Stock Market Collapse – October 24, 1929

Black Thursday received its name because it was on that day that the Stock Market began to crash. Investment in the Stock Market was quite small in 1929 compared with the present time but the conditions surrounding the market at that time were the reasons for its collapse.

Thursday, October 24, 1929, is remembered as “Black Thursday,” the day that the New York stock exchange began to crash. Close to thirteen million shares were traded in the panic selling that took place on that day. It was not the biggest day of volume but the level of trading and the downward trend created fear and confusion, elements that are the greatest enemies of the market.

The bigger day of selling came later, on Tuesday, October 29, when more than sixteen million shares were sold. It was the most devastating day in the history of the New York stock market. One story from later in the day, perhaps apocryphal, is that someone offered to buy a large number of shares for a dollar each and because there were no offers he got them all.

Newspapers across the country told the story in their headlines, next day, October 30, in words like the following: stock prices virtually collapsed yesterday; billions of dollars of market value were wiped out; from every point of view it was the most disastrous day in Wall Street’s history. New York bankers, the people to whom investors looked for hope in the crisis, like all others, saw little prospect of recovery for the foreseeable future. Black Thursday had indeed been a turning point.

Stocks began to lose their value rapidly, beginning on October 24. By the close of business on that day four billion dollars had been lost. It took exchange clerks until five o’clock next morning to complete the paper work. By the following Monday, the realization of what had happened began to sink in, and a full-blown panic was evident. Thousands of people, many of them ordinary working people, saw their recently acquired wealth disappear. In that last week of October the total value of stocks dropped by $15 billion.

The crash heralded the end of a long period of economic growth, often referred to as the ”Roaring Twenties.“ There was a rapid increase in industrialization coupled with a rash of new technologies. The Ford “Model A” car came out in 1927. Radios were everywhere and sound movies were breaking all records about the same time. Most of all there was a spirit of optimism about the future. Wages were high and consumer spending was also high.

The stock market caught the attention of more and more people as its values kept on climbing. One feature that caught the attention of more thoughtful people was the strength of a widespread desire to get rich quickly with a minimum of effort. It was a distorted understanding of the American dream that anyone can get to the top if he or she tries hard enough, and it became very evident in the Florida real estate boom of the mid-twenties.

Large tracts of land in Florida were being subdivided into building lots and sold for a 10 percent down payment. The people who bought these lots had no intention of living on them. They had become convinced that Florida’s warm climate would attract an endless number of people from the cold northern states and this demand would continue to raise the value of the lots they had bought. Within a few weeks they could sell for a good profit what they had bought with borrowed money.

As long as this continued and everyone profited from recurring sales there was no incentive to ask questions about how such a trend could continue indefinitely. The optimism of the time failed to see the risks in the speculative bubble with which they were involved. The first sobering reassessment came with the 1926 hurricane that killed hundreds and tore roofs off thousands of houses. Then, within two years of the first explosion of demand, the number of buyers from the north steadily decreased. By 1928 it was all over and defaults had multiplied.

The boom and bust experience of Florida did not have a lasting influence on the get-rich-quick outlook. The new prospective bubble that appeared on the horizon was the stock market. The familiar Dow-Jones Industrial Index, often known as the Dow, had risen rapidly, from 100 in 1924 to 150 in 1926, then to 200 in 1928. These numbers might seem insignificant when we see more than 10,000 as the Dow’s value today, but the important thing to note about the 1920s was the rate of growth, doubling in four years. In fact, it accelerated rapidly after 1928, jumping from 200 to 350 within a year.

That should have given some warning to investors but they failed to see the danger. Buying on margin became the popular activity in these years of rapid growth. It meant that you could buy stock at one tenth of its value using borrowed money. Borrowing money was no easier then than now but people thought that the high gains in the market would justify a high rate of borrowing. You then paid back over time what you borrowed, including interest, but as you did so the increased value of your stock more than paid for the cost of borrowing.

It all looked so perfect that many thousands who never previously paid any attention to the stock market began to invest. They borrowed all they could, withdrew all their savings, even mortgaged their homes, and bought stock. A more useful measure of the times can be gained from the prices of individual stocks rather than the Dow. One mining company had a share value of $50 in 1924. By 1927 it had jumped to $274 and two years later to $575.

If one could pick the right place in which to invest, people thought, enormous wealth could be secured. The Marconi Company’s shares jumped from $4 in 1927 to $28 a year later but one comment from the president of the company, warning everyone that shares were running too high, should have alerted investors to the volatility of the market. For that one remark the company’s shares dropped to $7 within two days.

