This October 29th will be the eightieth anniversary of the stock market crash of 1929 or Black Tuesday. As we are now in the midst of the worst economic downturn since that time, I think that it is extremely important that we take a look back into history. What similarities are evident between 1929 and 2009? What mistakes are we continuing to make? What lessons have gone unheeded?
Although the economy of the 1920s boomed, trouble lurked beneath the surface. The textile, steel, and railroad industries were barely profitable. Mining and lumbering were in decline. In the late 1920s, the auto, construction, and consumer goods industries faltered. The biggest problem, though, was in agriculture. Wartime demand for food dropped, and farmers suffered. Unable to make mortgage payments, many lost their land. Congress tried to help farmers by passing laws that would boost food prices, but President Calvin Coolidge vetoed them.
Farmers, short on money, bought fewer goods. That trend, combined with the consumer debt load, cut consumer spending. Consumer spending was also hurt by lagging incomes. These problems were not completely evident in the 1928 presidential election. Despite the thriving U.S. economy of the late 1920 s, Calvin Coolidge decided not to run for president again.
In his place, Republicans nominated the president's handpicked successor, popular World War I humanitarian administrator Herbert Hoover, to continue America's prosperity. Democrats chose New York Governor Alfred E. Smith on an anti-Prohibition platform. Hoover won easily, with 444 electoral votes to Smith's 87 and with a margin of more than 6 million popular votes.
Soon after Hoover took office, however, the prosperous times and successful run of the bull market came to an abrupt halt. Stiffer competition with Britain for foreign investment spurred speculators to dump American stocks and securities in the late summer of 1929 . By late October, it was clear that the market had seen better days, and an increasing number of Americans pulled their money out of the stock market.
The Dow Jones Industrial Average fell steadily over a ten-day period, finally crashing on October 29 , 1929 . On this so-called Black Tuesday, investors panicked and dumped an unprecedented 16 million shares.
The rampant practice of buying on margin, which had damaged Americans' credit, made the effects of the stock market crash worse. As a result, within one month, American investors had lost tens of billions of dollars.
The great stock market crash signaled the beginning of the Great Depression. It didn't cause the Depression, but it hurried -and worsened- the economic collapse. The main causes of the Depression were the aging industrial base, farmers' problems, the problem of easy credit, and the fact that too few people held too great a share of the nation's wealth.
There were several seeds of this stock market crash that were sown during the Warren G. Harding administration. Harding's election in 1920 meant big money for big business. The anti-trust gains made by Wilsonian progressives went out the door as a new era dawned for fat-cat tycoons and good old boys in the Republican Party. Ironically, though, many of Harding's pro-business policies hurt the American economy in the long run.
First, the sudden free-for-all in the market led to speculation and corruption. Speculators began using future earnings on the stocks they owned-money they did not even have yet-to buy new stocks, a process known as "buying on margin." This overspeculation, along with widespread corruption and faulty international finances, eventually led to the stock market crash of 1929.
Under Harding's administration, there were huge rewards distributed to big business and limited benefits for average American workers. In 1923, for example, the Supreme Court ruled in Adkins v. Children's Hospital that women workers did not merit special labor protection from the government, because they were now enfranchised and could theoretically protect themselves. This decision effectively reversed the previous 1908 Muller v. Oregon ruling.
Meanwhile, Congress passed the Esch-Cummins Transportation Act in 1920, which deregulated railroads, putting their control back into the hands of plutocratic owners. In 1922, Harding and Congress also passed the Fordney-McCumber Tariff, which drove taxes on foreign goods up to almost 40 percent to protect American industry.
This effectively prevented Europe from exporting goods to the United States to boost its economy after the war. Europe was deeply in debt and needed to sell goods to American consumers to pay off loans owed to the U.S. government. Harding's new tariff sparked an international tariff war that brought international trade to a virtual standstill.
Such protectionist measures, combined with the federal government's new willingness to break strikes using force, caused a drastic drop in labor union membership throughout the country.
President Hoover tried to reassure Americans that the economy would right itself. Many people, panicking, pulled their money from banks. With so many withdrawals happening so suddenly, many banks were forced to close. When the banks failed, other depositors lost their deposits. Businesses began to close as well, and millions of Americans lost their jobs. Unemployment had been 3 percent in 1929; by 1933, it was 25 percent. Those who kept their jobs suffered pay cuts or reduced hours.
