The Crash of 1987

US stock markets suffered their largest peacetime one-day fall yet on 19 October 1987, when the Dow Jones Industrial Average index of shares in leading US companies dropped 22% and European and Japanese markets followed suit.

The losses were triggered by the widespread belief that insider trading and company takeovers on borrowed money were dominating the markets, while the US economy was entering into an economic slowdown.

There were also worries about the value of the US dollar, which had been declining on international markets.

These fears grew when Germany raised a key interest rate, boosting the value of its currency.

Newly-introduced computerised trading systems exacerbated the stock market declines, as sell orders were executed automatically.

Concerns that major banks might go bust led the Fed and other major central banks to lower interest rates sharply.

"Circuit-breakers" were also introduced to limit program trading and allow the authorities to suspend all trades for short periods.

The crash seemed to have little direct economic effect and stock markets soon recovered. But the lower interest rates, especially in the UK, may have contributed to the housing market bubble of 1988-89 and to the pressures on the pound sterling which led to the devaluation of 1992.

The crash also showed that global stock markets were now closely linked, and changes in economic policy in one country could affect markets around the world. Laws on insider trading were also tightened up in the US and UK.

By Steve Schifferes
Economics reporter, BBC News

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