Crash of 1929 - SpeedyLook encyclopedia

The Krach of 1929 is a stock exchange crisis which proceeded with the Bourse of New York between the October 24th and the October 29th 1929. This event marks the beginning of the Grande the depression, largest Economic crisis of the 20th century. The day-keys of the crash inherited distinct nicknames: October 24th is called black Thursday , the October 28th is the black Monday , and on October 29th is the black Tuesday .

Mechanism

The crash of 1929 is consecutive with a Speculative bubble, which starts towards 1927. The bubble is amplified by the new system of installment purchase of actions, which since 1926 is allowed Wall Street. The investors can thus buy titles with a cover of only 10 %. The rate of loan depends on the Interest rate in the short run; the perenniality of this system thus depends on the difference between the rate of appreciation of the actions and this rate in loan.

Following the rise of interest rates in April 1929, when the first stagnation of the courses occurs the refunding of the interests becomes higher than the stock exchange profits and of many investors are then constrained to sell their titles to cover their loans (calls for additional cover), which will push the courses with the fall and will start a chain reaction. It is in September 1929 that the courses reach their more historical high level.

History

The Années 1920 mark one period of strong growth in the United States. Thus, between 1921 and 1929, the industrial production increases 50 %. The stock exchange “boom” thus does not appear Ex nihilo . However, the annual rise of the courses over the same period is of 18 %, is a total rise of 300 %. According to Jacques Brasseul, “the course of the titles increases as more as the profits of the companies, which themselves increase more as the production, the productivity, and finally more as the wages, good last in this race. ” A speculative element develops, then becomes dominating starting from 1928, date where the cabinet Charles Merrill (today Merrill Lynch) recommends to be involved in debt more to buy actions, and indicates: “Without that constituting a recommendation of sale, the moment is convenient to be released from its appropriations”. In fact indeed any more the dividends attract the investors, but the possibility of reselling with an important appreciation, much of titles are bought with credit for this purpose.

Economy, it, watch of the signs of weakness as of the beginning 1929: thus, the production Automobile falls of 622 000 vehicles with 416 000 between March and September. The industrial production, it, moves back of 7 % between May and October. This deceleration is partly due to a phenomenon of asphyxiation: the available capital runs to the Stock Exchange rather than towards the “real” economy.

Between March 1926 and October 1929, the stock exchange increases 120 %. The September 3rd, the index Dow Jones reaches 381,17, its more high level before 1954. The October 16th, the economist Irving Fisher declares: “Stock prices cuts reached what looks like has permanently high plate” (“the courses reached what seems to be a perpetually high plate”).

The crash

A few days before the crash (18, 19 and October 23rd), the first massive sales take place. They are still profit-takings, but they start to involve the courses with the fall.

Thursday October 24th ( Black Thursday or Black Thursday ) mark first true panic. The morning, it almost is not purchasers, whatever the price, and the courses crumble. At midday, the index Dow Jones lost 22,6 %. A riot bursts outside the New York Stock Exchange, after the guards of the building and the police force prevented shareholders from entering. The gallery of the visitors is closed. The most insane rumors circulate: eleven speculators would have committed suicide, Stock Exchange Chicago and Buffalo would have already closed, that of New York would be about to do it. An emergency meeting between five of the principal bankers of New York is held with the seat of J.P. Morgan & Co. during a score of minutes. With his exit, Thomas Lamont, one of the leaders of J.P. Morgan, declare: “There was an minor amount of sales at a loss to the Stock Exchange (...) because of technical requirements on the market. (...) The consensus of our group is that the majority of quotations of the Stock Exchange do not represent the situation accurately. (...) situation is likely to improve”. The market rebounds slightly with the news which the banks will intervene to support the courses. Indeed, towards 13:30, of the institutional investors carried out by Richard Whitney, vice-president of the NYSE, intervene directly: Whitney approaches the station of quotation of U.S. Steel, request the course in force (195), and announces “I buy 25 000 shares with 205”. As soon as the first titles are exchanged, it starts again the operation for another action, and thus makes the turn of a dozen stations. The courses are rectified quickly, and lowers it for the day is limited to 2,1% (index Dow Jones: 299,47). For example, the title Montgomery Ward is worth 83 dollars with the opening, 50 in middle of day, 74 with the fence. Two titles record their more high level of the year, while 441 reaches their level low. Exchanged volumes reach 12,9 million actions for the day - a record, the normal volume being of 2-3 million, and the preceding record of only 8,3 million. The teleprinters have up to one hour and half of delay on the courses; thus the panicked salesmen do not know yet at which price they yielded their titles.

