Wall Street Stock Market Crash of 1929

[Type the document title]
Wall Street Stock Market Crash of

1929
An Indian perspective Economic and Legal
Page 1
Table of Contents
1.Abbreviations..................................................Pg.3
2.Research Methodology...................................Pg.4-5
3.Introduction....................................................Pg.6-7
4.Micro-Economics Aspect...............................Pg.8-12
5.Relationship between Economics and Law....Pg.13-15
6.Comparitive Study..........................................Pg.16-19
7.Conclusion......................................................Pg.20-21
8.Suggestions /Recommendations.....................Pg.22
9. References /Bibliography...............................Pg.23
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Abbreviations
esp. : Especially
etc. : Et cetera
i.e. : That is
approx. : approximately
edn. : Edition
pg. : Page
para : paragraph
www : World Wide Web
http. : Hyper Text Transfer Protocol
.com : commercial
.org : organization
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Chapter 1: Research Methodology
Relevance of the Topic

The Stock Market Crash of 1929 devastated the economy and was a key factor of causing
The Great Depression. The Wall Street Crash of 1929, also known as Black Tuesday1 or
the Stock Market Crash of 1929 began in late October 1929 and was the most
devastating stock market crash in the history of the United States, when taking into
consideration the full extent and duration of its fallout.2 The crash signaled the beginning of
the 10-year Great Depression that affected all Western industrialized countries.3
Objective of Study
The objective of the study is to explain the Wall Street Stock Exchange crash that occured in
1929. The study tries to contemplate about and explain the main causes of the crash as well
as other contributing factors. It also covers the subsequent relation of the crash with other
events in the American history and more importantly it lists out the effects suffered by the
people and other countries in the aftermath of the crash.
1 "Depression & WWII (19291945)". Americaslibrary.gov. Retrieved August 12, 2013.
2 Bone, James. "The beginner's guide to stock markets". The Times (London). Archived from the
original on May 25, 2010. Retrieved January 29, 2012. "The most savage bear market of all time was
the Wall Street Crash of 19291932, in which share prices fell by 89 per cent."
3 "Stock Market Crash of 1929". Encyclopdia Britannica. Retrieved January 29, 2012.
Page 4
Research Questions
What was the Wall Street Crash 1929 and what caused the sudden crash?
What were the major effects of the crash on the U.S. economy and also its subsequent
effects on other western countries?

Was the crash of 1929 the single most affecting factor to cause the Great Depression
of 1930?
Limitation of Research
The research is restricted to secondary research. There may be biases in the data as they are
second hand.
Page 5
Chapter 2: Introduction
Origin of the Wall Street Stock Exchange
The history of the New York Stock Exchange starts with the signing of the Buttonwood
Agreement by twenty-four stockbrokers and merchants of New York City on May 17, 1792.
The signing of the agreement took place outside at 68 Wall Street under a Buttonwood tree.
Initially there were five securities traded in New York City with the first listed company on
the NYSE being the Bank of New York.
On April 4, 2007, the NYSE Group, Inc. combined with Euronext N.V. forming the holding
company NYSE Euronext. NYSE Euronext (NYSE/New York and Euronext Paris: NYX)
describes itself as "the worlds largest and most liquid exchange group ... [comprised of] six
cash equities exchanges in five countries and six derivatives exchanges." 4
Historical Perspective: Importance in U.S. economy

The end of World War I heralded a new era in the United States. It was an era of enthusiasm,
confidence, and optimism. A time when inventions such as the airplane and radio made
anything seem possible. A time when 19th century morals were set aside and flappers became
the model of the new woman. A time when Prohibition5 renewed confidence in the
productivity of the common man. It is in such times of optimism that people take their
savings out from under their mattresses and out of banks and invest it. In the 1920s, many
invested in the stock market.
4 http://www.nyse.com/about/1088808971270.html
5 http://history1900s.about.com/od/1920s/p/prohibition.htm
Page 6

