i thought we'd take a trip down memory lane as we approach this fine month of October in 1999......
"The Great Slump: Capitalism in Crisis 1929-1933"
Looking back with the benefit of hindsight at those closing days of September, it is almost impossible not to feel a sense of excitement and apprehension, as in the closing moments of some great tragedy; for so many years the market had sustained so many hopes and so many dreams, had created fortunes that had grown unbelievably out of nothing, had given millions of Americans the sense that a future of limitless and dazzling possibilities extended before them. And now all this was over, or nearly over, for at last the Great Bull Market was finally coming to its close.
Some time towards the beginning of October, large numbers of people must have come to a decision, individually and collectively, that the moment had come when it was best to take one's profits and get out. What motives determined their decision it is impossible to say, or whether it was taken by instinct or after mature deliberation; they may have behaved as irrationally as, on the whole, they had behaved throughout the speculative boom. Some may have been influenced by the Hatry crash in Britain, some by the recession in business activity, some, it is thought, by the refusal of the Massachusetts Department of Public Utilities to allow Boston Edison to split its stock four to one and by its comment that, at the market value of the stock, 'no one, in our judgement… would find it to his advantage to buy it'; to how many other stocks did the same judgement apply? Or it may have been due to some general sense that, at long last, speculation really had outrun all rational, or even irrational, expectations. As professor Galbraith says: 'What first stirred these doubts we do not know'; what was important was that the doubts had arisen and the innumerable investors, large and small, had decided that the time had come to call it a day.
It is not likely, however, that any of them envisaged how catastrophic the effect of their combined decisions was going to be, particularly when the high priests of the market continued to exude an unchanging confidence. In the middle of October Charles E. Mitchell announced that 'the industrial condition of the United States is absolutely sound'; and Professor Irving Fisher stated that share prices seemed to have 'reached a permanent high plateau; I expect to see the stock market a good deal higher than it is today within a few months.'
Despite such predictions, the market took a sudden move downwards. During the half-day session of Saturday, 19 October, nearly 3 ½ million shares changed hands and the Times industrial index was down twelve points; it was significant that brokers sent out large numbers of margin calls, asking for cash to cover their customers' losses. Yet there appeared to be no particular reason for the break in the market, and on the following day, Sunday, the press was full of reassurances that the fall would be quickly reversed. Many people, however, refused to be reassured; on Monday, 21 October, six million shares changed hands, though the losses were less than on the previous Saturday. The very large volume of trading, on a falling market, had one effect, which some people found peculiarly disturbing. The ticker tape failed to keep up with the market and at the close was over an hour and a half behind. On a rising market such an occurrence was inconvenient but not alarming. It simply meant postponing the pleasure of knowing what one's profit had been; it was slightly unnerving that on a falling market one might be ruined without even knowing it.
Once again the bulls, commercial and academic, went to work. Charles E. Mitchell reiterated his faith in the market, and Professor Irving Fisher repeated the many reasons for confidence; he attached particular importance to the tonic effect of prohibition on the productivity of the American worker. Other market experts, however, concluded that the time had come to sell stocks and buy gold, and they appeared to have carried conviction with many investors; on Wednesday, 23 October, there was heavy selling, particularly at the close, and margin calls by brokers were higher than had ever been known.
Thursday, 24 October, opened with the announcement of a new issue of Kreuger and Toll certificates, at $23, but that day most people were more anxious to sell than to buy. During the morning there was an avalanche of selling, which developed into uncontrollable panic; 12,894,650 shares changed hands, and some stocks became virtually unsaleable at any price. Throughout the country the ticker tape fell hopelessly behind the market; losses, heavy as they were, were exaggerated and multiplied by rumour, so as to create an atmosphere which was something between terror and stupefaction. A curious clamour, as from some vast beehive, arose from the Exchange in New York, and crowds, aware that something strange and terrible was happening within, gathered round it and around the branch offices of brokerage houses throughout the country. Special police were dispatched to keep order in Wall Street. By midday stocks were selling for nothing, the exchanges were closed in Buffalo and Chicago; eleven well-known speculators had committed suicide. At 12:30 the visitors' gallery of the New York Stock Exchange was cleared; among the spectators of the frenzied scenes on the floor was Mr. Winston Churchill.
