Stock Market Crash of 1929

The Dow Jones Industrial Average rose sixfold, from 63 in August 1921 to 381 in September 1929. New brokerage houses, investment trusts, and margin accounts let ordinary people buy stocks with borrowed money, typically putting down 10 percent of the price and borrowing the rest. Even so, only about 2.5 percent of Americans had brokerage accounts. In mid-October 1929 the economist Irving Fisher declared that stock prices had reached “what looks like a permanently high plateau.”

Federal Reserve officials believed speculation was diverting credit from productive uses. The Board urged reserve banks to deny credit to member banks that lent to speculators, and in August 1929 it allowed the New York Fed to raise its discount rate to 6 percent. Lending to brokers continued anyway. Meanwhile the economy had already begun contracting in the summer of 1929.

Prices peaked on September 3, 1929. As they fell in October, leading bankers met at the offices of J. P. Morgan, pooled funds, and publicly bought blocks of shares at high prices to restore confidence. The market steadied briefly, but on Black Monday and Black Tuesday frightened investors dumped their holdings. Shares of U.S. Steel eventually fell from $262 to $22, and General Motors from $73 to $8.

The crash wiped out savings and confidence. Fearful consumers stopped buying big-ticket items on credit, such as automobiles; firms like Ford cut production and laid off workers, and the downturn deepened. According to the Federal Reserve’s historians, the crash’s direct impact faded within months, and by the fall of 1930 recovery seemed possible — until waves of bank failures turned a sharp recession into the longest and deepest depression in the nation’s history.

Economists drew lessons from 1929: that central banks should be cautious about trying to deflate stock market bubbles, and that the damage from a crash can be contained if the financial system is protected. The crash led to new securities regulation in the New Deal, and it remains the reference point for every later market panic.