This week we looked at the Stock Market Crash of 1929 and how it happened. Not all Stock Market crashes cause deep depressions or recessions, and in fact, many now argue that the Great Depression had many other factors besides the ’29 crash. For example, only about 3-5% of Americans owned any stock at all in 1929. But I do think that the crash both revealed and foreshadowed deep problems within the economy as a whole, and so I still thought it worthwhile to examine. At the very time, for example, when the stock market rose dramatically, key industries like agriculture and construction showed major signs of weakness.
Not only that, it gave us a great platform to discuss the bursting of the dot-com bubble in 2000, which did not bring about substantial economic harm, and the crash of 2008 recently which did. What were the differences in the two, and which was 1929 more like? It seems that the 2000 dip revealed a weird anomaly in the economy, whereas in 2008, the problems lay much more at its heart, with our financial system in general. Here are a few different graphs that show similar drops in the market, but each had its own particular effect on the economy:
This graph suggests that maybe market ‘crashes’ are simply ‘corrections.”
We spent two days this week on our own’Stock Market of the 1920’s’ activity. My main purpose was not recreate entirely how stocks are actually sold and have value. I wanted the students to focus on understanding the psychological aspect of not only stock value, but the value of anything at all. After all, what makes our paper money valuable in itself? Only that we have all agreed as a society that it does carry value. If we lost that belief, the economy would collapse shortly.
In our game this week the market started slowly. In fact, this class on the first day was the most cautious class I can remember in the last 10 years I have done this activity. But towards the end of the first day and into the second, the volume of trades and the amounts traded grew a great deal. Crashes usually happen when meteoric rises create a bubble, but in this case most every stock traded at a reasonable growth rate. “Consumer Confidence” remained high throughout this period, as most teams willingly parted with cash to get stock. Each team benefitted, with the exception of one team who bet on a decline and sold all their stock, only to see prices continue to rise. I hope everyone had as good a time playing as I did watching.