Stock Market Crash
Stock Market Crash
United States 1929
The 1920s are often generalized as a decade of post-war affluence and good times. In reality, however, there was great economic disparity worldwide, which was one of many economic and political factors that precipitated the Great Depression of the 1930s. Nevertheless, the stock market crash of 1929 is the hallmark event frequently said to have brought about these economic hard times.
Various United States economic policies in the 1920s, including tariffs and reparations, decreased the international market for American goods, contributing to economic woes in the U.S. In addition, the nation's productive capacity was greater than its capacity to consume. This prompted credit expansion, which increased public debt. Other credit mechanisms existed that also allowed increased stock market speculation and buying on margin. Those who bought stocks on margin ultimately had to make good on their loan by paying cash or selling the stock, and many opted to sell because of inadequate funds. The federal government had attempted to stem speculative buying, but with little effect.
The stock market crash began Tuesday, 29 October, and continued to fluctuate for the next two weeks. Politicians and financiers expected the economy to self-correct as it had during previous cycles, but it did not, and the effects lasted for years. As Time magazine pointed out, in retrospect the blame has been attributed variously to "greedy speculators, Wall Street manipulators, gold merchants, and a carnival of other scapegoats."
- 1914: On the Western Front, the first battles of the Marne and Ypres establish a line that will more or less hold for the next four years.
- 1919: Treaty of Versailles signed by the Allies and Germany, but rejected by the U.S. Senate. This is due in part to rancor between President Woodrow Wilson and Republican Senate leaders, and in part to concerns over Wilson's plan to commit the United States to the newly established League of Nations and other international duties. Not until 1921 will Congress formally end U.S. participation in the war, but it will never agree to join the League.
- 1924: In the United States, Secretary of the Interior Albert B. Fall, along with oil company executives Harry Sinclair and Edward L. Doheny, is charged with conspiracy and bribery in making fraudulent leases of U.S. Navy oil reserves at Teapot Dome, Wyoming. The resulting Teapot Dome scandal clouds the administration of President Warren G. Harding.
- 1927: Charles A. Lindbergh makes the first successful solo nonstop flight across the Atlantic and becomes an international hero.
- 1929: The Lateran Treaty between the Catholic Church and Mussolini's regime establishes the Vatican City as an independent political entity.
- 1929: Edwin Hubble proposes a model of an ever-expanding universe.
- 1931: Financial crisis widens in the United States and Europe, which reel from bank failures and climbing unemployment levels. In London, armies of the unemployed riot.
- 1933: Newly inaugurated U.S. president Franklin D. Roosevelt launches the first phase of his New Deal to put depression-era America back to work.
- 1935: Second phase of New Deal begins with the introduction of social security, farm assistance, and housing and tax reform.
- 1941: Japanese bombing of Pearl Harbor on 7 December brings the United States into the war against the Axis. Combined with the attack on the Soviet Union, which makes Stalin an unlikely ally of the Western democracies, the events of 1941 will ultimately turn the tide of the war.
- 1944: Creation of International Monetary Fund and World Bank at Bretton Woods Conference.
Event and Its Context
Numerous significant events preceded the stock market crash. Some economists trace the start of these events to 1928. Just six months prior to the crash, the stock market was at a record high; by 29 October, the market was down 40 percent, and it lost 11.5 percent in a single day. That day was Tuesday, 29 October, commonly called "Black Tuesday." The previous Thursday had been a record day for the market, with a record of 13 million shares traded. This was four times the previous record. The Dow had fallen 20 percent that day but rallied the following day. More bad news on Monday, 28 October, sent the Dow down 13.5 percent, but the market did not recover.
One factor said to have led to the crash was the ability of investors to buy on margin. Buying on margin is a type of loan enabling people to buy stock against possible future profits, and such loans were notoriously easy to obtain. There were reports of working men and women obtaining margin loans with very little collateral. Stocks were easily purchased for about 10 percent cash. There were some three million investors about this time, many of whom were new and inexperienced and purchased stocks based on tips and bad advice. By enabling speculation and bad trading, these loans caused average working people to lose their savings when the market fell. They also adversely affected banks.
It is also telling that the actual number of stock market investors in 1929 is widely debated. In Panic on Wall Street, Robert Sobel says that corporations were reporting 20 million investors. A more realistic number provided by the United States Treasury chief actuary, Joseph McCoy, is three million, which did not include speculators. Sobel says that these figures are difficult to calculate, because many people had more than one—as many as twelve or more—active brokerage accounts. In 1929 there were about 120 million brokerage accounts. The number of margin accounts was about 600,000.
The Market Crashes
There were warnings prior to the crash, but they were largely ignored. Political and financial leaders repeatedly pronounced the national economy "absolutely sound." Share prices had climbed unusually high in an 18-month period and reached a historic high on 3 September 1929. Days later Roger Babson—a statistician some considered eccentric—addressed the National Business Conference. He told them, "Sooner or later, a crash is coming, and it may be terrific." Benjamin Strong, chair of the Federal Reserve Bank of New York, was also concerned and repeatedly advised the Federal Reserve Bank to raise its interest rates to restrain out of control speculation.