The exchange was closed shortly after the beginning of World War I (July 31, 1914), but it
partially re-opened on November 28 of that year in order to help the war effort by
trading bonds.6
Contemporary position of the Wall Street Stock Exchange
The New York Stock Exchange (NYSE), also known as the "Wall Street Stock
Exchange", is a stock exchange located at 11 Wall Street ,Lower Manhattan, New York
City, New York, United States. It is currently the world's largest stock exchange by market
capitalization of its listed companies at US$16.613 trillion as of May 2013.7 Average daily
trading value was estimated at approx. US$169 billion in 2013.
The NYSE trading floor is located at 11 Wall Street and is composed of four rooms used for
the facilitation of trading. A fifth trading room, located at 30 Broad Street, was closed in
February 2007. The main building, located at 18 Broad Street, between the corners of Wall
Street and Exchange Place, was designated a National Historic Landmark in 1978,8 as was
the 11 Wall Street building
The NYSE is owned by Intercontinental Exchange, a holding company it also lists
(NYSE: ICE). Previously, it was part of NYSE Euronext (NYX), which was formed by the
NYSE's 2007 merger with the fully electronic stock exchange Euronext.9 NYSE and
Euronext now operate as divisions of Intercontinental Exchange. The NYSE has been the
6Weeks, Linton. "History's Advice During A Panic? Don't Panic". NPR. Retrieved
2008-10-01.
7 "NYSE Composite Index". Retrieved 9 June 2014.
8 National Park Service, National Historic Landmarks Survey, New York,

Retrieved May 31, 2007
9 Rothwell, Steve (December 20, 2012), "For the New York Stock Exchange, a sell
order", San Jose Mercury News, Associated Press
Page 7

subject of several lawsuits regarding fraud or breach of duty 10and was sued by its former
CEO for breach of contract and defamation11
Chapter 3: Micro Economics Aspect

Micro- Economic Analysis of the Crash
The 1929 Stock Market crash was a result of various economic imbalances and structural
failings. These are some of the most significant economic factors behind the stock market
crash of 1929.
1.
2.
3.
4.
5.
Credit Boom
Buying on the Margin
Irrational Exuberance
Mismatch between production and consumption
Agricultural Recession
6. Weaknesses in the Banking System
The above mentioned factors and the theories related to them are mentioned below.
1. Credit Boom
10 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUUw5xkA1kkg
http://www.reuters.com/article/2012/12/24/us-nyseeuronext-sale-lawsuitidUSBRE8BN0KW20121224
11 http://www.washingtonpost.com/wp-dyn/articles/A63674-2004Jul20.html
Page 8

In the 1920s, there was a rapid growth in bank credit and loans. Encouraged by the strength
of the economy people felt the stock market was a one way bet. Some consumers borrowed
to buy shares. Firms took out more loans for expansion. Because people became highly
indebted, it meant they became more susceptible to a change in confidence. When that
change of confidence came in 1929, those who had borrowed were particularly exposed and
joined the rush to sell shares and try and redeem their debts.
The above graph shows all the loans given out in the U.S. between 1918-40. The shaded
areas indicate recession periods.
2. Buying on the Margin
Related to buying on credit was the practise of buying shares on the margin. This meant you
only had to pay 10 or 20% of the value of the shares; it meant you were borrowing 80-90%
of the value of the shares. This enabled more money to be put into shares, increasing their
value. It is said there were many margin millionaire investors. They had made huge profits
by buying on the margin and watching share prices rise. But, it left investors very exposed
when prices fell. These margin millionaires got wiped out when the stock market fall came. It
also affected those banks and investors who had lent money to those buying on the margin.
By 1929, 2 out of every 5 dollars a bank loaned were used to purchase stocks.
Page 9
3. Irrational Exuberance
The graph shows the difference between price and the earning per share where earning
per share indicate the net profits earned in the previous twelve months.
A lot of the Stock Market crash can be blamed on over exuberance and false expectations. In
the years leading up to 1929, the stock market offered the potential for making huge gains in
wealth. It was the new gold rush. People bought shares with the expectations of making more
Page 10

