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HANOI UNIVERSITY
Foundation Studies Department
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TEL: 8544338 (303)
K m 9 N gu ye n T rai R oad, T ha nh Xua n B ac , T hanh Xu an D i s t ri c t , H anoi - V i et nam
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--------------------------------------------------------------EAP 2007 -ACADEMICWRITING -WRITINGARESAERCHPAPER
Statement of authorship
Student name ______________________LE QUYNH ANH _______________ _____________
Class____3 TN_06 _____ Student Number_______________0604040004_________________
Subject________________________EAP WRITING ____________________ _____________
Lecturer______________________TRAN THUY HANG _________________ _____________
Name of research paper_____THE 1929 STOCK MARKET CRASH___________________
_________________________________ IN WALL STREET ______________ _____________
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I declare that the work attached is entirely my own, and that I have given due acknowledgement as required by the
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Signed__________________ Date ________01/06/2007_________
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HANOI UNIVERSITY
FOUNDATION STUDIES DEPARTMENT
------------o0o-----------
THE 1929 STOCK MARKET CRASH
IN WALL STREET
Teacher: Tran Thuy Hang
Student: Le Quynh Anh
Class: 3TC_06
Course: Finance and banking
Date: 1st June 2007
ABSTRACT
Throughout the world history, there were many stock market
crashes with heavy damages in a long time. The most
outstanding collapse of the stock market is the 1929 stock market
crash in Wall Street. This paper, based on secondary research,
aims to provide the basic information about the most remarkable
crisis in the stock market, namely the stock market of 1929. The
findings of the research give the general overview of the stock
market crash, then analyze its causes and effects. Finally, this
paper draws the conclusion that people would learn to foresee a
coming financial disaster after all of the historical stock market
crashes.
TABLE OF CONTENTS
Abstract……………………………………………………………………………i
List of tables and figures………..………………………………………………iii
1. Introduction….…………………………………………………………………1
2. The general overview of the 1929 stock market crash.……………………1
2.1. The definition of the stock market crash…..……………………….1
2.2. The overview of the 1929 stock market crash..…………………….2
3. The causes of the 1929 stock market crash..……………………………….3
3.1. The investment trusts…………….….………………………………3
3.2. The margin buying……………..……………………………………4
3.3. The public utility sector………………….………………………….4
3.4. The market psychology………………..……….……………………5
4. The effects of the 1929 stock market crash.……………………………….6
4.1. Great Depression……………………………………………………..6
4.2. Future crashes………………………………………………………..6
4.2.1. The 1987 crash……………………………………………..6
4.2.2. The other crashes……………….………………………….8
5. Conclusion…………...…………………………………………………………8
References………………………….……………………………………………..A
Appendices………………………………………………………………………..B
LIST OF TABLES AND FIGURES
Table 1: Dow Jones Industrial Index Average 1921-1932……….…………………….2
Table 2: The 1929 Price-earnings Ratio…………………………………..…………….4
Figure 1: Dow Jones Industrial Index Average 1921-1932……………………………3
Figure 2 : Dow Jones 1987……………………………………………….………………6
1. Introduction
There is a famous name which is referred to as the first cradle of the stock market in the
world history. It is considered to be the “historical heart” of Finance District in New York
City and the roof of the New York stock exchange. This well-known name is Wall Street,
which related to the historical stock market crashes. In the crash history, the most
outstanding event is the collapse of 1929 in Wall Street, which created a big peal of
thunder in the stock market all over the world. The Wall Street crash of 1929, was also
called the Great Crash or the Crash of 1929, was the stock market crash which occurred
in the late October in 1929. “It started on 29th October 1929 (Black Tuesday), when share
prices on the New York Stock Exchange (NYSE) collapsed”.(www.en.wikipedia.org)
The 1929 stock market was led to by many important causes and resulted in heavily
damages, which impacted on the world’s stock market. The main purpose of the research
paper is to give the general overview about the stock market crash of 1929 and analyze its
causes and effects. Thanks to the analysis, we can investigate the relationship between
the 1929 stock market crash and others future crashes in the world history.
2. The general overview of the 1929 stock market crash
2.1. The definition of the stock market crash
Basically, a stock market is a market for trading of company stock, “derivatives”, which
is a financial investment whose price depends on the value of shares. A stock market
crash is a sudden fall of stock prices, often follows speculative stock market “bubbles”.
The term “bubble” means a situation that can not last in which people can make a lot of
money due to the sharp increase of prices. “Stock market crashes are social phenomena
where external economic events combine with crowd behavior and psychology in a
positive feedback loop that drives investors to sell”( www.en.wikipedia.org )
2.2. The overview of the 1929 stock market crash
The Wall Street crash of 1929, the most well-known crash, took place on 29th October,
1929, when the prices on the New York Stock Exchange collapsed. On September 3,
1929, The Dow Jones Industrial Average reached the highest record of 381.2. (The 1929
stock market crash _ Harold Bierman, Jr, Cornel University )
Tables 1 shows the average of the highs and lows of the Dow Jones Industrial Index from
1921 to 1932.
