ECONOMICS

PROJECT: WALL
STREET CRASH
OF 1929
WALL STREET CRASH OF 1929/THE GREAT
CRASH

Stock Market Crash of 1929, Economic event in the U.S. that

precipitated the Great Depression. The U.S. stock market expanded
rapidly in the late 1920s and reached a peak in August 1929, when prices
began to decline while speculation increased. Prices began to decline in
September and early October, but speculation continued, fueled in many
cases by individuals who had borrowed money to buy shares—a practice
that could be sustained only as long as stock prices continued rising. On
October 18 the market went into a free fall, and the wild rush to buy
stocks gave way to an equally wild rush to sell. The first day of real panic,
October 24, is known as Black Thursday; on that day a record 12.9
million shares were traded as investors rushed to salvage their losses.
Banks and investment companies bought large blocks of stock to stem
the panic.
The panic began again on Black Monday (October 28), with the market
closing down 12.8 percent. but on October 29, “Black Tuesday,” 16
million shares were traded and prices collapsed. The crash began a 10-
year economic slump that affected all the Western industrialized
countries. The Effects of the 1929 Wall Street Crash resulted in the
closure of banks, high levels of unemployment, bankruptcies, suicides,
starvation, evictions and wage cuts that led to the Great Depression. The
global impact of the 1929 Wall Street Crash resulted in the world-wide
collapse of share values.

CAUSES OF THE WALL STREET CRASH OF 1929

1) Banking panics and monetary contraction. Between 1930 and
1932 the United States experienced four extended banking panics,
during which large numbers of bank customers, fearful of their bank’s
solvency, simultaneously attempted to withdraw their deposits in cash.
Ironically, the frequent effect of a banking panic is to bring about the
very crisis that panicked customers aim to protect themselves against:
even financially healthy banks can be ruined by a large panic. By 1933
one-fifth of the banks in existence in 1930 had failed, leading the new
Franklin D. Roosevelt administration to declare a four-day “bank
holiday”, during which all of the country’s banks remained closed until
they could prove their solvency to government inspectors. The natural
 consequence of widespread bank failures was to decrease consumer
spending and business investment, because there were fewer banks to
lend money. There was also less money to lend, partly because people
were hoarding it in the form of cash. According to some scholars, that
problem was exacerbated by the Federal Reserve, which raised interest
rates and deliberately reduced the money. The reduced money supply
in turn reduced prices, which further discouraged lending and
investment.

2) The gold standard. As the United States experienced declining

output and deflation, it tended to run a trade surplus with other
countries because Americans were buying fewer imported goods, while
American exports were relatively cheap. Such imbalances gave rise to
significant foreign gold outflows to the United States, which in turn
threatened to devalue the currencies of the countries whose gold
reserves had been depleted. Accordingly, foreign central banks
attempted to counteract the trade imbalance by raising their interest
rates, which had the effect of reducing output and prices and increasing
unemployment in their countries.
3) Decreased international lending and tariffs. In the late 1920s,
while the U.S. economy was still expanding, lending by U.S. banks to
foreign countries fell, partly because of relatively high U.S. interest
rates. The drop-off contributed to contractionary effects in some
borrower countries. Meanwhile, American agricultural interests,
suffering because of overproduction and increased competition from
European and other agricultural producers, lobbied Congress for
passage of new tariffs on agricultural imports. Congress eventually
adopted broad legislation, the Smoot-Hawley Tariff Act (1930), that
imposed steep tariffs on a wide range of agricultural and industrial
products. The legislation naturally provoked retaliatory measures by
several other countries, the cumulative effect of which was declining
output in several countries and a reduction in global trade.

MEASURES TAKEN
➢ Investment companies and leading bankers attempted to stabilize
the market by buying up great blocks of stock
➢ After the stock market crash, President Hoover sought to prevent
panic from spreading throughout the economy. In November, he
summoned business leaders to the White House and secured
promises from them to maintain wages. Hoover received
commitments from private industry to spend $1.8 billion for new
construction and repairs to be started in 1930.

