Wall Street Crash of 1929

10 Key excerpts on "Wall Street Crash of 1929"

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  The Global 1920s

  Politics, economics and society

  • Richard Carr, Bradley W. Hart(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The Economist in London was already hailing the development as ‘a landmark in post-war financial history’. It continued that

  the share boom of 1926–29 originated in a period of industrial prosperity which has never been surpassed in the world’s history. The stock market became a cynosure of interest for the whole American nation, high and low, rich and poor. While the boom lasted Wall Street was a market for the world’s floating resources, since to speculate in that centre, or to lend to others for that purpose, afforded a higher rate of return than any other form of contemporary activity.

  (The Economist, 2 November 1929)

  Such safe returns on capital were, for the time being, over and would not return for over two decades. The 1920s ended with perhaps their most defining moment still playing out.

  Unsurprisingly, therefore, the crash of 1929, and the events that followed, became seared in the American psyche. By the mid-1930s, the country was plunging into the series of events that would become known as the Great Depression and the world would soon follow suit. But what factors had led to this catastrophic economic collapse? After all, as the previous chapter has noted, the US stock market had crashed before, only to recover in a fairly short time. There had been extended recessions – even depressions – before. Yet the 1929 crash was different – the stock market did recover, somewhat, only to plunge again and again. This chapter considers the causes and immediate effects of the 1929 stock market crash and its effects around the world. The following chapter examines both intellectual and government policy responses to the events of 1929, and while the vast majority of the Great Depression took place in the 1930s, the foundations of what would come later were laid in the final months of the 1920s.

  Causes of the crash

  The American stock market crash of 1929 did not happen in a vacuum and was in fact the result of long-standing factors affecting the US economy. ‘In 1929’, economist John Kenneth Galbraith wrote, ‘the economy was headed for trouble. Eventually that trouble was violently reflected in Wall Street’ (Galbraith 1961 : 93). Galbraith blamed the crash on widespread speculation in stocks that exceeded all rationality, coupled with an overproduction of goods and a downturn in American agriculture. After the crash took place, he argued, it was made worse by the heavy concentration of wealth in the hands of a very few (discussed in chapter 2 on class in the present book); poor corporate practices that included regularly using income to pay off substantial debts; a weak banking structure that quickly began to fail; other countries owing the Unites States too much money (discussed in the previous chapter) and relying heavily on the US economy; and poor economic policy making (‘it seems certain that the economists and those who offered economic counsel in the late twenties and early thirties were almost uniquely perverse’, Galbraith 1961

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  The Creation and Destruction of Value

  The Globalization Cycle

  • Harold James(Author)
  • 2009(Publication Date)
  • Harvard University Press

    (Publisher)

  More recently, the volatility of financial markets has increased due to the globalization of markets. The memory of 1929 is now used with each financial crisis (whatever the origin), as part of a call for stabi-lization policies and for a fundamental rethinking or reversal of financial liberalization. Helmut Schmidt, for instance, who as German chancellor in the 1970s had been obsessed by the possibility of another Great Depression, in 1997 after the East Asia crisis stated, “The main parallel lies in the helplessness of many governments, which had not noticed in time that they had been locked in a financial trap, and now have no idea of how they might escape.” 6 The finan-cier George Soros at the same time warned of “the imminent disintegration of the global capitalist sys-4 6 THE CREATION AND DESTRUCTION OF VALUE tem,” which would “succumb to its defects.” 7 The af-termath of the 2007 subprime crisis has produced similar reactions. Again, George Soros opined, “This is not a normal crisis but the end of an era.” 8 The chairman of the Swiss bank UBS, while defending himself from criticism about his own and his insti-tution’s particular failings after an $18 billion write-down, noted that the world was experiencing the “most difficult financial circumstances since 1929.” 9 The statement is typical of market sentiment during bad times, but is also curiously erroneous. Most of the world, and particularly European countries, still had considerable financial stability in 1929; the really severe jolt, the annus terribilis, came in 1931. There are also other perplexing misapprehensions: the bad day on Wall Street is often called “Black Friday” although the dramatic market falls were on Thursday, Octo-ber 24, 1929, and Monday and Tuesday, October 28 and 29. THE MYSTERY OF 1929 The 1929 crisis is a substantial curiosity in that it was a major event, with truly world-historical conse-quences (the Great Depression, even perhaps the Sec-4 7 1929 OR 1931 ?