money. As share prices rose, people started to borrow money to invest in the stock market.
The market got caught up in a speculative bubble. Shares kept rising and people felt they
would continue to do so. The problem was that stock prices became divorced from the real
potential earnings of the share prices. Prices were not being driven by economic
fundamentals but the optimism / exuberance of investors. The average earning per share rose
by 400% between 1923 and 1929. Yet, those who questioned the value of shares were often
labelled doom-mongers.
This was not the first investment bubble, nor was it the last. Most recently we saw a similar
phenomenon in the dot com bubble.
In March 1929, the stock market saw its first major reverse, but this mini-panic was
overcome leading to a strong rebound in the summer of 1929. By October 1929, shares were
grossly overvalued. When some companies posted disappointing results on October 24
(Black Thursday), some investors started to feel this would be a good time to cash in on their
profits; share prices began to fall and panic selling caused prices to fall sharply. Financiers,
such as JP Morgan tried to restore confidence by buying shares to prop up prices. But, this
failed to alter the rapid change in market sentiment. On October 29(Black Tuesday) share
prices fell by $40 billion in a single day. By 1930 the value of shares had fallen by 90%. The
bull market had been replaced by a bear market.
4. Mismatch between Production and Consumption

The 1920s saw great strides in production techniques, especially in industries like
automobiles. The production line enables economies of scale and great increases in
production. However, demand for buying expensive cars and consumer goods were
struggling to keep up. Therefore, towards the end of the 1920s many firms were struggling to
sell all their production. This caused some of the disappointing profit results which
precipitated falls in share prices.
In 1929, there were already warning signs from the economy with falling car sales, lower
steel production and a slowdown in housing construction. However, despite these warning
signs, people still kept buying shares.
Page 11
The above graph clearly shows that Rapid growth in Real GDP during the 1920s, couldnt be
maintained
5. Agricultural Recession
Even before 1929, the American agricultural sector was struggling to maintain profitability.
Many small farmers were driven out of business because they could not compete in the new
economic climate. Better technology was increasing supply, but demand for food was not
increasing at same rate. Therefore, prices fell and farmers incomes dropped. There was
occupational and geographical immobility in this sector, and it was difficult for unemployed
farmers to get jobs elsewhere in the economy.
6. Weaknesses in the Banking System

Before the Great Depression, the American banking system was characterised by having
many small to medium sized firms. America had over 30,000 banks. The effect of this was
that they were prone to going bankrupt if there was a run on deposits. In particular, many
banks in rural areas went bankrupt due to the agricultural recession. This had a negative
impact on the rest of the financial industry. Between 1923 and 1930 5,000 banks collapsed.
Page 12
Chapter 4: Relationship between Economics

