A week ago we finished our cycle on the history of money. We have, however, decided to continue our educational mission in a new series of articles. Every Sunday we will deal with economic issues – with an emphasis on economic crises.
“Bitcoin will not fall anymore” – you probably met with such posts on social media almost a day or two before the bubble burst. Maybe you even wrote them yourself? There is nothing to be ashamed of! Committing these types of mistakes happens the best. Example? On October 16, 1929, a professor of economics from Yale Irving Fisher University, he stated that “American prices have stabilized at a high level.” A week and one day passed. The Dow Jones index fell by 2% and started the most famous Wall Street crash.
A slight drop becomes a huge snowball
Slight drop was actually a snowball which turned into a gigantic snowball that crushes everything that stands in its way. In the so-called “Black Monday”, that is October 28, 1929. Dow Jones has already fallen by 13%, a day later, in “Black Tuesday, another 12%. He continued to resemble Hitchcock’s film from the peak period of his work or the work of an outstanding composer. After a monumental, memorable intro, scenes that were unbearable to the human psyche and cascades of sounds fascinating and at the same time frightening were falling on the viewer / listener. If the director of “Big Short”, Adam McKay, once decides to film this historical period, he will probably do it with similar comparisons …
More weeks passed, which passed in months and then in years. By 1932, shares of American companies fell by 89%. To better illustrate the scale of this disaster, one piece of information is enough. The stock index returned to the highest level in 1954! And this despite the fact that World War II happened on the way, which stirred up the US economy and did not harm it.
The sphere was still going. In the United States production dropped by 1/3, the same value of Americans was out of work. Production and prices have declined worldwide. International trade has shrunk by 30%. Germany stood at the threshold of almost civilization disaster, which we will probably write on another occasion.
Why did this happen?
Exactly! The history of the stock exchange knows a lot more drastic craps, which, however, did not cause such effects. In July 1914, when the First World War broke out, stock exchanges around the world recorded such declines that the stock prices were temporarily suspended to contain the situation and cool the heads of terrified investors.
Why, however, did such effects result in the crash of 1929? Historians and economists still can not answer this question. Before the “Black Thursday”, the government of the French Prime Minister Aristide Briand collapsed. What’s worse, the New York Times gave this information to the first page! Is that what scares investors so much? Or maybe a vote in the Senate regarding taxes on the import of chemical products? Maybe stock market players scared the problems related to German reparations?
Historians-meteorologists explain this in a different way. A day earlier, storms passed through the USA. And if it sounds irrational to you, it is worth adding that the day before “Black Monday” on October 19, 1987, England was struck by equally strong winds. With the next bubble on bitcoin, we suggest to follow the weather forecasts …
During the First World War, production in the USA grew. Mainly because there were fights on the Old Continent that prevented the normal functioning of companies. After the end of hostilities in Europe, production returned to the previous tracks, which led to the fact that the awakened American economy recorded overproduction. The latter in turn led to a fall in prices.
On the one hand, it could be a prelude to the crisis, but overall the economy continued to work great. What’s more, the market for modern technologies has been thriving. The aforementioned prof. Fisher also predicted that investing in such ventures would ultimately lead to higher earnings.
Here, however, there was a problem. Americans could afford more and more, but these purchases were made on credit. In addition, there was a craze for investing in shares of companies that operated on the market of modern solutions. RCA’s shares in four years increased by nearly 1000%. The stock market has seen more and more new ventures of this type. Many small investors played with leverage and for borrowed funds.
All this led to a catastrophe …
To be continued…