The Stock Market Crash of 1929
The 1920's were a time of innovation, speculation, and mass consumption driven by a boom in the areas of investment and production. Soldiers returning from World War I were looking for jobs and had money to spend. Initially after the war here was a short, but deep recession as demand had been slowed to a near standstill. Innovation of products was an important channel to kick start the economy. Factories that had once been focused on wartime production, were soon churning out products for a population returning to normalcy. This boom was also supported heavily by 3 consecutive Republican Presidents, Harding, Coolidge, and Hoover. Harding's strong belief in lower taxes, reducing the debt, and a economic philosophy of laissez-faire markets, would be the impetus for the golden twenties in which Calvin Coolidge would take credit and Hoover would have to deal with.
The supply side road to economic recovery ushered in a time of mass consumption of products once a luxury like the automobile, radio, air conditioning, home electricity and Hollywood movies. Another side of innovation came in the form of financial investments. New products were in high demand and companies needed capital to supply their growing customer base. The stock market, which was once for large commercial businesses, soon became a game for the masses. Everyone wanted their chance at making a fortune which after all was the American dream.
Many on those in business and finance saw this as a way to increase their own fortunes. Charles E. Mitchell, president of National City Bank (now Citibank), and president of National City Company, which became the largest security issuing entity in the world, saw an opportunity in the everyman. His salesmen started to target individuals as investors and advanced millions to his sales team for speculation. The 1920's were marked by a cosmopolitan sensibility that helped to instill the idea of upward mobility. Unfortunately for the masses, there was an increasing disparity of wealth. The wealthiest 5% Americans were making over 33% of the income. How was the average person able to get in to the market and amass their own fortune? Credit.
One of the new slogans of the decade became, "Buy now, pay later".
Everyday people were getting in on the stock market craze based on margin buying. At the time, the market had seen a six year rise that appeared to have no end in sight in early 1929. The great American economist, Irving Fisher proclaimed that "Stock prices have reached what looks like a permanently high plateau."
In March of 1929, soon after Herbert Hoover's inauguration, there was a growing unrest on the part of investors over the fact that the stock market was largely dependent on borrowed money. By August of that year, brokers would regularly be lending more than 2/3rds the face value of the stock being purchased. More than $8.5 billion was out on loan which was more than currency in circulation. The Federal Reserve debated asking for regulation of the stock market and the practice of buying on margin, but ultimately stayed silent. Monday, March 25th saw a large sell off of blue chip stocks which continued on Tuesday. A small panic had begun on the part of investors. Those who had bought on margin, usually only 10%, were hit very hard and could not cover their stocks. Brokers sold off those stocks which caused the market to fall even more. As prices dropped more margin calls were triggered and so the dominoes began to fall. Credit became increasingly difficult to find as interest rates quickly went up to 20%. Banker, Charles E. Mitchell, worried about the whole system, as well as his own fortune, stepped in and through National City bank provided $25 million in credit to bring relief for margin calls. This capital injection helped to stop the bleeding and possible collapse in March of 1929.
In the following months the stock market continued to climb even though the economy had begun to slowdown. Steel production declined, the construction industry slowed, and the demand for automobiles fell sharply, yet the phenomenon of speculation pushed stock market prices higher. Borrowing soared to record heights as some blue chip stocks increased by 50% that summer.
In early fall of that year, Congress debated the Smoot-Hawley tariff bill which would increase tariffs on agricultural and industrial goods in the effort to protect farmers and American jobs from foreign competition. It was also seen as having strong negative effects from an international standpoint which are some of the reasons why it has been cited as a cause for the overall instability by investors in early September. The market began a roller coaster ride up until late October. A week before "Black Thursday", many highly respected bankers, like Charles Mitchell and Thomas Lamont of Morgan bank were saying how well the economy was and the only direction was up.
On Tuesday, October 24th, amidst rumors of economic uncertainty, the stock market lost 11% of it's value right at the opening bell. It continued to fall through the early afternoon. Some of the leading Wall Street bankers, like Thomas Lamont, Albert Wiggin, Charles E. Mitchell, and Richard Whitney, decided to pool some money together and buy large amounts of shares in Blue Chip stocks at higher than normal bids in order to demonstrate their faith in the market in hopes that it would curb the sell off as it did in 1907. There was a temporary respite and the market closed that day only down a little over 6.3% which was small compared to the direction it had been going earlier in the day.
The crash had been staved off, but as Newspapers began to write about the instability of the market and the prospect of Herbert Hoover refusing to veto the Smoot-Haley Tariff act, the general consensus was that there was no better time than the present to get out of the market. October 28th, termed "Black Monday", saw a drop in the market of nearly 13%. "Black Tuesday", October 29, close to 16 million shares were traded, and the Dow lost an additional 30 points (11.73%).
Banker William Durant thought that he could support the market with a steady stream of capital in the form of purchasing stocks, but it was not enough. The market continued to fall and hit a short term bottom of 198 points by mid November. It then had a rally, going up to 294 in early April of 1930, then once again began a long and steady decline which hit rock bottom in July, 1932 when the Dow closed at a little over $41.
Many economists of the times had been warning of the coming crash of the stock market, but were not taken seriously by Wall Street or investors who had been borrowing money on margin. Roger Babson had been forecasting a stock market crash for 2 years, yet he was dismissed as unpatriotic until September of 1929, the height of unrest over the market's dependence on borrowed money. Billions of dollars disappeared in a matter of days in October of 1929. The stock market crash, although not considered the direct cause of the "The Great Depression", was a broken rung on the ladder of American and global economic stability.
Regardless of one's stance of the reasons for the stock market crash of 1929 or the ensuing depression, one thing that is always true of these historical events is that the mass population is effected. Jobs are lost, savings are lost, homes are lost, families are lost, dreams are lost, and faith in the system is lost. The practice of speculation in the stock market was like a long wonderful party at which the booze flowed freely and the music never stopped. That is until the next morning when the bill had to be paid, the house had to be cleaned, and the hangover was in full effect. Like many parties that lasted too long, the police, or in this case the government, intervened too late. In 1933, they passed the Glass-Steagal act which created the FDIC and put limits on the behavior and expansion of Wall Street and banks to say the least. It was the beginning of a regulated and responsible form of Capitalism in America that had been needed since before the dawning of the 20th century. Pandora's box was finally closed... 
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