Stock Market Crash 1929 – Can Such Disaster Continue?


The stock market crash of 1929 ended the economic boom of the Golden Twenties in the last century abruptly. The financial collapse following the economic slump went down as a Great Depression in the history books and is still considered the heaviest and longest world economic crisis of modern times. Especially the Black Thursday on October 24th is remembered as one of the darkest chapters of the financial history (also called Black Friday in Europe due to the time difference). 90 years later, valuations on the stock exchange are alarmingly high again. And again, trade conflicts and economic worries keep investors on their toes – is there a risk that a disaster will repeat itself like it did then?

"The economists said we had reached a new level of prosperity in this country that we would never fall behind again – and then the crash came," says US author John Steele Gordon in the documentary "The Crash of 1929". After the Dow Jones hit an all-time high in September, the US index fell into disrepute. On Thursday of the penultimate week of October, panic set in – at the opening of the trade, the market fell by eleven percent. Although it managed to stabilize the courses for a short time. But on Monday and Tuesday it was down another more than 20 percent down.

Stock market crash becomes a global economic crisis

It was the beginning of a crash that should push the Dow by mid-1932, just under 90 percent below its previous record high. Large parts of the assets of companies and households were destroyed, the US economy plunged into a deep crisis. Between 1929 and 1933, the unemployment rate rose from 3.2 to 24.9 percent. The Dow did not recover its huge losses until 1954. How was such an extreme decline possible? One important reason is that back then it was even more common to gamble on the stock market. When buying shares often only a fraction had to be paid – the result was a huge speculative bubble.

The US Federal Reserve is also seen by experts as a decisive factor. Founded only in 1913, the Federal Reserve was still relatively inexperienced at the time – and made an unfortunate figure in the crisis. In the optimistic boom years of the 1920s, central bankers relaxed their monetary policy and did little for a long time to curb the sometimes irrational exuberance in the markets. When the bubble burst, the Fed then let many bankrupt banks die rather than flood the financial system with extra liquidity. In retrospect, this brought a lot of criticism to the institution, including that of later Federal Reserve Chairman Ben Bernanke.

International conflicts burden the economy

As a further accelerator of fire, which ultimately led to the Great Depression, political mistakes apply. After the First World War and the Treaty of Versailles with the controversial German reparations payments there were already enough international conflicts that burdened the global economy. In the US, too, the economy began to cool down before the share price crash. The US government's decision to drastically increase tariff barriers in mid-1930 continued to fuel the economy. The so-called Smoot-Hawley Tariff Act was supposed to protect the domestic industry, but historians see the law as the final pioneer of the Great Depression.

US President Donald Trump does not seem to impress that much, he tweeted in March 2018: "Trade wars are good and easy to win". Since then, however, the opposite has been confirmed – according to most analysts, Trump's punitive tariffs have so far mainly caused damage. And the US seems a long way from winning: Trump has recently been content with a partial settlement in the conflict with China that can hardly be considered a sign of strength. Instead, the clinch of the world's two largest economic powers is now traded as the most threatening global economic risk.

Could there be another extreme scenario like 1929? There are parallels. That does not just affect Trump's penchant for high tariffs. Even on the stock markets, prices have again reached a level after years of a rally fueled by cheap central bank money, which is sometimes decoupled from the real economic situation. In the US, a whole series of loss-making start-ups were listed on the stock exchange billions this year. Alarm signals were already sent by the bond market. There, government bonds with short maturities yielded more returns in the meantime than long ones, which financial professionals consider to be an important indicator of a recession.

The US interbank market has recently seen similar tensions as during the 2008 financial crisis – the Federal Reserve needed to prevent a credit crunch with additional liquidity. Nevertheless, the risk of a renewed financial market collapse among experts is considered to be relatively low. Although many analysts consider a course correction and a further weakening of the global economy to be well possible. But hardly anyone has a big crash with bad consequences like 90 years ago on the screen. Most experts trust that the major central banks are now crisis-proven and determined enough to prevent further escalation in a stock market panic.

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