The Great Crash of 1929 ranks among the climactic events of the last century, apparently heralding the beginning of the Great Depression. This event raises at least four questions that are relevant today:
• Why did the “Roaring 20s” roar? Some prominent contemporaries held that the decade roared because of consumerism, credit growth, and the Jazz Age. However, recent research suggests an alternative explanation: a revolution in manufacturing and technology that amplified economic growth and volatility in markets.
• Was the boom in equities a “bubble?” Both the authors’ research and other studies show surprisingly weak evidence of a bubble. The boom probably reflected the technology shock of the ’20s. If there was a bubble, it was limited in time, breadth, and impact.
• What caused the Crash? The onset of an ordinary recession, surprising changes in monetary policy by the Fed, growing regulation, and rising protectionism all help to explain a sharp and sudden change in investor sentiment.
• Did the Crash cause the Great Depression, as popular opinion has long maintained? No. The cycle of economic contraction had begun well before the crash. Furthermore, the wealth effect of the Crash was limited. The pivot from recession into Great Depression reflected the abandonment of the Gold Exchange Standard, a wave of bank panics and collapse of credit, protectionism, and a number of maladroit public policies. But if the Crash did not cause the Depression, it probably amplified the effects of forces already at work.
Answers to these questions, illuminated by careful research, remind decision-makers in business and government that the first explanations for historical events are not always the best, that complex systems have unintended consequences, and that gaps in information make the Great Crash a difficult standard by which to assess future events. The use of historical precedent warrants caution and great humility in the makers of public policy.