Stock Market Crashes Through the Ages – Part I – 17th and 18th Centuries

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18th-centuries

Bulls and Bears. It’s all about predicting when that upturn or that downswing in the market

is going to take place and when you need to sell or buy that stock to hit the jackpot and

make the millions. People have been doing it for centuries and that doesn’t look like it is

going to stop right now. There have been dozens of financial crises over the centuries and

each of them has had an effect on the lives of people to varying degrees.

Here’s the low down on what the biggest and the worst, the bad, grizzly bears that have

affected our lives and shaped the way that we deal with the next one (if we learn from our

mistakes that is!). The best of the bunch of world stock-market crashes from the 17th and

18th centuries are as follows. But, they might be old, they might be gone, but you’ll be

surprised that we haven’t learnt a lot from our past mistakes. We did surprisingly crazy

things and we are still doing some of the very same things today. Let’s take a peek into the

past and see what was and what wasn’t the thing to do!

1.       Kipper and Wipper

1623

In German, known as the Kipper und Wipperzeit, or the ‘Tipper and See-saw’.  It is the first

real financial crises and downturn in the economy and it took place at the start of the Thirty

Years’ War (1618-1648). There was no effective taxation to finance the war and so the Holy

Roman Emperor started to debase currency to raise revenue. The name of the crisis stems

from the scales that were used to identify coins that had not been debased. They were

removed from circulation and then melted down. Mixing them with baser metals (copper,

lead or tin) meant that they could be reissued with a lower value of currency. Modern

Quantitative Easing methods before QE had even been invented! Abenomics in the

17th century! We think that we invented everything, don’t we just?

Trouble was: the currency became so devalued that nobody wanted it anymore. Riots

occurred, soldiers refused to work if they weren’t paid in real, non-debased money and even

the state came a cropper, when it started getting the money back after collecting taxes. The

coins became absolutely worthless and were nothing more than tidily-winks for kids in the

streets. Is this what is in store for us?

2.       Mississippi Company Bubble

1720

Bubbles usually burst and the Mississippi Company was no exception.

However, the Mississippi Bubble wasn’t technically a bubble at all. It was inflationary

pressure fueled by excessive money supply and failure of policies implemented to control

money supplies.

The Mississippi Company was a business corporation that had a monopoly over the French

colonies in the Americas. John Law set up the ‘Banque Générale Privée’ (or the ‘General

Private Bank’) in 1716 and developed the circulation of paper notes as a means of payment.

Law was a Scot that believed that money did not constitute wealth at all and that it was

merely a means of exchange between companies and individuals.

He was avant-garde in that he believed that the wealth of a nation was dependent on trade

between countries. He was appointed Controller of General Finances for Louis XV. The bank

that Law set up was the first central bank of France and its capital was made up of

government bills. The bank issued more notes than it should have done and it didn’t have

enough coinage to represent the sums that were being printed.

Law was a notorious alcoholic, so maybe he was drunk half the time. He was also a gambler.

He believed that coins should be gotten rid of and that we should only use paper money. He

also believed that shares were a form of money, even the most superior form of money that

existed, since they generated dividends. The printing of money for Law’s French bank

resulted in economic inflation. The value of the paper currency ended up getting halved.

Law was an excellent modern-day marketing man too. He made everyone believe (via gross-

exaggeration) that Louisiana was much wealthier than it actually was. Smooth-talker,

obviously.

The notes issued by the bank were used to pay dividends to shareholders that were

investing  in the Mississippi Company. Except, the French had to admit after a while that

they didn’t have the coinage to back it all up. Sounds like the UK Financial Rock (amongst

many others that could be mentioned) meltdown in 2007 when people started queuing

outside the banks to withdraw their money en masse. That bank run was the first that took

place in Britain for 150 years! Maybe, they should have heeded Law’s warning and got rid of

the coins in circulation altogether.