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  The Age of Global Economic Crises

  (1929-2022)

  • Juan Manuel Matés-Barco, María Vázquez-Fariñas, Juan Manuel Matés-Barco, María Vázquez-Fariñas(Authors)
  • 2023(Publication Date)
  • Routledge

    (Publisher)

  Roaring Twenties wore the face of optimism and economic prosperity. Much of the reparations for war damage had been paid, and this made it easier to solve the more immediate problems. However, the foundation of that prosperity was so fragile that 1929 showed most starkly how the progress of recent years had been but a mirage.

  1.3 The 1929 crisis and its effects on the world economy

  Until 1929, none of the economic crises in previous history had been as far-reaching as the one that occurred in that year. Above all, the crash of 1929 is significant for its broad global impact, which was facilitated by the importance of the United States in the international economy. The exceptions were nations that, because of their precariousness or economic situation, were cut off from the capitalist system. In any case, the crisis did not begin at the same time in all countries, nor did it have the same magnitude, nor was its duration identical. As Morilla Critz (1991) points out, there are two basic truths that allow us to understand the shocks suffered by the international economy: 1) the seeds of the crisis were scattered in many places ; and 2) that from a certain moment (which we place in 1929), a chain reaction was set in motion, which amplified and spread the crisis from one sector to another, and from one part of the world to another .

  1.3.1 The crisis from the perspective of economic theory

  The unfolding of the 1929 crisis has been well described by many scholars, but the analysis of the causes remains a matter of discussion and debate (Kindleberger 1991; Galbraith 1993; Marichal 2010). The complexity lies in explaining the severity, depth, and extent of the subsequent economic depression. History has shown how the capitalist system exhibits cyclical behaviour, which has been described differently according to the respective schools of economic thought (Barber 1974; Barnett 2017).

  First, there is the instability school, which characterises capitalism as an essentially unstable system. Malthus, Marx, and Keynes have been its leading exponents. Thomas Malthus (1766–1834) developed his theories on crises, underconsumption, and defended protectionism (Fernández-Delgado 2003). For his part, Karl Marx (1818–1883) pointed out the internal contradictions of capitalism, due to the difficulty of controlling the market and chronic underconsumption, which would lead to its destruction. At the same time, Marx harshly criticised the Malthusian theory of population as a superficial plagiarism of authors such as Daniel Defoe (1660–1731) and Benjamin Franklin (1706–1790). On the other hand, in Capital

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  Booms, Bubbles and Bust in the US Stock Market

  • David Western(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  10  The great asset price bubble of 1929

  Introduction

  Rarely does an economic crisis scar the minds of people for life, but the Great Depression is the exception. Many years after the event, even when many ordinary people had become millionaires, they remained frugal in their lifestyles. Fear of another depression burnt the importance of thrift into their mindsets. Given the magnitude of the disaster, and its long aftermath, it should not come as a surprise that governments introduced regulatory changes in the 1930s that were aimed at reducing speculative tendencies within the economic and investment arenas. The financial sector was a major target, as it significantly fuelled the boom of the 1920s, as was the stock broking fraternity that fostered ‘buying on margin’. Nevertheless, it was the individual speculator’s greed that drove the quest for quick capital gains, rather than medium term dividends, and so the speculator could accept a major slice of the blame for the economic and social crisis that ensued. What were causes of the Great Depression? How important were speculative forces in this crash? What lessons have we learnt? Could history repeat itself? This chapter examines these questions in the light of the recent boom in US stocks prices. Of particular interest is the degree to which speculative forces overshadowed real economy-wide forces in driving the crash of 1929.

  Seeds of the bust in the 1920s

  There were economic developments in the 1920s that may have spurred the rise of the stock market later in the decade. The economic power of the United States was given a boost post First World War as Europe was still recovering from the ravages of that war. There was a race to lift inventory levels and so a boom developed in 1920–1. The domestic economy was also undergoing a transformation, as an industrial organization revolution saw US companies develop new management techniques, generate economies of scale and scope and benefit from innovation as science was applied more to industrial problems. Such a transformation is analogous to the ‘peace dividend’ spoken of after the end of the Cold War in the 1990s. Hence, real factors or better economic fundamentals may have laid the foundations for the improved economic performance of US companies in terms of earnings and dividends throughout the 1920s. Higher productivity could then explain the ‘real bubble’ in stocks from early 1927 until October 1929.

