The stock market crash of October 29, 1929, known as Black Tuesday, had far-reaching economic consequences and prompted responses from the government and the Federal Reserve.
Key Facts
- Economic Consequences:
- Billions of dollars were lost, wiping out thousands of investors.
- Stock tickers ran hours behind due to the tremendous volume of trading.
- The crash caused a decline in production and a rise in unemployment.
- Stock prices continued to drop in the following weeks.
- Government and Federal Reserve Response:
- The Federal Reserve Board and the leaders of the reserve banks debated how to address the crisis.
- The Federal Reserve initially favored a policy of direct action, denying credit requests from member banks that loaned funds to stock speculators.
- The governor of the Federal Reserve Bank of New York wanted to raise the discount lending rate to indirectly raise rates for all borrowers.
- The Federal Reserve’s rate increase had unintended consequences, leading to a global recession.
- Actions by the Federal Reserve Bank of New York:
- The New York Fed purchased government securities on the open market and expedited lending through its discount window.
- It lowered the discount rate and assured commercial banks that it would supply the reserves they needed.
- These actions helped to contain the crisis in the short run and kept short-term interest rates from rising to disruptive levels.
Economic Consequences
- The crash resulted in the loss of billions of dollars, wiping out the savings of countless investors.
- The tremendous volume of trading on Black Tuesday caused stock tickers to run hours behind, hindering the dissemination of accurate information.
- The crash led to a decline in production and a rise in unemployment, exacerbating the economic downturn that had begun earlier in 1929.
- Stock prices continued to decline in the weeks following Black Tuesday, further eroding investor confidence and hindering economic recovery.
Government and Federal Reserve Response
- The Federal Reserve Board and the leaders of the reserve banks engaged in debates regarding the appropriate response to the crisis.
- The Federal Reserve initially favored a policy of direct action, denying credit requests from member banks that provided loans to stock speculators.
- The governor of the Federal Reserve Bank of New York advocated for raising the discount lending rate to indirectly increase interest rates for all borrowers.
- The Federal Reserve’s decision to raise interest rates had unintended consequences, contributing to a global recession.
Actions by the Federal Reserve Bank of New York
- The New York Fed took several measures to mitigate the impact of the crisis.
- It purchased government securities on the open market and expedited lending through its discount window, increasing the availability of funds.
- The New York Fed lowered the discount rate and assured commercial banks that it would provide the necessary reserves, helping to stabilize the financial system.
- These actions by the New York Fed helped contain the crisis in the short term and prevented short-term interest rates from reaching disruptive levels.
References
- Stock Market Crash of 1929, Federal Reserve History (https://www.federalreservehistory.org/essays/stock-market-crash-of-1929)
- Stock market crashes on Black Tuesday, HISTORY (https://www.history.com/this-day-in-history/stock-market-crashes)
- Wall Street Crash of 1929, Wikipedia (https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929)
FAQs
What were the immediate economic consequences of the Black Tuesday stock market crash?
The crash resulted in the loss of billions of dollars, wiping out the savings of countless investors. It also led to a decline in production and a rise in unemployment, exacerbating the economic downturn that had begun earlier in 1929.
How did the Federal Reserve respond to the crisis?
The Federal Reserve initially favored a policy of direct action, denying credit requests from member banks that loaned funds to stock speculators. However, the governor of the Federal Reserve Bank of New York advocated for raising the discount lending rate to indirectly increase interest rates for all borrowers.
What were the unintended consequences of the Federal Reserve’s decision to raise interest rates?
The Federal Reserve’s decision to raise interest rates had unintended consequences, contributing to a global recession.
What actions did the Federal Reserve Bank of New York take to mitigate the impact of the crisis?
The New York Fed purchased government securities on the open market and expedited lending through its discount window, increasing the availability of funds. It also lowered the discount rate and assured commercial banks that it would provide the necessary reserves, helping to stabilize the financial system.
Was the Black Tuesday crash the sole cause of the Great Depression?
No, the stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom.
What was the extent of the economic damage caused by the crash?
By 1933, nearly half of America’s banks had failed, and unemployment was approaching 15 million people, or 30 percent of the workforce.
How long did it take for the U.S. to recover from the Great Depression?
It took World War II and the massive level of armaments production taken on by the United States to finally bring the country out of the Depression after a decade of suffering.
What lessons did economists and policymakers learn from the Black Tuesday crash and the subsequent Great Depression?
Economists and policymakers learned that central banks should be careful when acting in response to equity markets, as detecting and deflating financial bubbles is difficult. They also learned that when stock market crashes occur, their damage can be contained by following appropriate measures to stabilize the financial system.