Today in history: October 29, 1929

“Sooner or later a crash is coming, and it may be terrific.”

— Roger Babson, September 5, 1929, speaking before his Annual National Business Conference

Ouch.

All speculative bubbles go through four stages, each with its own internal logic. The first stage, which is sometimes referred to as the “displacement”, starts when something changes people’s expectations about the future — a shift in government policy, a discovery, a fabulous new invention. A few well-informed souls try to cash in on the displacement by investing in the new vehicle of speculation, but most investors stay on the sidelines. The early investors make extremely high returns, and this attracts the attention of others. Next comes the boom stage, when prices are rising sharply and skepticism gives way to greed. The sight of easy money being made lures people into the market, which keeps prices rising, which, in turn, attracts more investors. Eventually, those upstanding citizens who haven’t joined in the festivities feel left out. Not just left out. They feel like fools. If their daughter’s boyfriend, who does nothing all day but sit around and play with his computer, can make fifty thousand dollars on his America Online stock, why can’t they? Boom passes into euphoria. Established rules of investing, and often more common sense, are dispensed with. Prices lose all connection with reality. Investors know this situation can’t last forever, and they vie to cash in before the bubble bursts. As Charles Kindleberger, an MIT economic historian, wrote in his book Manias, Panics, and Crashes: A History of Financial Crisis, “Speculation tends to detach itself from really valuable objects and turns to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.” Finally, inevitably, comes the bust. Sometimes there is a clear reason for the break; sometimes, the market implodes of its own accord. Either way, prices plummet, speculators and companies go bankrupt, and the economy heads into recession. A few months later, everybody looks back in amazement, asking: “How did that happen?”

— John Cassidy, “Dot.con: How America Lost Its Mind and Money in the Internet Era“

Until the beginning of 1928, even a man of conservative mind could believe that the prices of common stock were catching up with the increase in corporation earnings, the prospect for further increases, the peace and tranquility of the times, and the certainty that the Administration then firmly in power in Washington would take no more than necessary of any earnings in taxes. Early in 1928, the nature of the boom changed. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.

— John Kenneth Galbraith, “The Great Crash 1929“

“There is no cause for alarm. The high tide of prosperity will continue.”

— Andrew W. Mellon, late September, 1929

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came.

— John Kenneth Galbraith, “The Great Crash

The rich man’s chauffeur drove with his ears laid back to catch the news of an impending move in Bethlehem Steel; he held fifty shares himself on a twenty-point margin. The window-cleaner at the broker’s office paused to watch the ticker, for he was thinking of converting his laboriously accumulated savings into a few shares of Simmons. Edwin Lefevre (an articulate reporter on the market at this time who could claim considerable personal experience) told of a broker’s valet who made nearly a quarter of a million in the market, of a trained nurse who cleaned up thirty thousand following the tips given her by grateful patients; and of a Wyoming cattleman, thirty miles from the nearest railroad, who bought or sold a thousand shares a day.

— Frederick Lewis Allen, “Only Yesterday”, a history of the 1920s, published in 1932

Thursday, October 24, is the first of the days which history — such as it is on the subject — identifies with the panic of 1929. Measured by disorder, fright, and confusion, it deserves to be so regarded. That day 12,894,650 shares changed hands, many of them at prices which shattered the dreams and the hopes of those who had owned them. Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929, showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid.

The panic did not last all day. It was a phenomenon of the morning hours. The market opening itself was unspectacular, and for a while prices were firm. Volume, however, was very large, and soon prices began to sag. Once again the ticker dropped behind. Prices fell further and faster, and the ticker lagged more and more. By eleven o’clock the market had degenerated into a wild, mad scramble to sell. In the crowded boardrooms across the country the ticker told of a frightful collapse. But the selected quotations coming in over the bond ticker also showed that current values went far below the ancient history of the tape. The uncertainty led more and more people to try to sell. Others, no longer able to respond to margin calls, were sold out. By eleven-thirty the market had surrendered to blind, relentless fear. This, indeed, was panic.

