Oct. 29 was the 83rd anniversary of the stock market crash of 1929, also known as Black Tuesday. As we are now in the midst of the worst economic downturn since that time, it is extremely important that we take a look back into history. What similarities are evident between 1929 and 2008? What mistakes are we continuing to make? What lessons have gone unheeded?
Before the crash of 1929
Although the economy of the 1920s boomed, trouble lurked beneath the surface. The textile, steel and railroad industries were barely profitable. Mining and lumbering were in decline. In the late 1920s, the auto, construction and consumer goods industries faltered. The biggest problem, though, was in agriculture. Wartime demand for food dropped, and farmers suffered. Unable to make mortgage payments, many lost their land. Congress tried to help farmers by passing laws that would boost food prices, but President Calvin Coolidge vetoed them.
Farmers, short on money, bought fewer goods. That trend, combined with the consumer debt load, cut consumer spending. Consumer spending was also hurt by lagging incomes. These problems were not completely evident in the 1928 presidential election. Despite the thriving U.S. economy of the late 1920s, Calvin Coolidge decided not to run for president again.
In his place, Republicans nominated the president’s hand-picked successor, popular World War I humanitarian administrator Herbert Hoover, to continue America’s prosperity. Democrats chose New York Governor Alfred E. Smith on an anti-Prohibition platform. Hoover won easily, with 444 electoral votes to Smith’s 87 and with a margin of more than 6 million popular votes.
Soon after Hoover took office, however, the prosperous times and successful run of the bull market came to an abrupt halt. Stiffer competition with Britain for foreign investment spurred speculators to dump American stocks and securities in the late summer of 1929. By late October, it was clear that the market had seen better days, and an increasing number of Americans pulled their money out of the stock market.
The Dow Jones Industrial Average fell steadily over a 10-day period, finally crashing on Oct. 29 , 1929. On this so-called Black Tuesday, investors panicked and dumped an unprecedented 16 million shares.
The rampant practice of buying on margin, which had damaged Americans’ credit, made the effects of the stock market crash worse. As a result, within one month, American investors had lost tens of billions of dollars.
The great stock market crash signaled the beginning of the Great Depression. It didn’t cause the Depression, but it hurried — and worsened — the economic collapse. The main causes of the Depression were the aging industrial base, farmers’ problems, the problem of easy credit and the fact that too few people held too great a share of the nation’s wealth.
There were several seeds of this stock market crash that were sown during the Warren G. Harding administration. Harding’s election in 1920 meant big money for big business. The antitrust gains made by Wilsonian progressives went out the door as a new era dawned for fat-cat tycoons and good old boys in the Republican Party. Ironically, though, many of Harding’s pro-business policies hurt the American economy in the long run.
First, the sudden free-for-all in the market led to speculation and corruption. Speculators began using future earnings on the stocks they owned — money they did not even have yet — to buy new stocks, a process known as “buying on margin.” This overspeculation, along with widespread corruption and faulty international finances, eventually led to the stock market crash of 1929.
Under Harding’s administration, there were huge rewards distributed to big business and limited benefits for average American workers. In 1923, for example, the Supreme Court ruled in Adkins v. Children’s Hospital that women workers did not merit special labor protection from the government, because they were now enfranchised and could theoretically protect themselves. This decision effectively reversed the previous 1908 Muller v. Oregon ruling.
Meanwhile, Congress passed the Esch-Cummins Transportation Act in 1920, which deregulated railroads, putting their control back into the hands of plutocratic owners. In 1922, Harding and Congress also passed the Fordney-McCumber Tariff, which drove taxes on foreign goods up to almost 40 percent to protect American industry.
This effectively prevented Europe from exporting goods to the United States to boost its economy after the war. Europe was deeply in debt and needed to sell goods to American consumers to pay off loans owed to the U.S. government. Harding’s new tariff sparked an international tariff war that brought international trade to a virtual standstill.
Such protectionist measures, combined with the federal government’s new willingness to break strikes using force, caused a drastic drop in labor union membership throughout the country.
The fiscal house of cards falls down
President Hoover tried to reassure Americans that the economy would right itself. Many people, panicking, pulled their money from banks. With so many withdrawals happening so suddenly, many banks were forced to close. When the banks failed, other depositors lost their deposits. Businesses began to close as well, and millions of Americans lost their jobs. Unemployment had been 3 percent in 1929; by 1933, it was 25 percent. Those who kept their jobs suffered pay cuts or reduced hours.
The Depression spread around the world. The drop in consumer demand in the United States cut European exports, hurting their economies. As stated previously, although the 1929 stock market crash was certainly a leading catalyst for the Great Depression, it was not the sole cause. Historians still debate exactly why the Great Depression was so severe, but they generally agree that it was the result of a confluence of factors.
Remedies constructed
Following the great stock market crash of 1929, the U.S. government created the Pecora Commission in 1932 to study what had caused the great crash in order to learn about and then adjust financial policy to prevent a similar stock market crash in the future.
One of the main factors the Pecora Commission cited as a possible cause for the 1929 crash was the wide range of abusive practices on the part of banks and bank affiliates. These abusive practices included a variety of conflicts of interest such as the underwriting of unsound securities in order to pay off bad bank loans as well as “pool operations” to support the price of bank stocks.
Following the Pecora Commission, the Glass-Steagall Act of 1933 was established to protect the public against the abuses made by the banking industry. Unfortunately, approximately 70 years later, Wall Street interests were able to repeal the Glass-Steagall Act in 1999.
Remedies undone
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999 (enacted Nov. 12, 1999), is an act of the 106th United States Congress (1999-2001) which repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank and/or an insurance company.
GLBA allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers.
This, Act, by the way, was approved of by the Clinton administration (with Larry Summers being quite instrumental in the White House’s approval). So as the Democratic Party fawns over Clinton’s efforts to help re-elect President Obama — as Obama has invited many of those Clinton economic advisers back into the White House — and the Democratic faithful joyfully chant Romnesia, it appears that they, too, can be quite selective in their recall of history.
This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance and banking, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the “financial services industry.”
This rampant deregulation led to risky and greed-driven financial ventures such as subprime mortgages, collateralized debt obligations (CDO’s),commercial paper and credit default swaps — which brings us to … today.
Conclusion
There is a saying, “History repeats itself because human nature remains the same.” The greed, arrogance, injustice and irresponsibility that caused the stock market crash of 1929 and the implosion of our current economy were avoidable tragedies.
The legislative, executive and judicial branches of government that are supposed to stand between the American citizen and corporate greed have “bought by Wall Street” branded on their hides.
Wall Street, by way of big bonuses, is set to re-incentivize the risky behavior that led to many of this nation’s financial woes. And as, to this date, there have been no major criminal repercussions for what was clearly criminal behavior, what’s to stop the devastation from happening all over again?