In the spring and summer of 1929, the U.S. economy was riding high on the decade-long winning spree called the Roaring Twenties, but the Fed was raising interest rates to slow a booming market and an increasingly vocal minority of economists and bankers were beginning to wonder how long the party could possibly last.
In 1929, popular prognosticators like the Yale economist Irving Fisher swore that if a correction came, it would look like a harmless slump, while others predicted a jagged cliff. But nobody, absolutely nobody, could have foreseen the stock-market slaughter that happened in late October.
On two straight days, dubbed Black Monday and Black Tuesday, the stock market crashed by 25 percent and by mid-November it had lost half its value. When the market collapse finally hit rock bottom in 1932, the Dow Jones Industrial Average had withered away by a staggering 90 percent.
Hindsight is 20/20, but there were signals back in the summer of 1929 that trouble lay ahead.
What Goes Up...
Gary Richardson, an economics professor at the University of California Irvine and a former historian for the Federal Reserve, has researched the Fed’s role in the 1929 crash and the ensuing Great Depression. He says that the first warning sign of a looming market correction was a general consensus that the blistering pace at which stock prices were rising in the late 1920s was unsustainable.
“People could see in 1928 and 1929 that if stock prices kept going up at the current rate, in a few decades they’d be astronomic,” says Richardson. The question was less about whether the meteoric stock market rise was going to end, but how it would end.
READ MORE: What Caused the Stock Market Crash of 1929?
The global financial industry is now highly sophisticated with some of the best minds and the most powerful computers dedicated to predicting future market movements. In 1929, the field of quantitative forecasting was in its infancy. Each leading economic forecaster devised his own stock market indexes in an attempt to capture market trends.
Economist Roger Babson was one of the most prominent prophets of doom, concluding that stock prices were wildly inflated compared to the prospect of future dividends. In September 1929, Babson told a National Business Conference in Massachusetts that “sooner or later a crash is coming which will take in the leading stocks and cause a decline from 60 to 80 points in the Dow-Jones barometer… Some day the time is coming when the market will begin to slide off, sellers will exceed buyers and paper profits will begin to disappear. Then there will immediately be a stampede to save what paper profits then exist.”
Others, like the Yale economist Fisher, brushed off fears of a reversal, concluding that stock prices were on par with soaring corporate profits. In response to Babson’s dark predictions, Fisher famously told a crowd of stock brokers that stock prices had reached “what looks like a permanently high plateau.” That was on October 15, 1929, less than two weeks before Black Monday.
Fed Tried to Put on the Brakes
Richardson says that Americans displayed a uniquely bad tendency for creating boom/bust markets long before the stock market crash of 1929. It stemmed from a commercial banking system in which money tended to pool in a handful of economic centers like New York City and Chicago. When a market got hot, whether it was railroad bonds or equity stocks, these banks would loan money to brokers so that investors could buy shares at steep margins. Investors would put down 10 percent of the share price and borrow the rest, using the stock or bond itself as collateral.
Buying on margin lets investors buy more stock with less money, but it’s inherently risky since the broker can issue a margin call at any time to collect on the loan. And if the share price has gone down, the investor will have to pay back the full loan balance plus some change. One of the reasons Congress created the Federal Reserve in 1914 was to stem this kind of credit-fueled market speculation.
Starting in 1928, the Fed launched a very public campaign to slow down runaway stock prices by cutting off easy credit to investors, Richardson says. It started with a technique called “moral suasion,” similar to Alan Greenspan’s warning in 1996 that “irrational exuberance” was artificially pushing up stock prices. Back in 1929, the message was “Stop loaning money to investors,” says Richardson. “This is creating a problem.”
Banks didn’t get the message, so the Fed resorted to “direct action,” which operated more like a direct threat. In a letter to every commercial U.S. bank under the Fed’s purview, the central bank said that if you continue to lend to brokers and investors, we’re going to cut off access to the Fed’s discount window. No more credit for you.
But that didn’t work either.
In a last ditch effort to undercut the spike in stock prices, the Fed decided to raise interest rates in August 1929. If investors missed the first two signs that the Fed wanted to slam the breaks on the stock market, this one should have been abundantly clear.
“The Fed made a string of public announcements: ‘We’re doing this to slow the growth of stock prices,’” says Richardson. “Investors are very aware that the Fed is trying to bring down stock prices using all the tools at its disposal.”
Interest Rate Hike’s Bad Timing
Unfortunately, the timing of the interest rate hike couldn’t have been worse. Little did the Fed know that the U.S. economy would reach its peak in August 1929. Tightening the credit market was supposed to shrink stock prices by maybe 10 percent, says Richardson, but definitely not 90 percent.
Today, even mainstream news outlets run stories on wonky financial terms like the inverted treasury yield curve, which is supposed to be a strong predictor of a coming recession. Back in 1929, there were fewer such indicators available to investors, but still enough to get a read on whether the economy was expanding or contracting. Monthly figures were published, for example, about leading indicators like new housing permits and manufacturing orders.
“In 1929, it was clear that there had been this big boom but that the economy was starting to cool down,” says Richardson. “Just like today, there was a lot of discussion in the press about whether the economy had reached a peak or not. That all got resolved very quickly with the crash and its aftermath.”
READ MORE: The 2008 Crash: What Happened to All That Money?
