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Home , Black Monday (1987), November 1929, September 1929

THE GREAT CRASH OF 1929 AT SE VENTY -FIVE

By Richard Sylla After the September peak, the Great Crash. Dow declined moderately to 351 on The price slide on Wall Street con- In 2004 Americans celebrate, if October 15. During the month after tinued after and Black that is the right word, the 75th October 15, all hell broke loose. Tuesday, just as it had begun before anniversary of the Great Market From an intra-day high of 330 on those two defining days. Continuing Crash of 1929. There had been mar- October 23, the Dow reached an weakness in early November pushed ket crashes before 1929. And there intra-day low of 272 the next day, the Dow down to the crash-period were crashes after 1929. But 1929 is Black Thursday, on record volume closing low of 199 on . still considered THE BIG ONE. of 12.9 million shares. Well-publi- From the September peak, had How did the Great Crash develop cized and large-scale stock pur- lost 48 percent of their value in a little in 1929? What did we think of it at its chases organized by a New York over two months. Nonetheless, the 25th and 50th anniversaries in 1954 bankers’ pool during the day on Dow was still twice as high as it had and 1979? And how might we view it Black Thursday moved the close up been six years earlier. now, at its 75th? Exploring these ques- to 299. Prices stabilized at that Those are the essential facts of the tions, I conclude that we need to for- level the next two days — the New Great Crash. But how are we to inter- get some of what “everyone knows” York Stock Exchange had Saturday pret them? Why, of all of financial about the Crash of ’29. sessions then. history’s crashes, was this crash THE 1929. Stocks, as measured by the Then on Black Monday, October BIG ONE? Dow Jones Industrial Average (the 28, the Dow fell from the 299 close on Without a doubt it is because the Dow), reached a peak close of 381 on Saturday to a close of 261. The next Crash of 1929 came at the beginning , 1929, and the average day, Black Tuesday, the Dow crashed of an economic downturn that lasted closed at 351 on October 15, a mod- to a low of 212 and a close of 230 on longer than all other downturns in est decline from the peak. From its new record volume, 16.4 million American history, from 1929 to 1933. close of 96 at the end of 1923 to the shares. Those two late October days This was the great- peak of , the Dow in 1929, when the Dow lost 23 per- est economic crisis in America’s his- increased at a compound rate of 24 cent of its value from Saturday’s close tory. By the time the Dow reached its percent per year. to Tuesday’s, define for many the Depression low of 41 in mid-1932, it

www.financialhistory.org11 Financial History ~ Fall 2004 y r o t s i H l a i c n a n i F n a c i r e m A f o m u e s u M e h t f o n o i t c e l l o C Front page of the Brooklyn Daily Eagle from Black Thursday, October 24, 1929. was off almost 90 percent from the bells, Congress invited Professor when Galbraith drew his lugubrious 1929 peak, and less than half of Galbraith to testify in early 1955 at lessons, no one in 1979 was happy where it had been at the end of 1923. hearings intended to probe into about that. The Dow had reached And since the Crash came at the whether the 1950s boom and the those 1979 levels much earlier, in beginning of the Great Depression, surpassing of 1929 stock prices por- 1964, and even surpassed them in the crash must have been a major tended another bust. 1965. In a sense, by 1979 stocks — at cause of the Depression. “Toward the end [of his testi- least the Dow stocks as a group — had At least this is what many began mony],” Galbraith reported in the not gained in 15 years. to believe as economic conditions introduction to a later edition of the The intervening period had been got worse and worse during 1930- book, “I suggested that history could terrible, with Vietnam, the collapse 33. As the idea worked its way into repeat itself, although I successfully of the of fixed textbooks, it is what Americans resisted all invitations to predict exchange rates, wage and price con- continued to believe for decades. when. I did urge a stiff tightening of trols, oil price shocks, Watergate, The Great Crash-Great Depression requirements as a precaution- rampant , and ever-rising connection is what many of our his- ary step.”1 After referring to “the interest rates. In the midst of all this tory textbooks still teach us. Most suicidal tendencies of the economic came the worst bear market since the of us still believe it. Nonetheless, system,” one of which is “the recur- 1930s. From a peak of 1,051 in Jan- from the perspective of 75 years, it rent speculative orgy,” Galbraith uary 1973, the Dow fell to 585 in is likely a flawed lesson. added, “The Great Crash of 1929 October 1974. This was a loss of 45 1954. From the perspective of 25 contracted the demand for goods, percent, almost as great a loss as the years, the Crash-Depression nexus destroyed for a time the normal 48 percent drop from September to seemed anything but a flawed lesson. machinery for lending and invest- November in 1929. Since the decline In 1954, the Dow opened the year at ment, helped arrest economic growth, was spread over 21 months, few 283 and closed it at 404. It was the caused much hardship and, needless termed it a crash. It was just a bear first time the index had reached and to say, alienated countless thousands market, if maybe worse than most surpassed its peak of September 1929, from the economic system. The bear markets. Although the economy a quarter century before. That set off causes of the crash were all in the was hardly in good shape, the 1973- alarm bells in the country, if not on speculative orgy that preceded it.”2 74 bear market was not followed by Wall Street. That is how the 1929 crash looked a depression, just a that Sensing opportunity, economist to an informed observer 50 years ago. ended in 1975. and author John Kenneth Galbraith 1979. When the Great Crash had By 1979, the first of three consecu- of Harvard produced a small book, its 50th anniversary, no one seemed to tive years of double-digit inflation, no The Great Crash, 1929, a witty and care. The Dow opened that year at one expected a crash because it sardonic treatment of the subject 811 and, after reaching a high of 898, seemed that stocks had already still worth reading half a century it closed at 839. Although the aver- crashed, at least in real (inflation- later. Hearing some of the alarm ages had doubled since the mid-1950s adjusted) terms, since the mid 1960s.

