Black Thusday: The Crash

Black Thusday: The Crash

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In the roaring 1920s, the United States bathed in previously unheard of prosperity. Industry and agriculture alike profited from the thriving economy. The Federal Reserve Board (known as "the Fed") practiced a policy of easy money, and consumer conf idence was high. Average income grew steadily throughout the decade and production soared. Levels of investment grew to new heights. At year's end in 1925, the market value of all stocks totaled $27 billion. By early October of 1929, that number had g rown to $87 billion. However, the economy began to slow down in 1928, and the trend continued in 1929. Agricultural prices slipped, a result of production surpluses and a downturn in business activity. In July of 1928, the Federal Reserve Board, took n otice and hiked interest rates in an attempt to slow investment to a pace more appropriate to the economic decline. Despite this and other warning signs, patterns of investment continued much as they had in the mid-20s, giving little recognition to the e conomic slowdown. The stage was set for a major market correction.

On October 24, 1929, dubbed Black Thursday, the stock market crashed. Prices began to decline early in the day, triggering a selling panic in the New York Stock Exchange (NYSE). When trading closed the Dow Jones Industrial Average had fallen 9 percent and 12,894,650 shares of stock had changed hands, smashing the previous record of 8,246,742. Despite the crash, reports remained optimistic. Major New York banks united to buy up $30 million worth of stock in efforts to stabilize the market, and president Herbert Hoover announced that recovery was expected. Hoover's claims had little merit; the situation became bleaker during the next week. October 29 broke the now four-day old NYSE record for number of transactions: 16,410,035 shares changed hands in total. The market dropped 17.3 percent, confirming, and cementing, the permanency of the crash. The coming months saw no recovery.

The crash in the market spelled disaster for the national economy. Corporations with heavy investments faced a sudden and almost insurmountable shock to their assets. Investing froze. As a result, the national economy fell into an unprecedented period of depression. Import spending dropped from $4.399 billion in 1929 to only $1.323 billion by 1932. The same period saw a sharp drop in exports as well. National income slipped lower each year from 1929 to 1932, and did not return to pre-depression levels until World War II.

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Production reached its low point in 1932, contributing a slide in Gross National Product from $104 billion in 1929 to $59 billion in 1932. This drop in output caused unemployment to balloon over the same period, from 1.6 million unemployed in 1932 to 13 million in 1933; unemployment became arguably the foremost problem of the depression. Agricultural prices were cut almost in half, and many farms foreclosed upon.

Commentary


The common explanation for event of the stock market crash in 1929 has remained constant from the time of crash until the present. Economists and historians generally agree that wild speculation had inflated stock prices far beyond their appropriate levels, and that at the first sign of a correction, traders panicked and began selling their stock, fueling the crash even further. Speculation on the future value of stocks presented a particularly significant problem in the 1920s because quite often investors bought stock with loaned money. Banks, confident in a rising market, were willing to loan speculators up to three quarters of the price of stock purchases. When the crash hit, it had a double effect; borrowing investors were unable to repay their debts, and banks could not collect their loans.

There is evidence to support the theory proposing rampant speculation as a cause of the crash, such as the increase in total market value from $27 billion in 1925 to $87 billion in 1929. During the period from 1922 to 1928, the Dow grew by 218.7 percent, followed by a drop of 73 percent between 1929 and 1932. Economist Harold Bierman uses the specific example of utility stocks, calculating that they were, on average, selling for three times their inherent value based on accounting numbers. Utilities stocks represented 18 percent of all shares on the New York Stock Exchange, meaning that small corrections in utility stock prices would have large effects on the market at large. These arguments suggest that the crash represented a market correction made necessary by inflation of stock prices due to speculation. However, many economists and historians cite a more varied and complex group of causes as contributing to the crash as well.

One theory of contributing causes cites the liquidation of British investments in the US market as an important factor in the crash. This liquidation resulted from market anxiety and tighter market controls in English markets after the revelation of the Clarence Haftry scandal. Hatry, a businessman in England, was found guilty of a plot in which he created and issued false securities to finance the operation of companies he owned. When caught, he owed English banks more than $65 million. He was unable to pay, and the banks bore the brunt of the disaster. These events led the British government to consider and implement a number of regulations on investment, and may have played into the decision of the Central Bank of England to hike interest rates. The increase in regulation, interest rates, and market anxiety that resulted from the Hatry scandal caused British investors to reduce foreign holdings, most of which were in the US market. While this argument might seem compelling, there is little evidence to suggest that this withdrawal was significant enough to play a part in triggering the selling panic of late October 1929.

Another, more compelling theory is that the stringent attempts of the US government and the Federal Reserve Board to stop speculation caused an overreaction in the market, leading to the selling panic. During 1928 and 1929, Hoover headed a crusade to curb speculation, which he feared would lead to a fierce correction in the market. He encouraged the media to warn about the perils of speculation and newspapers and radio news programs responded with frequent predictions of doom should the wild speculation continue. Hoover also encouraged the Fed to take measures to slow the economy. The Fed responded by increasing the discount rate from 5 to 6 percent, effectively increasing all interest rates. However, the warnings of the news media fell on seemingly deaf ears, as the market continued to provide lucrative profits for speculators, and the increased interest rates on loans did little to deter speculators who expected much higher returns on investment. Considering the lack of immediate effects, it is difficult to see how the crusade against speculation could have directly triggered the crash, but it no doubt helped to set the stage for the reversal of fortunes in late 1929.

There were many causes of the stock market crash October 24, 1929. Of these various factors, the market speculation of the 1920s is the most important. However, one must consider external forces such as foreign investment, and look into the psychology of the market players in order to get a complete picture of the causes of the crash.


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