Hi Don - care to read this and see if I have it right? I am going to credit you and Grace in the footnotes for this passage:
One popular explanation for the collapse of 1929-1930 is the Great Crash of the United States stock market in October-November, 1929. This theory argues that billions of dollars were "lost" during the Great Crash, and that it was the "loss" of this money that caused the financial collapse.
This explanation rests on a fundamental misunderstanding of the nature of stock market transactions. Every sale and purchase of a share of stock is a zero-sum transaction. The owner of a share of stock transfers ownership to the buyer for a sum of money. The money paid goes into the account of the seller, it does not vanish.
Even when a share of stock is sold at a loss, no money was ever "lost." The money was simply transferred from one account to another.
If Buyer A purchased a share of stock from Seller A for $100, and then sold it to Buyer B for $1, he has $1, has lost $99 on the series of transactions, but Seller A is $100 to the good.
If, on the other hand, Buyer A purchased a share of stock from Seller A for $1, and the stock's price soared to $100, and then crashed back down to $1, at which point Buyer A sold the share to Buyer B for $1, Buyer A has $1, has lost nothing and has broken even (less brokerage fees.) The $99 that Buyer A thinks he has lost never actually existed. Experienced stock traders say that the money has gone to "money heaven."
The fallacy of the belief that one's stock is worth today's market price can be simply demonstrated by trying to sell it at that price. The more shares that are offered for sale in the stock market, the faster the price declines. When millions of people are trying to dump billions of shares of stock at the same time, there simply are not enough buyers. This is called the "sell to whom?" phenomenon. Without buyers, the price collapses.
Thus, the wide-spread belief that billions were "lost" in the stock market collapse in October-November, 1929, is based on fallacious reasoning. The money that was "lost" was transferred, dollar for dollar (less brokerage fees) to someone else's pocket, or else it never existed in the first place.
Nevertheless, millions of sellers who sold their own shares at a loss, or were sold out by their brokers to cover margin calls, wound up far poorer than they had begun, especially those who bought their shares using margin accounts. In 1929, there were no restrictions on margin accounts, so many investors ended up owing far more than they were able to repay comfortably, if at all. |
