The people's voice of reason

October 1929 v. October 1987 Black Mondays: a tale of two crashes

These are indeed unwonted times – certainly a first in my ten plus years as an Alabama Gazette columnist. I wholeheartedly concur with the wise decision to not print an April issue for many reasons, mostly driven by loss of distribution points with so many businesses closing. I’m nonetheless blessed to be included in this ONLINE-ONLY edition. Seems apropos in the midst of this current crash to repost my October 2017 Gazette column on the anniversaries of 1929 and 1987 crashes. Rewarding to have former students and long time readers contacting me about this history from classes and this past column as where they first learned of ‘curbs & circuit breakers’ on Wall Street now being triggered these past days. I pray you agree it is worthy of your time to (re)read.

I’ll let the history below speak for itself. To those asking if this will be a quick, easily forgotten 1987 crash, understand in our current less market driven results, it is unlikely. With bond and interest rates increasingly more manipulated in our command economy, the herding mentality into equities/stocks is as distorted as I’ve ever witnessed. In short, we’ve inflated the bubble much more than usual these past years making this POP all the more profound. With ‘circuit breakers’ there’s not a short, well defined selldown – it is no longer allowed as was the case in 1987 – i.e., don’t expect to see another 23% one day drop. Furthermore, the federal legislation which triggered the 1987 sell off was easy to back-off of allowing quick return/correction back up to the long-term trend line. Our current crash is more like the 1929 distorted economy and it appears the politburo is going to push toward even more Hoover/FDR type leviathan responses than using this event to bring an end to the bubble/bailout cycles. This is no surprise to anyone understanding our ‘privatize the distorted gains and socialise the losses’ US economy. This is not sustainable and will accelerate our path to the usual destination of all command and control/mandated socialist economies.

The October 2017 Alabama Gazette column is as follows:

The more commonly remembered (88th Anniversary) stock market crash of 1929 resulted from “an overbought, overvalued, and excessively bullish market, rising even as economic conditions were not supporting the advance,” according to pop press accounts and economists who like to describe instead of explain results. What proffered the overbought, overvalued unsupported exuberance is noticeably absent in the discourse of Keynesian economists and other lotharios of leviathan. The crash began on Thursday October 24, when the market fell 11%. Institutional investors and financiers attempted to attenuate the 'panic' selloff with above market bids so the day's sharp losses were blunted and stocks rebounded.

These feeble attempts failed to address what triggered (think fear) this Wall St. selloff. Hoover's 'jawboning' for the Smoot-Hawley Tariff signaled further resolve toward another high-watermark of protectionism actually enacted in June 1931 where unemployment immediately spiked up from about 6% to 14%, long after the October ’29 crash. Economists who understand Wall St. realize investors respond to a legislative event(s) when they forecast it will pass, not when actually signed (7/17/30) into law or enacted. European investors were also ripe for a crash observing the looming clouds of protectionism forecasted to once again contract economies; high profile fraud cases are cited for the September London exchange crash which also did not recover since fraud and forgery weren’t the fundamental reason(s) driving the selloff. Exacerbated by margin calls, Wall St. closed down 13% on October 28th the Monday (a.k.a. ‘Black Monday’ in retrospect) days after the ‘double-digit’ loss on Thursday. Bids further disappeared the next day (Black Tuesday) as the market fell another 12% starting the long-term trend line down hitting bottom in 1932 with some ‘sucker rallies.’ More informed investors who understood what was happening correctly forecasted the Democrat likely to win the nomination wouldn’t reverse the typical big-government Republican policies

advanced by Hoover.

