The 1929 Stock Market Crash and the Great Depression

The 1929 stock market crash was a collapse in US share prices in October 1929. The Dow Jones Industrial Average (the Dow), an index of large US company shares, fell 12.82% on 28 October and 11.73% on 29 October. By 29 October it was 39.64% below its peak of 381.17 on 3 September.

The Dow kept falling to 41.22 on 8 July 1932, which is 89.19% below the peak. The Great Depression, the long US economic downturn of the 1930s, began with a contraction. The National Bureau of Economic Research (NBER), the body that dates US business cycles, dates it from August 1929 to March 1933. The crash came two months into it.

The Dow's highest close of 1929 was 381.17 on Tuesday 3 September. It drifted lower for seven weeks. By Tuesday 22 October it closed at 326.51, which was 14.34% below the peak.

Chart 1 shows the daily close from 3 September to 31 December 1929. The Dow ended the year at 248.48, which was 34.81% below the peak. The table gives the sessions around the crash, including a Saturday close on 26 October.

Source: MeasuringWorth (Samuel H. Williamson); YX Insights calculation.

The history essay on the crash by the Federal Reserve (the Fed), the US central bank, calls Monday 28 October Black Monday and Tuesday 29 October Black Tuesday. Together the two sessions took the Dow down 23.05% from the Saturday close. The autumn low close was 198.69 on 13 November.

Chart 2 shows the daily close from 1920 to 1955. From the 1932 low the Dow needed a rise of 824.72% to regain the peak.

It first closed above 381.17 on 23 November 1954, at 382.74, after 25 years and 2 months.

The fall did not end in 1929.

The Dow rallied to 294.07 on 17 April 1930, which was 48.00% above the November 1929 low and still 22.85% below the peak.

Year-end closes then fell to 164.58 in 1930 and 77.90 in 1931. The low close came on 8 July 1932. A fall from a peak to a low is a drawdown.

What Is a Drawdown? covers how it is measured.

Those figures leave out dividends and inflation.

A second index, Robert Shiller's S&P Composite of large US company shares, lets us add reinvested dividends. On that basis, using monthly averages, the index fell 81.76% from September 1929 to June 1932. It regained its September 1929 level in January 1945, 15 years and 4 months later, before inflation.

Consumer prices fell over these years. In Shiller's inflation-adjusted version of the same series the level was regained in November 1936, 7 years and 2 months after the peak. The price alone took until September 1954.

The money stock is currency plus bank deposits. The Industrial Production Index is the Fed's measure of factory, mine and utility output.

Chart 3 sets those two measures and consumer prices side by side, all indexed to August 1929 as 100. By March 1933 the money stock was 35.24% lower and consumer prices were 27.17% lower. The Industrial Production Index was 51.71% lower.

The NBER dates the contraction from August 1929 to March 1933, which is 43 months. It dates the expansion that began in March 1933 as lasting 50 months, to May 1937. For how these dates are set, see What Is a Recession?

Industrial production was 2.40% below its August 1929 level in October 1929, 7.19% below in November and 11.30% below in December. Real Gross Domestic Product (GDP), output adjusted for price changes, was 26.34% lower in 1933 than in 1929. It first returned to its 1929 level in 1936.

Studies of the Depression point to bank failures, the money stock, the gold standard and tariffs. This section gives the numbers for each.

Bank suspensions, banks closing to depositors, ran at 628 among all incorporated US commercial banks in 1929. They reached 1,292 in 1930, 2,213 in 1931, 1,416 in 1932 and 3,891 in 1933. The total for 1930 to 1933 was 8,812. President Roosevelt ordered a national banking holiday on 6 March 1933.

Ben Bernanke, then a Fed governor, said on 8 November 2002: "During the Depression decade, something close to half of all U.S. commercial banks either failed or merged with other banks."

The gold standard fixed each currency to a quantity of gold, which tied countries' interest rates and money supplies together.

The Fed raised rates in 1928 and 1929. Its history essay on the Great Depression says that, because the gold standard linked countries' interest rates, these rises triggered recessions in other countries.

Britain left the gold standard in September 1931.

The Smoot-Hawley Tariff, a US law of June 1930 that raised import duties, is a further factor. Douglas Irwin's 1996 NBER working paper estimates that the tariff alone cut the volume of US imports by 4 to 8%. Those imports fell by over 40% in the two years after June 1930.

This guide reports named studies and does not rank them.

Milton Friedman and Anna Schwartz's 1963 A Monetary History of the United States emphasises monetary contraction, including the fall in the money stock.

Bernanke's 1983 work argued that the effective closing of the banking system might also have hurt the flow of credit. Barry Eichengreen and Jeffrey Sachs (1985) found that countries that left the gold standard earlier also recovered earlier.

Christina Romer's 1988 NBER paper argues that the crash generated temporary uncertainty about future income, which cut spending on durable and semidurable goods in late 1929 and much of 1930.

The Fed's history essay notes that Allan Meltzer (2003) and other scholars suggest the crash was a symptom of the contraction, not a cause. Irwin's estimate is that nearly a quarter of the import fall came from the effective tariff, meaning the tariff plus deflation.

For the reasons share prices fall in general, see Why Is the Stock Market Down? Whether crashes can be forecast is covered in Will the Stock Market Crash?

The crash was a fall of 39.64% in the Dow, from its 3 September 1929 peak to 29 October 1929. The Dow kept falling to 41.22 on 8 July 1932, which is 89.19% below the peak. It first closed above the peak again on 23 November 1954.

The Dow fell 12.82% on 28 October 1929 and 11.73% on 29 October. From its 381.17 peak on 3 September 1929 it fell 39.64% to the 29 October close. It kept falling and reached 41.22 on 8 July 1932, which is 89.19% below the peak.

The Dow first closed above its 1929 peak on 23 November 1954, 25 years and 2 months after 3 September 1929. That counts prices only. With reinvested dividends added, the S&P Composite regained its September 1929 level in January 1945, 15 years and 4 months later, before inflation.

Published studies give different answers. Romer's 1988 paper argues that the crash cut spending through temporary uncertainty. Other studies stress bank failures, the money stock, the gold standard or tariffs. The Fed's history essay notes that Meltzer (2003) and others suggest the crash was a symptom of the contraction.

No. A crash is a fast fall in share prices. A recession is a decline in economic activity, dated by the NBER. The NBER dates the contraction from August 1929, before the October crash. See What Is a Recession? for how recessions are defined.

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DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.