For a few hours on that day a mood of rear and consternation reigned in all the financial centers of the United States, in the stock exchanges, in brokerage houses, as if, suddenly and unbelievably, a bottomless pit had opened before men's eyes. Most men simply could not understand, or believe, what was happening to them; their faces, said an observer, showed 'not so much suffering as a sort of horrified incredulity'.
In New York at least action was quickly taken to bring the panic under control. At 12 o'clock a meeting took place at the offices of J.P. Morgan and Co. at 23 Wall Street, which was attended by Thomas W. Lamont, senior partner of Morgan's, Albert H. Wiggin, chairman of the Chase National Bank, Charles E. Mitchell, chairman of the Board of the National City Bank, William C. Potter, President of the Guaranty Trust Company, and Sewell Prosser, Chairman of the Bankers' Trust Company. Merely the news of the meeting was enough to alleviate the panic. To the speculator it meant that the most powerful financiers in the United States, controlling between them almost unlimited resources, had decided to 'organize support' of a falling market would always be available was a popular and widespread one, and was based on assumptions in which cynicism and piety were curiously mixed. It was thought that the bankers, as trustees of the financial soundness of the United States, would never permit a collapse in share values, and that they were themselves too heavily involved to be able to afford one. It was also thought that their funds were amply adequate to arrest any decline, however steep, and that the investment trusts in particular had ample cash available which they would be only too glad to employ in picking up bargains which would inevitably recover their value.
On this occasion, popular belief was justified. The meeting at Morgan's quickly resolved to support the market and formed a pool to be devoted to this purpose. The size of the pool has never been revealed, and estimates of it have varied from $240 million down to $30 million. But the size of the pool was not important; what was important was the news that the high priests of finance, with all their mysterious prestige and authority, their expertise and their untold wealth, intended to intervene on the scene of panic. Lamont announced to the press that 'there had been a little distress selling on the Stock Exchange', and that this had been due to 'a technical condition of the market' and indicated that the bankers had decided to take matters in hand. This was enough; panic selling ceased and prices began to rise. Visible and dramatic evidence of the bankers' decision was provided at 1:30, when Richard Whitney, acting president of the Stock Exchange, a floor trader for Morgan and brother of a Morgan partner, appeared on the floor and, moving from stand to stand, placed orders for fifteen or twenty well-known stocks in blocks of ten thousand shares. Action had been added to words and the market responded; though selling orders continued to pour in from all over the country, prices so far recovered that, by the close of the day's trading, the Times industrial index was only twelve points down; some stocks, like U.S. Steel, which had been an object of Whitney's operations, and J.I. Case, a favorite speculative share, even made small gains during the day.
Yet in spite of the market's recovery, thousands of 'investors' or speculators were ruined or sold out in the course of the day. Initially, the catastrophic fall in prices had been concentrated, after a quiet opening, into the morning hours on the New York Stock Exchange: by 11:30, with Whitney's operations on behalf of the bankers' pool, it was over in New York. But the fall was so precipitous that once again the ticker tape fell behind the market and did not catch up with it until eight minutes past seven that night; throughout the United States men watched the almost incredible figures flickering across the board knowing that, calamitous as they were, they might not as yet have spell out the worst. Fear and uncertainty were magnified by rumor; by 11:30 utter panic had set in. In Buffalo and Cleveland the stock exchanges were closed.
Panic drove many investors to sell; others were sold out by their brokers when they failed to respond to margin calls, and such forced sales contributed to increase the panic. Selling orders continued to pour in throughout the day, despite the bankers; intervention. The technical means of communication were inadequate to deal with a panic of such proportions, and this in itself contributed to the ruin of many investors. On the other hand, those who were able to follow the operations of the pool were in a position to end the day with a profit. U.S. Steel, the stock chosen by Whitney at the starting point of his operations, opened in the morning at 205 ½, fell to 193 ½ by the time Whitney began to buy, and ended the day with a gain of two points.
