Black Tuesday

What Is Black Tuesday?

14 Billion dollar loss on Black Tuesday (Oct 29, 1929) is the day which is known as the start of the Great Depression where DowJones crashed by 12% highest till the Black Tuesday and the Great Depression started.

The Black Tuesday crash will be named one of the darkest days ever in the history of Wall Street. People have gone bankrupt, many companies have stopped their operations, and some of the company's shares went down by 50%.

As the day started, people were unable to hear the opening bell. They just listened from 8:30 a.m. till the market closed Sell! Sell! Sell! As people were unable to understand the reason.

Many economists say that it is because of huge investment through debt that people invest in the market without even thinking or analyzing the stocks which they are buying. 

World War 1 resulted in a drastic boom in the manufacturing of guns which boosted the economy from WW1 to the end on October 29, 1929, when the market collapsed due to extensive overvaluation.

Big investment firms started taking out their money from the market and going for safer investment options like debt and government bonds, because of this, big corporate investment firms started selling in the market. 

Investment Institutions taking out their money from the market decreased the value of the securities as they invested in massive amounts, which resulted in a devastating decline in the market.

The rise of the bear cartel in the USA market is where popular investors start shorting the market to gain money, there, they increase the speed of the market's downfall by doing shorting (short selling) in the market.

It is the process in which a person will gain profits by decreasing the value of the shares, and it became a fashion on Wall Street in 1929. Many financial institutions did this at that time to earn profits or recover.

Understanding Black Tuesday

An extravagant event on “October 29th, 1929” popularly known as Black Tuesday, was the biggest collapse in the Mighty American stock market till that date, it started crashing, and for the very first time, the Dow Jones decreased by 12%.

More than 16 million shares have been sold across the market, which is the highest at that time, with 14 billion dollars wiped off. That was one of the saddest days in the history of trading when a well-known company’s share went down.

On 29th October 1929, with the opening bell of Wall Street, only three words were being said by all the people in the ring Sell! Sell! Sell!. It is the time in which the whole market collapses and starts selling, which makes the Dow Jones down by 12%+.

It started the Great Depression, which lasted for a decade. As a result, the purchasing power in the economy has decreased.

It was the first time people were not trusting the stock market for investing, and people started securing their funds on their own in cash or gold. They stop using banks for depositing or saving their money.

It was sad to see that after such a boom in the market from 1920-1929, it all started crashing suddenly just because of bad debt management by the financial institutions, and the banking institutions started using public deposit funds from the bank.

This means financial institutions allowed people to give loans for investing in the stock market, which was very volatile at the time of the 1920 and 30s, making it easy for people who wanted to invest in the market.

Banks started using the money of the people who were deposited there for saving purposes to invest in the securities market, popularly known as the stock market, without the concern of the account holder.

Preceding the Black Tuesday Market Crash

It all started from the start of the First World War due to the unexpected increase in the requirement for guns and different defense equipment, the manufacturing sector of the economy started growing. That it also increases employment opportunities in the defense sector.

The US economy has been booming, and the government has started printing more currency to stabilize their economy after the economy becomes stable and people start getting to their jobs and earning, which eventually increases the purchasing power of the people.

This allowed the people of America to buy more goods and services and encouraged new entrepreneurs to start their businesses as the demand was at its peak. The market could not compete with the Americans' current demand and increasing purchasing power.

After satisfying their needs, people started finding ways to increase their wealth. Then people began exploring more opportunities for wealth creation where the stock market came into place, a place where people could buy securities.

This started a chain of investing in the stock market from the cobbler to the banker, from a barber to a rich man, from lower-class to the upper-class people all started investing in the stock market and earning.

To invest in the market to gain profits, people started taking loans from the bank as many of them did not have money to invest in the equity market, which caused a huge increase in the investment in the market.

Gradually the bank from where the people are taking loans also started investing in the market not by just their funds but using the depositor’s money, or we can say the money of their customers. So due to this inflow of money into the stock market increased.

It creates a bubble in the market by using huge amounts of debt and depository money. In early 1929, economics experts predicted that there would be a slight correction happening this year, but it came out to be one of the biggest crashes in the stock market.

Events of Black Tuesday

On 24th October 1929, Black Thursday, when it suddenly started crashing, the stock market went down by more than 10 %, which was a massive hit to the market where people started panicking, but the two days off (Weekend) they could not do anything.

But on Black Tuesday, the market went down by more than 13%, and a total amount of 30 billion dollars was wiped out from the market. More than 3 million shares were said in just one day, continuing by Wednesday at the end of October 1929.

After that, at the start of November 1929, the stock market was shut down for 3 days to control the panic around people. That eventually increased the panic, and people started selling more and exciting themselves. 

That made people and big investment firms like J.P Morgan and Goldman Sachs start selling their investments and diversifying their portfolios to decrease the loss that occurred in the crash.

 This started the creation or start of the most significant recession of all time, known as the Great Depression, which lasted for more than 10 years when DowJones's industrial average went down from 386.10 to 40, decreasing by more than 90%.

Well, markets eventually recovered after a decade when the Great Depression was finally over, and the Second World War was going to start with the boom of the defense manufacturing sector, which repeated history.

Reasons for Black Tuesday

Some fo the reasons are:

1. An increase in the amount of the loan given to the people for investing in the markets, which eventually increases, starts the debt trap not being backed by reliable verifications by the banks and government.

2. Increase in the stock market bubble as people start earning more and start investing without even thinking of the stock they are investing, which increases the bubble in the stock market and ultimately busts into the crash.

3. The inflated market valuation also caused this crash due to an increase in the demand for investment and the limited supply. The market started inflating itself to complete the demands, which increased the price of the shares more than their value.

4. Banks use people's money from their savings accounts without asking them to invest in the market. Without considering, how would they repay the people if it all went down?