and Law
Linkage of the Crash to the Great Depression
In 1928 the new Republican president Herbert Hoover confidently stated, 'We in
America today are nearer to the final triumph over poverty than ever before in the
history of any land.' Within a year, all the confidence had ended and America was
plunged into the Depression.
The 1920s was often referred to as the "Roaring Twenties", or the "Jazz age". This related to
the booming period of quick economic expansion, but also varying social attitudes. Society
was becoming less restricted and discovering new found freedoms; suddenly people's outlook
was changing, and this was fueled by new technologies and a booming economy. However,
hidden behind the optimistic views and a booming economy, there were major structural
problems, which is said to have caused the notorious stock market crash of 1929 and the
Great Depression of the 1930s.
The Great Depression is said to have begun with the Wall Street Crash of October, 1929, and
quickly spread globally. The market crash marked the start of a decade of high
unemployment, poverty, low profits, deflation, reducing farm incomes, and lost opportunities
for economic growth and personal development. Although its causes are still uncertain and
controversial, the net effect was a abrupt and universal loss of confidence in the economic
future. The usual explanations include numerous factors, especially high consumer debt, illregulated markets that permitted overoptimistic loans by banks and investors, the lack of
high-growth new industries, all interacting to generate a downward economic spiral of
reduced spending, falling confidence, and reduced production.
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Legal Reforms Introduced after the Crash
The government as such, under President Herbert Hoovers Rule did not take very strict
actions to deal with the aftermaths of the crash. The president was a Republican and believed
in the principles of Rugged Individualism. Hoover did not believe that the depression
would last - "Prosperity is just around the corner" is what he said to businessmen in 1932
when things were just about at their worst.
However, Hoover did do some good. Money was used to create jobs to build things such as
the Hoover Dam. In 1932 he gave $300 million to the states to help the unemployed
(Emergency Relief and Reconstruction Act) but it had little impact as states run by the
Republicans believed in "rugged individualism" more than Hoover did and they used only
$30 million of the money offered to them.
In 1932, the Pecora Commission was established by the U.S. Senate to study the causes of
the crash. The following year, the U.S. Congress passed the GlassSteagall Act mandating a
separation between commercial banks, which take deposits and extend loans, and investment
banks, which underwrite, issue, and distribute stocks, bonds, and other securities.
After the experience of the 1929 crash, stock markets around the world instituted measures to
suspend trading in the event of rapid declines, claiming that the measures would prevent such
panic sales. However, the one-day crash of Black Monday, October 19, 1987, when the Dow
Jones Industrial Average fell 22.6%, was worse in percentage terms than any single day of
the 1929 crash.
Page 14
Role of Economic Factors in the Crash
The aftermath of the Crash of 1929 was such that the American economy could not
completely recover until the USA entered the Second World War in December 1941.
However, we can look at the various factors related to economics that were responsible for
triggering the crash in the first place and the Great Depression that followed.
1.
As early as 1926, there were signs that the boom was under threat - this was seen in
the collapse of land prices in Florida.
2.
Eventually, there were too many goods being made and not enough people to buy
them.
3.
Farmers had produced too much food in the 1920s, so prices for their produce
became steadily lower.
4.
There were too many small banks - these banks did not have enough funds to cope
with the sudden rush to take out savings, which happened in the autumn of 1929.
5.
Too much speculation on the stock market - the middle class had a lot to lose and
they had spent a lot on what amounted to pieces of paper.
6.
The Wall Street Crash of October 1929 was a massive psychological blow.
7.
America had lent huge sums of money to European countries. When the stock
market collapsed, they suddenly recalled those loans. This had a devastating impact on
the European economy.
8.
The collapse of European banks caused a general world financial crisis.
Page 15
Chapter 5: Comparative Study

Comparison between different Economic Fundamentals
Introduction
Economists and historians disagree as to what role the crash played in subsequent economic,
social, and political events. The Economist argued in a 1998 article that the Depression did
not start with the stock market crash.12 Nor was it clear at the time of the crash that a
depression was starting. They asked, "Can a very serious Stock Exchange collapse produce a
serious setback to industry when industrial production is for the most part in a healthy and
balanced condition?" They argued that there must be some setback, but there was not yet
sufficient evidence to prove that it will be long or that it need go to the length of producing a
general industrial depression.
But The Economist also cautioned that some bank failures are also to be expected and some
banks may not have any reserves left for financing commercial and industrial enterprises.
They concluded that the position of the banks is the key to the situation, but what was going
to happen could not have been foreseen."13
12 "Economics focus: The Great Depression", The Economist (Sept. 17, 1998)
13 "Reactions of the Wall Street slump", The Economist (Nov. 23, 1929)
Page 16

Academics see the Wall Street Crash of 1929 as part of a historical process that was a part of
the new theories of boom and bust. According to economists such as Joseph
Schumpeter and Nikolai Kondratiev and Charles E. Mitchell the crash was merely a
historical event in the continuing process known as economic cycles. The impact of the crash
was merely to increase the speed at which the cycle proceeded to its next level.
Milton Friedman's A Monetary History of the United States, co-written with Anna Schwartz,
advances the argument that what made the "great contraction" so severe was not the
downturn in the business cycle, protectionism, or the 1929 stock market crash in themselves but instead, according to Friedman, what plunged the country into a deep depression was the
collapse of the banking system during three waves of panics over the 193033 period.14
Economic Fundamentals of the Crash
The crash followed a speculative boom that had taken hold in the late 1920s. During the
latter half of the 1920s, steel production, building construction, retail turnover, automobiles
registered, even railway receipts advanced from record to record. The combined net profits of
536 manufacturing and trading companies showed an increase, in fact for the first six months
of 1929, of 36.6% over 1928, itself a record half-year. Iron and steel led the way with
doubled gains.15 Such figures set up a crescendo of stock-exchange speculation which had led
hundreds of thousands of Americans to invest heavily in the stock market. A significant
number of them were borrowing money to buy more stocks. By August 1929, brokers were
routinely lending small investors more than two-thirds of the face value of the stocks they
14 "Panic control" The Washington Times

