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The Stock Market Crash of 1929: A Review Article

Published online by Cambridge University Press:  13 December 2011

Maury Klein
Maury Klein
Affiliation:
Maury Klein is professor of history at theUniversity of Rhode Island.
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Abstract

The stock market crash of 1929, a major trauma that still haunts the national memory, has received surprisingly little attention from scholars in seventy years and has produced even less agreement as to its causes and consequences. This review of the literature suggests that the disagreements and debates over the crash reveal as much about what can and cannot be known for certain about the event as they do about potential answers to the mysteries of the crash.

Type
Articles
Information
Business History Review , Volume 75 , Issue 2 , Summer 2001 , pp. 325 - 351
Copyright
Copyright © The President and Fellows of Harvard College 2001

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References

1 Throughout this article, all figures for the Dow are taken from Pierce, Phyllis S., ed., The Dow Jones Averages 1885–1995 (Chicago, 1996)Google Scholar, which has no page numbers. The Times figures are drawn from the newspaper itself; the combined average included twenty-five industrials and twenty-five railroads.

2 The New York Stock Exchange's board of governors shortened daily trading sessions from five to three hours and eliminated the Saturday short session to allow brokerages and others to catch up on the immense backlog of paperwork generated by the crash. Normal trading hours and days resumed on November 26. The Exchange also closed on Tuesday, November 5, for election day.

3 Kennedy, David M., Freedom from Fear: The American People in Depression and War, 1929–1945 (New York, 1999), 39.Google Scholar

4 Willis, H. Parker, “Who Caused the Panic of 1929?” North American Review 229 (Feb. 1930), 177Google Scholar. Emphasis is in the original. Willis was editor of the New York Journal of Commerce. For some other early articles, see Albert Atwood, “The Appetite for Stock,” Saturday Evening Post (April 19, 1930), and “The Future of Stock Speculation,” Saturday Evening Post (Sept. 13, 1930); Howard Florance, “What Really Happened?” Review of Reviews (Jan. 1930); John T. Flynn, “The Birthday of the Slump,” Forum (Nov. 1930); Paul W. Garrett, “The Jazz Age in Finance,” North American Review (Feb. 1930); Edwin Lefevre, “A Trip on the Magic Carpet,” Saturday Evening Post (Feb. 1, 1930), and “The Long and the Short of It,” Saturday Evening Post (Dec. 13, 1930); Louis T. McFadden, “Convalescent Finance,” Saturday Evening Post (Feb. 15, 1930); Will Payne, “Deflation,” Saturday Evening Post (May 3, 1930); Burton Rascoe, “The Grim Anniversary,” New Republic (Oct. 29, 1930); George E. Roberts, “Lessons of the Stock Panic,” Outlook (Jan. 8, 1930); and Max Winkler, “Paying the Piper,” North American Review (Jan. 1930).

5 For more detail and differing views on these events and the role of the Federal Reserve Board during the 1920s, see the relevant chapters in the following books: Chandler, Lester V., Benjamin Strong: Central Banker (Washington. D.C., 1958)Google Scholar; Friedman, Milton and Schwartz, Anna Jacobson, A Monetary History of the United States, 1867–1960 (Princeton, 1963)Google Scholar; and Wicker, Elmus R., Federal Reserve Monetary Policy, 1917–1933 (New York, 1966).Google Scholar

6 Chandler, Benjamin Strong, 438. Miller made the statement in 1931.

7 Fisher, Irving, The Stock Market Crash—and After (New York, 1930).Google Scholar

8 For a sketch of Fisher, see Fisher, Irving Norton, My Father Irving Fisher (New York, 1956)Google Scholar. Fisher is most often mocked for his famous statement, made on the eve of the crash: “Stock prices have reached what looks like a permanently high plateau.” But the only source given for that remark is Angly, Edward, Oh Yeah? (New York, 1931), 38Google Scholar, a satirical volume “Compiled from Newspapers and Public Records.” In most cases, Angly gave at least the source of the statement, but for this one he did not.

9 Fisher, The Stock Market Crash—and After, 31–55. The potential causes included the wholesale liquidation of foreign holdings driven by falling prices on the British, French, and German exchanges; the use and abuse of unregulated investment companies by major commercial banks; the overvaluation of common stock; the onset of a business recession that autumn; the federal tax on capital gains; the refusal of the Massachusetts Public Service Commission to allow a split in the Edison Company of Boston's stock; the high level of brokers' loans; the enormous sums put into the call loan market by corporations and individuals; poor margin calculations; fear of the impending Smoot-Hawley tariff; the glut of undigested securities in the market, most of them for investment trusts; the withdrawal of gold from New York; and the “boom” or New Era enthusiasm that led investors to believe prices could only go higher despite warning signs to the contrary.

