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| Black Tuesday |
What It Is:
Black Tuesday refers to October 29, 1929, when panicked sellers traded nearly 16
million shares on the New York Stock Exchange (four times the normal volume at
the time), and the Dow Jones Industrial Average fell 12%.
How It Works/Example:
The years preceding Black Tuesday were filled with irrational exuberance. Stock
prices had risen across the board, even for companies that posted little profit,
and investors were very optimistic that the general upward trend of the market
and the economy would continue for some time.
The Dow Jones Industrial Average nearly doubled, rising from 191 in early 1928
to 381 by September 3, 1929. Prices began falling slightly but steadily, as
investors started to take profits. Many were not sure what to make of
the slide, and Irving Fisher, a well-known economist at the time, dismissed it
as nothing serious
Then on October 10, 1929, the Dow Jones Industrial Average closed above 350 for
the first time in ten trading days. This respite sparked profit taking, and the
Dow Jones Industrial Average began falling again amid the selling. The selling
became intense on Wednesday, October 23, and the market fell 6.3%. By October
24, Black Thursday, the selling frenzy reached a critical mass and by Black
Tuesday it turned to flat-out panic. Even though Richard Whitey, then head of
the New York Stock Exchange, calmly began buying shares of U.S. Steel and other
companies, this did little more than temporarily stem the tide. The trading
volume got so high that it delayed the ticker tape by over an hour, which
created confusion and anxiety. Some exchanges were so overwhelmed that they
closed early. The Dow Jones Industrial Average closed at 230.07 that day.
Black Tuesday is often associated with stories of investors and traders jumping out of windows after losing everything. Black Tuesday and the days surrounding were especially painful for investors who had borrowed money to purchase stocks that had become worthless or close to it. The situation influenced what became a major turning point for the American economy, because many of these borrowers, who had leveraged themselves considerably in an effort to participate in the bull market, were ruined financially. They had to sell everything to pay back their debts, and many couldn�t pay them back at all. Thousands of banks failed as a result. Businesses closed, as they were unable to get credit, and the nation�s disposable income fell precipitously.
Why It Matters:
Historians often cite Black Tuesday as the beginning of the Great Depression because it marked not only the end of one of the nation�s greatest bull markets, but the end of widespread optimism and confidence in the U.S. economy. Many investors had equated the health of the stock market with the health of the economy, but Black Tuesday challenged this premise. As with many market reversals, the causes are numerous, intertwined, and controversial. For example, many cite the September 1929 passage of the Smoot-Hawley Tariff Act, which placed high taxes on many imported items, as a major contributor to the market�s instability. Others note the huge amount of leverage investors had used to buy stocks, and some cite the scandal-ridden recall of British funds invested in the U.S. and the September 26 spike in the Bank of England�s discount rate. Regardless, investors no longer regarded high corporate profits and dividends, high wages, readily available bank debt, a booming auto industry, and a relative lack of stock market regulation solely as signs of better days ahead. They began to see them as signs of market ready for reversal.
Besides the dramatic effect on investor psychology, the events of Black Tuesday contributed to the creation of a variety of new laws, organizations, and programs designed to improve the country�s infrastructure, further social welfare, and prevent corporate fraud and abuses. These included the establishment of the Federal Depository Insurance Corporation and the passage of the Securities Act of 1933, the Glass-Steagall Act of 1933, the Securities and Exchange Act of 1934, and the Public Utility Holding Act of 1935. The panic caused by information delays also spawned faster ticker systems that could handle heavy trading days.
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