15 "Broad Facts of, Ilsa Crisis". The Daily News (Perth, Western Australia: National
Library of Australia). 1 November 1929. p. 6 (Edition: Home Final Edition). Retrieved 22
November 2012.
Page 17

were buying. Over $8.5 billion was out on loan,16 more than the entire amount of currency
circulating in the U.S. at the time.17
The rising share prices encouraged more people to invest; people hoped the share prices
would rise further. Speculation thus fuelled further rises and created an economic bubble.
Because of margin buying, investors stood to lose large sums of money if the market turned
downor even failed to advance quickly enough. The average P/E (price to earnings) ratio
of S&P Composite stocks was 32.6 in September 1929,18 clearly above historical norms.
Good harvests had built up a mass of 250,000,000 bushels of wheat to be 'carried over' when
1929 opened. By May there was also a winter-wheat crop of 560,000,000 bushels ready for
harvest in the Mississippi Valley. This oversupply caused a drop in wheat prices so heavy that
the net incomes of the farming population from wheat were threatened with extinction. Stock
markets are always sensitive to the future state of commodity markets and the slump in Wallstreet predicted for May by Sir George Paish, arrived on time. In June 1929 the position was
saved by a severe drought in the Dakotas and the Canadian West, plus unfavorable seed times
in Argentina and Eastern Australia. The oversupply would now be wanted to fill the big gaps
in the 1929 world wheat production. From 97c per bushel in May wheat rose to $1.49 in July.
When it was seen that at this figure the American farmers would get rather more for their
smaller crop than for that of 1928, up went stocks again and from far and wide orders came
to buy shares for the profits to come.
Then in August the wheat price fell when France and Italy were bragging of a magnificent
harvest and the situation in Australia improved. This sent a shiver through Wall Street and
stock prices quickly dropped, but word of cheap stocks brought a fresh rush of 'stags,'
amateur speculators and investors. Congress had also voted for a 100 million dollar relief
package for the farmers, hoping to stabilize wheat prices. By October though, the price had
16 Lambert, Richard (July 19, 2008). "Crashes, Bangs & Wallops". Financial
Times.
17 Facing the facts: an economic diagnosis. Retrieved 2008-09-30.
18 Shiller, Robert (2005-03-17). "Irrational Exuberance, Second
Edition". Princeton University Press. Retrieved 2007-02-03.
Page 18

fallen to $1.31 per bushel.19 The falling commodity markets in other countries told upon even
American self-confidence, and the stock market started to falter.
On October 24, 1929, with the Dow just past its September 3 peak of 381.17, the market
finally turned down, and panic selling started.20
The president of the Chase National Bank said at the time "We are reaping the natural fruit of
the orgy of speculation in which millions of people have indulged. It was inevitable, because
of the tremendous increase in the number of stockholders in recent years, that the number of
sellers would be greater than ever when the boom ended and selling took the place of
buying."21
Comparison : Effects of the Crash in India as compared to

the U.S.
The aftermaths of the crash of 1929 were not just restricted to America but the tremors
resulting from it and the further effects of The Great Depression were felt in India and other
countries as well.
The Great Depression of 1929 had a very severe impact on India, which was then under the
rule of the British Raj. The Government of British India adopted a protective trade policy
19 "Grain Plunges". The Courier-Mail (Brisbane, Qld: National Library of
Australia). 26 October 1929. p. 19. Retrieved 22 November 2012.
20 "Wild Selling. New York Panic.". The Sydney Morning Herald (Sydney, NSW:
National Library of Australia). 26 October 1929. p. 17. Retrieved 22 November
2012.
21 "Second Crash". The Sydney Morning Herald (Sydney, NSW: National Library
of Australia). 30 October 1929. p. 17. Retrieved 20 November 2012.
Page 19

