What Led to the 1929 Stock Market Crash?

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Crowd of people gather outside the New York Stock Exchange following the Crash of 1929.
Crowd of people gather outside the New York Stock Exchange following the Crash of 1929.

“Well somebody told us Wall Street fell, but we were so poor that we couldn’t tell…” these are rhythmic words found in the second stanza of the band Alabama’s classic country hit, Song of the South.

The Great Depression defined an entire generation, destroyed the American economy and even today serves as the standard for all things negative.  Half of all US banks failed during this time period and starvation inside New York City became so bad that the people of the West African nation of Cameroon collected money to send as relief to help starving Americans — all together, the African nation raised just under four dollars, $3.77.

The Great Depression gave us the Civilian Conservation Corps, national and state parks and prepared an entire generation for an even greater task, stopping Nazism and the Empirical Japanese Military, but what were the events that actually led to the Great Depression?

For starters, we must go back to the middle of the 1920s, a decade which came to be known as the “Roaring Twenties”. With Europe desolated by World War I (at the time, known as The Great War), the United States economy rapidly grew, as the country became a heavy exporter to the war torn continent which struggled with the daunting task of rebuilding its infrastructure.

While the country experienced “The Era of Good Feelings” in the 1820s, one hundred years later, the focus of the 1920s was centered squarely upon “feeling good”; Automobile sales surged, speakeasy taverns thumbed their noses at Prohibition laws, magazines and movie reels set an excessively high fashion standard and Americans first began their love affair with the intoxicating beverage of credit and debt.

From 1910 to 1930, the percentage of Americans living in cities climbed from 39% to 56%.

Electricity, silver screens, radio, automobiles, factories, and cities were all dramatically changing the country and money was easy to obtain, thanks to the generosity of creditors.

Driven by a love for money in an age of excess, stock trading became a hobby for many and an overwhelming number of traders were buying on margin, at its core this is the practice in which the buyer pays only a percentage of the stock’s value and the broker or a bank pay the remainder in the form of a loan.

Such easy money quickly inflated stock values well beyond their actual worth.

In 1926 the Dow Jones closed at 157.20, the following year at 200.70, and in 1929, the market reached a high of 381.17 — 250% growth in a three year period.

Flush with fresh cash, companies quickly began overproducing their products and by 1929, there was a gross oversupply of commodities, including farm crops, iron and produced goods.

Sensing companies were on the verge of seeing major profit losses, investors began liquidating their entire portfolios and on Thursday, Oct. 24, 1929, the market opened 11% lower than it had closed the previous evening.  According to Investopia, “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.”

This bounce back, however, was a mere illusion, as the following Monday, known as “Black Monday” saw the market close 13% lower.  The following day, “Black Tuesday”, saw the market lose another 12% of value.

By 1932, the Dow Jones hit a low of 41.22, compared to its 1929 high of 381.17.  It would take another 22 years in 1954 for the Dow Jones to ever see this high again.

Years of over tilling and improper land management would leave American agriculture devastated by the Dust Bowl in the early 1930s, further compounding the nation’s woes and soon Wall Street, Main Street and rural farming roads scattered across the entirety of the vast country were feeling the pains of financial collapse.  A decade characterized by feeling good was preceded by a decade of depression and misery, followed then by a decade of war.

America’s Great Depression presents innumerable lessons for us to glean from as a country, but two most striking for this writer are, 1.) Easy money doesn’t last forever and 2.) Neither do the bad times!

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