Financial Crash

On October 29, 1929, a day that became known as Black Tuesday, stock market prices tumbled. Over the previous five years, the rising market, bolstered by optimistic buyers, earned huge profits for investors, and the value of stocks nearly doubled. In late October, panicked sellers sent stock prices into free fall, culminating in the selling of more than 16 million shares valued at $32 billion on October 29. Although only 2.5 percent of Americans owned stock, the stock market crash had an enormous impact on the economy and the rest of the world. Because so much of the stock boom depended on generous margin requirements (a down payment of only 5 to 10 percent), when investor-borrowers got caught short by falling prices, they could not repay the financial institutions that had extended them credit. Banks and lending agencies, with their interlocking management and overextension of credit, had difficulty withstanding the turmoil unleashed by the stock market crash.

The 1929 crash did not cause the decade-long Great Depression that followed. The seeds for the greatest economic catastrophe in American history had been planted earlier. The economy had endured a series of panics and depressions in the past, but nothing like what happened between 1929 and 1940. The causes stemmed from flaws in an economic system that produced a great disparity of wealth, inadequate consumption, overextension of credit both at home and abroad, and the government’s unwillingness to relieve the plight of farmers. Republican administrations made matters worse by lowering taxes on the rich and raising tariffs to benefit manufacturers. The Federal Reserve Board exacerbated the situation by keeping interest rates high, thereby making it difficult for people to get loans and repay debts. The failure was not that of the United States alone; the depression affected capitalist nations throughout the world. The stock market collapse crushed whatever confidence the American public had that the unfettered law of supply and demand and laissez-faire economics could ensure prosperity.

Review & Relate

How did divisions within the Democratic Party contribute to Republican political dominance in the 1920s?

What underlying economic weaknesses led to the Great Depression?