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What was the relation between the Wall Street Crash of 1929 and the intangible

property markets?

This essay will argue that Wall Street and the Wall Street Crash of 1929 are indissolubly

connected with intangible property, or assets. Intangible property can therefore be

considered as the main cause, effect and accelerator in the crash of 1929.

To come to this conclusion, this essay will start with a description of the causes, processes

and consequences of the Wall Street Crash of 1929. Second, this essay will offer a

comprehensive explanation of intangible property markets elaborating on its different

definitions, aspects and scales. And thirdly the links between Wall Street and intangible

property will be described. Finally, this essay will conclude with an assessment of how

interwound Wall Street and intangible property markets are and how interlinked the Wall

Street Crash of 1929 and the intangible asset markets exactly were.

The Roaring Twenties signified a time in the US that the country could get ʻdrunk with the

elixir of prosperityʼ (Heilbroner, 2000, p.248). ʻThe United Statesʼs share of world

manufacturing production peaked in 1929 at over 42 per centʼ (Meredith & Dyster, 1999, p.

85) with a specifically rapidly growing business in steel and cars. The New York Stock

Exchange (NYSE) was the largest stock market ʻfed by higher domestic savings, inflow of

short-term speculative foreign capital and the use of marginal share trading.ʼ (Meredith &

Dyster, 1999, p.85) Right before the crash ʻIrving Fisher, … a noted Yale economist,

famously declared that shares had reached ʻa new and permanently high

plateau.ʼʼ (Harford, 2006, p.148)

But it was not all that positive. Farming problems emerged around 1925 and markets

started to get saturated causing prices to drop. More and more consumers became credit

dependent because of paying for goods in installments and taking up major mortgages. All

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this led to the creation of an asset bubble. Although not all academics agree on this

actually being a proper bubble. Most notably Sirkin (1975) and Bierman (1991) both using

Malkielʼs formula (1963) to claim that prices of stocks were not overvalued at this time

(Emerson Hall & Ferguson, 1998, p.28)

The start of the Wall Street Crash of 1929 is generally explained in three phases: Black

Monday, Black Thursday and Black Tuesday. Consecutively October 19, October 24 and

October 29 in 1929. On Black Monday, the New York Stock Exchange was about to plunge

but it was not until October 29 - after a successful attempt to stem the decline by the

exchangeʼs vice president Richard Whitney on Black Thursday - that the frenzy really

started. (Scott, 2003, p.31)

The US Federal Reserve eased too slowly and too restrictive exposing frailties in

fragmented US banking system that ended up contributing to the process of the collapse,

instead of easing it. ʻMonetarists like Friedman and Schwarz (1963) to Keynesians such as

Temin (1989) agree that this restrictive monetary policy … was the cause of the initial

economic slowdown that eventually turned into the Great Depression.ʼ (Emerson Hall &

Ferguson, 1998, p.30)

The main factors that led to this collapse excerpted: ʻThe United States had serious

balance-of-payments problemsʼ (Kindleberger, 1986, p.162) ʻJust prior to the 1929 crash,

NYSE broker loans totaled 9.8 percent of market capitalization.ʼ (Jacobs & Markowitz,

1999, p.175) of which the majority were margin loans that were suddenly called back on a

big scale. There were problems in the international monetary system specifically with the

gold standard. In the end this gold standard led to wrong parities: overvaluation of British

Pound Sterling and undervaluation of French Franc for example. Interest rates were based

on domestic rather than international trends and ʻinterest rates rose sharply beginning in

the spring of 1928ʼ (Kindleberger, 1986, p.59) Flexible prices and wages created the

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increased competition between main financial centers: New York, London and Paris. And

long term capital movements that were distorted by reparations and war debts, thus not

driven by commercial needs.

All of this contributed to the sudden and extreme collapse of the US stock markets in 1929.

Heilbroner acknowledges that it were not the stock markets that ʻdamaged the faith of a

generation firmly wedded to to the conviction of never-ending prosperityʼ (2000, p.251).

But ʻit was the unemployment that was hardest to bearʼ with ʼ14 million unemployedʼ (2000,

p.252).

The setbacks this crash caused were significant, especially in Europe, North & South

America and Australasia. The effects on the Russian and Japanese economies were a lot

smaller. Especially the decline of 46% in GDP in the US was enormous - measured from

August 1929 until March 1933 (U.S. World & News Reports, 2008, p.28). The US being

the biggest overseas lender at that time:

In 1929, $7.4 billion was made available to the world by the US imports on current
account and capital exports; by 1932 the outflow had fallen by 67 per cent to $2.4
billion.ʼ (Dunning, 1976, p.45)
The impact of this decline in available capital spread wider and faster than expected. Even

though the US encouraged investments in the US during the boom in the early twenties, it

now started a sharp decline in overseas lending. This presented a huge challenge for the

primary producing countries to repay their debts to the US. And while they tried to increase

their output, the US decided to ʻinvolve severe measures of economic

protectionismʼ (Jackson & Sorensen, 2007, p.36) causing further price depressions. And

even another crisis in 1931, caused by export control, problems with the British Pound

Sterling and European Reserves.

