Now the Federal Reserve doesn’t seem to be tightening. People are saying today that stocks seem to be overvalued and they’re supported by extremely low interest rates credit was kind of cheap in the 1920s until the Federal Reserve tightened. One similarity is that the market has been going up basically since 2009, so it’s been going up for 10 years, and of course it went up most of the time in the 1920s. On the 90th anniversary of the 1929 Wall Street crash, what should we keep in mind specifically for 2019? I don’t think the verdict is in on that particular discussion yet. Other people say try to intervene and cool off the speculation before you have a major stock market crash or banking crisis. One view is they’re not smart enough to know there’s going to be trouble, so wait until the trouble happens and then react. Have any mistakes from that time been repeated?Ī big question that hasn’t been resolved by economics and financial regulators is just when should the regulators intervene to try to slow things down. The 1929 stock market crash didn’t help, but for some reason it’s come down to us that the stock market crash started the Depression when there’s a lot of evidence against that theory. There was a contagion when a few big banks failed in New York City, then other people got worried and drew their money out of banks. The Federal Reserve as a central bank can lend money and stop that run on a bank, but if a bank is insolvent, it’s just going to belly up. A bank fails when its assets become less than its liabilities and when people don’t repay their loans. We didn’t have deposit insurance back then, so when the banks shut down, people lost their money. The Great Depression really began when the banks started failing in 1930, and then there were more bank failures in 19, leading to a bank holiday when FDR became president in ’33.

Schwartz’s book A Monetary History of the United States, 1867–1960 pointed out there was no connection between the 1929 Wall Street crash and the Great Depression. So what was the real story? The banks extended too many bad loans the banks were speculating too much. People ignore the fact that the stock market had a strong recovery after the crash because it’s inconvenient for the story. If you go from Black Thursday to Good Friday 1930, which was in the middle of April, the stock market was back up to just about the same level. The crash occurred in late October and early November of 1929. This is part of every schoolkid’s learning in social studies, but financial historians don’t think the evidence is very strong for that. The great myth is that the stock market crash caused the Great Depression. What do people tend to get wrong about the 1929 stock market crash? But the economy then was used to having recessions every two or three years, so there’s no reason why that recession had to turn into a Great Depression. It was a prosperous decade, but there was an economic slowdown at the end of the decade, a recession that had started in the second half of 1929. I used to compare it to my students to the 1990s. The 1920s were a period of great prosperity. The Federal Reserve in the summer of 1929 was worried about the excess of speculation so they actually did a tightening at the beginning of September.

easy money is good for the stock market, which is fairly true. The fact that the market had fallen 10% before the bankers intervened made other people wary of the market and probably they’re the ones who started selling the following Monday and Tuesday. There is a famous story, we don’t know if it’s true, about how in the late summer of 1929, a shoe-shine boy gave Joe Kennedy stock tips, and Kennedy, being a wise old investor, thought, “ If shoe shine boys are giving stock tips, then it’s time to get out of the market.” So the story says Joe Kennedy sold all of his stocks and made a killing, and maybe that’s the beginning of the fortune that made JFK president three decades later.

Stock crack of 1929