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  The Depression Dilemmas of Rural Iowa, 1929-1933

  • Lisa L. Ossian(Author)
  • 2012(Publication Date)
  • University of Missouri

    (Publisher)

  CHAPTER ONE

  OCTOBER 1929: THE STOCK MARKET PLUMMETS

  Echoes during the Fall Plowing: Iowa's Reactions to the Wall Street Crash

  “Historians will put a little red mark against 1929. It broke a lot of records and a lot of people.”

  —Business Week (December 1929)

  1929: “Like sheep over a fence, the people leaped into the stock market.”

  —Cyrenus Cole, Iowa through the Years (1940)

  The Wolf of Wall Street played only for a Friday and Saturday night, October 11 and 12, at the Iowa Theatre on Winterset's town square, but the movie certainly advertised itself well. “A story of terrific power!” the ad in the local newspaper proclaimed. “Watch out, Wolf, you know how to handle men, but you're not so clever with women. Smashing! Tearing! Ruthlessly crashing to wealth and power. Wall Street lived by men who battle there. The great money mart has a corner on the thrill market.”1 How did the stock market crash of 1929 echo across the country and into the next decade? The crash seemed dramatic and memorable, but was it a traumatic historical moment for other regions across the nation? What were its particular echoes in Iowa?2

  Many Americans considered the 1920s not only as the Roaring Twenties but as a New Era, one of confidence and endless optimism. The three Republican presidents had supported business expansion throughout the decade, especially during President Calvin Coolidge's term, and the “Coolidge Market” seemed to be moving seamlessly in 1929 to a “Hoover Market.” Dr. Charles A. Dice, an economist, published a book early that year titled New Levels in the Stock Market, and in words that would later haunt his career, described “a mighty revolution” that seemed to be occurring in industry, trade, and finance. Dice called this new prosperity “The Stock Market Extraordinary.” Only the sky appeared to be the limit.3

  The New Era did appear to be a decade of unbelievable prosperity when the United States emerged as the richest nation in the world following the Great War. The rise of the New York Stock Exchange by the late 1920s seemed remarkable as well, capturing London's previous role as center of the economic world, and Wall Street experienced its first day in which eight million shares were traded in 1929. During the 1920s, Americans played the stock market like “get-rich-quick games,” replacing frontier land speculation and gold rushes since they no longer applied in the twentieth century.4

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  The Stock Market

  • Rik W. Hafer, Scott E. Hein(Authors)
  • 2006(Publication Date)
  • Greenwood

    (Publisher)

  Whether this intervention was a wise policy is debatable, but it did calm financial markets. Stock prices began to climb sharply as the crisis was averted. From its low of 7,539 on August 31, the market once again began its upward climb, with the DJIA pushing through 9,400 by the end of 1998. As the DJIA pushed through 10,000 in early 1999—it stood at 3,600 only five years earlier—there arose an increasing level of anxiety. As in each of the previous crashes, the period preceding the decline often is characterized by mixed signals from otherwise reputable sources. Recall Irving Fisher’s claim on the eve of the 1929 crash that stock prices would only go higher? In an eerily similar statement, financial reporter Gretchen Morgenson wrote in the New York Times that ‘‘the market’s [upward] move is significant in what it reflects: the unparalleled strength of the economy and the dominance of the world economic stage by American Corporations.’’ 23 Juxtapose this view to that of Gail Dudack, the chief market strategist for Warburg, the U.S. unit of UBS, a major investment bank: ‘‘Wall Street is moving from fact to fiction.’’ 24 Her view was that the basis for stock valuation simply was not there. Investors were not irrational in trying to find the next Microsoft or Wal-Mart, but the reported earnings upon which they based their investment decisions simply were not there to support the high-flying stock prices. Attempts to explain the markets in the late 1990s did not account for the magnitude of misreported earnings. If market crashes are associated with key events, the massive and oftentimes fraudulent reporting of earnings exposed in 2000 is a good candidate to explain the crash. Speaking before an audience at the Center for Law and Business on the campus of New York University in September 1998, Arthur Levitt, the commissioner of the Securities and Ex- change Commission, suggested that ‘‘managing may be giving way to ma- nipulation.

