Looking Back at the Crash of '29: Then, as
Now, a New Era
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ny look back now at the
great stock market
boom of the 1920's must
inevitably be colored by the
boom of the 1990's. Then, as
now, leverage helped push
prices up. Then anyone
could buy stocks by putting
up 10 percent of the
purchase price. Now, the
margin rules call for 50
percent, but that rule is
easily evaded by those who
wish to do so. Then, as now,
there was talk that an
exciting new technology had rendered the old economic
laws irrelevant. Then, as now, stock connected to that
technology zoomed skyward, but even companies that
had nothing to do with the technology saw their stock
prices benefit.
That technology was radio. Like the Internet, it led to
widely publicized new ways to trade stocks. Suddenly,
investors and speculators could be closer than ever
before to the action. Millions of dollars of stocks were
traded from brokerage house offices set up on cruise
ships crossing the Atlantic.
Also like the 1990's, the rise
in stock prices sparked
warnings of excess from
skeptics long before the
actual top. Alexander D.
Noyes, The Times' financial
editor and probably the most
respected financial
journalist of the era, wrote a
long and persuasive article
comparing the 1920's
``speculative mania'' to
previous manias and casting
a skeptical eye on the ability
of stock prices to continue
rising. It was published on Nov. 15, 1925, nearly four
years before the crash.
By 1929, such cautionary voices had been discredited,
and the stock market had become a force unto itself,
propelled by dreams -- and the reality -- of quick
wealth. ``Playing the stock market has become a major
American pastime,'' reported The Times in a magazine
article published on March 24, 1929. The article noted
that the number of brokerage accounts had doubled in
the past two years, and added, ``It is quite true that the
people who know the least about the stock market have
made the most money out of it in the last few months.
Fools who rushed in where wise men feared to tread
ran up high gains.''
That article was written after the Fed had made its
principle stand against stock market speculation, by
warning banks not to borrow from the Fed's discount
window and then lend the money to stock market
speculators. That led to a credit crunch, with interest
rates on margin loans rising. The Dow Jones industrial
average fell 4 percent the week of March 18-23. Then
prices really cracked on Monday March 25 and
continued falling until late in the day on Tuesday, when
a rally arrived. Before that rally started, the Dow had
fallen about 8 percent over less than two days _ the
equivalent of around 800 points now.
``Responsible bankers
agree,'' The Times quoted an
unnamed broker as saying
that day, after the recovery
began, ``that stocks should
now be supported, having
reached a level that makes
them attractive.''
The responsible banker in
question, it turned out, was
Charles Mitchell, the
president of National City
Bank, a predecessor of
today's Citibank. He defied
the Fed, and lent out all the
money the speculators
wanted. Soon prices were
back on their upward
course. By the August peak,
the Dow was 35 percent above the low reached during
the March sell-off. There was a furor in Washington,
but the public and the politicians thought that rising
stock prices were good, and the Fed did nothing about
Mitchell's defiance.
When the crash arrived in October, it took several days
to unfold. The first break came on Thursday, Oct. 24,
but there was an afternoon rally that reduced the losses
and a decent rise on Friday. But prices were weak on
Saturday. (The market traded six days a week in those
days.)
Then the floor fell out. On Monday, Oct. 28, the Dow
fell 12.8 percent. The next day, thereafter known as
Black Tuesday, it lost another 11.7 percent. There
would be rallies, but from then on the direction was
down. By the time the bottom arrived, in 1932, the Dow
was down 89 percent from its 1929 peak.
In rereading The Times'
coverage of that crash, some
things stand out. The paper
wanted to cover the news
thoroughly and honestly, but
it also wanted to be careful
not to be alarmist. Each
day's headline found
something positive to
include, such as promises by
bankers to aid the market.
Nonetheless, the reporters
knew they were witnessing
something they had never seen before, as was reflected
in two paragraphs below, taken from the lead story on
Oct. 30, reporting on Black Tuesday:
``Yesterday's market crash was one which largely
affected rich men, institutions, investment trusts and
others who participate in the market on a broad and
intelligent scale. It was not the margin traders who
were caught in the rush to sell, but the rich men of the
country who are able to swing blocks of 5,000, 10,000,
up to 100,000 shares of high-priced stocks. They went
overboard with no more consideration than the little
trader who was swept out on the first day of the
market's upheaval, whose prices, even at their lowest
of last Thursday, now look high by comparison.''
``Wall Street was a street of
vanished hopes, of curiously
silent apprehension and of a
sort of paralyzed hypnosis
yesterday. Men and women
crowded the brokerage
offices, even those who
have been long since wiped
out, and followed the figures
on the tape. Little groups
gathered here and there to
discuss the falling prices in
hushed and awed tones.
They were participating in
the making of financial
history. It was the consensus
of bankers and brokers alike that no such scenes ever
again will be witnessed by this generation. To most of
those who have been in the market it is all the more
awe-inspiring because their financial history is limited
to bull markets.''
They were right. Never since has something quite like
that been seen. Those who are confident that the Fed
will assure that a similar event today would not bring
economic disaster might do well to remember that
people 70 years ago had faith in the same institution.
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