Financial Collapse of 1929's Stock Exchange
The catastrophic stock market crash of 1929 transpired after a spell of remarkable economic prosperity, now famously known as the Roaring Twenties. At the time, the Dow Jones Industrial Average (DJINDICES:^DJI) stood at 63 points in August 1921, yet it amplified sixfold over the subsequent eight years, reaching a peak of 381.17 points on September 3, 1929. This September day represented the zenith of the longest uninterrupted bull market in U.S. history up until then.
The ensuing dramatic plunge from this apex triggered a major economic downturn, with the U.S. succumbing to a prolonged depression. Let's delve into the details of the stock market crash of 1929.
The plot unravels
Unraveling in 1929 as the stock market crashed
The stock market's decline officially commenced following September 4, 1929, but the worst of the crash didn't reveal itself until more than a month later. On October 29, the Dow Jones Industrial Average plummeted by nearly 13%. The next day saw another significant downturn, with a fall of around 12%. These two disastrous days thenceforth became synonymous with "Black Monday" and "Black Tuesday."
Contemplating the extended aftermath, the stock market continued its downward spiral. By mid-November 1929, the Dow had plummeted by nearly half. The index did not regain its lowest point until the middle of 1932, when it closed at a depreciated 41.22 points - an astonishing 89% diminution from its peak. The Dow did not surpass its September 1929 high until November 1954.
The roots of the catastrophe
The roots of the 1929 stock market crash
The optimism of Roaring Twenties' investors fueled an excessive bubble in the stock market. The steadily rising stock prices instilled confidence amongst consumers, leading to exorbitant spending on luxury items like cars and telephones. This newfound confidence prompted consumers to accumulate these commodities on credit – a practice so widespread that by 1927, 15% of all major consumer purchases were made on installment plans.
To satisfy this ravenous demand for credit, thousands of banks and numerous new "installment credit" companies rushed to grant loans. Pinning their hopes on the growing U.S. economy, numerous overseas creditors eagerly supplied gold and assets to U.S. banks. Moreover, many of these "installment credit" companies were subsidiaries of major U.S. manufacturers themselves.
The growing debt burden throughout the 1920s soared dramatically, with the total derivative non-corporate debt in the U.S. reaching 40% of the nation's GDP (Gross Domestic Product) by September 1929.
Concurrently, the euphoric stock market gave birth to a multitude of brokerage houses and investment trusts, which democratized stock purchases for the everyday person. As a result, amateur investors not only began acquiring stocks outright but also commenced opening margin accounts, enabling stock purchases with borrowed money.
Investors with margin accounts typically pay only 10% of a stock's purchase price initially, with the stock itself serving as collateral for the remaining 90%. As investors increasingly relied on margin accounts to obtain stocks beyond their financial reach, new money flooded into the stock market, driving up stock prices exponentially.
The easy availability of leverage was amplified many times over, with both individual investors and investment trusts acquiring assets using borrowed capital. Some investment trusts, heavily reliant on borrowed funds, similarly invested in other over-leveraged investment trusts, which, in turn, invested in other trusts employing the same speculative strategy. In total, these mutually entwined trusts became heavily influenced by the movements of others' stocks, causing the market to plunge when the bubble burst in September 1929.
In the wake of the crash, the affected banks and lenders were saddled with immense debt and no means to recover the collateral-meager stocks they had extended loans for. Their only recourse was to limit all other avenues of lending, including consumer credit, which further diminished consumer spending during this period of economic downturn. The resulting hiccup in consumer spending triggered business closures and mass layoffs, perpetuating an escalating cycle of debt and unemployment. And with dysfunctional banks and investors filing for bankruptcy en masse, the economy was pushed into a tailspin.
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After the stock market crash of 1929, many investors faced financial losses. To mitigate these losses and recover their wealth, they started investing their money wisely in various finance and investment opportunities.
The 1929 stock market crash served as a harsh lesson for investors, emphasizing the importance of careful and responsible investing. To prevent a repeat of such a catastrophe, investors began educating themselves on finance, investing, and economic trends, ensuring they made informed decisions.