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To try and recover from these major financial impacts, some other measures followed. The

biggest and most significant ones being the suspension of the gold standard. ʻThe Bank of

England actually ran out of gold and on 19 September 1931 the gold standard was

suspended.ʼ (Chown, 1994, p.269) with the US following in 1933. However, the recovery

was still too uneven. World trade was still depressed having too big an emphasis on

domestic markets and this economic nationalism led to continuous rejection of free market

solutions.

The second part of this essay will explain and elaborate on the intangible property markets

with a specific focus on Wall Street before, during and after the 1929 crisis.

Intangible property is defined by Hamilton as:

Intangible capital is capital that has an economic value but is not something you can
drop on your foot.
It's the preponderant form of wealth. When we look at the shares of intangible
capital across income classes, you see it goes from about 60 percent in low-income
countries to 80 percent in high-income countries. That accords very much with that
notion that what really makes countries wealthy is not the bits and pieces, it's the
brainpower and the institutions that harness that brainpower. It's the skills more than
the rocks and minerals.ʼ (interviewed by Bailey, Our Intangible Riches, Aug/
Sept 2007)
Or as Smith & Parr define intangible assets: ʻall the elements of a business enterprise that

exist in addition to the monetary and tangible assets.ʼ (2000, p.15)

The value of intangible property depends greatly on the anticipated future earnings of the

entity it represents. So stocks in company X are valued based on the anticipated future

earning of that company. This also presents us one of the first major issues with intangible

property: the unconnectedness. Because the actors trading the stocks are not the ones

that manage the company, we can see a chasm in the precise valuation of the property.

The brokersʼ decisions might not have a good impact in managerial terms, whereas

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managers might make decision that can have a strong negative effect on the stocks. The

two rely on each othersʼ information and anticipation, but act on different premises and

principles. This aspect of intangible property will be elaborated on in more detail towards

the end of this essay.

Another major issue with intangible property is the aspect of goodwill and the

preponderance of anticipated future value, rather than reference to actual tangible

corporeal property. To put the definition of goodwill in accounting terms:

goodwill is valued as the unidentified residual after the values of the total identified
tangible assets are subtracted from the total value of the subject business. (Reilly &
Schweihs, 1998, p.385)
Since intangible property is intangible and based on the future it is basically impossible to

translate it to tangible terms, other than money. Money however is in a sense also

intangible, for it is not based on the gold standard anymore but on currency trade and

ʻanticipated future earningsʼ of states and their economies. Intangible assets ʻhave a

current exchange-value on the money markets or investment markets.ʼ (Commons, 2006,

p.160) So not only can intangibility be a problem, but the possibility of adding goodwill to

trade creates more issues in valuing property correctly. ʻWhen we determine the selling

price of a business we rate the goodwill, which we can not measure or weigh or put in a

shop-window…ʼ (Dickson, 1926, p. 339) Goodwill gives actors the option to value their

property higher than the standard (accounting) valuation, through putting more emphasis

on anticipated future earnings and growth and other external factors involved in giving up

their property. Classic example is Carnegie selling his Carnegie Steel Company to the

United States Steel Trust - a conglomerate founded by J.P. Morgan and E.H. Gary in 1901

- for $300 million instead of the $75 million that is was originally valued at by the

accountants. Carnegie argued that by selling his company, he not only gave up the profits

it represented, but also the potential growth and the fact that he was a major competitor in

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the market. He claimed his goodwill of giving up being a competitor and giving up the

potential of his company was worth an additional $225 million in this case.

Regular examples of intangible property are stocks, bonds and funds. According to Smith

and Parr, the current age is one especially based on information and intangibility. They

provide us this short overview showing the development of markets and their approach to

products, services and property (2000, pp.1-3):

age characteristics

pre Industrial Age hunter-gatherer/agricultural

Industrial Age/Revolution technology/mass-production

Intellectual Property Age/Information Age cooperation/sharing technologies

Aforementioned preponderance of ʻintangibilityʼ in companies can clearly be seen through

some of the case studies conducted by Smith and Parr. They show for example that

Procter & Gamble Co. consists for 88.5% of intellectual property and intangible assets,

worth $112,906.3 at the time. (2000, pp. 142-5) An even clearer abundance of intangibility

is shown by Yahoo! Inc. having 98.9% of their value allocated in intellectual property and

intangible assets, worth $46,653.1 at the time. (2000, pp. 144-8)

As influence of intangible property has become so big that it now makes up the majority of

assets. The fact that these assets are intangible makes them sensitive to fluctuation and

speculation, since their value can be so hard to determine as shown in the Wall Street

Crash in 1929 and more recently the global credit crunch in 2008. The creation of

intangible assets does not necessarily mean a negative influence; it creates more fruitful

markets and even bigger possibilities. However, the enormous reliance on these intangible

assets makes them a huge cause and effect that have the ability to create ʻholesʼ or

ʻbubblesʼ in markets, both gradually and sudden.

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This essay has argued that it was the abundance and volatility of intangible assets that

caused the Wall Street Crash of 1929. Consecutively, weak government interference did

not manage to subdue the posed problems in the intangible property markets. Wall Street

and intangible assets are indissoluble and were therefore the major effect, cause and

accelerator in the Wall Street Crash of 1929.

Word count: 1,957

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Brynjolfsson, Hitt, Yang, Intangible Assets: How the Interaction of Computers and
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