The stock market crash is conventionally said to have occurred on Thursday the 24 th and Tuesday the 29 th of October. On September 3, , the Dow Jones Industrial Average reached a record high of At the end of the market day on Thursday, October 24, the market was at On this day the market fell 33 points — a drop of 9 percent — on trading that was approximately three times the normal daily volume for the first nine months of the year.
By all accounts, there was a selling panic. By November 13, , the market had fallen to By the time the crash was completed in , following an unprecedentedly large economic depression, stocks had lost nearly 90 percent of their value.
The events of Black Thursday are normally defined to be the start of the stock market crash of , but the series of events leading to the crash started before that date. This article examines the causes of the stock market crash. While no consensus exists about its precise causes, the article will critique some arguments and support a preferred set of conclusions. It argues that one of the primary causes was the attempt by important people and the media to stop market speculators.
A second probable cause was the great expansion of investment trusts, public utility holding companies, and the amount of margin buying, all of which fueled the purchase of public utility stocks, and drove up their prices.
Public utilities, utility holding companies, and investment trusts were all highly levered using large amounts of debt and preferred stock.1929 The Great Crash. - a video about the stock market crash in 1929
These factors seem to have set the stage for the triggering event. This sector was vulnerable to the arrival of bad news regarding utility regulation. In October , the bad news arrived and utility stocks fell dramatically.
After the utilities decreased in price, margin buyers had to sell and there was then panic selling of all stocks. Thus, immediately upon learning of the crash of October 24 John Maynard Keynes Moggridge, , p. Thus, the common viewpoint was that stock prices were too high. There is much to criticize in conventional interpretations of the stock market crash, however.
Even the name is inexact. The largest losses to the market did not come in October but rather in the following two years. In December , many expert economists, including Keynes and Irving Fisher, felt that the financial crisis had ended and by April the Standard and Poor composite index was at There are good reasons for thinking that the stock market was not obviously overvalued in and that it was sensible to hold most stocks in the fall of and to buy stocks in December admittedly this investment strategy would have been terribly unsuccessful.
From to the third quarter of , common stocks increased in value by percent in four years, a compound annual growth of The fact that the stock market lost 90 percent of its value from to indicates that the market, at least using one criterion actual performance of the market , was overvalued in John Kenneth Galbraith implies that there was a speculative orgy and that the crash was predictable: The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.
Compare this position with the fact that Irving Fisher, one of the leading economists in the U. Paul Samuelson quotes P. Sergeant Florence another leading economist: Samuelson admits that: The stock price increases leading to October , were not driven solely by fools or speculators. There were also intelligent, knowledgeable investors who were buying or holding stocks in September and October Also, leading economists, both then and now, could neither anticipate nor explain the October decline of the market.
Thus, the conviction that stocks were obviously overpriced is somewhat of a myth. The s were, in fact, a period of real growth and prosperity.
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For the period of , wholesale prices went down 0. Examining the manufacturing situation in the United States prior to the crash is also informative. What Fisher saw was manufacturing efficiency rapidly increasing output per worker as was manufacturing output and the use of electricity. The financial fundamentals of the markets were also strong. During , the price-earnings ratio for 45 industrial stocks increased from approximately 12 to approximately It was over 15 in for industrials and then decreased to approximately 10 by the end of Values in this range would be considered reasonable by most market analysts today.
The rise in stock prices was not uniform across all industries. The stocks that went up the most were in industries where the economic fundamentals indicated there was cause for large amounts of optimism.
They included airplanes, agricultural implements, chemicals, department stores, steel, utilities, telephone and telegraph, electrical equipment, oil, paper, and radio. These were reasonable choices for expectations of growth.
Industrial bonds of investment grade were yielding 5. Consider that an interest rate of 5. In , the Federal Reserve Bulletin reported production in at an index of This is an annual growth rate in production of 3. During the period commodity prices actually decreased. The production record for the ten-year period was exceptionally good. Factory payrolls in September were at an index of an all-time high. In October the index dropped to , which beat all previous months and years except for September The factory employment measures were consistent with the payroll index.
