Black Thursday began the stock market crash of 1929. That Thursday saw the markets decline steeply by 11%. The following Black Monday of 1929 a few days later proved to be worse. Stocks crashed another 13% that Monday, October 28th. The following day became known as Black Tuesday as all of the remaining gains for the whole year were wiped out in that continuing stock market rout. This comprised the worst markets crash in American history. Black Thursday and the subsequent few days of crashes eventually led to the Great Depression.
The day before Black Thursday, investors had already taken significant losses and were feeling nervous. That prior Wednesday the markets declined by a steep 4.6%. The Washington Post made matters worse with their Thursday morning headline that roared, “Huge Selling Wave Creates Near Panic as Stocks Collapse.” The market opened at 305.85 on Thursday morning and proceeded to drop 11% throughout the day. The losses of this first crash day proved to be greater than a typically lengthy stock market correction.
Wall Street bankers became worried as they observed that stocks had already retraced almost 20% from the record close of September 3, 1929 at 381.2. The Black Thursday volume turned out to be three times as high as the daily average at 12.9 million shares. This made matters worse. After the three stock market crashes of Black Thursday, Black Monday, and Black Tuesday, the three foremost banks attempted to restore market confidence by purchasing stocks. This intervention seemed to work for a time, but it proved to have only a temporary effect.
These crashes alone did not begin the Great Depression of 1929. They did set the scene in destroying business investing confidence. Next individuals understood that the banks had taken their savings and invested them in stocks on Wall Street. They raced to be the first to withdraw their deposits. Banks closed down for the weekend then only disbursed ten cents for every dollar.
A great number of individuals who had never participated in the stock markets similarly lost all of their life time savings. The banks that no longer had deposits were forced into bankruptcy. This meant that businesses could no longer access loans and individuals were unable to purchase houses.
Wall Street sought safety in gold and pushed up the prices of the precious metal. At the time the dollar was on the gold standard. People traded in their dollars in exchange for gold which dangerously reduced gold reserves. This forced the Federal Reserve to increase interest rates to safeguard the dollar’s threatened value. It was this contractionary monetary policy that severely worsened the self destructive economic down spiral.
The irrational exuberance of the Roaring Twenties led to the black week of 1929. Stock market investing grew to become a national hobby. Stock market values roared up by 218% in the years from 1922 up to just before the crash. These returns amounted to more than 20% per year.
The financial situation became aggravated as people with no cash to invest could simply buy stocks on margin from their stock brokers with as little as 10% or 20% down. Banks began investing their depositor’s money without letting them know.
The resulting misappropriation of funds caused the run on the banks that came to characterize the Great Depression. Because of these all too common events, President Roosevelt came up with the Federal Deposit Insurance Corporation as part of his New Deal in order to restore confidence in the banks and to safeguard future depositors’ money.