Black Thursday: The Great Crash of 1929

So far, we have watched the market acquire power enough to move the state. Wall Street, which began with an agreement beneath a single tree, grew up alongside the railroads and became the heart of the American economy. And after the First World War, that prosperity climbed to heights never seen before. Yet a peak that one has climbed is always also the edge of a cliff. In this chapter, we trace the frenzied age in which everyone believed in abundance, the autumn of 1929 when it came crashing down overnight, and the birth of new rules that rose from the ashes—through both their light and their shadow.

An Age When Everyone Dreamed of Riches: The Roaring Twenties

Having passed through the First World War, 1920s America boomed with unprecedented prosperity. In this age, later called the ‘Roaring Twenties,’ new industrial products—automobiles and radios, washing machines and refrigerators—spread one after another into homes, and society as a whole raced ever forward. Factories grew lively, corporate profits swelled, and the streets overflowed with new amusements. Tomorrow will be richer than today—it was an age full of hope, when this could be believed.

That fervor came pouring into the stock market. Capital, flush from the boom, turned toward stocks, and share prices kept rising. And the very fact that share prices were rising drew still more people into the market. Stock investment, once the preserve of a wealthy few, is said to have spread to shopkeepers, clerks, and drivers. Everyone caught wind of how a neighbor had made money on stocks and, unwilling to be left behind, stepped into the market themselves.

What came into wide use here was a technique called ‘buying on margin.’ To buy stock, one paid only a small fraction of the price oneself and borrowed the rest from a broker. Since the entire amount of any rise became one’s own profit, it was a mechanism by which one could earn big with little capital. As long as share prices kept rising, there was no scheme more convenient. Yet, turned around, it was also a castle built on sand, with debt as its foundation.

The Autumn When Everything Came Crashing Down: The Great Crash of 1929

The peak arrived suddenly. Thursday, October 24, 1929. Share prices, which had kept rising until then, began to plunge the moment the market opened. A record number of shares were put up for sale, and people threw their holdings onto the market in a rush to get out first. This day would later be called ‘Black Thursday.’ Though it seemed for a moment to recover, the anxiety did not vanish.

And then Tuesday, October 29. On this day, called ‘Black Tuesday,’ sell orders poured in like an avalanche, and the market collapsed as if its floor had given way. Within just a few days, share prices are said to have fallen sharply. Those who had bought stocks on margin were asked for additional funds, and if they could not pay, they had no choice but to let their shares go. That distress selling drove prices down further, and the fallen prices called forth still more selling—the same cycle as in the rise now began turning in reverse, with terrifying force.

The wealth that had swelled on paper vanished like an illusion. People who had wagered on stocks with borrowed money faced the harsh reality of being left not with assets but with debt alone. Yet the true tragedy began here. The market’s collapse did not stay within the market alone.

The Chain of Depression and the Birth of New Rules

The crash in share prices soon swallowed the entire economy. People who had lost their assets tightened their purse strings, and goods stopped selling. When goods did not sell, factories cut production and workers lost their jobs. When jobs were lost, goods sold even less—it was an exitless vicious cycle, where contraction called forth contraction. This was the beginning of the Great Depression. America’s unemployment rate, within just a few years, is said to have leapt to a level approaching one in four of those able to work. And the crisis crossed the Atlantic, dragging in the economies of nations around the world. That the market had gained power enough to move the state thrust forward the reality that its collapse, too, could reach a scale enough to shake the world.

This unprecedented calamity left people with a single question: why could no one stop a runaway of such magnitude? In searching for the cause, overheated speculation, unfair trading in which only those who knew the inner workings profited, and the touting of stocks on baseless information rose to the surface as problems. A market cannot be protected merely by leaving it free. Since it holds power that draws in society as a whole, the market requires a guardian to preserve fairness and transparency—such a recognition was at last coming to be shared.

As the answer, new laws were put in order from 1933 to 1934, and the Securities and Exchange Commission (SEC), which oversees the market, was established. Companies came to bear the duty of disclosing accurate information to investors, and fraudulent trading came to be policed. Such regulation, binding the freedom of the market, is said to have drawn both praise and criticism even at the time. Yet the keen lesson—that leaving everything to the market’s goodwill had invited the Great Depression—pushed it forward.

The great crash that shook the world carved a deep scar into the history of the market. Yet people did not merely stand frozen amid the collapse. Learning from the pain, they built new rules and sought to remake the market into something more worthy of trust. Next time, we move toward the story of the securities market rising from the ashes after the war, and of investing—once the preserve of a few—spreading into the midst of ordinary life.