‘No big decline has ever been fully predicted.’
While newbie middle-class investors seeking easy riches absolutely fueled the 1929 stock market boom and bust, plenty of very sophisticated investors also missed the coming crash. And even those who were savvy enough to foretell a market slide couldn’t have imagined the carnage to come.
“No big decline has ever been fully predicted,” says Richardson. “If there was any reasonable prediction that home prices would collapse in 2008, then people would have stopped buying homes. If any reasonable person had foreseen anything like the 90-percent collapse in equity prices from 1929 to 1934, the market would have not gone up. There’s lots of really smart people who bet wrong on the market all the time.”
WATCH: America, the Story of US: Bust on HISTORY Vault
The 1929 Parallel
Will the stock market crash? History may not repeat itself, argues the author of The Great Crash, but the dynamics of speculation are remorselessly constant, and they, along with other ominous indicators, give no comfort to optimism
Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corportation?
Mr. Sachs: Yes, sir.
Senator Couzens: And it sold its stock to the public?
Mr. Sachs: A portion of it. The firms invested originally in ten per cent of the entire issue for the sum of ten million dollars.
Senator Couzens: And the other ninety per cent was sold to the public?
Mr. Sachs: Yes, sir.
Senator Couzens: And what is the price of the stock now?
Mr. Sachs: Approximately one and three quarters.
—from the Senate Hearings of Stock Exchange Practices, 1932
In March of 1929 Paul M. Warburg, a founding parent of the Federal Reserve System and an immensely prestigious banker in his time, called attention to the current orgy, as he said, of "unrestrained speculation" in the stock market and added that were it not brought to an end, there would be a disastrous collapse. His warning was badly received. It was made clear that he did not appreciate the new era in economic well-being that the market was so admirably reflecting he was said by one exceptionally articulate critic to be "sandbagging American prosperity." Less eloquent commentators voiced the thought that he was probably short in the market.
There was a decidedly more sympathetic response somewhat later that year to the still remembered observation of Professor Irving Fisher, of Yale, one of the most diversely innovative scholars of his time. Fisher said, "Stock prices have reached what looks like a permanently high plateau." Fisher was, in fact, long in the market and by some estimates lost between eight and ten million dollars in the almost immediately ensuing crash.
There is here a lesson about the larger constant as regards financial aberration and its consequences. There is a compelling vested interest in euphoria, even, or perhaps especially, when it verges, as in 1929, on insanity. Anyone who speaks or writes on current tendencies in financial markets should feel duly warned. There are, however, some controlling rules in these matters, which are ignored at no slight cost. Among those suffering most will be those who regard all current warnings with the greatest contempt.
The first rule—and our first parallel with 1929—has to do with the stock market itself and, as it may somewhat formally be called, the dynamics of speculation.
Any long-continued increase in stock prices, such as preceded the 1929 crash and such as we experienced at least until last September, brings a change in the purposes of the participants in the market. Initially the motivating force is from institutions and individuals who buy securities (and bid up prices) because of some underlying circumstance, actual or imagined, that is judged to affect values: The economy as a whole is improving. Inflation as a threat is pending or perhaps receding. The tax prospect seems favorable. Or, mercifully, a business-oriented Administration has come to power in Washington. Most of all, in a time when common-stock dividends are largely a fixed dole to stockholders, interest rates are thought likely to decline. This calls for a compensating increase in the value of stocks if they are to earn only the new going return. On such matters virtually all comment concerning the market, informed and often otherwise, centers.
But as a stock-market boom continues (the same can be true as regards a boom in real estate or even art), there is increasing participation by institutions and people who are attracted by the thought that they can take an upward ride with the prices and get out before the eventual fall. This participation, needless to say, drives up prices. And the prices so achieved no longer have any relation to underlying circumstance. Justifying causes for the increases will, also needless to say, be cited by the sadly vulnerable financial analysts and commentators and, alas, the often vulnerable business press. This will persuade yet other innocents to come in for the loss that awaits all so persuaded.
For the loss will come. The market at this stage is inherently unstable. At some point something—no one can ever know when or quite what—will trigger a decision by some to get out. The initial fall will persuade others that the time has come, and then yet others, and then the greater fall will come. Once the purely speculative component has been built into the structure, the eventual result is, to repeat, inevitable.
There will previously have been moments of unease from which there was recovery. These are symptoms of the eventual collapse. In 1928 and through the winter, spring, and summer of 1929 the stock market divorced itself from all underlying reality in the manner just cited. Justification was, of course, asserted: the unique and enduring quality of Coolidge and Hoover prosperity the infinitely benign effects of the supply-side tax reductions of Secretary of the Treasury Andrew W. Mellon, who was held to be the greatest in that office since Alexander Hamilton the high-tech future of RCA, the speculative favorite of the time, which so far had not paid a dividend.
But mostly speculators, amateur and otherwise, were getting on for the ride. In the spring of 1929 came the initial indication of instability—a very sharp break in the market. Prices recovered, and in the summer months they rocketed up. There was another bad break in September and further uneasy movements. Then, at the end of October, came the compelling rush to get out and therewith the crash. No one knows what precipitated it. No one ever will. A few—Bernard Baruch and, it has long been said, Joseph P. Kennedy—got out first. Most went down with the mob to an extraordinary degree, this is a game in which there are mainly losers.
