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Understand the historical context of the 1929 Crisis

Understand the historical context of the 1929 Crisis

As he did every Thursday, that morning in October 1929, the mythical oil billionaire John Rockefeller found his shoeshine, with whom he liked to talk about trivia. As he polished the leather, the boy looked at the richest man in the world and shot, “I’ve heard of some papers that are going to go up in earnest, sir.” Rockefeller folded the paper, stared at the guri, and returned to the office, selling a good part of his papers on the New York Stock Exchange. “If the boy who polishes his shoes knows everything about the market, then something very wrong is happening,” he said.

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A week later, on Oct. 24, which became known as “Black Thursday,” the stock market of the American metropolis was beginning a traumatic crash, leading thousands to bankruptcy. Banks and industries were ruined. Small investors also went bankrupt. They were teachers, waiters, typists. People who had been drawn into the stock market in a time of wonder: the crazy 1920s.

It is quite probable that history of Rockefeller, who got away reasonably unscathed from the break, is a legend – he was one of the few investors not to lose a lot of money. The fact is that three years later, shoemakers like the billionaire were the fastest growing profession in Manhattan. The New York Times reported that in addition to the 7,000 boys polishing shoes to help the family (a scene virtually nonexistent in the summer of 1929), there were a crowd of street vendors selling cheap ties, colorful balloons and all sorts of trinkets. New York lived its Third World days.

Crazy crazy

When the First War ended in 1918, Europe was devastated and its powers weakened. The United States , already the richest country in the world, began to supply the continent with manufactures and food. Throughout the whole of the 1920s, increased production generated growth and prosperity for the country, which dominated other markets, such as Latin America. The optimism was so great that it was believed to be facing the end of the era of economic cycles – the sway of the economy, periods of recession between times of expansion, which occurred several times throughout history .

The government facilitated the liberal economy without interference, reducing taxes. Calvin Coolidge, who was elected US president in 1924, said that “the business of the United States is business.” With the free market, light and loose, a new fashion emerged, alongside Ford T and Duke Ellington jazz: investing in stocks. The supply of products such as cars and appliances only increased and loans and credit sales became popular to help people buy more and more.

In the middle of the decade, Europe again competed for clientele and American production was overheated. There were no consumers for so much supply. But optimism was not restrained, after all the “invisible hand” of the market would always adapt to keep the country on the path to growth. In a 1928 speech, the new president, Herbert Hoover, stated: “We are now closer to the final triumph over poverty than any other land in history has ever been .”

In 1928, the appreciation of stocks began to take much greater steps than the growth of the economy itself. New technologies, such as broadcasting and cars, were the darling of investors. An action by the Radio Corporation of America, which in 1921 cost $ 1.5, was worth 57 times more seven years later. Speculation galloped. In Save Who Can, the English historian Edward Chancellor states that in 1929 “speculators became deaf to the warnings. (…) Instead of reasoning, they fed on the growing rumors about fabulous wealth gained in the stock market by drivers, cowboys, actresses. ”

In September, the Dow Jones market valuation index peaked in the year and the market began to feel a downward slump. Turnover decreased until the situation became unsustainable. “There was a financial crisis, a stock market crisis, and an economic, production and labor force crisis,” explains historian Wagner Pinheiro Pereira, author of October 24, 1929. “The crisis led shareholders to put shares on sale. With too many stocks and few buyers, the price fell, ruining people. Without resources, the companies fired. Banks and factories failed, and the effects spread throughout the world. “Hoover’s triumph never came. But the worst was yet to come.

Former UK finance minister Winston Churchill, who owns some stocks on Wall Street, visited the stock exchange on that fateful October 24. He had a silent panic – at that time he was not allowed to scream or run in the floor – even without the day he had registered a bankruptcy of big business. The fear was in the air by the simple fall in stock prices. A nervous crowd jostled outside when a man climbed atop a building. The nervousness increased. For nothing, at least at that moment: it was just a worker doing routine repairs. However, that day 11 suicides were recorded, such as that of a female jeweler who hanged herself, with the collection papers under her feet. For her and another 90% who ventured into the stock market, the investment turned into debt.

