to the investor."

The Federal Reserve decided to rein in speculation because it was diverting resources from productive uses. The Fed raised the rediscount rate to 6% from 5% in August, a move that some experts say stalled economic growth and reduced stock market liquidity, making the markets more vulnerable to rapid price drops.

Other Factors Leading to the 1929 Stock Market Crash

Another factor experts cite as leading to the 1929 crash is the overproduction in many industries that caused an oversupply of steel, iron, and durable goods. When it became clear that demand was low and there were not enough buyers for their goods, manufacturers dumped their products at a loss and share prices began to plummet. Some experts also cite an ongoing agricultural recession as another factor impacting the financial markets.

However, the straw that broke the camel’s back was probably the news in Oct. 1929 that the public utility holding companies would be regulated. The resulting sell-off cascaded through the system as investors who had bought stocks on margin became forced sellers.

The Aftermath of the 1929 Stock Market Crash

Instead of trying to stabilize the financial system, the Fed, thinking the crash was necessary or even desirable, did nothing to prevent the wave of bank failures that paralyzed the financial system — and so made the slump worse than it might have been. As Treasury Secretary Andrew Mellon told President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It’ll purge the rottenness out of the system."

The crash was exacerbated by the collapse of a parallel boom in foreign bonds. Because the demand for American exports had been propped up by the huge sums lent to overseas borrowers, this vendor-financed demand for American goods disappeared overnight. But the market did not drop steadily. In early 1930, it rebounded briefly by about 50% — in what would be a classic dead cat bounce — before collapsing again.

In the end, a quarter of America’s working population would lose their jobs as the Great Depression ushered in an era of isolationism, protectionism, and nationalism. The infamous Smoot-Hawley Tariff Act in 1930 started a spiral of beggar-thy-neighbor economic policies.

Special Considerations

The lack of government oversight was one of the major causes of the 1929 crash — thanks to laissez-faire economic theories. In response, Congress passed an array of important federal regulations aimed at stabilizing the markets. These include the Glass Steagall Act of 1933, the Securities and Exchange Act of 1934, and the Public Utility Holding Companies Act of 1935.