The Crash of 1929 - Video
(From the series The American Experience)

For our first class session, I will be showing a video from a PBS series on The American Experience. The video, which runs for 60 minutes, chronicles the stock market crash of 1929.

Here is a description of the video:

The year 1929 put the roar in the roaring twenties. Here is the story of a time when playing the stock market epitomized a national faith in a booming economy and almost everyone believed in the permanent prosperity the American dream. It was time when the stock market was riding in what appeared to be an unending ascent -- seemingly without limit -- until, late in the year, on the fateful day of October 29, 1929, the market crashed.

Large and small investors alike lost corporate and personal fortunes. A portrait of the era is conveyed by the close relatives of such financial titans of the 1920s as Charles Mitchell, president of the National City Bank (now Citibank), the man who popularized the notion of selling sot and high-yield bonds directly to the small investor; William Durant, "King of the Bulls" and founder of General Motors, who use his millions to try single handedly to avert the crash; and relatively small investors such as Groucho Marx, who detested gambling yet poured his entire life savings in stocks.

Viewers see how the financial fever and unbounded optimism of the 1980s [and 1990s] stack up to the roaring era of the 1920s and how recent events on Wall Street compare to the bitter times of the Depression.

The video is drawn from a book entitled "The Crash of 1929" written by the Harvard economist John Kenneth Galbraith, who is one of the featured commentators on the video. Here is a review of his book from Amazon.com

Rampant speculation. Record trading volumes. Assets bought not because of their value but because the buyer believes he can sell them for more in a day or two, or an hour or two. Welcome to the late 1920s. There are obvious and absolute parallels to the great bull market of the late 1990s, writes Galbraith in a new introduction dated 1997. Of course, Galbraith notes, every financial bubble since 1929 has been compared to the Great Crash, which is why this book has never been out of print since it became a bestseller in 1955.

Galbraith writes with great wit and erudition about the perilous actions of investors, and the curious inaction of the government. He notes that the problem wasn't a scarcity of securities to buy and sell; "the ingenuity and zeal with which companies were devised in which securities might be sold was as remarkable as anything." Those words become strikingly relevant in light of revenue-negative start-up companies coming into the market each week in the 1990s, along with fragmented pieces of established companies, like real estate and bottling plants. Of course, the 1920s were different from the 1990s. There was no safety net below citizens, no unemployment insurance or Social Security. And today we don't have the creepy investment trusts--in which shares of companies that held some stocks and bonds were sold for several times the assets' market value. But, boy, are the similarities spooky, particularly the prevailing trend at the time toward corporate mergers and industry consolidations--not to mention all the partially informed people who imagined themselves to be financial geniuses because the shares of stock they bought kept going up. --Lou Schuler

The video, produced in 1990 long before the bursting of the dot.com bubble in 2001, inevitably leads viewers to draw some dramatic comparisons between the stock crash of 1929 and that of 2001. You may be interested in the following graphical comparison:

Galbraith's thesis that government failed in preventing the crash continues to be debated. In the view of some economists, the Hoover Administration overreacted to the 1929 crash and then the Roosevelt Administration prolonged the Depression by injecting too much governmental control in the economy. Consider the following review of Murray Rothbard, America's Great Depression (1963):

Murray N. Rothbard's America's Great Depression is a staple of modern economic literature and crucial for understanding a pivotal event in American and world history. Since it first appeared in 1963, it has been the definitive treatment of the causes of the depression.

Rothbard opens with a theoretical treatment of business cycle theory, showing how an expansive monetary policy generates imbalances between investment and consumption. He proceeds to examine the Fed's policies of the 1920s, demonstrating that it was quite inflationary even if the effects did not show up in the price of goods and services. He showed that the stock market correction was merely one symptom of the investment boom that led inevitably to a bust.

The Great Depression was not a crisis for capitalism but merely an example of the downturn part of the business cycle, which in turn was generated by government intervention in the economy. According to free-market advocates, had the book appeared 30 years earlier it might have avoided the damage to the intellectual world inflicted by Keynesian- and socialist-style treatments.

Others are more sanguine. Recently, Professor Edmund Phelps opined in the Wall Street Journal that, although not all booms and busts are alike, "the rest of the present decade will tend, barring new shocks, to resemble the rest of the '30s -- a recovery with investment and employment below historical levels." See Edmund S. Phelps, Crash, Bang, Wallop, Wall St. J. A14 (Jan.5 , 2004).

What should the role of government be in this boom and bust cycle? The debate continues. Should government intervene in our capital markets or are they best left alone? Some recent empirical research suggests a correlation between mandatory securities disclosure and efficient capital allocation:

The value of mandatory securities disclosure is intensely debated. Two big questions occupy much of the attention: Do more accurate share prices contribute to the efficient provision of goods and services in the economy? Even if they do, will mandatory disclosure effectively contribute to share price accuracy? To date, the debate has been largely theoretical. This Article sheds much needed empirical light on the matter. After introducing a new technique from financial economics - R2 - to measure share price accuracy, the Article starts by discussing recent R2 studies by ourselves and others addressing the first question. Using both cross country and cross industry comparisons, the results show that more accurate share prices improve capital allocation and thus do in fact contribute to the efficient provision of goods and services in the economy. The Article then presents a new R2 study that we have conducted addressing the second question. The study examines the effect of a December 1980 change in the SEC's disclosure rule requiring every issuer's filings to contain a section with management's discussion and analysis of the issuer's financial results (the"MD&A" rule). The change required managers to disclose any material information suggesting that the issuer's most recent results are not necessarily indicative of future results. Our study shows that share prices became more accurate a result of the changed rule, suggesting that mandatory disclosure can in fact be effective.

"Law, Share Price Accuracy And Economic Performance: The New Evidence" (Michigan Law Review, Forthcoming), draft version available at SSRN 437662 -- MERRITT B. FOX ( University of Michigan Law School); ARTYOM A. DURNEV ( University of Miami, Department of Finance): RANDALL MORCK (University of Alberta, Department of Finance and Management Science, National Bureau of Economic Research (NBER)), BERNARD YIN YEUNG ( New York University)