The Crash of 1929
On October 19 1987, the Dow-Jones industrial average suffered a major devaluation. The Dow
lost over 500 points. Stock trading markets worldwide were all suffering similar declines. At the time, there was a lot of
concern over what this meant to the overall economy of the world. The reason for this concern comes from the fact that the
last time there was a large devaluation in the stock market, there followed a depression. Economists used a yardstick from
the Jazz Age to evaluate this 'correction'; the yardstick was the crash of October 1929.
The crash of 1929 continues to be a fascinating example of panic in high finance and is still
a staple of Economics 101. This event involved all people, big and small, rich and poor, young and old. Everyone.
Depressions, we are told, are cyclical in the nature of economics. In this era, we have successfully
evaded depressions with the aid of computers, government regulation, and because we actually learned from history. The subject
of this crash in 1929 has been studied and discussed many times over the years, by many economic authors. Most notable, in
my opinion, would be John Galbraith. His book, "The Great Crash 1929", I heartily recommend if you are interested in the details
of the crash and events leading up to it. It is a warning to us that our economic world will not always necessarily be safe.
In 1929, even in 1928, the warnings of an economic disaster were heeded by some of the Wall
Street denizens. It seems clear that everyone involved in the speculative boom of the late twenties knew that eventually stocks
would drop. Who cares though? At the moment, we are in the business of making money. When the bulls are stampeding, it raises
a cloud of dust that makes it hard to see danger. This boom of the 20s is almost as famous as the bust.
The post-war world was rebuilding in early 20s. The application of electricity in our lives
really began to grow during this exciting decade. Imagine the open frontier there was for electric appliances as more homes
were becoming 'electric'. Consumerism is always a major contributor to boom, and in the Jazz Age it stayed true to form. At
the same time, many people were caught up in the stock market. In the years from 1925 to 1929 it was almost a craze to play
the market. The little guy could speculate with the seasoned pros in the pit. It was fun; it was the heyday of the Jazz Age.
It was also shaky. What made the market popular was the fact that you could go to a broker
and purchase stock on margin. What this means is that instead of buying your stocks with the money you have, you could purchase
them with cash down and the rest on credit. Not a bad deal, especially when the collateral is your ownership of the stock.
For example, let's say you want 100 shares of Red Wagon stock. The cost for 100 shares is say $15000. You put down 10% and
make monthly payments. Jones down the street is doing the same thing, as is Johnson, Wilson, and Douglas. Well, all this purchase
of stock is pushing up the price. Now 100 shares of Red Wagon co. is worth $20000. In essence, you are paying off what you
owe on the stock by its increase in value. So how can you lose on this? In the Jazz Age, economists knew how and were very
worried about it.
You might be wondering at this point, why didn't they do anything about it if they knew a
collapse was imminent? The answer is not so simple. There was a policy which many world governments followed, including the
Coolidge administration, known as laissez-faire. Laissez-faire roughly translated means 'let things be'. It is an old economic
term to describe a government policy of non-intervention. As pretty as the word sounds, it was this policy that allowed the
speculation bubble to grow unchecked. There was a Federal Reserve in those days, but its powers on economic matters were not
utilized as they are today. In 1928, there was a lot of talk on how to curb the tide of marginal stock purchases without causing
a panic on the market. The bottom line was, no one wanted to take the blame if the market crashed because of measures taken
to prevent it. So, laissez-faire continued and they hoped for the best.
It is not fair to say that the people of the Jazz Age did absolutely nothing, however. In
late March 1929, just after the inauguration of Herbert Hoover, the Federal Reserve Board was meeting every day behind closed
doors. There was no doubt heavy discussion about the market and the national economy. The first of many 'mini' crashes and
recoveries began on Monday, March 25, 1929. As a result, for the next six months, it was probably the most nervous market
in the history of world. I wonder how investors today would react if they took the roller coaster of those times? October
The summer of 1929 was not too bad. It hearkened somewhat of the good old days of optimism.
And even though there still was an air of nervousness, the market appeared to be stable. It was on September 3, right after
the holiday, that a bear market became firmly established. The roller coaster was on its final descent.
Panic. It is a word that describes a highly intense, contagious fear amongst a large number
of people. It is a phenomenon which social psychologists are fond of studying, yet at the same time they themselves are just
as prone to it as the rest of us are. Panic is far more serious than a frenzy, and it is hard to describe without reference.
In the crash of 1987, it may be safe to say it was a day of frenzied selling, and arguably far short of true panic. One week
in October 1929, there was a true panic, and many rich people became poor people in one single day.