By the summer of 1929 interest in the stock market was at a fever pitch. The nation had never seen anything like it since the days of the nineteenth century gold rushes. Stock prices had jumped 78 percent since 1928. At lunchtime all traffic came to a standstill as thousands crowded into the New York Stock Exchange. New office blocks appeared almost every week to cope with demand. Anyone could buy stocks even if he had no money. Brokers were glad to loan money because they were sure that the rising value of stocks would more than cover their risk. Ships sailing for Europe were fitted with tickertape and brokerage offices so people could speculate in the course of the voyage.

The enormous amount of unsecured consumer debt created by speculation left the stock market fragile. Some economic analysts warned of an impending correction, but their warnings were largely ignored. Banks, eager to increase their profits, speculated dangerously. Finally, in October 1929, the buying craze began to slow down. Many took note of the extremely high rate of growth and pulled back, but for most it was too late to change course.

Before long the Federal Government decided it had to step in to establish control mechanisms such as the Securities Exchange Commission to make sure that fraud, overpriced stocks, and unrealistic levels of risk would never again ruin the stock market. At the same time the loss of so much wealth led to a massive downturn in the national economy and the first signs of the Great Depression surfaced. It lasted for ten years and the causes of this long period of economic stagnation are varied.

Production of products had outrun demand. In the enthusiasm of the good times, manufacturing firms and investors had anticipated a certain high demand and designed production levels accordingly. It seems strange that the memories of the late 1920s did not last long. The intensity of the failures of that period should have alerted everyone to the unpredictability of the stock market, but in less than sixty years a similar collapse occurred.

In 1987 there was a crash very much like that in 1929. Again it happened in October and it was a Monday, a “Black Monday,” that led the crash.

In some ways, the 1987 crash was much worse than the 1929 one—508 points on the Dow, the biggest drop ever, compared with 124 points in 1929. In percentage terms the market lost 23 percent of its value in 1987 against 25 percent in 1929. The important differences, however, are the effects of the various controls instituted after 1929. There was no worldwide economic crisis in the wake of the 1987 crash, just a temporary slowdown before a rapid rise soon after, one that continued throughout the 1990s.


Iceland Goes Bust – 2008

Even the largest of corporations can go bankrupt, and the Third World has many countries that constantly teeter on the verge of insolvency. But the financial cataclysm that brought the proud little nation of Iceland to its knees in 2008 shocked the world.

This volcanic island in the North Atlantic with a population of just 320,000 people became an independent republic in 1944 after severing formal constitutional ties with Denmark. Following World War II, Iceland was almost entirely dependent on fishing, a resource fiercely defended during the ‘cod wars’ with Britain from the 1950s to the 1970s, before the country started to evolve a more broadly based free-market economy. Pre-eminent among the new commercial activities were financial services, with a low-tax regime and light-touch regulation encouraging spectacular growth. By 2007 Iceland not only had an enviable welfare system, but was also an extremely prosperous country. There would be a vicious sting in the tail.

The global economic crisis of 2008 revealed severe structural weakness in the Icelandic economic powerhouse. The country’s banks had liabilities of over 80 billion euros – an awesome sum compared with Iceland’s annual GDP (gross domestic product) of around 15 billion euros. When the world’s financial markets went south, this imbalance was bound to end in tears – floods of them.

Emergency legislation enabled the government to take control over the operation of Iceland’s three largest banks – Glitnir, Kaupthing and Landsbanki – and renege on international debts. This caused huge losses to resentful overseas investors, but wasn’t sufficient to rescue the economy. A bailout loan was received from the IMF (International Monetary Fund), interest rates reached 18 per cent and Iceland appealed to its fellow Nordic countries for additional aid. The Icelandic krona was devalued by two-thirds and by late October the country was bankrupt.

When: October 2008

Where: Iceland

Toll: Apart from unfortunate international depositors who lost billions when the banks went bust, the most immediate casualty of financial mismanagement was the Icelandic government, which was forced out of office and replaced by a new left-wing administration. Its first act was to request the resignation of the Central Bank of Iceland’s governors.

You should know: Riches to rags? In 2007, just one year before financial Armageddon, the United Nations ranked Iceland the wealthiest country on earth, with the highest per capita income – and also put it high on the list of the world’s most productive nations.


