The Wall Street Crash: the day the bubble burst

Ninety years ago, the buoyant US economy suffered a cataclysmic earthquake from which it would take an entire decade to recover. Writing for BBC History Revealed, Nige Tassell recalls the events and aftermath of the Wall Street Crash of 1929

Scores of people milled about the entrance to the Stock Exchange on 24 October 1929, as the market went through the greatest shake up in its history. It was a light tremor heralding the earthquake to come. (Photo by NY Daily News Archive via Getty Images)

On Thursday 24 October 1929, Wall Street – a narrow thoroughfare at the southern tip of Manhattan Island – was unusually busy. Extremely busy. The street’s most significant building, the New York Stock Exchange, didn’t open for business until 10am, but vast crowds were gathering.

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This didn’t mean good news. It was neither a homecoming nor a victory parade. Instead, the atmosphere was thick with concern, with fear, with panic. In the last hour of trading the previous afternoon, the financial market had plummeted, with 2.6 million shares being sold in a chaotic last flurry of business. Flurry is perhaps too gentle an adjective. It was a hurricane.

The very visible concern on the streets of Lower Manhattan the next morning was understandable. The market maintained its downward spiral for the rest of that week and into the next. The following Monday saw it drop 12.8 per cent in value. On Tuesday – henceforth known as Black Tuesday – a further 12 per cent fall was recorded. Those who had gathered the previous Thursday to show concern were now crestfallen and broken. As the New York Times reported, the sense of resignation on Wall Street, the reality of personal financial ruin, was ubiquitous. “There were no smiles. There were no tears, either. Just the camaraderie of fellow sufferers. Everybody wanted to tell their neighbour how much he had lost. Nobody wanted to listen. It was too repetitious a tale.”

Why did the Wall Street Crash happen?

No-one could claim to have foreseen what occurred across those six days in October 1929. For several years, the US had been on a roll. Unlike the other industrial nations – which, after the four devastating years of World War I, were severely damaged or close to breaking economically – the US, thanks to its late entry into the war, emerged comparatively unscathed, financially.

The following decade saw a tremendous transformation, both industrially and culturally, from coast to coast. The cotton was high. “Jobs were plentiful and paychecks grew steadily,” observed Wall Street financial journalist Karen Blumenthal. “The 1920s didn’t just sing with the rhythms of jazz, or swing with the dancing of the Charleston. They roared with the confidence and optimism of a prosperous era.”

During the Roaring Twenties, industrialists and bankers became heroes of the nation

During the Roaring Twenties, industrialists and bankers became heroes of the nation, as well as being admired with the riches they had created for themselves. And the average American fancied a small fortune of their own. It would be Charles Mitchell, the president of National City Bank and thus one of these fêted figures, who would offer the passage to such prosperity.

Mitchell took his inspiration from the success of liberty bonds, which had been issued to the public during the last two years of World War I as a way of financing the Allied war effort. Promoted by cultural icons like Charlie Chaplin and Al Jolson, the public – seeing such outlay as a patriotic duty (especially when they earned up to 4.25 per cent in interest) – were thus introduced to the notion of investment.

They might have been underwritten by government, but the success of liberty bonds meant that, to the public’s mind at least, putting savings into stocks and shares on the financial market was now seen as respectable, when previously it had been deemed risky.

Mitchell opened brokers’ offices across the country to satisfy, and further encourage, this dabbling on the stock market. By the mid-1920s, three million Americans were stock investors, seduced by the magnetic pull of getting rich in such an uncomplicated way. The market was in the ascendancy. For instance, if an investor bought shares in either the department store chain Montgomery Ward or the utility firm General Electric in March 1928, they’d see their money doubled within just 18 months.

The gold rush was irresistible, even to previously staid, conservative businessmen. “The market was enchanted,” says Blumenthal, “part of an affluent and exciting time that seemed likely to continue forever. Politicians, professors and businessmen proclaimed that this was a new era, where the old ups and downs no longer applied.”

