The New York Times of Oct. 30, 1929: "Yesterday's market crash was one which largely affected rich men, institutions, investment trusts and others who participate in the market on a broad and intelligent scale. It was not the margin traders who were caught in the rush to sell, but the rich men of the country who are able to swing blocks of 5,000, 10,000, up to 100,000 shares of high-priced stocks. They went overboard with no more consideration than the little trader who was swept out on the first day of the market's upheaval, whose prices, even at their lowest of last Thursday, now look high by comparison ... To most of those who have been in the market it is all the more awe-inspiring because their financial history is limited to bull markets."
Overseas -- mainly European -- selling was an important factor. Some conspiracy theorists, such as Webster Tarpley in his "British Financial Warfare," supported by contemporary reporting by the likes of The Economist, went as far as writing: "When this Wall Street Bubble had reached gargantuan proportions in the autumn of 1929, 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 caused a violent depression in the United States and some other countries, with the collapse of financial markets and the contraction of production and employment. In 1929, Norman engineered a collapse by puncturing the bubble."
The crash was, in large part, a reaction to the sharp reversal, starting in 1928, of the reflationary, "cheap money" policies of the Fed intended, as Adolph Miller of the Fed's Board of Governors told a Senate committee, "to bring down money rates, the call rate among them, because of the international importance the call rate had come to acquire. The purpose was to start an outflow of gold -- to reverse the previous inflow of gold into the U.S. (back to Britain, which was having difficulty maintaining the gold standard because of the money flow to the U.S.)." But the Fed had already lost control of the speculative rush.
The crash of 1929 was not without its Enrons and WorldComs. Clarence Hatry and his associates admitted to forging the accounts of their investment group to show a fake net worth of 24 million pounds ($118 million, equivalent to $3.5 billion today) -- rather than the true picture of 19 million pounds in liabilities. This 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 web of offshore holding companies whose only purpose was to hide losses and disguise leverage. The president of the New York Stock Exchange, Richard Whitney, was later arrested for larceny.
Analysts and commentators thought of the stock exchange as decoupled from the real economy. Only one-tenth of the population was invested, compared to 50 percent today. The World wrote, with more than a bit of schadenfreude: "The country has not suffered a catastrophe ... The American people ... has been gambling largely with the surplus of its astonishing prosperity."
The Daily News concurred: "The sagging of the stocks has not destroyed a single factory, wiped out a single farm or city lot or real estate development, decreased the productive powers of a single workman or machine in the United States." In Louisville, the Herald Post commented sagely: "While Wall Street was getting rid of its weak holder to their own most drastic punishment, grain was stronger. That will go to the credit side of the national prosperity and help replace that buying power which some fear has been gravely impaired."
During the Coolidge presidency, according to the Encyclopaedia Britannica, "stock dividends rose by 108 percent, corporate profits by 76 percent, and wages by 33 percent. In 1929, 4,455,100 passenger cars were sold by American factories, one for every 27 members of the population, a record that was not broken until 1950. Productivity was the key to America's economic growth. Because of improvements in technology, overall labor costs declined by nearly 10 percent, even though the wages of individual workers rose."
Jude Waninski adds in his tome "The Way the World Works" that "between 1921 and 1929, gross national product grew to $103.1 billion from $69.6 billion. And because prices were falling, real output increased even faster." Tax rates were sharply 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 output rose from $60.8 billion to $68 billion. The Federal Reserve index of industrial production which had averaged only 67 in 1921 ... had risen to 110 by July 1928, and it reached 126 in June 1929 ... (but the American people) were also displaying an inordinate desire to get rich quickly with a minimum of physical effort."
Personal borrowing for consumption peaked in 1928 -- though the administration, unlike today, maintained twin fiscal and current account surpluses and the U.S. was a large net creditor. General Motors executive Charles Kettering (inventor of the self-starter, and promoter of leaded gasoline) described consumeritis thus, just days before the crash: "The key to economic prosperity is the organized creation of dissatisfaction."
Inequality skyrocketed. While output per man-hour shot up by 32 percent between 1923 and 1929, wages crept up only 8 percent. In 1929, the top 0.1 percent of the population earned as much as the bottom 42 percent. 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. It was the beginning of the end.
Were stocks overvalued prior to the crash? Did all stocks collapse indiscriminately? Not so. Even at the height of the panic, investors remained conscious of real values. On Nov. 3, 1929, the shares of American Can, General Electric, Westinghouse and Anaconda Copper were still substantially higher than on March 3, 1928.
John Campbell and Robert Shiller, author of "Irrational Exuberance," calculated, in a joint paper titled "Valuation Ratios and the Long-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 prior to the crash. Contrast this with 45 in March 2000.
In a National Bureau of Economic Research working paper published December 2001 and tellingly titled "The Stock Market Crash of 1929 -- Irving Fisher Was Right," Ellen McGrattan and Edward Prescott boldly claim: "We find that the stock market in 1929 did not crash because the market was overvalued. In fact, the evidence strongly suggests that stocks were undervalued, even at their 1929 peak."
According to their detailed paper, stocks were trading at 19 times after-tax corporate earning at the peak in 1929, a fraction of today's valuations even after the recent correction. A March 1999 "Economic Letter" published by the Federal Reserve Bank of San Francisco wholeheartedly concurs. It notes that at the peak, prices stood at 30.5 times the dividend yield, only slightly above the long-term average.
Contrast this with an article published in June 1990 issue of the Journal of Economic History by Robert Barsky and Bradford De Long and titled "Bull and Bear Markets in the Twentieth Century": "Major bull and bear markets were driven by shifts in assessments of fundamentals: investors had little knowledge of crucial factors, in particular the long run dividend growth rate, and their changing expectations of average dividend growth plausibly lie behind the major swings of this century."
Jude Wanninski attributes the crash to the disintegration of the pro-free-trade coalition in the Senate which later led to the 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 in the cards? This cannot be ruled out. The 1990s resembled the 1920s in more than one way. Are we ready for a recurrence of 1929? About as prepared as we were in 1928. Human nature -- the prime mover behind market meltdowns -- seems not to have changed that much in these intervening seven decades.
Will a stock market crash, should it happen, be followed by another Great Depression? It depends which kind of crash. The short-term puncturing of a temporary bubble -- for example, 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 sequel in London in 1720 (the infamous "South Sea Bubble"), and in the United States in 1835-40 and 1929-32.
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