Black Tuesday crashed the world's economy

The fourth day of the Great Stock Market Crash was October 29th, 1929, known to history as "Black Tuesday." The Dow Jones Industrial Average dropped 25% over the four days, and investors lost $30 billion. This was 10 times more than the 1929 federal budget, and more than the United States spent on World War I.

The market collapse brought an end to the decade of exuberance and excess known as the Roaring Twenties. The optimism that followed World War I had seen a huge expansion of American Industry, coupled with an agricultural decline caused by massive overproduction. People had flocked to the cities to share in the new prosperity, and invested their savings in the ever-rising stock market, rather than in more secure long-term assets. Money was easy, and brokers let people buy on credit. People thought the market would rise forever, but it didn't.

Following the Great Crash, the Dow saw another slide, a longer one, from April 1930 to July 1932, when it hit its lowest point of the 20th Century, representing a loss of 89% for all stocks. It heralded the beginning of the 12-year Great Depression that affected all Western industrialized countries. Bankruptcies followed in the wake of the stock price declines, and credit contraction induced business closures, bank failures, mass lay-offs, and a collapse of consumer confidence.

It was a time of great misery as businesses and farms closed and people's savings disappeared overnight. There were suicides, and New York hotel clerks were reportedly asking guests, "Do you want a room for sleeping or jumping?" As people deserted stocks and went for commodities such as gold, the Fed tried to boost the value of the dollar by raising interest rates. This move was also motivated by a belief that easy credit had led to the over-indulgence of stock buying that had ultimately precipitated the collapse.

There is still dispute about what caused the crash, but the analysis by Milton Friedman and Anna Schwartz in "A Monetary History of the United States," is now widely accepted as the reason that it led to the Great Depression. That analysis points to the collapse of the banking system during three waves of panics from 1930 to 1933 as the source of the credit famine that brought about bank failures and business and farm closures.

As the Financial Crisis of 2008 unfolded, those in authority decided to learn from the mistakes of history, rather than to repeat them. They unloosed the purse strings with quantitative easing and ultra-low interest rates, and no second Great Depression manifested itself. While it is too soon to be completely confident, it looks as though the crisis might have been contained. It has, however, left a great deal of extra money in the economy, distorting people’s view of real demand, and encouraging unjustified investment and misallocation of resources. It will take some delicate handling to remove it at a pace that does not trigger another collapse.