FinanceComparison.com.au

The Stock Market Crash of 1929

The Stock Market Crash of 1929, referred to with ominous black day names, is probably the most famous stock market crash in the recorded history of the stock market. While events began on the Monday and Tuesday of that week, Black Thursday, October 24 1929, is when the market crash made national and international news. A number of combined factors made this massive market crash possible, and because of the drop, millions in apparent wealth were lost within a single day.

Lack of regulation during a bull market leads to inflated stock values. In 1929 this lead to a scenario in which novice investors, and inexperienced professionals ignored fundamentals, and fraudsters proliferated. The 1929 crash saw many reforms aimed at eliminating state legislation differences with regard to market practices and unification of investment laws. Individual state laws governing investments are called blue-sky laws and after the 1929 crash, and the Uniform Securities Act, these laws are common to 40 of the 50 United States. Most current state laws are modeled after this act. 

Causes of the 1929 Stock Market Crash 

The major causes of the 1929 crash are two fold. The economy did dip during these years, and certainly international factors, such as the end of the First World War, affected fundamental economic issues of the time. There were completely mundane economic reasons for a downturn in all markets during this era, however, market practices enabled questionable and outright fraudulent behavior to propagate through all levels of the economy and the relatively unregulated stock market suffered greatly because of this.

Did the Market Crash Cause the Depression?

While the affects of the Great Depression are often marked as starting around the time of the 1929 crash it really was a delayed effect. This is similar to the recent housing market bubble where fundamental investors warned for months or years of inflated values and poor regulation. Because of the lack of regulation investment companies were able to portray a variety of investments that lacked fundamental value as opportunities caused a massive influx of new investors and an attitude that fundamentals could be ignored. In many ways the market crash was a result of a real economic depression that had earlier taken fold, rather than a cause for it.

Reaction to the Crash

To keep the market solvent J P Morgan literally wrote a check to keep the stock exchange from becoming insolvent. This prevented bankruptcy, but the lack of regulation had yet to be addressed. Much legislation was passed in the intervening years to address issues of solvency, over lending, and truth in investment literature. Further suitability of certain investors to certain investments was addressed. Investment professionals were forced to record the suitability of investors in any investment they advertise, as well as the investor’s attitude toward risk. Today only real estate, and hedge funds remain outside these regulations, though much attention is dedicated towards deciding whether these too should be more regulated.

Listed below are some additional resources relating to the stock market crash of 1929:

• The Depression & World War II

• The Great Depression

• The Dustbowl

• Blue Sky Laws

• The Uniform Securities Act

Return to Top