Prices fell to “black Tuesday”, 29, when despair took over the stock market. Brokers screamed, grabbed their necks, tore their jackets. Rockefeller announced in public that he would buy back stocks daily, which revived the market, but it turned out to be a joke. Radio comedian Eddie Cantor did not forgive: “I believe that. Who else still has money besides him? “Eddie, who had lost $ 1 million, tried to make legendary suicides, such as the receptionists at the Ritz Hotel who asked who came to the hotel if they were going to stay or kill themselves , Jumping from a high floor – although there has not been a significant increase in suicides over the previous year.

The crisis itself ended in November. It reached, in addition to Churchill, which was almost 600 thousand dollars poorer, about 1.2 million people in the United States- less than 1% of the population. The year 1930 began with new promises of employment, but the improvement of the mood of the market was ephemeral.

In two years, the Gross National Product (sum of income of American people and companies) fell 60%. In 1931, more banks went bankrupt than during the entire 20’s. “The Depression was by far the worst time in economic history ,” says American economist Randall Parker. Lack of money hit the factories hard. Industrials failed, among them William Durant, founder of General Motors – company-symbol of speculation. In 1936, to support himself, Durant washed dishes in New Jersey. Charles Mitchell, president of the National City Bank (the current Citibank) during the 1920s, was forced to resign after being accused of not having declared taxes. Even without being convicted for lack of evidence, was considered one of the responsible for crack. Hoover’s popularity sank along with the nation’s self-esteem.

Rows scattered throughout the country. Rows for a plate of thin soup, queues for a loaf of bread, queues of men in search of employment. In the countryside, the sign of poverty was clear: shantytowns with huts made of cardboard and tin could proliferate and farmers wander the roads in search of temporary services. While abandoned apples rotted and vultures ate the flesh of rams slaughtered in canyons (thrown by the owners who did not want to spend money on the slaughter), people died of starvation in the city. No one had money to consume. So nobody sold.

In 1932, a commission was organized by the government to determine the fraudsters on Wall Street. He found excessive remuneration and manipulation. The Stock Exchange was defined as a “casino”, leaving the population even more dissatisfied. With a speech that propagated state intervention in the economy, Democrat Franklin D. Roosevelt was elected president and in 1933, the recession’s heyday, announced an economic package to save the country: the New Deal.

At this point, with a quarter of its workers jobless, the recession of the United States hit Europe and other corners. In 1931, the French only had time to mock the “presumptuous Anglo-Saxon economy” before falling into the Depression as well as the British. The world-wide board was upside down, so much so that the Soviet Union of Josef Stalin became a destination for many young New Yorkers.

In Germany, traumatized by an enormous crisis in 1923, the ground for the rise of a radical and nationalist system was prepared. The historian Eric Hobsbawn in The Age of Extremes is emphatic: the Great Depression made Adolf Hitler the lord of Germany. Hitler’s regime, like Mussolini’s in Italy, succeeded in modernizing its industrial parks. In 1935, the production of the two countries had already returned to the level of 1929. Meanwhile, underdeveloped nations had to industrialize, since their agrarian export economies went down the drain, like Brazilian coffee.

In the United States , Roosevelt’s reforms were beginning to work. The economic effects of the Depression were only overcome almost a decade later, with the outbreak of World War II, which gave the country a chance to increase its output.

Today, the US economic recession – which the Federal Reserve has ranked as the worst since 1929 – reinforces the specter of a new global crisis. Opinions differ. “In the near horizon, this will not happen. The Fed is much better prepared than in the 1920s, and in the stock market there have been worse crises like 1987, “says Parker. “The crisis is inherent in the capitalist system,” says Wagner Pereira. Edward Chancellor in his book says that “in the past we have always reached a point where both speculation and credit reached the limits of expansion. At that moment, the economic cycle resurfaces … and the new era is relegated to history. ” Sooner or later, we may have to fasten our belts.

The Recession’s Pendulum

Economic crises have been common for centuries

1637 – Amsterdam – Tulips

Power, the Netherlands sees their optimism reflected in tulips. The flowers are ordered in advance. Prices skyrocket and everyone wants to invest. In the harvest, rumors of lack of buyers sow panic.

