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The stock market crash of 1929 plunged the world into chaos

  The stock market crash of 1929 plunged the world into chaos: Can that happen again today? On October 24, 1929, "Black Thursday" ...


The stock market crash of 1929 plunged the world into chaos: Can that happen again today?

On October 24, 1929, "Black Thursday" heralded the great world economic crisis. The combination of speculative bubbles, economic downturns and trade conflicts ended in a total economic crash. Some parallels to the present cannot be overlooked.

The stock market crash of 1929 abruptly ended the economic boom of the Roaring Twenties of the past century. The economic slump that followed the financial quake went down in history as the Great Depression and is still considered to be the worst and longest world economic crisis of modern times. Black Thursday on October 24th in particular is remembered as one of the darkest chapters in financial history (also known as Black Friday in Europe due to the time difference). 90 years later, valuations on the stock exchange are again alarmingly high. And once again trade disputes and economic worries keep investors in suspense - is there a risk that a disaster like the one back then will recur?

"Economists said we had reached a new level of prosperity in this country that we would never fall behind - and then came the crash," explains US author John Steele Gordon in the documentary "The Crash of 1929". After the Dow Jones hit an all-time high in September, the US benchmark index weakened. Panic set in on the Thursday of the penultimate week of October - when trading opened, the market fell by eleven percent. It was possible to stabilize the course for a short time. But on Monday and Tuesday, it was down by more than 20 percent.

Stock market crash turns into world economic crisis

It was the beginning of a crash that would push the Dow just under 90 percent below its previous record high by mid-1932. Large parts of corporate and household wealth were wiped out and the US economy plunged into deep crisis. Between 1929 and 1933 the unemployment rate rose from 3.2 to 24.9 percent. The Dow did not make up its enormous losses until 1954. How was such an extreme decline even possible? One important reason is that back then it was even more common than it is today to gamble on credit on the stock market. When buying shares, often only a fraction had to be paid down - the result was a huge speculative bubble. 

The US Federal Reserve is also seen by experts as a decisive factor. Founded in 1913, the Federal Reserve was still relatively inexperienced at the time - and looked unfortunate in the crisis . In the boom years of the 1920s, which were characterized by great optimism, the central bankers let monetary policy loose and for a long time did little to curb the sometimes irrational exuberance in the markets. Then, when the bubble burst, the Fed let numerous struggling banks die instead of flooding the financial system with additional liquidity. In retrospect, this brought the institution a lot of criticism, including from the later central bank chief Ben Bernanke.

International conflicts put a strain on the economy

Political mistakes are another accelerator that ultimately led to the Great Depression. After the First World War and the Treaty of Versailles with the controversial German reparation payments, there were already enough international conflicts that put a strain on the global economy . In the US, too, the economy began to cool before the share price plummeted. The US government's decision to drastically raise tariff barriers in mid-1930 continued to affect the economy. The so-called Smoot-Hawley Tariff Act was supposed to protect the domestic industry, but historians consider the law to be the definitive forerunner of the great global economic crisis. 

US President Donald Trump seems unimpressed, he tweeted in March 2018: "Trade wars are good and easy to win". Since then, however, the opposite has been confirmed - in the opinion of most analysts, Trump's punitive tariffs have so far mainly caused damage. And the USA seems far from a victory: In the conflict with China, Trump recently contented himself with a partial agreement that can hardly be viewed as a sign of strength. Instead, the clinch between the world's two largest economic powers is now being treated as the most threatening global economic risk.

Could there be another extreme scenario like 1929? There are certainly parallels. This does not only apply to Trump's weakness for high tariffs. On the stock exchanges, too, after years of a rally fueled by cheap central bank money, prices have again reached a level that is sometimes decoupled from the real economic situation. In the US, a number of lossy start-ups were floated on the stock market with valuation billions. The bond market was already sending out alarm signals. There, government bonds with short maturities have now yielded more returns than long ones, which financial professionals consider an important indicator of a recession. 

Tensions on the US interbank market have recently emerged similar to those seen during the 2008 financial crisis - the Federal Reserve had to prevent a credit crunch with additional liquidity. Nevertheless, experts consider the risk of a renewed financial market collapse to be relatively low. Many analysts believe that a course correction and a further weakening of the global economy are quite possible. But hardly anyone has a major crash with dire consequences like the one 90 years ago on their radar. Most experts trust that the major central banks are now crisis-tested and determined enough to prevent further escalations in the event of a stock market panic.