As Wall Street is preparing to open the market today to a Black Monday courtesy of president Donald Trump, Cryptopolitan wanted to take everyone back to October 19, 1987, so we can refresh our minds to what exactly went down on that fateful day.
So, Black Monday hit the world during regular trading hours, and it was the biggest one-day drop in Wall Street history. The Dow Jones Industrial Average (DJIA) plunged by 508 points, or 22.6%, in a single trading session. The damage didn’t stop in the United States.
Donald Trump speaking at CPAC 2011 in Washington, D.C. Photo by Gage Skidmore via Flickr.
Within hours, it became a global crash, hitting every major financial market. Total losses across the globe reached $1.71 trillion. But unlike this time, the crash came without warning, and people feared a second Great Depression was on the way.
Traders dumped shares as fast as possible, triggered by fear, computers, and broken trust in government financial plans. Some markets called it Black Tuesday due to time zone differences, but the pain was universal.
Markets started falling hard before the crash landed
The first signs of trouble showed up five days before Black Monday. On October 14, 1987, the House Committee on Ways and Means introduced a bill that would reduce tax benefits for companies financing mergers and leveraged buyouts.
The same day, the U.S. Commerce Department published a trade report showing a higher-than-expected deficit, making investors even more nervous. The news pushed the U.S. dollar down while interest rates climbed. Traders started backing off stocks.
That Wednesday, the DJIA fell 3.81%, or 95.46 points, down to 2,412.70. The next day, it dropped again by 2.39%, or 57.61 points. By Friday, October 16, the DJIA was down another 4.6%, or 108.35 points. That made it more than 12% lower than the record high set on August 25.
These drops hit the U.S. first, but it didn’t take long for other markets to follow. International indices that had been flying high for five years straight—rising by an average of 296%—were now sinking. The U.S. wasn’t alone in the panic.
From August 1982 to August 1987, the DJIA had climbed from 776 to 2,722, feeding a strong five-year bull market. But by October, that run was unraveling.
Behind the scenes, many things were adding fuel to the fire. Interest rates were rising. Deficits were growing. Stocks were seen as overpriced. And the U.S. dollar was falling fast. Investors were worried the whole thing was going to break.
In February 1987, top economies signed the Louvre Accord to try to stabilize currencies and fix the dollar’s drop. But no one believed it would work. Trust disappeared. When faith in the Louvre Accord fell apart, markets lost whatever calm they had left.
Computers made the panic worse
One of the biggest drivers behind the crash was a system known as portfolio insurance. This computer-based strategy used market data to trigger automatic sales of index futures if prices dropped. The idea was to limit risk. But when prices started falling, the computers kept selling—and that selling forced more selling. It was a self-made feedback loop.
Over the weekend before the crash, the stock market was technically closed, but trouble kept building. Portfolio insurance models kept generating orders.
Big mutual funds let investors redeem shares over the weekend at Friday’s closing price, which forced funds to prep for big Monday sales. But they didn’t have the cash. So they had to dump stocks early on Monday.
Some traders saw it coming and tried to get ahead by selling before the wave hit. By the time the New York Stock Exchange (NYSE) opened on Monday, October 19, sell orders were already stacked. The system couldn’t keep up. The imbalance between buy and sell orders was massive. The NYSE let designated market makers, also called specialists, delay trading if they couldn’t match orders. That’s what happened.
Source: Wikipedia
When the bell rang, 95 S&P 500 stocks didn’t even open on time. Neither did 11 of the 30 DJIA stocks. But the futures market opened on schedule—and it got hit immediately. The DJIA dropped from 2,246.74 at open to 1,738.74 at close.
System failures added to the chaos
The last 90 minutes of trading that day were pure mayhem. Stocks were falling fast. Traders were overwhelmed. 195 out of 2,257 NYSE-listed stocks had delays or stops. Computers failed.
Phone lines jammed. The SuperDot system used for processing orders broke down. Orders didn’t go through for over an hour. Fedwire, the system used to move large funds, also shut down temporarily.
Nobody could figure out who owed who, or where the money was. People weren’t just afraid of losing money—they were afraid the entire financial system might stop working.
The day after the crash, panic spread beyond stocks. Frederic Mishkin, an economist, said the bigger threat was the risk of a complete breakdown of financial firms. The Brady Commission, set up to investigate the crash, agreed.
Robert Glauber, part of that team, said, “Black Monday may have been frightening, but it was the capital-liquidity problem on Tuesday that was horrifying.”
Tuesday brought a margin call nightmare
On Tuesday, October 20, the nightmare got worse. Margin calls—demands for investors to add cash to cover losing positions—were up 10 times the normal amount and three times above any previous records. Some brokerage firms found out that their clients didn’t have enough money.
They were under segregated, meaning they didn’t separate client cash from firm cash. That forced firms to cover the gaps using their own money. Eleven firms got hit with margin calls for a single customer that were double their net capital.
These margin calls had to be paid by market open on Tuesday. Clearinghouses needed cash, and they asked banks to extend credit. But banks were maxed out.
They were already worried about risk, and now they were being asked for even more exposure to a broken market. Some banks hit their credit limits. Others just refused. Counterparty risk became real. Nobody knew who could pay what they owed, and nobody wanted to find out the hard way.
The entire financial structure was wobbling. And that’s when the Federal Reserve stepped in.
The Fed started injecting cash to stop a full collapse
On Tuesday morning, Alan Greenspan, then Chairman of the Fed, made a one-sentence statement:
“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
It had an immediate effect. The DJIA jumped nearly 200 points, but that didn’t last. By noon, the drop had resumed. So the Fed didn’t just talk—they acted.
That day, they injected $17 billion into the banking system through open market operations. That was more than 25% of total bank reserves and about 7% of the entire U.S. monetary base. The federal funds rate dropped 0.5% right away.
The Fed kept pumping money for weeks. They even started trading an hour earlier than usual. Banks were told the night before to expect it. Everything was public, clear, and fast. They wanted banks to lend, and they weren’t subtle about it.
The Fed’s goal wasn’t to make stocks go back up. It was to keep the system from falling apart. They used two tactics: pressure and cash. They pushed banks hard—known as moral suasion—to get them to keep lending to securities firms. At the same time, they gave those banks access to more money so they’d feel safe doing it.
Ben Bernanke, who later ran the Fed, explained it like this: “The Fed’s key action was to induce the banks (by suasion and by the supply of liquidity) to make loans, on customary terms, despite chaotic conditions and the possibility of severe adverse selection of borrowers.”
Translation: lending money at that moment made no financial sense. The Fed had to force it to happen anyway.
That strategy worked. Lending by large banks in Chicago and New York almost doubled. Even with everything collapsing around them, the Fed’s push kept the financial system from completely cracking.
Will they do the same thing this time? Who knows?
This articles is written by : Nermeen Nabil Khear Abdelmalak
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By Nermeen Nabil Khear 
