A question about "Wall Street crash and Great Depression ".
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There are so many factors in this, some of which I suspect modern economic science do not yet recognize. Aside from problems in the financial markets/banking system operations & practice, the war debt and disruption... there were huge changes in technology, industrial growth, and global economic centers. A very large portion of the financial managers and business leaders had learned their trade pre 1914, some as far back as the 1890s, but the world had changed. So many business leaders were trying to operate by the same assumptions and methods as two or three decades earlier. My grandfather was one of those. A successful business man he was the equilvalent of a 21st Century millionaire. but, in the 1920s he seems to have lost his way, confused by the rapidly changing economic landscape.
In hindsight several things or courses of action could have mitigated the 'volatility' of the era and the crisis of 1928-1931. The leaders of the era consciously rejected some of those, and others ere simply too cutting edge & unknown to the decision makers.
In hindsight several things or courses of action could have mitigated the 'volatility' of the era and the crisis of 1928-1931. The leaders of the era consciously rejected some of those, and others ere simply too cutting edge & unknown to the decision makers.
Kaze
Banned
The crash was enviable - look into the Tulip Mania, the South Sea Bubble, and the other previous corrections of the market. The problem is Laws usually are playing catch up - take the Bubble Act of 1720, it was not used until after it was too late. The problems are liquidity, fools believing in their overvalued assets (stocks), and other items that fuel the bubble and then when it bursts - the world will have to pick up the pieces.
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The usual thing I call the era between the two wars is "the era of all turns to glass." My argument is that the interwar period was ornamental and gaudy much like an Art Nouveau Tiffany lamp - all it takes is a black cat to come along and tip over the lamp onto the floor. The fall onto the floor is the Stock Market Crash. The war that follows is the cursing at the cat, tossing a shoe at the cat, and readying the dustpan. The Cold War is getting out the superglue and trying to remake the lamp with several missing pieces.
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The usual thing I call the era between the two wars is "the era of all turns to glass." My argument is that the interwar period was ornamental and gaudy much like an Art Nouveau Tiffany lamp - all it takes is a black cat to come along and tip over the lamp onto the floor. The fall onto the floor is the Stock Market Crash. The war that follows is the cursing at the cat, tossing a shoe at the cat, and readying the dustpan. The Cold War is getting out the superglue and trying to remake the lamp with several missing pieces.
From what I can tell, the main cause of the Stock Market Crash of 1929 was the instability caused by the First World War, and the subsequent destruction of a sizable chunk of the world market, followed by the United States reaping the short-term economic benefits by being a completely untouched industrial nation, but suffering the downfall of 'running out of market' once the initial bubble burst. @Carl Schwamberger raises some interesting points about changing technology and the realities of global finance that I hadn't considered that probably contributed to it as well.
The best way to avoid the Great Depression is to have no First World War, but that would spawn butterflies that would make Mothra look small. I think the best way to diminish (but not prevent) the Great Depression would be if Herbert Hoover was elected in 1920, when he first considered running for office. As Secretary of Commerce from 1921-1929, Hoover warned Presidents Harding and Coolidge that the good times couldn't last forever, and advised for at least some market protections and social programs. Harding didn't do anything following the post-First World War recession because of an intransigent Congress (and he died), while Coolidge didn't think it was his place to govern whilst in his position as President of the United States of America. If Hoover had committed to running in 1920, he could have gotten the Republican nomination, and could have implemented at least some market protection and reform (if he can get Congress to cooperate) before bowing out in 1928. A Republican gets elected to succeed Hoover, and the Republicans still get blamed for the Market Crash, but hopefully it would be downgraded to a large recession rather than the biggest economic crisis in history, especially if there's no Smoot-Hawley Tariff.
The best way to avoid the Great Depression is to have no First World War, but that would spawn butterflies that would make Mothra look small. I think the best way to diminish (but not prevent) the Great Depression would be if Herbert Hoover was elected in 1920, when he first considered running for office. As Secretary of Commerce from 1921-1929, Hoover warned Presidents Harding and Coolidge that the good times couldn't last forever, and advised for at least some market protections and social programs. Harding didn't do anything following the post-First World War recession because of an intransigent Congress (and he died), while Coolidge didn't think it was his place to govern whilst in his position as President of the United States of America. If Hoover had committed to running in 1920, he could have gotten the Republican nomination, and could have implemented at least some market protection and reform (if he can get Congress to cooperate) before bowing out in 1928. A Republican gets elected to succeed Hoover, and the Republicans still get blamed for the Market Crash, but hopefully it would be downgraded to a large recession rather than the biggest economic crisis in history, especially if there's no Smoot-Hawley Tariff.
