The Role of Speculators in the Market Crash of 1929

Abstract

90 years ago – in October 1929 – the crash on Wall Street created chaos in the financial markets. The Great Crash of 1929 led to the Great Depression the longest period of unemployment and contraction in modern history. The market crash of 1929 is considered a unique, five sigma event, occurring only once-in–a-lifetime. Seventy nine years after the Great Crash of 1929 (GC), the financial markets collapsed again in the Global Financial Crisis of 2008 (GFC) and threatened the financial stability of the world like in 1929. Explanations for the causes of a market crash can range from overindebtedness, asset bubbles, speculation to massive leverage in the system. Crises can have different forms ranging from classic hunger crises to modern forms of demand crises, corporate crises and financial market crises. While the causes of a hunger crisis is often the result of a series of poor harvest, the causes of a financial market crisis can be complex and are not always easy to identify. In this paper I focus on the worst financial market crisis in history the GC in the USA. It was argued that funds and short sellers were the culprits of the crisis, and that they benefited from it. This paper covers the speculators in the GC by analysing their role, their strategies and their returns. I introduce an analysis of the role of speculators in their function as either liquidity providers or liquidity takers. As far as the theory of speculation is concerned I use Minsky’s Financial Instability Hypothesis. The analysis shows that in a systematic crisis there are no winners and there is no place to hide.