Things came to a head for the Mississippi Company in 1720 when the bubble burst in Law’s

face. People rushed to try to convert their paper notes to coins and the bank foreclosed on

payment. Bank notes had increased by 186% just in one year. Inflation was rampant and

prices were doubling. Shares increased in price, but not so much through demand as the

result of inflation. Law had to devalue the Banque Générale’s notes by 50% to deal with the

inflationary pressure. Shares plummeted from 10, 000 livres to 1, 000 livres per share in

1720. By 1721, they were only worth 500 livres. The result was that investors lost millions.

France plunged into economic depression, and brought half of Europe with it. It also laid the

foundations, as usual, for social upheaval, revolution and struggle. The French Revolution

was built on this.

Louis XV got rid of Law. He was exiled, poverty-stricken to Venice where he died in 1729,

penniless. Luckily he believed that money wasn’t wealth, just a means of exchange. But,

isn’t that the way. Choose the scapegoat, exile them and then carry on regardless. We are

still doing it.

 3.       South Sea Company

1720

The South Sea Company was a joint-stock company that was founded just a decade before it

went broke bringing with it the economy of the UK.  However, its intention was to reduce

British national debt originally. The founders were found guilty of insider trading and they

brought about the collapse of the shares of the company and ruined the national economy

even further. They knew when the debt was going to be consolidated, and so they bought

that debt in advance to make huge profits. It was bribes galore as the MPs were given back-

handers to make sure Acts of Parliament went through to support their scheming. A modern-

day insider trading scandal.

We are still doing it today. Preet Bharara, New York US Attorney, has charged 72 people over

the past three years with insider trading. Some of the most famous cases to date are the

Enron, Jeffrey Skilling case, for instance. Skilling (former President of Enron) was convicted in

2006 of insider trading (as well as 18 other charges). He ended up getting sentenced to 24

years behind bars and fined the hefty sum of $45 million. He appealed to the Supreme Court

in 2010 and it went back to the appeals court for review. Or, in May 2011, Raj Rajaratnam

was convicted of having tried to use insider information concerning the Galleon Group. It

could have brought in the tidy sum of $20 million had he not been arrested, causing the

subsequent falling apart of the group.

The South Sea Company saw the value of its shares rise rapidly over a very short period of

time, mainly due to rumors, once again. In January 1720 the price rose to £128. A month

later, it was worth £175 per share. By March, it stood at £330. By the end of the year a share

was worth more than £1, 000. People were scrambling to get hold of the shares and make

money, believing that the price would rise endlessly. Politicians were in cahoots with the

founders of the company. They were ‘sold’ shares (that they never actually paid for) and

then they waited until the price increased and ‘sold’ them back for a profit.

The company benefited from the legitimacy of the prestigious names that were investing in

the company. It was all about image, even back then. The bubble came to an end as people

became aware of what was taking place. The stocks fell to £150 and ruined thousands. It

was put forward in the House of Commons that the bankers should be tied up in sacks with

snakes and thrown into the Thames. It never happened (obviously), but the estates of the

founders were confiscated and used to pay for relief funds of the victims. Ministers were

prosecuted and the Chancellor of the Exchequer of Great Britain (John Aislabie) ended up in

prison.

4.       Bengal Bubble

1769

The Great East Indian Crash took place in 1769 as a result of overvaluation of stock of the

East India Company. This happened over a twelve year period between 1757 and 1769 due

to attacks on the company’s holdings in Bengal, India and the famine of 1770. All of this was

coupled with the collapse of the textile industry in the province of Bengal.

As a result stocks of the British East India Company fell from £276 in December 1768 to

£122 in 1784. That’s a fall of 55% in the value of the stocks. There is even a Facebook page

you can like (if the fancy takes you). It turns out there are pages to like most things these

days, even events that turned out to be catastrophic for those that invested in them in the

18th century.

Back then the answer of the British government was to bail out the East India Company, but

that just acted as a catalyst to the company’s demise and subsequent disappearance as

people lost confidence. Makes you think if today’s bail-out techniques will do the same.

 5.       Panic of 1796-1797

1796

This was a series of downswings in the credit markets that caused recessions in the UK and

the United States. There was a land-speculation bubble that exploded in the faces of the

investors and the banking system in 1796 and as a result the Bank of England refused to

maintain specie payments (the redemption of US paper money in coinage (usually gold)).