The Depression spread around the world. The drop in consumer demand in the United States cut European exports, hurting their economies. As stated previously, although the 1929 stock market crash was certainly a leading catalyst for the Great Depression, it was not the sole cause. Historians still debate exactly why the Great Depression was so severe, but they generally agree that it was the result of a confluence of factors.
Following the great stock market crash of 1929, the US Govt. created the Pecora Commission in 1932 to study what had caused the great crash; to learn about and then adjust financial policy to prevent a similar stock market crash in the future.
One of the main factors the Pecora Commission cited as a possible cause for the 1929 crash was the wide range of abusive practices on the part of banks and bank affiliates . These abusive practices included a variety of conflicts of interest such as the underwriting of unsound securities in order to pay off bad bank loans as well as "pool operations" to support the price of bank stocks.
Following the Pecora Commission, the Glass-Steagall Act of 1933 was established to protect the public against the abuses made by the banking industry. Unfortunately, approximately 70 years later, Wall Street interests were able to repeal the Glass-Steagall Act in 1999.
The Gramm-Leach-Bliley Act (GLBA) , also known as the Financial Services Modernization Act of 1999 (enacted November 12, 1999) is an act of the 106th United States Congress (1999-2001) which repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and/or an insurance company.
The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers.
This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance, and banking, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the "financial services industry".
This rampant deregulation led to risky and greed-driven financial ventures such as: subprime mortgages, collateralized debt obligations (CDO's), commercial paper and credit default swaps --- which brings us to... today.
There is a saying: "History repeats itself because human nature remains the same." The greed, arrogance, injustice and irresponsibility that caused the stock market crash of 1929 and the implosion of our current economy were avoidable tragedies. As Wall Street is, by way of big bonuses, set to re-incentivize the risky behavior that led to many of this nation's financial woes, it seems we will never change; we will never learn.
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You are exactly right, we will never learn. We need to change our behavior and our biggest challenge (surprisingly, given how many challenges are out there) is to avoid repeating the mistakes of the past. Is it just human nature or perhaps a comfort felt with things that have been done before: whether it works or not seems to be irrelevant. Kind of like the 'devil-you-know' attitude many have. Excellent article, sir.
Thanks Michael. I do believe a part of human nature is becoming too comfortable with our familiar devils such as greed, ignorance and arrogance, to name a few. I hope that we as an electorate and as citizens will do better. Thanks again for commenting Michael.
A Typical Rhymes article - informative, with an impact! Very good, Edward. The problem, as far as I can see, is that the people who will cause the next depression apparently can't or won't read - too busy making a killing.
Yes I am familiar with the Great Gatsby and have read it. Tragic tale about the inner-workings of the rich and indifferent. It would be interesting to see an updated version of the book and film.
Thanks Ken. It was my hope to highlight the similarities between the two eras.
Yes, the little guy, more often than not, takes the biggest hit when these things go down.
Books have been some of my closest friends since my early childhood --- I have been challenged by C.S. Lewis; cheered by Dickens & Hugo; enlightened by DuBois & Frederick Douglass... I could go on and on!
Thanks Bro, for reading and commenting, I always appreciate it.
Wow, very engaging and informative. Now I know much more than I did before about the '29 crash, and can certainly see the parallels. Great article well stated!
Thanks Terry. I am happy that this article was educational and enjoyable for you --- proving that enjoyment & education can co-exist! I appreciate you taking the time to read & comment.
If we want to avoid making the same mistakes we made in the past we must change the system. Living and working under the same conditions will only lead to more of the same problems.
Thanks for commenting David. I agree, something needs to be changed and we have it within ourselves to affect that change. I often wonder how many economic meltdowns does it take for a nation to catch on.
As always there are two sides to every coin. Government interference also was a large contributing factor to this and put a lot of pressure on banks to loan money to people who really shouldn't have been buying a house. Then of course they put all the blame on wall street. Funny thing about pointing your finger at someone, there are three more pointing right back at you. I'm not saying that the banks were innocent but the government also played a huge part in this.