Collapse of Lehman Brothers – 2008

Lehman Brothers was founded in 1850 by three brothers who emigrated to the USA from Germany, initially running a store in Alabama. But they soon turned to cotton trading and shifted operations to New York. Lehman remained a commodities house until the early 20th century, when the focus switched to public offerings, laying foundations for a financial services institution that would become one of the world’s great investment banks.

By 2008, after a short-lived merger with American Express, Lehman had reinvented itself as an independent asset-management company, with over 28,000 employees and turnover up from $2.7 billion in 1994 to more than $19 billion. But there had been difficulties along the way – disruption when its World Trade Centre offices were destroyed in the 9/11 attacks and an expensive run-in with regulators over the way the bank’s investment division influenced the findings of its research analysts.

These setbacks paled into insignificance during 2008. Lehman was heavily involved in the subprime loans business, an activity that was driving unsustainable economic growth. But these were by definition the riskiest of loans, to consumers without security whose ability to repay was recklessly taken on trust. Despite suffering a $50 million hit by closing its own subprime mortgage lender in 2007, Lehman was still badly exposed. When securitizing vast mortgage packages for onward sale, the company sold the best mortgages and kept the worst, a decision that proved catastrophic.

Huge losses were reported, Lehman Brothers stock lost three-quarters of its value, then plunged again when rumors of a takeover came to nothing. A mass exodus of clients took place, the firm’s assets were drastically downgraded by credit agencies and the firm was forced to file for bankruptcy in September 2008. Unbelievably, this great financial behemoth had been slain by its own misjudgments.

When was the Collapse of Lehman Brothers: September 15 2008

Where was the Collapse of Lehman Brothers: New York City, USA

What was the Collapse of Lehman Brothers toll: Disastrous – the collapse of Lehman Brothers was the shove that finally pushed the tottering global financial system off a cliff, precipitating a crisis that threatened to become another worldwide Great Depression.

You should know: The world financial meltdown might have been avoided (or at least mitigated) if the demise of such an important investment bank had been averted. But the US government failed to appreciate the potential gravity of the situation and refused to mount a bail-out that would have cost but a tiny fraction of its subsequent mega-investment in economic stimulus measures and rescue packages for broken financial institutions.


Global Financial Crisis – 2007-2009

The causes of catastrophic financial events that started unfolding in 2007 were many and varied, but one inescapable fact is that consumers in America and Europe (especially the UK) had been living in a fools’ paradise. For years inflation had been low – mainly as a result of cheap imports from the Far East – while interest rates were depressed by vast inflows of capital from those self-same Asian economies as well as the oil- producing countries.

A manic spending spree saw house prices rocket and complacent politicians announcing that the era of ‘boom and bust’ was over. They were so wrong. Over-optimistic consumers had kept a • dangerous economic model afloat, eagerly indulging their every whim with easily borrowed, cheap money. They were assisted by creative bankers, who earned massive bonuses by creating financial instruments that turned out to consist of no more than smoke and mirrors – many involving vast loan packages sold to fellow banks that purported to be sound, though actually were based on debts incurred by companies and individuals who couldn’t afford repayments.

It couldn’t last. The first ominous cracks appeared in 2007, when housing bubbles burst. This was followed by a run on the highly leveraged (over-borrowed) Northern Rock Bank in the UK that presaged the demise of numerous mortgage lenders. It came to a head in September 2008 with the collapse of New York’s once-mighty investment bank, Lehman Brothers. International financial markets panicked, vital inter-bank lending dried up and governments had to step in with massive bailout packages to prevent the world sliding into another Great Depression.

It would be two years before signs of recovery appeared in developed Western economies – with the vast sums borrowed by governments to combat the crisis sure to be a heavy financial burden on their citizens for a generation or more.

When was the Global Financial Crisis: 2007-2009

Where was the Global Financial Crisis: International

What was the Global Financial Crisis Toll: No wall-Street-Crash-style suicides were recorded at the height of the crisis, but numerous banks and businesses failed with severe consequences for countless individuals and the shocked world economy.

You should know: Even as tentative recovery got under way in the recently humbled economies of the USA, Europe and Japan – with the hesitant return to annual growth sometimes measured in a fraction of one percentage point – countries such as China were already powering ahead with growth rates that in some cases approached ten per cent. This serves as a potent reminder that the balance of global economic power is sure to tilt in favor of the Far East’s emerging tiger economies as the 21st century unfolds.