Dow-Jones Industrials Index Average
of Lows and Highs for the Year
1921
63.9
1922
91.0
1923
95.6
1924
104.4
1925
137.2
1926
150.9
1927
177.6
1928
245.6
1929
381.2
1930
225.8
1931
134.1
1932
79.4
Table 1: Dow Jones Industrial Index Average 1921-1932
( Source: 1921-1929 measures are from the Stock Market study, US Senate, 1955, pages
40,49,110 and 111; 1930-1932 Wigmore, 1985, pages 637-639)
As can be seen apparently in the table and the chart below, the Dow Jones Industrial
Average stood at 63.9 on 24th August, 1921, then increased more than six times to 381.2
on 3rd September, 1929. It recovered again in 1930, however, eventually hit the bottom in
1932.
Figure 1: Dow Jones Industrial Index Average 1921-1932
( Source: http://www.stock-market-crash.net/1929.htm )
3. The causes of the 1929 stock market crash
3.1. The investment trusts
“Investment trust” is a company which invests its money in other companies’ shares and
makes profits from these investments. By 1929, investment trusts became very popular
with investors in Wall Street. They sold stocks at higher prices than the value of the
underlying stocks; therefore, the 1929 stock market was obviously unreasonable. Sensible
investors paid a premium for what they supposed to be superior money. In concept,
people knew that investment trusts were sensible; nevertheless, in 1929 it became
opposite. Unfortunately, it was hard to find out the “portfolio” of the largest investment
trusts, “portfolio were rarely published and net asset values rarely calculated”. (Wigmore,
1985, p.682) As a result, a premium for investment trusts led to the stock price declines.
3.2. The margin buying
The term “margin” means the difference between the cost of buying and the prices for
which it was sold. Margin buying is a reason why people believed that the crash
occurred. The lower margin buying made the transactions be done more easily, which
followed by the stormy declines of the market and led to the crash. During the 1920s, the
margin buying was not controlled by the government. Buying on margin was controlled
by the “brokers” who played an intermediate role, bought and sold shares for other
people. Prior to October 1929, the average margin requirement was 50% of the stock
price. At the end of October 1929, margin was lowered to 25%. The margin buying was a
possible factor in causing the October crash in Wall Street.
3.3. The public utility sector
In addition to investment trusts and margin buying, the public “utility” sector was also
one of the causes resulted in the crash. Public utility were services provided to public
such as gas, electric, water and so on. In 1929, the prices of public utility stocks were
over three times the market price. For example, the following measures gave the figure
about the prices of five utilities.
1929 Price-earnings Ratio
High Price for Year
Book Value
Commonwealth Edison
35
3.31
Consolidated Gas of New York
39
3.34
Detroit Edison
35
3.06
Pacific Gas & Electric
28
3.30
Public Service of New Jersey
35
3.14
Table 2: The 1929 Price-earnings Ratio
( Source: Wigmore, 1985, page 39 )
The table illustrates the differential rates of the “book value” and the market prices. The
market prices increased over three times than the book value. The more the “priceearnings ratio” rose, the more likely the stocks were overestimated. Therefore, the stock
prices increased sharply, which made stockholders sell stocks as much as possible to earn
a colossal fortune. This led to the quick decline of the stock market and caused the crash.
3.4. The market psychology
After the bad news arrived and utility stocks fell dramatically, margin buyers had to sell
their stocks, consequently, there was a panic selling of all stocks. Market psychology is
one of the main reasons leading to the crash of 1929 in Wall Street. When all the stock
holders discovered that their stocks’ real values were lower than the values they paid,
they tried to sell their stocks as soon and as much as possible. Therefore, this trend made
the stock market value’s decreased dramatically. In 1929, the stock buyers didn’t hesitate
to sell all their holdings, which meant the fluctuation of the stock prices in Wall Street.
4. The effects of the 1929 stock market crash
4.1. Great Depression
The stock market crash of 1929 launched the Great Depression. It was the period from
the end of 1929 until the onset of World Wall II. The Great Depression was an economic
downturn which started after the stock market crash on October 29, 1929, known as “
Black Tuesday”. “ Great Depression, the longest, deepest, and most pervasive depression
in American history, lasted from 1929 to 1939. Its effects was felt in virtually all corners
of the world, and it is one of the great economic calamities in history” (
www.en.wikipedia.org ) It began in the United State soon after The New York stock
market crash of 1929 and lasted until 1939. By 1939 stock prices had dropped to 20% of
their previous value. Moreover, 11,000 of 25,000 banks in the United stated had failed
by 1933. The United State financial breakdown made the economic failures happen
sooner around the world, especially in Britain and Germany. Additionally, The Great
Depression contributed to “political upheaval” ( www.Britannica.com ). It led to the
election of United Stated President Franklin Roosevelt, who played an important role in
introducing changes in the structure of the United Stated economy through “ New Deal”.
