The Great Depression Part 3 – Black Days of the Stock Market Crash

Good day to each of you reading the third installment of the depression.

The information given is not pure speculation but taken from creditable sources on the internet.

For every cause, their must be an effect—Let’s examine the cause or causes of the devastation and toll that it took from 1929—1939.

So was the Stock Market the determining factor of the Great Depression? The answer is yes and no for we must analyze the shock waves of what was happening after the four Black Days of the Stock Market Crash.

The House of Cards as many have said came that dreaded Thursday, October 24, 1929 as Wall Street markets opened up 11% lower than the day before. Consider that Wall Street and its investors were reaching new heights by adding profits up to the point of Fall 1929 and everything was “roaring”.

Four days in October 1929 would change the face of American history as the balloon began losing its air. Here is information used from the businessinsider on that fateful time.

They first crashed on Oct. 24, 1929, when the markets opened 11% lower than the previous day. After this “Black Thursday,” they rallied briefly. But prices fell again the following Monday. Many investors couldn’t make their margin calls. Wholesale panic set in, leading to more selling. On “Black Tuesday,” Oct. 29, investors unloaded millions of shares — and kept on unloading. There were literally no buyers. 

“The system fell back on itself like a house of cards,” says Mitnick.

From 1929 to July 1932, the market lost more than 85% of its value. The Dow Jones Industrial Average sank from a 1929 high of 381.17 to as low as 41.22 in 1932. 

And it caused other simmering economic problems to come to a boil. 

When utilizing the Britannica of the causes of the Great Depression, the first topic was: The stock market crash of 1929. During the 1920s the U.S. stock market underwent a historic expansion. As stock prices rose to unprecedented levels, investing in the stock market came to be seen as an easy way to make money, and even people of ordinary means used much of their disposable income or even mortgaged their homes to buy stock. By the end of the decade hundreds of millions of shares were being carried on margin, meaning that their purchase price was financed with loans to be repaid with profits generated from ever-increasing share prices. Once prices began their inevitable decline in October 1929, millions of overextended shareholders fell into a panic and rushed to liquidate their holdings, exacerbating the decline and engendering further panic. Between September and November, stock prices fell 33 percent. The result was a profound psychological shock and a loss of confidence in the economy among both consumers and businesses. Accordingly, consumer spending, especially on durable goods, and business investment were drastically curtailed, leading to reduced industrial output and job losses, which further reduced spending and investment.

When doing a bit more research, let’s put this into a monetary prospective and utilize the thoughtco.com site on the stock market:

Remembered today as “Black Tuesday,” the stock market crash of October 29, 1929 was neither the sole cause of the Great Depression nor the first crash that month, but it’s typically remembered as the most obvious marker of the Depression beginning. The market, which had reached record highs that very summer, had begun to decline in September.

On Thursday, October 24, the market plunged at the opening bell, causing a panic. Though investors managed to halt the slide, just five days later on “Black Tuesday” the market crashed, losing 12% of its value and wiping out $14 billion of investments. By two months later, stockholders had lost more than $40 billion dollars. Even though the stock market regained some of its losses by the end of 1930, the economy was devastated. America truly entered what is called the Great Depression.

Just think, within sixty-four days, stockholders lost more than $40 billion dollars and this was in 1929. What would that be in today’s dollars, I have no clue, but I do know that wiped out many people as stockholders form the richest to the poorest.

Let’s turn to Britannica for the next cause of the 1929 depression: Banking panics and monetary contraction. Between 1930 and 1932 the United States experienced four extended banking panics, during which large numbers of bank customers, fearful of their bank’s solvency, simultaneously attempted to withdraw their deposits in cash. Ironically, the frequent effect of a banking panic is to bring about the very crisis that panicked customers aim to protect themselves against: even financially healthy banks can be ruined by a large panic. By 1933 one-fifth of the banks in existence in 1930 had failed, leading the new Franklin D. Roosevelt administration to declare a four-day “bank holiday” (later extended by three days), during which all of the country’s banks remained closed until they could prove their solvency to government inspectors. The natural consequence of widespread bank failures was to decrease consumer spending and business investment because there were fewer banks to lend money. There was also less money to lend, partly because people were hoarding it in the form of cash. According to some scholars, that problem was exacerbated by the Federal Reserve, which raised interest rates (further depressing lending) and deliberately reduced the money supply in the belief that doing so was necessary to maintain the gold standard (see below), by which the U.S. and many other countries had tied the value of their currencies to a fixed amount of gold. The reduced money supply in turn reduced prices, which further discouraged lending and investment (because people feared that future wages and profits would not be sufficient to cover loan payments).

As we turn to ThoughtCo.com, look at the number of bank failures in the land and keep in mind that the Federal Deposit Insurance Company was unheard of and people had no resort but to withdraw funds quickly.

The effects of the stock market crash rippled throughout the economy. Nearly 700 banks failed in waning months of 1929 and more than 3,000 collapsed in 1930. Federal deposit insurance was as-yet unheard of, so when the banks failed, people lost all their money. Some people panicked, causing bank runs as people desperately withdrew their money, which in turned forced more banks to close. By the end of the decade, more than 9,000 banks had failed. Surviving institutions, unsure of the economic situation and concerned for their own survival, became unwilling to lend money. This exacerbated the situation, leading to less and less spending.

When doing more research, according to the US History.org under the Great Depression, nine thousand banks failed during the months following the stock market crash of 1929.

Nine thousand banks and countless people who could not retrieve their money from the bank. Where could the people turn and what help could the Government provide and what role did the Federal Reserve play in the Great Depression.

Let’s answer the questions above in the next lesson.

Jeff