1929 Wall Street Stock Market Crash

The 1929 Wall Street Crash triggered a noisy backlash against short selling, turning short sellers into national scapegoats even as congressional hearings pointed toward inflated prices and stock-buying pools as central causes of the collapse. The episode shows how public explanations of a financial disaster can diverge from the evidence about who helped build the bubble—and how that divergence can shape regulation long after the crash.

Blame in the aftermath

In the wake of the crash, short selling was denounced on the Senate floor as one of “the great commercial evils of the day” and “a major cause of prolonging the depression.” The accusation cast traders who bet against stock prices as responsible for extending the country’s economic pain. The book describes the backlash as perhaps the noisiest in the history of hostility toward short sellers.

The campaign reached beyond the Senate. A year after the crash, the New York Stock Exchange discouraged investors from lending their shares, since short sellers needed to borrow shares before selling them. President Hoover voiced concern about the possible damage short sellers might do, and J. Edgar Hoover said he would examine whether they were conspiring to hold down prices. Economists Charles M. Jones and Owen A. Lamont later characterized the atmosphere as hysterical.

What the hearings found

Congressional hearings investigated allegations of nefarious short-selling activity, but their findings did not support the popular account. The congressmen came away empty-handed: the evidence made clear that many of the real villains of the crash had been on the long side. They had inflated stock prices with hyped-up rumors and stock-buying pools, then got out before the bubble burst.

That reversal matters to the crash’s history of blame. Short sellers were accused of driving prices down, while the hearings identified actors who had helped push prices up and then exited before the collapse. The investigation therefore exposed a gap between a vivid public target and the activities the book identifies as central to inflating the market.

Regulation and a lasting suspicion

The hearings did not end skepticism about short selling. Federal regulations soon made it more difficult, including a rule barring mutual funds from selling stocks short—a restriction that remained in place until 1997. The hostility outlasted the immediate crisis: the book notes that, despite many changes in American investing, popular suspicion of short sellers endured.

The crash thus had consequences beyond the immediate condemnation of traders. Its aftermath helped sustain regulation directed at short selling even though the congressional inquiry had failed to substantiate the allegations against short sellers and had instead pointed to price inflation by long investors. The episode became an example of how scapegoating can persist after an investigation complicates the story that first made it persuasive.