which, though beneficial to the United Kingdom, caused great damage to the Indian
economy. During the period 19291937, exports and imports fell drastically crippling
seaborne international trade. The railways and the agricultural sector were the most affected.
The international financial crisis combined with detrimental policies adopted by the
Government of India resulted in soaring prices of commodities. High prices along with the
stringent taxes prevalent in British India had a dreadful impact on most Indians. The
discontent of farmers manifested itself in rebellions and riots. The Salt Satyagraha of 1930
was one of the measures undertaken as a response to heavy taxation during the Great
Depression.
The Great Depression and the economic policies of the Government of British India
worsened already deteriorating Indo-British relations. When the first general elections were
held according to the Government of India Act 1935, anti-British feelings resulted in the proindependence Indian National Congress winning in most provinces with a very high
percentage of the vote share.
India suffered badly due to the Great Depression. The price decline from late 1929 to
October 1931 was 36 percent compared to 27 percent in the United Kingdom and 26
percent in the United States.22
Chapter 6: Conclusion
The Stock Market Crash of 1929 is one of the most profound and notable events of World
History. The facts and of the incident, the events leading upto it and the aftermath that
followed can be summed up in the following manner.
During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in
August 1929, after a period of wild speculation. By then, production had already declined
22 Manikumar, Pg 9
Page 20

and unemployment had risen, leaving stocks in great excess of their real value. Among
the other causes of the eventual market collapse were low wages, the proliferation of
debt, a struggling agricultural sector and an excess of large bank loans that could not be
liquidated.
Stock prices began to decline in September and early October 1929, and on October 18
the fall began. Panic set in, and on October 24, Black Thursday, a record 12,894,650
shares were traded. Investment companies and leading bankers attempted to stabilize the
market by buying up great blocks of stock, producing a moderate rally on Friday. On
Monday, however, the storm broke anew, and the market went into free fall. Black
Monday was followed by Black Tuesday (October 29), in which stock prices collapsed
completely and 16,410,030 shares were traded on the New York Stock Exchange in a
single day. Billions of dollars were lost, wiping out thousands of investors, and stock
tickers ran hours behind because the machinery could not handle the tremendous volume
of trading.
On October 29, 1929, Black Tuesday hit Wall Street as investors traded some 16 million
shares on the New York Stock Exchange in a single day. Billions of dollars were lost,
wiping out thousands of investors. In the aftermath of Black Tuesday, America and the
rest of the industrialized world spiraled downward into the Great Depression (1929-39),
the deepest and longest-lasting economic downturn in the history of the Western
industrialized world up to that time.
After October 29, 1929, stock prices had nowhere to go but up, so there was considerable
recovery during succeeding weeks. Overall, however, prices continued to drop as the
United States slumped into the Great Depression, and by 1932 stocks were worth only
about 20 percent of their value in the summer of 1929. The stock market crash of 1929
was not the sole cause of the Great Depression, but it did act to accelerate the global
economic collapse of which it was also a symptom. By 1933, nearly half of Americas
banks had failed, and unemployment was approaching 15 million people, or 30 percent of
the workforce.
Page 21
Chapter 7: Suggestions /Recommendations

After going through all the facts and the events that led to the crash and the after effects that
were caused by it, the best solution that comes to mind would be to keep a check on such
speculative trading in large volumes by the amateur speculators or Stags. This step would
help to prevent such events like the Wall Street Crash in the future and could play a major
role in preventing another economic meltdown.
Page 22
Separation of commercial banks, which take deposits and extend loans,

and investment banks, which underwrite, issue, and distribute stocks, bonds, and
other securities.
Suspend trading activities in the event of rapid decline of the market.

The issuing of loans to general public for buying of equities should be done on Credit
Worthiness basis and there should be a strict kept on it.
Bibliography / References
BOOKS REFERRED:
Britannica Encyclopaedia
"History's Advice During A Panic? Don't Panic" - NPR.
"For the New York Stock Exchange, a sell order" - Steve Rothwell
Page 23

NEWSPAPERS:
The Courier Mail

The Sydney Morning Herald
The Washington Times
Financial Times
The Economist
Websites Used
http://www.washingtonpost.com
http://www.reuters.com
http://www.bloomberg.com
http://americaslibrary.gov
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