The Great Crash of 1929: A Look Back After 90 Years

• DOI: http://doi.org/10.1111/jacf.12374
• Author: Robert F. Bruner,Scott C. Miller
• Date: 01 December 2019
• Published date: 01 December 2019

IN THIS ISSUE:

e Fed

and the

Financial

System

VOLUME 31

NUMBER 4

FALL 2019

APPLIED

CORPORATE FINANCE

Journal of

10 Hamilton and the U.S. Financial Revolution

Richard Sylla, New York University and NBER, and David J. Cowen, Museum of American Finance

16 A Limited Central Bank

Charles I. Plosser, Former President and CEO, Federal Reserve Bank of Philadelphia

21 How to Promote Fed Independence:

Perspectives from Political Economy and History

Charles W. Calomiris, Columbia University and The Hoover Institution

43 e Great Crash of 1929: A Look Back After 90 Years

Robert F. Bruner, University of Virginia, and Scott C. Miller, Yale University

59 e Strange and Futile World of Trade Wars

Steve H. Hanke and Edward Li, Johns Hopkins University

68 Monetary Policy Implementation: Making Better and

More Consistent Use of the Federal Reserve’s Balance Sheet

Peter N. Ireland, Boston College and the Shadow Open Market Committee

77 e Fed’s Communications: Suggestions for Improvement

Mickey D. Levy, Berenberg Capital Markets

86 FinTech, BigTech, and the Future of Banking

René M. Stulz, The Ohio State University

98 Will Blockchain Be a Big Deal? Reasons for Caution

Craig Pirrong, University of Houston

105 Two Modes of Investment Banking:

Technocrats, Relationship Managers, and Conict

Alan D. Morrison and William J. Wilhelm, Jr., University of Oxford and University of Virginia

118 Dividend Consistency: Rewards, Learning, and Expectations

David Michayluk and Scott Walker, University of Technology Sydney,

Karyn Neuhauser, Lamar University

129 e Reference-Driven College Paper

(Or Why Your Students Should Read the JACF)

Joseph W. Trefzger, Illinois State University

43

Journal of Applied Corporate Finance • Volume 31 Number 4 Fall 2019

T

ough the Great Crash presents daunting complexities,

attention to ve simple questions can help us focus on the

most signicant and enduring issues:

• Why did the “Roaring 20s” roar? Some prominent

contemporaries held that the decade roared because of

consumerism, credit growth, and the Jazz Age. However,

recent research suggests an alternative explanation: a revolu-

tion in manufacturing and technology that amplified

economic growth and volatility in markets.

• Was the boom in equities a “bubble”? We don’t know:

rigorous definition of a “bubble” does not exist. Yet for

decades, some have argued that the boom of the 1920s was

a bubble, and that an “orgy of speculation” doomed reckless

investors and justied a regulatory crackdown. However, more

recent research suggests that the boom probably reected the

Industrial Revolution of the ’20s. If there was a bubble, it was

limited in time, breadth, and impact.

• What caused the sudden reversal in the fall of 1929?

People like a familiar narrative. us, contemporary politicians

and pundits depicted the Crash as a kind of Greek tragedy:

nemesis followed hubris. However, economists’ examination

of contemporary events suggests that nemesis followed, and

partly took the form of, changes in public policy and the onset

of a recession.

• Did the Crash cause the Great Depression, as popular

opinion has long maintained? Scholarly research suggests that

the wealth eect of the Crash was limited and that the real

economic collapse followed from other, more forceful, shocks

that took place before as well as after the Crash. ese shocks

include the abandonment of the Gold Exchange Standard, a

wave of bank panics and collapse of credit, protectionism, and

a number of maladroit public policies. While the Crash may

not have caused the Depression, it probably amplied forces

already at work.

• Did public ocials respond appropriately? e answer

depends on the stance one takes on the foregoing questions.

is retrospective suggests that the complexity of this

episode, the great inuence of chance and contingency, and

the gaps in information make the Great Crash a dicult

standard by which to assess future events. Also, the implica-

tions of nancial crises change as we acquire new information,

more rigorous analysis, and emotional distance from such

events. e use of historical precedent warrants caution and

great humility in the makers of public policy.

The Boom and Crash

e U.S. economy steadily advanced from 1921 to 1929,

bookended and punctuated by four contractions. As shown in

Figure 1, the long boom of the 1920s dwarfed three other run-

ups that scholars have designated “bubbles.”¹ e decline from

1 Inthese gures,wefocus ontheDow JonesIndustrialAverageas aconsistent

measurecoveringallfourrun-ups.TheDJIAfocusesonlargeandmaturerms,asample

thatmayblunttheattributesofotherrun-ups,suchasasectoralfocusonenergy,tech-

nology,or housing. Forinstance, the NASDAQ Composite Index, which gave greater

heautumnof2019marksthe90thanniversaryoftheGreatCrashof1929.It

ranksasoneoftheclimacticeventsofthelast100yearsthatmarkedtheendof

oneageandthebeginningofanother.Assuch,itisttingtorevisitwhytheGreatCrash

becamesodeeplyetchedintheAmericanmemory,howtheU.S.governmentresponded,

andwhatwecanlearnfromtheexperience.JustastheGreatCrashloomedoverpolicy-

makersin2008,itwillinevitablysurfaceagainandagaininthepublicmindwitheachnew

markettumble.Therefore,wecanbenetfromrevisitingthepastasawayofanticipatingthe

futureandavoidingthepolicyerrorsofthepast.

byRobertF.Bruner,UniversityofVirginia,andScottC.Miller,YaleUniversity

e Great Crash of 1929: A Look Back After 90 Years