Monday, November 12, 2012

The Stock Marked Crash of 29

“Money, it’s a crime, Share it fairly, But don’t take a slice of my pie. Money, so they say, Is the root of all evil, Today.”[1]

“Black Tuesday (29th of October 1929) was the end of the beginning of the crash of Wall Street”[2]
The stock market had been rising and rising, and on September 4th 1929 it saw a massive and all time high. This encouraged brokers to take huge risks and banks to invest heavily in stock of all kinds. And to top the top, these stocks were heavily over-valued.
The over-valuing of stocks serves as a rather significant reason leading to the crash on Wall Street. The optimism, and lack of future aspect of most investments in the period before the crash, almost serves as an oxymoron to the great depression that followed after the crash.
Economical historians are pointing to other important reasons for the cataclysmic crash of Wall Street, one of these reasons being “margin buying”.
Margin Buying would allow people who did not have the cash to buy the stock outright to invest. Eventually, when the marked crashed, and investors wanted their money back quickly, this lead to people going personally bankrupt, having to cash in life savings, sell houses and other valuables in order to settle their enormous debts. Many could not cope at all, and 25% of all Americans were at one point during the Great Depression on the dole.
Another reason is listed as the strict monetary Federal Policies. The rates of interest on broker loans were unnaturally increased making it all the more difficult for investors to invest and create a future.

The after shocks of this event would continue shaking the world economy for 25 years, through The Hard Thirties, through WWII, through the rise of Communism, through The New Deal, through The Aftermath of war, and then in 1954 the world economy would finally start to recover. The start of (among others) The World Bank, made the world economy find a certain calm. Yet, even now in 2012, the crash in 1929 is an infamous incident in our past.
“Fundamentally, the alternative history suggests that banking manipulators caused the irrational exuberance, thus the speculative excesses, the crash of 1929 that followed, and therefore the Great Depression of 1933, which ultimately let to World War 2”[3]
The global economical crisis that followed the crash on Wall Street led to the growth of Nazism and ultimately to WWII.
One might speculate: Had the economy, world wide, remained stabile (incorporating the growth of technology in this equation), the need to look for other solutions, other ideologies, been so pressing, and Hitler would never have gained the kind of power he did. This is obviously a non-empiric statement, based highly on “what if’s”, because the fact remains, the crash happened, as did WWII, with all its terror and extermination.

Leading up to the crash we see some significant changes in the world economy. The most important of this was the disappearance of the gold standard.
“The Gold Standard is a monetary system providing a simple rule for domestic monetary authorities and for the international monetary system. The rule was to maintain the value of a national currency in terms of a fixed weight in gold (…)”[4]
To be able to finance the enormous costs of war, many countries went off the gold standard during WWI. They suffered significant and devastating inflation. And though many countries returned to the system after the war, they now found that things had been radically changed. The economy was not as evened out as it was before the war. And by the time of The Great Depression, the system had reached complete shutdown.
The printing of more money than they had gold in their reserves would lead to inflation, which led to an increase of the prices, which eventually led to speculation of currency.
It has been claimed (by Richard Lancaster, among others)[5] that all this is a part of a cleansing cycle, that these things needs to happen for the healthy world economy. And in light of that observation we can draw parallels to the Enron scandal (where Enron became the catalyst of a global economic fall) in 2008, other parallels are what’s happening in Greece and Spain at the moment.

It is hard to pinpoint one single incident leading to the crash, but the common man, as well as the learned economist knew that the Golden Twenties (or The Happy Twenties) were closing to their undefined end. So far an enormous optimism had set its mark on the world rising after a devastating war. Industrialization and modernization were key terms.
Before WWI, the English pound was shown as the strong and stabile currency. After the war, the dollar grew into the stabile currency in the world’s economical image.
Americans were producing cars, vast quantities of food, they were leading the industrial revolution (the world was definitely entering Modern Times), but the flipside to this was over production. So, to keep the production going at the level where continued economic growth was secured, what was not sold would be destroyed. Wheat (in the US) and coffee (in South America) would be burned. This is, even today, a method western countries put to use. Instead of lowering the prices, they destroyed the over production to keep the prices steady and high.
Also, the American banks were overly willing to give people rather high loans to buy items, which would not remain in original value for long.
Credit checkups, figuring out whether people had the financial capacity to repay their loans or not, were not standard operating procedure back in the day. Further, 20% of all debt at the time was tied up in car loans, among other things.
Stock speculators in the USA hit it big, and the masses slowly lost their grip on money and wealth.