The Bank of England was afraid that they were going to go bust and have insolvency

problems when there were too many demands by account holders to withdraw cash

deposits. The knock-on effect for the US and the UK was disflationary repercussions on the

financial markets.

The Panic of 1796-1797 revealed just how much the United States of America was

dependent on Europe for trade. It pointed to just how much interconnectedness there was,

even before globalization was thought up. Things haven’t changed much. It was thanks to

this panic that the Bankruptcy Act of 800 was established to form a framework whereby

debtors and creditors should reach a settlement for their common good. There’s always

something positive that comes out of the panics and bubble bursts, some might say.

These are just a few of the bubbles that burst in the 17th and the 18th centuries. They are

telling in that they reveal that we haven’t actually moved a long way from where we were

back then. We are still haunted by modern-day insider-dealing scandals; we still exile the

ones to ‘blame’ in the hope that getting rid of them will erase the page so that we can start

again and the dirty deeds that made people rich in the high echelons of the company will be

soon forgotten. We still over-market and exaggerate, oversell and inflate prices. Then

suddenly, the prices drop as people pull out and the government tries to shore up the

bleeding wound with Elastoplast and first-aid bandages. But when the blood is pumping out

and there’s a hemorrhage, sometimes, that doesn’t do anything at all. Or, at least nothing in

the long term.

In the next installment, we’ll take a look at the historical bubbles that burst in the

19th century.

Stock-Market Crashes Through the Ages – Part II – 19th CenturyBy tothetick on June 13, 2013 in Bonds, Economic News Analysis, Featured, Forex, Stocks with 0 Comments

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Stock-market crashes saw the light of day more and more as the world became industrialized. The 19th century saw a

rapid increase in their numbers.

There’s money to be had at any time, whether the market is going up or down. But, it’s avoiding the downs and

pulling out before the things start to go haywire that is important. Or, at least, investing in what’s good and what’s

going to take a hike. But, how can you believe what people have to say? The only ones who are any good at selling a

rise when in actually fact it’s a fall coming are the marketing gurus themselves. They are more common than we

might think. It’s no modern invention either. We are past masters of selling what doesn’t exist. Selling make-believe is

what makes people happy, until it takes a turn for the worse.

Some might say that predicting the downturn in the market can be done. You can develop algorithms and have

sophisticated math, analyzing stock movements in multiple countries at the same time with split-second data churning

out. You can use whacky ways to predict what’s happening if you can’t tot up the equations and come to a

decision, like seeing how many toothbrushes are sold in the economy (as people tend to stop going to the dentist

when there is a crisis). Although they are more likely to reveal what’s actually taking place, than what is going to

happen just round the next corner.

Use as much economic forecasting as you like but the market won’t react always how you expect it to. We all know

that. If it were an exact science, nobody would be poor. If it were a science at all, we would all be damn wealthy,

wouldn’t we?

But, looking at what happened in the past sometimes helps us see what we are still doing today. We didn’t invent

everything and we might think that we are high-flyers. But, somebody’s been there, done it and seen it all before. The

19th century was the industrialized world at its first beginnings. Trade, transport, better communication and money-

making were high up on the agenda.

Here are the best (or the worst, depending on which side of the fence you are sitting) examples of stock-market

crashes of the 19th century from the mammoth list that could be mentioned. The majority took place in the USA, which

was at the heart of industrialized prowess at the time; a place where money could be made hand over fist, but where

it could be lost twice as quickly. The John-Dos-Pasos world of disillusion and hope of classes in the race to become

rich and somebody, a household name:

Panic of 1819

If you were told that the Panic of 1819 was due to the issuing of paper money and over-speculation of land, then you

might have the impression that we are back in 2008-2012 and the financial crisis and the quantitative easing methods

of today. But, no! The Panic of 1819 was due to the fact that Britain and France had been at war for decades, even

centuries. They both had a need for US-produced goods and in particular agricultural products were very much in

demand. Thanks to the warring between these two countries, the United States was able to become a major supplier

and it prospered. However, when war ended things took a dive for the US. Europe was no longer in need and there

was a bumper crop in 1817 in Europe leaving the USA in the lurch.

