The 1929 Crash, what did we learn?
"Thursday, October 24, 1929 has the dubious honor of being
called Black Thursday because it was on this day that the New
York Stock Exchange crashed, heralding the end of the "Roaring
Twenties" and the beginning of the Great Depression. We've all
read about it in the history books, but what was it like for the
people of the time? What did they see in the newspaper when it
happened? What did they see that might have warned them of the
impending trouble -- or worse, might have helped cause it?? "
While there have been many suggested explanations for the cause
of Stock Market Crash, no one can fully account for it. Here are
some of the explanations proposed:
*1. Stocks were Overpriced *Many people believe that stocks were
overpriced and the stock market crash brought the share prices
back to a normal level. However, some studies using standard
measures of stock value, such as Price/Earnings ratios and
Price/Dividend ratios, argue that the share prices were not too
high.
*2. Massive Fraud and Illegal Activity *A number of people
believe that fraud and illegal activity was one of the causes of
the 1929 Stock Market Crash. However, evidence revealed that
there was probably very little actual insider trading or illegal
manipulation.
*3. Margin Buying *Margin buying is another scapegoat for the
cause of the Stock Market Crash. However, it is not the main
reason because there was very little margin outstanding relative
to the value of the market (the margin averaged less than five
percent of the market value).
*4. Federal Reserve Policy *The new President of the Federal
Reserve Board Adolph Miller tightened the monetary policy and
set out to lower the stock prices since he perceived that
speculation led stocks to be overpriced, causing damage to the
economy. Also, starting from the beginning of 1929, the interest
rate charged on broker loans rose tremendously. This policy
reduced the amount of broker loans that originated from banks
and lowered the liquidity of non-financial and other corporation
that financed brokers and dealers.
*5. Public Officials' Repeated Statements *Many public officials
commented that the stock prices were too high. For example, the
newly elected President of the United States, Herbert Hoover,
publicly stated that stocks were overvalued and that speculation
hurt the economy. Hoover's statement suggested to the public the
lengths he was willing to go to control the stock market. These
kinds of statements encouraged investors to believe that the
market would continue to be strong, which could be one of the
causes of the Stock Market Crash.
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