The September unadjusted measure of freight car loadings was at — also an all-time record. Kendrick shows that the period had an unusually high rate of change in total factor productivity. The annual rate of change of 5. Farming productivity change for was second only to the period Overall, the period easily took first place for productivity increases, handily beating the six other time periods studied by Kendrick all the periods studies were prior to with an annual productivity change measure of 3.
This was outstanding economic performance — performance which normally would justify stock market optimism. In the first nine months of , 1, firms announced increased dividends. In , the number was only and in , it was In September dividend increased were announced by firms compared with the year before. The financial news from corporations was very positive in September and October The August issue showed that for firms the increase for the first six months of compared to was In September, the results were expanded to firms with a The earnings for the third quarter for firms were calculated to be This is evidence that the general level of business activity and reported profits were excellent at the end of September and the middle of October Barrie Wigmore researched financial data for firms.
However, the return on equity for the firms using the year-end book value was a high The dividend yield was 2. Article after article from January to October in business magazines carried news of outstanding economic performance. Leinbach, two staff writers of the Magazine of Wall Street , wrote in June There was little hint of a severe weakness in the real economy in the months prior to October There is a great deal of evidence that in stock prices were not out of line with the real economics of the firms that had issued the stock.
Leading economists were betting that common stocks in the fall of were a good buy. Conventional financial reports of corporations gave cause for optimism relative to the earnings of corporations.
Price-earnings ratios, dividend amounts and changes in dividends, and earnings and changes in earnings all gave cause for stock price optimism. Table 1 shows the average of the highs and lows of the Dow Jones Industrial Index for to Using the information of Table 1, from to stocks rose in value by The price increases were large, but not beyond comprehension.
The price decreases taken to were consistent with the fact that by there was a worldwide depression. If we take the high of September and the year end value of Most of us, if we held stock in September would not have sold early in October. In fact, if I had money to invest, I would have purchased after the major break on Black Thursday, October I would have been sorry. Although it can be argued that the stock market was not overvalued, there is evidence that many feared that it was overvalued — including the Federal Reserve Board and the United States Senate.
By , there were many who felt the market price of equity securities had increased too much, and this feeling was reinforced daily by the media and statements by influential government officials. My research minimizes several candidates that are frequently cited by others see Bierman , , , and Barsky and DeLong , p.
In September , the market value of one segment of the market, the public utility sector, should be based on existing fundamentals, and fundamentals seem to have changed considerably in October While the and financial press focused extensively and excessively on broker loans and margin account activity, the statement by Snowden is the only unique relevant news event on October 3.
The October 4 p. The stock market went down on October 3 and October 4, but almost all reported business news was very optimistic.
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The primary negative news item was the statement by Snowden regarding the amount of speculation in the American stock market. The market had been subjected to a barrage of statements throughout the year that there was excessive speculation and that the level of stock prices was too high. There is a possibility that the Snowden comment reported on October 3 was the push that started the boulder down the hill, but there were other events that also jeopardized the level of the market.
On September 26 the Bank of England raised its discount rate from 5. England was losing gold as a result of investment in the New York Stock Exchange and wanted to decrease this investment. The Hatry Case also happened in September.
It was first reported on September 29, Both the collapse of the Hatry industrial empire and the increase in the investment returns available in England resulted in shrinkage of English investment especially the financing of broker loans in the United States, adding to the market instability in the beginning of October. On Wednesday, October 16, stock prices again declined. The news reports of the Post on October 17 and subsequent days are important since they were Associated Press AP releases, thus broadly read throughout the country.
The Associated Press reported p. The Times October 17, p. The economic news after the price drops of October 3 and October 4 had been good.
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But the deluge of bad news regarding public utility regulation seems to have truly upset the market. On Saturday, October 19, the Washington Post headlined p. An evaluation of the October 16 break in the New York Times on Sunday, October 20 pp. The negative factors were not very upsetting to an investor if one was optimistic that the real economic boom business prosperity would continue. The Times failed to consider the impact on the market of the news concerning the regulation of public utilities.
