Wall Street Crash: The consequences

By Maury Klein
Professor of History, University of Rhode Island

The crash did not cause the 1930s slump, but it laid the groundwork

Precisely 75 years ago, the United States was in the throes of the Wall Street crash - an event that remains a byword for financial trauma to this day.

It is understandable, then, that the 1929 crash is often seen as the cause of the decade-long depression that followed.

Understandable, but not strictly accurate: there were in fact two separate crises, one financial and the other economic, and their precise relationship has long been debated.

But the crash did have clear consequences, some of which have endured to this day.

Ups and downs

Contrary to popular impression, the crash itself was not the disaster of a single day but a series of events that began in the final week of October and reached its nadir in mid-November.

The crash and its ensuing scandals transformed businessmen from saints to sinners

Between December 1929 and March 1930 the Dow Jones Industrial Average actually regained three-quarters of what it had lost since the beginning of the crash.

The unmistakable signs of depression did not fasten themselves upon the United States until the autumn of 1930, nearly a year after the crash.

But the economy and the market fed on each other's woes: by June 1930, the sluggish economy sent the stock market into another nosedive that did not hit bottom until July 1932.

One consequence of the crash, then, was to turn the nation's first feverish love affair with the stock market into a lasting aversion. Trading volume fell sharply as the broader public left the arena, and the market did not again reach its price levels of September 1929 until the end of 1954.

Paradise lost

The most telling consequence of the crash was that it undermined the nation's confidence in its boom economy.

From the boom of the 1920s to the Depression of the 1930s; the 1929 crash was an era-changing event

In pictures

The market was considered a harbinger of the economy in the sense that its price movements anticipated and discounted broader trends and their effect on individual companies.

By the summer of 1929, both the economy and the market had become overheated, and the latter had lost its connection with economic realities and flown upward on the wings of an illusion that a new era had arrived in America.

The crash demolished that illusion: after October 1929, businessmen, investors and politicians alike watched every economic signal anxiously, seeking reassurance that the financial flameout had not soured the economy as well. The nation's mood shifted gradually from optimism to doubt to despair.

Crisis? What crisis?

President Herbert Hoover - who had come to office only in March 1929 - made every effort to counteract this mood swing within the limits of his philosophy of government that stressed voluntary action over government coercion.

No previous president had ever even tried to intervene in a failing economy.

By nature an energetic, upbeat person, Mr Hoover tried in vain to infect the nation with his optimism. But when recovery failed to come, his principles became a prison within which he could find no effective policies to cope with the deepening depression.

Thus the crash set the stage for the destruction of the Hoover presidency and the fall from power of the Republican party, which became the minority party for the first time since the 1850s and did not regain the White House until 1952.

That sinking feeling

The crash also encouraged a monetary policy that may have been the single most important factor in prolonging the depression.

Government continued to make war on inflation, its traditional enemy, at a time when deflation had emerged as the gravest threat.

Washington clung doggedly to the gold standard despite the disastrously deflationary effect of this policy. Falling prices did much to slow production, increase unemployment, and ruin farmers.

To make matters worse, the change in public mood wrought by the crash accelerated the rate of bank failures, which had been on the rise throughout the 1920s and increased sharply in 1930.

A public fearful of banks stashed its cash at home, thereby aggravating the problem of deflation.

The ripples spread

In broader terms, the crash and its ensuing scandals transformed businessmen from saints to sinners.

The severity of the depression brought to Washington a president whose imposing legacy included the rise of big government and far-ranging intervention in the economy

Having taken credit for the economic wonders of the 1920s, they were heaped with blame for its tragic aftermath. Not only their presence but their philosophy as well was banished into exile.

Overseas, hopes that the crash might do more good than harm - by freeing up capital to invest in European markets - soon came to nothing.

As American policy makers focused on the crisis at home, so financial support for European governments.

For Germany, a key beneficiary of US largesse during the 1920s, the consequences were particularly dire: a sharp rise in unemployment in 1930 helped boost the fortunes of Hitler's then-tiny national socialists, as well as other extremists.

Birth of big government

The severity of the depression brought to Washington a president in Franklin D Roosevelt whose imposing legacy included the rise of big government and far-ranging federal intervention in the economy.

That intervention included the creation of the nation's first federal social welfare programs (the last major industrial state to do so), the first federal regulation of Wall Street institutions, and the most important banking reform legislation in the nation's history.

The crash did not directly "cause" these changes, but it set in motion the events that transformed both the mood and the character of the nation and its institutions.

In this sense the market played its role of harbinger, anticipating and discounting what was to come. Afterward it retreated to the sidelines in the public eye and did not take center stage again until well into the postwar boom.

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Maury Klein is professor of history at Rhode Island University, and specialises in the history of American business. He is the author of, among others, Rainbow's End: The Crash of 1929.