The question now, in the winter of 1987, is whether the stock market is or has been repeating its history. There was, early last year, a period of very sharply appreciating prices following an earlier, slower ascent. Then, on September 11 and the days following, came a severe slump, the worst in any recent period. So far (as this is written) there has been no significant recovery. As to the further prospect, no one knows, despite the extreme willingness to say otherwise on the part of many who do not know. What is certain, however, is that once again there existed a speculative dynamic—of people and institutions drawn by the market rise to the thought that it would go up more, that they could ride the rise and get out in time. Perhaps last September signaled the end perhaps it was an episode in a continuing speculative rise with a worse drop yet to come. What we do know is that speculative episodes never come gently to an end. The wise, though for most the improbable, course is to assume the worst.
Another stock-market collapse would, however—one judges—be less traumatic in its larger effect than was the one in October of 1929. The Great Crash had a shattering effect on investment and consumer spending and eventually on production and employment, leading to the collapse of banks and business firms. Now there are safety nets, as they are called. Unemployment compensation, pensions, farm-income support, and much else would have a general cushioning effect, along with government fiscal support to the economy. There is insurance of bank deposits and the further certainty that any large corporation, if in danger, would be bailed out. Modern socialism, as I've elsewhere said, is when the corporate jets come down on National and Dulles airports.
A second, rather stronger parallel with 1929 is the present commitment to seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures. Here the similarity is striking and involves the same elements as before. In the months and years prior to the 1929 crash there was a wondrous proliferation of holding companies and investment trusts. The common feature of both the holding companies and the trusts was that they conducted no practical operations they existed to hold stock in other companies, and these companies frequently existed to hold stock in yet other companies. Pyramiding, it was called. The investment trust and the utility pyramid were the greatly admired marvels of the time. Samuel Insull brought together the utility companies of the Midwest in one vast holding- company complex, which he did not understand. Similarly, the Van Sweringen brothers built their vast railroad pyramid. But equally admired were the investment trusts, the formations of Goldman, Sachs and Company and the United Founders Corporation, and—an exceptionally glowing example of the entrepreneurial spirit—those of Harrison Williams, who assembled a combined holding-company and investment-trust system that was thought to have a market value by the summer of 1929 of around a billion dollars. There were scores of others.
The pyramids of Insull and the Varr Sweringens were a half dozen or more companies deep. The stock of the operating utility or railroad was held by a holding company. This company then sold bonds and preferred stock and common stock to the public, retaining for itself enough of the common stock for control. The exercise was then repeated—a new company, more bonds and stock to the public, control still retained in a majority or minority holding of the stock of the new creation. And so forth up the line, until an insignificant investment in the common stock of the final company controlled the whole structure.
The investment trusts were similar, except that their ultimate function was not to operate a railroad or a utility but only to hold securities. In December of 1928 Goldman, Sachs and Company created the Goldman Sachs Trading Corporation. It sold securities to the public but retained enough common stock for control. The following July the trading corporation, in association with Harrison Williams, launched the Shenandoah Corporation. Securities were similarly sold to the public a controlling interest remained with the trading corporation. Then Shenandoah, in the last days of the boom, created the Blue Ridge Corporation. Again preferred stock and common were sold to the public the controlling wedge of common stock remained now with Shenandoah. Shenandoah, as before, was controlled by the trading corporation, and the trading corporation by Goldman Sachs. The stated purpose of these superior machinations was to bring the financial genius of the time to bear on investment in common stocks and to share the ensuing rewards with the public.
No institutions ever excited more admiration. The creators of the investment trusts were men of conceded as well as self-admitted genius, and were believed to have a strong instinct for the public interest. John J. Raskob, the chairman of the Democratic National Committee in those days, thought an investment trust might be created in which the toiling masses would invest from their weekly earnings. He outlined the proposal in a Ladies' Home Journal article titled "Everybody Ought to Be Rich."
In all these operations debt was incurred to purchase common stock that, in turn, provided full voting control. The debt was passive as to control so was the preferred stock, which conferred no voting rights. The minority interests in the common stock sold to the public had no effect of power either. The remaining, retained investment in common stock exercised full authority over the whole structure. This was leverage. A marvelous thing. Leverage also meant that any increase in the earnings of the ultimate companies would flow back with geometric force to the originating company. That was because along the way the debt and preferred stock in the intermediate companies held by the public extracted only their fixed contractual share any increase in revenue and value flowed through to the ultimate and controlling investment in common stock.
It was a grave problem, however, that in the event of failing earnings and values, leverage would work fully as powerfully in reverse. All income and value, and in practice more, would be absorbed by the outer debt and preferred shares for the originating company there would remain literally—very literally—nothing. But of this in 1929 no one, or not many, thought a rising market combined with the managerial and investment genius of the men who built these structures made any such concern seem irrelevant in the extreme.
Here the parallel: after fifty-seven years investment trusts, called closed-end funds, are now coming back into fashion, although still, I would judge, in a rather modest way as compared with 1929. The more exciting parallel is in the rediscovery of leverage. Leverage is again working its wonders. Not in utility pyramids: these in their full 1929 manifestation are forbidden by law. And the great investment houses, to be sure, still raise capital for new and expanding enterprises. But that is not where the present interest and excitement lie. These lie in the wave of corporate takeovers, mergers, and acquisitions and the leveraged buy-outs. And in the bank loans and bond issues, not excluding the junk bonds, that are arranged to finance these operations.
