Just eight days before the stock market crash of 1929, Yale economist Irving Fisher made a stock market prediction published in the New York Times: “Stock prices have reached what looks like a permanently high plateau.” October 24, 1929, which became known as Black Thursday, marked the first of a four-day collapse of the stock market. Thousands of investors lost billions of dollars, and it would be a catalyst for the Great Depression.
During the 20s, the economy grew by 42 %, unemployment was below 4%, and the average income increased by $1500. The United States was generating nearly half of the global volume, and mass production made items such as washing machines, refrigerators, vacuums, and radios attainable to most households.
Newspapers featured stories of maids and teachers making millions of dollars on the stock market, giving Americans the confidence to invest.
Credit was easily given to individuals and businesses to buy stocks “on margin,” meaning an investor could put down 10-20% of their funds and borrow the difference from their stockbroker. But if the stock price fell below the amount of the loan, a “margin call” was issued requiring immediate payback of the loan. Many people were unaware of how risky this was. There were no laws in place to prevent banks from buying stocks on margin, and many banks used their customers’ savings without telling them.
The stock market maintained a steady climb up from 1920 to September 1929. After a 52-week high, the market corrected on March 25, 1929, and fell 10%. Investors started to panic after margin calls were made, but the banks reassured investors and continued to lend, and the market recovered. To undercut the spike in stock prices, the Federal Reserve Bank of New York raised the interest rate from 5% to 6% on August 8. The Bank of England followed suit to slow down their loss of gold reserves. Financing for stockbroker margin loans fell as interest rates rose.
At the end of September, the London Stock Exchange took a huge hit when it suspended all Hatry Group shares, which were worth about $24 million. It was discovered that Hatry Group founder, Clarence Hatry, purchased United Steel Companies with fraudulent collateral. The news headlines made American investors very nervous.
The construction of homes, automobile sales, and steel production in the United States had slowed down, and unemployment was on the rise. These were some of the early warning signs that the bubble was about to burst.
The media began reporting significant declines in the stock market in early and mid-October, which played a part in the stock market’s instability. Britain’s finance minister Phillip Snowden declared that the U.S. stock market was a “perfect orgy of speculation,” which was reported by the New York Times and the Wall Street Journal. Associated Press stories highlighted the public utilities’ poor performance that added to the concerns of investors. Public utility stocks were more than three times their book value. Major newspapers reported on stock market dips, and the lack of concern among officials about the dips, and the heightened anxiety of investors.
American investors began to panic, and on October 24, Black Thursday, 12,894,650 shares were traded. The following day, leading bankers and investment firms tried to stabilize the market by purchasing big blocks of stock. The market fell again on Monday. On October 29, Black Tuesday, within the first thirty minutes of opening, 3 million shares were traded. Peoples’ life savings were wiped out within seconds as stockbrokers were fighting each other on the trading floor. It was a frenzy as 16,410,000 shares were sold that day. The massive volume of trading kept stock tickers running behind for hours and used 15,000 miles of ticker tape! The Dow fell 12 percent to 230.07.
$30 billion dollars was lost, which is the equivalent of $396 billion today.
The stock market crash ruined the economy because it wasn’t just investors who lost money but also businesses. Others who didn’t invest in the market also lost their life savings because many banks had used their customers’ deposits to invest their money. Stores, factories, and half of the U.S. banks closed their doors permanently. Farm income also diminished by 50%.
The front pages of all American newspapers were dedicated to the Stock Market Crash, false stories of stockbrokers jumping from the windows of buildings spread, and the world took notice. It would mark the beginning of the Great Depression.
Even though only 10% of American households had invested in the stock market, nearly one-third of Americans would lose their life savings and jobs during the Great Depression.