1) a lot of gov’ts tried to cut expenses and “balance” the budget,
2) a lot of gov’ts put up trade barriers to help “their” industries
2) a lot of gov’ts put up trade barriers to help “their” industries
Excellent answers. The Crash of '29 was caused by many things all coming together in perfect sequence. The Great Depression did not get going until the early 1930s. Some parts of the Nation did not recover until the second year of WW2. To imagine different laws and rules and natures of the investor to prevent the Crash Of 1929 is easy but to put everything in place at the right time would have been impossible. Once started, it is difficult to stop a high speed train wreck.
It will happen again. Quantitative Easing. Stock Market. Bond Market. Real Estate. The US Dollar. All World currencies. All bubbles. If timed on target correctly another huge correction, (Crash) is quite probable. It is a matter of when.
It will happen again. Quantitative Easing. Stock Market. Bond Market. Real Estate. The US Dollar. All World currencies. All bubbles. If timed on target correctly another huge correction, (Crash) is quite probable. It is a matter of when.
So, the argument is stock market traders and speculators anticipated coming tariffs (and plus I’d add, a contagion effect). And that tariffs also deepened an ongoing depression.
And many of the other contributing factors don’t exist today (thank Goddess!)
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* political left and right might have considerable overlap as far as what thinkers on each side of spectrum tend to focus on as causes of the Great Depression
Two additional influences that I found interesting was that interest rates were being held back despite the inflationary pressures and real indicators it needed to rise to ease the repayment of debt by the British, thus low interest rates miscued the market into a speculative bubble fed by "cheap" money. Next the crash of foreign lending, too much capital was seeking investment in a disrupted world and increasingly got fed into too much debt spending or dubious loans and when these get cut off those nations are in default, combined with a return of yet more money seeking investment that dumps into the spiraling up stock market. The market crash evaporated the capital required for the readjustment and rebuilding, siphoning it off just as the real need for lending and far more tangible investments were coming, it was as if the farmer had a windfall he spent in winter on nothing useful just as spring planting season was upon him and he had no money for seed, fertilizer or the new tractor.
Look at the number of start ups in the new and ultra new technologies of the era. It's similar to the DotCom bubble, except with multiple technologies. Seemingly cheap money was used by too many investors to chase high return/risk investments.
As said before, the Stock Market crash was bound to happen, just a matter of timing and scope.
It was the triggering event for the events that followed which resulted in the Great Depression.
If the Fed had started rising interest rates in late 1928 or early 1929 that would have reduced some of the fuel for the explosion.
Placing some restrictions on margin accounts would have helpful, minimizing the leveraging that was going on.
It was the triggering event for the events that followed which resulted in the Great Depression.
If the Fed had started rising interest rates in late 1928 or early 1929 that would have reduced some of the fuel for the explosion.
Placing some restrictions on margin accounts would have helpful, minimizing the leveraging that was going on.
More limitations on margin. Margin is using debt to buy stock. Nowadays its 50%. Meaning if I have $100, I can buy $200 of stock ($100 coming from me and $100 loaned by the broker). IIRC, in the 1920s, the minimum equity you needed was 10%, meaning I could use that $100 to buy $1,000 of stock. Well, once stocks started falling, everyone started getting margin calls (the broker says you need to put more money into your account to maintain the 10% or the broker automatically sells). Selling beget more selling and the crash was on. The problem is, at 10%, the banks lost 9x more than the investors, which ended up crushing a lot of banks. And then the route was on. There were a lot of other issues at stake as well. But having higher margin requirements would have been a big help.
Preventing the Great Depression is one of the trickiest non-war-related PODs in twentieth century history.
The problem is twofold:
The problem is twofold:
- The economic knowledge required to prevent it was only developed as a result of experiencing it in the first place. Counter-cycle interventionism is counter-intuitive, and as such a political hard-sell (hell, it's a political hard-sell in the twenty-first century, because policy makers are too young to remember the 1930s). Oh, yes, and the sodding obsession with the Gold Standard (which the Euro is revisiting...) - no-one had any idea that it was a bad thing yet.
