Crashes and bubbles

1929 stock market crash

The worst stock market crash in history started in 1929 and was one of the catalysts of the Great Depression. The crash abruptly ended a period known as the Roaring Twenties, during which the economy expanded significantly and the stock market boomed.

The Dow Jones Industrial Average (DJINDICES:^DJI) rose from 63 points in August, 1921, to 381 points by September of 1929 — a six-fold increase. It started to descend from its peak on Sept. 3, before accelerating during a two-day crash on Monday, Oct. 28, and Tuesday, Oct. 29. The Dow on what is now known as Black Monday tumbled by nearly 13% and declined by another almost 12% on what is referred to as Black Tuesday.

By mid-November, 1929, the Dow had lost about half its value. The stock market was bearish, meaning that its value had declined by more than 20%. The Dow continued to lose value until the summer of 1932, when it bottomed out at 41 points, a stomach-churning 89% below its peak. The Dow didn’t regain its pre-crash value until 1954.

The primary cause of the 1929 stock market crash was excessive leverage. Many individual investors and investment trusts had begun buying stocks on margin, meaning that they paid only 10% of the value of a stock to acquire it under the terms of a margin loan. The investment trusts also often purchased shares of other highly leveraged investment trusts, making the trusts’ fates highly intertwined. Consumers, too, increasingly purchased items on credit. When the debt bubble burst, it caused the greatest stock market and economic crash in modern history.

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