The Crash Of 1929 Explained

It is vital to learn from history. This, of course, applies to many areas of life and not just investing and markets.

I know a number of people that think that JK Galbraith's book about 1929 should be required reading for EVERYONE, not just investors. An economic boom has the potential to impact everyone in society, and the fall, panic, recession that follows will impact everyone. So we should all read it.

Presuming that you have not yet read that classic, these videos will give you a feel and flavour of what happened and why.

The playlist below explains something about the rise in markets and the economy first and then on to the crash. As Galbraith said,

"As already so often emphasized, the collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before. The only question concerning that speculation was how long it would last. Sometime, sooner or later, confidence in the short-run reality of increasing common stock values would weaken. When this happened, some people would sell, and this would destroy the reality of increasing values. Holding for an increase would now become meaningless; the new reality would be falling prices. There would be a rush, pellmell, to unload. This was the way past speculative orgies had ended. It was the way the end came in 1929. It is the way speculation will end in the future."

For most people politics and economics are things that they "don't understand" or are "not interested in". However, as the winds of change sweep through an economy, such blinkered answers can only lead to personal disaster.

Certainly in Europe through the seemingly never-ending eurozone crisis, the populations of Ireland, Portugal, Greece, Spain and Italy have had to withstand a great deal. At the time of writing (mid 2012) it is not even clear whether we are through the worst of the crisis. Possibly not.

These countries might not have had the same "speculative orgies" that Galbraith discusses (explained here), but the entire national edifice seemed to have been built on borrowed money. This is hopefully a lesson to us all.

The reality, of course, is that most of these European countries did have a speculative orgy - it is just that they each had their own version of it. Spain, for example, had a massive real estate boom which was powered by a huge amount of borrowed money. Ireland was very similar.

Greece also had a personal borrowing boom, but much less was spent on property. In addition to this, the government had been living well beyond it's means for many years and the scale of the national debt was very hard to uncover. Even in 2015, when this update is being written, the country is still in a major mess and GDP has been going backwards for years.

Poor old Cyprus had a boom and their economy grew strongly. However, it was very closely tied to Greece and when the Greek banking system came under pressure, so did Cyprus.

In each case, much of the growth was powered by borrowed money - either by governments, corporations, individuals or all three groups. Invariably, the elected governments were simply not experienced or competent enough to make the right choices when trouble arrived and this compounded the problems.

Economic growth, even if only in some sectors, does also translate to stock market indices increasing. This means that for many people, their net worth had increased massively in the space of a decade. But, ultimately, their net worth's were all correlated to the national economy. As economic growth stopped dead, property prices fell, stock prices fell and then banks closed down, taking their final security with them. When things get really bad for an economy there is nowhere to hide - apart from abroad perhaps...