Crash of 1929

Watching the news today, one cannot avoid hearing how well or poorly the stock market is doing. Reports on trading in stocks such as the Dow Jones Industrial Average, the NASDAQ, and the S&P 500 show us how the business world is operating every day. Often, these averages are used to make judgments about the health of our economy. But what is the stock market? Here is how materials from McGraw-Hill publishing defines the stock market:

Stock traders on the floor of the New York Stock Exchange in 1936.

Stock markets are associations of brokers and dealers who trade stocks and bonds. The New York Stock Exchange (NYSE) is the leading stock market in the United States. Stocks are shares in the ownership of businesses. The process of buying and selling a stock resembles an auction, with the shares going to the highest bidder. The price of a stock is determined by the number of shares available for sale and the number of people eager to buy them. If many people want to buy a stock, its price usually rises. If many people want to sell it, the stock’s price usually drops. The supply and demand of stocks for sale depend on business performance, their future prospects, the economy, national and international (world) events, public feelings about the future, and the stocks’ dividends. [Dividends are payments made to shareholders based upon company profits.]

The value of stocks traded on the NYSE grew steadily during the prosperous 1920s, reaching record levels in September 1929. To fund stock purchases, many investors bought “on the margin,” paying only a portion of the stock price at purchase and borrowing the rest from brokers. In 1929 about two million Americans owned stocks.

Fearing that the boom market would soon end, some investors began selling stocks in late September 1929. Almost overnight the value of stocks plunged. With many sellers and few buyers, the prices of stocks dropped far below purchase prices. Brokers demanded repayment of loans, forcing investors who had bought on margin to sell their stocks at a loss to repay loans.

On Tuesday, October 29, just thirty minutes after the NYSE opened, 3,259,800 shares had been sold for a loss of more than two billion dollars. The prices of fifty leading stocks dropped on average of forty points a share. An investor who paid one-hundred dollars a share for stock could get only sixty dollars a share for it. The market lost about fourteen billion dollars in a single day. Shock spread across the country. The already-weakened American economy collapsed, and the United States slid into the Great Depression.

The Great Depression brought millions into poverty, shook world governments, and made people question the safety of a free market economy. Political and business leaders would scramble for over a decade to find ways to overcome the difficulties caused by the massive depression.

How did the stock market crash affect the American economy?

In your own words, describe how the stock market crashed and why this had an impact on the American economy.