Zimbabwe Hyperinflation – 2000-2009

Southern Rhodesia was created by acquisitive British colonial entrepreneur Cecil Rhodes, after whom landlocked territory south of the Zambesi River was named. The country became a self-governing British colony in 1923, but when majority governments started replacing colonial administrations all over Africa, Rhodesia’s white rulers made a Unilateral Declaration of Independence (UDI) in 1965, joining neighboring South Africa in trying to roll back the advancing tide of black nationalism.

Stakes were high, for the fertile land was ideal for growing maize and tobacco, with white-owned farms producing excellent yields. But the breakaway was doomed. Prolonged armed struggle between Ian Smith’s government and two groups of freedom fighters – Robert Mugabe’s ZANU and Joshua Nkomo’s ZAPU – ended in defeat for the beleaguered regime, though the war lasted for 15 years.

Robert Mugabe’s ZANU won a landslide victory in free elections held in 1980, then ruthlessly crushed rival ZANU in its Matabeleland power base. Although the newly named Zimbabwe was nominally a parliamentary democracy, and it took some time to erode established institutions like an independent judiciary, Mugabe set about becoming an autocratic dictator.

White farms were seized from 2000 – the best by government high-ups, most of the rest by roaming bands of war veterans. Agricultural production imploded, exports dried up, economic activity stagnated and the country ran out of hard currency. The result was disastrous for Zimbabwe’s population, leading to hyperinflation that ravaged the country. Between 1998 and 2007 the annual inflation rate rose from 32 per cent to 2.31 million per cent in 2008, going off the scale in 2009 with prices doubling every 1.3 days and banknotes reaching dizzying denominations of Z$100 billion and more. It had taken fewer than 30 years for Mugabe’s corrupt regime to destroy Zimbabwe’s economy and turn the prosperous ‘bread basket of Africa’ into a basket case.

When was the Zimbabwe Hyperinflation: 2000-2009

Where was the Zimbabwe Hyperinflation: Zimbabwe

What was the Zimbabwe Hyperinflation death toll: The number of deaths specifically caused by malnutrition and related diseases since Zimbabwe’s economy collapsed and hyperinflation took hold can only be guessed at but best estimates start in the high tens of thousands and don’t stop there. Average life expectancy in Zimbabwe declined to 37 years of age for men and 34 for women, the world’s lowest figures.

You should know: The inflation nightmare eased somewhat – for some – in January 2009 when Zimbabwe citizens were officially permitted to use hard currency to purchase the few goods and services that were available. But this was little consolation for those unfortunate sufferers without relatives abroad who could send back life-saving remittances or helpful contacts in the regime.


Dot-com Bubble – 2000-2001

Every so often, something happens to change the world, from invention of the wheel through the first smelting of iron to gunpowder and the development of the steam engine. But none of the many discoveries that transformed the way people lived could hold a candle to the biggest innovation of them all – the internet, aka the worldwide web.

The personal computers that became increasingly available from the early 1980s made it all possible. In 1988, the internet arrived – and within a decade this interconnected global system of computer networks using a common protocol was reaching billions of individuals and growing fast. Possibilities were infinite and a Wild West mentality took hold – this was a new frontier and plenty were willing and able to join the technological gold rush.

All sorts of clever ideas for exploiting this exciting newcomer were devised and – just as a gold rush rewards the fortunate few who come up with nuggets that make them rich – prescient backers of some internet start-up companies saw relatively modest investments increase in value beyond their wildest dreams. Massive returns soon led to feeding frenzy and there were plenty of young entrepreneurs happy to put forward imaginative proposals for dot-com enterprises (named after the ‘com’ suffix that completed universal website addresses).

Normal commercial caution went out of the window as a combination of ignorance of the new medium and greed saw the rapid inflation of a financial bubble as dot-com stocks boomed for two heady years from 1998. But confidence in the potential of technological advance rather than more traditional methods of assessing investment potential proved to be unsustainable, and after reaching a high point in March 2000 the dot-com bubble burst. In the next 12 months dozens of dot-com companies failed and their investors lost billions.

When was the Dot-com Bubble: 2000-2001

Where was the Dot-com Bubble: International

Toll: Numerous over-hyped internet start-ups where hard-headed analysis would have shown that they could never make a fraction of the profits dazzled investors were prepared to bet on.

You should know: The business model that fuelled the dot-com bubble (and so singularly failed) is summarized by the phrase ‘get big fast’. The idea was to spend vast sums establishing public awareness of a new dot-com enterprise, on the assumption that once a large number of regular users had been hooked they could subsequently be profitably exploited.