Black Tuesday, 85 years ago today, has been known ever since as the day Americans lost faith in the stock market. It is seen sometimes as the beginning of the Great Depression, but in fact is probably only the most remembered signal that the American economy was on a downward trajectory.
The 1920s had been a period of fast growth following the end of World War I. People were adopting new technologies -- electrical service, telephones, radios and family cars -- and feeling good about their futures.
During those years, Americans came to believe that high growth was the new normal. The value of the Dow Jones Industrial Average grew 600 percent, from 63 in the summer of 1921 to 381 by early September 1929.
As stock values rose, more people invested, pushing prices higher. In those days, banks would lend up to 90 percent of the price of a stock to investors. Small investors piled into the market.
But there were warning signals that a bubble was forming. Real estate values peaked in 1925 and then began falling.
By the spring of 1929, steel production was declining, home construction was declining and car sales were declining. In addition, the 1928 and 1929 wheat harvests were huge and the oversupply of grain reduced prices in an economy that still had a large agricultural sector.
In March 1929, the Federal Reserve issued a warning about market froth and bank lending for stock purchases, and there was a "mini-crash" on the 25th of the month.
On October 28, 1929, the Dow dropped by 12.8 percent. The next day, Black Tuesday, brought another 12 percent drop.
Prominent bankers and industrialists invested in the stock market to shore up public confidence, which helped a little. But not enough.
What followed was a cascade of reactions. Banks called in margin loans that had been made for stock purchases. Stock sellers put their proceeds into banks, but their actions were offset by panicked depositors who, fearing bank failures, began drawing their money out of banks. The Federal Reserve flooded the banks with cash to keep the banks from failing.
Still, within a year 744 banks failed and another 1,350 suspended operations. (Remember, this was before the adoption of deposit insurance; unlucky depositors lost some to all of their money.) By the end of the 1939, 9,000 banks had failed.
And, confidence lost, the stock market decline continued.
As people worried about their financial security, they cut back their purchases. As demand for products declined, businesses laid off workers.
Because there was no tracking of employment at the time, the chart below estimates unemployment levels between 1929 and 1940.
Black Tuesday was scary, no doubt. Anytime the stock market drops 25 percent in two days is a concern.
But was the panicked reaction that followed proportionate to the event? Or was it an accelerant that turned an expected financial correction into the long, deep and very painful Great Depression?
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