Americans had been buying up land at rates that had never been seen so as to produce in what looked like a

booming industry.

In 1815, 1 million acres of land were sold off to the people.

By 1819 that had increased to 3.5 million acres.

All of it, of course, was purchased via loans. As things took a nose-dive, the people were unable to pay back their

loans. Sounds like the credit crunch and the sub-prime crisis.

You would have thought that we would have learnt our lesson back then, wouldn’t you? But, no, we did the same

thing: lending to people in times of economic boom, even to those that are going to be unable to pay it all back.  The

banks ended up demanding immediate repayment so they didn’t end up losing out. Sound familiar?

Prices of agricultural products were plummeting while the plantation owners were over-producing due to having

bought up too much land.

Land prices fell and brought the economy down as the banks called in those loans.

Bank credit was restricted, loans were cancelled and the Bank of the United States started printing money to deal

with the lack of funds.

The printing presses went into action and the rest is history. Almost exactly what has happened today, isn’t it? Didn’t

the people who decide study the Panic of 1819?

It was all down to a chain of events, the war between two countries, the reliance on another and suddenly when they

are no longer at war they do a runner leaving the country that helped them out to do their own thing. But, isn’t all fair

in love and war?

Perhaps the only good thing that came out of the panic was the understanding that there had to be some sort of poor

relief for the people that were left destitute and the US education system was also created.

Panic of 1837

It was the USA’s trading relations with Great Britain that caused the panic of 1837 to take place in the US once again.

Those Brits have a lot to answer for, I hear you say. They were economic leaders in the world (back then) and what

they did had a great effect on what the rest of the world either did or what happened to others. Secondly, there were

few trade barriers and that meant that the effects of liberal economics with little restraint based purely on supply and

demand meant that changes were made almost immediately and put into effect.

The story goes like this.

Britain was suffering from a slump in its agricultural production and ended up relying heavily on the USA, especially in

terms of cotton and crops.

The US agricultural industry was booming and so British investors placed their money where they were going to get

the best returns.

However, they didn’t bank on the fact that the Bank of England would increase interest rates (from 3% to 5%), in an

attempt to replenish their diminishing reserves.

The money that had been invested in the US by the British investors suddenly flowed back into the coffers of the

Bank of England.

The US was left only with the choice to do exactly the self-same thing in a copy-cat scenario.

A bit like bailing out the banks in the financial crisis. You start one and then everybody has to do it, don’t they? Or if

you start baling out one country suffering from financial instability and the consequences of rising debt, then you can

never let up and you can’t say no to the others. Then you are really done. Isn’t that where we are at now?

Bank of England

The US raised interest rates and there were restrictive credit policies. Money was in short supply and printing presses

started up again to inject money into the economy. Politicians and Bank of the United States’ officials refused to make

public addresses and people buried their heads in the sand thinking it would blow over.

Cotton prices shot through the roof and so did land prices. The effect was almost the same as in the 1819 panic: land

prices and inflation in general. The result was catastrophic for the USA and ended up going well into the mid-1840s.

Panic of 1857

The 1857 panic is commonly known as the world’s first global financial crisis. By the 1850s, travel had gone through

great changes. Railroads were already at their height of use and transport in trade was faster and better than it had

ever been before.

Once again, it started in Britain at the time. Looks like Britain was the USA of yesterday, the financial-crisis instigator

of the world at the time. Tough to carry that burden on your shoulders, but one saving grace is that people forget who,

why and when very quickly just as soon as the next crisis comes along. Otherwise we wouldn’t be repeating history

over and over, would we?

The British government in 1857 did (and succeeded) everything in their power to get around the Peel Banking Act of

1844, requiring that gold and silver back up the money that was in circulation.

The panic that ensued in Great Britain spread rapidly to the US and it was the Ohio Life Insurance and Trust

Company that caused the triggering of the panic in 1857 in the US.

