MARKET COMMENT
Reliving The Wall Street Crash

By Maynard Paton (TMFMayn)
October 22, 2004

This weekend marks the 75th anniversary of the 1929 Wall Street Crash. If you're not familiar with what is probably the worst disaster in financial markets, these ten points will bring you up to speed.

1. The new economic era: The 1929 Crash was preceded by an economic boom. While Europe struggled to rebuild after the First World War, the United States prospered during the 1920s as the major creditor of the Allied nations.  The War also prompted endless new inventions, many of which helped increase US production capacity and efficiency. Numerous Americans also believed developments such as electricity and the motor car had changed the economic landscape for ever.

2. The visions of boundless hope and optimism: The economic prosperity bolstered the American stock market. After touching 64 in 1921, the Dow Jones index had raced to 381 by September 1929. The market optimism was especially prevalent in the more speculative issues. Radio Corporation of America was a particular favourite. The dominant 'wireless' operator of the time, RCA witnessed its stock trade at under $2 in 1921 and top $500 in 1929.

3. The investment trusts: Investment trusts were given market listings in the 1920s. Sold as vehicles for the ordinary man to get a slice of market action, these collective funds were launched at a rate of almost one a day in 1929. Trouble was, the more dubious trusts did not reveal their asset value and -- as it turned out -- buyers effectively paid a premium for the underlying stocks, which were already trading at unjustifiable levels.

4. The excessive margin trading: Margin trading fuelled the speculative frenzy. At the top (when the New York market was worth $90b), broker loans amounted to around $9b, while a further $7b of debt was borrowed direct from banks to fund stock purchases. With shares used as collateral, the Crash and the resulting bad loans caused many banks to go broke.

5. The Crash: The New York market snapped on October 24th 1929 ('Black Thursday'), when the Dow lost 6% to close at 306. Following a stable Friday and Saturday morning, the Dow then slumped 13% to 261 on October 28th ('Black Monday') and another 12% on October 29th ('Black Tuesday'). Between the September peak and mid-November, the Dow lost 48%.

6. The suckers' rally: Despite a subsequent rally (which saw the Dow hit 290 during April 1930), the low came during July 1932 in the midst of the Great Depression. The Dow's nadir was 41, a loss of almost 90% from the summit reached three years prior. As well as those lost in the Crash, it is often said just as many fortunes were lost after the Crash by those trying to pick the bottom.

7. The buying opportunity: It took until 1954 -- 25 years -- before the Dow exceeded its 381 top of 1929. But the canny investor drip-feeding his money into the US market from the 1929 top would still have done reasonably well. Read more.

8. The (lack of) brokers leaping to their death: Despite lurid accounts within the London press, New York's pavements were not littered with bodies. Official figures state that, during October and November of 1929, the number of suicides was relatively low. Several well-publicised deaths did fulfil the stereotype though. Visiting New York at the time, Winston Churchill was awakened the day after 'Black Tuesday' by a crowd outside his hotel. "Under my very window a gentleman cast himself down fifteen storeys and was dashed to pieces, causing a wild commotion and the arrival of the fire brigade" Churchill claimed.

9. The experts got it wrong:

"We in America today are nearer to the final triumph over poverty than ever before in the history of any land." -- Herbert Hoover, President of the United States, 1928.

"Stocks have reached what looks like a permanently high plateau." -- Irving Fisher, Professor of Economics, Yale University, October 1929.

"Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks" -- John D Rockefeller, October 29th 1929.

10. The classic study: John Kenneth Galbraith provides the definitive review of the events leading up to, during and after October 1929 in his classic book The Great Crash, 1929. Priced just £7.19, you can order your copy through the Fool's bookshop.