10 Ibid., 5–6, 65–197, 233–7. “If it can be shown that business was in an extraordinarily healthy condition … during these years and up to the present,” Fisher asserted, “it will be seen that the new plateau of stock prices which remains after the panic higher than all previous plateaus, was justified, even though the peak of September, 1929, rose too high.”

11 Ibid., 226–31. Canada and Argentina imposed gold embargoes. For a brief account of the Hatry failure, see Patterson, Robert T., The Great Boom and Panic: 1921–1929 (Chicago, 1965), 92–1Google Scholar. For Fisher's background as a monetary theorist, see the profile of him in Garraty, John A. and Carnes, Mark C., eds., American National Biography (New York, 1999), vol. 8: 12–15.Google Scholar

12 Noyes, Alexander Dana, The Market Place: Reminiscences of a Financial Editor (Boston, 1938), 337, 351.Google Scholar For a brief and inadequate sketch of Noyes, see his obituary in the New York Times, April 23, 1945. Before coming to the Times, he had long held the same position with the New York Evening Post. A close reading of the Times for 1928–29 confirms that Noyes did consistently warn against what he considered the illusions of his era.

13 Ibid., 315–17, 358. In 1927 alone, Noyes noted, the American market subscribed to loans from more than twenty governments as well as a hundred company loans offered by firms in seventeen foreign countries.

14 Ibid., 323–4, 343; Commercial and Financial Chronicle, March 9, 1929, 1444. “In aeronautics the public is inclined to look upon the art of rising into the air as the sole accomplishment,” Warburg noted. “The layman is apt to overlook the fact that the mastery of the art of descending is of equal if not greater importance.”

15 Ibid., 325–7.

16 Allen, Frederick Lewis, Only Yesterday: An Informal History of the 1920's (New York, 1931)Google Scholar; Galbraith, John Kenneth, The Great Crash (Boston, 1955)Google Scholar. I do not use the term “popular literature” in any pejorative sense but rather as a designation for works that reached a broad audience and often, as in the case of these two books, do not include thorough documentation. Allen has no notes but includes an appendix on sources; Galbraith provides some sparse notes and a brief note on sources.

17 Allen's depiction of the social history of the 1920s became the template for that era much as did Matthew Josephson's portrait of the Robber Barons three years later. Unlike Josephson's, however, Allen's work is remarkable for how much he got right about the era and its people. Indeed, Allen published a far more illuminating portrait of the business and Wall Street titans only a year after Josephson's book appeared. See Allen, Frederick Lewis, The Lords of Creation (New York, 1935).Google Scholar

18 Allen, Only Yesterday, 73. These citations come from the 1964 paperback edition of the work.

19 See “Stock Exchange Practices,” Report of the Committee on Banking and Currency, 73rd Cong., 2nd Sess., No. 1455 (Washington, 1934).Google Scholar

20 Allen, The Lords of Creation, 347–9, 361–3.

21 Galbraith, Great Crash, 83, 93–5.

22 Ibid., 113.

23 Ibid., xx, 173–7. “Early in 1928,” Galbraith wrote, “the nature of the boom changed. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.” Ibid., 16.

24 Friedman and Schwartz, Monetary History, 299–419. Arthur M. Schlesinger Jr. provided a brief account in the first volume of his Roosevelt trilogy in 1957. Schlesinger, Arthur M. Jr., The Crisis of the Old Order (Boston, 1957), 155–7.Google Scholar

25 Patterson, The Great Boom and Panic: 1921–1929, vii, 215. Although Patterson's work contained footnotes and a bibliography, it was, like Galbraith's, clearly intended for a general audience.

26 Ibid., 215–23.

27 Ibid., 224–6.

28 Hoover, Herbert, The Memoirs of Herbert Hoover—The Great Depression, 1929–1941 (New York, 1941), 5–28.Google Scholar

29 Sobel, Robert, The Great Bull Market: Wall Street in the 1920s (New York, 1968)Google Scholar. See also his Panic on Wall Street: A History of America's Financial Disasters (New York, 1968), 350–91Google Scholar, and The Big Board (New York, 1965), 262–92Google Scholar. Sobel's works usually contain a minimal scholarly apparatus of notes and bibliography.

30 Galbraith, Great Crash, 2; Sobel, Panic on Wall Street, 351. Sobel did not name any of the economists he had in mind.

31 Sobel, Great Bull Market, 9–12; Gerald Sirkin, “The Stock Market of 1929 Revisited: A Note,” Business History Review (Summer 1975), 223–31; Kindleberger, Charles P., The World in Depression, 1929–1939 (Berkeley, Calif., 1986), 96.Google Scholar This is a revised and enlarged version of Kindleberger's 1973 book.