The common feature of all these activities is the creation of debt. In 1985 alone some $139 billion dollars' worth of mergers and acquisitions was financed, much of it with new borrowing. More, it would appear, was so financed last year. Some $100 billion in admittedly perilous junk bonds (rarely has a name been more of a warning) was issued to more than adequately trusting investors. This debt has a first claim on earnings in its intractable way, it will absorb all earnings (and claim more) at some astringent time in the future.
That time will come. Greatly admired for the energy and ingenuity it now and recently has displayed, this development (the mergers and their resulting debt), to be adequately but not unduly blunt, will eventually be regarded as no less insane than the utility and railroad pyramiding and the investment-trust explosion of the 1920s.
Ever since the Compagnie d'Occident of John Law (which was formed to search for the highly exiguous gold deposits of Louisiana) since the wonderful exfoliation of enterprises of the South Sea Bubble since the outbreak of investment enthusiasm in Britain in the 1820s (a company "to drain the Red Sea with a view to recovering the treasure abandoned by the Egyptians after the crossing of the Jews") and on down to the 1929 investment trusts, the offshore funds and Bernard Cornfeld, and yet on to Penn Square and the Latin American loans—nothing has been more remarkable than the susceptibility of the investing public to financial illusion and the like-mindedness of the most reputable of bankers, investment bankers, brokers, and free-lance financial geniuses. Nor is the reason far to seek. Nothing so gives the illusion of intelligence as personal association with large sums of money.
It is, alas, an illusion. The mergers, acquisitions, takeovers, leveraged buy- outs, their presumed contribution to economic success and market values, and the burden of debt that they incur are the current form of that illusion. They will one day—again, no one can say when—be so recognized. A fall in earnings will render the debt burden insupportable. A minor literature will marvel at the earlier retreat from reality, as is now the case with the Penn Square fiasco and the loans to Latin America.
The third parallel between present and past, which will be vividly and also painfully revealed, concerns one of the great constants of capitalism. That is its tendency to single out for the most ostentatious punishment those on whom it once seemed to lavish its greatest gifts.
In the years before the 1929 crash the system accorded fortune and prestige to a greatly featured croup of men—to Arthur W. Cutten, M. J. Meehan, Bernard E. ("Sell'em Ben") Smith, and Harry F. Sinclair, all market operators of major distinction also to Charles E. Mitchell, the head of the National City Bank as it then was, and Albert Wiggin, the head of the Chase National Bank, both deeply involved in the market on their own behalf to Ivar Kreuger, the Match King, international financier (and sometime forger of government bonds) and to Richard Whitney, soon to become president of the New York Stock Exchange and its most uncompromising public defender.
All suffered a fearful fall after the crash. Called before a congressional committee, Cutten, Meehan, and Sinclair all had grave lapses of memory. Mitchell and Wiggin, the great bankers, were both sacked Mitchell went through long and tedious proceedings for alleged income-tax evasion, and the large pension Wiggin had thoughtfully arranged for himself was revoked. Ivar Kreuger went out one day in Paris, bought a gun, and shot himself. Harry Sinclair eventually went to jail, and so, for embezzlement, did Richard Whitney. Whitney's passage into Sing Sing, in dignified, dark-vested attire, wearing, it has been said, the Porcellian pig of his Harvard club, was one of the more widely circulated news portraits of the time.
The young professionals now engaged in much-admired and no less publicized trading, merger takeover, buy-back, and other deals, as they are called, will one day, we can be sadly sure, suffer a broadly similar fate. Some will go to jail some are already on the way, for vending, buying, and using inside information. Given the exceptionally oblique line between legitimate and much-praised financial knowledge and wrongfully obtained and much-condemned inside information, more are known to be at risk. But for most the more mundane prospect is unemployment and professional obloquy, and for some, personal insolvency. Expensive apartments will become available on the upper East Side of Manhattan there will be property transfers in the Hamptons. David Stockman, said by the press to have a car sent out for him to Connecticut each morning by his employer, may end up taking the train.
S. C. Gwynne, a young onetime banker, tells in his excellent book Selling Money of his services in the late seventies and early eighties to the international division of Cleveland Trust, now AmeriTrust, a relatively conservative player on the world scene. He journeyed from Manila to Algiers and Riyadh in search of loans. It was a time of admiring reference to the recycling of funds on deposit from the OPEC countries to the capital-hungry lands. And he tells us that
The end for those in the present play will come when either recession or a tight- money crunch to arrest inflation makes the debt load they have so confidently created no longer tolerable. Then there will be threats of default and bankruptcy, a drastic contraction in operations, no bonuses, a trimming of pay and payrolls, and numerous very, very early retirements. And from many who did not themselves foresee the result, there will be a heavy-handed condemnation of the failure to see that this would be the result. For those who engage in trading operations at the investment houses the day of reckoning could be when the market goes down seemingly without limit. Then will be rediscovered the oldest rule of Wall Street: financial genius is before the fall.
