The Great Depression of 1929

What happened during the Great Depression of 1929?

On October 28, 1929, the Dow fell 12.8% in one day. The second-biggest drop in history (until 1987) occurred the following day (October 29, 1929), when the Dow dropped 11.7%. This marked the stock market crash of 1929.

Far more significant than news about fundamentals among the newspaper stories on Monday, October 28, 1929, are clues to the importance attached in people’s minds to the events of just a few days earlier, when the stock exchange experienced a record decline in share prices.

That was the so-called Black Thursday, October 24, 1929, when the Dow had fallen 12.9% within the day but recovered substantially before the end of trading, so that the closing average was down only 2.1% from the preceding close.

This event was no longer news, but the memory of the emotions it had generated was very much part of the ambience on the following Monday. There was news on the Wednesday before Black Thursday that there had been a major drop in the market (the Dow closed on Wednesday down 6.3% from Tuesday’s close) and that total transactions had had their second highest day in history.

The most significant concrete news stories in the newspapers seem consistently to have been about previous moves of the market itself. There is no way that the events of the great depression of 1929 can be considered a response to any real news stories.

The Brady Commission was saying, in effect, that the crash of 1987 was a negative bubble. The important point is that it was the changed nature of the feedback loop, not the news stories that broke around the time of the crash, that was the essential cause of the crash. The media can sometimes foster stronger feedback from past price changes to further price changes, and they can also foster another sequence of events, referred to as an attention cascade.

Stock market expansions have often been associated with popular perceptions that the future is brighter or less uncertain than it was in the past. The term new era has periodically been used to describe these times. The public is interested in expansive descriptions of future technology—for example, in what amazing new capabilities computers will soon have—not in gauging the level of U.S. corporate earnings in coming years. In a sense, the high-tech age, the computer age, and the space age seemed just around the corner in 1901, though the concepts were expressed in different words than would have been used in early 2000.

People were upbeat in 1901, and in later years, the first decade of the twentieth century came to be called the Age of Optimism, the Age of Confidence, or the Cocksure Era. The 1920s were a time of rapid economic growth and, in particular, of the widespread dissemination of some technological innovations, such as automobiles, that had formerly been available only to the wealthy. Prof. Irving Fisher at Yale, who has been described as one of America’s most eminent economists, argued that the U.S. stock market was not at all overvalued. He was quoted as saying just before the peak in 1929 that “stock prices have reached what looks like a permanently high plateau.”

New era thinking also seemed, judging from media accounts, to undergo a sudden surge in the mid-1950s. The idea that Irving Fisher had presented in the 1920s as a reason for optimism, that businesses were able to plan better for the future, was floated again as a new idea in the 1950s. The increase in the use of consumer credit was also cited, as it had been in the 1920s, as a reason to expect prosperity.

In 1996, one observer, writing in a Business Week article entitled “The Triumph of the New Economy,” listed five reasons that the market is not crazy: increased globalization, the boom in high-tech industries, moderating inflation, falling interest rates, and surging profits.