It is probable that the greatest losses during Black Thursday were incurred by small investors, handicapped both by inadequate resources to cover their margin losses, and by inadequate means of keeping in touch with the dramatically changing course of events in the market. Financial experts, indeed, took an almost moral pleasure in this 'shaking out' of the small investor and confidently predicted that this would provoke a renewal of the boom on a purer, saner, sounder basis. Evidence for this view was found in the effect of the bankers' intervention; on Black Thursday, they had shown both their strength and their wisdom and for the moment their reputation for both appeared to be vindicated. But not for long. When, in the following week, the market suffered even heavier blows, and when, this time, there was no organized support from the bankers, it began to be rumored that they had not only profited by Black Thursday but had actually provoked it by a gigantic bear operation against market values.
Black Thursday saw the ruin of many paper millionaires, the destruction of many hopes, the dissipation of many dreams. But among the greatest losers were also, in the long run, the bankers; it saw the beginning of the decline of their reputation for wisdom and integrity and of the fall of the banker from his position as one of the mythical American heroes.
For many investors, Black Thursday was a personal intimation that for them the American Dream was over. They were the first victims of the disaster, which would spread to the whole nation. But the general reaction was that, the worst having happened, it was now over; the morning of Black Thursday was so bad that it could not possibly happen again. And now once again the chorus of reassurances broke out, that the market was 'fundamentally sound', was 'laying the foundation for the constructive advance which we believe will characterize 1930', that the trouble of Black Thursday was 'purely technical', that 'there is nothing in the business situation to justify any nervousness'. Again the market seemed to correspond; on the two days following Black Thursday, trading was heavy but prices were steady, with a small gain on Friday and a small loss on Saturday, which meant that through many wanted to sell there were also others who were willing to buy. President Hoover announced that 'the fundamental business of the country, that is, production and distribution of commodities, is on a sound and prosperous basis', but he would not go any further and refused a request by the bankers' consortium that he should give some direct encouragement to share market. From Poughkeepsie, Governor Roosevelt denounced the 'fever of speculation' that had led to Black Thursday.
Whom did people believe? The weekend of 26-7 October provides fascinating, but baffling, evidence for anyone interested in mass movements of public opinion. To judge by the public evidence available, nearly everyone was agreed that the severe 'shakeout of the lunatic fringe' which the market had suffered in the past week was a good thing (except perhaps for the lunatics); that now the market, confident in the support of the bankers, would stage a recovery and go on to new triumphs; that stocks being at the moment relatively cheap would invite eager and heavy buying when the market opened on Monday. Brokerage houses reported an immense volume of buying orders waiting to be executed. No doubt much of this optimism was wish-fulfillment and much of the comment was inspired; the bankers, flushed by the success of their saving operation on Thursday, were busy organizing vocal support which would prevent their having to repeat it on Monday. Yet the point is that these were the voices which the speculator and investor had listened to for years and whose advice he had consistently taken; why should he reject it now?
In fact he did. Over the weekend investors and speculators throughout the country reached, by methods and for reasons we have no means of ascertaining, a common decision which contradicted all the advice offered to him by sources which he normally respected, and this decision found a spectacular expression on Monday. No doubt during those two days the investor engaged in all the normal activities, pleasures and amusements of an American during the last weekend of the Jazz Age. Like everyone else he drank his bootleg liquor, listened to the radio, read bestsellers like the All Quiet on the Western Front, and took his family out for a picnic in one of the three hand a half million new cars that were on the road; but, against all the advice of those who had any business to know, he also decided that tomorrow was the time to get out.
He was lucky if he did so without disaster. When the market opened on Monday, 28 October, there was an immense and irresistible rush to sell. The volume of trading, though not a large as on Black Thursday, was still enormous; 9 ¼ million shares. But the loss in share values was even greater; Steel down 17 ½ points, General Electric 47 ½, Westinghouse 34 ½, and the Times industrial index by 49. The prices at which Richard Whitney had rallied the market on Thursday were quickly left far behind, and in contrast with Thursday there was no recovery as the long day wore on; in the last hour three million shares changed hands at prices which were falling so rapidly that in some stocks 'air spots' developed; that is to say, they were offered for sale but no bids were available at any price.
