The 1929 Stock Market Crash and the Onset of the Great Depression

What happened

Stock prices rose sharply through the 1920s amid widespread use of margin loans and limited regulatory oversight of exchanges. The Dow Jones Industrial Average reached its peak on September 3, 1929. On October 24, 1929, known as Black Thursday, trading volume surged and prices fell rapidly, prompting a group of bankers to buy shares in an effort to stabilize the market.

Prices declined further on October 28 and then collapsed on October 29, 1929, Black Tuesday, with more than 16 million shares traded. The market continued to fall through 1930 and reached its lowest point in July 1932, when the Dow stood at approximately 41, down roughly 89 percent from its 1929 high.

Commercial banks that had lent heavily to stock speculators faced runs as depositors withdrew funds. More than 9,000 banks failed between 1930 and 1933. Industrial production fell by nearly half, and unemployment rose from under 4 percent in 1929 to approximately 25 percent by 1933.

Banking failures and monetary contraction

The wave of bank failures reduced the money supply as deposits were destroyed and lending contracted. The Federal Reserve did not prevent the collapse of the banking system or offset the decline in the money stock with open-market operations.

Deflationary pressure intensified as prices fell and real debt burdens increased for households and firms. International gold flows and adherence to the gold standard transmitted the contraction across countries.

Government policy responses

The Hoover administration initially relied on voluntary cooperation from business leaders and limited federal spending. The Smoot-Hawley Tariff Act of 1930 raised duties on imports, prompting retaliatory measures from trading partners.

After Franklin Roosevelt took office in March 1933, the federal government declared a bank holiday, passed the Emergency Banking Act, and created the Federal Deposit Insurance Corporation. The Securities Act of 1933 and the Securities Exchange Act of 1934 established new disclosure and oversight rules for securities markets.

Official investigations and findings

The Senate Banking and Currency Committee conducted hearings from 1932 to 1934 under counsel Ferdinand Pecora. Testimony revealed practices such as pool operations, insider trading, and conflicts of interest at major banks and brokerage firms.

The Pecora hearings produced a detailed record of market abuses but did not produce a single comprehensive report equivalent to later crisis commissions. Their findings directly informed the drafting of the 1933 and 1934 securities laws.

Economic interpretations

Milton Friedman and Anna Schwartz, in A Monetary History of the United States, identified the Federal Reserve's failure to expand the money supply as the primary cause of the depth and duration of the contraction. Other analysts, including John Kenneth Galbraith in The Great Crash 1929, emphasized speculative excesses and structural weaknesses in the financial system.

Later scholarship has examined the interaction between monetary policy, the gold standard, and aggregate demand, with contributions from economists such as Peter Temin and Ben Bernanke.