What was different? Why did the eerie similarities between these
two events eventually diverge so dramatically? The simple answer is
that in 1987 the central bank had the power to control the ultimate
source of liquidity in the economy—the supply of money. And, in con-
trast to 1929, it did not hesitate to use it. Heeding the painful lessons of
its mistakes in the early 1930s, the Fed temporarily flooded the economy
with money and pledged to stand by all bank deposits to ensure that all
aspects of the financial system would function properly.
The public was assured. There were no runs on banks, no contrac-
tion of the money supply, and no deflation in commodity and asset val-
ues. Indeed, the economy itself expanded despite the market collapse.
The October 1987 stock market crash taught investors an important les-
son—the world was indeed different from 1929 and a sharp sell-off can
be an opportunity for profit, not a time to panic.THE STOCK MARKET CRASH OF OCTOBER 1987
The stock crash of Monday, October 19, 1987, was one of the most dra-
matic financial events of the postwar era. The 508-point, or 22.6 percent,
decline in the Dow Jones Industrials from 2,247 to 1,739 was by far the
largest point drop up to that time and the largest one-day percentage
drop in all history. Volume on the New York Stock Exchange soared to an
all-time record, exceeding 600 million shares on both Monday and Tues-
day, and for that fateful week the number of shares traded exceeded the
volume for all of 1966.
The crash on Wall Street reverberated around the world. Tokyo,
which two years later was going to enter its own massive bear market,
fell the least, but it still experienced a record one-day drop of 15.6 per-
cent. Stocks in New Zealand fell nearly 40 percent, and the Hong Kong
market closed because collapsing prices brought massive defaults in
their stock index futures market. In the United States alone, stock values
on that infamous day dropped about $500 billion, and the total world-
wide decline in stock values exceeded $1 trillion. A similar percentage
decline in today’s market would wipe out more than $7 trillion world-
wide, a sum greater than the gross national product of every country but
the United States.^1
The stock market decline began in earnest the week prior to “Black
Monday,” as October 19 came to be called. At 8:30 a.m. on the precedingCHAPTER 16 Market Volatility 271
(^1) This is based on a $31.6 trillion worldwide total stock value in 2007, float adjusted. The sum would
be much larger if we included the value of government-held shares in emerging markets.