It was all down to fraudulent activities of the bank’s executives that there was a bank-run in 1857.

The bank suspended activities after incurring losses of $7 million.

They had lent too much money to railroads in the conquest of the west.

However, it was in 1857 that the flow of people to the west had considerably slowed down.

They had over-lent to railroad companies and they didn’t have enough gold or silver to back it up, just like in Britain.

The value of land fell, the railroad securities disappeared.

The banks went into meltdown.

Once again, the banking system had lent too much in times of economic prosperity, and they didn’t have enough to

back it up. The railroads also went into meltdown and so did the farmers. Land prices depreciated and crops became

almost worthless (grain hit the floor at $0.80 a bushel, spiraling from the dizzy heights of $2.19).

Railroads in the USA

It was the Panic of 1857 that partly resulted in the American Civil War a few years later. The north had suffered

immensely from the drop in prices. The south had not suffered quite so much.  The south became stronger in the

relationship between the two parts of the USA, but tensions grew to the widening disparity between the wealth and

the problem of slavery that was central to their dispute.

Panic of 1873

This time it was another world recession that became the first one that was known as the ‘Great Depression’ until an

even greater one came along in the 1929 and then it was relegated to the back-burner, forgotten. It was a depression

that was triggered by Germany this time and their decision to get rid of the silver standard. It put an end to Great

Britain’s hegemony in the world.

Bank reserves had been put under a great deal of strain from money that had been lost in the construction of railways

as well as due to speculative investments and property-sector losses that hit hard. The railways were the dot com

bubbles of the 1990s and 2000s. Massive investment, euphoria, then a pin prick, and it all deflated.

The German decision to stop using silver to mint coins resulted in a fall in prices in the USA, where most of the silver

was exported from at the time. Due to the fall in demand, the Coinage Act was passed and meant that the US used

the gold standard. Silver lost even more in price.

The Germans instigated the move away from liberal free-market policies towards ones that were more

conservative.

Otto Von Bismarck

Bismarck as Chancellor nationalized industries and even created the social security system to provide workers with

pensions so that they state wouldn’t have to pay for them at retirement age (which was later exported all around the

world, until it became too much for us to finance).

Conclusions

The panics happened every twenty years and then towards the end of the 19th century they accelerated closing the

gap between each panic as we became more industrialized, more dependent on travel, transport and communication

became faster and faster. There were other panics that occurred in 1884, then again in 1893 and 1896. Panic was

synonymous with the world that the 19th century had wafted in on the railroads that they were building. But, it wasn’t a

patch on what the 20th century had in store as the panics and crashes became more and more recurrent.

So, are there reasons why the stock markets created so many bubbles that bust in the faces of our 19 th-century

ancestors? That was probably because there was a major rise of the middle-class in the 19th century. It wasn’t just

the select very few that were from the higher echelons of society that were going into business. Making money, rather

than inheriting it was the order of the day for the first time in the 19th century. The Industrial Revolution had brought

entrepreneurship into the living rooms of the middle classes on a steam train. It had opened doors in communication,

transport and energy. There were opportunities to be had in every sector and there were at last more than just that

select few who were ready to make a buck.  There was also reduced interference by the state and the beginnings of

the forging of the system in which we live today. Risks were taken. Whether they were calculated risks or not is

entirely another matter? But, it was the 19th century when industrialization meant opportunity and yet still at the same

time a working class that was not adequately organized to defend itself or demand more than the entrepreneurs

allowed them to.

Thomas Edison

The list of entrepreneurs that stands witness to the 19th century’s success is endless. The Edisons and the

Carnegies, the Rockefellers and the Vanderbilts are still today almost as strong as household names, aren’t they?

Cornelius Vanderbilt

What reasons do you think could explain the stock-market crashes of the 19th

century?

Take a look at the Stock-Market Crashes Through the Ages – Part I – 17th and 18th centuries.

In the next installment, we’ll take a look at the historical bubbles that burst in the 20th century.