A month prior to the 1929 crash the market peaked September 3rd with the Dow Jones Industrial Average [DJIA] at 381.17; the bottom was recorded on July 8, 1932, where the Dow closed at 41.22. A remarkable 89% drop from peak to trough which was even more devastating for small-cap and speculative stocks, some compelled to declare bankruptcy and unlisted from the market dropping them out of reported data. A quarter century later the DJIA returns to the 381.17 result on Nov. 23, 1954. As observed with many proactive command economy policies/programs, less stable results (i.e., higher peaks/lower troughs) with longer durations outside less amplified (more stable) cycles from the long-term trend line occur than if/when market forces are allowed to more quickly correct. A brief overview of some economic history is required pedagogy to understand what shepherded the October ’29 crash as the US became a more dominant player on world stage, even if they didn’t realize their increased standing. The newly formed Republican Party (morphed from the protectionist wing of the Whig Party) deployed federal armies to military accomplish desired wealth transfers after exited States proved it would not be achieved politically. Other nations (most notably Europe) witnessed our experiment in independent sovereignty over empire and nation building finally fail after a few score.

Thoughts of reclaiming New World riches faded following the War of 1812. How industrious the US shown itself to be toward ruthless consolidation and hegemonic empire (Lincoln-Marx mentality made it clear the New World was leading the way toward command and control/soviet-style government) discouraged further attempts of reclamation. Europe resumed their amplified cycle of death and destruction followed by rebuilding instead of decentralized peace and stability. Modern technologies more quickly ground European armies to a halt, bankrupting their nations toward stalemate. Whenever Europe goes to war demand for US exports explode, WWI was no exception. Instead of simply benefitting from the folly of this war to end all wars, the US entered to break the stalemate moving the end result to the 1919 Treaty of Versailles which many economists (including John Maynard Keynes) forecasted impossible for Germany to meet in the coming years. This shepherding Europe to the even more virulent national socialist result of WWII is fodder for a future column.

The end of WWI meant return to normalcy, those who benefitted from the short-run boon of war must adjust. As Europe began to clear their fields and reallocate resources to a peacetime economy (more interested in feeding themselves than producing arms) was quickly noticed by American farmers. The so-called “Emergency Tariff” [1921] was a response to Europe getting back on their feet. More formalized under the “Fordney-McCumber Tariff” [1922] the US imposed high tariffs on agriculture and raw materials which are our ‘comparative advantage’ often exported. Republicans promised this would lead to great wealth for the American farmer as they had always touted protectionism helps American jobs over a uniform tariff to keep commerce regular as proscribed in the Constitution. Since our manufactured goods are usually inferior, there’s less demand to export them. Impeding the flow of refined steel, equipment, etc. increasing the price of inputs for production (esp. construction, manufacture) has a negative impact on employment, ceteris paribus. Political rhetoric of the next boon in farming fooled the dumb masses driving the ‘roaring twenties’ as the big govt. Repulocrats effectively fool the masses today with similar ‘feel good’ rhetoric.

Those who bought into this traditional Republican protectionist promise, reallocated their capital, effort, time, savings, etc. into farming. The ‘sodbuster’ distortion increased prices for farmland, mortgages, tractors, etc. but had very visible consequences. Once the usual protectionist result unfolded, demand for US exports decline as other nations react to our artificial trade barriers with ‘in kind’ raising of their protectionist policies in response. This time the folly was felt all the more enacting protectionist policies on our comparative advantage often exported; protectionism on inferior manufactured goods less exported was not as profound. As markets for our Ag and raw materials slowly closed while Europe further recovered from WWI, much of the newly sodbusted land along with longer/market established farmland was foolish to plant giving rise to the actual cause (contrary to modern politically trained

student claims these past years of global warming) of the “Dust Bowl.” When struggling farmers press Hoover and the Republicans on where all the relief and promised prosperity was, Hoover’s response was tariffs clearly were still not high enough. The 1931 Smoot-Hawley Tariff’s average dutiable rate of 60% was a little below the 1828 ‘Tariff of Abominations’ record at 61% which triggered the Nullification Crisis a century before. The stage for war between the States was set with the 1828 Tariff, but cooler heads prevailed and tariff reductions narrowly avoided conflict. Enter Mr. Lincoln (the greatest politician this nation has ever produced) and the newly formed Republicans wanting to return the tariff to 1828 levels mastering the use of slavery rhetoric to cloak their avarice; willing to accomplish their ends militarily when political machinations failed.