- Too much structural poison from the First World War. Britain is no longer able to stabilise the international financial system, and the United States is not yet willing to do so.
Preventing any stock market crash in the 20 years between WW1 and 1939 is unlikely, financial crises are a recurrent feature of capitalist economies (note I am not saying they are inherent in capitalism, just that they happen a lot). In any case, the crash may well have represented a shift in the underlying real economy (this is very debatable). To prevent the great depression better policies are needed in the aftermath of a financial crisis in the 1920s and 1930s. This is tricky since much of the apparatus of modern macro was developed in response to the great depression and didn't really exist before 1931. Ignoring this what could have been done*
The first and obvious step would have been either never to reestablish the gold standard or for countries to leave it asap after the crash. This would reduce the internationalisation of the crisis and allow for monetary policy to respond appropriately without needing to have interest rates high enough to maintain the exchange rate. Without leaving the gold standard fiscal stimulus is also problematic, whatever its actual effectiveness. One of the great regularities of the depression is that recovery begins about 12-18 months after leaving the gold standard. Alongside this the recession and crash of 1920-21, when very few countries were on the gold standard, did not have anywhere near the spread or duration of the great depression. This is the standard modern diagnosis of the great depression (see Golden Fetters for its first completely full exposition).
An alternative might have been for a coordinated devaluation of all currencies against gold, increasing the currency value of gold reserves and so enabling governments to cut nominal interest rates without worrying about gold reserves being exhausted as people switch from interest bearing deposits into gold, at least for a while. The obvious hindrance is future credibility and international agreement.
Another alternative would be a change in exchange rates, preferably before the crisis. After everyone had gone back onto the gold standard it became clear the British had gone back on at too high a rate leading to continual threats to its membership. For the Great Depression this had two effects. Firstly it discouraged the US from raising interest rates at an early stage in the US stock market boom which might have dampened the boom and lessened the outflow of US capital to the rest of the world in the 1920s (which contributed to the depression when the flow stopped from around 1929), as Meltzer has pointed out in his history of the US Federal Reserve the international dimension played a fairly small part in US monetary policy so this is pretty unlikely to have happened. Secondly the weakness of a number of countries exchange rates limited their ability to cut rates without leaving the gold standard, so earlier devaluation might have given them more room for manoeuvre, again this is unlike to have large effects. An equivalent to this would have been countries actually following the gold standard and increasing the note issue when money flowed into their countries (France and the US I'm looking at you). This should generate higher inflation in these countries weakening their exchange rates and strengthening that of the countries experiencing an outflow leading to a better balanced global economy before the crisis and so the crisis might not have been as bad.
From a purely US perspective, protectionism and getting confused about the difference between the real and the nominal interest rate didn't help. One of the main contributors to the depth and persistence of the depression in the US was the credit crunch caused by the wave of US bank failures. The US Fed looked at bank reserves and nominal interest rates and thought credit was very loose. However, in a world of rapidly falling prices the real interest rate was actually pretty high** and banks were holding more reserves than normal because their loans needed higher backing both because of the fear the loans could turn bad and (linked to this) the fear of a bank run in a world without federal deposit insurance or branch banking (which enables greater risk sharing). As Ben Bernanke said on behalf of the Fed back in 2002 "Regarding the Great Depression. You're right, we did it. We're very sorry."
Aside from its global impact the major feature of the great depression was its duration. This is likely down to the breakdown in global economic cooperation in the 1930s (including but not limited to protectionism), and US economic policy choking off the recovery in 1937 because of the fear of inflation. However there is a school of thought that argues that both the great depression and its duration were linked to the growth of governmental regulation (see Lee Ohanian's work in particular) and that many parts of the new deal (e.g. cartelization, unionisation, price fixing and wage increases) were counterproductive and made things worse. Needless to say this is controversial and is (I think) a minority position in its sweeping claims.
* I have a PhD in economics, not that this makes me an authority, it's just that this is a different audience from my normal one and I'm not sure how much background/detail to give, so my apologies if I get it wrong.
** If you buy a house for $1000 at 1% interest in a world where house prices are falling at 10% the real cost of borrowing is 11% as after 12 months you owe $1001 and have an asset worth $990, the difference being 11%.
