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Claude Cockburn, writing for the Times of London “from New York, described the irrational exuberance that gripped the nation just before the Great Depression. As Europe wallowed in post-war malaise, America seems to have discovered a new economy, the secret of uninterrupted growth and prosperity, the source of transforming technology:
“The atmosphere of the great boom was savagely exciting, but there were times when a person with my European background felt alarmingly alone. He wanted to believe, as these people believed in eternal recovery of the great bull market or other contents only a person with whom he might discuss some general doubts without being regarded as an imbecile or a person of deliberately evil intent – some kind of anarchist, perhaps. ”
The largest with most analysts impeccable credentials and track record does not predict the imminent collapse and the unprecedented economic depression that followed. Irving Fisher, an eminent economist, who, according to his biographer-son, Irving Norton Fisher, lost the equivalent of $ 140 million in cash today in the crash, made a series of soothing predictions. On October 22 he said these avuncular statements: “Quotations have not met with actual values, as yet … (There is) no cause for the collapse … The market has not been inflated but merely readjusted … ”
The black market convulsions on Thursday, October 24 1929 and Black Tuesday, October 29 – The New York Times wrote: “Rally at close cheers brokers, bankers optimistic”.
In an editorial October 26, is devastated rabid speculators and compliant analysts: “We feel much less in the future of those newly invented conceptions of finance which revised the principles of political economy with a view solely to fitting the stock market whims. ‘ ‘But it ended thus: “(The Federal Reserve has) insured the soundness of the enterprises, when the speculative markets went on the rocks.”
Compare this to Alan Greenspan’s testimony to Congress this summer: “While bubbles that burst are less favorable, the consequences need not be catastrophic for the economy … (The depression was brought by) a result of policy failures.”
Investors, their equity leverage with bank and broker loans, crowded into stocks of exciting “new technologies” such as radio and mass electrification. The bull market – especially in matters of public utilities – was fueled by “mergers, new groupings, combinations and good earnings” and enterprises for the purchase of the stock funds of employees. ”
Cautionary voices – such as Paul Warburg, the influential banker, Roger Babson, the “prophet of loss” and Alexander Noyes, the eternal Cassandra from the New York Times – were derided. The number of brokerage accounts doubled between March 1927 and March 1929.
When the market corrected by 8 percent between March 18-27 – following a Fed induced credit crunch and a series of mysterious closed-door sessions of the Board of Governors of the Federal Reserve – bankers rushed in. The New York Times reported : “Responsible bankers agree that stocks should now be supported, having reached a level that makes them interesting.”In August, the market grew by 35 percent on its Mar low. But it has reached a peak September 3, and since then has been downhill.
On October 19, five days before “Black Thursday”, Business Week published this sanguine prognosis:
“Now, of course, the fundamental weakness of such periods – price inflation, heavy inventories, over-extension of commercial credit – are totally absent. The security market seems to be suffering an attack of stock indigestion. .. There is further reassurance in the fact that, if more companies show signs of fatigue, the banking system is well placed to administer any needed credit tonic hours aside from his excellent offer. ”
The incident took place gradually. Black Thursday actually ended with an inspiring rally. Friday and Saturday – trading ceased only on Sundays – witnessed a slight recovery followed by profit taking. The market dropped to 12.8 percent Monday, with Winston Churchill watching from the visitors’ gallery – incurring a loss of $ 10-14 billion.
The Wall Street Journal warned naive investors:
“Many are looking for technical corrective reactions from time to time, but do not expect these to disturb the upward trend for any prolonged period of time.”
The collapse of the market for another 11.7 percent the next day – though trading ended with an impressive rally from the lows. October 31 was a good day with a “vigorous, lively rally from bell to bell.” Even Rockefeller joined the myriad buyers. Stocks soared. It seemed that the worst was over.