Just as warnings were sounded in the past, a thousand professional economist (before they ‘were all Keynesians’ as espoused today) sent an open letter to Hoover warning of the consequences (if history were any guide) of pursuing the path to yet another extremely protectionist tariff. Displaying his repute for blatant hubris, Hoover ignored the economists’ prophetic caveat saying he realized consumers would pay higher prices but would be made better off… Whenever a politician claims higher prices will benefit consumers (or welfare in general) when those higher prices will NOT motivate more supply, innovation, etc. but are a result of wealth transfers from impeding commerce – hold onto your wallet and RUN AWAY!

Easy to understand special interests who receive the transfer championing these policies/programs, but it will not promote the general welfare and allocation (esp. in capital markets) of resources to higher valued use(s) in our economy. Among the most ardent lotharios of leviathan in our pantheon of presidents, Hoover went to his grave lamenting how many of HIS big govt. programs were attributed to FDR. Once it was clear Hoover and the Republicans would not back off of this new high-watermark of protection, a crash with no foreseeable correction (until a change in Executive and/or Congress) was a rational forecast. Investors in fact observed Hoover and Congress remain obstinate even with the huge selloff response on Wall St. Some argue a 1929 Congress made more comfortable by the recently established 435 limited House of Representatives, enjoying less competition/discipline from voters, aided and abetted these recalcitrant protectionists.

Onto some more myth busting (to accompany “Republicans fought to end slavery” and “Protectionism saves jobs,” etc. rhetoric) w.r.t. Lincoln-like deification of FDR. It was an interesting time for the Democratic Party. After the Grover Cleveland era some considered a tipping point (as the only President to not serve consecutive terms as another popular vote v. Electoral College anomaly) a growing number of traditional Democrats grew tired of losing to the big govt. Republicans. The race was on to ‘out republican the Republicans’ and the socialists were accomplishing all the goals traditional big govt. Republicans (progressives) wanted without being elected under the Socialist Party moniker. It took four ballots at the DNC before FDR secured the 770 votes required to lock the nomination as Garner (who would be FDR’s VP for most of his four term presidency) finally released his delegates to FDR. It was clear the traditional Democrats (Jeffersonians who rejected corporate AND social welfare redistributionists) could not carry the day. Perhaps Garner thought the ills of progressivism were somehow different from deleterious results of the corrupt political machines. While the direction of the transfer matters to the specific recipient(s) the contraction to the economy is nonetheless profound – especially among those least able to weather tough economic times.

Contracting economies induce the worst out of mankind. As unemployment reaches unbearable levels the word ‘racism’ [1936] enters our lexicon when competition and merit attenuate as determinants of employment. More explicit, vulgar fallacies of inherent superiority of race carry the day as progressives become more emboldened and empowered over peoples’ lives desperate to get or hold onto jobs. Progressives gave birth to the first federal minimum wage in this era, one of the more effective tools still today to enable discrimination against minorities, single moms, etc.

Traditional Democrat voters, slow to see the realignments, think their candidate will come in and again clean-up the usual mess of Republican protectionism. Voters, unlike investors, are generally more ignorant of what specifically drives economic results. They were in for a surprise. FDR was NOT a traditional Democrat, he was a big govt. Republican enamored with his Uncle Teddy’s progressive hard charging toward centralized command economy results. Much had already been accomplished (some say the ‘Revolution of 1913’ today) with a more certain federal income tax, direct election of US senators, federal reserve, debt less tied to specific federal projects, etc. Some of our top soviet economists say the fed didn’t do enough with monetary tools at their disposal, but they DID – it failed because it was addressing a symptom, not the problem.

