Wall Street Crash of 1929

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The Wall Street Crash of 1929, also known as the Great Crash, and the Stock Market Crash of 1929, was the worst stock market crash of all time, in which share prices fell by 89 per cent.[1] It contributed to the Great Depression of the 1930s, which affected many countries all around the world.[2]


From June 1914 to January 1920, when demand deposits grew by 96.9 percent, time deposits rose by 126.1 percent. In the great boom of the 1920s, that started after the recession of 1920–21 (a short recession, thanks to the budget cutting and lowering of taxes by Warren Harding[3]), total demand deposits rose from 1921 to 1929 by 36.5 percent. Time deposits in banks expanded in the same period by 75.9 percent. The great boom of the 1920s (also called "Roaring Twenties") was largely fueled by credit expansion going into time deposits. The greatest expansion of time deposits came in Central Reserve Cities (New York and Chicago), where the Fed’s open market operations were all conducted, as opposed to Reserve Cities and Country Banks. As acknowledged by Federal Reserve officials, time or savings deposits were then, for all practical purposes, equivalent to demand deposits and should be paid on demand in case of a run on a bank.

With the passage of the Federal Reserve Act, President Wilson appointed Benjamin Strong to the most powerful post in the Federal Reserve System, Governor of the Federal Reserve Bank of New York. He made quickly this position dominant in the System and decided on Fed policy without consulting or even against the wishes of the Federal Reserve Board in Washington. Strong was the dominant leader of the Fed from 1914 until his death in 1928. He pursued an inflationary policy, to finance the war effort for WWI, connected to the interests of the House of Morgan. Another motivation was the attempt to prop up the Bank of England in the 1920s, when it returned to the gold standard with an overvalued pound. To prevent the loss of gold to the States, its governor Montagu Norman secretly convinced Strong to inflate in order to help England. The expansion ended only after Strong's death and the Great Depression followed soon after. In 1928 Strong admitted that "very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis" - that is, to help Britain maintain a phony and inflationary form of gold standard.[4]

The inflation was also motivated by a desire to help American exporters (particularly farmers), by stimulation of foreign lending. At the same time the U.S. turned to a sharp protectionist policy with the Fordney–McCumber Tariff of 1922. In the foreign lending boom, other countries were hampered in trying to sell their goods to the United States, but were encouraged to borrow dollars. The government did not have any peacetime authority to interfere with loans, but did so illegally. In 1921, President Harding and his cabinet conferred with several American investment bankers, at the instigation of Secretary of Commerce Hoover, to be informed in advance of foreign loans, so that the government "might express itself regarding them". The bankers agreed. Hoover commented that even bad loans helped American exports and provided a cheap form of relief and employment. Later Hoover demanded from bankers, that foreign loans would be inspected by agents of the Department of Commerce. Both requests were mostly ignored. While admitted to be legally unenforceable, it was all in the name of "national interests".[5]

Stock market boom

This particular stock-market correction was bound to be severe because of the unprecedented amount of speculation. In 1929 1,548,707 customers had accounts with America's 29 stock-exchanges. In a population of 120 million, nearly 30 million families had an active association with the market, and a million investors could be called speculators. Moreover, of these nearly two-thirds, or 600,000, were trading on margin, that is on funds they either did not possess or could not easily produce.

The danger of this growth in margin trading was compounded by the mushrooming of investment trusts which marked the last phase of the bull market. Traditionally stocks were valued at about ten times earnings. With high margin trading, earnings on shares, only one or two per cent, were far less than the eight to ten percent interest on loans used to buy them. This meant that any profits were in capital gains alone. Thus, Radio Corporation of America, which had never paid a dividend at all, went from 85 to 410 points in 1928. By 1929 some stocks were selling at 50 times earnings. A market boom based entirely on capital gains is merely a form of pyramid-selling.