5. Manufacturing without proper demand forecasting for the product resulted in the crash as there was less demand than the total production people were less interested in buying. 

6. Businesses and companies cannot understand the fundamental economic concept of demand and supply. They increase the supply without even thinking of demand as it falls and companies make losses.

7. A decrease in economic growth is one of the important reasons. At the time of 1929, the economy of the USA was growing at a decreasing economic growth rate which was the first hint for this crash. 

8. The government started making policies restricting foreign or international trade to do business in the USA. It started promoting the domestic industry to revive them, which decreased the value of stocks of foreign companies in the market.

9. Too much speculation is one of the reasons why the market has fallen, as people were very bullish then.

Impact of Black Tuesday on the world's economy

The impacts are:

1. It started the Great Depression in America when the whole financial system collapsed. People suddenly started becoming unemployed just for no reason. Big corporate giants and businesses shut down their production.

2. The demand was drastically decreased as the public had no money to spend. This effect primarily impacted electronic and real estate industries, suddenly, people became homeless, and the currency started deflating.

3. At that time, people were unable to meet necessities like food and shelter clothing, which made many people sell their homes and investments to survive the collapse of the demand.

4. It resulted in a mass unemployment rise where the mass firing of employees is very common. People had no money to expand on as their savings were lost in the market crash, and they had no jobs.

5. The Businessman raising funds stopped raising funds and money. They preferred to take debt rather than issue shares, which decreased the income for the stock brokers and intermediaries in the stock exchanges.

6. After that crash, the Canadian market ( Toronto Stock Exchange) and the European market fell, making this crash a real-world crisis because Europe ruled many of the countries in the world.

7. Due to the Great Depression, the whole world got an economic hit as, at that time, the USA was the economic powerhouse for the rest of the world and impacted the entire world’s economy.

8. Only the bearish investors were the luckiest as they enjoyed both the crash and the depression period, which turned out to be a gold mine for them. Traders start to earn money in the market by decreasing the market value. 

9. Ironically this crash increased the amount of short selling type of trade, a trade in which we sell shares first and buy them after at a lower price to gain profit. This means earning by decreasing the total market valuation.

Consequences of Black Tuesday

Afterward, stock markets worldwide instituted measures to suspend trading in the event of rapid declines, claiming that the measures would prevent such panic sales. 

The stock market was shut down for three days to control the panic around the situation. But unfortunately, it ultimately increased exponentially, and when the market opened, it drastically again started falling.

At that level, the operators could not measure the transaction, and only one thing was happening: selling. No one was interested in buying. So people were ready to exit at any cost and take huge losses just to exit.

It was an uncontrollable fall where nobody knows where the market stopped falling and when it returned to the previous high. So people started distrusting the market and went for other investments like investing in bonds, government securities, or real estate but not Wall Street.

After the crash, the government made a commission known as the Pecora commission 1932 by the U.S. Senate to study the causes of the crash. Following passed the law Glass-Steagall Act of 1933 to separate commercial banks from investment banks.

This started the great phenomenon known as the Great Depression (1929-1939), where many businesses fell, many jobs were scratched up, and people became unemployed. They started becoming homeless, and the market hadn't recovered till 10 years.

At this time, there was the start of a new market trend known as short selling, which investors had previously popularized at that time, and many banks and investors did.

One of the famous investors Jesse Livermore who was popularly known as or considered the piano of day trading, earned a fortune for himself. Similarly, some of the banks also did that to recover their losses and make a profit.

After this brief period, the Americans mobilized for World War 2 at the end of 1941, which was covered in 1945 when they moved ten million people from the civilian labor force to the defense force.

World War 2 dramatically increased employment rates as people were recruited into the defense forces, and the armed manufacturing firms recruited the civilian labor force for production.

This increased the government-funded capital spending from only 5% of the annual U.S investment in industrial capital from 1940 to 1943 when the government accounted for 67% of U.S capital investments. 

Black Tuesday Learnings

We can learn from this crash that we should invest in the stock market when we have proper knowledge regarding the stock and the need, not because the people are investing, so we are investing just because of the FOMO effect. 

The principle of Warren Buffett is that “when others are greedy, you become fearful, and when others are fearful, you become greedy” as the market becomes greedy, you should stop investing and think about whether you are investing right or wrong, but people do the opposite.

We can easily see that buying and holding is not always a great option, as it takes a decade to reach its previous high, which is a long time. In addition, people generally don't have much patience to hold on and see their assets decreasing daily.

It tells us that the market is uncertain. We cannot predict if the market will increase or decrease on a day-to-day basis or in a year, and the market will always be impartial for wall street we all are equal.

Also, which tells us that even if the companies are in profit, the business is doing good. It doesn't matter to the market as it deals on a demand and supply basis. Sometimes the price of a good fundamental stock collapses because of less demand and more supply.

It also helps us to understand that we should not only invest in the stock market, we should diversify the portfolio by investing in debt, mutual funds, bonds, debentures, real estate, gold, and many more, which will help to deal with this type of crisis.

It explained that too much debt is bad for all of us if we can't manage it or do not have the proper knowledge to manage debt. Moreover, we should not trust financial institutions or banking institutions for money because it is our responsibility to take care of our money.

The real king of an economy is only one factor: demand and supply. It ultimately comes into demand-supply that whether the economy is going to be up or down if the business is good, but the demand is less, then the prices will decrease or visa-versa.

Understanding the market and equity investments is essential before we start investing. Doing this could have saved a lot of investors a lot of pain. It is also important for the investor to understand their risk appetite and manage their risk accordingly

Researched and authored by Kartikay Agarwal | Linkedin

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Annual Return
• Bull
• Fly Spread
• Perpetual Bonds
• Stock Quote