The Wall Street Crash of 1929, also known as the Great Crash and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout. The crash signaled the beginning of the 10-year Great Depression that affected all Western industrialized countries, and did not end in the United States until the onset of American mobilization for World War II at the end of 1941 (Figure 2).
The crash followed a speculative boom that had taken hold in the late 1920s, 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 were buying. More than $8.5 billion was loaned, more than the entire amount of currency circulating in the U.S. at the time.
The rising share prices encouraged more people to invest; people hoped the share prices would rise further. Speculation thus fueled further rises and created an economic bubble. Because of margin buying, investors stood to lose large sums of money if the market turned down, or failed to advance quickly enough. 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.
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 Glass–Steagall 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.
Effects and Academic Debate
The Wall Street Crash had a major impact on the U.S. and world economy, and it has been the source of intense academic debate from its aftermath until the present day. The psychological effects of the crash reverberated across the nation as business became aware of the difficulties in securing capital markets investments for new projects and expansions. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties, including contraction of credit, business closures, firing of workers, bank failures, decline of the money supply, and other economic depressing events.
The failure set off a worldwide run on U.S. gold deposits and forced the Federal Reserve to raise interest rates. Some 4,000 banks and other lenders ultimately failed. Also, the uptick rule, which "allowed short selling only when the last tick in a stock's price was positive" was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run.
Many 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 Kondratieff, 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, makes the argument that what made the "great contraction" so severe was not the downturn in the business cycle, trade protectionism, or the 1929 stock market crash, but the collapse of the banking system during three waves of panic over the 1930-33 period.