10 Facts to Know About the Stock Market Crash of 1929 – Lombardi Letter

Here Are the Top Ten Stock Market Crash of 1929 Facts 1. It Could Happen Again

The first fact to know about the stock market crash of 1929 is that a similar crash could happen again in 2017.

The second fact is that a similar crash today could cause aneconomic collapse worldwide. The 1929 crash happened when the world was less interconnected. It affected mostly the United States and Europe. The next one will be more inclusive.

The Great Depression of the 1930s is the name given to the great economic downturn in the heart of Western capitalist economies following the 1929 crisis. Before breaking down this key historical event in a series of facts, a stock market crash of 1929 summary is necessary.

The 1929 crisis happened so quickly that panic was societys first response. Some historians have gone asfar as describing it as a psychological crisis, even more than an economic one. No doubt, the fact that so few had expected the Crash of 1929 showed that American capitalism suffered from the disease of excessive optimism and even self-reference.

The latter point, the self-reference, refers to the tendency of many American investors in the 1920s to ignore what was happening in Europe. That failure to readclear signals accounted for the shock. Nevertheless, the stock market crash of 1929 was a process that lasted a week and three disastrous sessions that began on October 24, culminating on Tuesday, October 29.

The third fact to know about the 1929 crash is that it was not a single-day event. The crash began on Thursday, October 24so-called Black Thursday. There was a collapse of the market as stocks lost some 13% of their value. The shock factor was considerable, given that the Dow Jones Industrial Average (DJIA) hit a record high barely a month earlier on September 3.

Following five years of bullish excess, during which the DJIA increased fivefold and reached a peak of 381.17 on September 3, 1929,the value started to fall. The DJIA started losing its gains during an initial and gradual drop. Stocks entered a yo-yo phase, recovering over half their loss, only to drop again.

The decline went into a full tailspin on Black Thursday. Some 12.9 million shares were sold that day. The banks were bamboozled. They reacted just like a hurried driver who ignores the water temperature gauge as it moves toward the red end. Instead of stopping to check if a fan belt has broken, she/he drives on, hoping the problem fixes itself.

Similarly, the banks were relying on the market to fix itself. Thus, they bought more, achieving a recovery. Black Thursday ended with a 2.1% losswhich seemed positively bullish compared to the 13% lost in the first part of the day. On October 25, the markets were quiet. It was that deceitful kind of calm that precedes the worst storms.

That storm would cause the Big Crash on Monday, October 28, and completed its path of destruction on Tuesday, October 29the famous Black Tuesday. On that day, over 16 million shares were sold. The market lost $14.0 billion worth of value. But, during the week that started on Black Thursday, the total loss was $30.0 billion.

That was over ten times the annual budget of the U.S. federal government, far more than the same spent during World War 1. (Burns, Ric, James Sanders, Lisa Ades, Steve Rivo, Marilyn Ness, David Ogden Stiers, Buddy Squires, Allen Moore, Brian Keane, and Charlie Rose. 2010. New York: A Documentary Film. [United States]: PBS Home Video.)

As we start to examine what caused the Crash of 1929, World War 1is one of the main causes. This is not to suggest the war itself, which left devastation and millions dead. Rather, how the Great War set up the markets for the euphoria of the 1920s, the Crash of 1929, and the wake-up call of the Depression in the 1930s.

World War 1 is the most important of the stock market crash of 1929 causes. The crash occurred as a result of the lopsided development between the U.S. and European economies, and other countries of the world in the decade 1919-1928. Europe was busy reconstructing amid massive social and political changes, marked by instability and the collapse of empires and monarchies.

While the First World War had destroyed the European industrial powers, it created a unique opportunity for the United States not only to intervene in the conflict militarily and politically,but more than anything else, it allowed the U.S. to exploit its huge economic and financial power, already established between the second half of the nineteenth and early twentieth century.

As Europe was strugglingwhile Russia became the Soviet Union, essentially dropping out of the market altogethergrowth was stagnant. America was growing rapidly but there was no corresponding expansion of the world market. Thus, the 1920s, the roaring twenties, were marked by the dominance of the Republican Party at its peak free market moment.

