Could the Great Crash of '29 Recur?

"It can't happen again." That was the cocky mood along the eight blocks of Wall Street last week. A new generation of stockbrokers, analysts and specialists who have only read about the Great Crash confidently continued business as usual. A block from the New York Stock Exchange, Trinity Church, which was packed with prayerful people in October 1929, did normal business.

But could that dreaded month when the bubble burst and the world plunged into a decade-long recession recur exactly 50 years later? Many conditions today look frighteningly similar to those of late 1929. Then the panic was spawned by the Federal Reserve's attempt to nip speculation by raising the discount rate a full percentage point from 5% to 6%. The nation's banks in 1929 had built up a pyramid of foreign debt. National City Bank judged that Peru had a "bad debt record, adverse moral and political risk, bad internal debt situation"--and then lent the country $90 million that was soon defaulted. Wall Street banks today have $48.7 billion in loans outstanding to Peru and other oil-poor developing countries. Consumers in the '20s had just discovered the installment plan and were plunging into debt to buy radios, refrigerators and that new Model A from Henry Ford. Their grandchildren now have "plastic money" in the form of credit cards and owe $292.5 billion. The '20s real estate boom was centered in Florida, had created millionaires and seemed to prove, then as now, that one rarely loses money buying land. Even President Carter's insistence last week that the U.S. had a "good solid economy" stirred echoes of Herbert Hoover, another engineer President, who said two days after the Black Thursday of 1929 that the "fundamental business of the country is sound."

But Wall Street today is also very different from what it was a half-century ago. Then the market and the country were in an ebullient mood; optimism was king. The stock market law of gravity held that whatever goes up must go up again. During one day, RCA--the IBM of its era--soared 40 points. In recent years, however, the stock market has had the blahs, reflecting national uncertainty about the future. This summer the Dow Jones industrial average had already declined 50% from its peak of 1051 in 1973, when adjusted for inflation. Concludes Economist John Kenneth Galbraith, author of The Great Crash, a study of the 1929 debacle: "It would be hard to find any buildup of speculative hubris that would make us as vulnerable as we were in 1929."

The Wall Street player today is also not like the 1929 Fifth Avenue cook who quit because her mistress would not install a stock ticker in the kitchen or the shoeshine boy who passed on to Joseph Kennedy the insider's tip to "buy oil and rails." In the past decade, 7 million small investors have pulled their money out of Wall Street and spent it on real estate, gold or simply a new mink coat. Over half of today's market is dominated by professional investors representing pension funds, insurance companies or mutual funds. They have better financial backing and are far less likely to take a flyer than were their predecessors. As a result, the market is less fun but more stable.

Wall Street is also safer today because, in the aftermath of the Crash, the Government moved to outlaw some of the abuses that permitted the 1929 bubble. Fifty years ago, a buyer had to put down only 10% of his own money to get a stock; he could use credit for the rest. Today, under a Federal Reserve rule, customers have to put up at least 50% of their own funds. The Fed can also slow bank credit to stop speculation from feeding a boom, a step it took last week. In addition, there was no watchdog Securities and Exchange Commission in 1929 (it was set up in 1934). Today the SEC closely polices financial markets to stop inside dealing and fraudulent company reports, which were rampant in the '20s. While a stock market fall is always possible, it is less likely now to ripple through the economy, as it did in 1929.

Some economists now wonder if the nation has so successfully insulated itself from a 1929-type depression that it is condemned to 13% or worse inflation. Robert Heilbroner argues that the postwar measures to avoid another Crash and Depression have "put a floor under the downward movement of the economy." This guarantee against disaster, in Heilbroner's view, has changed economic expectations so much that corporations raise prices and unions demand higher wages more recklessly than they otherwise would. The result is faster inflation. Thus the cure for the Great Crash, seen from this perspective, has created side effects that must be treated if the nation is to avoid the Great Inflation.

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