IT IS GREAT TO BE A TEACHER of personal finance economics, in part because the content is clearly relevant to students. Students don't require a lot of convincing to buy into the idea that they should learn to make good decisions directly related to their financial futures. In the same way, history comes alive when it relates to students' lives. When an opportunity comes along to bring these content areas together, economics teachers, history teachers, and students all can enjoy the moment.
Teaching about the stock market in general, and historical stock market crashes in particular, provides one such opportunity. It is almost impossible to read or listen to news reports today without encountering some announcement about how the stock market is doing. Tapping into students' curiosity about the stock market can motivate them to learn many related and important concepts. The topic of stock market crashes creates a natural segue for history teachers into personal finance, and for personal finance teachers into history. Students interested in how personal investment may lead to personal wealth are also curious about why things went so wrong in 1929 and in other crashes.
This article discusses two twentieth-century stock market crashes: the crash of 1929 and the crash of 1987. (1) When this material is presented to students, they see important parallels between the two historical events. But despite remarkable similarities in the severity and many other aspects of the two crashes, the crash of 1929 was followed by the Great Depression, whereas the market rebounded almost immediately from the crash of 1987 The consequences had obvious implications for the well being of investors in these two periods. What accounts for the differences? Are there some important economics lessons here, for both history and personal finance classes?
THE STOCK MARKET CRASH OF 1929
The Crash of 1929: What Happened?
The stock market crash of October 1929 is often seen as the end of the prosperity of the 1920s. However, there were many signs that the economy was already on the way down before the crash. The two worst days were October 24, 1929 ("Black Thursday") and October 29, 1929 ("Black Tuesday"). What happened?
Stock prices increased dramatically in 1928, with the Dow Jones Industrial Average reaching a peak of 381.2 on September 3. Stock prices fell by about 10 percent following this peak, but then rose again about 8 percent by mid-October. Panic selling appears to have set in on October 23, and on October 24 a record-breaking 13 million shares were traded, compared to an average of four million shares per day in September. The technology of the day (telephone and telegraph lines) was not able to keep up with the trading, and the ticker tape ran an hour and a half late. Many sellers did not know what prices they had received for their trades until later that night. Several of the nation's largest bankers were alerted to the crisis and announced that they were willing to buy stocks above the going prices. The intent of the bankers was to give people confidence in the market and to stop the panic selling. On October 25, President Herbert Hoover also tried to halt panic selling by assuring people that the "fundamental business of the country--that is, the production and distribution of goods and services--is on a sound and prosperous basis."
Although prices steadied for a few days, panic selling started again on October 28. Nearly 16.5 million shares were traded on October 29, and the downward trend in stock prices continued. Two weeks after the crash, the average prices of leading stocks were about half of what they had been in September.
The Crash of 1929: What Followed?
After the stock market crash of 1929, things only got worse. By the end of 1929 the market recovered somewhat, but in general stock prices continued a downward spiral until 1932. By 1932, average stock prices had fallen more than 75 percent and people had lost an estimated $45 billion in wealth. …