These opinions, however, were counter to those of most United States economists, including those from august institutions such as Stanford and Princeton universities. They stated publicly that stock prices would continue to rise. As Sobel says, this was exactly what the public wanted to hear. "There were few bears on Wall Street, and fewer still on university campuses throughout the nation."
By October 1929 the economic signs could not have become any clearer. Home building was down appreciably; farming was in bad shape and had been for years; automobile sales and industrial production were down; and stocks were down, prompting brokers to initiate margin calls. Those who had purchased stocks on credit had to give their brokers cash. If they did not have the cash by the deadline, the stocks would be sold.Before the closing bell sounded on Wednesday, 23 October, 2.6 million shares had sold in the final hour of trading.
When the exchange opened the next day, trading became even more frantic. As stocks were being dumped, prices plunged. According to a Time magazine account, "Outside in the streets, people began drifting toward the pillared exchange building and assembling there as though it were some royal palace where a king lay dying." The crowd was in shock. Some reportedly stormed the visitors' gallery to see firsthand what was transpiring on the floor. "They screamed as they noted the large declines," wrote Sobel, "others wept, or looked upon the tumult as through it were the end of the world. At 11 A.M. the gallery was closed, to keep the hysterical and the morbid from the scene."
More than $9.5 billion in paper value was lost during the first two hours of trading. By noon, several bankers assembled at J. P. Morgan to discuss the situation, including representatives of Chase National, Guaranty Trust, Bankers Trust, and First National. These men were in charge of more than $6 billion in assets. They created a pool with which they would purchase stocks to buoy the market financially, hoping to reverse the market's fortunes. The amount said to be involved varies widely—between $20 million and $240 million, though the more likely figure is between $20 and $30 million. The pool purchases were made soon after the meeting ended. Richard Whitney, acting exchange president, purchased 10,000 shares of U.S. Steel. Cheers reportedly arose from the floor. Traders knew it was an attempt to shore market confidence. Whitney made several other above-market purchases of blue-chip stocks, and some ultimately gained. At closing, more than 13 million shares of stock were traded; stocks were only twelve points below those of the previous day.
Although this day is marked as the start of economic problems, the problem lingered for weeks. The demonstration of confidence by bankers had been a temporary fix. There were discussions about closing the market, but it was decided to allow operations to continue in the hope that the market would self-correct. Other recessions and poor markets had corrected with time; why would this be any different? The market continued to yo-yo. It was 13 November when the market reached its low. Between September and November, the stock market lost $30 billion in value.
Consumer Attitudes and the Federal Reserve System
In the late 1920s the global economy was still recovering from World War I. In the United States this era was also marked by a shift in consumer attitudes. New products, notably automobiles and electrical appliances, were available. New forms of credit were also becoming available, allowing people to purchase goods on the installment plan, which changed savings habits as well. American consumers also had greater personal disposable income. In 1919 disposable income was 4.64 percent; it was 9.34 percent by 1929.
Ironically, consumption was down dramatically. Terms for buying on installment were changed to encourage people to purchase, but thrift was a concept so ingrained in most people and so equated with morality that luxury spending remained rare. As Oscar Wells, former president of the American Bankers' Association observed, "Since the war particularly, we have taught that thrift is an attribute, greatly to be sought after. There is no consistency in preaching this doctrine on the one hand and, on the other, of encouraging an indulgence in buying on the installment plan at a cost ranging from fifteen to forty percent for the privilege."
Fingers are frequently pointed in the direction of the Federal Reserve system, which had been operational only since 1914. Officials saw the economy contracting, but they did not adopt policies to halt the recession. Had they been more proactive, a total economic collapse might have been avoided; this is a point that has been debated frequently. Federal Reserve officials were divided as to what would help the economy. They eventually believed that the buildup of installment credit during the 1920s was a key factor in precipitating the downward cycle. Although economic scholars have presented new views about the causes of the Great Depression, some economists including John Kenneth Galbraith believe that the crash was to blame. Other economists now say that the Great Depression was triggered not by the crash but by devotion to the gold standard and other federal monetary policies.
The gold standard had just been resumed after World War I and was still shaky. Currency throughout the world was tied to gold, which was deemed the critical factor in the international economy. Regulating the economy while keeping the gold standard meant that both prices and wages had to fall. Moreover, the United States was not the only country trying to preserve the gold standard. Between 1923 and 1928 there was a worldwide attempt to restore the gold standard, and this strategy was generally seen as the key to a stable international monetary system. It was also hoped that it would spur international trade and speed global economic recovery, which had begun tentatively in 1924.
