The stock market crash of 1929 started because of investors but was amplified by the actions of Congress. Black Tuesday sparked the Great Depression.
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The stock market crash of 1929 is known as the most catastrophic event in the history of the US stock market. On Thursday, October 24, 1929, the stock market fell 11%. The losses continued on Monday, October 28, when the market fell another 13%.
Then, on, what became known as "Black Tuesday," October 29, the market fell another 12% and provided a spark for what would be known as the Great Depression. From that point, the stock market would not bottom out until the summer of 1932 and would not reach the peak of 1929 levels until the 1950s.
In the years preceding the crash, much of the US was in the throes of the "Roaring Twenties." From 1920 to 1929, total wealth in the US more than doubled, and the unemployment rate averaged 3.7%. The economy was in a period of expansion, but consumers and companies were taking on debt and engaged in more speculative financial behavior, setting the stage for the crash and the Great Depression.
The stock market crash of 1929 was not caused by one single factor but a collection of events on the part of investors, regulators, and international relations. Here's a quick rundown on some of the major causes:
The stock market would continue to fall through 1932, hitting the bottom at 89% below its peak in 1929 and then the Great Depression began. "By 1933, almost half of America's banks had failed and unemployment rates were around 30% or 15 million people," Lutkemuller adds.
For African Americans, it was even worse, as approximately half were out of work and racial violence would increase in parts of the South. It wouldn't be until 1954 that the Dow Jones would reach pre-crash levels. In an effort to put the US back on track, a series of moves were made in 1933 under President Franklin D. Roosevelt's New Deal.
The New Deal was an expansive series of programs put in place, with several of the original protections and agencies that are still used today. The New Deal created the Federal Deposit Insurance Corporation (FDIC) to ensure the funds held in US banks up to a certain limit.
It also created the Securities and Exchange Commission (SEC) to protect investors and oversee the stock market. The FDIC was created because as the stock market fell, thousands of people began withdrawing their money from banks. "Banks didn't have adequate reserves to meet these demands, due to the funds being invested in the market. This sent the market into even more of a spiral," adds Lutkemuller.
Because the economy and the stock market are linked to so many complex and fluid factors like international relations, consumer behavior, and regulations there was no single cause for the crash. But these factors are even more complex today, due to the rise of cryptocurrencies and investment opportunities and technology. Lutkemuller says that market crashes are not as easy to forecast as you might think. "Hindsight bias is very common when looking back at previous market crashes, but it is very hard to predict in real-time."
It is also important to point out that while buying and holding for the long term is generally considered solid financial advice today, it may not have been the best idea in the years directly after the crash in 1929. "We have been blessed with an extraordinary bull market the past decade," Lutkemuller said. "But let's not forget that it took almost 25 years for the stock market to fully recover to its September 1929 peak."