New York Stock Exchange
The Crash of the New York Stock Exchange (1929)
The most well known stock market crash occurred in 1929. It was a sign of the end of the ‘Roaring Twenties' and the arrival of the Great Depression. The recession caused question in the then accepted theories of economics and President Hoovers use of hands-off politics. When Franklin Roosevelt was elected in 1932 state protections for the elderly and unemployed were enacted, along with the expansion of government regulation of economic activity.
During the 1920s, rapid growth occurred to the New York Stock Exchange as stock prices rose steadily. The Dow Jones Industrial Average rose from 150 to 380 between January 1927 and September 1929. At this time more and more Americans began to invest their savings in financial markets. Many of these individuals took out loans to buy stocks, using the purchased stock themselves as collateral for their loans. These were called margin loans and were payable on demand.
But, the negatives were being spoken of. In the national newspapers you could find debates by leading economists about whether the stock market was over-priced. Irving Fisher, one of the United States leading economist, put forth the argument that the stock prices were appropriate because of events changing industrial technologies, rising incomes, monetary stability, and Prohibition's sobering effect on the workforce. On the other hand, Roger Babson believed the future held economic disaster.
In the end of October the stock market growth had hit a plateau and the ‘bubble' seemed ready to burst. In February 1928, the Federal Reserve Board had already begun increasing interest rates. Since early summer the industrial production had been falling and it was clear the real economy had reversed from previous years. Concurrently, in Congress pressure for tariffs increased. Grim declines in the stock markets began on Thursday, October 24th and on Monday, October 28th the Dow Jones Industrial Average lost 38.33 points. The very next day, known as ‘Black Tuesday', they lost another 20.57 points. The percentage lost was only exceeded by the ‘Black Monday' crash of 1987.
As the prices of stock dropped, it began to concern creditors whether their outstanding loans could be paid. The collateral on which the loans were based was the value of the shares. In many cases the value of the shares had declined to such an extent that their value was less than the value of the loan. At this point banks and brokerages called in many under-performing margin loans. This only served to intensify the already very fragile position of the market as the debtors had to sell theirs stocks in order to pay their loans. This only put more of a downward pressure on the markets. By November 1929, the Dow Jones Industrial Average had dropped to 145.
Most of the loss that steamed from the crash occurred years later as the Depression grew worse. Shortly before the 1932 election the Dow Jones Industrial Average had fallen to 34, a total loss of over 90 percent in less then three years. It took only three years to fall, but would take nearly 25 years to return to its peak of 381.
The banking systems were struck by the crash because numerous banks held stocks and made equity investments. The swift market losses put many banks in bankruptcy because their investments no longer covered their liabilities. Mass fear that the bank would run out and depositors would not be able to obtain savings caused a run on the banks only causing more banks to go into bankruptcy. With in three years of the crash, 40 percent of the banks or nearly 10,000 banks in the United States had failed. Millions of people lost everything even if they had not invested in the stock market.
The United States Congress passed the Glass-Stegall Act in 1932. This act was in response to the failures in the banking sector, after the crash, which had been blamed on the exposure of banks to stock market investments. Through the act the Federal Reserve Board was given grater flexibility to regulate banks and intervene in the financial system. The use of some of the government's gold reserves for loans to businesses, which had previously been prohibited before the act, were not allowed. The Bank Act of 1933 served to prohibit commercial banks from owning brokerage firms and created the Federal Deposit Insurance Corporation (FDIC) which provides federal insurance for private savings accounts. The Securities and Exchange Commission (SEC) was created by the Securities and Exchange Act of 1934 which provided greater government involvement in the affairs of the stock exchange. The SEC was created to regulate the United States' financial markets. In order to reduce speculation as had occurred in the late 1920s the Federal Reserve Board was given the authority to control margin requirements.
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