Crash of 1929

The sharp fall in the share prices quoted on the New York stock exchange, that came to be known as the crash of 2009, started shortly after the downturn in American economic activity known as the great depression, and is believed to have contributed to its severity. The fall continued until the begining of the recovery in economic activity in 1933, by which time average prices had shrunk to no more than 15 per cent of their 1929 peak.

The once popular view that categorised the crash as the bursting of a speculative "bubble" has since been replaced by a consensus among economists that it was the consequence of mistaken monetary policies.

The stock exchange crash

The crash marked the end of a period of eight increasingly prosperous years, known as the "roaring twenties": a period of above-average growth of national income, exceptionally rapid growth in corporate earnings, and even more rapid growth in stock exchange prices. That trend intensified in the latter years, with stock prices rising from about 10 times corporate earnings in 1928 to 15 times or more in 1929. But, in a few days in the autumn of 1929, the average share price on the New York stock exchange dropped by a staggering 30 per cent.

There have been many day-by-day accounts of that dramatic occurrence, noteably that of John Kenneth Galbraith .

What followed was the result of mutual interactions beteween the behaviour of investors on the stock exchange and the economic downturn that had started a few months earlier, and its eventual outcome was the loss by 1933 of about 90 per cent of the former value of United States equities .

Explanations

The historical evidence suggests that the stock market crashed because the Federal Reserve severely tightened credit to stock investors, not because stocks were overvalued. Subsequent easing of credit was coincident with a recovery in stock prices.