The many investors who borrowed for to speculate are constrained to liquidate their positions (calls for additional cover or margin cal ) as from the following day. The courses remain stable Friday 25 (Dow Jones: 301,22) and Saturday 26 (pre-war period, there was a half-session saturdays).

The cycle packs Monday 28 ( black Monday or Black Monday ), where 9,25 million titles is exchanged. The banks do not intervene, contrary to previous Thursday. The index Dow Jones loses 13 % (260,64), a record which will be beaten only by the black Monday of 1987. Certain titles are massacred: General Electric, -48 points; Eastman Kodak, -42; AT&T and Westinghouse, -34; U.S. Steel, -18.

The October 29th ( black Tuesday or Black Tuesday ), exchanged volume reached 16,4 million titles. The teleprinters have up to two hours and half of delay on the courses. The index Dow Jones still loses 12 % (230,07) and the one year profits of rise disappear. John Kenneth Galbraith writes that it is about the “day more the devastator in the history of the Stock Exchange of New York, and perhaps also in all the history of the Stock Exchanges. ” Winston Churchill, which is then in New York, affirms being the witness of the suicide of a speculator who would have been thrown by the window. The forever confirmed event, and it is at the origin of the legends on the many speculators who would have thus défenestrés themselves.

Between the October 22nd and the November 13rd, the index Dow Jones passes from 326,51 to 198,69 (- 39 %), which corresponds to a virtual loss of 30 billion dollars.

After the crash

See also: Great depression

By an effect of dominos, it is the whole of the Stock Exchange which crumbles, and the fall of 1930 with 1932 is higher than that of the year 1929. The July 8th 1932, the Dow Jones falls to 41,22, its low level since its creation in 1896.

Among spectacular collapses:

Goldman Sachs passes from 104 dollars in 1929 to 1,75 in 1932;
American Founders Group (investment company) passes from 75 dollars with 0,75 in 1935;
U.S. Steel passes from 262 dollars with 22 the July 8th 1932;
General Motors passes from 1075 dollars with 40 in 1932.
General Electric of 1612 dollars with 154 in 1932.

The Dow Jones loses, in this interval, 89% of its value. The virtual value of the whole of the titles in the final analysis loses, as for it, 72 billion dollars.

Some famous losers, with their losses in dollars of the time:

J.P. Morgan, Jr. : between 20 and 60 million dollars;
Family Vanderbilt: 40 million;
Family Rockefeller: approximately 80 % of the inheritance;
Eddie Cantor : 2 million;
Winston Churchill : 500 000;
Groucho Marx : 240 000.

The loss of confidence due to the stock exchange crisis affects consumption and the investments at the time of the months following the crash. The investors who speculated while borrowing cannot refund any more and cause dead losses, which leads the banks to restrict their credit. The large companies know increasing cash shortage then. Weakest go bankrupt, which increases the brittleness of the banks. The savers panic and precipitate near their bank to withdraw their money. Without mechanisms of stabilization, the weakest banks are devastated by the hemorrhage of funds and must go bankrupt in their turn: the crisis becomes a banking Crise then as from 1930.

The appropriations are dried up, consumption, the investment and the production continues to fall, the Chômage explodes (of 1,5 million with 15 million in 1933), and the banking crisis becomes a Economic crisis in 1931.

Financial instability and protectionist measurements (such as the Law Hawley-Smoot of 1930 on the Customs duties) support the propagation of the crisis to all the Western economies as from 1931.

An attempt at recovery of the US economy will be started by the New Deal and in particular the National Industrial Recovery Act of 1933, but a relapse occurs in 1937. It is only with the entry of the United States in the Second world war fine 1941 that the country is rectified durably.

The market indexes will show values comparable with those preceding the 1929 only twenty-five years crisis later (the peak of the September 3rd 1929 is exceeded the November 23rd 1954).

Great depression;
monetary and financial Crises:

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Mechanism

History

The crash

After the crash

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