I had the chance to view a documentary on The Great Depression of 1929, which originated in the USA. The documentary attempted to explain the similarities between the Great Depression and the current economic turbulence. This documentary interests me because I’ve read and seen images of how bad things were during the Depression but never knew what triggered it.
According to the documentary, the Depression was triggered by a sudden loss of confidence in the NYSE, where stock prices plummeted because of panic selling from lack of buyers. Till this day, no one knows why this occurred. Several historians were interviewed to understand the background before the Depression – USA had been enjoying prosperity after the World War 1 and most Americans were spending heavily. Several high profile people got rich speculating on the stock market and this attracted alot of attention. Common people thought of the stock market as an avenue to get-rich quickly and many jumped into it, without understanding how the stock market worked. There was alot of speculation in the market and very little regulations.
Financial institutions made it easier for people to invest by giving loans, which were collateralised against their stocks, i.e. margin trading. As the stock market was increasing, there was little fear of margin calls. So many invested, using money that they didn’t have. It was speculated that the NYSE at that time was controlled by several big-time players, at the expense of common people. They hyped up the prices of specific stocks by buying in large quantities and sold it all, just as common people bought into those stocks. As there was little regulation over the NYSE at that time, the stock prices were unsupported by fundamentals.
So on Oct 29, 1929 (Black Tuesday), the day when the market suddenly crashed, many common people were caught with shares which were worth much less than they had paid for it, some were even worthless. Common people didn’t understand how all that “money” suddenly disappear overnight. Everyone was shocked at the sudden collapse. There was news of people jumping from buildings near the NYSE. Soon the Financial Institutions started their margin calls and people were forced to find ways and means to make up the shortfall in their now worth-less shares. As expected, many people were unable to make up the shortfall and this cause many banks to fail. This further increased people’s lack of confidence in the banking system and triggered massive withdrawals and bank runs. The surviving banks tightened credit and businesses started to fail, from lack of financing. As businesses started to fail, people were laid off and thus, started a spiral of poverty which is synonymous with the Great Depression.
The resemblances are so close that it makes me wonder, why would people allow a repeat.