The Crash of 1929

Contents

1. The decade before
2. The break in October
3. From panic to depression
4. The measurements
5. What it looked like on the street
6. How contemporaries explained it
7. The rules written afterward
8. Compared with 2007 to 2009
9. The bridge to the next entry

The early lesson for Brent O’Mara was that markets do not always cooperate. No episode in American history delivered that lesson more thoroughly than the collapse described in this entry. The timeline runs from a single October day to a decade of consequences. On October 28, 1929, the Federal Reserve’s history records, a broad market gauge fell nearly 13 percent; the next day, PBS notes, the market crashed again in what the press called Black Tuesday.¹⁶ Within a year 5,000 banks had collapsed and six million workers had lost their jobs. Regional bank panics began in the fall of 1930, became a nationwide crisis in the fall of 1931, and in March 1933 every bank in the country was closed for a week. The downturn that began in 1929 lasted, by the Fed’s reckoning, until 1941.¹⁶

Figure

From the October break to the bank holiday

1. 01
   October 28, 1929A broad market gauge fell nearly 13 percent in a single day.
2. 02
   Fall 1930A series of regional bank panics began just as the country appeared poised for recovery.
3. 03
   Fall 1931The regional panics turned into a nationwide financial crisis.
4. 04
   1932The Banking Act reformed the central bank's role in providing credit during downturns and the Emergency Relief and Construction Act expanded its lending powers.
5. 05
   March 1933For an entire week all banking transactions in the country were halted.
6. 06
   1933The Banking Act commonly called Glass Steagall was passed to restore public confidence in the financial system.

The decade before

The 1920s were a period of dramatic economic change. For the first time more Americans lived in cities than on farms, the nation’s total wealth more than doubled between 1920 and 1929, and gross national product grew 40 percent from 1922 to 1929.³ History.com describes a consumer culture in which people across the country bought the same goods and heard the same advertisements: radios in more than 12 million households by the end of the decade, three quarters of the population at a movie theater every week, and by 1929 one car on the road for every five Americans, bought with low prices and generous credit.³ The same account ends where the decade did, with the excesses coming down as the economy failed at the decade’s close.³

The break in October

The crowd in the photograph at the head of this entry filled the street outside the exchange in October 1929. The break itself, on October 28 and 29, took a broad gauge down nearly 13 percent in the first of those two days.¹ History.com describes investors who saw their fortunes vanish overnight, alongside factory workers and clerks who found themselves without work and desperate to feed their families.² A St. Louis Fed economist, David Wheelock, later made the point that the stock market came down hard after the 1929 peak and then stayed flat for many years, a path unlike the recovery that followed the 2009 low.⁴

From panic to depression

The collapse of share prices did not, by itself, produce the Depression. What turned a severe recession into something worse was the banking system. The Fed’s history records that the country appeared poised for recovery when a series of bank panics began in the fall of 1930, and that earlier regional panics turned into a nationwide financial crisis in the fall of 1931.¹ Wheelock noted that recessions following financial crises have historically been far more severe than ordinary recessions, in the United States and elsewhere, and that the 1930s and the 2000s both fit the pattern.⁴

The measurements

The 1929 peak and the early 1933 bottom bracket the worst contraction in the country’s history. Over that stretch real output fell by about a third, 36.2 percent; the unemployment rate touched 25 percent; and the price level fell 27 percent.⁴ Twenty quarters after the peak, output was still 27 percent below where it had been in the third quarter of 1929, and four years after the peak the unemployment rate was still 17.5 percent.⁴ History.com puts the peak unemployment rate in 1933 at 25.6 percent, one worker in four, far above the 14.7 percent reached in April 2020 when the pandemic closed businesses.²

Figure

The size of the Depression

fall in real output from peak to bottom

36.2 percent

the unemployment rate at its worst

25 percent

fall in the price level

27 percent

What it looked like on the street

Some people were reduced to selling fruit on street corners; others lost their homes and lived in shanty towns known as Hoovervilles, a bitter reference to a president who kept saying that prosperity was just around the corner.² PBS sets that misery beside the other side of the decade: a 47 story hotel that opened in 1931 at a cost of 42 million dollars, a 1933 debutante party that cost more than 60,000 dollars with four orchestras, and a newspaper magnate whose parties grew more frantic as the Depression deepened. The rich held a third of all wealth while the poor had no savings at all, an inequality the program counts among the Depression’s causes.⁶

How contemporaries explained it

Gilbert Seldes published an interpretive history of the years 1929 to 1932 while they were still fresh, and Time reviewed it in 1933. He called the book a fever chart, plotting public opinion against the swoops of economic graphs. The panic was over, he said, because the boom had been the panic: America in 1928 and the first months of 1929 had been a mob, and its statesmen, financiers and industrialists had been paralyzed, refusing to check the force of events lest the act of checking bring on the catastrophe itself.⁵ The years from 1929 to 1933 were, in his phrase, a succession of breaking idols and abandoned faiths.⁵

The rules written afterward

The decade after the break produced the laws that still shape American banking. The Banking Act of 1932 reformed the central bank’s role in providing credit during downturns, and the Emergency Relief and Construction Act of the same year expanded its ability to lend in unusual and exigent circumstances.¹ During 1932 and 1933 the Reconstruction Finance Corporation effectively served as the discount lending arm of the central bank. In March 1933 came the week long bank holiday, and later that year the Banking Act commonly called Glass Steagall, aimed at restoring public confidence and debated widely before it passed; a 1935 law restructured the central bank itself.¹ Wheelock’s audience in 2013 was reminded that their grandparents and great grandparents had lived through something far more severe than the recession just ended.⁴

Compared with 2007 to 2009

The comparison is instructive precisely because the later episode was the worst since the first. The recession of December 2007 to June 2009 lasted 18 months, real output shrank by about 5 percent, unemployment reached 10 percent for a single month, and prices rose modestly rather than falling.⁴ By the first quarter of 2013 output stood 3 percent above its 2007 peak, where the economy of 1934 remained more than a quarter smaller than it had been in 1929.⁴ The fuller story of the later crisis is told under the financial crisis, and the other great one day break, in October 1987, has its own entry.

Figure

The Depression beside the Great Recession

	1929 to 1933	2007 to 2009
Length	peak in 1929 to a bottom in early 1933	18 months, December 2007 to June 2009
Real output	fell 36.2 percent	fell about 5 percent
Unemployment	peaked at 25 percent	touched 10 percent for one month
Prices	fell 27 percent	rose about 1.6 percent on average during the recession
Five years after the peak	output still 27 percent below the peak	output above the previous peak

The bridge to the next entry

The Depression wrote rules for institutions: who could lend, who insured deposits, what a bank could own. It also left a question of measurement that outlived it. The downturn is dated here from 1929 to 1941 on the Fed’s reckoning and from a 1929 peak to an early 1933 bottom on Wheelock’s, and the two reckonings measure different things, a contraction and a return to normal.¹⁴ Who fixes the peak and trough months of an American recession, by what method, and why the answer arrives so long after the fact, is the subject of the next entry.