1697 – London – Shipping companies

The commerce with the Indies and the hunting of treasures foments the emergence of companies. The shares of some of them are up 500%. After the break, 70% of English and Scottish companies speak.

1825 – London – Precious Metals of Latin America

Investors turn their eyes to gold mines. Speculation runs wild. The default of Latin American companies that had taken loans helps sink the UK into recession.

1990 – Tokyo – Real estate market

There is unprecedented growth in the stock market. Investing in the stock market becomes fashionable. Real estate speculation jumps wide. The Bank of Japan decides to end the party and corrupt schemes come to the surface.

Coffee CrisisIn Brazil, acts of despair

“My son, this year you will not win this one. We’re broke. “Jayme Wright Jr., my grandfather, was five when he heard this from his mother on Christmas Day 1931. The previous year, the family had to sell jewelry and dispense employees. “Faustous life” was tight in a house in Santos, where his father and grandfather – my great-great-grandfather, João Francisco Wright – were coffee exporters, the main product of the Brazilian economy. The 1929 crack hit those who worked with such “green gold”, since the United States was our biggest consumer and, broken, had no more money for coffee, which accounted for more than 70% of our exports. But the problem was before the crisis. Since the end of the 19th century, Brazil was already facing overproduction, which diminished the value of coffee, Being forced to stockpile in order to insure prices. As of 1925, the fires became common. My grandfather remembers seeing it on the horizon, not understanding it right. “Looking at this photo is like having a record of the fall of the Bastille,” compares, without fear of exaggeration, the architect Aníbal de Almeida Fernandes, whose grandparents also suffered from the crisis. Aristocrats of the coffee elite of Vassouras, Rio interior, Joaquim Rodrigues de Almeida and the family moved to the Baguary farm, in Araraquara (SP), in 1890. After living the decay of Vassouras, Joaquim was shaken by the coffee crisis that Came later. He died melancholy in 1937, and the following year, the family disbanded the estate. My great-great-grandfather had to dispose of the farm in Guarantã (SP), sold cars and house and paid his debts. In 1933, alone in the office, Wrote a letter to the family and sought an end to his torment with a shot that shot in his own chest. FD

Post Scriptum

Danger in sight? Crisis in the US would not bring down Brazil

The crisis of the American economy in 2008 brought the fear of a tragedy like that of 1929. The economist Filipe Albert, graduated by FEA-USP, specialist in International Conjuncture of Consulting Trends, talks about impacts in Brazil, should the crisis worsen.

What would happen if there were a recession in the United States as large as 1929?

Although the United States now accounts for 30% of the world’s GDP and is an important trading partner of growing countries, as is the case in Brazil, it is possible to say that there would be a more limited impact here than in the 1930s. At that time, Brazil practically only exported coffee and the Americans were the main buyers. Today, Brazil has a diversified export agenda, with emphasis on agricultural products, especially valued. Brazil has also diversified its trading partners, it is not so dependent on the United States . Needless to say, if there were no such slowdown there, Brazil would be even better off than it is.

Would China, with significant growth, have the function of cushioning the negative impact of a recession in the United States ?

That already happens. This country has been growing a lot and has been buying more and more from Brazil. In China, which also has the United States as one of the main trading partners, there is, like Brazil, a diversification of the list of trading partners. In this way, the impact of the American downturn has been somewhat diluted because of other partners. And the volume of business closed with Brazil is only increasing. It is that China is hungry for development.

What would be the worst case scenario for the US economy?

The most pessimistic scenario would be a credit crunch, that is, a drastic reduction in the volume of credit for companies and consumers. This would lead to paralysis of the American economy. But, unlike 79 years ago, US banks have been able to get support from foreign capital, which injects them with money and helps them dodge the current crisis. This crisis began with a real estate bubble, when loans taken by unskilled buyers were not paid to banks and there was a generalized default. Among the main causes of the Crisis of 1929 were unbridled speculation, the proliferation of debts and the consequent breach of financial institutions. They are the same factors that are at the root of the current crisis. The difference is that American banks today have been saved by foreign capital