Date of Award

1989

Document Type

Thesis

Degree Name

Master of Business Administration

Department

Business

First Advisor

Arlene Taich

Second Advisor

Don Fuller

Third Advisor

Mike Wood

Abstract

Investors, scholars, and economists are still arguing about what caused the October, 1929 stock market crash, and the probability is that decades from now, their successors will remain in disagreement about what caused the October, 1987 crash.

As a result of the stock market crash of 1929 , the Great Depression began. Conventional dating of the downturn based on evidence from a variety of sources puts the slump of our economy near the middle of the year. In the popular consciousness - then and now - nothing happened until the stock market crash in the fall of the year. Stock prices, which had increased at an accelerating rate in 1928 and 1929, collapsed suddenly in October. Black Thursday, October 24, 1929, had become the symbol of the Depression.

The change in financial markets was dramatic due to the stock market crash. Short-term interest rates, which had been high in 1928 and 1929 as the Federal Reserve System tried to dampen the stock market boom, fell rapidly to unprecedented levels in late 1929.

Several hypotheses have been noted as causes for the stock market crash of 1929. One of the hypothesis is the spending hypothesis. It states that the Depression was generated by a fall in autonomous spending. At a given level of income, desired investment and consumption fell. Various reasons for this fall can be given, but the two most frequently cited focus on construction and the stock market. The quantity of money fell because of a fall in the supply of money, not a fall in the demand. The fall in the supply of money was caused in the first instance by a decline in Federal Reserve credit outstanding in 1930, but far more importantly by the effects of the banking failures starting in late 1930. The clear - but unstated - implication is that the fall in the quantity of money caused the level of income to fall. Given a stable demand for money, a fall in the supply of money required a movement along the demand curve, that is, a fall in income, to equilibrate the supply and demand for money. The behavior of the Federal Reserve System was the underlying causal factor.

As with the stock market crash of 1929, various reasons have been given by investors and economists as to the causes of the crash on Black Monday, October 19, 1987. Some economists say that the market was triggered by Japanese investors' heavy selling of United States government bonds. The trigger being that the Japanese came in for their own reason and sold an enormous amount of the United States bonds, and drove the 30-year bonds up through the ten percent level.

Other economists say that it was the twin deficits that caused the stock market crash: the trade deficits and the budget deficits, or it was the tax legislation that caused the events leading to the crash . Downward pressures on the dollar and upward pressure on interest rates were also crucial factors in the market in the days leading to the crash.

There was a vast amount of difference in our economy in October, 1987 compared to the economy in October, 1929.

However, today 's financial system and economic policy mechanisms provide considerably more protection against the type of cascading economic collapse that crippled the nation during the Depression.

Both of the stock market events discussed brought the most climatic financial concerns to our society in history.

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