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8 reasons why the 1929 stock market crash won’t happen again

04 October 2023

Every time the economy goes on a downward spiral, many people refer to the 1929 stock market crash, which is considered to be the worst economic event in modern history.

It’s often used as an example of how bad things could get.  After the stock market crash, the US and European economies went into depression. Up to 25% of the US population was out of a job.

The stock market was also obliterated. At a peak of 381 points on September 3, 1929, the Dow Jones Industrial Average crashed to 198 in less than 2 months. It would take another 20 years before the Dow would surpass the 200-point level.

But will we experience something so draconian again?

That’s something experts like to predict. Headlines like, “Why The 1929 Stock Market Crash Could Happen Again” are always popular during a stock market crash.

As an investor and student of financial history, my answer is this: No, we will not see another 1930s-style crash and depression.

Here are 8 reasons why. At the end of this article, I’m confident you will agree with me.

1. Pre-modern stock markets were casinos

While there are a lot of speculators in global markets, there are also many long-term investors.

Before the 1930s, long-term investing wasn’t a thing. This is something new investors find hard to believe because the idea of investing is so sold that you would assume people always invested.

From the 17th century to the 1920s, investing as a means to build long-term, sustainable wealth was not in the realm of possibilities. Markets were too unstable.

It wasn’t until 1924 that economist Edgar Lawrence Smith applied a fundamental look at the long-term returns of stocks. In his book, Common Stocks as Long Term Investments, he challenged the conventional idea that stocks were merely mediums of speculation.

He was one of the first people who popularized stocks as investments. Benjamin Graham and David Dodd built on that work in their 1934 book, Security Analysis, which became the bible of long-term investing in stocks.

But it wasn’t after WWII that investing in stocks became in fashion. Since then, we have had more investors than speculators. Something that makes global markets much more stable. When speculators cause crashes, investors are ready to buy assets at bargain prices because they are in it for the long haul.

2. Colluding and cornering markets isn’t commonplace

This point goes hand in hand with the previous one. Since markets were for speculators, they used all kinds of tactics to gain an edge.

My favorite stock trader of all time is Jesse Livermore. He had many great thoughts about trading in stocks. But he was a notorious stock market manipulator.

Forget about inside information. Livermore and his friends would pool money together and they would move markets by sheer force. When they decided to pump up the price of a stock, you couldn’t stop them.

Think of it this way. When millions of people participated in the short-squeeze of Gamestop, it was world news. Back then, it was just another day on Wall Street.

This is because we have so many large stock market participants that it’s difficult to move markets, even if you work together with other parties. While market manipulation still happens in other asset classes, large-cap stocks are not influenced by a handful of players.

This is something that makes the stock market robust. Something that you can’t easily break.

3. Stock market participants are smarter now

Just as the lockdowns started during Covid, Goldman Sachs reported that ordinary investors have picked companies that outperformed the stock picks of typical hedge funds.

Goldman found that “amateurs” picked an equity basket that went up 61% compared to the 45% increase made by professional Wall Street stock pickers. It’s now possible for retail investors to make smarter investment decisions than the so-called professionals!

The stock market crash of 1929 is partly credited to the overconfidence and ignorance of retail investors. Ordinary people borrowed massive amounts of money, even mortgaged their homes, to invest in a stock market bubble that eventually burst.

But thanks to advances in technology and the availability of information, most people can make more informed decisions when investing.

Of course, investors will still experience losses and lick their wounds. Like how the hyped Robinhood app gained millions of active users in mid-2020 — many of them young people — only to lose 10% of them this year.

And there are still thousands of people who have lost all their life savings. But it’s no longer as common as back then.

That’s because we now have more collective knowledge and experience than ever. And investors are getting smarter every day because of this collective knowledge.

4. Most of the population relies on the stock market

To me, this is the biggest reason why the stock market will not go into a depression. Over the decades, society has given so much importance to the stock market, that it’s impossible to let it burn.

Just think of how many people rely on pension funds. When many of them collapsed in the fallout of the financial crisis in 2008, we saw the destruction of people’s livelihoods.

It made people aware that the stock market cannot be down for a long time.

But the pension fund as we know it didn’t exist in 1929. The common idea was, “Who cares about the stock market? It’s for rich people anyway.” They didn’t realize how connected the stock market was to the economy. Even back when the stakes were much lower.

Now, EVERYBODY relies on the stock market. Pension funds are still a relatively new invention. The first modern pension fund was built by General Motors in 1950.