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  A Degree in a Book: Economics

  Everything You Need to Know to Master the Subject - in One Book!

  • Elaine Schwartz(Author)
  • 2023(Publication Date)
  • Arcturus

    (Publisher)

  Rather like the human heart, a state’s financial system pumps the money and the credit that sustain the life of the economy. This money and credit flow through the banks and securities markets that connect the people who save money to those who want to borrow and/or invest it.

  THE CRASH

  Our story starts in 1929, when stock markets crashed, banks failed, and countries defaulted on the bonds they had sold. Worried, depositors rushed to banks to withdraw their savings. But because one person’s deposit had become someone else’s business loan or home mortgage, the money wasn’t there.

  This was not a new phenomenon. Faced with distressed borrowers and concerned depositors, bank failures had multiplied between 1921 and 1929. This culminated in what became known as Black Tuesday, October 29, 1929, when prices collapsed on the New York Stock Exchange and the Great Depression began. It would last a decade and few, if any, countries around the world were unaffected by it—although its effects were particularly debilitating in the US and in Europe.

  We will soon see how one Nobel Prize winner described the importance of banks. But first, our stroll around the circular flow will take us to commercial and investment banks and securities markets.

  SECURITIES ▶ including stock and bonds, financial instruments we can buy and sell that represent value.

  THE 1930S

  Recognizing the financial crisis as a threat to the entire economy, the US Senate’s Committee on Banking and Currency scheduled a series of hearings to identify the problem and its possible solutions. J.P. Morgan Jr., son of the world’s most famous banker and the head of his namesake company, was among the people they called to testify.

  J.P. Morgan & Co. was founded in 1871 and grew to be a global banking and financial empire. As a commercial and investment bank, it funded wealthy individuals and large corporations. John Pierpont Morgan controlled the organization until his death in 1913, overseeing the expansion of an entire capital goods sector of the US economy, and helping to create the securities that funded industries ranging from steel to electricity. He also directed the reorganization of the railroads when the industry collapsed in the early 1890s, and resolved a banking panic in 1907—all from the comfort of his library.

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  Capital of Capital

  Money, Banking, and Power in New York City, 1784-2012

  • Steven Jaffe, Jessica Lautin, Museum of the City of New York(Authors)
  • 2014(Publication Date)
  • Columbia University Press

    (Publisher)

  The idea that bankers, especially those on Wall Street, were at least partly to blame for the speculative excesses that had triggered the stock market crash of 1929 was popular. More immediate was the animosity of depositors who had lost savings in failed banks or homeowners whose properties were foreclosed by banks when they could not pay their mortgages. A widely shared gallows humor now pervaded routines on New York’s vaudeville and burlesque stages. Eddie Cantor, the son of Jewish immigrants who had become a popular actor, singer, and come-dian on Broadway and the radio, had invested in the stock market as a Goldman, Sachs client in the 1920s and sustained big losses during the 1929 crash. Cantor now performed a routine in which a “stooge” walked across the stage vigorously twist-ing a lemon. “Who are you?” Cantor asked the stooge. “I’m a margin clerk for Goldman, Sachs,” came the reply. Another joke took a jab at National City. “Nearly all of us made promises we can’t keep on account of the turn in Wall Street,” it went. “I promised my wife a rope of pearls. I can’t get the pearls but I have the rope—and I’m thinking of using it myself. . . . t William Gropper, Profits , ca. 1935. The Gropper Family/Tamiment Library & Robert F. Wagner Labor Archives, New York University CHAPTER 6 CRASH + DEPRESSION 167 u Nat Norman, [“Hooverville” in Central Park], ca. 1932. Museum of the City of New York, Gift of Nat Norman, 81.114.49 This photograph depicts a shantytown erected in Central Park by impoverished New Yorkers during the depression. By September 1932, 17 houses fanned out across the park’s former reservoir site. Take what is left of your bankroll and go out and buy yourself plenty of National Casket.” 8 In the eyes of the most radical critics, the depression showed that the entire capitalist system, reliant on the lending and underwriting provided by bankers, was a fraud and a failure that had enriched a few at the expense of the many, now hungry and jobless.

