Crash of 1929

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The sharp fall in the share prices quoted on the New York Stock Exchange, that came to be known as the crash of 1929, started shortly after the downturn in economic activity known as the Great Depression and is believed to have contributed to its severity. The decline in prices continued until the beginning 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 values.

The once popular view that categorised the crash as the bursting of a speculative bubble has since been replaced by a consensus among economists that it was the consequence of mistaken monetary policies.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. Then, in the June of 1929, industrial activity began a decline [1] that continued throughout the rest of the year, and, 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, notably that of John Kenneth Galbraith [2], who referred to it as " the typhoon that blew out of lower Manhattan in October 1929". The savings of a great number of people were wiped out, the reputations of some eminent authorities were damaged [3] and there were a few well-publicised suicides

What followed in the ensuing years was the result of mutual interactions between the behaviour of investors on the stock exchange and the economic downturn; and its eventual outcome was the loss by 1933 of about 90 per cent of the former value of United States equities [4].


It is generally agreed that most investors would not have been alarmed by the downturn in industrial activity that had preceded the initial crash, but that awareness of the more severe downturn in subsequent years must have contributed to the continuing fall in stock exchange prices. What is not generally agreed upon is the cause of the initial crash. The conventional explanation has, for many years, been that it was caused by the bursting of a speculative bubble, implying that stocks were priced above their real value in 1929 [2][5]. Evidence to the contrary has since emerged [6], and Federal Reserve Board Chairman (and author of scholarly works on the period) Ben Bernanke has endorsed the conclusion that the crash was not the consequence of speculation [7]. Most economists now accept Milton Friedman's contention that the crash was caused by the perverse application of monetary policy by the Federal Reserve Board [8] [9].


Despite the evidence concerning the sequence of events some commentators are still incline to the view that the crash of 1929 caused the Great Depression. That was not the view taken by John Kenneth Galbraith, but he did say that "had the economy been fundamentally sound, the effect of the great stock market crash might have been small" [2], a remark that implies that he considered it to have made a major contribution. The discussion of the factors contributing to that depression in the article on that subject throws further light on that assessment.



  1. Geoffrey Moore and Julius Sishkin Indicators of Business Contractions and Expansions page 25 National Bureau of Economic Research Occasional Paper 103, 1967 [1]
  2. 2.0 2.1 2.2 John Kenneth Galbraith: The Great Crash 1929, Penguin Books 1992
  3. Including Professor Irving Fisher, who was henceforth best known for his 1929 advice that "Stock prices have reached what looks like a permanently high plateau".
  4. For more detail about the sequence of events, see the Timelines subpage
  5. see the summary of Galbraith's analysis on the Tutorials subpage
  6. Ellen McGrattan: The Stock Market Crash of 1929: Irving Fisher Was Right!, Federal Reserve Bank of Minneapolis, Research Department Staff Report 294, December 2001[[2]]
  7. Ben Bernanke: Asset-Price "Bubbles" and Monetary Policy, speech at the New York Chapter of the National Association for Business Economics, October 15, 2002[3]
  8. Milton Friedman and Anna Schwartz A Monetary History of the United States 1867-1960, Princeton University Press for NBER, 1963
  9. see the summary of Friedman's analysis on the Tutorials subpage