On Monday, October 21, the market went down again. The Times October 22 identified the causes to be. The same newspaper carried an article about a talk by Irving Fisher p. On Wednesday, October 23 the market tumbled. The Times headlines October 24, p. If the events of the next day Black Thursday had not occurred, October 23 would have gone down in history as a major stock market event.
The Times lamented October 24, p. Thursday, October 24 Black Thursday was a 12,, share day the previous record was 8,, shares on March 26, on the NYSE. A call loan is a loan payable on demand of the lender. There should not have been a crash.
The rest of the country seemed alarmed. On October 25, the market gained. A Times editorial p. Stocks again went down on Monday, October There were 9,, shares traded 3,, in the final hour. The Times on Tuesday, October 29 again carried an article on the New York public utility investigating committee being critical of the rate making process.
My interpretation of these events is that the statement by Snowden, Chancellor of the Exchequer, indicating the presence of a speculative orgy in America is likely to have triggered the October 3 break. Public utility stocks had been driven up by an explosion of investment trust formation and investing.
Public utility regulation was being reviewed by the Federal Trade Commission, New York City, New York State, and Massachusetts, and these reviews were watched by the other regulatory commissions and by investors. Then on October 24, the selling panic happened. There are three topics that require expansion. First, there is the setting of the climate concerning speculation that may have led to the possibility of relatively specific issues being able to trigger a general market decline.
Second, there are investment trusts, utility holding companies, and margin buying that seem to have resulted in one sector being very over-levered and overvalued.
Third, there are the public utility stocks that appear to be the best candidate as the actual trigger of the crash. During , the public was bombarded with statements of outrage by public officials regarding the speculative orgy taking place on the New York Stock Exchange.
If the media say something often enough, a large percentage of the public may come to believe it. By October 29 the overall opinion was that there had been excessive speculation and the market had been too high. Galbraith , Kindleberger , and Malkiel all clearly accept this assumption. In the spring of , the U. Taylor, head of U.
Herbert Hoover becoming president in March was a very significant event. Hoover was an aggressive foe of speculation. It was controlled by brokers interested in their own well-being. When the crash came, no major brokerage firm was bankrupted, because the brokers managed their finances in a conservative manner.
The Financial Times reported the level and the changes in the amount regularly. For example, the October 4 issue indicated that on October 3 broker loans reached a record high as money rates dropped from 7. By October 9, money rates had dropped further to below. Thus, investors prior to October 24 had relatively easy access to funds at the lowest rate since July My conclusion is that the margin buying was a likely factor in causing stock prices to go up, but there is no reason to conclude that margin buying triggered the October crash.
Once the selling rush began, however, the calling of margin loans probably exacerbated the price declines. A calling of margin loans requires the stock buyer to contribute more cash to the broker or the broker sells the stock to get the cash.
By , investment trusts were very popular with investors. These trusts were the version of closed-end mutual funds. In recent years seasoned closed-end mutual funds sell at a discount to their fundamental value. In , the investment trusts sold at a premium — i. We have current evidence that rational investors will pay a premium for what they consider to be superior money management skills.
While the two sets of numbers from the Economist and the Financial Times are not exactly comparable, both sets of numbers indicate that investment trusts had become very popular by October The common stocks of trusts that had used debt or preferred stock leverage were particularly vulnerable to the stock price declines.
Many of the trusts were levered, but the leverage of choice was not debt but rather preferred stock. In concept, investment trusts were sensible. They offered expert management and diversification. Unfortunately, in a diversification of stocks was not going to be a big help given the universal price declines.
Irving Fisher on September 6, was quoted in the New York Herald Tribune as stating: One, the anticipation of large dividend returns in the immediate future; and two, reduction of risk to investors largely brought about through investment diversification made possible for the investor by investment trusts. If a researcher could find out the composition of the portfolio of a couple of dozen of the largest investment trusts as of September-October this would be extremely helpful.
Seven important types of information that are not readily available but would be of interest are:. The ideal information to establish whether market prices are excessively high compared to intrinsic values is to have both the prices and well-defined intrinsic values at the same moment in time.
