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The Stock Market of 1929 Revisited: A Note

Published online by Cambridge University Press:  11 June 2012

Gerald Sirkin
Gerald Sirkin
Affiliation:
Professor of Economics, City College, City University of New York
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Abstract

Applying a formulation devised by Burton G. Malkiel to stock prices prior to the market crash of 1929, this study finds that descriptions of the period as a “speculative orgy” are misleading.

Type
Research Article
Information
Business History Review , Volume 49 , Issue 2 , Summer 1975 , pp. 223 - 231
Copyright
Copyright © The President and Fellows of Harvard College 1975

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References

1 See Galbraith, John Kenneth, The Great Crash: 1929 (Boston, 1961), xx, xxiGoogle Scholar.

2 Irving Fisher, “The Stock Market Panic in 1929,” American Statistical Association, Proceedings, March, 1930, Supplement, N.S. No. 169A, pp. 93-96; The Stock Market Crash — and After (New York, 1930Google Scholar).

3 Sobel, Robert, The Great Bull Market: Wall Street in the 1920's (New York, 1968Google Scholar); Chandler, Lester V., America's Greatest Depression, 1929-1941 (New York, 1970Google Scholar).

4 Leading text books still speak of a “wild ‘bull’ market” based only on self-induced speculative expectations (Samuelson, Paul A., Economics, 9th ed., New York, 1973, p. 74Google Scholar); and of “the speculative boom of 1928-29, when speculative activity reached heights completely out of touch with the actual profit possibilities or the general level of business activity.” (Bach, George L., Economics, Englewood Cliffs, New Jersey, 1974, p. 125Google Scholar.)

5 Fisher, “The Stock Market Panic in 1929,” 94.

6 Ibid., 96.

7 Malkiel, Bunton G., “Equity Yields, Growth, and the Structure of Share Prices,” American Economic Review, Vol. 53, No. 5 (December, 1963), 1004–1031Google Scholar.

8 The rate of return, r, consists of the dividend yield, dE/P, and the rate of growth of the price of the stock. With a fixed P/E, the growth rate of P will equal g, the growth rate of E. . (What if d = 0? d refers to a steady-state dividend ratio – one that will continue permanently. A stock that will never pay a dividend will presumably have a zero price, no matter what the growth of earnings.)

9 The increments to equity will be (l–d)E, assuming equity increases only by reinvestment of earnings, and the rate of growth of equity, Q, will be (l–d)E/Q.

By the assumption that E and Q grow at the same rate, (l–d)E/Q = g.

From footnote 8, p = d/r−g. Substituting for g, p = . When assumed values for r and E/Q are inserted, p can be calculated for every d.

10 Abramovitz, Moses and David, Paul A., “Reinterpreting Economic Growth: Parables and Realities,” American Economic Review, LXII, No. 2 (May, 1973), 428–439Google Scholar.

11 Fisher, The Stock Market Crash and After, 100. Fisher described the claim of a “new era” as “exaggerated,” but he believed that the “tempo” of invention, scientific research, and business activity had increased.