Industrial productions plummeted across the world after the crash on Wall Street. Prices on all kinds of product as well, e.g. silk and wheat.
People lost their jobs, and even though prices reached an all time low, no one could benefit from this, because no one had any money at this stage. The world as a whole landed in a vicious circle of economic ruin and wreckage.
When people lose their jobs, they have less to spend, and when less people are spending money, less production is being upheld, eventually leading to an increase in people with no jobs or money.
A different consequence, and this is a bit on the side, is that people become rather creative in times of need. The need to unwind and amuse the self with whatever means available grew strong these days. Underground activities such as gambling flourished in “The Hard Thirties”.

“The stock marked crash of 1929 was the most significant crash in US history. Although the crash itself only lasted four days, it led to a catastrophic sell-off. The Dow Jones Industrial Average lost 90% of its value between its record high close of 381,2 on September 3, 1929, and its subsequent bottom of 41,22 on July 8, 1932. It took 25 years for the Dow to regain its September high.”[6]

The crash on Wall Street led America, and further, the world into an economical Dark Age.
Two months after the crash in October, stockholders had lost more than $40 million dollars, and even though the stock marked initially managed to regain some of its losses by the end of 1930, it was far from enough. America, and the world as such, spiralled down into the Great Depression and The Hard Thirties.

We can speculate on whether Hitler would have gained power had it not been for the crash in New York in 1929. But as the world economy joined America on the decent to economic ruin, the need for new thoughts, new ideologies arouse, thus making both Nazism and Communism grow.
“The Versailles treaty threw long and dark shadows in the years between the war, and became a significant factor in the process leading up to WW2. The Victorious’ claims created a desire for revenge, and this was especially in reference to article 231 that created the hatred and the aggression. This article stated that Germany alone held the blame for the war, and was economically responsible for all the damages and losses the allied had suffered.”[7]
The changes post WWII, were also significant. We saw the beginning of the UN, and not only peace followed.
The Great Depression hit hard across the globe, but particularly in the countries, who lost the war. Trade and economic collaborations came to a full stand still, and inflation was one of the hard facts. These incidents created a need for a “saviour” in the entire world as a whole. But being the “losers” of the war, Germany felt the depression even more, making them embrace their “saviour”. Hitler provided something as generic as jobs. People have been grateful and loyal for far less.

In The Thirties countries started guarding their borders and what products were taken in and let out. Today we see WTO are trying to open the economical borders, and boundaries. We see a trading policy today where countries focus on producing trade goods that reflect the specific country’s speciality (Italy and France produce and export wine, Norway produce and export fish and oil).
But in The Thirties they needed to be self-sustainable within each country. They would produce everything a nation needed on the inside of the borders. This was a way of assuring that whatever jobs available would go to the nation’s citizens. In retrospect, this had to fail. Every country can not, at any given time make every given product; just the thought itself would sky-rocket production costs to astronomical sums, causing currency to deflate and prices to sink, being unable to pay for production, people losing their jobs, depression sinking down as a haze of gloom.

It became increasingly difficult to get financial support to start any kind of business, and the psychological effect spread across USA as a nation, and across the world as a whole. The massive decline in the worldwide stock market, caused bankruptcies and serious macro-economical difficulties.
“The Stock Marked Crash of 1929, also called the Great Crash, a sharp decline in U.S. stock marked values in 1929 that contributed to the Great Depression of the 1930s. The Great Depression lasted approximately 10 years and affected both industrial and non industrial communities in many parts of the world.”[8]
US gold reserves saw horrid times come closer as countries started cashing their dollars in for the gold that was implied with the dollar. This forced the Federal Reserve to raise interest on rent.
It has been speculated that the Gold Standard was a part of what prolonged The Great Depression. Instead of spending the money available in the market, to stimulate and re-charge the economy, make it thrive again, the money available was tied up in gold.
“The price level is less predictable if the shocks to the price level are larger and if they are more persistent. We look at measures of average inflation to judge, ex post, whether a regime has been associated with price stability”[9]
After the crash, the gold standard was suspended. More notes than equalled gold in the reserves were printed, and the currency went dangerously up and down instead of staying stabile and safe. The international monetary system was no longer an effective trade currency. The gold standard became a bit un-stabile, but was again fully operational from 1958.
There was no proper way of knowing how much of the individual country’s money that was spent when trading internationally. Countries trading internationally never knew how much their own currency was worth.
The gold standard came to a definitive end in 1971, when President Nixon refused to follow the old system (France wanted gold for their Dollars, and USA paid up), that he had printed more money than was in the reserves was an underlying reason.
In 1973 all currency were released.
Previously, only the dollar could be changed in gold, though through 1944-1958 people and countries were so poor that this functioned more as the general theory than the real life practice.
“As good as gold” is a saying, understandably enough, coined during the years of the gold standard.