The first and obvious step would have been either never to reestablish the gold standard or for countries to leave it asap after the crash. This would reduce the internationalisation of the crisis and allow for monetary policy to respond appropriately without needing to have interest rates high enough to maintain the exchange rate. Without leaving the gold standard fiscal stimulus is also problematic, whatever its actual effectiveness. One of the great regularities of the depression is that recovery begins about 12-18 months after leaving the gold standard. Alongside this the recession and crash of 1920-21, when very few countries were on the gold standard, did not have anywhere near the spread or duration of the great depression. This is the standard modern diagnosis of the great depression (see Golden Fetters for its first completely full exposition).
An alternative might have been for a coordinated devaluation of all currencies against gold, increasing the currency value of gold reserves and so enabling governments to cut nominal interest rates without worrying about gold reserves being exhausted as people switch from interest bearing deposits into gold, at least for a while. The obvious hindrance is future credibility and international agreement.
Another alternative would be a change in exchange rates, preferably before the crisis. After everyone had gone back onto the gold standard it became clear the British had gone back on at too high a rate leading to continual threats to its membership. For the Great Depression this had two effects. Firstly it discouraged the US from raising interest rates at an early stage in the US stock market boom which might have dampened the boom and lessened the outflow of US capital to the rest of the world in the 1920s (which contributed to the depression when the flow stopped from around 1929), as Meltzer has pointed out in his history of the US Federal Reserve the international dimension played a fairly small part in US monetary policy so this is pretty unlikely to have happened. Secondly the weakness of a number of countries exchange rates limited their ability to cut rates without leaving the gold standard, so earlier devaluation might have given them more room for manoeuvre, again this is unlike to have large effects. An equivalent to this would have been countries actually following the gold standard and increasing the note issue when money flowed into their countries (France and the US I'm looking at you). This should generate higher inflation in these countries weakening their exchange rates and strengthening that of the countries experiencing an outflow leading to a better balanced global economy before the crisis and so the crisis might not have been as bad.
From a purely US perspective, protectionism and getting confused about the difference between the real and the nominal interest rate didn't help. One of the main contributors to the depth and persistence of the depression in the US was the credit crunch caused by the wave of US bank failures. The US Fed looked at bank reserves and nominal interest rates and thought credit was very loose. However, in a world of rapidly falling prices the real interest rate was actually pretty high** and banks were holding more reserves than normal because their loans needed higher backing both because of the fear the loans could turn bad and (linked to this) the fear of a bank run in a world without federal deposit insurance or branch banking (which enables greater risk sharing). As Ben Bernanke said on behalf of the Fed back in 2002 "Regarding the Great Depression. You're right, we did it. We're very sorry."
Aside from its global impact the major feature of the great depression was its duration. This is likely down to the breakdown in global economic cooperation in the 1930s (including but not limited to protectionism), and US economic policy choking off the recovery in 1937 because of the fear of inflation. However there is a school of thought that argues that both the great depression and its duration were linked to the growth of governmental regulation (see Lee Ohanian's work in particular) and that many parts of the new deal (e.g. cartelization, unionisation, price fixing and wage increases) were counterproductive and made things worse. Needless to say this is controversial and is (I think) a minority position in its sweeping claims.
* I have a PhD in economics, not that this makes me an authority, it's just that this is a different audience from my normal one and I'm not sure how much background/detail to give, so my apologies if I get it wrong.
** If you buy a house for $1000 at 1% interest in a world where house prices are falling at 10% the real cost of borrowing is 11% as after 12 months you owe $1001 and have an asset worth $990, the difference being 11%.
I thought the Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed covered it quite well. He highlights that the US Fed kept interest rates low to help the Europeans pay their debts and help them back onto the Gold Standard. These low interest rates triggered the US stock market boom.
The stock market crash was not the trigger for the Great Depression (there's been similar, in fact worse sell offs, in history, 1987 being a classic one, without major economic impact). What happened was as some posters pointed out: a perfect storm.
In primus: it was a liquidity crisis at the heart.
No one had money to loan, and people were beginning to call loans in (In fact, I suggest you look at the European Banking market in the months leading UP to the crash)
More loans became instantly due (because of the crash) at the same time farmers were entering into (after a decade of low food prices, meaning no real ability to service their loans, over and beyond the bare essentials) a famine in areas, meaning even less money was going into the banks. At the same time, depositors were getting jittery...
Then add into a demand slump. Add into that, several war notes becoming due (the biggest ones). Liquidity dried up faster than a creek in the Mojave during summer...
Stock market reflects, does not trigger crises.