32 Schachtman, Tom, The Day America Crashed (New York, 1979)Google Scholar; Thomas, Gordon and Morgan-Witts, Max, The Day the Bubble Burst (New York, 1979)Google Scholar. Schachtman's work has some skimpy documentation and a brief note on the sources. Thomas and Morgan-Witts have fuller source listings but utilize what may be the most frustrating system of documentation ever devised: a general list of sources used for each chapter that makes it all but impossible to trace a given quotation or event to its proper source. The crash also appeared in novels and plays—William Inge's “Splendor in the Grass” being one example—but a compilation of these examples would take the paper too far afield.

33 Klingaman, William, 1929: The Year of the Great Crash (New York, 1989).Google Scholar Schachtman was a filmmaker, Thomas and Morgan-Witts journalists who specialized in books about disasters. Klingaman had earlier published books dealing with 1919 and 1941. His work provides fuller notes and a more detailed bibliography than the earlier works but is clearly intended for a popular audience.

34 Wigmore, Barrie A., The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929–1933 (Westport, Conn., 1985), xv–xvi.Google Scholar Wigmore noted that most books had “succumbed to the drama of the event and have concentrated on hyperbole, extreme market changes, and personalities.”

35 Ibid., 26–31, 529–30. The low return on equity by most of the highest-priced stocks, Wigmore argued, reflected the “incongruity between stock prices and business reality.”

36 Bierman, Harold Jr., The Great Myths of 1929 and the Lessons to be Learned (Westport, Conn., 1991), 5–68, 174–5, 186Google Scholar, and The Causes of the 1929 Stock Market Crash: A Speculative Orgy or a New Era? (Westport, Conn., 1998)Google Scholar, passim. Both books feature a rather bizarre approach and organization, using snippets of information that contain some serious errors of contextual omission as well as a failure to engage previous work on the subject except in a highly selective manner.

37 White, Eugene N., “When the Ticker Ran Late: The Stock Market Boom and Crash of 1929,” in White, Eugene N., ed., Crashes and Panics: The Lessons from History (Homewood, Ill., 1990), 143–5.Google Scholar On the debate over whether or not there was a bubble, see also J. Bradford DeLong and Andrei Schleifer, “The Stock Market Bubble of 1929: Evidence from Closedend Mutual Funds,” Journal of Economic History (Sept. 1991), 675–700; Peter Rappoport and Eugene N. White, “Was There a Bubble in the 1929 Stock Market?” Journal of Economic History (Sept. 1993), 549–74; and Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited, “Journal of Economic Perspectives (Spring 1990), 67–83.

38 White, “When the Ticker Ran Late,” 146–58. Dice had in August 1929 published a book insisting that the “new levels of prices in the stock market were the product of economic fundamentals.” Dice, Charles Amos, New Levels in the Stock Market (New York, 1929).Google Scholar

39 White, “When the Ticker Ran Late,” 158–70.

40 Ibid., 170–80. The contemporary explanations include the issuing of large quantities of new stock, the Boston Edison decision, apprehension over the pending Smoot-Hawley tariff bill, the Hatry failure, and the credit situation. In a later article, White suggested that the tariff may have been something of a factor. See Rappoport and White, “Was There a Bubble,” 570.

41 Shiller, Robert J., Irrational Exuberance (Princeton, N.J., 2000), xii, 3, 7, 82–8.Google Scholar Greenspan used the memorable phrase in a speech given on December 5, 1996.

42 Two examples (ibid., 222–4) suffice to indicate the depth and quality of historical material in the book. At one point Shiller, describes the famous bankers' pool during the crisis as being set up by J. P. Morgan and John D. Rockefeller. Jack Morgan was abroad at the time, and Rockefeller had nothing to do with the pool, which was organized by Thomas Lamont of the House of Morgan. See Chernow, Ron, The House of Morgan (New York, 1990), 315–16.Google Scholar Shiller also states that the Fed raised the rediscount rate from 5 percent to 6 percent on February 14, 1929. In fact, the rate was not raised. The New York Federal Reserve Bank voted to raise the rate but was overruled by the Federal Reserve Board in Washington, which also vetoed nine more attempts. The increase to 6 percent was not approved until August 9, 1929. See Friedman and Schwartz, Monetary History, 258–64.

43 Jordan, Virgil, “The Era of Mad Illusions,” North American Review, 229 (Jan. 1930), 55.Google Scholar Shiller, in a 1984 article, pointed to the influence of extraneous fads and fashions on stock prices and to social psychology as a useful tool in explaining price movements. See Shiller, Robert J., “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, 2 (1984), 457–510.CrossRefGoogle Scholar

44 Jordan, “The Era of Mad Illusions,” 55.

45 “In American economic history,” noted Bernstein, Michael A., “there is no greater puzzle than the persistent failure of investment activity during the depression of the 1930s to generate a full recovery.” The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939 (New York, 1987), 1.CrossRefGoogle Scholar The first twenty pages of this work provide a useful summary of three alternative approaches to solving this mystery.

