THE GREAT CRASH OF 1929 - Council on Foreign Relations

THE GREAT CRASH OF 1929
AT SEVENTY-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
that is the right word, the 75th October 15, all hell broke loose. tinued after Black Monday and Black
anniversary of the Great Stock Market From an intra-day high of 330 on Tuesday, just as it had begun before
Crash of 1929. There had been mar- October 23, the Dow reached an those two defining days. Continuing
ket crashes before 1929. And there intra-day low of 272 the next day, weakness in early November pushed
were crashes after 1929. But 1929 is Black Thursday, on record volume the Dow down to the crash-period
still considered THE BIG ONE. of 12.9 million shares. Well-publi- closing low of 199 on November 13.
cized and large-scale stock pur- From the September peak, stocks had
How did the Great Crash develop chases organized by a New York lost 48 percent of their value in a little
in 1929? What did we think of it at its bankers’ pool during the day on over two months. Nonetheless, the
25th and 50th anniversaries in 1954 Black Thursday moved the close up Dow was still twice as high as it had
and 1979? And how might we view it to 299. Prices stabilized at that been six years earlier.
now, at its 75th? Exploring these ques- level the next two days — the New
tions, I conclude that we need to for- York Stock Exchange had Saturday Those are the essential facts of the
get some of what “everyone knows” sessions then. Great Crash. But how are we to inter-
about the Crash of ’29. pret them? Why, of all of financial
Then on Black Monday, October history’s crashes, was this crash THE
1929. Stocks, as measured by the 28, the Dow fell from the 299 close on BIG ONE?
Dow Jones Industrial Average (the Saturday to a close of 261. The next
Dow), reached a peak close of 381 on day, Black Tuesday, the Dow crashed Without a doubt it is because the
September 3, 1929, and the average to a low of 212 and a close of 230 on Crash of 1929 came at the beginning
closed at 351 on October 15, a mod- new record volume, 16.4 million of an economic downturn that lasted
est decline from the peak. From its shares. Those two late October days longer than all other downturns in
close of 96 at the end of 1923 to the in 1929, when the Dow lost 23 per- American history, from 1929 to 1933.
peak of September 1929, the Dow cent of its value from Saturday’s close This Great Depression was the great-
increased at a compound rate of 24 to Tuesday’s, define for many the est economic crisis in America’s his-
percent per year. tory. By the time the Dow reached its
Depression low of 41 in mid-1932, it

www.financialhistory.org 11 Financial History ~ Fall 2004

Collection of the Museum of American Financial History

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. least the Dow stocks as a group — had
“Toward the end [of his testi- not gained in 15 years.
At least this is what many began mony],” Galbraith reported in the
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 Bretton Woods system 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 margin requirements as a precaution- rampant inflation, 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
contracted the demand for goods, percent, almost as great a loss as the
1954. From the perspective of 25 destroyed for a time the normal 48 percent drop from September to
years, the Crash-Depression nexus machinery for lending and invest- November in 1929. Since the decline
seemed anything but a flawed lesson. ment, helped arrest economic growth, was spread over 21 months, few
In 1954, the Dow opened the year at caused much hardship and, needless termed it a crash. It was just a bear
283 and closed it at 404. It was the to say, alienated countless thousands market, if maybe worse than most
first time the index had reached and from the economic system. The bear markets. Although the economy
surpassed its peak of September 1929, causes of the crash were all in the was hardly in good shape, the 1973-
a quarter century before. That set off speculative orgy that preceded it.”2 74 bear market was not followed by
alarm bells in the country, if not on a depression, just a recession that
Wall Street. That is how the 1929 crash looked ended in 1975.
to an informed observer 50 years ago.
Sensing opportunity, economist By 1979, the first of three consecu-
and author John Kenneth Galbraith 1979. When the Great Crash had tive years of double-digit inflation, no
of Harvard produced a small book, its 50th anniversary, no one seemed to one expected a crash because it
The Great Crash, 1929, a witty and care. The Dow opened that year at seemed that stocks had already
sardonic treatment of the subject 811 and, after reaching a high of 898, crashed, at least in real (inflation-
still worth reading half a century it closed at 839. Although the aver- adjusted) terms, since the mid 1960s.
later. Hearing some of the alarm ages had doubled since the mid-1950s

Financial History ~ Fall 2004 12 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 Paul Volcker to head 74 bear market. The Nasdaq compos- took 15 months to reverse the similar
the Federal Reserve. 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
allowing interest rates to rise to 5,049 in March 2000, and hit a low of So in 2004 the case for making the
unprecedented levels in U.S. history. 1,119 in October 2002. That decline of Great Crash a prime cause of the
The result was a mild recession in 78 percent, nearly as bad as the 89 per- Great Depression is far weaker than it
1980, and the worst recession since cent decline of the Dow from 1929 to was in 1979 or 1954. What then did
the 1930s in 1981-82. Ronald Rea- 1932, is remindful of what happened cause the Depression? That is a long
gan, who passed on earlier this year, to stocks during the Great Depression. story, and there is not agreement on
became president in 1981. To his all of its details. But there is consensus
credit, President Reagan supported Yet there was not a Great Depression that economic policymakers made
the Volcker Fed’s efforts to control after 2000, only a mild recession in many mistakes as the slide from reces-
inflation when politics might have 2001. In 2004, the Dow is above sion into depression took place after
dictated blaming the Fed for the 10,000 again, and the Nasdaq is in the 1929. They raised taxes and duties on
1981-82 recession. But it took a while vicinity of 2,000. These represent pretty imports. They tried to balance the
for Reagan, Volcker, and others to good gains from the October 2002 budget by cutting government spend-
make it “morning in America” again. lows. And the economy in 2004 ing. They made money tight and let
In August 1982, the Dow hit a low of appears quite healthy. Like 1987, recent banks fail by the thousands, causing
777, a bit lower than the 1979 low. experience provides further grounds for consumer and business spending to
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
was “morning in America.” For Back to 1929. In Galbraith’s Nothing like that happened after
investors, happy days were here again. account of the Great Crash of 1929, the crash of 1987, or during the bear
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 stock market 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
another Great Depression. What did happen in those months? Notes
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,
forgotten. Why? Most likely it is mid-April 1930. Its close on Wednes- 1929 (Boston: Houghton Mifflin, 1961), p.
because it was not followed by a day, October 23, 1929, before Black xii.
depression, much less another Great Thursday, Black Monday, and Black
Depression. That should make us Tuesday, had been 306. In other 2 Ibid., p. xx.
think about 1929. Perhaps the crash- words, during the five months after
depression nexus is not as warranted the November 1929 lows, the Dow 3 Ibid., p. 146.
as our teachers and our textbooks had recovered 96 percent of its losses
taught us. in what most historians call the Great Dr. Richard Sylla teaches financial
Crash. At its April peak the Dow was history at NYU’s Stern School of
After the turn of the year 2000, the still at only 77 percent of its pre-crash Business, and is a Trustee of the
stock market experienced another peak in September 1929, so it was still Museum of American Financial His-
major bear market. From the January tory and a member of this magazine’s
editorial advisory board.

www.financialhistory.org 13 Financial History ~ Fall 2004