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Published Jul 23, 21
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On Monday and “Black Tuesday” the market continued to fall, closing down 36% from where it had been the previous mid-week. Simply put, there were far more sellers than buyers at given prices. Some big bankers that were propping up the market the previous Thursday started liquidating their own portfolios, even as they increased loans to stave off a run on cash.

Many investment trusts had invested in each other as well and used their customers’ money to buy back declining stock in their own companies. The $30 billion that evaporated the first week was 10x more than the entire federal budget and more than all of what the U.S. spent on WWI.



The New York Times predicted it would cause a downturn in consumer spending on luxury items, but not much else, underestimating its impact on middle and working-class America. Similar downturns had occurred before and most people thought this one would correct itself soon enough. Most companies were still sound and automakers marked the downturn by cutting prices, with Ford’s roadster dropping from $450 to $435.

Barron’s pointed out that stocks could now sell “ex-hopes and romance.” Smart money that was out of the market for the crash jumped back in to take advantage of seeming bargains. At the end of 1929, the Times announced its annual biggest story of the year: Richard Byrd’s solo flight over Antarctica.

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The market rebounded some by early 1930, and many commentators thought the hiccup would be no worse than the previous downturn in 1921. When some bankers and theologians met with President Hoover in June 1930 to discuss the recession, he proudly told them, “Gentleman, you’ve come 60 days too late.

The Dow Jones Industrial Average eventually plummeted 89% overall from its 1929 high, while the initial decline of October 1929 was just 25% — no more than a similar downturn in October 1987 that didn’t result in a major recession. Economist J.K. Galbraith later wrote of the seeming recovery and temporary market rebound that, “Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune.” Galbraith most famously quipped that “the function of economic forecasting is to make astrology look respectable.” The Wall Street Crash didn’t cause the Great Depression outright — only 16% of Americans were in the market — but it lowered consumer spending, caused panic that worsened an ongoing recession, reduced corporations’ assets and hurt their future prospects, and contributed to a banking crisis.

The crash reduced millions of people to paupers within a matter of months, both rich and middle-class. Remember Clarence Birdseye from the previous chapter? He sold his frozen packaged foods business and put all his money in stocks just before the crash. British politician Winston Churchill had most of his money in the market.

The drop-off in consumer spending/confidence lowered corporate earning power, as the market dropped through fits and starts until 1932. In addition to earnings, corporations rely on investments for money (shareholder equity) and the downturn meant they wouldn’t be able to generate as much cash in the future. Corporations invest in other corporations, too, so the crash further depleted their coffers.

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Banks that lent money to consumers for on-margin investing lost much of what they’d loaned. Banks had invested their own depositors’ money in the stock market, too, and, after the crash, they loaned less to corporations and individuals and small businesses. The spread between what banks pay customers in interest and what they earn with customers’ money through investments or higher-interest long-term loans is how they make a profit.

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In the early 1930s, anxious customers rushed to pull out their savings, but with most of their deposits invested or loaned out, banks didn’t have cash in their vaults corresponding to all their savings and checking accounts. Before the FDIC, the government didn’t insure customers’ accounts, so they lost all or most of their money if the bank went under.

Their tight-money policy was in step with other central banks in Britain and Europe that feared inflation and tied currencies to gold bullion (not coins, because bars are easier for governments and central banks to control). Britain reverted to its original pre-WWI gold-sterling (pound) standard, causing a gold shortage and a run on American gold.

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