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The 1929 Stock Market Crash; its lessons for today

Three quarters of a century, this month, marks the beginning of one of the darkest chapters in American history; the 1929 stock market crash that led to the Great Depression of the 1930's. The depression followed a period of great wealth and exuberance during the 1920's, and instead brought large scale unemployment and great economic depravity. 

The crash was the harbinger of the turmoil to come and it took effect on Thursday, October 24th, 1929, "black Thursday", bringing the roaring twenties to a screeching halt, as people committed suicide after learning that their entire 'net worth' had been virtually wiped out.  The market which had been overvalued, had created a 'bubble' of artificial wealth.  Profits on overvalued stocks led to enormous (by standards of the day) paper profits.  The impetus was fed by journalists, who prior to the crash, had quoted leading economists as saying that the market surge would continue, which in turn, led to a market frenzy, of feverish buying sprees.  

The upsurge in the market had been made possible as a consequence of several factors. During the 1920's wages had greatly increased, consumer spending was at an all time high driving the economy ever forward.  So stock values were pushed continually higher; many investors caught in the dynamism mortgaged their homes cashed in other investments in order to increase their stock portfolios. By late October however, investors began to sense the market to be unstable and began to sell.  On October 24th, as selling increased, prices began to drop, and by the end of the day the NYSE had lost $4 billion, and by yearend, $15 billion had 'evaporated'.  Thousands were ruined.

Bankers, who had heavily invested in the market, were unable to meet their depositors' requests for withdrawals and as a consequence, one third of the nation's banks were forced to close, leaving many depositors without their life's savings.  Factory and business closures soon followed and the great depression had begun.

Similar Echoes Today !

Just like the 1920's, the 1980's and 1990's saw an explosive growth in the economy. The NASDAQ Stock Market until 1990, never exceeded 500, but by the spring of 2000, it rang the 4000 mark. Today's opening bell, established the NASDAQ at 1955, demonstrating a continuing pattern of loss of value. A massive sell off earlier this year, wiped out gains, and brought the NASDAQ to 2014, ( still higher than where it stands today ).

Like the 1920's, many individuals and institutions are heavily invested in the Stock Market.  Approximately 50% of U.S. households have some sort of stock portfolio.  Many retirement funds have migrated from Treasury notes to stocks, along with many investors' life savings that previously were on deposit in savings bank accounts.  As interest rates dropped to an all time low in the last two years, garnering many savings accounts less than 1 percent per annum, many individuals have opted to invest heavily in stocks that were bringing in 7 or 8 percent per year on average-- thus the heavy migration to stocks.

Like the 1920's, consumers, have driven our economy through their purchasing power, however the consumers of today have done so by borrowing on credit, by virtue of low interest rates.  Consumers have also heavily mortgaged their homes in order to purchase large ticket items, like boats, expensive cars, capital improvements, second homes and lavish vacations.  We should remember that the stock market crash of 1929 happened as the consequence of overvalued stocks, while many consumers were heavily indebted.  Today, some economists are warning that the market is once again, over valued and overdue for a major correction. 

Just like 1929, most American households are overextended and heavily invested in the market.  Savings accounts, retirement accounts have largely migrated to the market and the U.S. government has accumulated massive debt and may be ill prepared to fund extensive bank failings if that were to occur. As of June 30th 2004, according to the FDIC, the Federal Deposit Insurance Corporation, the total percent of insured bank deposits stands at 64.74 percent, as opposed to; 72.66 percent three years ago; 80.29 percent as of December 31, 1995; and 81.61 percent as of December 31st 1992. The total number of insured bank accounts covered by the federal government is decreasing. Given  current statistics, 36 percent of bank depositors would lose their deposits should a massive bank failure occur.

Of concern also, is that today's banking environment has fewer and fewer banks, as a consequence of bank 'merger-mania'. Since the mid 1980's, according to the FDIC, 50 percent of U.S. Savings Banks, and Commercial Banks have either been purchased by larger banks or have ceased operations. Of the approximately 7,500 banks that closed; 2262 were mandated to cease operations due to unsafe practices or as a result of bankruptcy.

The primary reason often cited for bank mergers by management has been the drive for greater efficiency and for greater profit margins, however the statistics (Economic Review-Atlanta) reflecting previous bank mergers tell a different story and cast a shadow of doubt on such reasoning. The resulting institutions arrived at by mergers and acquisitions, tend to be neither more efficient nor more profitable, just much bigger, politically more powerful and in terms of society-- pose a far greater risk, should they fail. 

V.S.

Posted  October  5, 2004

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