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The Money Programme Saturday, 6 November, 1999, 10:49 GMT
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The Money Programme

The Great Crash: a warning from history

Seventy years ago, on Black Thursday, October the 24th 1929, the world shuddered as 13 million shares were sold on Wall Street, after confidence in the stock market burst and panic took over. Five days later, another sixteen million shares were sold by frenzied investors. That was just the start of a decline that saw the U.S. stock market lose 90 per cent of its peak value in 3 years. And now, in October 1999, the great American economist and historian of the Wall Street Crash, Professor J.K.Galbraith has warned that it could happen again.

The parallels, he has suggested, are there for all to see, especially because shares are over-valued through speculation by investors. He told the Money Programme:

"At any period of boom, any period of good times gives an opportunity to some of the most mentally delinquent people in the community. I was going to say stupid - but I took that word back. That attracts their belief and attracts their money. And out of that in corporations, in banks in private speculators and in the financial community comes the mindless optimism which bids up prices. And because prices are going up more are attracted. And that puts them up more than before. There's a self fulfilling prophecy there."

The similarities are in some ways uncanny. In 1929, the American stock market was booming, inflation was low, the economy was buoyant and many talked of a " New Era" of growth, fuelled by the brave new technologies of planes, cars and - wireless.

Prof. Galbraith told us: "The magic of nineteen twenty nine centred strongly on radio. The favourite speculator possibility at that time was Radio Corporation of America, RCA, which incidentally had never paid a dividend. But here was the new world of radio."

Many private investors had got money on credit to play the seemingly unstoppable stock market, just as some of their 1990s counterparts play today's market by "margin" trading on the internet. When the 1929 market went belly-up, those who'd speculated to accumulate lost everything, their homes and their livelihoods.

Businesses failed, industrial production slowed, housebuilding slumped, unemployment soared, the Great Depression began and the repercussions were felt across the world. Overseas loans came to an end, and Europe too fell into a depression. Could the stock market events leading to this apocalyptic scenario really be played out again? If it did happen, it would have an impact across the Atlantic and throughout the rest of the world. A leading stock market historian, David Schwartz, has compared the pattern of the Dow Jones movements in 1929 and 1999. He showed me graphs of the ups and downs of the market for four years before the Wall Street crash, superimposed on the ups and downs of the last four years. The two looked eerily similar, especially in the final year, and on the far right-hand-side the pink line representing the 1929 Dow fell steeply off the side of the graph. What the line representing 1999 will do next, we don't know.

Many believe that American share prices are still far too high; the estimates vary between ten and fifty per cent over-valued. Stocks could be hit by widely expected interest rate rises in the US, the UK and Europe, as central banks try to control the risk of a flare-up of inflation. There's a consensus among economists and market-watchers in the U.K. that prices need to come down, but most believe it will happen gradually, rather than in a disastrous crash.

Steven Bell, chief economist at Deutsche Asset Management in London, told the Money Programme, "I do not think we are going to see a kind of vertical collapse in the stock market, I do think it's high, I think the US stock market is expensive and over the next year I think we are going to see a lot of volatile movements but at the end of that year it might have gone nowhere, it might be down a bit. Interest-rates will probably be over the hill, in the sense they will have risen but will then be heading down, the economy will will still be looking pretty good and the stock market just won't look so expensive then."

But if you believe in the lessons of history, historian David Schwartz has further evidence to to worry you. He has a theory he calls the "added digit theory" about how the Dow Jones develops, and periodically suffers from long periods of depressed prices, known as a "bear market" . He explained it like this.

"There is a funny trend that has been running for a century. Back in 1916 the Americans were not at war yet and the Dow Jones had flirted with the one hundred level for several years and it finally broke through to a new digit. It sounds laughable today but it finally broke through to the one hundred level, prices continued to rise for a couple of months and then a major drop kicked in, it took ten years for the Dow to get back to the hundred level. The same thing happened in 1972 when the Dow broke through to another new digit level, it broke through to the thousand level. Prices began to rise, continued to rise for about two, three months and then a major bear market kicked in, prices did not get back to the thousand level for ten years. Now we get to a new hurdle, I call it the 'added digit theory', and here we are, we have just passed ten thousand, prices continue to rise for a couple more months and nobody knows what is going to happen in the future and it is a worrying concept."

Professor Galbraith, now 90, has warned U.S. leaders not to repeat the mistakes of the past, such as an over-smug reassurance about the state of the economy. He told the Money Programme: "Throughout the nineteen thirties the financial leadership in the United States and the political leadership all joined in one word, one phrase. The fundamentals are sound. That was I say, repeated and repeated. Ad nauseam. But the fundamentals are sound. One hears that again on occasion today. And my last word is - when ever anybody hears it said that the fundamentals are sound, you should have a slight sense of unease."

Sceptics would argue that doom-sayers are always proved right - eventually. Superstitious fear of a second disastrous crash, seventy years on, might conceivably drive dealers and investors to sell shares. But it would be a truly appalling thing if the psychology of coincidence played a part in a re-run of the Wall Street Crash, the most terrible market disaster in history.
Lesley Curwen

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