Happy Black Tuesday!

Historians often point to October 29th, 1929, as the beginning of the Great Depression, but it really wasn’t. Black Tuesday, as it is known today, was merely the capitulation-phase of a stock market collapse that had begun more than a month earlier. Equities prices had been gyrating wildly since early September edging lower and lower between weak, but infrequent rallies. 

By the time October rolled around, the sense of foreboding was palpable reaching its peak on October 24 when the market was battered by the first titanic selloff on Black Thursday. The panic on that day marked the end of the Roaring Twenties and the debt-fueled exuberance that tripled the value of the Dow in just 5 years leading to the longest bull market on record. 

Thursday’s mayhem was the beginning of the end, the bursting of a gigantic asset-price bubble that had been propped precariously atop an overbuilt and stagnating economy. Author Claire Suddath recalls the events of that day in a Time magazine article titled “The Crash of 1929″. 

Here’s an excerpt:

“In the last hour of trading on Thursday, Oct. 24, 1929, stock prices suddenly plummeted. When the closing bell rang at 3 p.m. people were shaken. No one was sure what had just happened, but that evening provided enough time for fear and panic to set in. When the market opened again the next day, prices plunged with renewed violence. …. Thirteen million shares changed hands — the highest daily volume in the exchange’s history at that point…The following day, President Herbert Hoover went on the radio to reassure the American people, saying “The fundamental business of the country…is on a sound and prosperous basis.”

And then came Black Monday. As soon as the opening bell rang on Oct. 28, prices began to drop. Huge blocks of shares changed hands, as previously impregnable companies like U.S. Steel and General Electric began to tumble. By the end of the day, the Dow had dropped 13%. 

So many shares changed hands that day that traders didn’t have time to record them all. They worked into the night, sleeping in their offices or on the floor, trying to catch up to be ready for October 29.

As the story goes, the opening bell was never heard on Black Tuesday because the shouts of “Sell! Sell! Sell!” drowned it out. In the first thirty minutes, 3 million shares changed hands and with them, another $2 million disappeared into thin air. Phone lines clogged. The volume of Western Union telegrams traveling across the country tripled. The ticker tape ran so far behind the actual transactions that some traders simply let it run out …Brokers called in margins; if stockholders couldn’t pay up, their stocks were sold, wiping out many an investor’s life savings in an instant….. When the market closed at 3 p.m., more than 16.4 million shares had changed hands…. The Dow had dropped another 12%…..The stock market wouldn’t recover to its pre-crash numbers until 1954.” (“The Crash of 1929“, Claire Suddath, Time magazine)

The panic on Black Tuesday erased all hope of a rebound. The country was now in the grips of an unprecedented economic calamity. Companies began to lay off workers, industrial production began to shrink, and the economy dipped into Depression. The mood of the nation became increasingly gloomy as the slump deepened and bread lines formed in cities everywhere accompanied by shanty towns that popped up in the rail-yards or on the outskirts of town. In the next few years, hundreds of banks would be shuttered, thousands of businesses would fail, and millions of people would lose their homes and jobs. Here’s an excerpt from Extracts from John Kenneth Galbraith’s, “The Great Crash: 1929″, which captures the mood of that period:

“The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune…..The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.” (“Extracts from “The Great Crash: 1929″, John Kenneth Galbraith, First Published 1955, Page 130, Chapter 7: “Things Become More Serious“)

Galbraith’s chronicle helps to shed light on our situation today which is equally tenuous. The stunning growth of finance capital has decimated the productive economy shifting resources to areas of speculative activity that weaken demand, reduce hiring, and increase stagnation. As was true during the Roaring 20′s, Wall Street has steered the economy from one catastrophic credit bubble to the next leaving behind millions of victims who have lost their jobs, their home equity, or their life’s savings. While there have been some signs of recovery in employment, growth and housing; the central bank has persisted with its emergency programs as if Lehman Brothers had defaulted just hours ago. In truth, the crisis has never ended because the debts have never been written down nor accounts balanced. Thus, the Fed must keep rates at zero indefinitely so the nation’s biggest banks can continue to roll over their gigantic debtpile and avoid bankruptcy. The system has been changed utterly to accommodate the “extend and pretend” regime of underwater, zombie financial institutions which are kept afloat with trillions in zero-cost liquidity provided by the Fed via QE and zirp.

Unlike today, political leaders in the 1930s were committed to cleaning up Wall Street and putting the country back to work. Franklin Roosevelt–who replaced Herbert Hoover as president in 1932– launched the New Deal which served as the umbrella for myriad public works programs like Works Progress Administration (WPA), the Civilian Conservation Corps (CCC), and the Federal Emergency Relief Administration. At the same time, FDR reined in Wall Street by signing the Glass Steagall Act and the Federal Deposit Insurance Corporation (FDIC) to stop speculation with depositors money and to restore public confidence in the nation’s banks. Here’s a clip from FDR’s First Inaugural Address:

“Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources….

…In our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money…” (FDR’s First Inaugural Address, History Matters)

In contrast, current president Barack Obama has focused almost exclusively on deficit reduction while staving off any attempt to hold Wall Street accountable for the “epidemic of fraud” that precipitated the financial crisis and pushed the economy into severe recession. On jobs, Obama’s record is even worse, in fact, he’s slashed more public sector jobs than any president in the modern era. According to the New York Times, “Federal employment is at a 47 year low” while MSN Money notes “The number of public sector jobs has shrunk by more than 700,000 on his (Obama’s) watch.” Obama’s disgraceful performance as president has been applauded by liberal economists and pundits who still expect him to morph into the agent of change he professed to be during the presidential campaign. Regrettably, these experts are bound to be disappointed. The economy is weaker and more vulnerable due to Obama’s negligence. If there’s another panic on Wall Street and the economy heads back into recession, much of the blame will be his.

In an article titled, “The Main Causes of the Great Depression” Paul Alexander Gusmorino said:

“Many factors played a role in bringing about the Great Depression, however, the main cause was the combination of the greatly unequal distribution of wealth throughout the 1920′s, and the extensive stock market speculation that took place during the latter part that same decade.”

Income disparity is greater today than it was in the lead up to the Depression. Also, the amount of money in various levered assets, derivatives and debt instruments vastly exceeds the speculative bets of 1929. With the same factors at play, the question should be this: Will the Fed’s bloated balance sheet and willingness to intervene in the markets be enough to prevent another Black Tuesday-type meltdown.

While that’s certainly a possibility, I wouldn’t bet on it.

Happy Black Tuesday!

(COUNTERPUNCH)