Thursday, October 29, 2015

History time...

Black Tuesday and the Great Depression

by Bob Livingston

On this day 86 years ago, Oct. 29, 1929, known as Black Tuesday, a then-record 16,410,030 shares traded on the New York Stock Exchange. The market declined that day by almost 12 percent, wiping out billions of dollars of wealth and devastating thousands of investors. The mood was so gloomy that some investors took to jumping out of skyscraper windows and offing themselves in even more creative ways.

Black Tuesday followed a series of “Black” days: Black Thursday (Oct. 24, in which set a record of 12.9 million shares traded on the NYSE) and Black Monday (Oct. 28, in which the New York Stock Exchange lost a whopping 12.82 percent of its value) as the U.S. economy joined economic bubbles bursting around the globe, sending the world into the Great Depression.

Curiously, the NYSE saw its largest one-day increase up that time — with a gain of 12.34 percent — on Oct. 30. Wide swings in market prices signify a market on shaky ground. This time, the ground was worse than shaky. It was a black hole that would not recover for years, despite brief rallies and the vain efforts of government men.

The 1920s had been one of if not the most prosperous decades ever in the U.S. It wasn’t just that people grew richer. As Robert P. Murphy, Ph.D. writes in “The Politically Incorrect Guide to The Great Depression and The New Deal,” people’s lives changed in that decade. Households began receiving electricity for the first time, and numerous gadgets and appliances became available to the masses that made their lives easier. Automobiles became affordable; more households bought radios, connecting them to the world; and Hollywood and sports became big businesses.

But all was not sweetness and light. The Federal Reserve, created by the banksters for the banksters in 1913, was offering easy money. That easy money was pushed into the stock market. The banksters were loaning to each other — creating speculative markets and financial institutions to run them — any almost anyone else who asked, and more of that money was going into the stock market.

The bursting bubble was inevitable. As Murphy writes:

In a laissez-faire market where money and banking are not disturbed by the government, the interest rate is a price that tells borrowers how much capital citizens have saved and made available to fund projects. But when the Fed adopts an “easy-money” policy by pushing down interest rates, this signal is distorted and the interest rate no longer does its job of channeling available capital into the most deserving projects. Instead, an unsustainable boom develops, with firms hiring workers and starting production processes that will have to be discontinued once the Fed slows down its injections of new money.

Many economists point to the Fed hikes in interest rates in 1928 and 1929 as the cause of the stock market crash. In a sense this is true, but the deeper point is that the crash was made inevitable by the bubble in the stock market fueled by the artificially cheap credit preceding the hikes. In other words, when the Fed stopped pumping in gobs of new money that pushed up the stock market, investors came to their senses and asset prices plunged back towards their pre-bubble level. (Emphasis in original.)

What wasn’t inevitable was the years-long misery that followed. That was exacerbated by more easy money flowing into the system, as well as New Deal make-work and other programs, which further distorted the market and included the destruction of food and livestock — while people were standing in food lines — in order to prop up the prices of farm goods.

Rather than letting the recession mechanism work its way out — as previous recessions and panics had — which would have created a short but severe recession adjustment period (recessions had previously lasted no longer than 18 months), the Fed tried to inflate its way out of the recession. In other words, inflation had created the problem; and the solution, according to the government men, was to use more inflation to solve it.

In 2008 and in the years since, the Fed and the government men have done the same thing again; and once again, they’re surprised by the results.


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