For the normal financial security, this is impossible since the intrinsic values are not objectively well defined. There are two exceptions. DeLong and Schleifer followed one path, very cleverly choosing to study closed-end mutual funds. DeLong and Schleifer state , p. In the third quarter of p. After , some trusts revealed net asset values. Thus, DeLong and Schleifer lacked the amount and quality of information that would have allowed definite conclusions. In fact, if investors also lacked the information regarding the portfolio composition we would have to place investment trusts in a unique investment category where investment decisions were made without reliable financial statements.
If investors in the third quarter of did not know the current net asset value of investment trusts, this fact is significant. The closed-end funds were an attractive vehicle to study since the market for investment trusts in was large and growing rapidly. But they worried about the validity of their study because funds were not selected randomly. DeLong and Schleifer had limited data pp. For example, for September there were two observations, for August there were five, and for July there were nine.
The nine funds observed in July had the following premia: Given that closed-end funds tend to sell at a discount, the positive premiums are interesting. Given the conventional perspective in that financial experts could manager money better than the person not plugged into the street, it is not surprising that some investors were willing to pay for expertise and to buy shares in investment trusts.
Thus, a premium for investment trusts does not imply the same premium for other stocks. In addition to investment trusts, intrinsic values are usually well defined for regulated public utilities. There are several reasons why a public utility can earn more or less than a fair return, but the target set by the regulatory authority is the weighted average cost of capital.
This assumes that r is the return required by the market as well as the return allowed by regulators. Thus, the present value of the equity is equal to the present rate base, and the stock price should be equal to the rate base per share.
There can be time periods where the utility can earn more or less than the allowed return. The reasons for this include regulatory lag, changes in efficiency, changes in the weather, and changes in the mix and number of customers.
Also, the cost of equity may be different than the allowed return because of inaccurate or incorrect or changing capital market conditions. Thus, the stock price may differ from the book value, but one would not expect the stock price to be very much different than the book value per share for very long. There should be a tendency for the stock price to revert to the book value for a public utility supplying an essential service where there is no effective competition, and the rate commission is effectively allowing a fair return to be earned.
In , public utility stock prices were in excess of three times their book values. Consider, for example, the following measures Wigmore, , p. Sooner or later this price bubble had to break unless the regulatory authorities were to decide to allow the utilities to earn more than a fair return, or an infinite stream of greater fools existed. The decision made by the Massachusetts Public Utility Commission in October applicable to the Edison Electric Illuminating Company of Boston made clear that neither of these improbable events were going to happen see below.
The utilities bubble did burst. A comparison of the beginning of the year prices and the highest prices is also of interest: The growth in value for utilities during the first nine months of was more than twice that of the other two groups.
The following high and low prices for for a typical set of public utilities and holding companies illustrate how severely public utility prices were hit by the crash New York Times , 1 January quotations. Picking on one segment of the market as the cause of a general break in the market is not obviously correct. But the combination of an overpriced utility segment and investment trusts with a portion of the market that had purchased on margin appears to be a viable explanation.
Thus, they were a large sector, capable of exerting a powerful influence on the overall market. Moreover, many contemporaries pointed to the utility sector as an important force in triggering the market decline.
The October 19, issue of the Commercial and Financial Chronicle identified the main depressing influences on the market to be the indications of a recession in steel and the refusal of the Massachusetts Department of Public Utilities to allow Edison Electric Illuminating Company of Boston to split its stock.
On August 2, , the New York Times reported that the Directors of the Edison Electric Illuminating Company of Boston had called a meeting of stockholders to obtain authorization for a stock split.
On Saturday October 12, p. Holds Rates Should Not Be Raised Until Company Can Reduce Charge for Electricity. The Massachusetts Department of Public Utilities New York Times , October 12, p.
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On October 15, the Boston City Council advised the mayor to initiate legislation for public ownership of Edison, on October 16, the Department announced it would investigate the level of rates being charged by Edison, and on October 19, it set the dates for the inquiry. On Tuesday, October 15 p. The decision is a far-reaching one and Wall Street expressed the greatest interest in what effect it will have, if any, upon commissions in other States.
