The Stock Market Crash of 1929 still remains to be a big event in the history of stock trading even after 80 years of its occurrence. The great depression of 1929 rocked the life of investors all around the world.
The day was September 4th 1929 when the stock market saw a massive high. This high encouraged banks into investing heavily into stocks. Even lots of individual investors got into investing with the hope of fully exploiting this high. But the high was not there to stay. And on October 29th 1929 the stock market saw a huge drop in the Dow. That day the Dow had dropped notoriously by 11.5%. That would be a 39.6% if measured from the high point of September 4th that same year.
Now the stock market started uplifting very slow and steadily. In the summer of 1930s the market had recovered by 30% when measured from its lowest point during the crash. But then again in July 1932 the market dropped to a point just like that of 1929. And gradually the Dow was recorded to be more than 50% below the largest drop that had occurred on 29th October 3 years back.
There were many causes that resulted in the great depression of 1929. The first and foremost reason is overvalued stocks. Analysts tell that the stocks were priced much and the P/E ratios were quite high. The P/E ratio of the traded stocks in 1929 averaged around 60. Another reason that has been deduced is that of margin buying. Investors had to pay just 10% of the total value of the stocks at the time of buying and the rest they could pay in installments. The stock market could not stay stabilized when such a huge amount of money was borrowed from it. Analysts found out that in 1929, almost 5% of the total value of the stock market was due to margin buying.
The federal policies are also to be blamed as said by the analysts. The prevailing president of the Federal Reserve Board, Mr. Adolph Miller introduced very strict monetary policies. The rates of interest on the broker loans were unnaturally increased making it all the more difficult for the investors. Bad banking structure can also be blamed for the great depression of 1929. There was huge number of new banks that were cropping up every single day. The restrictions that were imposed by the federation weren’t good enough. They didn’t have any regulation to determine the minimum capital required to start up a bank or any rules regarding the amount of reserves that was allowed to be lent. Obviously most of these banks were insolvent and were closing at an equally faster rate as they were opening up. When the market crashed in 1929, the situations became worse. These banks which had invested in stocks heavily couldn’t were perished due to the market crash.
The stock market crash of 1929 resulted in a loss of around $14 billion of wealth. Now after the crash certain reform acts had to be set up to again stabilize the market. One of the steps that was taken was the setting up of the Securities and Exchange Commission or the SEC. The role of this institution was to lay down the market rules and punish in case of any violation of the laws. An Act called the Glass-Stegall Act was passed. This act told that the commercial and the investment banks could no longer have any association between them. But as the time passed the federal rules and the Glass- Stegall rule have liberalized to a great extent. The other reform that was introduced was the establishment of the Federal deposit Insurance Corporation or the FDIC. This was meant to see that each and every individual bank account was insured up to $100000.
After the crash of 1929 there was a gradual but slow improvement in the market as mentioned before. But that was just temporary. No one could guess that the year 1932 would bring such a huge crash again. The crash of 1932 was so huge that the crash of 1929 seemed really petty in front of it. There was 50% depreciation even from the lowest point of 1929. The drop was so massive that it just dissolved every bit of profit that the stock market ever had. Analysts said that for the stock market to gain that peak which it had in September 1929, it would take almost 30 years.