The Stock Market Boom and Crash of 1929 Revisited

In trying to explain the 1987 stock market crash, many analysts drew obvious but vague comparisons with the events of 1929. Newspapers published a chart, reproduced in Figure 1, showing the bull market of the 1920s superimposed on the 1980s. The degree of similarity between the two periods up to the crash was striking. Yet while analysts noted this close correspondence, they drew few inferences from it. Comparisons proved difficult because the crash of 1929 had received little scholarly attention since Galbraith's The Great Crash 1929 (1954). This paper will sort through many of the hypotheses offered to explain the 1929 boom and bust. Most of the factors cited by historians played trivial or insignificant roles. The central issue is whether fundamentals or a bubble drove the bull market upwards. An econometric resolution of this question is unlikely, for reasons that Flood and Hodrick explain in their contribution to this symposium. However, the qualitative evidence assembled in this paper favors the view that a bubble was present in the 1929 market. The Conventional Wisdom Galbraith's classic book still provides the most commonly accepted explanation of the 1929 boom and crash. He argues that a bubble in the stock market was formed during the rapid economic growth of the 1920s. Galbraith emphasizes the irrational element-the mania-that induced the public to invest in the bull market. The rise in