The Wall Street Crash of 1929, also called the Great Crash or the Crash of '29, is the stock-market crash that occurred in late October, 1929. It started on October 24 ("Black Thursday") and continued through October 29, 1929 ("Black Tuesday"), when share prices on the New York Stock Exchange (NYSE) collapsed. However, the days leading up to the 29th had also seen enormous stock-market upheaval, with panic selling and extremely high levels of trading interspersed with brief periods of recovery.
Not only was the event of such a magnitude that it is unforgettable, the fact that economists were unable to predict it is in itself of great note. Although some well-known economists, particularly those of the Austrian School, were aware of the situation their warnings went unheeded. After the crash, the world sank into the Great Depression, with these two events inextricably linked in people's minds. Debate over the causes of the crash and this worldwide depression still continue, as economists and others seek not only to understand the past but to learn from them and thus to avoid a repetition of history. While safety measures have been instituted by the New York Stock Exchange and other stock exchanges to prevent a crash of such magnitude, it is change in the attitudes and actions of those involved in the world of finance and business that is needed to ensure that the suffering resulting from massive unemployment and loss of savings can be avoided in the future.
Before The Crash
At the time of the stock market crash in 1929, New York City had grown to be a major metropolis, and its Wall Street district was one of the world's leading financial centers. The Roaring Twenties, which was a precursor to the Crash, was a time of prosperity and excess in the city, and despite warnings against speculation, many believed that the market could sustain high price levels (Smith 2008). Shortly before the crash, Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau" (Teach 2007).
In 1929, so many people were buying on margin that they had run up a debt of six billion dollars (Allen 1986). "Buying on margin" involves borrowing money at a low interest rate (usually from a broker) to purchase stock, and then putting up the stock as collateral for the loan, expecting the stock price to go up resulting in dividends. Buying on margin has the effect of magnifying any profit or loss made on changes in the stock prices, but it allows individuals to make purchases without having cash to support them. In short, the bull market on Wall Street that began in 1923 led to an unprecedented period of share trading: "Excessive speculation was creating inflated wealth and a sense of prosperity built upon borrowed money" (Geisst 2004).
However, by 1929 there were signs of instability. On September 3 the Dow Jones Industrial Average (DJIA) reached its peak, closing at 381.7 (The Guardian 2008). The prosperity could not last forever, though. During the month of September, and despite the peak on the Dow Jones on September 3, the market was dropping sharply only to rise and then drop again. It was like tremors before a major earthquake but nobody heeded the warning. The market had sagged temporarily before, but it always came back stronger (Allen 1986).
In the days leading up to Black Tuesday in October, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. These swings were later correlated with the prospects for passage of the Smoot-Hawley Tariff Act, which was then being debated in Congress (Wanniski 1978).
After the crash, the Dow Jones Industrial Average recovered early in 1930, only to reverse and crash again, reaching a low point of the great bear market in 1932. The Dow did not return to pre-1929 levels until late 1954.
Predictions by prominent economists
On September 5, the economist Roger Babson gave a speech in which he said "Sooner or later, a crash is coming, and it may be terrific." Later that day the stock market declined by about three percent, a phenomenon that became known as the "Babson Break." He had predicted a crash for years but this time the market fell (Allen 1986). The Great Depression soon followed.
It is interesting that both protagonists of the Austrian School, Ludwig von Mises and Friedrich von Hayek predicted the crash much earlier than Babson.
In the summer of 1929, von Mises was offered a high position at the Kreditanstalt Bank. His future wife, Margit, was ecstatic, but von Mises decided against it. “Why not?” she asked. His response shocked her:
“A great crash is coming, and I don’t want my name in any way connected with it.” He preferred to write and teach. “If you want a rich man,” he said, “don’t marry me. I am not interested in earning money. I am writing about money, but will never have much of my own” (Margit von Mises 1984, Skousen 1993).
The consequences
The Crash led to higher trade tariffs as governments tried to shore up their economies, and higher interest rates in the US after a worldwide run on U.S. gold deposits. In America unemployment went from 1.5 million in 1929 to 12.8 million—or 24.75 percent of the workforce—by 1933, a pattern replicated around the world. It took 23 years for the U.S. market to recover (The Guardian 2008). While the Crash is inevitably linked to the Great Depression, the cause of that devastating worldwide situation go deeper than the Crash, which was in actuality only the "tip of the iceberg," a symptom of the problem. The causes of the Crash and failures to adjust in its aftermath combined to produce the Great Depression.
Causes
Some economists such as Joseph Schumpeter and Nikolai Kondratiev (also written Kondratieff) have claimed that the crash of 1929 was merely a historical event in the continuing process known as economic cycles. The Kondratiev long-wave cycle is a theory based on study of nineteenth century price behavior. The theory predicts 50-60 year-long cycles of economic booms and depressions (Kondratiev 1984). However, the stock market crash in 1929 was as monumental as it was unexpected. Thus, it falls far beyond the standard Kondratiev’s long-term economic cycles theory, which itself has been subject to serious criticism (Rothbard 1984).
Thus, although the K-cycle theory has economic merit, it cannot explain the 1929 Stock Market crash which occurred in the context of a variety of economic imbalances and structural failings. Thus the Crash is treated as a singularity (a unique event). These are some of the most significant economic factors behind the stock market crash of 1929.
Boom and bust
One possible explanation for the severity of the Crash in 1929 is that the preceding period was one of excessive investment—a great economic "boom"—which inevitably led to an equally excessive "bust." On this point, economists of the Monetarist and Austrian Schools are sharply divided. An interesting historical sidelight is the fact that Irving Fisher, the principal Monetarist of the 1920s, completely failed to anticipate the crash, while Austrian economists Ludwig von Mises and Friedrich Hayek predicted the economic crisis.
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