The final parallel with 1929 is a more general one it has broadly to do with tax reduction and investment incentives. In the Coolidge years, as noted, Andrew Mellon reduced taxes on the affluent. The declared purpose was to stimulate the economy more precise reference to saving, investment, and economic growth was for the future. The unannounced purpose was, as ever, to lessen the tax bite on the most bitten. By the summer of 1929 the economy was, nonetheless, stagnant—even in slight recession. (To this, rather than to the built-in inevitabilities of speculation, some economists looking for deeper substance later attributed the crash.) There is every likelihood that a very large part of the enhanced personal revenues from the tax reduction simply went into the stock market, rather than into real capital formation or even improved consumer demand.
So again now. Funds have been flowing into the stock market to be absorbed by the deals aforementioned or the cost of making them. Some, perhaps much, of this money—no one, to be sure, knows how much—is from the supply-side tax reductions. Real capital spending is currently flat, even declining—a depressing fact.
From the mergers, acquisitions, and buy-backs, it is now reasonably well agreed, comes no increase at all in industrial competence. The young men who serve in the great investment houses render no service to investment decisions, product innovation, production, automation, or labor relations in the companies whose securities they shuffle. They have no real concern with such matters. They do float some issues for new ventures or expanded operations one concedes this while noting again how dismal is the present showing on real capital investment. Mostly their operations absorb savings into an inherently sterile activity.
History may not repeat itself, but some of its lessons are inescapable. One is that in the world of high and confident finance little is ever really new. The controlling fact is not the tendency to brilliant invention the controlling fact is the shortness of the public memory, especially when it contends with a euphoric desire to forget.
Opinion: The market will collapse ‘by the end of June’? Really?
“A huge collapse is coming,” warns longtime market prognosticator Harry Dent. He adds, “This thing will be hell,” it could be “the biggest crash ever,” and the start of “the next big economic downturn.”
When? By the end of June, if not sooner, it seems.
That’s less than 10 weeks away. Oh, well.
Dent’s forecast seems to have struck some kind of chord. For about a week or longer, the article was the most popular article at ThinkAdvisor.com. But although he may be unique in setting a deadline, he’s not the only guru predicting disaster.
Just this week I got a note from Jonathan Ruffer, an eminent money manager in London, with this dire warning: “I take it pretty much for granted that the 40 year bull market is ending, and that it will be replaced by hard investment times.” And Jeremy Grantham (also born in England, but long based in the U.S.) recently concluded that stocks, bonds and real estate are all in a bubble and may well collapse together in the next year or two. Longstanding gloomster John Hussman estimates the S&P 500 SPX, +0.33% could end up losing us all money over the next 20 years even before you deduct inflation, and suspects a quick 25-30% market slump may be ahead.
I have a guilty secret. I’m a sucker for these warnings (OK, maybe not for Dent’s). They often make for compelling reading. The most bearish stock market forecasters are generally more intelligent, more freethinking, and more interesting than the average Wall Street salesman. They usually write much better, too. Hussman’s math and logic are almost unarguable. Why, asked John Wesley, does the devil have the best tunes? (I am not comparing these people to a religious devil, of course, only to the Wall Street equivalent: Sinners who may interfere with the business.)
And their arguments make plenty of sense. Maybe not those predicting a market collapse in time for Wimbledon, but those warning us of grim years ahead. The U.S. stock market is almost 90% above the level where the “Warren Buffett Rule” is supposed to trigger red flashing lights and deafening warning sounds. The so-called “Shiller” or cyclically adjusted price to earnings ratio ], the Tobin’s Q — all sorts of measures are telling us some version of Alien’s “Danger! The emergency destruct system is now activated! The ship will detonate in T minutes 10 minutes.” Run, don’t walk, to the escape pod. Don’t forget the cat.
And most of the most bullish forecasts we hear from Wall Street involve the simple fallacy of double-counting: The more stocks rise the better their “historic returns,” which a salesman then cheerfully extrapolates into the future.
Ergo, the more expensive stocks are, the more attractive they are.
The bears have had plenty of logic and math on their side. But most of them have been predicting various reruns of the Great Depression for most of the past 20 years. Not just in 2000 and 2007, which were good times to get out of stocks, but also the rest of the time, which weren’t.
Over the past 20 years, a simple U.S. stock-market index fund such as the SPDR S&P 500 ETF SPY, +0.36% or Vanguard Total Stock Market Index fund VTSMX, +0.34% has quintupled your money.
These forecasts are always guaranteed to generate a lot of attention. More important, fears of a market crash have kept vast numbers of ordinary people out of stocks completely. In my day to day conversations I’m struck by how many otherwise sensible people think, not simply that the stock market is risky, but that you can, and possibly will, “lose everything.”
Why is this? And why do I (like many others) find myself peeking at the latest iceberg warning? It’s hard wired into us, psychologist Sarah Newcomb tells me. Warnings trigger our body’s stress, flight-or-fight responses, she says. “The story that there may be a market boom may move us slightly, but the story that they may be a market crash moves us more,” she says.
Newcomb, who has a Ph.D. in behavioral economics, is the director of behavioral science at financial research company Morningstar.
I guess it goes back to all those eons when our ancestors were roaming the savannas of Africa. At the first sign any sign of danger they learned to run first and ask questions later.
The early humans who treated every rustle in the grass as a lion lived to pass on their genes.
Those who didn’t … well, they ended up lunch for a big cat.