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  Europe's Promise

  Why the European Way Is the Best Hope in an Insecure Age

  • Steven Hill(Author)
  • 2010(Publication Date)
  • University of California Press

    (Publisher)

  107 The economic crash that began in the fall of 2008 stunned the world with its velocity and scope. Like a tsunami that arose seemingly with-out warning — though actually there had been ample alarm bells, but few had listened — it flooded everything in its path. Countries whose prospects had been bright less than a year before suddenly were deluged with bank failures, financial collapse, and ruin. The speedy economic contraction resulted in millions of jobs lost, factories closed, businesses shuttered, exports sitting on the docks, and homes repossessed. It saw the vanishing of more than a trillion dollars in stock market wealth in a single day, with more losses to follow. Worldwide economic activity slowed and seized to a degree that none of the experts had thought pos-sible. The economic pandemic spread from the United States to Europe, China, Japan, Brazil, India, Russia, Korea, Australia, Saudi Arabia, Iran, Pakistan — none were immune from its ravages. Besides the obvi-ous human suffering and government hand-wringing, economic theory SIX THE ECONOMIC CRASH OF 2008 – 9 Wall Street Capitalism vs. Social Capitalism The engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society. Francis Fukuyama, author, The End of History and the Last Man 108 / SOCIAL CAPITALIST EUROPE itself lay in tatters. The crisis demanded the rewriting of the economics textbooks, because nearly all the experts had been so wrong. What was especially revealing about the crisis was the different ways that the United States and Europe, by far the world’s two leading economies, coped with it.

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  A History of Financial Crises

  Dreams and Follies of Expectations

  • Cihan Bilginsoy(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Galbraith’s (2009 [1954]: 186) account focuses on the structural fragilities of the real sector of the economy. He believes that the economy had certain attributes that were highly brittle and vulnerable to the shock created by the crash. Aggregate demand was sensitive to declining asset values because income distribution was highly unequal, and the small securities-owning class carried out a disproportionate share of spending. Highly leveraged holding companies and investment-trust chains were exposed to huge losses if and when leveraging worked in reverse. Large numbers of highly interconnected financial institutions raised the likelihood of bank failures turning into an epidemic. Policymakers and experts were oblivious to the state of the economy and incapable of adopting appropriate measures in times of trouble. The collapse of corporate structures destroyed the ability to borrow and the willingness to lend. In this context the momentous decline of stock prices spread across the economy with little resistance.

  Kindleberger and Aliber (2011: 80–1) note that during the euphoric 1920s the positive feedback loop between higher stock prices and the flow of credit to the stock market came at the expense of loans to producers and consumers. The economy began to turn downward in the summer of 1929, not because the Fed reduced the money supply but because there was a shortage of credit in the real sector of the economy. When the crash hit, the subsequent liquidity freeze pushed the economy into a depression.

  The legislative response to the crash

  The crash of 1929 and the subsequent banking failures raised questions about the stability of markets and the need to impose rules and regulations on banks and exchanges to avoid financial crises. Congress passed, and the president signed, a series of acts after 1933, including the Glass–Steagall Act of 1933, the Securities Act of 1933, and the Securities and Exchange Act of 1934, and instituted a series of new rules and regulations to prevent a recurrence of the financial extravagance of 1928 and 1929. Among these the Glass–Steagall Act was the most prominent. The act separated commercial and investment banks. It defined the primary role of commercial banks and their affiliates as being an intermediary between depositors and retail borrowers, i.e. firms and households who need funds to purchase homes, durables, machinery, and equipment. No depository institution was permitted to buy, sell, underwrite, and distribute securities (with a few exceptions concerning government and investment-grade bonds) or to issue bonds against their assets. The objective of this provision was to prevent commercial banks from engaging in high-risk activities with depositors’ money. The act also extended federal supervision of commercial banks. Regional Fed banks were assigned to oversee the books of the member banks to ensure that they did not engage in speculative activities. Thus, commercial banks ended up controlling huge amounts of deposits but were prevented from taking high risks with depositors’ money. The banking laws of the 1930s made the commercial banking system very dull indeed.

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