Sharp increases in Discount rates, buying bonds, etc. were met with further increases in unemployment as it showed further resolve to continue the Republicans’ extreme protectionist policy. Tariff revenues declined – no surprise to anyone familiar with the Laffer Curve. The recently [1913] reestablished federal income tax is already in place (no delay/effort required to impose it as did Lincoln in our first federal income tax) to continue financing this tariff policy contracting the economy. The fiscal discipline designed in the Constitution to limit duration policies of this sort could be sustained was circumvented. We could now observe the result of high tariffs AND the ability to increase a federal income tax when tariff revenue drops from protectionism. Indeed as the federal income tax was raised, unemployment climbed to an even higher new record providing short-run revenue for the federal government to continue operating.

Unemployment in fact spiked down in anticipation of electing a Democrat executive, but when president elect FDR is silent on reversing Hoover’s excessive taxation, unemployment returns to the record high level around 27%.

Roosevelt takes office, still no promise of tariff reduction, as the bitter reality of no relief in sight for years sets in... he declares a Bank Holiday as marginal banks (about 6,000 already closed their doors 1929-32) hanging on will not survive a “New Deal” instead of relief from Republican protectionism. More unconstitutional policies/programs (y’all know the ‘alphabet soup’ many of us had to memorize in govt. schools – AAA, CCC, CWA, EBA, FCA, FDIC, FERA, FHA, FSRC, HOLC, NRA, NIRA, PWA, REA, SSA, TVA, et al) along with the revered Glass-Stegall Act, did nothing to address the source of the problem. Unemployment hovers around 25% from 1932 to late 1934 until MFN (Most Favoured Nation trading status) provides some tariff relief. MFN was also unconstitutional, but did reduce some specific tariffs (up to 50%) with other nations for reductions in kind at the pleasure of the executive (FDR was the first president to enjoy this empowerment) so finally unemployment slowly declined.

This downward trend-line in unemployment would end in 1938 as many State and local governments imposed minimum wage laws and the NLRB (soon after the Wagner-Connery Act was deemed OK by SCotUS) imposed our first federal min. wage. Unemployment again spikes up, hovering around 20% until the storm clouds of war in Europe overshadow the ills of protectionism where once again demand for exports from America increase. WWII is what brings unemployment down and keeps it down for the duration. I pray younger readers learn and understand this economic history to come up with more sane ways to get out of failed policies we appear to be headed toward yet again.

The less remembered (30th Anniversary) but deeper stock market crash of 1987, “resulted primarily from program trading selloff and some secondary factors including excessive valuations, illiquid markets, balance of trade fears, market psychology, etc.,” according to pop press and the usual talking heads. Again, why programing to buy as the market dropped 508 points (22.6%) didn’t kick in and why sudden concern on the same day about valuations, liquidity, BoT results, etc. are noticeably absent among most economists who supposedly ‘are all Keynesians now.’ Computer trading was nothing new in 1987 and computers do not THINK for themselves. Investors decided to pull the plug on buy bids because what triggered the selloff was not resolved as stock prices plummeted toward record loss results. 1987 was another strong year for the stock market leading up to this ‘Black Monday’ crash, continuing the bull market which started charging up in 1982. Widely recognized as the ‘most extreme one week plunge in history’ – why is this crash largely forgotten, yet most know something about the 1929 crash? If one does not want an example/illustration of market forces disciplining political folly, 1987’s Black Monday is best forgotten.

A more reasoned explanation for the stock market crash of October 19, 1987 was published in the Journal of Financial Economics by a classmate from my grad school days at Clemson, Professor Mark Mitchell. He found the crash was triggered by legislation under consideration in closed Ways & Means Committee meeting Tuesday, October 13th. Just as the Mitch & Nancy types do their ‘public service’ behind closed doors to hide their evil, so did Dan. Mr. Rostenkowski (D – Illinois) was a fixture on this powerful committee for 13 years and a perfect complement to President Reagan who was another big govt. (modern) Democrat who ran as a Republican to grow government (champion corporate welfare, increase debt per capita three-fold, amnesty instead of Constitutionally based policy, etc.) while the masses reveled in Reagan rhetoric.