Outside the Exchange in Broad Street a weird roar could be heard. A crowd gathered. Police Commissioner Grover Whalen became aware that something was happening and dispatched a special police detail to Wall Street to insure the peace. More people came and waited, though apparently no one knew for what. A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump. Crowds also formed around the branch offices of brokerage firms throughout the city and, indeed, throughout the country. Word of what was happening, or what was thought to be happening, was passed out by those who were within sight of the board or the Trans-Lux. An observer thought that people’s expressions showed “not so much suffering as a sort of horrified incredulity.” Rumor after rumor swept Wall Street and these outlyinhg wakes. Stocks were now selling for nothing. The Chicago and Buffalo Exchanges had closed.

— John Kenneth Galbraith, “The Great Crash”

We were crowded in the cabin
Watching figures on the Board;
It was midnight on the ocean
And a tempest loudly roared.

“We are lost!” the Captain shouted,
As he staggered down the stairs.

“I’ve got a tip,” he faltered,
“Straight by wireless from the aunt
Of a fellow who’s related
To a cousin of Durant.”

At these awful words we shuddered,
And the stoutest bull grew sick
While the brokers cried, “More margin!”
And the ticker ceased to tick.

But the captain’s little daughter
Said, “I do not understand —
Isn’t Morgan on the ocean
Just the same as on the land?”

— anonymous poem, published in “The Literary Digest”, August 31, 1929

On Sunday [October 27] there were sermons suggesting that a certain measure of divine retribution had been visited on the Republic and that it had not been entirely unmerited. People had lost sight of spiritual values in their single-minded pursuit of riches. Now they had had their lesson.

Almost everyone believed that the heavenly knuckle-rapping was over and that speculation could be now resumed in earnest. The papers were full of the prospects for next week’s market.

Stocks, it was agreed, were again cheap and accordingly there would be a heavy rush to buy. Numerous stories from brokerage houses, some of them possibly inspired, told of a fabulous volume of buying orders which was piling up in anticipation of the opening of the market. In a concerted advertising campaign in Monday’s papers, stock market firms urged the wisdom of picking up these bargains promptly. “We believe,” said one house, “that the investor who purchases securities at this time with the discrimination that is always a condition of prudent investing, may do so with utmost confidence.” On Monday the real disaster began.

— John Kenneth Galbraith, “The Great Crash”

On September 3, 1929, by common consent, the great bull market of the nineteen twenties came to an end. Economics, as always, vouchsafes us few dramatic turning points. Its events are invariably fuzzy or even indeterminate. On some days that followed — a few only — some averages were actually higher. However, never again did the market manifest its old confidence. The later peaks were not peaks but brief interruptions of a downward trend.

— John Kenneth Galbraith, “The Great Crash”

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost …

The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.

— John Kenneth Galbraith, “The Great Crash”

Transcript from Senate Hearings, April – June, 1932:

Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corporation?

Mr. Sachs: Yes, sir.

Senator Couzens: And it sold its stock to the public?

Mr. Sachs: A portion of it. The firm invested originally in 10 per cent of the entire issue for the sum of $10,000,000.

Senator Couzens: And the other 90 percent was sold to the public?

Mr. Sachs: Yes, sir.

Senator Couzens: At what price?

Mr. Sachs: 104. That is the old stock … the stock was split two for one.

Senator Couzens: And what is the price of the stock now?

Mr. Sachs: Approximately 1^3/4.

Until 1928, stock exchange prices had merely kept pace with actual industrial performance. From the beginning of 1928 the element of unreality, of fantasy indeed, began to grow. As Bagehot put it, “People are most credulous when they are most happy.” People bought and sold in blissful ignorance. In 1927 the number of shares changing hands, at 567,990,875, broke all records. The figure then rose to 920,550,032.