Recent data found that the majority of American families have some level of investment in the market, mostly in the form of a 401(k) retirement fund.

In 1929, the stock market was a game mostly played by the minority of the population. But they had too much power to destroy the wealth of all people (see next point).

5. Normal banks are no longer investment banks

Until the 1920s, banks used the deposits of savers to lend to stock market speculators. When speculators took too much risk and blew up a bank, everyone’s money was gone. That means your money wasn’t safe at all when you stored it in a bank.

At the time, only 10% of typical households had investments. But over 90% of all banks had their money in the stock market.

In the early 30s, the government tried to restore the public’s trust in the banking system. They put into law the Glass-Steagall Act, which separated commercial banking from investment banking. So depositors won’t have to worry that the bank will lose their money in speculative investments.

On top of that, one of the act’s proponents, Rep. Henry Steagall, also pushed for the creation of the Federal Deposit Insurance Corporation (FDIC). At the time, the FDIC insured deposits up to $2,500. (This limit was raised numerous times over the years until reaching the current $250,000).

In 1933, the FDIC was born and bank deposits became instantly more secure. That increased the trust of the public in banks.

6. The SEC protects investors

Not only did stock prices crash, but public confidence in the markets also crashed in 1929. So congress did something: It created the Securities and Exchange Commission.

The main purpose of the SEC can be boiled down to these two main points:

  • Companies offering securities for sale to the public must tell the truth about their business, the securities they are selling, and the risks involved in investing in those securities.
  • Those who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly.

It sounds great. But the SEC isn’t perfect, and they don’t catch all crooks. But they instill fear in many bad actors. That alone makes the stock market safer and less prone to systemic problems.

7. Markets can halt trading when needed

Stock market exchanges have a wide range of rules that protect investors from imbalances in the market.

For example, when panic breaks out in the stock market, a series of sell orders can seriously collapse an entire market, wiping out trillions of dollars of wealth.

The October 1987 crash is famous because it was seemingly triggered by “glitches” in the system (no one knows exactly why the market crashed so badly on Black Monday).

When the market starts to slide, no one knows how far it can go if everyone starts selling, or is stopped out of their positions automatically.

That’s why not only the SEC can halt trading, but also individual exchanges. In fact, exchanges have “circuit breakers” that are designed to stop unusual swings. This allows for a much more orderly market.

More order, more peace of mind.

8. The federal reserve has more flexibility now

In the 1930s, the world economy used the “Gold Standard.” Governments only printed money that was equivalent in value to the gold stored in their vaults.

Since countries held onto the Gold Standard, there was much ado about interest rates and stimulating economies. European countries decided to increase interest rates, which made the depression worse.

This is an overlooked fact about the great depression. The world did not only have to deal with a massive stock market collapse, but worse, they had a massive banking crisis on their hands. There was no agreement on what they should do to boost the economy.

These days, the Federal Reserve System has the power to adjust interest rates and inject liquidity into the system.

While the FED was created in 1913, they were constrained by the Gold Standard principles, which made them powerless in the aftermath of the 1929 crisis.

When the depression hit, instead of stimulating the economy, the FED was tied to its limited gold reserves. They couldn’t print more money. And this made the money supply tighter.

But after the 70s, countries started to follow Modern Monetary Theory.

With MMT, a government prints out as much money as it needs to pay its debts, stimulate the economy, and so forth. The amount of printed money in circulation is no longer tied to how much gold it has in its vaults. And everyone agrees to trust the value of the money printed.

This is the key characteristic of the developed world. It’s not because we’re smarter. We simply have trust in our money.

MMT has a lot of critics, of course. And some people even say that can cause a market collapse. They have been proven somewhat right in 2022.

But if people truly lose all trust in the announced value of their own currency, then any form of money will be worthless. With MMT, governments now have the power to adjust the money supply whenever it needs to. All in all, this is a good thing.

The stock market has changed

Every year, the world gets more complex, and the stock market reflects that. With this increasing complexity, there’s a possibility that markets will crash more often in the future. But since we don’t know what will happen, it’s fruitless to speculate too much about the future.

The fact is that people’s lives depend on the stock market more than ever. And finance is a behemoth of an industry. It’s so important now that all the participants and governments need to do everything in their power to keep it alive.

Everybody has so much skin in the game that it makes the stock market a robust system. And I strongly believe markets always recover.

Since we all rely on it for our pensions and wealth, the end of the stock market would mean the end of capitalism. There are simply too many people who don’t want that to happen.

Now that we’re at the end of this article: Will markets collapse again like in 1929?

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