Content area
Full text
-"Contemporary and historical accounts have failed to find even a smoking gun, let alone a culprit. "
Rappoport and White [1993, p. 570]
In Black Thursday, October 24, 1929, the stock market (NYSE) fell 9% during the day. The volume was approximately three times the normal daily volume for the first nine months of the year. There was a selling panic.
Many authors conclude that stock prices were too high in October 1929 and that a crash was inevitable (see Galbraith [1961], Kindleberger [1978], and Malkiel [1975]). Fisher [1930] and Bierman [1991 and 1998] argue that stock prices could be justified by fundamental economic events, but the conventional wisdom is that speculation was the cause of the overly high stock prices in 1929, and excessively high stock prices caused the crash.
But if the conventional view of history is not correct, and if U.S. stocks were not universally too high, then what did cause the Great Crash? This article reviews a small set of possible causes of the crash and reaches specific conclusions that may cast some light on the causes of this important event. While I do not prove that I know the exact specific causes of the crash, I present some reasonable evidence that supports the hypotheses.
THE 1929 MARKET
From 1922 to 1929, stocks rose in value by 218.7%. This is equivalent to an 18% annual growth rate in value for the seven years. From 1929 to 1932, stocks lost 73% of their value (different indexes measured at different times would give different measures of the increase and decrease). The price increases are large, but not beyond comprehension, given the industrial prosperity that had taken place. The price decreases taken to 1932 are consistent with the fact that by 1932 there was a worldwide depression.
After stating some necessary assumptions, I review the major stock market events of October 1929 and then focus in more detail on the factors leading to the crash.
The Assumptions
To limit the scope of this article, seven assumptions are made. These assumptions are defended in Bierman [1998].
It is assumed that:
1. The market did not fall just because it was too high; in fact, it is not obvious that it was too high.
2....