1929 – The Great Depression

It began on Thursday, October 24, 1929. 12,894,650 shares changed hands on the New York Stock Exchange-a record. To put this number in perspective, let us go back a bit to March 12, 1928, when there was at that time a record set for trading activity. On that day, a total of 3,875,910 shares were traded. As you can see, Wall Street was a very, very busy place, as marketed worldwide. A big problem not mentioned so far in all this was communication.

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The ticker tape machine had gone through great amounts of perfections since its early applications in the 1870s-80s by Edison and others. Even at telegraphic speed, the volume was having an effect on time. Issues were behind as much as one hour to an hour and a half on the tape. Phones were just busy signals on hooks. It was causing crowds to gather outside of the NYSE trying to get in the communication. Police had to be called to control the strangest of riot masses; the investors of business. It is not yet noon.

The habit of lunch eased the panic somewhat and New York paused for a breath. There were rumblings of bargain grabbing to come in the afternoon, so maybe something could be salvaged. And it did come back to regain much of the losses. For example, a stock like Montgomery-Ward opened at 83 and dropped to 50 and recovered to 74. This was typical for the big name companies. On Friday, the mixture of margin call bargains combined with sells that were waiting from the late tickers on Thursday led to a bit of a gain. The trading was about 6 million shares. There was a short session on Saturday, which brought everything back to the level on Thursday.

The weekend was indeed a welcome relief. It gave investors a chance to sort out their portfolios and plan for what might be a rough week. Others, though, had cleverly planned for the crash and kept their money out and were ready to pick up some real bargains. They got set up for even worse ruin. On Monday, October 28, 1929, the volume was huge – over 9,250,000 shares traded. The losses were great as well. But unlike Thursday, there was no dramatic recovery; it was the prelude to Black Tuesday – the most infamous day in Wall Street history.

There is a reckoning that occurs every so often in world history. It is a time when debts are paid when wars are fought when disease ravages and passes through a land, when the corn does not grow like it used to, or when the forces of nature itself deliver a brief catastrophic blow. On Black Tuesday, the reckoning of several years of boom, which was based in large part on credit, came due. There were to be 16,410,030 shares traded on that day. People were dumping their securities and causing even more downward pressure on the market. There were despondent stockbrokers, in tears hopelessly trying to get in touch with customers for margin. This time, the panic of selling made sure, once and for all, that there was to be no quick fix, that the recovery would be slow and painful. There was not the nearly the recovery of gains seen on Thursday. The Dow Jones closed at $230 – down 23% from the opening of $299. The market had crashed.

Here are daily, weekly, and monthly charts of the 1929 Crash. The October 28th and October 29th drops look pretty impressive on the daily chart.

 

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DJIA Daily Chart 1929

 

But they pale in comparison to what came later.

 

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DJIA WEEKLY CHART 1929

 

The monthly chart shows the eventual market low in 1932. Although investors would have recovered their losses earlier due to dividends, the DJIA did not make it back to its 1929 highs until 1954.

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DJIA MONTHLY CHART 1929 – 33

While there have been many suggested explanations for the Crash, no one can fully account for it. Here are some of the explanations proposed:

  • Many people believe that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price/Earnings ratios and Price/Dividend ratios, argue that the share prices were not too high.
  • A number of people believe that fraud and illegal activity was one of the causes of the 1929 Crash. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation.

  • Margin buying is another scapegoat for the cause of the Crash. However, it is not the main reason because there was very little margin outstanding relative to the value of the market (the margin averaged less than five percent of the market value).

  • The new President of the Federal Reserve Board Adolph Miller tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, starting from the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the number of broker loans that originated from banks and lowered the liquidity of non-financial and other corporation that financed brokers and dealers.

 

  • Many public officials commented that the stock prices were too high. For example, the newly elected President of the United States, Herbert Hoover, publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover’s statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the Crash.

1929 Crash caused the Great Depression ?

Following the stock market crash if 1929, the US economy fell into a recession that lasted for a decade. At the height of the great depression, GNP was down 40% from its pre-depression levels and unemployment was above 25% (underemployment was at 50%). While the 1929 crash was a significant contributor, there are other important factors.

  • Despite rising wages overall, income distribution was extremely unequal. Gaps in income had actually increased since the 1890s. The 1% of the population at the very top of the pyramid had incomes 650% greater than that 11 % of Americans at the bottom of the pyramid. The tremendous concentration of wealth in the hands of the few meant that the American economy was dependent on high investment or luxury spending of the rich. However, both high spending and high investment are very susceptible to fluctuations in the economy; they are much less stable than people’s expenses on daily necessities like food, clothing, and shelter. Therefore, when the market crashed and the economy tumbled, both big spending and big investment collapsed.

  • From the late 1870s on, there had been an ongoing movement of consolidations and mergers. During World War I, many would-be competitors were merged into huge corporations like General Electric, making competition nearly nonexistent. In 1929 two hundred of the biggest corporations controlled 50% of the corporate wealth in America. This concentration of wealth meant that if just a few companies went under after the Crash, the whole economy would suffer.

  • In the 1920s, banks were opening at the rate of 4-5 per day, but with few federal restrictions to determine how much start-up capital a bank needed or how much of its reserves it could lend. As a result, most of these banks were highly insolvent; between 1923 and 1929, banks closed at the rate of two a day. Until the stock market crash in 1929, prosperity covered up the flaws in the banking system.

  • World War I had turned the U.S. from a debtor nation into a creditor nation. In the aftermath of the war, the U.S. was owed more money — from both the victorious Allies and the defeated Central Powers — than it owed to foreign nations. The Republican administrations of the 1920s insisted on payments in gold bullion, but the world’s gold supply was limited and by the end of the 1920s, the United States itself controlled most of the world’s supply. Besides gold, which was increasingly in short supply, countries could pay their debts in goods and services. However, protectionism and high tariffs kept foreign goods out of the U.S. This protectionism produced a negative effect on U.S. exports: if foreign countries couldn’t pay their debts, they had no money to buy American goods.

  • Most American economists and political leaders in 1929 still believed in laissez-faire and the self- regulating the economy. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses couldn’t keep up high employment for long when they were not selling goods. There was a widespread belief that if the federal budget were balanced, the economy would bounce back. To balance the budget demanded no further tax cuts (although Hoover lowered taxes) and no increase in government spending, which was disastrous in the light of rising unemployment and falling prices. Another problem with economic practices of the day was the commitment of the Hoover administration to remain on the international gold standard. Many suggested increasing the money supply and devaluing the dollar by printing paper money not backed by gold, but Hoover refused. Going off the gold standard was one of the first actions of new President Roosevelt in 1933.
  • The decline in money supply between 1929 and 1933 dampened economic developments. It led to a sharp contraction in output and nominal income, and an extraordinary climb in unemployment. If the Federal Reserve had increased the money supply, the fall in the economic activity could have been moderated considerably.

  • The Depression was a global event. The international monetary system of the time (the gold exchange standard) was a fixed-rate system. As long as the rules were observed, economic conditions in various countries would be closely related. Thus, problems in one large economy would be passed on to others, and ultimately, could be transmitted back to the country of origin