Black Tuesday

What is Black Tuesday?

Black Tuesday, also known as the Wall Street Crash of 1929, was the worst stock market crash in US history. Black Tuesday was an abrupt end to the rapid economic expansion of the roaring 20’s, and is widely considered to be one of the causes behind the beginning of The Great Depression.

On October 29, 1929, over 16.4 million shares were traded on the New York Stock Exchange (NYSE). This was four times the average volume at that time. Investors lost a total of $14 billion ($212 billion in 2020 dollars), and the Dow Jones Industrial Average (DJIA) fell by 12% in a single day.

The events on this day were preceded by a long chain of contributing factors that began almost a decade before.

Problems with the Stock Market Leading to Black Tuesday

The values and prices of stocks (shares invested in U.S. companies) should reflect the overall health of business and production. But by the late 1920s, the value of the stock market did not correspond to economic activity – stock prices were artificially high. This was called the ‘Great Bull Market’ of the 1920s.

The Great Bull Market did not reflect the fact that the U.S. economy was slowing down. By 1927, major sectors of the economy, such as steel production, residential construction, automobile sales, and consumer spending, had all decreased, and within another two years, industrial production and employment were down as well. Nonetheless, investors and stock brokers ignored these signs, and the stock market prices continued to rise through 1929.

This leads us to the first major problem with the 1920s stock market, which culminated in Black Tuesday: speculation. Stock speculation is defined as risky financial investments focused on the prices not on the underlying and fundamental business and economic situation. So, investors saw that prices on the stock market were rising but ignored the broad economic slowdowns of the late 1920s. Speculators were essentially betting that prices would continue to rise. President Herbert Hoover characterized the situation as an ‘orgy of mad speculation.’

The second problem with the late-1920s stock market was the proliferation of call loans. People that wanted to buy stocks but who didn’t have enough money to pay for the entire purchase, could acquire them with a loan. The lender of the loan could then ‘call’ for repayment of the loan if the stock price dropped precipitously. Call loans were popular with stockbrokers because they could charge high interest rates on the loan. And call loans made it very easy for anyone to invest in the stock market. Here is a fact that illustrates why call loans were a problem: the Federal Reserve System had $200 million in securities in 1928, but that same year there were $8 billion in call loans outstanding.

Just weeks before Black Tuesday, a leading bank president confidently stated there was ‘nothing fundamentally wrong with the stock market or with the underlying business and credit structure.’

What Happened

Panicked sellers were shouting “Sell! Sell!” so loudly that no one heard the bell ring. In a half hour, they sold 3 million shares and lost $2 million.

As the day wore on, the Dow fell to 212.33. The ticker tape that announced stock prices was hours behind. That meant investors didn’t know how much they were losing. They frantically called their brokers. When they couldn’t get through, they sent telegrams. Western Union said its volume of telegrams tripled that day.

Back then, traders physically wrote orders on pieces of paper. There were so many trades that the orders backed up. Traders just stuffed them into trash cans. Fistfights broke out, and one trader collapsed. Once revived, he was put back to work. Members of the NYSE board were afraid to close the market because it might make the panic even worse.

The prominent banks of the day tried to stop the crash. Morgan Bank, Chase National Bank, and National City Bank of New York bought shares of stocks.

They wanted to restore confidence in the stock market. Instead, the intervention signaled the exact opposite. Investors saw it as a sign that the banks had panicked.

Between October 24 and October 29, it is estimated that the U.S. stocks lost more than $26 billion in value. According to historians, investors and traders were jumping out of windows frustrated for having lost all their money, and the situation was even worse for those who have borrowed money to buy stocks in the rising U.S. market a few days before the crash.

Evidently, Black Tuesday is a major turning point in the U.S economy as many investors who tried to hedge their risk and participate in the stock market were financially destroyed as they have sold all their assets to be able to pay off their debts, yet many of them could not repay them at all. As a result, many U.S. banks collapsed, businesses shut down, and the U.S disposable income declined sharply.