The ‘prospect theory’ guys, Daniel Kahneman and Amos Tversky, also found that we feel more pain from a dollar we lose than we feel joy from a dollar we gain. So we’re more attuned to any story telling us there might be about to lose money than to any story telling us we’re more likely to gain.
It’s not that the bull market salesmen are clearly right. Actually, math and cold hard logic should give anyone cause for concern, especially about the most euphoric U.S. stocks.
But even if these skeptics turn out to be right, when is it going to happen? Will the market go up another 10% or 20% or 50% before it turns? Will it happen in June this year — or June in 2025?
I always figure that the day I finally decide to tune these guys out altogether will be the moment the Titanic hits the iceberg.
But there are options instead of trying to guess on Boom and Doom. We can just let the market decide for us instead. Money manager Meb Faber worked out years ago that pretty much every stock market crash or bear market in history has been signaled in advance. If you just cashed out when the market index first fell below its 200-day moving average, you avoided nearly all the carnage. (OK, in the sudden 1987 one-day crash you got all of a single day’s notice.)
Even if you didn’t end up making more money in the long-term than a buy-and-hold investor, he found, you made pretty much the same amount … and with far less “volatility“ (and sleepless nights).
Last year this trigger got you out of the S&P 500 on March 2, just before the main implosion. The market rose above the 200-day moving average again, triggering it was time to get back in, on June 1.
Most people will use the S&P 500 index as their trigger, but Faber found it worked for other assets such as REITs as well. Global investors may prefer the MSCI All-Country World Index.
Is this system guaranteed to work? Of course not. But nor is anything else. That includes all those bullish predictions that stocks will earn you inflation plus 6% a year. And those bearish predictions that once the market reaches a certain valuation triggers it’s heading for disaster. All rules are rely on some assumption that the future will resemble the past.
And using this rule means you can safely and happily ignore all the people predicting the end of the world.
25.1 The Stock Market Crash of 1929
Herbert Hoover became president at a time of ongoing prosperity in the country. Americans hoped he would continue to lead the country through still more economic growth, and neither he nor the country was ready for the unraveling that followed. But Hoover’s moderate policies, based upon a strongly held belief in the spirit of American individualism, were not enough to stem the ever-growing problems, and the economy slipped further and further into the Great Depression.
While it is misleading to view the stock market crash of 1929 as the sole cause of the Great Depression, the dramatic events of that October did play a role in the downward spiral of the American economy. The crash, which took place less than a year after Hoover was inaugurated, was the most extreme sign of the economy’s weakness. Multiple factors contributed to the crash, which in turn caused a consumer panic that drove the economy even further downhill, in ways that neither Hoover nor the financial industry was able to restrain. Hoover, like many others at the time, thought and hoped that the country would right itself with limited government intervention. This was not the case, however, and millions of Americans sank into grinding poverty.
THE EARLY DAYS OF HOOVER’S PRESIDENCY
Upon his inauguration, President Hoover set forth an agenda that he hoped would continue the “Coolidge prosperity” of the previous administration. While accepting the Republican Party’s presidential nomination in 1928, Hoover commented, “Given the chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation forever.” In the spirit of normalcy that defined the Republican ascendancy of the 1920s, Hoover planned to immediately overhaul federal regulations with the intention of allowing the nation’s economy to grow unfettered by any controls. The role of the government, he contended, should be to create a partnership with the American people, in which the latter would rise (or fall) on their own merits and abilities. He felt the less government intervention in their lives, the better.
Yet, to listen to Hoover’s later reflections on Franklin Roosevelt’s first term in office, one could easily mistake his vision for America for the one held by his successor. Speaking in 1936 before an audience in Denver, Colorado, he acknowledged that it was always his intent as president to ensure “a nation built of home owners and farm owners. We want to see more and more of them insured against death and accident, unemployment and old age,” he declared. “We want them all secure.” 1 Such humanitarianism was not uncommon to Hoover. Throughout his early career in public service, he was committed to relief for people around the world. In 1900, he coordinated relief efforts for foreign nationals trapped in China during the Boxer Rebellion. At the outset of World War I, he led the food relief effort in Europe, specifically helping millions of Belgians who faced German forces. President Woodrow Wilson subsequently appointed him head of the U.S. Food Administration to coordinate rationing efforts in America as well as to secure essential food items for the Allied forces and citizens in Europe.
Hoover’s first months in office hinted at the reformist, humanitarian spirit that he had displayed throughout his career. He continued the civil service reform of the early twentieth century by expanding opportunities for employment throughout the federal government. In response to the Teapot Dome Affair, which had occurred during the Harding administration, he invalidated several private oil leases on public lands. He directed the Department of Justice, through its Bureau of Investigation, to crack down on organized crime, resulting in the arrest and imprisonment of Al Capone. By the summer of 1929, he had signed into law the creation of a Federal Farm Board to help farmers with government price supports, expanded tax cuts across all income classes, and set aside federal funds to clean up slums in major American cities. To directly assist several overlooked populations, he created the Veterans Administration and expanded veterans’ hospitals, established the Federal Bureau of Prisons to oversee incarceration conditions nationwide, and reorganized the Bureau of Indian Affairs to further protect Native Americans. Just prior to the stock market crash, he even proposed the creation of an old-age pension program, promising fifty dollars monthly to all Americans over the age of sixty-five—a proposal remarkably similar to the social security benefit that would become a hallmark of Roosevelt’s subsequent New Deal programs. As the summer of 1929 came to a close, Hoover remained a popular successor to Calvin “Silent Cal” Coolidge, and all signs pointed to a highly successful administration.
