Black Monday (1987)

Black Monday was a sudden and severe global stock market crash. It occurred on Monday, October 19, 1987. Because of different time zones, some parts of the world experienced it on Tuesday. This event caused massive financial losses across the globe. Experts estimated the total worldwide losses at US$1.71 trillion. The crash was so intense that many people feared it would lead to a Great Depression. It serves as a major example of how interconnected global financial markets have become.

Several complex factors likely caused the initial fall in stock prices. Some investors believed that stocks were significantly overvalued. They expected a price correction was necessary. There were also persistent US trade and budget deficits. Rising interest rates added more pressure to the markets. Additionally, a decline in the value of the US dollar created a crisis of confidence. In February 1987, leaders signed the Louvre Accord to stabilize money markets. However, doubts about this agreement helped fuel the instability.

Before the crash, the markets had been in a strong "bull market." A bull market is a period where stock prices rise steadily. For five years, the Dow Jones Industrial Average (DJIA) climbed significantly. It rose from 776 in August 1982 to a peak of 2,722 in August 1987. During this period, the nineteen largest market indices grew by an average of 296 percent. However, signs of trouble appeared just before the crash. On October 14, 1987, new tax bills and high trade deficit figures pushed prices down. The DJIA fell over 12 percent from its August high by the end of that week.

Technology played a role in how fast the market fell. Some investors used "portfolio insurance" to manage their risks. This involved using computer-based models to buy or sell index futures. As prices dropped, these models triggered massive sales. This created a self-reinforcing cycle of fear and selling. During the weekend before the crash, many mutual funds allowed customers to redeem shares. The number of requests was much higher than the firms' cash reserves. This forced them to sell huge amounts of stock as soon as the market opened on Monday.

When the New York Stock Exchange opened on October 19, the pressure was immense. A massive imbalance occurred between people wanting to sell and people wanting to buy. The DJIA fell 508 points, which was a 22.6 percent drop. This was the largest one-day percentage drop in the history of the DJIA. The volume of trading was so high that it overwhelmed computer and communication systems. Many orders went unfilled for over an hour. Trading delays and halts affected 195 of the 2,257 NYSE-listed stocks.

The day after the crash, a new problem emerged called a liquidity crisis. Liquidity refers to having enough cash to meet immediate needs. Investors faced massive "margin calls," which are demands to add more cash to their accounts. These calls were ten times larger than the usual average. Some firms did not have enough cash to cover these costs. This created a risk that major brokerage houses might fail. If these firms collapsed, the trouble could have spread to the entire global economy.

Central banks responded quickly to prevent a total economic collapse. The Federal Reserve (Fed) acted as a "lender of last resort." This means they provided money to keep the system running. On October 20, Fed Chairman Alan Greenspan issued a decisive public statement. He affirmed the Fed's readiness to support the financial system. The Fed injected $17 billion into the banking system on that day. This amount was about 25 percent of all bank reserve balances in the US. This action helped lower interest rates and restored some confidence.

The crash was truly a global event affecting twenty-three major markets. In the United Kingdom, the FTSE 100 index fell 23 percent in just two days. In Japan, the market saw a decline of 14.9 percent in one day. While the US lost $500 billion, Japan lost $421 billion. Some markets were hit much harder than others. Hong Kong saw a massive drop of 45.8 percent. In contrast, Austria was the least affected, falling only 11.4 percent. The impact on each country depended largely on how its central bank responded to the crisis.