What were the warning signs?

While the bubble continued to expand, no-one seemed to pay too much attention to the elephant in the room. Most of the stocks invested in by the average American were bought ‘on margin’ – that is, partly by borrowing from the brokers. In some cases, as much as 90 per cent of the purchase price was loaned. Should there be a sizeable crack in the market, the average stock investor had plenty to lose. Underneath the hype, it was a fragile house of cards.

Prior to the crash of late October 1929, prices had slipped a little the previous month. Not too much notice was taken. Experts saw a red-hot market being subject to a little ventilation as no bad thing. The sharper players took advantage of these lower prices. After all, following every previous blip over the past few years, the market had more than recovered its previous position.

Underneath the hype, the market was a fragile house of cards

Those six October days were far from a blip. They delivered a near-fatal blow to the US economy as a whole – and a definite fatal blow to millions of personal livelihoods. Industry found it difficult to trade, as belief in the concept of credit – and in the credibility of the banking system – had been shot to pieces. The scramble for money to continue to operate and to pay wages was intense.

Manufacturing was reduced as a result; within three years of the crash, production of the motor car, such a symbol of the good times of the 1920s,was around a quarter of what it had been. Unemployment rose spectacularly too. Six months after the events of October 1929, the jobless total had more than doubled to 3.25 million.

These were desperate times. “The descent came by stages,” wrote historian Hugh Brogan. “The loss of one job; the search for another in the same line; the search, growing frantic, for work in any line; the first appearance at the bread-line, where, astonishingly, you met dozens of other honest men who had kept the rules, worked hard and were now as low as the professional bums.”

The rural unemployed moved en masse to find work, whether in the drought-ridden dustbowls of Texas and Oklahoma heading west to find agricultural jobs in California or on plantations in the Deep South heading north to the industrialised cities. These times were just about economic uncertainty. The very fabric of American society was beginning to fray.

How did the Wall Street Crash affect the US economy?

The Wall Street Crash wasn’t the cause of the Great Depression, but it did mark the beginning of it. It was the equivalent of a heart attack being suffered by someone with high blood pressure. The economy had a pre-existing condition, an underlying weakness. But its aftercare – as administered, or otherwise, by President Herbert Hoover – was insufficient.

The Republican President was reluctant for the government to step into the crisis, believing that a more laissez-faire stance would encourage businesses and banks to right the economy. His aloofness as a person didn’t help his argument, and he was ridiculed for appearing not to care enough for his fellow citizens. Those who’d been hit hardest by the Great Depression and had their homes foreclosed were living in shanty towns, which the President’s critics dubbed ‘Hoovervilles’.

The Wall Street Crash wasn’t the cause of the Great Depression, but it did mark the beginning of it

It came as no surprise that, at the presidential election of 1932, Hoover was unceremoniously dumped from office, with his successor, the Democrat Franklin D Roosevelt, winning 57.4 per cent of the popular vote. The mandate of the landslide, coupled with large Democrat majorities in both houses of Congress, allowed for a brave tackling of the country’s plight.

After Hoover’s failure, the public clamour for the government to intervene was deafening. At Roosevelt’s inauguration in March 1933, he sought to reassure and unite a broken population. “The people of the United States have not failed. In their need, they have registered a mandate that they want direct, vigorous action.

“Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the government itself, treating the task as we would treat the emergency of a war.”

The effect was instant. “In a few minutes,” Brogan also wrote, “Roosevelt did what had so wearingly eluded Hoover for four years: he gave back to his countrymen their hope and their energy. By the end of the week, half a million grateful letters had poured into the White House – first waters of a flood that was never to dry up.”

Mobster Al Capone sponsored this soup kitchen for folk on the breadline in Chicago. (Photo by: Photo12/Universal Images Group via Getty Images)
Mobster Al Capone sponsored this soup kitchen for folk on the breadline in Chicago. (Photo by: Photo12/Universal Images Group via Getty Images)

How did Roosevelt’s New Deal combat the effects of the Wall Street Crash?

