STOCK MARKET CRASH 1929

The Stock Market is one place which sees ups and downs on a regular basis. But the year 1929 was a one time period which experienced a sharp rise followed by a crash in the stock prices. This stock market crash was one of the major episodes in the history of American financial markets. Thursday the 24^th and Tuesday the 29^th October are respectively known as the ‘Black Thursday’ and ‘Black Tuesday’ because of the great stock market crash on these days.

By the time, the crash was completed which happened in the year 1932, the country was facing large economic depression and the stocks had nearly lost 90% of their value.

The nominal stock price index 64% from Jan 1928 to Sep 1929 then fell down 33% from Sep 1929 to Dec 1929and then recovered to some extent. But by the summer of 1932, it had fallen down to 66% below the Dec 1929 level and 77% below its Sep 1929 average.

According to Irving Fisher, the high levels of price during 1929 were actually a reflection of expectation that the future corporate cash flows would be high. And so the crash was reflection of changes in the expectations of the future; that were ex post faulty but ex ante rational.

Before the month of October in the year of 1929, people had no idea of the weakness in the economy of the country. Lots of theories proved that the stock prices in 1929 were not something that was not corresponding with the stocks that had been issued by the firms. Purchasing of common stocks till the fall of 1929 was being considered good sign of trade. All the conventional reports from the corporations were also giving reasons for optimisms. So perhaps, the investors were highly optimistic and were wiling to pay much more then the earlier experiences. The over pricing of the stocks and factors like changes in dividends and earnings that became the reason for the stock price optimism and finally the crash.

One of the lessons learned from the 1929 crash is that as far as the stock market is concerned, there is a very little difference between optimism, over optimism and pessimism.