The cautionary tale of the 1929 Stock Market Crash – The Black Thursday

This is an important time to revisit the October 24, 1929 stock market crash, also known as Black Thursday, which most historians tend to believe was the beginning of The Great Depression

A year on from the 2020 Coronavirus crash and the subsequent recovery of the Indian stock markets to their all-time highs (despite worsening public health conditions) should remind us that the state of the stock market may or may not depend on the state of the national economy and business ecosystem itself and can be broadly influenced by public greed, fear, and over-speculation.

Speaking of greed, fear, and speculation, this is an important time to revisit the October 24, 1929 stock market crash, also known as Black Thursday, which most historians tend to believe was the beginning of The Great Depression, a raging economic crisis that lasted for over a decade in the United States.

World War I and the Roaring 20s

The story leading up to Black Tuesday starts over a decade ago in the late 1910s. The United States emerged as one of the victors in World War I, delayed infrastructure projects started resuming, returning soldiers and women entered the American workforce, the national governments earned a substantial amount from the war and business was booming in The United States. Industrial production started delivering stupendous profits and more convenient products like the radios, the dishwashers, and the washing machines; Ford’s affordable Model T meant an everyday American could own a car too. Life was good in the early 1920s for an average American and this bought on the period of the ‘Roaring 20s’.

Since business was so good in the country and spending of the population skyrocketed due to the introduction of credit in the economy, and the companies were able to pay higher salaries to a larger workforce, America became a richer country, with many Americans now having more money than knowing what to do with. Seeing that business is good in the country, a lot of Americans looked to increase their wealth in the stock market.

Market Mania

People started buying up shares of companies in large quantities, and the state of the economy was so good that any stock pick could deliver multibagger returns. People took out loans from banks to buy shares in the stock market and the banks would happily lend it to them regardless of credit score. The banks would themselves use consumer deposits to buy shares in the stock market.

The market wasn’t just bullish, it was euphoric. It wasn’t uncommon for investors to pour their life’s savings into whatever was the hottest stock pick that day. The Dow Jones index, the American equivalent of Sensex, rose by 218% from the end of World War I till early 1929s. But this mania wouldn’t last for too long, as it was built on market sentiment way more than fundamental reasons.

The wheels start coming off

Companies realized that their production and revenue were unable to keep up with the increase in their stock prices. The entire market was overbought with massive loans and credits, and a slowdown in the economic cycle was long overdue. Products were not being made as quickly and sales had started to reduce. People started getting laid off their jobs as companies had to reduce expenditure and consumer expenditure was reducing as well, leading to increasing falls in revenue. People have taken too much debt and are unable to pay them back with reduced salaries, and interest rates have started to rise as well.

However, the stock market didn’t seem to be affected by this for a long time, and the buying mania kept going on. Eventually, the fear in the hearts of investors started to overcome the greed for making more money and the sense that this bull run is coming to an end is evident as investor uncertainty increased.

Black Thursday

Finally, on the ring of the bell on 24th October 1929, famously known as Black Thursday people started mass selling their shares and others have started shorting the market. The Dow Jones plunged by a massive 11% in the opening session of the day in massive volumes (to be precise, 13 million shares overall, a then-record in the history of the United States stock exchanges). Massive chunks of American wealth were erased. And while markets eventually recovered a bit that day, the panic was unbearable on 29th October 1929, commonly known as Black Tuesday where the Dow Jones fell another 12% and the record that was set on Black Thursday was already broken with 16.4 million shares sold in the opening session.

The markets lost $14 billion that day, equivalent to inflation-adjusted $220 billion today. Lost in one day. Many shares became worth $0, people lost their life savings and were grossly defaulting on their bank loans. The money deposited in the banks themselves was lost as the deposit money too disappeared in the stock markets. Depositors only got back 10 cents on every dollar they put in the bank.

This nationwide phenomenon of uncontrolled greed and fear, from companies to customers to the biggest banks, led to what’s known as the Great Depression.