Monday differed from Thursday in other respects also. There had been bad days on the New York Stock Exchange before, but they had nearly always ended with a recovery. In the two days following Black Thursday, many investors had been tempted back into the market in order to buy at what appeared to be bargain prices, while the bankers' pool had disposed of many of Thursday's purchases at a profit. Monday's collapse, following on Thursday's seemed to indicate that something abnormal and unprecedented was happening, so that past experience no longer offered any guide and no one could say what the morning would bring. The abyss that had opened for a few hours on Thursday, before it was closed by the bankers' pool, now gaped open again and it was not clear how, this time, it was to be closed.
For on Monday it became clear that the bankers would not, or could not, repeat their rescue operation; far from rescuing others, some of them were by now in need of rescue themselves. There were, it is true, rumors that 'organized support' was again on its way. When, at ten minutes past one, Charles E. Mitchell was seen entering Morgan's offices, there was a momentary rally and Steel recovered from 194 to 198. The effect would have been different if it had been known that, far from organizing general support for the market, Mitchell was almost certainly seeking a personal loan form Morgan's in order to extricate himself from his difficulties, which had become pressing.
The bankers did indeed meet a Morgan's, from 4:30 to 6:30, but only to announce afterwards that they were not committed to supporting any particular level of share prices but only to maintaining an orderly market. In fact, their brokers were not able to do more than stop up the 'air holes' which were appearing in some stocks. Even so, there were still optimists who retained some faith in the power of the banks, who spoke hopefully of the organized support that would appear in the morning.
That night, the market resembled some battlefield on which the staff of a defeated army tries desperately and hopelessly to reorganize its demoralized forces. The weekend had hardly allowed the brokers time to clear up the unfinished business left behind by the huge volume of trading on Thursday; now, writes F.L. Allen:
Once more the ticker fell ridiculously far behind, the lights in the brokers' offices and the banks burned till dawn, and the telegraph offices distributed thousands of margin calls and demands for more collateral to back up loans at the banks. Bankers, brokers, clerks, messengers were almost at the end of their strength; for days and nights they had been driving themselves to keep pace with the most terrific volume of business that had ever descended on them. It did not seem as if they could keep it up much longer.
Worst of all, no one could say what the morning would bring.
The question was soon answered, in a manner which exceeded the blackest expectations. Tuesday, 29 October, was even worse than Monday; it was, says Professor Galbraith, 'the most devastating day in the history of the New York stock market and it may have been the most devastating day in the history of the markets'. Nothing like it had ever been seen before and possibly never will be seen again. As soon as the exchange opened, it was inundated with orders to sell. Three million shares were sold in the first half-hour; by two o'clock, eight million; by the close, 16,410,030. It was catastrophic; moreover the fall in share values was almost as great as the day before and the Times industrial index fell by 43 points, equal to all the gains that had been made in the whole of the preceding year. Huge blocks of shares were thrown upon the market to sell for whatever they might fetch and even so there were no bidders; the air holes, which had worried the bankers, became great vents and fissures impossible to repair. A single example illustrates what happened to many stocks. In the course of the Bull Market, the stock of the White Sewing Machine Company had stood as high as 48. On Monday, 28 October, it fell to 11 1/8. On the Tuesday, someone - it is said, a cleaver messenger boy - put in an order to buy at 1, and there being no other bidders bought the stock for a dollar a share.
Selling orders came in such huge volume that it was impossible to handle them; some were simply overlooked or forgotten, and found unexecuted at the end of the terrible day. By midday the market was so utterly demoralized that the governing committee of the Stock Exchange, meeting by stealth so as not to provoke rumors, considered whether to close the exchange, but decided against it. So the selling continued; Blue Ridge, which had been launched so successfully at 24 in September, and had fallen to 12 on 24 October, finished on this day at 3. And now there was not even the hope of support from the bankers' consortium, rather, the horrid rumor began to circulate that they were selling short; at the end of the day Lamont had to deny that the bankers had been conducting a bear raid on the market. The 29th October may be thought of as the day when bankers of the United States first lost that mysterious aura of power, prestige and integrity which had previously clothed them and which they, or at least some of them, had grossly exploited in giving their blessing to the Bull Market.
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"History never repeats, but it rhymes"
-Mark Twain
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