Rostenkowski was well paid by wealthy upper level managers and CEOs of companies who didn’t like being disciplined by ‘hostile takeovers’ exposing their poorly managed firms. Some may be more familiar with ‘Corporate Raider’ nomenclature or terms like ‘poison pill.’ Hollywood certainly makes it clear with movies like “Pretty Woman” (Richard Gere’s epiphany) and “Wall Street” (not heard subliminal names like Gordon Gecko and Bud Fox since

Caddyshack) how they want the ignorant masses to think about their role in society. The lesser known “Other Peoples’ Money” is my favorite, can you cast anyone better than Danny DeVito as an obnoxious reviled corporate raider going after Gregory Peck – a.k.a. Atticus Finch? Corporate raiders buy into firms so poorly managed their stock price does not even reflect the firm’s asset value. Let that sink in… millions of dollars of ‘stuff’ are so misallocated by the firm’s managers the company is worth less than if the assets were sold. It is the LAST firewall of protecting investors, retirees, etc. from stock prices going far below asset value. When news leaked from this closed Tuesday October 13th caucus meeting to protect high level execs and managers from corporate raiders, the selloff began. Rostenkowski knew his legislation would trigger fear – the reason for the closed meeting. Investors who understand how markets work realize stock prices would be less likely to at least reflect the firm’s asset value and now ‘the cat was out of the bag.’ Corrupt Dan didn’t have time to get his minions to buffer the response in a pre-circuit breaker/curbed Wall St.

Even more deleterious to the economy in general, reducing the discipline of corporate raiders would make it more difficult to get assets out the control of corrupt/poor managers and into the hands of more competent, honest ones. Yet another recipe for job destruction and contraction. Remarkably, one of our most entrenched, corrupt DC swamp creatures (similar character, integrity and spirit as our felon Hubbard, but Rostenkowski plead guilty to his charges) had to back off the legislation with such a shattering response from Wall St. Once the fear of Dan’s legislation subsided and investors changed their forecast that this powerful taker of huge campaign contributions and corruption wouldn’t logroll the proposed legislation into law, the market quickly corrected. Adam Smith’s so-called ‘animal spirits’ in action – i.e., fear and greed. When investors fear something on Wall St. they’re selling. Once the fear subsides greed kicks to return to buying – the greater the drop, the more appealing the stock prices. Some may recall how mutual funds delighted in showing returns since 1/1988 taking advantage of those ignorant of this historic event.

The ability of Wall St. to so loudly and clearly signal fear to thwart legislation of this sort had to be quashed. Circuit breakers and curbs will not permit such effective communication and makes markets easier to manipulate today, knowing exactly where the boundaries lie. The observed less stable results (higher peaks/lower troughs) and much longer durations outside cycles remaining closer to the long-term trend line are no surprise. Moving onto bailouts of poorly managed firms and policies/programs to discourage correction was an easily predictable next step in keeping with the 1929 history of further empowering the command economy addressing symptoms instead of the problem. Making it more difficult for markets to purge trash (poorly run firms) out of the system impedes resource allocation to higher valued uses to promote jobs, more competitive prices, etc. So what’s the punchline? The deeper 1987 crash is forgotten because DC backed off the legislation which triggered the selloff, so the market was allowed to quickly correct. The lesser 1929 crash is an indelible memory because DC did NOT back off the legislation which triggered that ‘Black Monday’ selloff and didn’t provide any reversal (however partial) until MFN five years later. Long drawn out downturns like 2008 are much more likely under the current ‘breaker and curbed’ command economy result; little dispute the federal government has much greater power than a century ago to dust up much more devastation to make the ‘Dust Bowl’ look like a small ‘Dust Devil’ in comparison.


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