All of Europe suffered the reverberations of the crash on Wall Street. And where Europe slowly faced the terrors of war, USA dealt with the financial repercussions of the crash.
Franklin D. Roosevelt was in the lead of a concept we today know as “The New Deal”.
This was a situation where the leaders of the land took control of their country’s economy. From having a market-governed economy, USA now faced an economy in the control of the Presidency.
Roosevelt’s plan incorporated the “Three R’s”.
They were: Relief, recovery and reform.
The crash on Wall Street had left the masses without jobs (and also hope for ever getting a job), subsequently without money and means. So to begin with, the “Relief”-part of the deal was to give an economic aid to the poor and unemployed.
The crash on Wall Street rendered the economy in free fall.  The “Recovery”-part of the deal was to steer the economy back to what was considered normality on both a macro- and micro level.
The crash on Wall Street left a nation in fright of this ever happening again. This fright spread across the world. The “Reform”-part of the deal was to prevent the financial system ever sinking down to depression levels ever again.

So, to the everyday citizen, how did life change after the crash on the stock market October 29th 1929?
The very telling, and highly measurable unemployment rate from this time is probably what rings a bell in most minds. The photographs of men marching and protesting about the lack of jobs and resolutions, is a powerful image of what it was like during this time. And because it took the world economy so long to recover from this, images of the kind were quite frequent.
“Most people in the world were connected in one or another way to agriculture and production, and when their ability to buy disappeared due to lack of provision, it would affect their ability to buy what was produced in the modern industry. Taxes, and ability to pay taxes were also reduced. Yet, both the European and the American economy expanded from 1924, but the crash in 1929 dramatically enforced the lack of economic balance. In 1932 the industrial production in the USA was half of what it was in 1929, as was the national income. Almost half of all the banks were closed, and millions of people had lost all of their savings (…)”[10]

“The tailor had his closet filled with suits, but had no shoes, the shoemaker had plenty of shoes, but wanted a suit. They had not money to buy from each other, and swapping became a phenomenon, well known as such.”[11]  

In conclusion, the world really did change, as it saw the rise of Fascism, Nazism and Communism as a consequence to the shortage of money, jobs and prosperity ahead. This made the likes of Hitler a welcome piece of the puzzle when searching for hidden solutions.  And the world would be forever changed from the repercussions of also this war. WWII was in many ways the growing field of technology. Where WWI was fought in the trenches, WWII took to the air; we saw the dawn of the atomic age, we saw the dawn of international political collaboration, for instance the UN. And in the aftermath of the UN, we saw new politically problematic issues being born, for instance what happened, and is still happening, in the Gaza strip.
“When people know they have no future, can we blame them if we cannot tame them?”[12]
If a liveable, durable and healthy world economy is to exist, for it to have valid reasons to last, to see democracy and capitalism survive at all, normal people will need normality in their everyday condition and life.


Overall view:

* Det 20. århundrets historie - et globalt perspektiv
Randi Rønning Balsvik
Cappelen Akademisk Forlag, 2010
1.Utgave, 2. opplag 2012

The Crash in 1929:

* Richard Lancaster, Editorial, October 29, 2002

*, US economy

* American History
Article by Martin Kelly
“Top 5 causes of the Great Depression”

Gold Standard:

* The Concise Encyclopedia of Economics, Gold Standard, by Michael D. Bordo (2008) (checked 20th of October 2012)


* Marillion, Gaza, from Sounds That Can’t Be Made, 2012

Richard Lancaster, editorial, 29th of October, 2002
[7] Translation of: Det 20. århundrets historie - et globalt perspektiv. Randi Rønning Balsvik. Cappelen Akademisk Forlag, 2010, opplag 2 (2012). Page 84
[10] Translation and paraphrasing of: Det 20. århundrets historie - et globalt perspektiv. Randi Rønning Balsvik. Cappelen Akademisk Forlag 2010. 2. opplag(2012). Page 103
[11] Translation and paraphrasing of: Det 20. århundrets historie - et globalt perspektiv. Randi Rønning Balsvik. Cappelen Akademisk Forlag 2010. 2. opplag (2012). Page 104
[12] Marillion, Gaza, Sounds That Can’t Be Made, 2012 

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