The New York Times was optimistic:
“It is thought that stocks will be stabilized at their actual worth levels, some higher and lower than at present, and that selling prices will be guided in the immediate future with the value of any particular security, based on its dividend record, capabilities and prospects of gain. Little is heard these days on Wall Street ’stock entering. ”
But it was not long before irate customers began blaming their stupendous losses on advice they received from their brokers. Alec Wilder, a songwriter in New York in 1929, interviewed by Stud Terkel in “Hard Times” four decades later, described this typical exchange with his money manager:
“I knew something was terribly wrong, because I heard bellboys, everybody, talking about the stock market. About six weeks before the Wall Street Crash, I convinced my mother in Rochester to let me talk to our family adviser. I wanted to sell stock I was left by my father. He had very sentimental: ‘Oh your father would not like to do this’. He was so convincing, I said OK I could have sold for $ 160,000. Four years later, I was sold for $ 4000. ”
Exhausted and numb from days of hectic trading and back office, the brokerage houses bag pressure to declare an exchange of two days of vacation. Exchanges around North America followed.
At first, the Fed refused to reduce the discount rate. “(There) was no change in financial conditions that the board thought called for its action.” – If you have an injection of liquidity in the money market by purchasing government bonds. Then, it partially sold and has reduced the discount rate in New York, which, curiously, was 1 percent above the other Fed districts – by 1 percent. This is too little, too late. The market is not recovered after November 1. Despite further reductions in the discount rate to 4 percent is a huge shed 89 percent in nominal terms, when he hit less than three years away.
Everyone was duped. The rich were impoverished overnight. Small time margin traders – the forerunners of today day traders – lost their shirts and much more. The New York Times:
“Yesterday the market was a clash which largely affected rich men, institutions, investment companies and others who participate in the market on a large scale and intelligent. It was not the margin traders who were caught in the rush to sell but the rich men of the country that are able to rotate the blocks of 5,000, 10,000, up to 100,000 shares of stock price high. They went into the sea, with no more consideration of the small trader who was swept out of the first day of turmoil in the market, where prices, even at their lowest of last Thursday, now high in comparison … For most of those who have been on the market is even more fear-inspiring because their financial history is limited bull markets. ”
Overseas – mainly European – selling was an important factor. Some conspiracy theorists, such as Webster Tarpley in his “British Financial war” backed by the same by the likes of “The Economist”, went with regard to writing:
“When the Wall Street Bubble had reached gigantic proportions in the autumn of 1929, (Lord) Montagu Norman (governor of the Bank of England 1920-1944) sharply (upped) the British bank rate, repatriating British hot money, and pulling the rug out from under the Wall Street speculators, thus deliberately and consciously imploding the U.S. markets. This has caused a violent depression in the United States and certain other countries, with the collapse of financial markets and the contraction of output and employment . In 1929, Norman engineered a collapse by puncturing the bubble. ”
The accident was in large part a reaction to a sharp reversal, starting in 1928, the reflationary, “cheap money” policies of the Fed intended, as Adolph Miller of the Fed Board of Governors told a committee of the Senate, “to bring down money rates, the percentage of calls between them, because of the importance the international rate had come to buy. The goal was to create an outflow of gold – to reverse the previous inflow of ‘ gold in this country (back in Britain). “But the Fed had already lost control of the speculative rush.
The crash of 1929 was not without its Enrons and World.com ’s. Clarence Hatry and his associates admitted to forging the accounts of their investment group to show a fake net worth of $ 24 million British pounds – rather than the true image of 19 billion debts. This has led to forced liquidation of Wall Street positions by harried British financiers.
The collapse of Middle West Utilities, run by the energy tycoon, Samuel Insull, exposed a network of offshore companies whose sole purpose was to mask and hide the loss of leverage. The former president of NYSE, Richard Whitney was arrested for theft.
Analysts and commentators thought of the stock exchange as decoupled from the real economy. Only one tenth of the population was invested – compared to 40 percent today. “The World” wrote, with more than a little ‘of Schadenfreude: “The country has not suffered a disaster … … The American people has been largely a game of chance with the surplus of its astonishing prosperity. ”
“The Daily News agreed:” The sagging of the stocks has not destroyed a single factory, wiped out a single farm or city lot or real estate development, has reduced the production of a single machine or worker power in the United States. ” A Louisville, l ‘ “Herald Post” commented sagely: “While Wall Street was getting rid of its weak holder of their most drastic punishment, grain was stronger. This will be credited to the side of national prosperity and help replace that purchasing power which some fear has been gravely compromised. ”
During the Coolidge presidency, according to the Encyclopedia Britannica, “stock dividends rose by 108 percent, corporate profits of 76 percent and wages by 33 percent. In 1929, 4,455,100 cars were sold American factories, one for every 27 members of the population, a record that was not broken until 1950. Productivity is the key to economic growth in America. Because of improvements in technology, in general, labor costs fell by almost 10 percent, while wages rose by individual workers. ”
Jude Waninski adds in his book “The way the world works”, that “between 1921 and 1929, GNP grew to $ 103.1 billion from $ 69.6 billion. And because prices were falling, real output increased even faster. ” Tax rates have been drastically reduced.