Boston Edison had closed at on Friday, October 11, before the announcement was released. It dropped 61 points at its low on Monday, October 14 but closed at , a loss of 32 points. On October 16 p. One major factor that can be identified leading to the price break for public utilities was the ruling by the Massachusetts Public Utility Commission.
The only specific action was that it refused to permit Edison Electric Illuminating Company of Boston to split its stock. But the Commission made it clear it had additional messages to communicate. For example, the Financial Times October 16, , p.
There were also rumors of public ownership and a shifting of control. The next day October 17 , the Times reported p. Massachusetts was not alone in challenging the profit levels of utilities. The Federal Trade Commission, New York City, and New York State were all challenging the status of public utility regulation.
New York Governor Franklin D. Roosevelt appointed a committee on October 8 to investigate the regulation of public utilities in the state.
The Chairman of the Public Service Commission, testifying before the Committee wanted more control over utility holding companies, especially management fees and other transfers. The New York State Committee also noted the increasing importance of investment trusts: In New York City Mayor Jimmy Walker was fighting the accusation of graft charges with statements that his administration would fight aggressively against rate increases, thus proving that he had not accepted bribes New York Times , October It is reasonable to conclude that the October 16 break was related to the news from Massachusetts and New York.
On October 17, the New York Times p. On Black Thursday, October 24, the market panic began. The market dropped from The declines were led by the motor stocks and public utilities. Public utilities were a very important segment of the stock market, and even more importantly, any change in public utility stock values resulted in larger changes in equity wealth.
Market price per share The public utility holding companies, in fact, were even more vulnerable to a stock price change since their ratio of price to book value averaged 4. For simplicity, this discussion has assumed the trust held all the holding company stock.
The effects shown would be reduced if the trust held only a fraction of the stock. However, this discussion has also assumed that no debt or margin was used to finance the investment. The vulnerability of the margin investor buying a trust stock that has invested in a utility is obvious.
These highly levered non-operating utilities offered an opportunity for speculation. There were also holding companies that owned holding companies e. These stocks were even more volatile than the publicly owned utilities.
The amount of leverage both debt and preferred stock used in the utility sector may have been enormous, but we cannot tell for certain. When the large amount of leverage is combined with the inflated prices of the public utility stock, both holding company stocks, and the investment trust the problem is even more dramatic. Although no consensus has been reached on the causes of the stock market crash, the evidence cited above suggests that it may have been that the fear of speculation helped push the stock market to the brink of collapse.
The resulting decline in stock prices weakened margin positions. When several governmental bodies indicated that public utilities in the future were not going to be able to justify their market prices, the decreases in utility stock prices resulted in margin positions being further weakened resulting in general selling.
At some stage, the selling panic started and the crash resulted. What can we learn from the crash? The Great Myths of and the Lessons to be Learned. The Causes of the Stock Market Crash. Westport, CT, Greenwood Press, Committee on Banking and Currency. Hearings on Performance of the National and Federal Reserve Banking System.
Evidence from Closed-end Mutual Funds. Productivity Trends in the United States.
Princeton University Press, The Collected Writings of John Maynard Keynes , Volume XX. Rappoport, Peter and Eugene N. The Crash and Its Aftermath: A History of Securities Markets in the United States, Greenwood Press, Westport, Net Encyclopedia, edited by Robert Whaples. In Memoriam Mailing Lists Related Sites. Sponsors Economic History Association Economic History Society Business History Conference The Cliometric Society Economic and Business History Society. Please read our Copyright Information page for important copyright information.
Send email to admin eh. The Stock Market Crash Harold Bierman, Jr. Were Stocks Obviously Overpriced in October ? Debatable — Economic Indicators Were Strong From to the third quarter of , common stocks increased in value by percent in four years, a compound annual growth of Table 1 Dow-Jones Industrials Index Average of Lows and Highs for the Year Events Precipitating the Crash Although it can be argued that the stock market was not overvalued, there is evidence that many feared that it was overvalued — including the Federal Reserve Board and the United States Senate.