THE GREAT CRASH
The promise of the Hoover administration was cut short when the stock market lost almost one-half its value in the fall of 1929, plunging many Americans into financial ruin. However, as a singular event, the stock market crash itself did not cause the Great Depression that followed. In fact, only approximately 10 percent of American households held stock investments and speculated in the market yet nearly a third would lose their lifelong savings and jobs in the ensuing depression. The connection between the crash and the subsequent decade of hardship was complex, involving underlying weaknesses in the economy that many policymakers had long ignored.
What Was the Crash?
To understand the crash, it is useful to address the decade that preceded it. The prosperous 1920s ushered in a feeling of euphoria among middle-class and wealthy Americans, and people began to speculate on wilder investments. The government was a willing partner in this endeavor: The Federal Reserve followed a brief postwar recession in 1920–1921 with a policy of setting interest rates artificially low, as well as easing the reserve requirements on the nation’s largest banks. As a result, the money supply in the U.S. increased by nearly 60 percent, which convinced even more Americans of the safety of investing in questionable schemes. They felt that prosperity was boundless and that extreme risks were likely tickets to wealth. Named for Charles Ponzi, the original “Ponzi schemes” emerged early in the 1920s to encourage novice investors to divert funds to unfounded ventures, which in reality simply used new investors’ funds to pay off older investors as the schemes grew in size. Speculation , where investors purchased into high-risk schemes that they hoped would pay off quickly, became the norm. Several banks, including deposit institutions that originally avoided investment loans, began to offer easy credit, allowing people to invest, even when they lacked the money to do so. An example of this mindset was the Florida land boom of the 1920s: Real estate developers touted Florida as a tropical paradise and investors went all in, buying land they had never seen with money they didn’t have and selling it for even higher prices.
Selling Optimism and Risk
Advertising offers a useful window into the popular perceptions and beliefs of an era. By seeing how businesses were presenting their goods to consumers, it is possible to sense the hopes and aspirations of people at that moment in history. Maybe companies are selling patriotism or pride in technological advances. Maybe they are pushing idealized views of parenthood or safety. In the 1920s, advertisers were selling opportunity and euphoria, further feeding the notions of many Americans that prosperity would never end.
In the decade before the Great Depression, the optimism of the American public was seemingly boundless. Advertisements from that era show large new cars, timesaving labor devices, and, of course, land. This advertisement for California real estate illustrates how realtors in the West, much like the ongoing Florida land boom, used a combination of the hard sell and easy credit (Figure 25.3). “Buy now!!” the ad shouts. “You are sure to make money on these.” In great numbers, people did. With easy access to credit and hard-pushing advertisements like this one, many felt that they could not afford to miss out on such an opportunity. Unfortunately, overspeculation in California and hurricanes along the Gulf Coast and in Florida conspired to burst this land bubble, and would-be millionaires were left with nothing but the ads that once pulled them in.
The Florida land boom went bust in 1925–1926. A combination of negative press about the speculative nature of the boom, IRS investigations into the questionable financial practices of several land brokers, and a railroad embargo that limited the delivery of construction supplies into the region significantly hampered investor interest. The subsequent Great Miami Hurricane of 1926 drove most land developers into outright bankruptcy. However, speculation continued throughout the decade, this time in the stock market. Buyers purchased stock “on margin”—buying for a small down payment with borrowed money, with the intention of quickly selling at a much higher price before the remaining payment came due—which worked well as long as prices continued to rise. Speculators were aided by retail stock brokerage firms, which catered to average investors anxious to play the market but lacking direct ties to investment banking houses or larger brokerage firms. When prices began to fluctuate in the summer of 1929, investors sought excuses to continue their speculation. When fluctuations turned to outright and steady losses, everyone started to sell. As September began to unfold, the Dow Jones Industrial Average peaked at a value of 381 points, or roughly ten times the stock market’s value, at the start of the 1920s.
Several warning signs portended the impending crash but went unheeded by Americans still giddy over the potential fortunes that speculation might promise. A brief downturn in the market on September 18, 1929, raised questions among more-seasoned investment bankers, leading some to predict an end to high stock values, but did little to stem the tide of investment. Even the collapse of the London Stock Exchange on September 20 failed to fully curtail the optimism of American investors. However, when the New York Stock Exchange lost 11 percent of its value on October 24—often referred to as “Black Thursday”—key American investors sat up and took notice. In an effort to forestall a much-feared panic, leading banks, including Chase National, National City, J.P. Morgan, and others, conspired to purchase large amounts of blue chip stocks (including U.S. Steel) in order to keep the prices artificially high. Even that effort failed in the growing wave of stock sales. Nevertheless, Hoover delivered a radio address on Friday in which he assured the American people, “The fundamental business of the country . . . is on a sound and prosperous basis.”
