Events Leading to the Crash

To understand the crash, it is useful to address the decade that preceded it. The prosperous 1920s ushered in a feeling of euphoria among middle-class and wealthy Americans, and people began to speculate on wilder investments. The government was a willing partner in this endeavor: The Federal Reserve followed a brief postwar recession in 1920–1921 with a policy of setting interest rates artificially low, as well as easing the reserve requirements on the nation’s largest banks. As a result, the money supply in the U.S. increased by nearly 60 percent, which convinced even more Americans of the safety of investing in questionable schemes. They felt that prosperity was boundless and that extreme risks were likely tickets to wealth. Speculation, where investors bought into high-risk schemes that they hoped would pay off quickly, became the norm. Several banks, including deposit institutions that originally avoided investment loans, began to offer easy credit, allowing cash-poor people to invest.

Selling Optimism and Risk

Figure 4. This real estate advertisement from Los Angeles illustrates the hard-sell techniques and easy credit offered to those who wished to buy in. Unfortunately, the opportunities being promoted with these techniques were of little value, and many lost their investments. (credit: “army.arch”/Flickr)

Advertising offers a useful window into the popular perceptions and beliefs of an era. By seeing how businesses were presenting their goods to consumers, it is possible to sense the hopes and aspirations of people at that moment in history. In the 1920s, advertisers were selling opportunity and euphoria, further feeding the notions of many Americans that prosperity would never end.

In the decade before the Great Depression, the optimism of the American public was seemingly boundless. Advertisements from that era show large new cars, timesaving labor devices, and, of course, land. This advertisement for California real estate illustrates how realtors in the West, much as they had in the Florida land boom, used a combination of the hard sell and easy credit. “Buy now!!” the ad shouts. “You are sure to make money on these.” In great numbers, people took the bait.

With easy access to credit and insistent, reassuring advertisements like this one, many felt that they could not afford to miss out on such an opportunity. Unfortunately, overspeculation in California and hurricanes along the Gulf Coast and in Florida conspired to burst this land bubble, and would-be millionaires were left with nothing but the ads that once pulled them in.

The Florida land boom went bust in 1925–1926. A combination of negative press about the speculative nature of the boom, IRS investigations into the questionable financial practices of several land brokers, and a railroad embargo that limited the delivery of construction supplies into the region, significantly hampered investor interest. The subsequent Great Miami Hurricane of 1926 drove most land developers into outright bankruptcy.

However, speculation continued throughout the decade, this time in the stock market. Buyers purchased stock “on margin”—buying for a small down payment with borrowed money, with the intention of quickly selling at a much higher price before the remaining payment came due—which worked well as long as prices continued to rise.

Buying stocks on margin brought hundreds of thousands of new investors into the market. Under the loose rules of the time, they could purchase a stock by simply laying down 10 percent of its cost and borrowing the rest from banks or stockbrokers—buying, for example, $1,000 worth of a stock and handing over just $100 in cash. If your $1,000 in stocks then rose in value to $1,075, you made $75 on your $100 investment when you sold the stock—or so it seemed. That $75 profit existed only on paper, because you still had to pay back the bank or broker who loaned you the $900 at a rate of 14 to 19 percent. Investors at that time did not seem to care all that much, however, because they were making money. To many, buying stocks on margin was easy money and a way to get rich quickly. But if your stock went down in value, the broker would demand more and more of the loan to be paid in cash to cover the loss.

Speculators were aided by retail stock brokerage firms, which catered to average investors anxious to enter the market but lacking direct ties to investment banking houses or larger brokerage firms. When prices began to fluctuate in the summer of 1929, investors sought excuses to continue their speculation. When fluctuations turned to clear, steady losses, everyone started to sell. As September began to unfold, the Dow Jones Industrial Average peaked at a value of 381 points, or roughly ten times the stock market’s value at the start of the 1920s.

Several warning signs portended the impending crash but went unheeded by Americans still giddy over the potential fortunes that speculation might promise. A brief downturn in the market on September 18, 1929, raised questions among more-seasoned investment bankers, leading some to predict an end to high stock values. However, these worries did little to stem the tide of investment. Even the collapse of the London Stock Exchange on September 20 failed to fully curtail the optimism of American investors.

Figure 5. Crowds of people gather outside the New York Stock Exchange following the crash of 1929. Library of Congress.

Market Fluctuations

Black Tuesday

Figure 6. October 29, 1929, or Black Tuesday, witnessed thousands of people racing to Wall Street discount brokerages and markets to sell their stocks. Prices plummeted throughout the day, eventually leading to a complete stock market crash.

On October 29, later known as Black Tuesday, the stock market began its long precipitous fall. No one even heard the opening bell on Wall Street that day, as shouts of “Sell! Sell!” drowned it out. In the first three minutes alone, nearly three million shares of stock, accounting for $2 million of wealth, changed hands. The volume of Western Union telegrams tripled, and telephone lines could not meet the demand, as investors sought any means available to dump their stock immediately. Rumors spread of investors jumping from their office windows. Fistfights broke out on the trading floor, where one broker fainted from physical exhaustion. Stock trades happened at such a furious pace that runners had nowhere to store the trade slips, and so they resorted to stuffing them into trash cans. Although the stock exchange’s board of governors briefly considered closing the exchange early, they subsequently chose to let the market run its course, lest the American public panic even further at the thought of closure. When the final bell rang, errand boys spent hours sweeping up tons of paper, ticker tape, and sales slips.

Stock values evaporated. Shares of U.S. Steel dropped from $262 to $22. General Motors stock fell from $73 a share to $8. Four-fifths of J. D. Rockefeller’s fortune—the greatest in American history—vanished. Stockholders traded over sixteen million shares and lost over $14 billion in wealth in a single day. To put this in context, a trading day of three million shares was considered a busy day on the stock market. People unloaded their stock as quickly as they could, accepting dramatic losses. Banks, facing debt and seeking to protect their own assets, demanded payment for the loans they had provided to individual investors. Those individuals who could not afford to pay found their stocks sold immediately and their life savings wiped out in minutes, yet their debt to the bank still remained.

The financial outcome of the crash was devastating. Between September 1 and November 30, 1929, the stock market lost over one-half of its value, dropping from $64 billion to approximately $30 billion. Any effort to stem the tide was, as one historian noted, tantamount to bailing Niagara Falls with a bucket. The crash affected many more than the relatively few Americans who invested in the stock market. While only 10 percent of households had investments, over 90 percent of all banks held investments in the stock market. Many banks failed because of their inadequate cash reserves. This was in part due to the Federal Reserve lowering the limits of cash reserves that banks were traditionally required to hold in their vaults, as well as the fact that many banks invested in the stock market themselves. Eventually, thousands of banks closed their doors after losing all of their assets, leaving their customers penniless. While a few savvy investors got out at the right time and eventually made fortunes buying up discarded stock, those success stories were rare. Housewives who speculated with grocery money, bookkeepers who embezzled company funds hoping to strike it rich and pay the funds back before getting caught, and bankers who used customer deposits to follow speculative trends all lost. While the stock market crash was the trigger, the lack of appropriate economic and banking safeguards, along with a public psyche that pursued wealth and prosperity at all costs, allowed this event to spiral downward into a depression.