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 Brief History of U.S. Stock Market Crashes

(Causes, Costs, and Results)

The Crash of 1929

In total, 14 billion dollars of wealth were lost during the market crash.

Causes of the Crash:

1. Overvalued Stocks. Some analysts also maintain stocks were heavily overbought;
   
2. Low Margin Requirements. At the time of the crash, you needed to put down only 10% cash in order to buy stocks. If you wanted to invest $10,000 in stocks, only $1,000 in cash was required;
   
3. Interest Rate Hikes. The Fed aggressively raised interest rates on broker loans;
   
4. Poor Banking Structures. There were few federal restrictions on start-up capital requirements for new banks. As a result, many banks were highly insolvent. When these banks started to invest heavily in the stock market, the results proved to be devastating, once the market started to crash. By 1932, 40% of all banks in the U.S. had gone out of business.

On September 4, 1929, the stock market hit an all-time high. Banks were heavily invested in stocks, and individual investors borrowed on margin to invest in stocks. On October 29, 1929, the stock market dropped 11.5%, bringing the Dow 39.6% off its high.

After the crash, the stock market mounted a slow comeback. By the summer of 1930, the market was up 30% from the crash low. But by July 1932, the stock market hit a low that made the 1929 crash. By the summer of 1932, the Dow had lost almost 89% of its value and traded more than 50% below the low it had reached on October 29, 1929.

Following the Crash:

1. The Securities and Exchange Commission (SEC) was established;.
   
2. The Glass-Stegall Act was passed. It separated commercial and investment banking activities. Over the past decade though, the Fed and banking regulators have softened some of the provisions of the Glass-Stegall Act;
   
3. 3. In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

 

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