Thursday, October 29, 2015

This Day In History...Black Tuesday

As our country finds itself trying to scratch and claw our way out of the worst financial crisis in many of our lifetimes, I often find it useful to look back at historical times of hardship, both at the mistakes that were made leading up to it, and the actions taken afterwards to resolve those issues.  On this day in history, we’ll look primarily at the start of the Great Depression, in particular a day known as “Black Tuesday”.

On Oct 29, 1929 the stock market crashed
and sent the country's economy into a tailspin
The 1920’s were known as the “Roaring Twenties” for two reasons: a rise in organized crime in reaction to Prohibition, and a raging economy, primarily throughout the first half of the decade.  That rage however, was built off of optimism, not real success.  Following the first World War, a feeling of patriotism and optimism swept through the country.  Investors caught the optimistic feeling, pouring money into the stock market as prices soared, with the Dow Jones reaching 350 On October 10, 1929 for the first time in it’s history.

The market couldn’t bear the strain, and began to buckle.  The first hiccup came on September 18, 1929, a day originally labeled “Black Thursday”.  On this day, the market took a sharp turn downward-however the relatively new Federal Reserve System was able to stall the crash in the immediate time frame, however by the end of the next month things had taken a turn for the worse.

On what would become the real “Black Thursday” (October 24, 1929) the market took a sharp turn downwards at the opening bell, dropping 11% to start the day off.  A group of banks put their collective financial weight and buying power behind a man named Richard Whitney, who attempted a tried and true method of stopping the crisis by staging large purchases of certain “blue chip” stocks.  This method had worked in 1893 and 1907 to help pull the country out of potential financial tailspin, and for a moment it seemed like it would work again, as by the end of the day the market had regained some ground, closing at the end of the day down only 6%.

The following week however, the market would finish tearing the heart out of the American financial system, dropping 13% on “Black Monday” (October 28, 1929) losing 38.33 points.  The following day on “Black Tuesday” the market finished it’s plummet, losing 30 more points to shed another 12%.  This on a day that the Dow Jones set a record that would stand for another 40 years; trading a total of 16 million shares amidst wide speculation that President Herbert Hoover would veto the pending Smoot-Hawley Tariff Act.

The Glass-Steagall Act eventually helped pull the
country out of it's financial tailspin.
The market would experience a brief one day recovery on the 30th, but over the next several weeks it would continue to crash, ultimately bottoming out around 198 points (from that previous high of 350).  Over the next two decades the market would continue to slide, and then slowly begin to build itself back up.  In fact it would be more than another 25 years-November 23, 1954-before the market would fully recover and hit that pre-crash high of 350 again, as economists tried to figure out the best way to regulate things and avoid sharp crashes like that of 1929 again.

Such regulatory measures as the Glass-Steagall Act grew out of the experiences of 1929, in much the same way regulatory measures such as Sarbanes-Oxley or the Dodd/Frank has grown out of the financial failures our country has experienced over the last decade or so.  The question history forces us to ask today is the same that it forced economists to ask in 1929 however; will the same policies that have worked in the past work this time?  Only time will tell...

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