Letters by a modern St. Ferdinand III about cults

There are many myths about the stock market crash of 1929 – all them taught and believed in by the well informed media and those profound thinkers in public education. The crash of October 29 only reset stock levels back to 1928 – hardly a meltdown. But more importantly the causes of the 1929 credit and stock crisis originated with government. They had little to do with 'markets'.

The 1920's under President Coolidge were the most dynamic decade probably in US history – and the most laissez-faire. More wealth was created for more people in those 10 years than in any other community, at any other time in history. Real per-capita income went from $500 in 1920 to over $700 by 1928. National income rose from $59 billion to $88 billion during the same period – real gains of over 40% in just 8 years.

Appliances and inventions to simply life and improve entertainment abounded. Cars became the new normal. An entire nexus of industry around the car including roads, construction, restaurants grew apace creating jobs and wealth. The US middle class rose to over 100 million people whose standard of living was 30 years ahead of the European. The 1920s boom was uneven, but spectacular dismaying snobs like F Scott Fitzgerald who could not stand the dirty mass enjoying what only the rich had previously owned.

But as with any good party the hangover from the 1920s bash was terrible. Though the wealth and asset creation was real and in many ways permanent there were two terrible flaws with the rampant growth of the 1920s. First, US industry was protected by high tariffs giving future governments a platform to further raise tariffs and keep out cheaper and better products. Second, the US financial system was awash in liquidity, supported by near zero interest rates. Both of these would guarantee that Coolidge's statement to his daughter that 'a depression is coming', would be realized.

The US raised tariffs twice which distorted trade patterns and de-stabilized markets. The first was in 1922 with the Ford-McCumber tariff and than again in 1930 with the execrable Smoot-Hawley act which was the largest tariff protectionism in history. World commerce and America's own economy suffered greatly under these two political acts designed to appease higher wage workers and voters in the US, and earn the political support of a variety of large and rather inefficient businesses and industries.

Both acts guaranteed a loss of trade and resultant corporate profits and negatively impacted stock markets. The 'crash' of 1929 was in part a market response to the Smoot Hawley proposal, than making its way through Congress. The markets rightly sold off in advance, knowing that the bill's passage would herald the end of trade and corporate profitability and would be matched by tax increases and massive spending. The market was of course right.

What guaranteed the so-called crash was the advent of liquidity tied to poor fiscal policy embedded in tariffs and with the election of Hoover the social engineering demi-god of US politics as President in 1928, the nefarious impact of massive state intervention. The combination was inexorable and disastrous. But it was US liquidity of course which dramatically fed a stock market bubble during the 1920s.

The US government fed the banking system an increase in money supply as 'aggregate demand' from growing GDP created an appetite for US greenbacks. This increase in money supply was somewhat more than warranted and helped fuel the rise of loans and investments – and the creation of investment trusts dedicated to stock purchasing. These trusts were the harbingers of the larger institutions we know today, including hedge funds and mutual funds. The trusts also benefited from the first mass democratic interest in stocks – by 1929 some 40 % of Americans had stock investments.

Added to this money supply increase was the low to zero interest rate policy of the Coolidge administration. As one could easily forecast, near zero rates generated a plethora of loans and various schemes where a poor man of modest means could borrow money. A lot of this borrowed money found its way into Wall Street. Investment trusts and brokers invented the 'margin account' during the 1920s, wherein a person could put down less than 10 % of the value of the stock purchase in cash and borrow the rest. It was highly imprudent but very popular.

The combination of all of these factors created a deluge of capital which drove up stock prices. Keep in mind that during the 1920s there were far fewer listed stocks than today. The limited opportunities attracted excess cash and drove up Price-Earnings ratios to the highest on record. Before 1929 some stocks were trading at over 50 times P-E – the historical average is 16. A fall was easily forecasted. All that was necessary was a push – and that came from Hoover's social engineering project replete with taxes, spending and higher tariffs.

The stock market did not really crash in October 1929. The index peaked before Monday October 21 at 452. As the excess credit inflation started to burst, margin calls went out – in effect trusts and brokers calling in leveraged loans. Since few had cash on hand it generated a panic. Selling commenced and bankruptcies followed. After 4 weeks, the index stood at 224 – or the same level as December 1928. A sharp and rational correction to be sure but hardly a disaster. By December 1929 the market had stabilized. Much wealth had been destroyed - but much wealth had also been created during the bubble years preceding October 1929.

If prudent fiscal and monetary policy had been followed in 1930 the 'depression' never would have occurred, and the sharp credit deflation which was so necessary and vital, would have corrected itself by the end of 1930. Instead the politicians became further involved. Their credit inflation during the 1920s had caused a stock market excess and correction. Now improvident social engineering combined with massive taxation and spending, along with far too high interest rates guaranteed a sharp contraction in capital, markets and industry. Yet today the media, and the social engineers at public schools blame the events of October 1929 and beyond, on the 'markets'.

What is certain is that easy money and credit expansion usually end poorly. The last decade also proves that point. Yet today the same policies which caused the stock bubble of the 1920s and the 2000s is still in train. So when will the next crisis hit and how hard will it be ?