They called it tulip mania.
Every Dutch man, woman and child wanted one, and wanted one badly.
They traded anything and everything for just one exotic plant.
The frenzy continued from 1634 to 1637; however, it would not last.
Interest eventually declined, and with it, the flower’s value.
Many who had invested in tulip stock soon found themselves penniless, sending the economy
into a years-long depression.
As the Dutch can attest, stock market crashes are nothing new.
However, their causes and effects can vary.
There have been four major stock market crashes so far in America’s history.
The first of these was the crash of 1929.
It was preceded by the booming economy of the ‘20s when everyone was snatching up
fancy homes and trendy automobiles and those playing the market were borrowing obscene
amounts of money.
Due to these conditions, markets soared, reaching their highest point in August of 1929.
But even then, there were hints of an impending catastrophe.
Production had begun to taper off, unemployment levels were on the rise, and widespread debt
along with countless loans combined in a recipe for disaster.
October 29, 1929 became known as Black Tuesday.
It was a day of widespread panic.
Investors traded millions of shares, resulting in a loss of billions and the bankruptcy of
many.
Its aftermath pushed an already faltering America head-first into the worst known economic
fallout of its time.
Thus, began the Great Depression.
Its effects were devastating; by 1932 stocks had fallen 89% and had all but completely
lost their value.
By 1933 30% of the population was unemployed, leaving 15 million struggling to survive.
Thanks to President Franklin D. Roosevelt and the jobs created by the second World War,
the economy eventually recovered.
However, the Depression had lasted more than a decade.
The Second notable crash was in 1987, again in October and was dubbed Black Monday the
2nd.
It was caused in many of the same ways as its namesake with a new contributing factor:
technology.
On October 19, 1987, as investors began to frantically sell their stock, they were able
to do so at unprecedented rates thanks to the use of computers.
When all was said and done, the market had sunk 23% in a single day.
It was the biggest drop in stock market history.
Overall, the market had lost a trillion dollars.
To put this into perspective, the market was out $14 billion in 1929.
However, unlike the earlier crash, the economy of 1987 recovered quickly when the Federal
Reserve intervened.
Technology was again a culprit in the third major stock market crash of 1999 to 2000.
As indicated by its name, this crash was much longer than a one-day affair.
Problems began with the rise of the dot.com market and technological giants such as Globe.com,
GeoCities, and AOL in the ‘90s.
Stocks in these companies initially soared, far surpassing their true value, only to be
sold off by investors and plummet to all-time lows.
Globe.com shares, though offered at $9, were bought up at $87 on opening day; 2 years later
they were purchased for less than one dollar.
It was not the only tech giant effected; investors were in a hurry to sell any and all related
stock.
As a consequence, the Nasdaq would fall from 5,000 to 1,000 in the span of a year.
After this crash investors learned to critique tech company stability and exercise more caution
when making a purchase.
Last but not least was the crash of 2008, leading to a recession and just narrowly avoiding
a full-on collapse.
This time problems arose beginning in 2006 with a decline in housing prices and an increase
in homeowners unable to pay their mortgage.
This resulted in the bankruptcy of several financial institutions.
In this instance, Congress intervened with bail-outs for select banks and by manipulating
interest rates so they stabilized around zero percent.
Two years later, the stock market began to make a recovery, though it did so slowly.
As evidenced by history, crashes can occur in a day or over the span of a year.
Their recovery can be quick or draw out for a decade.
The reason for recovery varies as well.
So, what does all of this tell us to expect if, say, the market were to crash tomorrow?
Truth be told, we should expect that history would not repeat itself exactly.
The chance of collapse should not only be less likely, but its’ effects less severe
as well.
The reason for this is that there are now safeguards in place to prevent disasters on
the same scale as in the past.
A key to prevention was and still is panic.
It all starts when people feel less uncertain about the market, due to any of several reasons,
and sell their stock.
In normal circumstances, this has no great effect as it will be bought up by someone
else who has more confidence.
However, as was described by each of the four historical crashes, there was a profound absence
of any faith in the system at all.
In other words, there were only sellers, and once sold, no buyers to restore balance.
In these instances, the first nervous few soon led to more and more nervous individuals,
resulting in a free-for-all dump of any and all shares.
When this trend continues it has devastating consequences, as in the crash of 1929, when
stock lost almost all of its value and the economy tanked for years.
America has analyzed these past events and learned from its mistakes.
Now, when the Dow drops by 10% before 2 in the afternoon, trading stops for an hour.
If the Dow drops by 20% by that same time, trading stops for two hours.
Trading ends for the day if the Dow declines by 30%.
This is meant to prevent wide-spread panic and emotion-based trading.
Further, if the case of a major national tragedy or other similar event, markets may not open
at all.
In these situations, it is easy for many to make rash, unwise decisions that are difficult
if not impossible to recover from.
However, although these new procedures are without a doubt beneficial, another large
crash is possible.
If somehow this were still to happen, it would affect many people from every walk of life.
Companies without an income from stock would make cuts where they could.
Unnecessary expansion and further development would be on hold.
Businesses would also try to save which could lead to cuts in the workforce.
Unemployment numbers would rise.
Those hoping to retire might find that the worth of their 401 (k) has declined and they
must work longer than expected.
However, as is evidenced by history, even the most devastating declines don’t last.
Eventually, there is a recovery, although it may be slower than many would wish.
Bottomed out stock prices have nowhere to go but up.
For this reason, those who hold on to their stocks and resist the urge to sell will be
pleasantly surprised as they recover their losses.
Riding the tide and remaining calm is imperative when it comes to the stock market.
It will also prevent things from getting worse and make the road to recovery possible.
So, what do you think, is it likely that the market will completely crash again?
And if it did, should we panic?
Let us know in the comments!
Also, be sure to check out our other video called What if USA paid off its debt!
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