24 September 1979
The Great Crash
By Gwynne Dyer
LONDON: The ideal capitalist enterprise, it was once suggested, would be a brothel over a five- minute carwash. But all the best ways of making one’s capital multiply involve the owner no work at — like the stock market. What goes up must come down, however, and 50 years ago next month Welt Street came down with a crash that still reverberates in Western memory.
The Crash of 1929 inaugurated the grim decade of the Great Depression. In the United States, one quarter of the population was out of work by 1932. The gross National Product of the U.S. dropped by a third in four years, and it did not recover to its 1929 dollar value until 1941.
Much the same happened in Europe, although rearmament – and so recovery – came earlier. Nor was what we now call the Third World spared: Most of the world lost a full decade of economic growth.
Most historians also blame the Great Depression for Hitler’s rise to power in Germany and for Japan’s desperate grab for an economically self-sufficient empire in East Asia. On that reckoning, the Crash of 1929 also led eventually to the Second World War, – and so to the end of the European empires, the Soviet conquest of half of Europe and the Communist victory in China.
Somehow it all seems much too large a result from the mere fact that the average value of industrial shares on the New York Stock Exchange declined by half between mid-September and mid-November of 1929.
That is why the popular memory has embroidered and dramatized the events of late 1929. ‘Everyone’ in America was caught up in the speculative fever, we are told, and everyone lost their shirts when the crash came. The crash was supposed to have happened on a single day – most often called ‘Black Friday,’ October 24th – by the end of which ruined speculators were raining onto the sidewalks of New York in formation suicide leaps.
The facts, as usual, are rather different. The total number of customers on all American stock exchanges in 1929 was only 1.5 million in a United States population which was then 120 mIllion. The panic of ‘Black Friday’ was over by the afternoon, and the market closed for the day only 12 points down. The suicide rate in New York in the autumn months of 1929 was no higher than normal.
And yet the slow-motion Crash of 1929, beginning with a slight downward movement in stock values September 5 and accelerating into a sickening slide in late October, really did cause the Great Depression. The reason was that it came at the end of one of those mercifully rare bouts of specutative lunacy which leave hang-overs of historic proportions.
The major economic advantage of the capitalist system – renamed free enterprise for propaganda reasons during the Cold. War – over the various models of centrally planned economies is its greater flexibility. But the flexibility comes from tens and hundreds of thousands of companies and individuals making independent decisions, which naturally also means unpredictability.
And unpredictability inevitably brings speculation. Each individual’s business decisions depend on his estimate of what all the other individuals, and so the economy as a whole, will decideto do. The business cycle is basically a product of collective psychology, and the stock market is its most sensitive barometer.
Normally the collective expectations of economic growth or recession move within quite narrow and rational limits, and so does the stock market. But once in a great while people will be seized by the belief that the expansion of the economy (or more precisely, the rise in the stock market prices) will be rapid, continuous and unlimited., In fact, only the most naive believe this literally. Insiders know that the rise in stock values must end some time, and plan to, sell out just before that moment. But since the whole momentum of the expansion is psychological, they must not give any hint by word or deed that they think this will ever happen for fear of breaking the spell and precipitating the collapse.
When such a speculative fever hits the market (for reasons that would be best understood by lemmings), speculators will buy any stock, at any price – usually with a great deal of borrowed money (on margin) – in the belief that they will be able to sell it again in a few weeks or months at a far higher price. The true worth of a particular stock, or even what kind of enterprise it represents, entirely ceases to matter.
Just before the first great crash of modern history, the South Sea Bubble of 1720, speculators willingly poured their money into, amongst other curiosities, a promotion ‘For an Undettaking which shall in due Time be revealed.’ The same get-rich quick psychology had taken over in1929, with expectations of infinite rises in stock prices. When the collapse came, as it eventually had to, the disillusionment was correspondingly deep and long lasting.
The higher you rise, the farther you fall. By November 13, 1929, the prices of industrial stocks had fallen by half. There followed a brief recovery, but the decline then continued relentlessly until June, 1932, by which time the prices were on average only one-eighth of their value three years before. And it was the psychological hang-over of the Crash – the ever more deeply entrenched belief that things would go on getting worse – that made the Great Depression so deep and so long.
Could it ever happen again? The human capacity to suspend disbelief under the goad of greed has certainly not diminished, as witness the ever green schemes for chain letters and pyramid selling. Stock markets are more closely regulated nowadays but that did not prevent utterly implausible but hugely successful promotions like Bernie Cornfeld s Investors Overseas Services (Do you sincerely want to be rich? ) in the late 1960s.
The, main deterrent to another round of lunatic speculation like that before the Great Crash of 1929 is the memory of that event. In the present pessimistic economic climate it could not possibly happen. But some day the economic prospects may seem rosy again, and memory fades.
Appreciation to Ronald Knowling, Assistant Manager – Central Division
Provincial Information and Library Resources Board Gander, NL for the submission of archived article by Gwynne Dyer.