What precipitated the October crash? The market did not fall just because it was too high — as argued above it is not obvious that it was too high. The actions of the Federal Reserve, while not always wise, cannot be directly identified with the October stock market crashes in an important way. The Smoot-Hawley tariff, while looming on the horizon, was not cited by the news sources in as a factor, and was probably not important to the October market.
The Hatry Affair in England was not material for the New York Stock Exchange and the timing did not coincide with the October crashes.
Business activity news in October was generally good and there were very few hints of a coming depression. Short selling and bear raids were not large enough to move the entire market. Fraud and other illegal or immoral acts were not material, despite the attention they have received.
A large broker loan increase was expected the article stated that the loans increased, but the increase was not as large as expected. Wednesday, October 16, On Wednesday, October 16, stock prices again declined. Monday, October 21, On Monday, October 21, the market went down again. The Times October 22 identified the causes to be margin sellers buyers on margin being forced to sell foreign money liquidating skillful short selling The same newspaper carried an article about a talk by Irving Fisher p.
Wednesday, October 23, On Wednesday, October 23 the market tumbled. An Interpretive Overview of Events and Issues My interpretation of these events is that the statement by Snowden, Chancellor of the Exchequer, indicating the presence of a speculative orgy in America is likely to have triggered the October 3 break. Contemporary Worries of Excessive Speculation During , the public was bombarded with statements of outrage by public officials regarding the speculative orgy taking place on the New York Stock Exchange.
Investment Trusts By , investment trusts were very popular with investors. Seven important types of information that are not readily available but would be of interest are: The percentage of the portfolio that was public utilities. The extent of diversification. The percentage of the portfolios that was NYSE firms.
The ratio of market price to net asset value at various points in time. The amount of debt and preferred stock leverage used. Who bought the trusts and how long they held. The Public Utility Sector In addition to investment trusts, intrinsic values are usually well defined for regulated public utilities. Edison Electric of Boston On August 2, , the New York Times reported that the Directors of the Edison Electric Illuminating Company of Boston had called a meeting of stockholders to obtain authorization for a stock split.
The Public Utility Multipliers and Leverage Public utilities were a very important segment of the stock market, and even more importantly, any change in public utility stock values resulted in larger changes in equity wealth. Consider the following hypothetical values for a public utility: Conclusions and Lessons Although no consensus has been reached on the causes of the stock market crash, the evidence cited above suggests that it may have been that the fear of speculation helped push the stock market to the brink of collapse.
There is a delicate balance between optimism and pessimism regarding the stock market. Statements and actions by government officials can affect the sensitivity of stock prices to events. Call a market overpriced often enough, and investors may begin to believe it. A levered investment portfolio amplifies the swings of the stock market. Some investment securities have leverage built into them e. A series of presumably undramatic events may establish a setting for a wide price decline.
A segment of the market can experience bad news and a price decline that infects the broader market. In , it seems to have been public utilities. In , high technology firms were candidates. Interpreting events and assigning blame is unreliable if there has not been an adequate passage of time and opportunity for reflection and analysis — and is difficult even with decades of hindsight.
It is difficult to predict a major market turn with any degree of reliability. It is impressive that in September , Roger Babson predicted the collapse of the stock market, but he had been predicting a collapse for many years. Also, even Babson recommended diversification and was against complete liquidation of stock investments Financial Chronicle , September 7, , p.
Even a market that is not excessively high can collapse. Both market psychology and the underlying economics are relevant. References Barsky, Robert B. Commercial and Financial Chronicle , issues. Federal Reserve Bulletin , February, The Stock Market Crash and After. The Great Crash , Boston, Houghton Mifflin, The Memoirs of Herbert Hoover. New York, Macmillan, Manias, Panics, and Crashes.
New York, Basic Books, New York, Norton, and New York Times , and Senate Committee on Banking and Currency. Wall Street Journal , October Washington Post , October Net - Economic History Services.