The 1929 U. S. stock market crash is an interesting economic event. Many economists have studied it and published various theories on why it occurred. Wanniski blames the imminent passage of the Smoot-Hawley Tariff Act. Other economists have ascribed it to the international currency/gold adjustments arising from the British return to the gold standard in 1926. Another contributing factor was the creation of pyramided trusts such as the Goldman Sachs Trading Corporation which in turn begat the Shenandoah Corporation which then created the Blue Ridge Corporation. The latter two entities were financed primarily by preferred stock and debt (bonds), creating a leveraged structure with fixed financing charges which allowed the profits (dividends and capital gains) from the common stock they purchased to flow back up to the parent structure, magnifying the financial return significantly. Like most leveraged entities, this worked well as long as stock values and dividends went up. Once a decline in corporate profits and common stock values set in, the results were disastrous. Last of all, many investors in the market were buying on margin. In their case, a significant downturn (such as the October crash) caused margin calls which they could not meet which in turn resulted in a forced sale of their securities increasing the selling pressure on the market.
With the foregoing background, it is interesting to examine the market valuations in 1929. The Dow Jones Industrial Average was at approximately 300 at the start of 1929, peaking at 381 on September 3, 1929. At around this time it became apparent that the Smoot-Hawley tariff would probably pass, the Federal Reserve increased the discount rate and other factors were contributing to push stock prices down. As the market moved off of its peak, a correction began and by mid October it was down over 10% from its peak of 381. During this period it had been fluctuating but always with a downward trend. Then beginning on Monday, October 21 the closing DJ values were: 21 October 320 22 October 326 23 October 305 24 October 299 25 October 301 26 October 298 28 October 260 29 October -- 30 October 230 13 November 198 December Peak 263 The interesting point in this economic history is the recovery after the October crash and then the long decline. People will always wonder whether reasonable action by the government and the Federal Reserve and better understanding by the economists of the day might not have allowed us to avoid the depression.