You have a point Jeff, but Clinton was trying to help poor people buy homes, while Wall Street bundled loans at the first opportunity. Can't you see the difference in basic human values and morality? Or is human values only for suckers? The government, usually the liberal side, is for the people and by the people; while Wall Street sees people as marks and is out for nothing but wealth accumulation. (I wonder if Reagan is still waiting for it all to trickle down?) Greed is never satisfied and will always fall on its own sword, so already it's all repeating itself on Wall Street because Wall Street can't survive without leverage. Watch out for 2011 when credit dries up altogether and the temporary bailouts disappear, because the bailouts are just delaying the inevitable. "As GM goes, goes the country." They were too stubborn to change as well. Hold cash now.The magic tricks are almost over! :-) Just my humble opinions
Thanks for commenting Jeff. I was attempting to present a historical record of what happened before, during and after the 1929 stock market crash, while drawing the correlations between that time and now.
Since you introduced what you believe to be government culpability, however, I will attempt to answer that as well.
The notion that the government tried to force lending institutions into giving loans to unqualified applicants and thereby helping to cause this economic meltdown is not based in fact.
I addressed many of those notions in my piece: He That Despises The Poor Despises His Maker: Scapegoating in an Economic Crisis. When this theory is forwarded, it usually based upon misconceptions regarding the Community Reinvestment Act or CRA --- I don't know if that is what you are referring to or not.
Nevertheless, under the Community Reinvestment Act, passed in 1977, Congress concluded that "regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered." This included all communities in a lender's service area, and federal financial regulatory agencies were charged with the responsibility to "assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution" --- not "unqualified" applicants.
The goal was to put an end to redlining and to increase access to credit for qualified borrowers in areas that had long been underserved. But, again, only "consistent with safe and sound" lending practices. And the law has worked.
According to studies by the Treasury, Federal Reserve, Joint Center for Housing Studies and others, the CRA has led to increasing homeownership in precisely those markets where the law was intended to do so and CRA-related lending has been found to be profitable.
Coincidentally, the law was strongest in the 1990s, before the statute was watered down and before the surge in subprime lending. Not coincidentally, the CRA was weakened by the Phil Gramm-led Financial Modernization Act of 1999 and subsequent regulatory "reforms." As a result, fewer mortgage lenders were covered by the law, and the rules that did apply were less stringent to many institutions --- the same Gramm bill spoken of in this piece.
So the CRA was strongest when families were able to buy and stay in their homes at record levels. The law was weakened just as the subprime lending craze took off, with the foreclosure and related economic crises that immediately followed.
More important, it is essential to understand that CRA-covered lenders did not make the loans that went bad. When the law was passed in 1977 approximately three-quarters of all mortgage loans were made by depository institutions covered by the CRA. Today approximately three-quarters of all loans are made by independent mortgage brokers and bankers who have never been covered by the law --- in other words, when institutions not bound by government standards
And as the National Community Reinvestment Coalition reported, CRA
lenders have originated only one-quarter of subprime loans, with the
overwhelming number of those loans-the loans that have led to the
mortgage meltdown-being made by institutions that had no CRA
responsibilities. In 2005 the Federal Reserve reported that just 5
percent of loans made by CRA institutions were high-cost loans,
compared to 34 percent for non-CRA lenders. Admittedly, I am a
sociologist and not an economist, but I am familiar enough with simple
math to know that 34% is significantly larger than 5% --- there is no way five percent can be deemed extreme governmental interference.
Additionally, according to the Wall Street Journal, 60 to 65 percent of those who received subprime loans qualified for conventional mortgages.
In my opinion, looking at the data and research, if the government was guilty of a sin, it was a sin of omission and not commission --- by effectively letting Wall Street have its way by rampant deregulation (and this factors into the equation far more than what Main Street did or did not do), they emboldened the "too-big-to-fail" entities in their risky ventures.
I believe that the analysis that I have rendered has a strong basis in the historical record and an overwhelming amount of research conducted by private and governmental agencies and organizations --- yet, I am open to discussion or debate. I thank you Jeff for taking the time to read and comment.
Thanks Marijo. It was my intent to give some historical context in regard to where we are today in our financial institutions. I am hoping your investments are safe and growing. Take care Marijo and blessings to you.
Thank you for the article! The reason why these things happen are simple. Our monetary system. Most have no clue how it works but it's designed to enslave the people. A monetary system based on debt has NEVER worked in the history of mankind but you see they don't want a fair system to work because then wealth would be more evenly distributed as would power. Great article!
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