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Wednesday, October 25, 2006

Black Thursday, October 24, 1929

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Today in 1929, the New York Stock Exchange began a slide that would soon cause share prices across the board to fall. The day became known as “Black Thursday”, as it marked the beginning of the stock market collapse that was the first indicator of what would become known as the Great Depression.

Black Thursday did not occur without warning. That October had seen stock prices rise and fall sharply, then return to an ominous calm. Up to then, however, most of the western world had lived in a sort of rosy haze of economic prosperity the likes of which civilizations had never seen. The “Lost Generation”, those born during the last decade of the 19th century, came home from the First World War ready to forget what a cruel place the world could be. The economic boom of the 1920’s was, in part, supported by an overfed confidence that believed the good times were here to stay.

The dissipation could not go on forever. The stock market of the 1920’s was fed by banks who made loans to millions of Americans so they, too, could get in on the money being turned out on Wall Street. Borrowing money to buy stock was a new concept in financial circles, but when every stock seemed to bring a good return on investment, there was little reason to worry about bad loans. Share prices rose, leading more and more people to invest. Optimism was high, but as would happen 70 years later during the “dot-com” boom, share prices soon became grossly inflated. On September 3rd, 1929, the Dow Jones Industrial Average reached an all-time high of 381.17. It would not be that high again for nearly 25 years.

When the bubble burst on Black Thursday, panic selling took hold. Nearly 13 millions shares were traded, a record during the days of manually inputed stock prices and slow ticker-tape machines. At 1PM that day, a group of Wall Street bankers met and tried to plan a way out of the chaos. Richard Whitney, the Vice President of the New York Stock Exchange, was chosen to act on their behalf. With the resources of almost every large bank in the nation behind him, Whitney placed bids on huge blocks of blue-chip stocks, offering to buy them at prices above current market value. This tactic had worked once before during the Panic of 1907, and it seemed to work this time as well.

As with so many events of the 20th century, the media’s weekend coverage of the stock market slide helped set the nation on edge. By Monday, October 28th, investor confidence had dropped off the chart and stocks were soon in free fall. The next day was no better. Several of the wealthiest families in the United States, including the Rockefeller family, bought large quantities of stock in an effort to instill investor confidence. But it was too late. In the course of four working days, the stock market had lost more than 25% of its value.

The economy made something of a recovery in 1930, but the end of the year saw another market crash. This time, the slide continued for two years. By the end of 1930, the entire nation was feeling the economic grip of a depression. The low point came on July 8th, 1932, when the Dow Jones Industrial Average fell to 41.22, the lowest it had been since the end of the 19th century.

A room full of economics professors could well spend the rest of their careers arguing about the root causes of the Great Depression. First, it is important to remember that the stock market crash did not cause the depression; the economy was already fragile and the slide of 1929 was just a contributing factor.

As the economic situation worsened in the first years of the 1930’s, President Hoover tried to boost the economy, first by signing the Smoot-Hawley Tariff Act. The Act imposed tariffs on more than 3,200 imported products at rates that averaged near 60%. It was hoped that this would encourage Americans to buy more US products. What it actually did was encourage other nations to slap large tariffs on US goods, which had an enormous effect on the amount of goods the United States could sell overseas. The end result was a worsening of the already-gloomy economic picture.

The Pecora Commission was established by the US Senate in 1931 to find the cause of the crash. The end result of the Commission’s work was the Glass-Steagall Act, which is actually two laws. Among other things, they increased the power of the Federal Reserve, took the United States off the gold standard and created the Federal Deposit Insurance Corporation, which guarantees the deposits of bank customers to this day.

It is a common belief that the wide-ranging programs of President Franklin Roosevelt brought the Great Depression to an end. Although the economy would see some improvement during the latter years of the 1930’s, it was still considered in depression until after the United States entered the Second World War in December, 1941. It is interesting to note that as of April, 1942, stock prices on the New York Stock Exchange were still 75% below their pre-October 1929 levels.

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