Black Tuesday: Definition, Facts & the Great Depression

Instructor: Jason McCollom
On October 29, 1929, the stock market collapsed, leading to a banking crisis and ultimately to the Great Depression. Learn how Black Tuesday precipitated and contributed to the greatest economic disaster of the twentieth century.

What was Black Tuesday?

Imagine you go to the bank to withdraw some money to pay bills. You have for years placed all your income into an account with this bank. Almost every dime you have is in your bank account. You arrive at the bank, and find it strange that there is a line of customers snaking out the front door. You wait in line for a long time, and when you reach the teller she regretfully informs you that the bank doesn't have your money. It is gone.

The stock market crash of 1929, which began with 'Black Tuesday,' (October 29) led to this widespread situation across the United States in the early 1930s. Business in the country was slowing, and the economy had stalled, but investors kept pouring money into the stock market. On Black Tuesday, the bubble burst, causing bank panics and sending the U.S. into an economic downward spiral that became the Great Depression.

Problems with the Stock Market Leading to Black Tuesday

The values and prices of stocks (shares invested in U.S. companies) should reflect the overall health of business and production. But by the late 1920s, the value of the stock market did not correspond to economic activity - stock prices were artificially high. This was called the 'Great Bull Market' of the 1920s.

The Great Bull Market did not reflect the fact that the U.S. economy was slowing down. By 1927, major sectors of the economy, such as steel production, residential construction, automobile sales, and consumer spending, had all decreased, and within another two years, industrial production and employment were down as well. Nonetheless, investors and stock brokers ignored these signs, and the stock market prices continued to rise through 1929.

This leads us to the first major problem with the 1920s stock market, which culminated in Black Tuesday: speculation. Stock speculation is defined as risky financial investments focused on the prices not on the underlying and fundamental business and economic situation. So, investors saw that prices on the stock market were rising but ignored the broad economic slowdowns of the late 1920s. Speculators were essentially betting that prices would continue to rise. President Herbert Hoover characterized the situation as an 'orgy of mad speculation.'

The second problem with the late-1920s stock market was the proliferation of call loans. People that wanted to buy stocks but who didn't have enough money to pay for the entire purchase, could acquire them with a loan. The lender of the loan could then 'call' for repayment of the loan if the stock price dropped precipitously. Call loans were popular with stockbrokers because they could charge high interest rates on the loan. And call loans made it very easy for anyone to invest in the stock market. Here is a fact that illustrates why call loans were a problem: the Federal Reserve System had $200 million in securities in 1928, but that same year there were $8 billion in call loans outstanding.

Just weeks before Black Tuesday, a leading bank president confidently stated there was 'nothing fundamentally wrong with the stock market or with the underlying business and credit structure.'

Black Tuesday and the Stock Market Crash

In late October 1929, stock prices plummeted, and millions of people holding stocks all attempted to sell as quickly as they could. Investor confidence - on which any stock market depends - was eroded quickly, and an atmosphere of anxiety and uncertainty was created.

In this atmosphere on Black Thursday (October 24, 1929), almost 13 million shares were bought and sold. This shattered all previous records. But Black Tuesday (October 29, 1929) made Black Thursday look like a dinner party. On Black Tuesday, over 16 million shares were bought and sold, a record that stood for almost forty years.

Thousands of stock brokers demanded their call loans be paid immediately, which was not possible because by 1929 most brokers were lending investors more than two-thirds the face value of stocks investors were buying. Thus, on Black Tuesday, brokers were stuck selling the stocks at much lower prices. Black Tuesday was the culmination of thousands of stock brokers and investors selling millions of shares of stocks at the same time, all with rapidly declining prices.

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