THE STOCK MARKET CRASHES OF 1929 & 1987

THE STOCK MARKET CRASHES OF 1929 and 1987

On the surface, there was a similar pattern to the stock market crashes of 1929 and 1987. In both cases, stock prices rose dramatically, crashed suddenly, and investors suffered tremendous losses. However, the economic conditions leading up to the two events were considerably different, and significant differences can be found in the economic policies following the market declines. Because of these differences, the consequences of the 1987 crash are likely to be far less severe than those of 1929.

The greatest similarity between the two market crashes can be found in market behavior and stock prices leading up to and during @the collapse. In both cases, rising stock values were fueled by speculation and the bubble ultimately burst. The stock market of the late-1920s has been called "a Sambler's paradise" because of the rapid gains in stock prices. But analysts point out that the market conditions "bore little relation to current or prospective business conditions or to the level of profits." Between 1925 and September, 1929, industrial output grew by 25% and business pro+its grew by less than 50%, while average stock prices more than doubled (Aldcroft, 1981, pp. 195-196). Stock values o+ the time were simply not justified by business and economic conditions.

In 1987, the market also rose rapidly before it plunged. The Dow Jones average exceeded 2700 points in August and some speculators had visions of 3000. After the cr

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ries lend funds abroad during a recession, because the domestic demand is sluggish and the lending will stimulate foreign economies and raise the exports of the original country. During a boom period, the reverse pattern helps to stabilize the global economy. During the 1920s and 1930s, the U.S. followed opposite policies -- its foreign lending increased in the 1920s and then decreased during the depression (Kindlebergher, 1986, p. 292). Much of the money put in circulation during the 1920s found its way back into the speculative U.S. stock market, rather than being used for economic development abroad. Choking off the supplies of money and credit after 1930 caused the global economy to stagnate, when an increase in credit could have been a stimulus. During the late-1980s, the U.S. is following the reverse pattern which puts it back into the "countercyclical" situation, and capital flows are opposite of what they were in the 1920s. Instead of the huge outflow of capital that occurred in the mid1920s, capital has been flowing into the U.S. during the 1980s. The tremendous inflow of foreign capital has boosted U.S. expansion and benefitted foreign export industries. President Reagan has called the U.S. the "investment capit

Category: Economics - T