The stock market crash of 1929: what caused it and what happened on Black Tuesday

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The stock market crash of 1929 was the collapse of US share prices that began in the last week of October 1929. The Dow Jones Industrial Average fell nearly 13% on Monday, October 28 and nearly 12% on Tuesday, October 29, and it kept sliding for almost three years, reaching 41.22 on July 8, 1932, 89% below its peak of 381.17 on September 3, 1929.

The crash is the best-known event in the history of stock market crashes, and it is often treated as the start of the Great Depression. The real story is more tangled. The economy had already turned down before the crash, and economists still disagree about how much the fall in share prices did to the wider economy.

What happened in October 1929?

Three days carry names. The Library of Congress describes Thursday, October 24, 1929 (Black Thursday) as the day of the largest sell-off of shares. Prices recovered part of the ground before the close, so the worst losses came the following week.

Sources: Federal Reserve History essay on the crash; Library of Congress research guide.

Two days of double-digit falls in a row were enough to make October 1929 a symbol. For comparison, the worst single day in the S&P 500 during the 2020 pandemic sell-off was March 16, 2020, at -12.0% (see the 2020 crash). The other famous one-day collapse is Black Monday 1987.

Why did the stock market crash in 1929?

No single cause explains it. The sources point to a mix of a long price boom, borrowed money and tighter monetary policy, with the panic itself feeding on those conditions.

A long boom in share prices

The 1920s were years of strong optimism. According to the Federal Reserve's history essay, the Dow rose six-fold, from 63 in August 1921 to 381 in September 1929. In the same essay, the economist Irving Fisher is recorded as saying that prices had reached "what looks like a permanently high plateau."

Buying on margin

New ways of borrowing brought ordinary savers into the market. A buyer on margin put down a fraction of the price, typically 10%, and borrowed the rest, with the shares as collateral. That works well while prices rise. When they fall, lenders ask for more cash, and buyers who cannot pay are sold out, which pushes prices lower and triggers the next round of calls. Heavy margin borrowing helps explain why the selling in October 1929 fed on itself so quickly.

Tighter money from the Federal Reserve

The Federal Reserve worried that speculation was pulling credit away from commerce and industry. Its leaders disagreed on what to do. The Board in Washington preferred "direct action," asking Reserve Banks to deny credit to member banks that lent to speculators. George Harrison, governor of the New York Fed, wanted to raise the discount rate instead, and the Board turned down several of New York's requests before agreeing in August 1929, when the New York rate reached 6%.

The tightening had begun earlier. In a 2002 speech, then-Governor Ben Bernanke described how the Fed contracted policy from the spring of 1928, with the discount rate reaching 5% by July 1928, the highest since 1921. Higher rates in New York also forced central banks abroad to raise theirs, because the gold standard tied countries' interest rates together.

An economy that was already slowing

The National Bureau of Economic Research dates the business cycle peak to August 1929, two months before the crash. A recession had already started when the selling began. The Library of Congress guide notes that during the 1920s boom unemployment rose and production declined, which left share prices on a weaker footing than they looked.

What did the Federal Reserve do after the crash?

The New York Fed moved quickly. It bought government securities in the open market, sped up lending through its discount window, lowered the discount rate, and told commercial banks it would supply the reserves they needed. These steps raised total reserves in the banking system, kept short-term interest rates from jumping, and let banks stay open and meet withdrawals during the panic.

At the time, the Board and other Reserve Banks complained that New York had exceeded its authority. The Federal Reserve History essay concludes that, in hindsight, the actions helped contain the crisis in the short run. The later failures of Fed policy came in 1930 to 1933, during the banking panics, which are covered on our Great Depression page.

How bad was the fall from 1929 to 1932?

October 1929 was only the first leg. By mid-November the Dow had lost almost half its value. It then rallied for a while and fell again, more slowly and for much longer, as the economy sank and banks failed. The low came on July 8, 1932, at 41.22, which the Federal Reserve essay calls the Dow's lowest value of the twentieth century.

A fall of 89% means that $100 in the Dow at the 1929 peak was worth about $11 at the 1932 low, on index prices alone. The index took until November 23, 1954 to close above its 1929 high again. That headline number leaves out dividends and the deflation of the early 1930s, when the prices of everyday goods also fell, so the loss measured in what money could buy was smaller than the index suggests. It was still severe by any measure.

The 1929-32 decline is deeper than any later US crash. The Nasdaq Composite fell 77.9% in the dot-com bust of 2000-2002, and the Nasdaq lost 55.6% between 2007 and 2009 (see the 2008 financial crisis). A fall of 20% or more from a recent high is usually called a bear market.

Did the 1929 crash cause the Great Depression?

Partly, and the question is still argued. The Federal Reserve History essay sets out two views. The academic consensus treats the crash as one contributing factor: it frightened investors and consumers, fear and uncertainty cut purchases of big-ticket goods, unemployment rose and the contraction deepened. A second group of scholars, including the economist Allan Meltzer, sees the crash as a symptom of a contraction that was already under way.

Both sides agree that the crash alone does not explain a downturn that lasted from August 1929 to March 1933. Waves of bank failures, a fall of nearly 30% in the money supply between the fall of 1930 and the winter of 1933, and the spread of the slump through the gold standard did the larger damage. The difference between a crash and a depression is explained on our page on recession vs depression.

What changed because of the crash?

The crash and the hearings that followed led to the first real federal oversight of the securities markets. The Pecora hearings (1932-1934) investigated the causes of the 1929 crash and exposed abuses in the financial industry. Congress then passed the Securities Act of 1933, which required registration of most securities sales, and President Roosevelt signed the Securities Exchange Act on June 6, 1934, creating the Securities and Exchange Commission. Joseph P. Kennedy became its first chairman.

Banking reforms came in the same years: the Glass-Steagall provisions of the Banking Act of 1933 separated commercial and investment banking and created the FDIC to insure deposits. Those changes were a response to the bank runs of the early 1930s, explained on our page about bank runs.

What lessons do historians draw from 1929?

Three points come up again and again in the official histories. Borrowed money makes falling markets fall faster. Central bank decisions about credit can feed a boom and then sharpen the bust. And a quick, firm supply of cash to banks during a panic, as the New York Fed provided in October 1929, can stop a market crash from turning into a banking crisis, while the absence of that support in 1930-33 let the damage spread.

If you are reading about 1929 because you are worried about your own savings today, the right response depends on your situation, your time horizon and your debts. We do not give investment advice. The SEC's investor education site, Investor.gov, is a neutral place to start, and the UK's MoneyHelper service covers the same ground for UK readers.

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