Stock-Market Crashes Through the Ages – Part III – Early 20th CenturyBy tothetick on June 18, 2013 in Bonds, Commodities, Economic News Analysis, Education, Featured, Stocks with

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The 20th century could be categorized as THE century when communications took off and we started living in each

other’s pockets. Lives had been ruined by war, trouble and strife. Wealth had been redistributed beyond belief. There

were no longer just a few that were making the profits, but there were growing classes of people that wanted

recognition.

They might not have got it until the second half of the 20th century, but the way things unraveled in the first half meant

that people were not prepared to sit back and let things go into the hands of the rich landlords and the factory owners.

Rights had been acquired and they were being demanded. Women, workers, whoever they were, everybody wanted

a piece of the cake. It wasn’t until the second half of the twentieth century that dabbling and buying shares, thinking

you could strike it lucky and make a million, was going to become part and parcel of most people’s lives. Maybe that’s

the whole problem. People betting on investments as if that was nothing more than a couple of whippets running

round the race track on a Saturday afternoon, bag of chips in one hand and a pint of ale in the other. Flat cap and

everything.

The markets don’t act like that. But, we allowed people to think that they could make a quick million bucks by

investing what they had hidden under the mattresses for decades. Why did they need to worry anyhow, social

security had been invented, we were looking after the destitute and not locking them behind the gates of Victorian

workhouses and mental asylums. There was a safety net that had been created in society by the advent of the

National Health Services (1948 in the UK) that we pride ourselves for inventing or the retirement schemes that we

say will make pensioners’ lives better (Dankeschön, Mr. Bismarck).

As time went on in the 19th century the number of stock-market crashes increased.

That number increased even more in the 20th century. Information was accessible. Telecommunication technology

was entering our lives as a daily piece of equipment. I could start to be absent and yet present at the same time. I

didn’t have to be literally somewhere physically; I could be there almost in person via the transmission of my voice or

an image. It was reserved for the elite at the start, but as the century progressed, it became more and more

democratized. Later in the century, it would be possible to be completely present, and yet physically absent and I

would be able to do it from the comfort of my own living room. Education was becoming more and more widespread.

Newspapers were being read even by those that had not been able to read in the previous century (total circulation

was at over 27 million in 1920 and households had papers delivered both in the morning and in the evening). Access

to information meant the learning of events almost in real-time.

Stock Markets: Interconnected

The 20th century saw an explosion in the number of stock market crashes. Here are a few of them. The ones that bit

us from behind as we scrambled out of the markets sometimes to be left without a cent. One thing about it all was

that the dream of the self-made man, the entrepreneur, the idea of striking it rich had really come into its own in this

century! This is just the first half of the 20th century!

1. Panic of 1901

We entered the 20th century with a panic. The turn of the century has always been equated with great change, either

good or bad. The Panic of 1901 was due to some extent to the fight for the control of the Northern Pacific Railway.

Stock Market: Edward Henry Harriman

The Northern Pacific was a transcontinental railway (1864-1970).

Edward Henry Harriman who was the Chairman of Union Pacific attempted at all costs to monopolize the railway

sector.

He attempted to buy stock en masse belonging to Northern Pacific Railway to take control of the company.

The NYSE was said to look more like a football field as the panic started and prices began to fall as people started to

sell in sheer panic.

The market crashed and brought down with it the majority of US railway companies (Burlington and Missouri Pacific,

for example).

The only one that was left still standing was the Northern Pacific. The run on their shares by Harriman had meant that

people were selling all other shares like they were going out of fashion and attempting to buy into Northern Pacific.

One company’s loss became another companies gain and Northern Pacific increased by 16.5 points.

The crash spread to other companies. It brought the country into recession and was the first stock-market crash of

the 20th century.

2. Panic of 1907

The Panic of 1907, is the Bankers’ Panic. The NYSE dropped by 50%. The reasons? Lack of confidence in the

market and retraction of market liquidity by NY banks. The banks had lent out too much money in an attempt to

purchase the United Copper Company and this caused loss of confidence and bank runs ensued.

