What Caused the Stock Market Crash of 1929?

The decade known as the "Roaring Twenties" was a period of exuberant and substantial political, economic and social growth and change in the United States and abroad, but the era came to a dramatic and abrupt end. In October 1929, the stock market crashed, paving the way into America's Great Depression of the 1930s.

In the years to follow, some of the many repercussions of the crash would be the failure of thousands of banks and the loss of employment for nearly one-fourth of the workforce (before the days of unemployment checks); it is estimated that millions lost their life savings in the stock market crash of 1929.

The crash began on Oct. 24, 1929, known as "Black Thursday," when the market opened 11% lower than the previous day's close. Institutions and financiers stepped in with bids above the market price to stem the panic, and the losses on that day were modest with stocks bouncing back over the next two days.

However, this bounce turned out to be illusory, as the following Monday, now known as the dreaded Black Monday, the market closed down 13% with the losses exacerbated by margin calls. The next day (Black Tuesday), bids completely vanished, and the market fell another 12%. From there, the market trended lower until hitting bottom in 1932.

Experts conclude that the crash occurred because the market was overbought, overvalued, and excessively bullish, rising even as economic conditions were not supporting the advance.

Before this crash, which ruined both corporate and individual wealth, the stock market peaked on Sept. 3, 1929, with the Dow Jones Industrial Average (DJIA) at 381.17. The ultimate bottom was reached on July 8, 1932, where the Dow stood at 41.22. From peak to trough, this was a loss of 89.19%.

The price of blue chip stocks declined, but there was more pain in small-cap and speculative stocks, many of which declared bankruptcy and were delisted from the market. It was not until Nov. 23, 1954 that the Dow reached its previous peak of 381.17.

In the first half of the 1920s, companies experienced a great deal of success exporting to Europe, which was rebuilding from the war. Unemployment was low, and automobiles were spreading across the country, creating jobs and efficiencies for the economy. Until the peak in 1929, stock prices went up by nearly 10 times. In the 1920s, investing in the stock market became somewhat of a national pastime for those who could afford it and even those who could not—the latter borrowed from stockbrokers to finance their investments.

The economic growth created an environment in which speculating in stocks became almost a hobby, with the general population wanting a piece of the market. Many were buying stocks on margin—the practice of buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or a broker—in ratios as high as 1:3, meaning they were putting down $1 of capital for every $3 of stock they purchased. This also meant that a loss of one-third of the value in the stock would wipe them out.

People were not buying stocks on fundamentals; they were buying in anticipation of rising share prices. Rising share prices simply brought more people into the markets, convinced that it was easy money. In mid-1929, the economy stumbled due to excess production in many industries, creating an oversupply. Essentially, companies were able to acquire money cheaply due to high share prices and invest in their own production with the requisite optimism.

This overproduction eventually led to oversupply in many areas of the market, such as farm crops, steel, and iron. Companies were forced to dump their products at a loss, and share prices began to falter. Due to the number of shares bought on margin by the general public and the lack of cash on the sidelines, entire portfolios were liquidated, and the stock market spiraled downwards.

The stock market crash and the ensuing Great Depression (1929-1939) had a direct impact on nearly every segment of society and altered an entire generation's perspective and relationship to the financial markets.

In a sense, the time frame after the market crash was a total reversal of the attitude of the Roaring Twenties, which had been a time of great optimism, high consumer spending, and economic growth.