Between 1929 and 1932, the industrial production in the United States declined by 46%, the wholesale prices declined by 32%, the foreign trade by 70%, while unemployment surged 607%. Similarly, the Great Depression era affected other economies as well. In the U.K. and Germany, unemployment increased by 129% and 232%, respectively, whereas industrial production declined by 23% and 41%, respectively.

What Does Black Tuesday Mean?

Black Tuesday signaled the end of a period of post-World War I economic expansion and the beginning of the Great Depression, which lasted until the beginning of World War II.

The United States emerged from World War I as a major economic power, but the country’s focus was on developing its own industry rather than international cooperation. High tariffs were imposed on many imported products to protect nascent industries such as cars and steel. Agricultural prices fell as European production returned after being shut down during the war, and tariffs were imposed to try to protect American farmers as well. However, their incomes and the value of their farms fell, and migration to the industrialized cities accelerated.

The boom years of the so-called Roaring ’20s were fueled by optimism that the world had fought the war to end all wars, and good times had arrived permanently. Between 1921 and the crash in 1929, stock prices went up nearly 10 times as ordinary individuals bought stock, often for the first time. This was fueled by lending by brokers that at times reached two-thirds of the stock price, with the purchased stock serving as collateral. Income inequality also rose. It is estimated that the top 1% of America’s population held 19.6% of its wealth.

How It Helped Cause the Great Depression

Black Tuesday’s losses destroyed confidence in the economy. That loss of confidence led to the Great Depression. In those days, people believed the stock market was the economy. What was good for Wall Street was thought to be good for Main Street.

The stock market crash created bank runs. People withdrew all their savings at once. Many banks didn’t have enough cash on hand and were forced to close. There was no Federal Deposit Insurance Corporation to insure savings.9

Investors abandoned the stock market and started putting their money in commodities. As a result, gold prices soared. At that time, the United States was on the gold standard and promised to honor each dollar with its value in gold. As people began turning in dollars for gold, the U.S. government began to worry it would run out of gold.

The Federal Reserve tried to come to the rescue by increasing the value of the dollar. It did this by raising interest rates, which reduced liquidity to businesses. But, without funds to grow, companies started laying off employees. That created a vicious downward economic spiral that became the Great Depression.

The Lasting Effects of the 1929 Stock Market Crash

Before the crash, many people felt that the stock market was a reflection of the booming economy and invested their life savings in hopes that it would continue to go up. Many who had not invested were also affected since some bankers invested consumers’ money without their permission or knowledge, ultimately losing it entirely. Between the loss in value of their investments – and the repayment of loans and borrowed stocks – many people’s life savings were completely wiped out by the crash.

After losing confidence in the banks, many consumers chose to withdraw their savings all at once, causing a wave of bank runs across the country. Due to low reserve requirements, banks did not have enough available cash to meet consumer demand. They were forced to liquidate assets at below-market prices, leading to insolvency and bankruptcies. Roughly 650 banks failed in 1929, followed by an additional 1,300 in the next year.

Consumers weren’t the only ones affected by the crash: Many businesses, public utility companies, banks, and investment trusts had also invested. This led to a dramatic decline in production and money supply – along with mass layoffs – as businesses lacked the funds to pay their employees. Aiming to increase domestic spending and aid businesses, President Hoover introduced the Smoot-Hawley Tariff in 1930 which increased tariffs on imported goods. However, foreign countries responded by boycotting and placing tariffs on American products, directly harming American producers desperate for sales.

The effects of the crash were felt by the entire country for years. By 1932, stocks were only worth about 20% of their value in the summer of 1929. In fact, on July 8, 1932, the market hit a 20th-century low of 41.22 – 89% lower than its peak of 381.17 on Sept. 3, 1929. By 1933, almost 50% of American banks had failed and nearly 15 million people (30% of the workforce) were unemployed.

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