On 29 October 1929 (aka 'Black Tuesday'), the United States' stock market known as “Wall Street” spectacularly crashed – the largest in US history. The crash triggered the 'Great Depression' in the US and around the world, which lasted in some countries (eg the US) for more than a decade.
The National Museum of Australia acknowledges that the Wall Street crash was what led to a worldwide economic depression, collapsing the Australian economy, sending unemployment to an eye-watering peak of 32 per cent in 1932 and causing a schism in Australian politics about the best way to respond to the crisis. The Depression etched a deep, permanent scar in the Australian social and political psyche.
Many of the circumstances that led to the 1929 Black Tuesday crash have unfortunately been repeated in subsequent business cycles and crashes. Government responses to those crashes have typically been Keynesian and interventionist, prolonging the readjustment to prices, wages, activity, gearing and investment and keeping the disease in the system for longer.
Rather than being a consequence of economic freedom, the Great Depression (like most recessions) is a lesson against loose central bank money on the up-slope of the business cycle and adjustment-distorting intervention by “government knows best” strategies on the down-slope. (See Further Details below)
Mark this anniversary of the catalyst for the Great Depression by:
- reading more at the National Museum of Australia website about how Australian politics and society grappled with the Great Depression after Black Tuesday
- asking the older generation - particularly those born before 1935 - what they recall from personal experience or their parents' stories about living during the Great Depression - and why they believe the Depression happened
- watching a documentary on the Wall Street crash of 1929, and this non-Keynesian economic take on it (with further background here) or - if you'd like to take a more relaxed approach - watch Hollywood films Wall Street, Wall Street II or The Big Short
- viewing this documentary on the role of money and banking over the centuries
- taking a brief look at the stock market crashes over the last few decades
- for subscribers to The Australian newspaper, read this article by Australian economist Tony Makin on the 2008 Global Financial Crisis (aka the North-Atlantic Banking Crisis) and how supra-national bodies like the International Monetary Fund (IMF) have returned to the Keynesian mindset and “panaceas” of the 1970s (guaranteeing bigger government & more meddlesome intervention after each business cycle – the Keynesian ratcheting-up of government scale, scope and reach), and/or
- sharing this Action Plan post with family, friends, “bulls and bears”, investors and those that appreciate learning from history.
The name “Wall Street” came from a humble path that grew into a thoroughfare in lower Manhattan (now New York City) connecting the banks of the East and Hudson Rivers, due to a wall that was built nearby by early Dutch settlers in the 1600s to guard against native Americans and pirates.
Due to the concentration of foot and horse traffic, the path attracted merchants with small businesses and warehouses which eventually grew into a street of bustling commerce. Securities began being traded in the precinct in the 1790s evolving into the New York Stock Exchange which later built at 11 Wall Street.
October – a key corporate reporting season in the US – is always a critical month for US (and world) stocks as analysts and directors return from their US summer breaks and put their earlier-year economic and corporate forecasts under the microscope for possible revisions. Large adverse revisions in this reporting season – off the back of any recent “bull run” in stocks – can trigger large and sudden shifts in sentiment, significant re-valuations and contagion effects – not just across the US but also around the world (due to the integration of global financial markets).
The 1929 “Black Tuesday” crash was made almost inevitable by the five years (from 1924) of reckless credit expansion by the Federal Reserve System – the central bank of America, which today is still privately-owned – under then Republican President Coolidge’s administration. Coolidge’s (typically admirable) “hands-off”, trusting and laissez-faire approach to markets and the lives of US citizens was undermined by:
- a private central bank that ran remarkably loose money and credit,
- a “maturing” fractional banking system amplifying the effect, that by 1929 had created a bubble,
- namely an enormous and unstable debt-fuelled asset/stock price bubble.
Too much of a good thing
Before the 1920s, stock market activity and speculation was largely restricted to professionals. But as the “roaring twenties” progressed, evermore ordinary Americans were dabbling on the stock market, equipped with loans increasingly available to everyday Americans, and to gearing ratios not seen before. This dual effect blew out the broader supply of money which pumped up stock prices far beyond their fundamentals.
Eventually, the old adage, “What goes up must come down” kicked in. Bureaucrats, regulators and politicians were spooked and did not let the natural adjustment mechanisms take their course: orderly liquidations and falling prices, wages, costs and debt levels, as was occurring during the mild US recession of 1930.
Fools rush in
The relatively new administration of Republican President Herbert Hoover (inaugurated in March 1929) opted to intervene on a far large scale.
Initially, Hoover’s administration was hands-off and laissez-faire, sharing similar instincts with predecessor Coolridge’s. But as 1930 progressed, the Hoover administration was tempted, panicked and then convinced to stimulate demand and increasingly intervene in labour and goods markets. These very interventions retarded the necessary market adjustment, clouding price and investment signals and converting what might have been a mild, months-long recession into a deep and protracted Depression.
By putting a floor under wages and goods prices, markets failed to clear and unemployment blew out further. To fix this self-inflicted “shortfall in demand” (aka “demand deficiency”), government deficit spending was unleashed, which focused on public works untested by the market. To protect local industry jobs and demand, tariff and other trade barriers were hiked (via the Smoot-Hawley Tariff Act of June 1930). This led to retaliatory action from other (particularly European) nations that reduced demand for US (and world) exports. The contraction of American and other economies was profound. In 1932, a massive, contractionary hike in taxes was implemented to start paying for the prolonged deficit spending which had sought to “fill the demand shortfall”. The economy and the electorate could stand no more.
Doubling down on intervention
American voters installed - by a landslide - a new Democrat President in the form of Franklin Delano Roosevelt (FDR), with his inauguration occurring in March 1933. The Roosevelt administration, however, doubled-down with further market and institutional intervention – as it had worked “so well” under President Hoover. FDR’s “New Deal” was a big spending, IR and interventionist program that continued to “fight the economy all the way”. America’s entry into World War II (due to the Japanese bombing of Pearl Harbour in late 1941) and subsequent war effort put a belated end to the Great Depression – a deep, twelve year economic hole America had dug for itself.
Incidentally, US stock prices did not return to pre-1929 crash levels until late 1954 – a generation later.
Will anyone learn?
The excerpt below from a 1969 article from Austrian School economist, Hans Sennholz (who studied under Ludwig von Mises) describes well the ham-fisted Hoover approach – a pre-cursor to the Keynesian disease of “government knows best” that has afflicted Western economies ever since (and especially after downturns):
“The Hoover administration opposed any readjustment. Under the influence of "the new economics" of government planning, the president urged businessmen not to cut prices and reduce wages, but rather to increase capital outlay, wages, and other spending in order to maintain purchasing power. He embarked upon deficit spending and called upon municipalities to increase their borrowing for more public works. Through the Farm Board, which Hoover had organized in the autumn of 1929, the federal government tried strenuously to uphold the prices of wheat, cotton, and other farm products. The GOP tradition was further invoked to curtail foreign imports.
The Smoot-Hawley Tariff Act of June 1930, raised American tariffs to unprecedented levels, which practically closed our borders to foreign goods. According to most economic historians, this was the crowning folly of the whole period from 1920 to 1933 and the beginning of the real depression.”
The key lessons from the 1929 Wall Street crash – prolonged loose money and credit that create debt-fuelled asset price bubbles, and subsequent, ham-fisted government interventions which retard the necessary readjustments – are still poorly understood today with the mistakes instinctively repeated.
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