Fear of inflation was the final straw for Wall Street

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The Independent Online
If share prices fell today on the same scale as they dived on Monday 19 October 1987, the Dow Jones index would shed about 1,800 points. The crash a decade ago on Sunday was, proportionately, twice as bad as the Great Crash of October 1929.

It did not hit London quite as severely. Although the stock market had been closed on Friday by the previous night's catastrophic storm, the FTSE 100 index fell by "only" 11 per cent on the Monday. But even that would correspond to a more than 550-point collapse today.

A biography of Alan Greenspan, the Federal Reserve chairman, reports that he flew to Dallas, Texas, on the Monday morning to give a speech. Arriving at the airport after the market had closed in the afternoon, he first misunderstood officials telling him the Dow had fallen by "five- oh-eight" as a 5.08 drop, not 508 points, or 23 per cent. Three hundred points of the decline had occurred in the last hour of trading. The book, Back from the Brink, notes: "Oddly enough, Greenspan recalls he slumbered peacefully that night, getting his usual five hours of sleep."

Although the Monday was cataclysmic, the previous week had been bad enough. The index had fallen 95 points (a record) on Wednesday after the publication of bad trade figures, 58 points on Thursday, and 108 points on Friday (another record).

One of the characteristics of the 1987 crash was the way the baton was passed from market to market around the globe. After New York closed, Tokyo and Hong Kong recorded declines, and London followed suit the next morning. London kept it up on Tuesday 20 October, recording another 12 per cent drop.

A second feature was the way automatic "program trading" by arbitrageurs accelerated the fall in shares, which happened so rapidly that the NYSE's communications systems could not display up-to-date prices. The introduction of "circuit breakers" after a 50-point fall in the Dow should prevent a repeat, imposing pauses when the index is heading up or down too sharply.

With hindsight, all the conditions had been there for a stock market crash. Shares had risen very sharply, and were fairly widely regarded as overvalued. There was a clear imbalance in the US economy, which was manifested in the yawning trade deficit.

There was also severe tension between the American and German governments over the levels of their currencies. The Louvre Accord, agreed the previous spring, had halted the two-year fall in the dollar from its 1985 peak. But by the autumn the co-ordination seemed to be breaking down, and the Germans had raised interest rates earlier in October.

The final trigger was the fear of higher inflation. Sudden signs of wage and cost pressures took long-term bond yields higher, making equities look even more overvalued.