The Stock Market: Crash

THE STOCK MARKET: CRASH

Signs

Although the signs had been clear for months, the crash clearly took many by surprise, perhaps because of the conflicting information to which they had been exposed or perhaps because of their own wishful thinking. The beginning of the end came quietly. In October freight-car loadings and housing starts, key economic indicators of the time, began to decline. As many later noted, the crash did not occur because investors suddenly decided it was time to leave but because they were pushed out. On the stock exchange, business seemed to be relatively normal; shares traded were in the four- to five-million range. But in September brokers' loans increased to $670 million—a good sign because it indicated there was still substantial interest in the market and a bad sign because it increased the outstanding balance of these volatile loans.

Ominous Signs

On 23 October two ominous events occurred: sales totaled six million shares, an enormous amount, and investors throughout the country began to discover how little they knew of what was afoot. The ticker fell more than an hour behind events, and by the end of the day investors had to wait an hour and forty minutes to know how much they had made or lost. Un-fortunately, if they had lost, the delay often made it impossible to do anything about it, a plight especially alarming to those outside Manhattan who felt cut off from events. Many investors began to realize that they could be wiped out and not know it for several days. Thousands of orders to buy or sell had piled up in back offices. In 1929 office methods were still quite primitive: books were largely kept by hand, and there were no computers, no electronic transfers of funds. This situation was especially serious to people trading on margin.

Margin Trading

When the market was rising, margin trading had seemed like a magical way of making money. The margin trader bought stock by paying less than the full price (borrowing the margin—the difference—from the broker). If the customer paid 90 percent and a few days after the purchase the stock rose by a dozen points, the margin could be covered easily and a profit made. At this point the customer might pay off the margin, sell the stock, and get out, or he might pay off the margin, keep the stock, and increase his holdings by using the margin again. But this sort of account was extremely risky. If the stock fell, the customer had to put up more money to sustain the account. In the worst case, if the stock kept falling, the customer ultimately ran out of cash, and the broker, who in most cases had himself borrowed money from his banker, was forced to sell out the account for what he could get. The greater the margin, the greater the difficulty when the market began to fall. If the customer could not pay the broker, the broker was unable to pay the banker, and all parties fell like a house of cards.

Dangers of the Margin

As the summer passed, there were increasing numbers of margin calls (delivered in uniquely distinguishable brown envelopes or, as matters deteriorated, by telephone). As stocks fell and the value of the buyers' holdings declined, they had to be "covered" by additional margins. Investors who had sufficient funds to pay the margin remained undisturbed, and brokers were relaxed and polite. There was really no problem, they said; it was just a matter of straightening out a few loose ends. If the customer continued to have the money to cover the margin, that statement was true. But as matters grew more serious for both investors and brokers, the calls became less polite. The brokers were desperate for cash to pay their banks. The banks were desperate to pay the federal lenders or the out-of-town banks whose spare cash they had poured into the call market.

Collapse

Thus, the slide turned into total collapse. The banks wanted their money from the brokers. The brokers wanted their money from the customers. The only way most customers could get the money was to sell the stock, and selling the stock depressed the market even more, increasing pressure all along the line. Again panic was fed by a shortage of information; the prices quoted on the ticker lagged well behind the actual prices on the exchange floor. On the evening of Thursday, 24 October, the ticker did not fall silent until eight and one-half minutes past 7:00 P.M., more than four hours after the market had closed. Nobody knew what current prices were or what they would be in the morning after some overnight revaluation had been made. The rancher in Wyoming might just as well have been in Tibet, but the broker in Manhattan was little better off. On this one business day—24 October 1929—all the unthinkable crises and nightmares that had threatened during the preceding weeks came to pass.

Prelude

The day began quietly. Many brokers and bankers arrived in the Wall Street area early and found that the place was already crowded, not only with their colleagues, many of whom had spent the night in their offices or in nearby hotels, but also with a large number of customers and depositors, who were clearly in a hostile mood, although little was said. Obviously the crowd was frightened and confused by what was going on. One young broker from E. F. Hutton found the entrance to the stock exchange already crowded, and when the doorman recognized him and let him in, there was a rumble of displeasure from the throngs outside.

Churchill

On the exchange floor as the 10 A.M. opening hour neared, William Crawford, the longtime superintendent of the Exchange, received a call from Richard Whitney, acting president of the Exchange. Fearing that Whitney would close the Exchange, Crawford was relieved to find that the message concerned a visit from the British politician Winston Churchill, who was expected in midmorning. Crawford privately thought that Churchill might have picked a better day.

Disaster

For the first half hour after the opening bell had sounded, the situation looked somewhat better, but the resulting optimism was short-lived; by 10:45 A.M. the anemic recovery was over. Soon, communications broke down completely. Not only did the ticker begin to lag but switchboards were jammed, and bankers and brokers found that a call downstairs or across the street took a half hour to complete and that long-distance calls were nearly impossible. Immediately, huge blocks of stock were tendered for what they would bring, and after two and one-half hours had passed, sales had reached 12,894,650, more than twice the previous days sales.

