Crashes

Precipitous stock market price drops. There is no precise definition of the term, although the most serious crashes of the 19th and early 20th centuries caused serious collateral damage in the banking system as well as in the STOCK MARKETS.

In the 19th century, crashes were referred to as “panics.” Before much was known about the interrelationship of different sectors of the economy, panic implied that investors lost confidence in the market and began to sell at the same time, causing serious deterioration in stock prices. Panics occurred in 1837, 1857, 1869, 1873, and 1893, as well as in 1907. When the market fell in October 1929, the term crash became widely used. In all of the panics prior to 1929, dozens of banks were forced to close their doors, especially when the United States was still on a gold standard. The U.S. banking system was seriously affected after the 1929 crash, and many savers withdrew their funds from banks, fearful that banks would close, leaving them penniless. The most serious banking collapse after the crash came in 1930 when the BANK OF UNITED STATES was forced to close its doors.

In the post–World War II era, the term crash has been used more liberally, connoting any serious price drop on the stock exchange in which recovery was not imminent. But a crash is materially different from a bear market, in which prices fall and stay depressed for a period of time before recovering. In the past, a crash was acknowledged to have occurred when a market’s precipitous drop had serious effects for the economy rather than simply being a price correction from inflated stock values. Since the development of the safety net of banking and securities laws during the 1930s, crashes have not been so unexpected or dramatic as in the pre-1929 period, although they have occurred in one form or other in 1987 and in the post–Internet bubble period after 2000.

See also NEW YORK STOCK EXCHANGE.

Further reading

• Galbraith, John Kenneth. The Great Crash 1929. New York: Penguin, 1954. 
• Collman, Charles Albert. Our Mysterious Panics, 1830–1930. New York: William Morrow, 1931. 
• Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. 4th ed. New York: John Wiley & Sons, 2000.