In his first 100 days in office, Roosevelt certainly kept his promises. That vigorous, direct action came in the form of 15 major laws aimed at creating jobs and rebooting industry, the economy and, symbolically, belief.  The legislative strides he made were speedy and sizeable.

The Emergency Banking Act aimed to stabilise – and thus restore faith in – the banking system through the introduction of federal deposit insurance, while the Federal Emergency Relief Administration offered support for the poor in the form of blankets, soup kitchens and employment opportunities. Work was also offered to those signing up for the Civilian Conservation Corps, which placed the unemployed in six-month camps, working on conservation projects while earning $30 a month. By the scheme’s end in 1942, 2.5 million men had been employed by the corps. Further work was on offer through the Public Works Administration, set up to improve the country’s infrastructure.

More money had to be printed to end a run on the banks in March 1933. (Photo by Imagno/Getty Images)
More money had to be printed to end a run on the banks in March 1933. (Photo by Imagno/Getty Images)

Roosevelt’s programme – delivered under the New Deal banner – was revolutionary in the way it placed the federal government, previously largely invisible in everyday life, at the heart of the nation’s recovery. The project to rebuild the US – both materially and psychologically – was an impressive one, yet the nation wasn’t completely united behind the cause. Some Democrats still felt it didn’t go as far and as deep as it might, while many Republicans, echoing the stance previously taken by Hoover, felt it was an unwelcome and invasive repositioning of the role of big government.

Regardless of how energising the New Deal was to the nation, it didn’t solve the Great Depression. Productivity failed to revive in quite the manner that Roosevelt hoped, while unemployment remained high throughout the 1930s. His success, though, measured by three further presidential election victories, was one of motivation and inspiration.

The Great Depression was ended by events out of the president’s control. When the Japanese bombed Pearl Harbor in 1941, forcing the US to enter World War II, the economy belatedly rebounded. In order to supply troops overseas, productivity in the manufacturing and agricultural sectors expanded rapidly, while creating millions of jobs. The prosperous times would return.

THE CRASH HEARD AROUND THE WORLD

Understanding the global effect of October 1929…

The Wall Street Crash didn’t send ripples across other countries’ economies: it had a tsunami-like effect, showing how economically interconnected the world had become.

Unlike the US, Britain hadn’t enjoyed a prosperous, buoyant Twenties. The cost of the four years of World War I had dictated that. With New York increasingly seen as the global centre of finance, Britain’s economy struggled to repair itself and unemployment remained high throughout the decade. When the Crash occurred, Britain tumbled into a depression that parliament – failing to enact the kind of New Deal-style recovery plan that ultimately revived American fortunes – couldn’t prevent. By 1934, Britain began defaulting on war debts owed to the US.

Germany had defaulted on its war reparations two years earlier. Following the Wall Street Crash, the US had withdrawn capital from the country and, in attempting to achieve economic equilibrium, Chancellor Heinrich Brüning cut public expenditure, causing productivity to fall and unemployment to rise. The German banking system collapsed in 1931. France had enjoyed a significantly more prosperous 1920s than either Britain or Germany.

This was down to sizeable government investment in industry and infrastructure. In the early aftermath of the Crash, its economy appeared more resolute than those of its neighbours across the English Channel and to the immediate east. This didn’t last long. The global recession caused a fall in demand for French exports and the country sank into economic turmoil, with a succession of brief governments unable to stymie the fall.

Across these three European countries, severely depressed economies gave rise to radicalised politics, most significantly in Germany where Adolf Hitler became Chancellor in 1933 and established a one-party state that would violently reconstruct the face of Europe.

Nige Tassell is an author and journalist who writes about sport and history.

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This article is taken from the November 2019 issue of BBC History Revealed.