The Dow Jones Industrial Average went from a low of 191 in early 1928 to a high of 300 in December, 1928 and peaked at 381 in September 1929.  Due to the anticipation of continued increases in earnings and dividends,Price/Earnings ratios rose from a conservative 10 or 12 to 20, and higher for the market's favorite stocks. Many observers believed that stock market prices in the first six months of 1929 were overpriced, while some perceived that stocks were cheap. On October 3, the Dow began to drop, declining throughout the week of October 14.

The night of Mondy October 21,1929, margin calls were heavy, and numerous Dutch and German sell calls came in overnight for the Tuesday morning opening.  On Tuesday morning, out-of-town banks and corporations called in $150 million of call loans, and Wall Street was in a panic before the New York Stock Exchange opened.

On October 24, 1929, people began selling their stocks as fast as they could. Sell orders flooded market exchanges.  On a normal day, only 750-800 members of the New York Stock Exchange started the Exchange. However, there were 1100 members on the floor for the morning opening. Furthermore, the Exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight and extra telephone staff was arranged at the members' boxes around the floor. The Dow Jones Industrial Index closed at 299 that day.

October 29 was the beginning of the Crash.  Within the first few hours the stock market was open, prices fell so far as to wipe out all the gains that had been made in the previous year.  The Dow Jones Industrial Index closed at 230.  Since the stock market was viewed as the chief indicator of the American economy, public confidence was shattered. Between October 29 and November 13 (when stock prices hit their lowest point) over $30 billion disappeared from the American economy. It took nearly twenty-five years for many stocks to recover.

While there have been many suggested explanations for the Crash, no one can fully account for it. Here are some of the explanations proposed:

1. Stocks were Overpriced

Many people believe that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price/Earnings ratios and Price/Dividend ratios, argue that the share prices were not too high.

2. Massive Fraud and Illegal Activity

A number of people believe that fraud and illegal activity was one of the causes of the 1929 Crash. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation.

3. Margin Buying

Margin buying is another scapegoat for the cause of the Crash. However, it is not the main reason because there was very little margin outstanding relative to the value of the market (the margin averaged less than five percent of the market value).

4. Federal Reserve Policy

The new President of the Federal Reserve Board Adolph Miller tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, starting from the beginning of 1929, the interest rate charged on broker loans rose tremendously.  This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporation that financed brokers and dealers.

5. Public Officials' Repeated Statements

Many public officials commented that the stock prices were too high.  For example, the newly elected President of the United States, Herbert Hoover, publicly stated that stocks were overvalued and that speculation hurt the economy.  Hoover's statement suggested to the public the lengths he was willing to go to control the stock market.   These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the Crash.

There was criticism of Federal Reserve policy after the crash, even though the Federal Reserve initial reaction to the Crash seemed to have been fully appropriate.  Between October 1929 and February 1930, the interest rate was lowered from 6 to 4 percent, and the money supply increased immediately after the Crash.  Commercial banks in New York made loans to securities brokers and dealers,  which in turn provided liquidity to the non-financial and other corporations that financed brokers and dealers  prior to the Crash.

However, monetary policy became ambiguous during February 1930 and 1932.   Government securities purchases in the open market continued to decline until 1932.   This reduced liquidity by lowering non-borrowed reserves. Furthermore,   although the interest rate was reduced between March 1930 and September 1931, it was raised twice later in 1931.  This rise made loans more expensive and deterred people and corporations from borrowing.  What is worse, the money supply dropped by 31 percent between 1929 and 1933 -- depressing economic development further during the Depression.

After the stock market crash, production fell by nearly 50 percent from the business cycle peak in August 1929 to the trough in March 1933.  At the same time, the overall price level dropped by about one-third.  Since the Great Depression happened after the 1929 stock market crash, many people blamed it for the economic collapse.  Some held President Hoover responsible; others targeted the brokers, bankers, and businessmen.   But the cause of the Great Depression could not be attributed to one individual or even a group of people. Also, it seems unlikely that a crash in stock prices would have been sufficient to lead the U.S. economy into depression and to sustain the downward spiral in business activity.  So, what events triggered the Great Depression?   Click here if you want to know the cause of the Depression.

Here are some of the reasons why many people bought shares during 1929:

1. Rising Stock Dividends

The stock market was propped up by new investors entering the market, who viewed it as an easy way to get rich quick. However, economic historians estimate that a relatively small number of Americans -- about 4 million -- had investments in the market at any one time. Rather, the constant influx of new investors coming in and old investors moving out ensured that new money was always floating around.

2. Increase in Personal Savings

Higher wages meant that even average Americans now had surplus money to put into savings or invest in the stock market.

3. Relatively Easy Money Policy

At this time, banks made money more readily available at lower interest rates to more and more people. Although economists debate the actual influence of this phenomenon on the stock market, it's conceivable that many people took out loans not only to buy cars, but also to buy stock.

4. Over-production Profits were Invested in New Production

From 1925 on, industry was over-producing. In anticipation of eventually selling the surplus, business leaders funneled their profits right back into industry, investing in factories, new machinery, and more workers, which led to even greater overproduction. This increased production gave the companies an aura of financial soundness, which encouraged Americans to buy more stock.

5. Investors' High Expectation

At this time there were no effective legal guidelines on the buying and selling of stock. Free from legal guidelines, corporations began printing up more and more common stock. Many investors in the stock market practiced "buying on margin," that is, buying stock on credit. Confident that a given stock's value would rise, an investor put a down payment on the stock, expecting in a few months to pay the balance of the initial cost plus receive a hefty profit. This turned the stock market into a speculative pyramid game, in which most of the money invested in the market wasn't actually there.

Before the 1929 Crash, few regulations were enforced.  Investors were not protected from fraud, hype and shoddy stocks.  Individuals did not know whether companies were doing as well as they claimed to be doing and whether companies' financial reports were reliable.  It was after the Crash that an agency known as the Securities and Exchange Commission (SEC) was established to lay down the law and punish the violators.