You want to prevent a 'market crash?' No real way. Now, if you want to prevent the Great depression?
THAT's possible.
In primus: it was a liquidity crisis at the heart.
No one had money to loan, and people were beginning to call loans in (In fact, I suggest you look at the European Banking market in the months leading UP to the crash)
More loans became instantly due (because of the crash) at the same time farmers were entering into (after a decade of low food prices, meaning no real ability to service their loans, over and beyond the bare essentials) a famine in areas, meaning even less money was going into the banks. At the same time, depositors were getting jittery...
Then add into a demand slump. Add into that, several war notes becoming due (the biggest ones). Liquidity dried up faster than a creek in the Mojave during summer...
Stock market reflects, does not trigger crises.
You want to prevent a 'market crash?' No real way. Now, if you want to prevent the Great depression?
THAT's possible.
You are quite correct in there was a liquidity crisis throughout the international financial system. The system was working less and less effectively over the 3-4 years prior to the crash. The Lords of Finance covers these events in detail. Nonetheless, many economists state that the triggering event for the final collapse of the economic system was the US Stock Market collapse in 1929. When US banks were forced to come up with cash to pay off their margin calls, they called in loans both in the US and abroad with the ripple effect that liquidity dried up and eventually world economies collapsed. The actions taken by the Federal Reserve and US Government only compounded the problem.
Again, I tend to agree with you here, market crashes are inevitable. It is a consequence of the free market economic system. But again, you can minimize the consequences of the crash by having the proper structural and regulatory mechanisms in place. The 2008 crash and financial collapse could have been reduced if the Glass-Steagall provisions had remained in place, along with better regulation of the financial markets (e.g., derivatives). You will never be able to eliminate stupidity and greed but you can temper it to some extent.
Actually, the crash itself was not the trigger, but I really suggest you look at 3 banks (all folded during the period afterwards, and I don't have my notes on this handy) The crash was the visible final proof of the liquidity crisis. Or more precisely: Several banks (not just European, but they triggered what came next) called in their margin calls, as well as called in notes they were owed, backed by securities, all in the few days leading up to the crash.
Or: Bank A called in Bank B's note, who called in Bank C's, who then started scrambling around for cash, calling in every liquid asset, and calling in it's short term stock loans, which triggered the sell off. Sell offs are not triggers, they're the proof of the trigger.
Lords of Finance IIRC, even discusses this. The economists are right in a sense, that the stock market was 'the trigger' in a psychological sense. But a fair amount of people (Hughes was one, oddly enough) had already cotton onto the system's going into recession. What the crash did, was make it obvious.
To be really cold: the Trigger for the Great depression, was how the end of WW1 came about, combined with the farming market being... shall we say, substandard.
The stock market in itself, crashing, isn't a big deal. It was going to correct, a lot of smart people knew this, and a fair amount had begun edging themselves out. What the stock market crash did, was catch a lot of banks without reserves, or others with no spare capital.
The only practical way, given mores and political thought to prevent the great depression? In primus: No reparations, no war debt (which the US had actually proposed to a degree, IIRC, can't recall if it was Coolidge who suggested this, or was it Wilson, and if so, he was right to do so, maybe the only thing he was right about...), which would have helped Austria and Germany out severely, and lessened the burden on Britain and France. Even then, a nasty recession would have happened, period in roughly the same period, due to previous mentions of demand shock, and the farming crisis that was building.
This would have given Britain more money, and the ability to stabilize the system (to some degree) and quite possibly talk the US into helping stabilize.
This is just wrong. It was Britain that repeatedly suggested an all round cancellation of reparations and war debts. The US was the major opponent of this (France also opposed it, particularly at first). Indeed, the US absolutely refused to admit there was any link between war debts and reparations, and refused to attend any meeting at which one was discussed if the other was also to be discussed (at least until the great depression). Britain in the end only sought to claim reparations and war debt payments due to it to the extent that it needed to cover its payments to the US (the UK was a large net creditor in war debts, never mind reparations). Part of the problem with the Young plan for reparations was that, while it reduced the burden of reparations on Germany, this was by eliminating most of the part that was conditional on the state of the Germany economy and making most of the payments unconditional. This was because war debt payments to the US were unconditional and would need to be covered by reparations payment.
Practically Silent Cal's most famous statement was in relation to war debts when he said "The hired the money didn't they" in response to a suggestion on restructuring.