The government kept public spending at a minimum while favoring the emergence of large corporations and the accumulation of private wealth. There was no social assistance in the sense that we understand it today. It was as free a market as there ever was in the 20thcentury.

To get an idea of the spirit of the age and the colossal inequality that existed between the poor and the rich, watch any Charlie Chaplin movie from that period. Moviessuch as The Kidor Gold Rushdepict the socio-economic context that produced the Great Crash. Or read The Great Gatsbyby F. Scott Fitzgerald. It was in the 1920s, even more than in the post-Crash years of the Great Depression, that the wage gap widened.

Corporate profits increased but wages stagnated. The rich became richer and the upper middle classes were blinded by optimism in the markets and the prospect of unlimited wealth. This was fueled by the idea that wealth did not have to come from work. It could be achieved at the New York Stock Exchange (NYSE).

Thus, the ruling market sentiment of the 1920s was nothing short of euphoria. The NYSE set successive records fueled by speculative transactions and the prospect of easy money. The most fashionable financial practice of the age was investing on creditand buying goods on installments. Euphoria proved costly.

This should sound familiar. Does the 2007-2008 crisis sound familiar? Does the 2016-2017 rally come to mind? The result was that the real economy became ever more detached from Wall Street and the speculation that ruled it. The Dow Jones rallies of most of the 1920s decade represented the spread of a wafer economy, increasingly disconnected from the real one.

Stock values rose without any logic, driving up companies capitalizations, independently from their industrial or business reality. Simply put, the economy had a weak foundation. Meanwhile, reflecting the financial euphoria, mass production produced too many goods for the American market.

The assembly line. Innovations in the system of production led the U.S. economy to grow at a very brisk pace throughout the 1920s. In 1913, just before the start of World War 1, Henry Ford invented the assembly line. That was one of the most disruptive economic developments in history. It allowed for unprecedented increases in productivity.

The assembly line meant a sharp reduction in the number of employees in factories. Technological innovations, then as now, forced companies to rationalize. Meanwhile, those who could, rose to the middle class. The number of service sector, advertising, or marketing jobs emerged, fueling the rise of a new middle-classsusceptible to the market euphoria of the age.

U.S. private banks financed the post-war recovery in Europe, while in turn, the old continent, with imports of goods, financed industrial development and the flourishing of the U.S. market. The same went for agricultural production. There was too much of it and not enough markets. Europe, for its part, was too poor to absorb the excess production.

Even almost a century ago, the economies of Europe and the United States were financially interdependent. But just as in 2007-2008, in 1928, the system started to show the first cracks. In addition to the increasingly unequal distribution of income, inflation increased and the emerging new middle class lost its purchasing power.

That meant all that over-abundance of goods was left occupying space on warehouses and factories, unsold. At the same time, the major investment banks were using up their funds to bankroll European consumption, in hopes of fueling the economy.

The stock market crash in New York and the subsequent Depression was the first crisis of the capitalist globalization of goods and capital, that Karl Marx predicted a few decades earlier. But the crisis offered the United States an opportunity to rethink its model of society. The country was forced to rebuild an economic, political, and financial base that was more inclusive of social rights.

It left the United States in a better position to face future crashes. Indeed, the 2008 financial crash has had deeper effects than the 1929 crash. But the latters levels of abject poverty were not repeated.

Its effects went deep. They should be included as one of the causes of the Second World War. It also helped generate a certain sympathy from prominent European and U.S. intellectuals to Soviet Russia, which remained largely immune from the crisis.

Certainly, the Crash and the Depression helped bring Hitler to power. Germany was one of the countries that suffered most from U.S. economic events during the Depression. Politically, the 1929 Crash had deep effects. After years of Republican dominance under presidents Calvin Coolidge and Herbert Hoover, the Democratic Franklin Delano Roosevelt entered the White House in 1933.

The Republicans lost credibility, unable as they were to lead the U.S., causinga climate of deep uncertainty. The situation remained very serious at least until 1932, when some 75% of Americans were said to be suffering from hunger. The real turning point, in terms of trust and hope was Franklin Delano Roosevelt, who ushered a new economic and social policy which was called the New Deal.

Go here to read the rest:

10 Facts to Know About the Stock Market Crash of 1929 - Lombardi Letter