Chaos

By 11:00 A.M. the floor was a madhouse, as noisy as a steel mill. Crawford, a man who took his job seriously, noted that the rules of the Exchange were being violated on a wholesale basis. The rules in question prohibited traders on the floor from "shouting," "being coatless," "shoving," "running," or "cursing," and, so far as he could see, almost all the members were doing all of the above. But there were a few who appeared calm and collected, including John "Black Jack" Bouvier, future father-in-law of John F. Kennedy. Despite the few cool heads in the room, the air was filled with shouts to "sell at the market"—though no one knew what the market was at any given time.

National Response

In Detroit, Charles S. Mott, then chairman of GM, had laid careful plans for a stock-market emergency, but now his New York broker told him that almost nothing could be done from Detroit. In San Francisco, banker A. P. Giannini was holed up in his private hideaway in the Mark Hopkins Hotel. In New York, executive John J. Raskob, who weeks earlier had declared that everyone should be rich, was glued to the ticker, as were Joseph P. Kennedy and the "great bear" operator Jesse Livermore.

Recovery Efforts

At noon Acting President Whitney directed that the public gallery be closed (Churchill had already left), and at about the same time the leading bankers met to devise a plan, although they had some difficulty getting to the Morgan offices because of the crowd. En route they tried as best they could to radiate confidence, and rumors circulated that they and their banks would mount a rescue operation from the Morgan offices at 23 Wall Street. At 1:15 P.M. Richard Whitney, the bankers' representative, walked calmly onto the trading floor. Superintendent Crawford braced himself, thinking that Whitney would close the market, but instead he walked to the steel post and inquired politely, but in a loud voice to be heard over the bedlam, what the current price was. He was informed that it was 195. He ordered ten thousand shares at 205, and in the instantaneous hush he walked from post to post, ordering large blocks of choice issues.

Whitney

The bankers could hardly have chosen a better representative. A tall and handsome Harvard graduate with a patrician air, Whitney was Morgan's floor trader, and his elder brother, George, was a highly respected Morgan partner; the younger Whitney was clearly Morgan's man. Few men liked Richard Whitney—he was a consummate snob with a reputation for less than total honesty—but they had to respect him and his connections. (In 1938 he pleaded guilty to two indictments for grand larceny for looting his wife's estate and was sentenced to five-to-ten years in Sing Sing on each count. Always called "Mr. Whitney" by the prison staff and his fellow inmates, he was paroled three years later and lived comfortably until his death on 5 December 1974.) His performance on 24 October 1929 was, of course, great drama, but although the market briefly rallied, Whitney's gesture had no lasting effect. Later in the day, Thomas Lamont, head of the Morgan bank and an icon on Wall Street, received the press and talked bravely, but all to no avail.

Terrible Reality

The bankers were, in fact, in an impossible situation; to do what they knew should be done required them to act against their interests. Their instincts told them to sell, to get out from under as soon as possible. What the bankers had done on Thursday was to help restore some of the losses with the hope that further selling would stop; but that did not happen. Thursday's sales of close to thirteen million shares was followed by Friday sales of nearly six million shares, and the bankers (many of whom were not themselves as well-off as many thought) would have been superhuman if they had not joined the selling parade. The following Tuesday, 29 October—"Black Tuesday"—is regarded as one of the most devastating days in economic history, with 16,410,030 shares sold. By the evening of the 29th, no one had any illusions that the crisis was just a minor "adjustment" that would soon pass. The next day's edition of the show-business paper, Variety, summed it up, "WALL ST. LAYS AN EGG."

Myths

Not all stocks became worthless, and not everyone went flat broke. Over the next weeks some stocks rallied but remained far from their high points. Sound stocks like GM, U.S. Steel, and RCA still had value, and after a time they again became salable. But, sadly, many small investors were in fact wiped out, most of them caught in the margin trap. According to folklore, dozens of brokers jumped to their deaths from Manhattan sky-scrapers. That story was largely mythical, though Edward Stone, a widely known broker, was forcibly restrained from jumping by his wife and his daughter. Rumors also flew of office boys making bids on good stock at fire-sale prices and having them accepted in the absence of other bids; but few of these accounts were really true.

Bankers and Brokers

One truth did emerge: bankers and brokers who had been lionized since the market boom began were now out of fashion. They were no longer invited to present commencement addresses, presented with honorary degrees, or featured in laudatory interviews. Instead they faced grillings from congressional committees and, in some cases, charges of mismanagement or even criminal prosecution. Never again in their lifetimes would the market or their positions be the same.

Sources:

John Brooks, Once in Golconda (New York: Norton, 1969);

John Kenneth Galbraith, The Great Crash (Boston: Houghton Mifflin, 1961);

Edwin Lefevre, Reminiscences of a Stock Operator (Garden City, N.Y.: Doubleday, 1930);

William E. Leuchtenburg, The Perils of Prosperity, 1914-1932 (Chicago: University of Chicago Press, 1958);

Forrest McDonald, Instill (Chicago: University of Chicago Press, 1962);

Ferdinand Pecora, Wall Street Under Oath (New York: Simon & Schuster, 1939).