The stock market crash of 1929 ushered in the Great Depression and offers myriad lessons on the economy and on the U.S. money culture that still resonate today - almost 90 years after the greatest stock market collapse in U.S. history.
To truly learn from the stock market crash of 1929, it helps to re-examine what happened, why it happened, and what Americans had to do to recover from the crash, and from the ensuing depression.
What Was the Stock Market Crash of 1929?
Historians call the stock market crash of 1929 "Black Monday" - the day the financial markets collapsed, taking down the U.S. economy in the process. This is not to be confused with the crash of the same name that happened in 1987.
On Oct. 28, 1929, the U.S. stock market lost 13% of its total value, after posting significant gains through what historians call "The Roaring 20s." From 1921 through September, 1929, the Dow Jones Industrial Average rose from 63 to 381, a period of unprecedented growth.
On the preceding Friday, Oct. 24, the stock market actually rose, as Wall Street investment firms and big banks bought stocks to bolster the market. But the upward bump proved to be short-lived
Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. But Monday, sellers flooded the market, and the run on stocks - and the stock market crash - began in earnest. By Tuesday, over 16.4 million shares were traded on the New York Stock Exchange - most of them from panicked sellers.
One common misconception about the stock market crash of 1929 was that it all happened in a single day. That's not the case, as the market collapse occurred on multiple days, particularly on Oct.28 and Oct. 29, when the Dow lost 25% of its value. One month later, the Dow hit its historical low point, at 41.22 and within three years, the unemployment rate rose to 30%.
The Great Depression, itself, would last until 1939, and the Dow wouldn't reach its pre-crash high until 1954.
Warning Signs Before the Crash of 1929
Ironically, the stock market crash of 1929 came at a time of high economic optimism in the U.S.
The stock market was on a strong upward trend and the post-World War I national economy was strong, as companies were in full hiring mode and consumer sentiment was robust. Manufacturing production started to slow down and the jobless rate inched higher.
Yet investors, egged on by Wall Street insiders who thrived on the commissions made on investor stock market trades, continued to pour money into a highly speculative market, borrowing over $120 billion that was steered into the stock market. Soon many stocks were overvalued
There were, however some clues that the nation's economic picture wasn't as rosy as it seemed.
When the market began to dip in September of 1929, panic selling set in as investors sold stocks, in large part to make back the money they had borrowed to get into the market in the first place. Few made any money as the September market swoon picked up steam.
Over the next three years, millions of investors lost all their investment portfolio assets, and many lost their homes and jobs as the Great Depression arrived. How bad was it? An investment of $10,000 in the U.S. stock market would slide downward in value to $1,400 by 1932.
What Did the Government Do After the Crash?
The U.S. government did not exactly take quick action in the immediate aftermath of the stock market crash of 1929.
President Herbert Hoover was an avowed proponent of limited government and was committed to the federal government not interfering with the economy at such a precarious period in time. For the first few months after the crash, the federal government, at Hoover's behest, didn't do much to directly respond to the market crash and its lethal economic aftermath.
By 1930, when Hoover's laissez-faire, "hands-off" policy proved insufficient to the needs of the American people, the White House chose a path out of the depression that relied on getting Americans back to work. That year, Hoover created the President's Emergency Committee for Employment to work with local job center and welfare departments to get people working again.
Hoover then pivoted to economic policies that were heavy on federal government involvement, including taking the following steps.
- Creating the National Credit Corporation to aid U.S. reeling banks to stay open and remain solvent.
- Established the Reconstruction Finance Corporation to steer much-needed funds to major U.S. industries, like banks, railroads and manufacturers.
- Signed into law the Glass-Steagall Act in 1932, which eased the process of getting approved for commercial credit and bolstered the economy by releasing $750 million in U.S. gold reserves to fund business loans.
- Established the Emergency Relief and Construction Act of 1932, to deliver financial aid to the Reconstruction Finance Corporation to spread money to state governments, and to hard-hit cities and towns.
The results of this flurry of government activity were mixed, and U.S. citizens blamed the Great Depression, and the resulting anemic recovery, on Hoover and Republicans. Hoover was soon replaced in the oval office by Franklin D. Roosevelt, and the Republican party wound up losing both houses of Congress.
President Roosevelt had more moderate success in bringing the country out of the Great Depression, but the nation didn't completely recover until the period between 1939 and 1945. In that period, the country was at war on two fronts, and demand for manufacturing, consumer goods, and service personnel finally lifted the massive economic cloud hanging over the U.S.
Critical Lessons Learned From the Stock Market Crash of 1929
There are certainly numerous lessons to learn from the stock market crash of 1929 that can be invaluable in avoiding future market crashes.
In general, game-changing issues like high consumer and corporate debt (both of which were a big factor in the market crash of 2008 and the resulting recession), industries that went unregulated (like many banks in 1929) and rampant speculation by investors amidst soaring stock market prices are still in play today.
Here are some big takeaways from the 1929 stock market crash that remain important today:
- Avoid using leverage. A big problem in 1929 was that investors borrowed too much money to invest in the stock market, believing that the stock market would keep on rising and never decline. Big mistake. When the market did decline, creditors wanted their money back, but financially ailing investors were over-leveraged, and couldn't repay their loans. The lesson learned? Never borrow money for your investment account. If things go south in a hurry, you'll be glad you didn't overextend yourself with excessive borrowing.
- Stock market bubbles are all too real. Bubbles exist and investors need to pay attention. If stocks seem unrealistically high (former Federal Reserve Chairman Alan Greenspan referred to that scenario as "irrational exuberance") then it's time to practice some prudence and don't overpay for already pricey stocks.
- Market insiders may not have your best interests in mind. History shows us that in times of economic peril, it's everyone for themselves on Wall Street, and the average investor isn't usually a big priority. Think of the 2001 Enron scandal when company executives fraudulently inflated the firm's financial figures, which helped boost Enron's stock price. When the scam was revealed, Enron's stock plummeted, even as many executives, acting on insider knowledge that federal regulators were closing in, sold their shares. But the rank and file Enron employee who held company shares weren't so lucky and were left holding the bag when the stock plummeted.
- In economics, everything is linked together. One of the biggest lessons learned from the stock market crash of 1929 and the resulting Great Depression is that our major economic institutions - the stock market, banks, and the great American consumer - are bound together. When conditions deteriorate in any of those institutions, it's only a matter of time before the other institutions start sliding downhill, as well.
Overall, the stock market crash of 1929 represented the worst market downturn in U.S. history, with $30 billion lost in market value (a sum that would be worth $396 billion in 2018). It took decades for the nation to fully recover, and if nothing else, gave Americans some much-needed food for thought on big-ticket issues like money, economics, stock speculation, and investment risk going forward.