Wall Street Crash of 1929

4 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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  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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  Babbitts and Bohemians from the Great War to the Great Depression

  • Elizabeth Stevenson(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  THE CRASH

  Everything was happily set , everything was secure. Nothing could happen, except a crazy sailing upward of the price of stocks upon the New York Stock Exchange. People who had never put any money into stocks were aware of the way the market soared and took the breath and sense away from many citizens.

  Early in 1928, the nature of the boom changed [the boom that dated from 1922]. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest. . . . While the winter months of 1928 were rather quiet, thereafter the market began to rise, not by slow, steady steps, but by great vaulting leaps. [In 1929 there was a February drop and a March drop, but] . . . after June 1 all hesitation disappeared. Never before or since have so many become so wondrously, so effortlessly and so quickly rich.1

  Talk about the stock market was widespread. It seemed to many that if they did not know what margin was, or investment trusts, or brokers’ loans, or a bull market, their neighbors or friends did, and they were engaged in an exciting, profitable, and mysterious kind of transaction from which it was dull and stupid to be excluded. Sober, after-the-fact analysis shows that not a great proportion of the total population played the market.

  The member firms of twenty-nine exchanges in that year [1929] reported themselves as having accounts with a total of 1,548,707 customers. Of these, 1,371,920 were customers of member firms of the New York Stock Exchange. Thus only one and a half million people, out of a population of approximately 120 million and of between 29 and 30 million families, had an active association of any sort with the stock market. And not all of these were speculators.2

  Probably only 600,000 engaged in margin trading. Yet the infection of the interest was what tinged the tone of the time, not the cold truth of the small number, a situation bearing comparison with the slaveowning of the old South when few were slaveholders but when many shared the psychological attitude of slaveholders. There was a craziness in the air in 1929 in which many more took part than those pouring their money into stocks.

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  Passion for Reality

  The Extraordinary Life of the Investing Pioneer Paul Cabot

  • Michael Yogg(Author)
  • 2014(Publication Date)
  • Columbia University Press

    (Publisher)

  In 1929 they turned cautious, just in time. They sold heavily over the summer to reduce their margin debt and to raise cash, but with an eye toward buying stocks back at lower prices later on. Thus they were defensively positioned by the time of the market peak on September 3 and through the crash in October, though not because they truly appreciated what was happening. While their sense of valuation and their sense of history led them to expect a correction, they were not ready for a crash; and they also had no idea that the consequences of the Wall Street Crash would take a decade to fully play out. They sensed danger; but they also seem to have been confused and uncertain of what to expect.

  For this reason, they took it all somewhat casually. Unlike Paul’s close friend, Sidney Weinberg of Goldman Sachs in New York (who had strong memories of that day and stayed at work for a week after the crash without going home once), Paul himself—at least in his early eighties—had no strong recollection of October 29, 1929. As he explained it,

  New York was the center of finance in the United States; [the Crash] would be felt far greater than in Boston, and I think that most of the financial interests in Boston were much more conservative and conservatively run than many of the institutions in New York. So that in a panic such as that, why, the less conservative ones got hurt the most.6

  Of course State Street was not conservatively run, just conservatively positioned on October 29.

  But the conservatism did not last. Barely a month later, they were back at it, confirming the fact that they did not fully comprehend the situation. They made the classic mistake of young investors, and quite a few older ones. They reflexively bought too early, on the “dip,” because stocks, while still high, were so much lower than they had been two to four weeks before. They even borrowed five million dollars, an amount equal to 20% of the fund’s assets, to leverage their purchases “at prices which appeared attractive at that time, but which afterwards proved to be considerably above the final low points.” As Paul said many years later, “We were young and not particularly frightened,” perhaps not as frightened as they should have been.7 When a sharp, though short-lived, recovery occurred in December 1929, they took the opportunity to get out of many of their positions and 80% of their debt. In the 1929 Annual Report, they concluded that while stocks were cheaper than they had been at any time during the past two years, the current business recession could develop into a depression, “which might run for a year or two.” Should that occur, stocks would offer few opportunities for profitable investment. They maintained a large cash position and invested primarily in what we today would call defensive or recession-resistant sectors—utilities and food stocks for example—until Roosevelt suspended dollar–gold convertibility for U.S. citizens in 1933 and Congress devalued the dollar versus gold in 1934.8

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