Financial History ~ Fall 200412 www.financialhistory.org It took three years to turn around 2000 peak of 11,723, the Dow slid to a bear market. But the Great Crash this long chain of awful events. But 7,286 by October 2002, a drop of 38 itself was almost entirely reversed in the turn-around began in 1979 with percent. That is remindful of the 1973- five months. By way of comparison, it the elevation of to head 74 bear market. The Nasdaq compos- took 15 months to reverse the similar the . Volcker started ite index, which was not around in crash of October 19, 1987. the process of ending inflation by 1929, fared far worse. It peaked at So in 2004 the case for making the allowing interest rates to rise to 5,049 in March 2000, and hit a low of Great Crash a prime cause of the unprecedented levels in U.S. history. 1,119 in October 2002. That decline of Great Depression is far weaker than it The result was a mild recession in 78 percent, nearly as bad as the 89 per- was in 1979 or 1954. What then did 1980, and the worst recession since cent decline of the Dow from 1929 to cause the Depression? That is a long the 1930s in 1981-82. Ronald Rea- 1932, is remindful of what happened story, and there is not agreement on gan, who passed on earlier this year, to stocks during the Great Depression. all of its details. But there is consensus became president in 1981. To his Yet there was not a Great Depression that economic policymakers made credit, President Reagan supported after 2000, only a mild recession in many mistakes as the slide from reces- the Volcker Fed’s efforts to control 2001. In 2004, the Dow is above sion into depression took place after inflation when politics might have 10,000 again, and the Nasdaq is in the 1929. They raised taxes and duties on dictated blaming the Fed for the vicinity of 2,000. These represent pretty imports. They tried to balance the 1981-82 recession. But it took a while good gains from the October 2002 budget by cutting government spend- for Reagan, Volcker, and others to lows. And the economy in 2004 ing. They made money tight and let make it “morning in America” again. appears quite healthy. Like 1987, recent banks fail by the thousands, causing In August 1982, the Dow hit a low of experience provides further grounds for consumer and business spending to 777, a bit lower than the 1979 low. questioning the conventional wisdom drop as well. The price level collapsed, 2004. From the 1982 low to the all- that the Crash of 1929 caused the and unemployment rates rose to time peak of 11,723 in January 2000, Depression of the early 1930s. record levels. the Dow increased 15-fold. This really Back to 1929. In Galbraith’s Nothing like that happened after was “morning in America.” For account of the Great Crash of 1929, the crash of 1987, or during the bear investors, happy days were here again. there is only one sentence indicating market of 2000-02. And there were no But not every day was a happy what the market did in the period depressions. Today’s economic policy- one, especially October 19, 1987. On immediately following the crash: “In makers have learned from the mis- that day, the Dow fell from 2,247 to January, February, and March of takes of their predecessors. Now that 1,739, a 23 percent decline that 1930 the showed a we know that major stock market matched the two-day decline on substantial recovery.”3 That at least crashes and bear markets need not Black Monday and Black Tuesday in is more accurate than most cause depressions, perhaps it is time 1929. From the August 1987 peak of accounts, which do not mention a that we stopped making the Crash of 2,722 to the October crash low, the price recovery at all, much less a 1929 the scapegoat for the misguided Dow lost 36 percent of its value. This substantial one. Such a mention economic policies in 1930-32 that was less than the 48 percent loss in might muddy up the popular story- were the real causes of the severity of two months in 1929. But the psycho- line that the Great Crash caused the the Depression. We need to “unlearn” logical impact was not substantially Great Depression. some flawed history. FH different. Some saw portents of What did happen in those months? Notes another Great Depression. From its low of 199 in November Today, the 1987 crash is all but 1929, the Dow recovered to 294 by 1 John Kenneth Galbraith, The Great Crash, 1929 (: Houghton Mifflin, 1961), p. forgotten. Why? Most likely it is mid-. Its close on Wednes- xii. because it was not followed by a day, October 23, 1929, before Black depression, much less another Great Thursday, Black Monday, and Black 2 Ibid., p. xx. Depression. That should make us Tuesday, had been 306. In other 3 Ibid., p. 146. think about 1929. Perhaps the crash- words, during the five months after depression nexus is not as warranted the lows, the Dow Dr. Richard Sylla teaches financial as our teachers and our textbooks had recovered 96 percent of its losses history at NYU’s Stern School of taught us. in what most historians call the Great Business, and is a Trustee of the After the turn of the year 2000, the Crash. At its April peak the Dow was Museum of American Financial His- stock market experienced another still at only 77 percent of its pre-crash tory and a member of this magazine’s major bear market. From the January peak in September 1929, so it was still editorial advisory board.

www.financialhistory.org13 Financial History ~ Fall 2004