46 Fisher, Stock Market Crash—And After, 63, 192, 269; New York Times, April 23, 1945; Fisher, My Father Irving Fisher, 264; American National Biography, 8:14–15; Time, Jan. 20, 1930, 38; Eichengreen, Barry, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York, 1992), 24.Google Scholar “There is no little irony,” wrote Eichengreen, “in the fact that inflation was the dominant fear in the depths of the Great Depression, when deflation was the real and present danger.”

47 Noyes, Market Place, 337, 351. Noyes recognized that no one had expected the sequel: “The crushing severity of the business reaction which ensued … was not predicted, even in October 1929; it created a sense of bewilderment, almost credulity.”

48 Allen, Only Yesterday, 281.

49 Ibid., 283–5.

50 Galbraith, Great Crash, 177–92. These pages contain explanation of the five factors.

51 Ibid., 40, 145, 188–90. Wicker, Federal Reserve Monetary Policy, 136, called Galbraith's account “seriously misleading.”

52 Sobel, Great Bull Market, 9–10, 147, 150–2; Sobel, Panic on Wall Street, 390–1. As an example of how the public memory sometimes made wrong connections, Sobel issued this reminder to readers: “Contrary to popular belief today, the banks remained solvent during the crash; the wave of liquidations would not take place for another year.” In another work, he called the first three months of 1930 “a period of lost opportunities.”

53 Wigmore, , Crash and Its Aftermath, xvi, 529–51.Google Scholar In these latter pages, Wigmore itemizes the key factors that deepened the depression.

54 Kindleberger, World in Depression, 1–5. The same debate dominates discussion in Brunner, Karl, ed., The Great Depression Revisited (The Hague, 1981).CrossRefGoogle Scholar

55 Kindleberger, World in Depression, 4; Friedman and Schwartz, Monetary History, 300, 307. Kindleberger repeated this view in a later work. See Kindleberger, Charles P., Manias, Panics, and Crashes: A History of Financial Crises (New York, 2000), 10, 24.Google Scholar This is the fourth edition of a work originally published in 1978.

56 Temin, Peter, Did Monetary Forces Cause the Great Depression? (New York, 1976), 7–13.Google Scholar Of Friedman and Schwartz's argument, Temin says, “Their narrative is long and complex, but it offers far less support for these assertions than appears at first. In fact, it assumes the conclusion and … does not test it or prove it at all.” Ibid., 15–16. For early examples of the spending hypothesis, see Ibid., 31–53.

57 Ibid., 74.

58 Ibid., 75–9.

59 Ibid., 170–2. Depressed agricultural prices added another deflating element, though Temin doubted that they played a major role.

60 Ibid., 137, 172–3. According to Temin, the data suggested that demand for money fell more rapidly than the supply during 1930 and most of 1931.

61 Ibid., 173–8.

62 Kindleberger, World in Depression, 114, 116; Kindleberger, Manias, Panics, and Crashes, 67. In the latter citation, Kindleberger added that “this is an old view, held by many economists prior to 1940, that has unaccountably slipped into disrepute during the Keynesian revolution and the monetarist counterrevolution.”

63 Wigmore, Crash and Its Aftermath, 551; Eichengreen, Golden Fetters, 14; Mayer, Thomas, “Consumption in the Great Depression,” Journal of Political Economy, 86 (1978), 139–45CrossRefGoogle Scholar, and “Money and the Great Depression; A Critique of Professor Temin's Thesis,” Explorations in Entrepreneurial History, 15 (1978), 127–45CrossRefGoogle Scholar.

64 Eichengreen, Golden Fetters, 4, 14–15. He added, “To some extent this is inevitable, for there is no consensus about the causes of the downturn in the United States.”

65 Romer, Christina D., “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics, 105 (August 1990), 598–623.CrossRefGoogle Scholar Reviewing a range of quantitative and qualitative evidence, Romer concluded that “stock price movements prolonged uncertainty in 1929 in a way that they did not in 1987. Whether this was the crucial difference between 1930 and 1988 is hard to say.”

66 Kennedy. Freedom from Fear, 59. Temin, Did Monetary Forces Cause the Great Depression?, 74, made this same point.

67 Ibid., 623.

68 Bernstein, Great Depression, 4–5.

69 Kindleberger, Manias, Panics, and Crashes, 13.

70 My own findings can be found in Rainbow's End: The Crash of 1929, forthcoming from Oxford University Press.

71 Quoted in Burner, David, Herbert Hoover: A Public Life (New York, 1979), 248.Google Scholar

72 Wall Street Journal, February 12, 1929.

73 Newsweek, December 18, 2000, 52, and January 8, 2001, 36.