The US had no central bank that would act as a lender of last resort at the time. President Andrew Jackson had let

the charter of the Second Bank of the United States lapse in 1836. Money supplies fluctuated only in line with

agricultural cycles. Money left NY in the autumn to purchase harvests and the only thing that made that money come

back was a raise in interest rates.

J.P. Morgan shored up the banks and bailed them out; otherwise there might have been an even worse situation.

There was an attempt to corner United Copper, by purchasing large quantities of the stock of the company in a bid to

be able to manipulate the price of copper afterwards.

Shares rose in the beginning from $39 to $52 per share. They reached $60 before they began to collapse.

Within just a few days, they ended up at $10.

J.P. Morgan had managed to shore up the banks for a while as they were suffering from lack of liquidity, but he was

unable to do so indefinitely. The bankers tried to call a press meeting to persuade the papers that they were

controlling everything. Even the city of New York needed $20 million otherwise it would go bankrupt.

Morgan said “if people will keep their money in the banks, everything will be all right”.

The banks were not willing to make loans (short-term) to brokers to carry out daily trading, worried that the stock

would fall even more. Prices fell as a consequence on October 24th 1907. The President of the NYSE requested that

the stock exchange be closed early to halt more losses. Closing the NYSE would mean even greater loss of

confidence. So, J. P. Morgan decided to call the banks to a meeting. He requested $25 million and it was raised in 10

minutes flat! Not bad, really! But, it didn’t stop the free-fall.

1907 caused the highest number of bankruptcies to that date in the US.

Production was estimated to have fallen by 11%.

Imports were down by 26%.

Even immigration dropped. The US was no longer the land of plenty (fall from 1.2 million immigrants to just ¾

of a million in one year).

Unemployment rose to over 8%, whereas it had been at under 3%.

3. Wall Street Crash 1929

Probably the most famous stock market crash of the entire history of the economy (apart from the one that we are

living right now). The Wall Street Crash is also known as Black Tuesday. Since this date we have used Black days

throughout our stock market crashes (Black Monday in 1987, or Black Wednesday in 1992, for example).

Just like in the period that preceded the stock-market crash of 2008, there was a time of wealth, success, making

money, sandwiched in between World War I and just before World War II. The roaring twenties. Innovation,

dynamism, liberation, freedom.

Motion pictures abounded, the automobile became commonplace, electricity entered the homes of the middle-

classes. Culture and lifestyles changed drastically. Everything became possible. Modernity had arrived. It’s strange

that the period that preceded the stock market crashes of the 21st century was also a time of great change. We had

invented and democratized communications to a point where we could carry it around in our pockets. We had

changed the way we accessed information and we had it at our finger tips like no other generation had had before via

Internet.

Speculation became the order of the day in 1929. The world investors were on a roll and it wasn’t going to end.

Money could be had and it was short-time financial gain that was important. Making money and making it fast. But,

even though we might not always apply the same knowledge today, what goes up must come down.

On March 25th 1929, it began with a mini-crash. This was only an omen of what was to come.

The National City Bank tried to shore up the losses by injecting $25 million into the market, stopping is descent into

hell. But, it was all temporary.

The USA was showing signs of waning economically. The steel market was on the slippery slope and construction

wasn’t anything more than just sluggish. The peak had been reached.

There were already 20 million cars on the roads, for example in 1929 in the US. Automakers sold 4.5 million cars in

the US market alone in that year before the crash.

General Motors had a net profit of $248 million. But, the peak had been reached, 1929 saw a dramatic drop. It was

only selling 1/3 of the cars it had been selling prior to the crash on the domestic market. It took ten years to

come back to the same level of profit and the number of car sales as in the period before the crash of 1929.

Although, it has to be said, even then, it was the shareholders that counted. The shareholders got dividends every

single year from GM between 1929 and 1939.

The roaring twenties had roared on from 1920 until 1929. The Dow Jones Industrial Average had been multiplied by

ten. Some even said that it was a “permanently high plateau” in September 1929. Very few are able to predict what

the market will do, but nobody today, at least, would suggest for a second that we are going to be on a permanent

high. That lesson has been heard loud and clear. The Dow jones reached its peak at 38.17 on September 3rd 1929.