In the Great Depression, real per capital GDP was still below its level in 1929 a decade
later. Look back the past, in the previous depressions, real per capital GDP in the
depressions of the 1870s and the 1890s returned to its original level within five years.
Economic activities started to decline in 1929 and real GDP fell more than 25 percent.
Consequently, it erased all of the economic growth of the previous quarter century.
4.2. Future crashes
4.2.1. The 1987 crash
The 1929 crash played an important part in motivating the appearance of the 1987 crash.
If the 1929 crash had not occurred, the 1987 crash would never taken place. John
explained: “ If the 1929 had not occurred, the precedent of 22% declines would not have
been set, and parallels impossible to make”. The 1987 stock market crash born an
uncanny resemblance to the 1929 stock market crash after 58 years.
Figure 2 : Dow Jones 1987
(Source:www.wikipedia.org )
The chart above illustrates the suddenly decrease of The Dow Jones from July 19,
1987 to January 19, 1988. The 1987 crash happened on Monday, October 19, 1987,
when the Dow Jones Industrial Average fell dramatically. The Black Monday decline
was the second largest one-day percentage decline in the stock market history. The
largest had occurred on Saturday, December 12, 1914, when the Dow Jones Industrial
Average fell 24.39%. By the end of October, 1987, “stock markets in Hong Kong had
fallen 45.8%, Australia 41.8%, the United Kingdom 26.4%, the United Stated 22.68%
and Canada 22.5%” ( www.wikipedia.org )
4.2.2. The other crashes
As a result of the 1929 and 1987 crashes, there was a strong impact on throughout the
stock markets all over the world. . According to the article by Robert Shiller in the New
York Times, “ Fear of crash caused the crash”, the 1929 and 1987 crashes led to the other
crashes in 1989 and 1997. The international stock markets exhibited several interesting
phenomena, including mini-crash of October 1989. Besides, on October 27th, 1997, the
Dow Jones plunged 7.2%.
5. Conclusion
In conclusion, the 1929 stock market crash created a milestone in the history of the stock
market and had a big impact on the international trade. Experts and economists all over
the world appreciated its strong influences towards the world economy market. It was
caused by four main reasons, namely investment trust, margin buying, public utility
sector and market psychology. As a result, it can not be denied that the stock market
crashes resulted in the terrible damages and meant a long period of recovery. Therefore,
the crash is a warning for the holders who want to invest into the stock market.
REFERENCES
John Paul Koning, “ Explaining the 1987 Stock Market Crash and Potential
Implications”
Harold Bierman, Jr, Cornel University, The 1929 stock market crash.
Available
at
URL:
http://www.amazon.com/Causes-1929-Stock-Market-
Crash/dp/031330629X (Accessed 12 May 2007)
Robert Shiller, 2000, New York Times, “Fear of crash caused the crash”, Irrational
Exuberance,
US Senate, 1955, 1921-1929 measures are from the Stock Market study, pages 40,49,110
and 111.
Wigmore, 1985, 1930-1932 Wigmore, pages 39, 637-639, 682.
Wikipedia, the free encyclopedia, 2007, Wall Street crash of 1929
Available at URL: http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
( Accessed 02 May 2007 )
Available at URL: http://en.wikipedia.org/wiki/Great_Depression
( Accessed 06 May 2007 )
Stock market crash of 1929, [ Internet ]
Available at URL: http://www.stock-market-crash.net/1929.htm
( Accessed 18 May 2007 )
Great Depression, [ Internet ]
Available at URL: www.Britannica.com (Accessed 18 May 2007)
APPENDICES
Glossary
1. Derivative
A financial investment such as an option (= that gives you
the right to buy or sell something in the future ) or a future (
= a contract to buy or sell something in the future ) whose
price depends on the value of the shares, bonds, raw
materials, etc.
2. Bubble
A situation that cannot last in which prices rise very
quickly and many people make a lot of money
3. Investment trust
A company that invests its money in other companies’
shares, bonds, etc. It makes its profits from the money
made on these investments.
4. Portfolio
A set of investments owned by a particular person or
organization.
5. Margin buying
When an investor buys shares, futures, etc. with money that
they borrow using a margin account.
6. Broker
A person or company that buys and sells things, for
example shares, bonds, etc., for other people. ( =
stockbroker )
7. Public utility
A service provided for the public, for example an
electricity, water or gas supply.
8. Book value
The value that a business gives to an asset in its financial
records, which is the original cost of the asset minus
depreciation (= its decrease in value over a period of time)
9. Price-earnings ratio
The relationship between the present market price of shares
in a particular company and the earnings per, used to
analyze the company’s performance over a period of time
or compare it with others.