Could history repeat itself?
Today, October 29, 1929, marks the 91st anniversary of the US stock market crash that led to the Great Depression.
Could this happen again?
Chances are it will not. Policies and oversights have been put into place to stop this from happening. But, the lessons from this experience are important to remember.
If you look at the chart from where I pegged it in November 1920 until it peaks in late 1929, you will see it rose faster than it has since (although the last ten years or so is very close).
Banks were investing heavily in stocks. Business were investing heavily in stocks. People were investing heavily in stocks. Stocks were a gold mine and everyone wanted to be get rich.
When stock prices dropped everyone lost a lot of money. People, businesses, and banks.
Then people panicked and decided to get all of their money out of the bank.
Remember, this was a time when cash was the main currency. There were no credit cards. No EFTs. No bitcoin.
Now, banks do not keep all of their assets in cash. Much of it is just numbers on a spreadsheet. One of the big ways banks make money is by investing the funds that have been deposited.
So when the people and businesses wanted to liquidate their accounts, the banks simply could not do it. Which caused people to panic even more and for some banks to fail,
Then, the government raised interest rates and reduced the money supply, which led people to hold on to their money and not invest it or make an unnecessary purchases.
Which led to businesses decreasing production and laying off workers.
Which led to even less demand for consumer goods.
The end result was mass unemployment (exceeding 25%) and the destabilization of the economies in many European countries that did not end until the start of World War II (the war machine is very profitable).
So, what has changed?
Well, the first thing you may have noticed when stocks tumbled this year is that the government made billions of dollars of money available to businesses to encourage them to maintain the workforce. Because people who have jobs have money to pay their bills and buy things.
It also gave stimulus funds to people. And, most people did just what the government was hoping they would do. They bought things. They invested. They boosted the economy.
There are a lot of behind-the-scenes oversights and policies meant to keep the stock market from being artificially inflated. They do not always work as intended, but they help.
People, businesses, and banks are all interconnected. This may not have been acknowledged or even understood 91 years ago. Now, economists know better. They have a better understanding of how affecting one of these things will affect the other two. While that does not guarantee another Great Depression will not occur, it greatly reduces it.
One thing that is said to have contributed to the Great Depression is the lack of bipartisan efforts. This is something that has not been corrected and does affect the economy.
What are your thoughts? Do you think we have learned our lesson or do you think history could repeat itself?