How the Stock Market Crash Affected America

The stock market crash of October 1929 destroyed a fortune in paper wealth, set off a cascade of bank failures, threw a quarter of the American workforce out of a job, and changed the political direction of the country. The crash was not, in itself, the Great Depression — but it was the trigger, and the effects of the crash on American life, in the years that followed, were larger and more lasting than almost any other economic event in American history. For the broader context, see the parent end of the Roaring Twenties; for the underlying mechanisms, ; for the year-by-year chronology,

The Wealth Destroyed

The most direct consequence was the destruction of paper wealth. The Dow Jones Industrial Average had reached a peak of 381.17 on September 3, 1929. By July 8, 1932, it had bottomed at 41.22 — a decline of 89 percent in less than three years. The total paper wealth destroyed has been estimated at about $30 billion — equal to roughly the entire federal budget of the United States in 1929. The richest 1 percent of American families lost an estimated $4 billion, and many of the country’s most prominent financiers were ruined. Jesse Livermore lost most of his fortune and declared bankruptcy in 1932. Charles E. Mitchell, the chairman of National City Bank, was indicted in 1933 for tax evasion.

For the middle-class investor who had put a few hundred dollars into the market on margin, the crash was often a personal catastrophe. Margins of 50 to 90 percent had been common in the late 1920s, meaning that a 10 percent decline could wipe out an investor’s entire equity and trigger a margin call. The full numbers are presented in our stock market crash coverage.

The Indirect Effect: Confidence and the Wealth Effect

The crash’s most important economic effect was indirect. The destruction of confidence that followed the crash caused American consumers and businesses to cut back spending — the “wealth effect” by which falling asset prices make people feel poorer and reduce their consumption. The result was that the unemployment rate, which had been below 4 percent in 1929, climbed past 8 percent in 1930, past 15 percent in 1931, past 22 percent in 1932, and reached roughly 25 percent in 1933. About 13 million Americans were unemployed by March 1933. Industrial production fell by 47 percent between 1929 and 1932. Real per-capita income fell by 30 percent. Net private investment was negative in every year from 1931 to 1935.

The Bank Failures

The single most destructive consequence was the cascade of bank failures that began in late 1930. There was no federal deposit insurance in 1929, and the American banking system was a unit banking system of more than 25,000 small, locally owned banks. The first major bank failures occurred in October 1930, when a run on the Bank of Tennessee in Nashville spread to other banks. The largest single failure was the Bank of the United States in New York City in December 1930, the largest bank failure in American history at that point. By the end of 1930, more than 1,300 American banks had failed. By the end of 1932, almost 5,400 had failed. By the time the new FDIC was created in June 1933, the cumulative total was more than 9,000. The money supply contracted by about 30 percent between 1929 and 1933, choking off credit to businesses and consumers.

The Human Cost

The human cost of the crash and the depression was severe. The most visible symbols were the Hoovervilles — shantytowns of cardboard, tar paper, and scrap lumber that sprang up on the edges of American cities. Empty pockets pulled inside out were “Hoover flags.” Old newspapers used as blankets were “Hoover blankets.” In the countryside, the depression was compounded by the Dust Bowl, a series of dust storms that began in 1930 and reached their peak in 1935. The dust storms destroyed the farms of roughly 2.5 million people, and the Okies — displaced farmers from Oklahoma, Texas, Arkansas, and Missouri — joined the wave of migration to California. John Steinbeck’s novel The Grapes of Wrath (1939) was the most famous literary account of that migration.

The depression also triggered a wave of deportations. Between 1929 and 1936, an estimated 400,000 to 1,000,000 people of Mexican descent were deported or pressured to leave the United States, the majority of them American citizens of long standing. The Mexican Repatriation was one of the largest forced migrations in American history, driven by the desire of local officials to reduce relief rolls.

The Political Consequences

The crash had immediate political consequences. In the 1930 midterms, the Republicans lost the House and the Senate. The 1932 presidential election was a referendum on Hoover’s handling of the depression, and Franklin D. Roosevelt won in a landslide — 472 electoral votes to Hoover’s 59, and about 57 percent of the popular vote. The election was the end of the Republican dominance that had begun in 1920. The political response also produced the Bonus Army — about 20,000 World War I veterans who marched on Washington in May and June 1932 to demand the immediate payment of a bonus. On July 28, 1932, Hoover ordered the Army, under General Douglas MacArthur, to clear the camps. The eviction — with tanks, tear gas, and bayonets — produced several deaths and a national outcry. The full story of Hoover’s failed response is told in our Harding, Coolidge, and Hoover coverage.

The International Consequences

The crash was not confined to the United States. The international banking crisis of 1931 began in May, when the Creditanstalt, the largest bank in Austria, collapsed. The collapse spread to Germany in July, when the Danat-Bank failed. Britain left the gold standard in September 1931. The international crisis deepened the depression by collapsing world trade: American exports fell by nearly 70 percent between 1929 and 1932. It also raised the political stakes of the depression. The collapse of the German economy in 1930 and 1931 created the conditions for the rise of Adolf Hitler and the Nazi Party. Hitler was appointed Chancellor of Germany in January 1933, less than three years after the American stock market crash. The international consequences of the American crash would shape the rest of the twentieth century.

The 1929 crash did not just end the Roaring Twenties; it created the world in which the rest of the twentieth century would unfold. Unemployment in the United States did not fall below 10 percent until 1941, and the depression generation would carry the memory of Hoovervilles and bread lines for the rest of their lives. The political response — the New Deal of Franklin Roosevelt, the expansion of the federal government, the creation of the FDIC, the SEC, the Social Security Administration — was the legacy of the crash. The cultural response — the social realism of Steinbeck, the documentary photography of Dorothea Lange and Walker Evans, the Federal Art Project — was the legacy of the crash. The 1929 crash is the pivot on which modern American history turns.