By the end of 1928 the new investment trusts were coming onto the market at the rate of one a day and virtually all were archetype inverted pyramids. They had "high leverage"—a new term in 1929—through their own supposedly shrewd investments, and secured phenomenal stock exchange growth on the basis of a very small plinth of real growth. United Founders Corporation, for instance, had been created by a bankrupt with an investment of $500, and by 1929 its nominal resources, which determined its share price, were listed as $686,165,000. Another investment trust had a market value of over a billion dollars but its chief asset was an electric company which in 1921 had been worth only $6 million. These crazy trusts, whose assets were almost entirely dubious paper, gave the boom an additional superstructure of pure speculation, and once the market broke the "high leverage" worked in reverse.[6]

The Crash

The economy ceased to expand in June, and it was inevitable that this change in the real economy would be reflected in the stock market. The bull market effectively came to an end on September 3, 1929, immediately the shrewder operators returned from vacation and looked hard at the underlying figures. Later rises were merely hiccups in a steady downward trend.

On Monday October 9, for the first time, the ticker-tape could not keep pace with the news of falls and never caught up. Margin calls had begun to go out by telegram the Saturday before, and by the beginning of the week speculators began to realize they might lose their savings and even their homes. On Thursday, October 12, shares dropped vertically with no one buying and speculators were sold out as they failed to respond to margin calls. Then came Black Tuesday, October 19, and the first selling of sound stocks to raise desperately needed liquidity.

By the end of the day on October 24, eleven men well-known on Wall Street had committed suicide. The immediate panic subsided on November 13, at which point the index had fallen from 452 to 224. That was indeed a severe correction but it has to be remembered that in December 1928 the index had been 245, only 21 points higher.[6]

After the crash

Main article: Great Depression

By July 8, 1932, New York Times industrials had fallen from 224 at the end of the initial panic to 58. U.S. Steel, the world’s biggest and most efficient steel-maker, which had been 262 points before the market broke in 1929, was now only 22. General Motors, already one of the best-run and most successful manufacturing groups in the world, had fallen from 73 to 8. These calamitous falls were gradually reflected in the real economy. Industrial production, which had been 114 in August 1929, was 54 by March 1933, a fall of more than half, while manufactured durables fell by 77 per cent, nearly four-fifths. Business construction fell from $8.7 billion in 1929 to only $1.4 billion in 1933.

Unemployment rose over the same period from a mere 3.2 per cent to 24.9 per cent in 1933 and 26.7 per cent the following year. At one point 34 million men, women, and children were without any income at all, and this figure excluded farm families who were also desperately hit. City revenues collapsed, schools and universities shut or went bankrupt, and malnutrition leapt to 20 per cent, something that had never happened before in United States history even in the harsh early days of settlement.

This pattern was repeated all over the industrial world. It was the worst slump in history, and the most protracted. Indeed there was no natural recovery. France, for instance, did not get back to its 1929 level of industrial production until the mid-1950s.[6]


  1. Mark Atherton. "The beginner's guide to stock markets", Times Online, May 8, 2009. Referenced 2011-03-23.
  2. Encyclopædia Britannica. "stock market crash of 1929.", Encyclopædia Britannica Online'. Encyclopædia Britannica, 2011. Web. 23 Mar. 2011. Referenced 2011-03-23.
  3. Thomas E. Woods, Jr. "Warren Harding and the Forgotten Depression of 1920", First Principles, Fall 2009 issue of The Intercollegiate Review. See also the video. Referenced 2009-10-11.
  4. Murray N. Rothbard. "The Mystery of Banking" (pdf), Chapter XVI: Central banking in the United States IV: The Federal Reserve System, p.235-246, referenced 2009-10-03.
  5. Murray N. Rothbard. "America’s Great Depression" (pdf), 5. The Development of the Inflation, p. 137-167, referenced 2009-11-17.
  6. 6.0 6.1 6.2 Paul Johnson. "Paul Johnson on Rothbard", Mises Daily, May 15, 2000. Referenced 2011-03-23.