Two new and sinister elements emerged: a vast increase in margin-trading and a rash of hastily cobbled-together investment trusts. Traditionally, stocks were valued at about ten times earnings. During the boom, as prices of stocks rose, divident yields fell. With high margin-trading, earnings on shares (or dividend yields), running at only 1 or 2 percent, were far less than the interest of 8-12 percent on loans used to buy them. This meant that any profits were on capital gains alone. Over the past 125 years of American history, divident yields have averaged 4.5 percent. The figures show that, whenever the divident yield sinks to as low as 2 percent, a crack in the market and a subsequent slump is on the way. That had been true of the last two bear markets before 1929 came, and investors or market analysts who studied historical performance, the only sure guide to prudence, should have spotted this. There were indeed some glaring warnings. Radio Corporation of America, which had never paid a divident at all, and whose earnings on shares were thus zero, nonetheless rose from 85 to 420 points in 1928. That was pure speculation, calculated on the assumption that capital gains would continue to be made indefinitely, a manifest absurdity. By 1929 some stocks were selling at fifty times earnings. As one expert put it, “The Market was discounting not merely the future but the hereafter.”

— Paul Johnson, “A History of the American People“

Among the speculators’ favorites during the 1920s were issues like Wright Aeronautics, Boeing, and, especially, Radio Company of America (or Radio, as it was then known), which was the most glamorous and fastest-growing corporation of the 1920s. Commercial radio was a revolutionary medium that shrunk the country like nothing before it, and Radio was the major player in the industry; it both manufactured radio sets and provided the programming they transmitted. In 1921 it’s stock hit a low of 1^1/2. Thereafter, it climbed steadily until 1927, when it headed for the stratosphere. In April 1929, Radio hit a high, after adjusting for stock splits, of 570. During the stunning ascent, old-timers shook their heads in disbelief. Despite its rapid growth, Radio had never paid a cent in dividents, and many of its shareholders were professional gamblers. In October 1929, the stock lost 75 percent of its value. It recovered a bit during 1930, but then collapsed again, and remained collapsed for the rest of the decade. Despite the strong growth of commercial radio, RCA’s stock didn’t recover its April 1929 level until 1964 — thirty-five years later.

— John Cassidy, “Dot.Con”

On Monday, October 21, for the first time, the ticker-tape could not keep pace with the news of falls and never caught up. In the confusion the panic intensified (the first margin calls had gone out on the Saturday before) and speculators began to realize they might lose their savings and even their homes. On Thursday, October 24 shares dropped vertically with no one buying, speculators were sold out as they failed to respond to margin calls, crowds gathered on Broad Street outside the New York Stock Exchange, and by the end of the day eleven men well known in Wall Street had committed suicide. Next week came Black Tuesday, the 29th, and the first selling of sound stocks in order to provide desperately needed liquidity.

Business downturns serve essential purposes. They have to be sharp. But they need not be long because they are self-adjusting. All they require on the part of governments, the business community, and the public is patience. The 1920 recession had adjusted itself, helped by Harding’s government cuts, in less than a year. There was no reason why the 1929 fall should have taken longer, for the American economy was fundamentally sound, as Coolidge had said. On November 13, at the end of the immediate four-week panic, the index was at 224, down from its peak at 452. There was nothing wrong in that. It had been only 245 in December 1928 after a year of steep rises. The panic merely knocked out the speculative element, leaving sound stock at about their right value in relation to earnings. If the recession had been allowed to adjust itself, as it would have done by the end of 1930 on any earlier analogy, confidence would have returned and the world slump need not have occurred. Instead the market went on down, slowly but inexorably, ceasing to reflect economic realities — its true function — and instead became an engine of doom, carrying into the pit the entire nation and, with it, the world.

— Paul Johnson, “A History of the American People”

So long sad times
Go long bad times
We are rid of you at last
Howdy gay times
Cloudy gray times
You are now a thing of the past

Happy days are here again
The skies above are clear again
So let’s sing a song of cheer again
Happy days are here again

Altogether shout it now
There’s no one
Who can doubt it now
So let’s tell the world about it now
Happy days are here again

Your cares and troubles are gone
There’ll be no more from now on
From now on …

Happy days are here again
The skies above are clear again
So, Let’s sing a song of cheer again

Happy times
Happy nights
Happy days
Are here again!

— recorded in late 1929 – it became the #1 hit of 1930. In the new context of 1930 the song lyrics DRIP with sarcasm.