President Hoover
➢ The President ordered federal departments to speed up their
construction projects and asked all governors to expand public works
projects in their states. He also asked Congress for a $160 million tax
cut while doubling spending for public buildings, dams, highways,
and harbors.
➢ In 1932, the Pecora Commission was established by the U.S.
Senate to study the causes of the crash.[28] The following year, the
U.S. Congress passed the Glass–Steagall Act mandating a separation
between commercial banks, which take deposits and extend loans,
and investment banks, which underwrite, issue, and
distribute stocks, bonds, and other securities.
 President’s letter to pass the Glass-Steagall Act

➢ the Glass-Steagall Act supported the economy by releasing $750

million in U.S. gold reserves to fund business loans.
➢ Stock markets around the world instituted measures to suspend
trading in the event of rapid declines, claiming that the measures
would prevent such panic sales.
➢ The Emergency Relief and Construction Act (1932) also provided
funds to make loans for relief to the states and included additional
money for local, state, and federal public works projects.
 ➢ In 1934, the Securities and Exchange Commission was created to
restore the public's trust in capital markets and to keep an eye on
the conduct of those markets. Among its many other duties:-
• SEC’s attempts to prevent market meltdowns by requiring
transparency
and also by regulating brokerage firms and self-regulatory
organizations
• It prohibits certain types of conduct, such as insider trading, and
enforces laws that govern the financial industry

ANALYSIS OF MEASURES

➢ Despite Hoover's efforts to revitalize the economy, the public blamed

him for the Great Depression because of his strong beliefs about the
limited role of government. As a result, he responded to the
 economic crisis with a goal of getting people back to work rather than
directly granting relief
➢ Hoover refused to involve the federal government in forcing fixed
prices, controlling businesses, or manipulating the value of the
currency. He was inclined to give indirect aid to banks or local public
works projects, but he refused to use federal money for direct aid to
citizens which further caused the great economic depression.
➢ The immediate impact of the Glass-Steagall Act was to restore the
public's faith in the banking sector
➢ Businesses were having difficulties in securing capital market
investments for new projects and expansions, this business
uncertainty naturally affected job security for employees and as the
 American worker (the consumer) faced uncertainty with regards to
income, naturally the propensity to consume declined
Thus, the measures were a bit helpful in the short run but in the long run
they caused the great economic depression

SUGGESTIONS
1. Buy and hold investing is not a sure bet. Even over the
course of
decades, it may be a losing strategy. The Dow Jones Industrial
Average (DJIA) was the most-watched stock market barometer for
many years both prior to and after the 1929 crash. From its peak in
Sept. 1929 to its trough in July 1932, the Dow plunged by 89%. It
took just over 25 years, to Nov. 1954, for the Dow to regain its
Sept. 1929 peak.
2. Paying big premiums for growth is risky. While the
shares of many major companies had P/E ratios of about 14 to 19
times earnings at the 1929 market peak, some of the premier
growth companies were much more expensive. For example, Radio
Corporation of America (RCA), a high-flying tech stock in today's
parlance, peaked at 73 times earnings and more than 16 times
book value, valuations similar to that of Amazon.com Inc. (AMZN)
today.

Additionally, in 1929 some investors were willing to pay huge fees

to entrust their money to star investment managers. In this vein, a
publication called The Magazine of Wall Street claimed that it was
“reasonable” to pay between 150% and 200% more than a fund’s
net asset value “if the past record of management indicates that it
can average 20 percent or more.”

3. Crashes are often unforeseen. Few, if any, leading market

watchers in 1929 anticipated a crash. An exception was economic
forecaster Roger Babson, but he had been telling investors to
 dump stocks since 1926. In the interim, the Dow rose by about
150% to its 1929 peak.

4. A crash may come while profits are rising. In 1929, corporate

profits were growing much faster than stock prices and, as noted above,
the shares of many leading companies traded at reasonable valuations by
historic standards. In 2019, however, many companies are reporting
profit declines.

5. Looking Ahead
An old adage in investing is that "trees don't grow to the sky." The next
bear market is inevitable, but when it starts, how long it lasts, and how
deeply it plunges are all unknowns. Another inevitability is that pundits
who predicted a crash will claim prescience, even if their timing was off
by years. Roger Babson was an early pioneer in this regard.