The Stock Market Crash of 1929

It was a time of great economic boom in the U.S. after World War I. The economy benefited greatly, fueled by industrialization and rapidly developing new technologies like the automobile and air travel.

This boom took stock market to great heights. From 1920 to 1929 stocks more than quadrupled1 in value. Because of such high soaring stocks, they were considered as extremely safe investments. The common man believed stocks to be a “sure thing” thus researching little into the company whose stocks were being bought. Investors started purchasing stock on “margin”. Investors started getting more and more leverage through margin financing their stock investments. Because of this leverage, if a stock went up by a little percentage, the investor received a magnified profit. Unfortunately, this also works the other way around. Small losses were also amplified. Investors went to the extent of mortgaging house and property because most of them never thought that a crash was possible. They thought that the market always “went up”. Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing.

In 1929, the U.S. Federal Reserve increased rates several times to calm the worked up stock market. (The fed funds rate is what banks pay when they borrow. It affects the rates they charge when they lend. Those rates, in turn, influence other interest rates in the economy, and the rate of inflation.) On Thursday October 24 1929, panic selling started in the market as the investors realized that the roar in the stock market was an over exaggerated bubble.