The London Stock Exchanged collapsed when a British investor (Clarence Hatry) became the most hated man in the

UK when he was jailed for fraud. Hatry was a London insurance clerk that had amassed immense wealth by

profiteering during WWI. He was about to merge his companies into a $40-million affair called the United Steel

Companies. But, the Stock Exchange Committee discovered that he had been borrowing ($1 million) without anything

to back it up.

It was on October 24th 1929 that Black Thursday occurred. The NYSE plummeted 11%. Bankers managed to stop

the landslide and purchase large quantities of stock well above the market price in blue-chip companies. It halted the

free-fall. But, temporarily. The NYSE closed at -6.38 points.

The newspapers managed to report the news and Monday 28th became known as Black Monday.

Black Monday saw the DJIA spiral out of control. The US market lost 12.8% as trading opened up on the NYSE. It

plummeted 38.33 points and closed at 260.64.

Black Tuesday, October 29th had 16 million shares being traded. The DJIA fell 30.57 points, to just 23.07. It lost

11.7%. In three days of trading the DJIA had lost over 30%.

What went horribly wrong? Speculation and certainly the belief that things would never end. Brokers were lending 2/3

of the face value of stocks that they were purchasing and that meant that in 1929 there was more money that was on

loan than the entire currency in circulation in the USA ($8.5 billion). That smacks of something familiar when we

think about the sub-prime crisis. The belief that housing prices could never fall and that we would always be on an

upper, lending money left, right and center.

One other thing that we learned is that our worlds were interconnected. Falls in London, Tokyo and New York

happened at the speed of light in 1929. What one did the other followed suit with. Only 16% of the US population

had money invested in the stock market in 1929, but it was probably those that had the companies that employed the

people that worked. The knock-on effect was enormous.

But people like Joseph Schumpeter and Nikolai Kondratieff believed through their economic-cycle theories looking

at the way the market reacted that the 1929 crash was just acceleration in the cycle and it enabled moving towards

the next one.

Stock Market: Nikolai Kondratieff

Stock Market: Joseph Schumpeter

 

4. Recession 1937

Spring 1937 saw the US economy get back on its feet and the levels of economic activity were similar to pre-1929

ones. Unemployment was still relatively high, but that was nothing compared to the vertiginous heights of 1933

(25%!). In 1937 things went haywire for just over a year causing an economic recession in the US, with a knock-on

effect in the rest of the world.

Unemployment was at 14.3% in 1937. It increased to 19%.

Manufacturing output fell by 37%.

Spending decreased and incomes fell by 15%.

GDP fell by 11%.

Economists fail to agree on the reasons (nothing surprising) as to the economic recession of 1937. Depends where

you stand. If you are a Keynesian, you will believe that federal spending cuts brought about the recession, coupled

with increased taxation. If you are a Milton-Friedman  man then it’s the money supply and the Federal Reserve’s

tightening of it that is the instigator.

The 1937 recession was called the ‘Recession within the Depression’.

Conclusions

Some might say that the benefits of what we have gained over the past century are far better than the relatively few

times that we had to wade through the nightmares on Wall Street and the Stock Market crashes that hit us full in the

face at times.

Some might say that it was worth it as the market generated the wealth on which we prospered in the 20 th century.

But, they also resulted in depression, recessions and slumps. Recessions that brought about the rise to power of

some of the worst dictators that the world had seen.

Recessions that brought about a fight for greed and a closing in upon ourselves in protectionist fear. But, the 1st half

the of the century was nothing compared to the stock market crashes that were waiting in store for us once we would

become really industrially connected and inter-connected. When we went global, when we reduced our barriers,

when we travelled from point A to point B at supersonic speed, and when one push of a fat finger on a keyboard sent

millions across the other side of the planet.

Stock markets were going to run in the second half of the 20th century at supersonic, virtual speed. We would enter

the Big-Bang world of deregulation of the financial markets, abolishing fixed commission charges. But, behind the

big bang was a black hole…