John Kenneth Galbraith noted these data in his seminal “The Great Crash”:
“Between 1925 and 1929, the number of manufacturing establishments increased from 183,900 to 206,700, the value of their production has increased from $ 60.8 billion to $ 68 billion. The U.S. Federal Reserve index of industrial production which had average only 67 in 1921 … had risen to 110 by July 1928, and reached 126 in June 1929 … (but the American people) were also displayed an inordinate desire to get rich quickly with minimal effort physical. ”
Personal loans for consumption peaked in 1928 – if the administration, unlike today, maintained twin fiscal and current account surpluses and the United States was a large net creditor. Charles Kettering, head of research division of General Motors consumeritis described as, a few days before the crash: “The key to economic prosperity is the organized creation of dissatisfaction.”
Inequality skyrocketed. While output per man-hour shot 32 percent between 1923 and 1929, salaries grew only 8 percent. In 1929, the upper 0.1 percent of the population earned as a 42 percent lower. Business-friendly administrations reduced by 70 percent the exorbitant taxes paid by those with an income of more than $ 1 million. But in the summer of 1929, businesses reported sharp increases in inventories. E ‘was the beginning of the end.
Stocks were overvalued before the crash? It has all of the stocks collapse indiscriminately? Not so. Even at the height of the panic, investors remained conscious of real values. On 3 November 1929 the shares of American Can, General Electric, Westinghouse and Anaconda Copper were still substantially higher than March 3 1928.
John Campbell and Robert Shiller, author of “irrational exuberance”, he calculated, in a joint paper entitled “Reports of assessment and the Lon-Run Market Outlook: An Update” posted on Yale University ’s Web Site, that share prices divided by a moving average of 10 years worth of earnings reached 28 just before the crash. Contrast with 45 in March of 2000.
In a paper published in December 2001 NBER and tellingly titled “the stock market crash of 1929 – Irving Fisher was Right”, Ellen McGrattan and Edward Prescott boldly claim: “We believe that the stock market in 1929 did not crash because the market was overestimated. In fact, the evidence strongly suggests that stocks were undervalued, even at their peak in 1929. ”
According to their detailed paper, stocks were trading at 19 times after-tax corporate earning at the peak in 1929, a fraction of today evaluations even after the recent correction. A March 1999 “Economic Letter” published by the Federal Reserve Bank of San Francisco-fully. It notes that a peak, prices stood at 30.5 times the dividend yield, only slightly above the long-term average.
Contrary to an article published in the June 1990 issue of the “Journal of Economic History” by Robert Barsky and Bradford De Long and titled “Bull and Bear Markets of the twentieth century”:
“Major bull and bear markets were driven by fundamental changes in the assessment of: investors had little knowledge of the decisive factors, in particular long-term growth rate of the dividend, and their changing expectations of average dividend growth plausibly behind the major swings of this century. ”
Jude Waninski attributes the crash to the disintegration of the pro-free trade coalition in the Senate which later led to the infamous Smoot-Hawley Tariff Act of 1930. He traces all the important moves in the market, between March 1929 and June 1930 to the intricate protectionist danse macabre in Congress.
This argument may never be decided. Is a similar crash on the cards? This can not be excluded. Of 1990 resembled 1920 in more than one way. We are ready for a recurrence of 1929? About how we were prepared in 1928. Human nature – the prime mover behind market Meltdowns – seemed not to have changed much in these intervening seven decades.
It will be a crash of the stock market, which should happen, be followed by another “Great Depression”? It depends on what kind of accident. The short term puncturing of a temporary bubble – eg, in 1962 and 1987 – is usually divorced from other economic fundamentals. But a major correction to a lasting bull market invariably leads to recession or worse.
As the economist Hernan Cortes Douglas reminds us in “The collapse of Wall Street and the Lessons of History”, published by the Friedberg Mercantile Group, this was the sequence in London in 1720 (the famous “South Sea Bubble”), and United States in 1835-40 and 1929-32.
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