Folktales Versus Reality
There is no question that the stock market crash of 1929 assumed mythical proportions, particularly in retrospect. One persistent myth concerns distraught brokers and investors who supposedly took their lives, jumping out of office buildings as fortunes were lost. Demographics, however, clearly refute this. Between 15 October and 13 November 1929, the suicide rate in Manhattan was lower than it had been the previous year.
"Wild were the rumors of ruin and suicide," according to one Time report of the day. "It has always remained part of American legend that Black Thursday featured stockbrokers leaping from skyscraper windows, but specific instances are hard to find." One such inconclusive report involved the president of Union Cigar, who either jumped or tumbled off a hotel ledge. His company stock had dropped from 113 to 4. The actual number of suicides between 24 October 1929 and 1 January 1930 was eight, two of which were on Wall Street. According to American Demographics, "less than one percent of suicides in the U.S. between October and December 1929 were because of the stock market crash."
Another common myth actually fueled stock speculation. Stories circulated about some working person—often a shoe-shine boy or waitress—getting a hot stock tip. Once they had invested their savings in a certain stock, they were able to make millions. Author Robert Sobel says that, rather than distorting events, it is more appropriate to consider the crash as "destined to become a symbol for the reality of 1930 and the decade that followed, and that one should take care not to confuse the symbol with the reality."
The Great Depression, supposedly triggered by the crash, did not occur solely in the United States but was a global depression, the effects of which could be felt throughout the Americas and Europe. European nations, still recovering from World War I, were particularly affected. The crash has been said to have precipitated numerous economic and political problems worldwide. The poor German economy, for example, contributed to the unchecked political ascendance of Adolf Hitler. Banking problems in Germany and Austria as well as the United States also contributed to further worldwide monetary woes. Domestically, there were an estimated 16 million people unemployed. The stock market would continue falling. Declines in unemployment, production, and prices continued.
The Federal Reserve, however, raised interest rates in 1928 and 1929 in attempts to halt market speculation. Conditions in 1929, coupled with federal economic policies, triggered a recession as well as an economic snowball effect. Corporations cut spending, followed by cuts in production, which meant that employment was cut back. This also meant that consumers were spending less. With demand for consumer goods off, the economy continued to contract. "The Federal Reserve slashed the money supply at a time when it should have expanded it," says Paul Ormerod. And George Selgin wrote, "Indeed, government errors were so extensive as to make one wonder whether the depression was inevitable, and whether it would have earned the epithet 'Great' had governments limited themselves to a classical 'hands-off' approach."
Babson, Roger: One of the few people to publicly state the stock market was headed for problems, his views were in the minority. He did, however, correctly predict there would be a crash.
Hoover, Herbert (1874-1964): Born in Iowa, Hoover studied engineering at Stanford University. He had served as secretary of commerce under both Warren G. Harding and Calvin Coolidge. Hoover had just become president at the time of the stock market crash.
Mellon, Andrew W. (1855-1937): Secretary of the Treasury (1921-1932), Mellon was influential in shaping government financial polices.
McCoy, Joseph: McCoy was chief actuary of the United StatesTreasury at the time of the stock market crash.
Morgan, John Pierpont, Jr. (1867-1943): Head of J. P. Morgan & Company, Morgan's business was at the crux of the United States and world economy. The firm had issued bonds for various nations in the Americas and Europe between 1917 and 1928. He was also on the several committees influential in determining war reparations. At the time of the crash, it was in the offices of J.P. Morgan & Company that bankers met to form a financial pool in an attempt to halt the crash. Ironically, Morgan was not in the country at the time of the stock market crash.
Norris, George W.: Governor of the Philadelphia Federal Reserve Bank (1920-1936), Norris was very vocal in the debates about installment credit.
Simmons, E. H. H.: President of the New York Stock Exchange at the time of the crash. Strong, Benjamin (1872-1928): Born in Fishkill, New York,
Strong was involved in the financial industry throughout his life. He was president of the Bankers' Trust Company when the Federal Reserve system was created in 1914. He was appointed governor of the Federal Reserve Bank of New York. Strong was concerned about how federal policies contributed to recessions. Although he died the year prior to the crash, Strong had been very influential in domestic and international finance. He was perceived abroad as the head of the Federal Reserve system.
Whitney, Richard (1888-1974): Acting president of the stock exchange at the time of the market crash, he is often credited with helping stabilize the panicked market by purchasing shares of U.S. Steel. Whitney was actually the exchange's vice president; the body's president was out of the country in October 1929. He was president of the exchange after this and served four terms. Whitney was found guilty of malfeasance in 1938. He served three years at Sing Sing Prison.
Young, Roy A.: Young started his banking career in Michigan.The Federal Reserve Bank of Minneapolis hired him in 1917. He was governor of the bank, but resigned to become a governor on the Federal Reserve Board in 1927. Young was most concerned about the effect speculation would have on the economy and frequently advised President Herbert Hoover to take decisive actions to control it.
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—Linda Dailey Paulson