The stock market crash of 1929 may be the most famous bubble in America. I hold to the belief that the Federal Reserve’s monetary policy was to blame for the crash and the resulting Great Depression. During the 1920’s the Federal Reserve inflated the monetary supply to grow the economy. The result was lower interest rates than the free market would have allowed causing the economy to overheat. Then in August 1929 the Fed changed policy and raised the discount rate. This also occurred under Fed Chairman Alan Greenspan (Tech and housing bubbles). Speculators entered the market driving the price of stocks higher. It is estimated that approximately 600,000 speculators traded on margins.
The result was not good. On Monday Oct 9, 1929 the reporting could not keep pace with news of the fall. That Saturday margin calls started to go out. By Oct 19, Black Tuesday, shares were dropping vertically in price. The extent of Americans involvement in the stock market even surprised me. I always thought the initial collapse only affected a few but nearly 30 million families were participants in the stock market out of only 120 million people. Investment trusts were being created daily and using high leverage to speculate in the market. When the market started its fall margin calls were made to people unable to pay. By July 8, 1932 the market had fallen from a high of 452 to 58. General Motors had fallen from 73 down to 8. At that time GM was considered one of the best run companies in America.
What followed was an economic collapse as industrial production dropped over 50% and unemployment hit 26.7% in 1934. (Johnson)
Pongracis, Jr., Ivan. The Great Depression According to Milton Friedman
http://www.fee.org/publications/the-freeman/article.asp?aid=8132
Johnson, Paul. Paul Johnson on Rothbard. Ludwig von Mises Institute.
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