Indicators of 1929 Depression

What happened between lavishing 1920's and the considered most traumatic event in financial history?

At the beginning of 1929, every respectable economic or market indicator pointed towards a rampant, vibrant economy. On one side Wall Street was celebrating Dow Jones all-time highs with delirious optimism, on the other side, indicators like unemployment levels kept fueling promises of a great future. 

Nobody felt the need to look back into our financial history to check for a possible pullback.  In the year 1920, inflation rate was a staggering 15.20%, by the end of the decade it ended with an annualized -1.73%, no particular reason for action, especially when expenditures were doing so well.

Black people in the south and white people in the southern Appalachians dwelled in a great depression during the 20's, while those in Easy Street enjoyed the fruits of their speculations.  How can that be? The Federal Reserve index just went from 67 in 1921, to 126 in June 1928.  Numbers, everything in paper was excellent, the truth was that the rich were getting richer, and the poor had nowhere to go.

In 1928, the unemployment rate was 4.2%.  In 1930 rose to 8.7% but, according to those that reign the market, there was no reason for alarm.  "We reached a new plateau in prosperity", writer John Steele will report.

On August 27, 1929 the Dow Jones reached an all-time peaked. People will flock to New York and set up tents in front of the Stock Exchange so they could trade in the market their hard-earned life savings... and not only their life savings but monies easily borrowed from banks so they could trade on margin.

In regards to the stock market, the economy became a whole speculative bubble.   Prophecies about the stock market crashing arouse about September 1929, and maybe before; but were quickly brushed off by analysts who in fact described this bonanza as a "permanently high plateau".  Hundreds bet their house on living happily ever after.

Then the market stumbled down.

President Herbert Clark Hoover

Snowballing into Catastrophe

Wednesday, October 23, 1929- At the trading floor, concern grew into fear; then evolved into panic and soon into anger.  In less than two hours 10 billion dollars invested in stock vanished into thin air, and magically reappear in the accounts of a privileged few.

Media, average investors and citizens alike watched both dumbfounded and in disbelief how their economic fairy tale crumbled in record time.

To save some face, and add-on temporary hope, a group of bankers pitched in to inject the market with $130 million dollars by Thursday, cheered by the myriad of investors.  Banks quickly closed their positions by Friday.

Tuesday, October 29, 1929- Known as the infamous "Black Tuesday".  This was not the regular kind of panic selling.  People were literally pushing and shoving to get their orders in.  Everybody wanted out.  60 million shares traded that day, which by today's account wouldn't seem much (we trade that much in the first fifteen minutes of any trading session) but more than 30 billion dollars were lost in the process.  About 4,210,000,000,000.00 in today's dollars.

Not even the World War I cost this much, especially within this time frame.

Could this be prevented?

Personal convictions and personal agendas detract from a definite answer

Republican president Herbert Clark Hoover, described by some as the lead cause of this Depression Era and defended by others for his persistent austerity measures.

Unluckily for him he was the 31st president of the United States at the wrong time.  A sound analysis on the causes for the Stock Market Crash which to more than ten years of depression, should start, if anything, with its predecessor,  Calvin Coolidge who had refused a second-term as president.

In March 1929, Coolidge declared stocks "cheap at current prices", although were already overvalued by 45% the previous year.  In September 1929, the Federal Reserve Board tried to prevent speculation by raising interest rates, and warned banks to stay clear of speculation.  But banks were easily loaning money at 20% interest to anyone able to walk through their doors.

Author Maury Klein, in his book Rainbow’s End The Crash of 1929 (2001), described Coolidge as "the perfect president for an age infatuated with business and hungry for material gain".

All the great indicators, that looked so good on paper, ensured Coolidge a dear spot in the American psyche.  They loved him.  He made sure the Federal Government got out of the way of business (deregulation).  And is well known for his quote "the business of America is business".  The artificial boom of the 1920s was in fact highly unstable.

In 1929, U.S. debt soared to $8 billion, mostly due to credit and personal spending.

A Crisis that Started Way Before 1929

A Nation on the Verge of Collapse: The Forgotten Depression of 1920

Who benefited from the Stock Market Crash?

Just like it happens now, it happened before.  Whenever there is a downturn in a market a very few end not merely benefited, but richer than ever.  Remember that the money does not really disappear in the stock market game, it is merely redirected to someone else's pocket.

In regards to the Stock Market Crash of 1929 the main pockets were:

1. Joseph P. Kennedy- Father of former John F. Kennedy, amassed a great fortune through real estate and other ventures made during the Depression.  Some scholars agree that his son owes much to his fortune having the money for campaigning for President.

2. Jesse Livermore- Although he really did not make the list for he shot himself after losing his fortune in 1933, Livermore had been shorting the market at key times, clearing a million in 1907 and $100 million by short selling in 1929.

3. Charles Edwin Mitchell- The head of Citibank sold outrageously overvalued stocks from National Bank at a staggering $340 per share to naïve investors.  This was one of the many stocks that decreased 90% or more in value during Black Tuesday and Black Thursday.

4. Albert Henry Wiggin- The Chase CEO short sale his own portfolio, engaged in stock speculation with bank funds, fraudulently earning $4 million during the Crash.

5. Bernard Baruch- He profited the ethical way, he sold when he foresaw the brink of collapse and sold his stocks just before the plummeting.