Posted 08.02.14

The Signs of Calamity

The Roaring Twenties, the decade that followed World War I and led to the Crash,[4] was a time of wealth and excess.

Building on post-war optimism, many rural Americans migrated to the cities in vast numbers throughout the decade with the hopes of finding a more prosperous life in the ever growing expansion of America’s industrial sector.[5] While the American cities prospered, the vast migration from rural areas and continued neglect of the US agriculture industry would create widespread financial despair among American farmers throughout the decade[5] and would later be blamed as one of the key factors that led to the 1929 stock market crash.[6]

Despite the dangers of speculation, many believed that the stock market would continue to rise indefinitely.

On March 25, 1929, however, a mini crash occurred after investors started to sell stocks at a rapid pace, exposing the market’s shaky foundation.[7] Two days later, banker Charles E. Mitchell announced his company the National City Bank would provide $25 million in credit to stop the market’s slide.[7] Mitchell’s move brought a temporary halt to the financial crisis and call money declined from 20 to eight percent.[7]

However, the American economy was now showing ominous signs of trouble.[7] Steel production was declining, construction was sluggish, car sales were down, and consumers were building up high debts because of easy credit.[7]

The market had been on a nine-year run that saw the Dow Jones Industrial Average increase in value tenfold, peaking at 381.17 on September 3, 1929.[7] Shortly before the crash, economist Irving Fisher famously proclaimed, “Stock prices have reached what looks like a permanently high plateau.”[8] The optimism and financial gains of the great bull market were shaken on September 18, 1929, when share prices on the New York Stock Exchange (NYSE) abruptly fell.

On September 20, the London Stock Exchange (LSE) officially crashed when top British investor Clarence Hatry and many of his associates were jailed for fraud and forgery.[9] The LSE’s crash greatly weakened the optimism of American investment in markets overseas.[9] In the days leading up to the crash, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. Economist and author Jude Wanniski later correlated these swings with the prospects for passage of the Smoot–Hawley Tariff Act, which was then being debated in Congress.[10]

On October 24 (“Black Thursday”), the market lost 11% of its value at the opening bell on very heavy trading.

Several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor.[11] The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank of New York. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.

With the bankers’ financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As traders watched, Whitney then placed similar bids on other “blue chip” stocks. This tactic was similar to one that ended the Panic of 1907. It succeeded in halting the slide. The Dow Jones Industrial Average recovered, closing with it down only 6.38 points for the day; however, unlike 1907, the respite was only temporary.

The trading floor of the New York Stock Exchange in 1930, six months after the crash of 1929

Over the weekend, the events were covered by the newspapers across the United States. On October 28, “Black Monday”,[12] more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 13%.

The next day, “Black Tuesday”, October 29, 1929, about sixteen million shares were traded, and the Dow lost an additional 30 points, or 12%,[13][14][15] amid rumors that U.S. President Herbert Hoover would not veto the pending Smoot–Hawley Tariff Act.[16]

The volume of stocks traded on October 29, 1929 was a record that was not broken for nearly 40 years.[14]

On October 29, William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the large decline in prices. Due to the massive volume of stocks traded that day, the ticker did not stop running until about 7:45 p.m. that evening. The market had lost over $30 billion in the space of two days which included $14 billion on October 29 alone.[17]

Dow Jones Industrial Average on Black Monday and Black Tuesday[18]

Date Change % Change Close
October 28, 1929 −38.33 −12.82 260.64
October 29, 1929 −30.57 −11.73 230.07

After a one-day recovery on October 30, where the Dow regained an additional 28.40 points, or 12%, to close at 258.47, the market continued to fall, arriving at an interim bottom on November 13, 1929, with the Dow closing at 198.60.

The market did recover for several months, starting on November 14, with the Dow gaining 18.59 points to close at 217.28, and reaching a secondary closing peak (i.e., bear market rally) of 294.07 on April 17, 1930. After the Smoot–Hawley Tariff Act was enacted in mid-June, the Dow dropped again, stabilizing above 200. The following year, the Dow embarked on another, much longer, steady slide from April 1931 to July 8, 1932 when it closed at 41.22—its lowest level of the 20th century, concluding an 89% loss rate for all of the market’s stocks. For most of the 1930s, the Dow began slowly to regain the ground it lost during the 1929 crash and the three years following it, beginning on March 15, 1933, with the largest percentage increase of 15.34%, with the Dow Jones closing at 62.10, with a 8.26 point increase. The largest percentage increases of the Dow Jones occurred during the early and mid-1930s, but it would not return to the peak closing of September 3, 1929 until November 23, 1954.[19][20

The Wall Street Crash had a major impact on the U.S. and world economy, and it has been the source of intense academic debate—historical, economic, and political—from its aftermath until the present day. Some people believed that abuses by utility holding companies contributed to the Wall Street Crash of 1929 and the Depression that followed.[34] Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market.[35]

The 1929 crash brought the Roaring Twenties to a shuddering halt.[36]

The resultant rise of mass unemployment is seen as a result of the crash, although the crash is by no means the sole event that contributed to the depression. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression. True or not, the consequences were dire for almost everybody. Most academic experts agree on one aspect of the crash: It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying.[37]

The failure set off a worldwide run on US gold deposits (i.e., the dollar), and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 banks and other lenders ultimately failed.

But The Economist also cautioned that some bank failures are also to be expected and some banks may not have any reserves left for financing commercial and industrial enterprises. They concluded that the position of the banks is the key to the situation, but what was going to happen could not have been foreseen.”[41]

When Franklin D Roosevelt became president, he set about to regulate banking With the bouncy popular song “Happy Days Are Here Again” as his campaign theme, FDR defeated incumbent Republican Herbert Hoover in November 1932, at the depth of the Great Depression. Energized by his personal victory over polio, FDR’s persistent optimism and activism contributed to a renewal of the national spirit.[1] Assisted by key aide Harry Hopkins, he worked closely with British Prime Minister Winston Churchill and Soviet leader Joseph Stalin in leading the Allies against Nazi Germany and Japan in World War II.

The war ended the depression and restored prosperity.

In his first hundred days in office, which began March 4, 1933, Roosevelt spearheaded major legislation and issued a profusion of executive orders that instituted the New Deal—a variety of programs designed to produce relief (government jobs for the unemployed), recovery (economic growth), and reform (through regulation of Wall Street, banks and transportation). The economy improved rapidly from 1933 to 1937, but then relapsed into a deep recession. The bipartisan Conservative Coalition that formed in 1937 prevented his packing the Supreme Court or passing any considerable legislation; it abolished many of the relief programs when unemployment practically vanished during the war.

Most of Roosevelt’s regulations on business were ended about 1975–1985, except for the regulation of Wall Street by the Securities and Exchange Commission, which still exists. Along with several smaller programs, major surviving programs include the Federal Deposit Insurance Corporation, which was created in 1933, and Social Security, which Congress passed in 1935.

Commentary:

In other words, once again the market was left to run its own course and destiny, with those who created the first 1929 Crash, still ultimately in control, the same speculation and greed creating the Global crisis of 2008.

Source:

https://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

https://en.wikipedia.org/wiki/Franklin_D._Roosevelt