As newspapers across the country began to cover the story in earnest, investors anxiously awaited the start of the following week. When the Dow Jones Industrial Average lost another 13 percent of its value on Monday morning, many knew the end of stock market speculation was near. The evening before the infamous crash was ominous. Jonathan Leonard, a newspaper reporter who regularly covered the stock market beat, wrote of how Wall Street “lit up like a Christmas tree.” Brokers and businessmen who feared the worst the next day crowded into restaurants and speakeasies (a place where alcoholic beverages were illegally sold). After a night of heavy drinking, they retreated to nearby hotels or flop-houses (cheap boarding houses), all of which were overbooked, and awaited sunrise. Children from nearby slums and tenement districts played stickball in the streets of the financial district, using wads of ticker tape for balls. Although they all awoke to newspapers filled with predictions of a financial turnaround, as well as technical reasons why the decline might be short-lived, the crash on Tuesday morning, October 29, caught few by surprise.
No one even heard the opening bell on Wall Street that day, as shouts of “Sell! Sell!” drowned it out. In the first three minutes alone, nearly three million shares of stock, accounting for $2 million of wealth, changed hands. The volume of Western Union telegrams tripled, and telephone lines could not meet the demand, as investors sought any means available to dump their stock immediately. Rumors spread of investors jumping from their office windows. Fistfights broke out on the trading floor, where one broker fainted from physical exhaustion. Stock trades happened at such a furious pace that runners had nowhere to store the trade slips, and so they resorted to stuffing them into trash cans. Although the stock exchange’s board of governors briefly considered closing the exchange early, they subsequently chose to let the market run its course, lest the American public panic even further at the thought of closure. When the final bell rang, errand boys spent hours sweeping up tons of paper, tickertape, and sales slips. Among the more curious finds in the rubbish were torn suit coats, crumpled eyeglasses, and one broker’s artificial leg. Outside a nearby brokerage house, a policeman allegedly found a discarded birdcage with a live parrot squawking, “More margin! More margin!”
On Black Tuesday , October 29, stock holders traded over sixteen million shares and lost over $14 billion in wealth in a single day. To put this in context, a trading day of three million shares was considered a busy day on the stock market. People unloaded their stock as quickly as they could, never minding the loss. Banks, facing debt and seeking to protect their own assets, demanded payment for the loans they had provided to individual investors. Those individuals who could not afford to pay found their stocks sold immediately and their life savings wiped out in minutes, yet their debt to the bank still remained (Figure 25.4).
The financial outcome of the crash was devastating. Between September 1 and November 30, 1929, the stock market lost over one-half its value, dropping from $64 billion to approximately $30 billion. Any effort to stem the tide was, as one historian noted, tantamount to bailing Niagara Falls with a bucket. The crash affected many more than the relatively few Americans who invested in the stock market. While only 10 percent of households had investments, over 90 percent of all banks had invested in the stock market. Many banks failed due to their dwindling cash reserves. This was in part due to the Federal Reserve lowering the limits of cash reserves that banks were traditionally required to hold in their vaults, as well as the fact that many banks invested in the stock market themselves. Eventually, thousands of banks closed their doors after losing all of their assets, leaving their customers penniless. While a few savvy investors got out at the right time and eventually made fortunes buying up discarded stock, those success stories were rare. Housewives who speculated with grocery money, bookkeepers who embezzled company funds hoping to strike it rich and pay the funds back before getting caught, and bankers who used customer deposits to follow speculative trends all lost. While the stock market crash was the trigger, the lack of appropriate economic and banking safeguards, along with a public psyche that pursued wealth and prosperity at all costs, allowed this event to spiral downward into a depression.
Click and Explore
The National Humanities Center has brought together a selection of newspaper commentary from the 1920s, from before the crash to its aftermath. Read through to see what journalists and financial analysts thought of the situation at the time.
Causes of the Crash
The crash of 1929 did not occur in a vacuum, nor did it cause the Great Depression. Rather, it was a tipping point where the underlying weaknesses in the economy, specifically in the nation’s banking system, came to the fore. It also represented both the end of an era characterized by blind faith in American exceptionalism and the beginning of one in which citizens began increasingly to question some long-held American values. A number of factors played a role in bringing the stock market to this point and contributed to the downward trend in the market, which continued well into the 1930s. In addition to the Federal Reserve’s questionable policies and misguided banking practices, three primary reasons for the collapse of the stock market were international economic woes, poor income distribution, and the psychology of public confidence.
After World War I, both America’s allies and the defeated nations of Germany and Austria contended with disastrous economies. The Allies owed large amounts of money to U.S. banks, which had advanced them money during the war effort. Unable to repay these debts, the Allies looked to reparations from Germany and Austria to help. The economies of those countries, however, were struggling badly, and they could not pay their reparations, despite the loans that the U.S. provided to assist with their payments. The U.S. government refused to forgive these loans, and American banks were in the position of extending additional private loans to foreign governments, who used them to repay their debts to the U.S. government, essentially shifting their obligations to private banks. When other countries began to default on this second wave of private bank loans, still more strain was placed on U.S. banks, which soon sought to liquidate these loans at the first sign of a stock market crisis.
Poor income distribution among Americans compounded the problem. A strong stock market relies on today’s buyers becoming tomorrow’s sellers, and therefore it must always have an influx of new buyers. In the 1920s, this was not the case. Eighty percent of American families had virtually no savings, and only one-half to 1 percent of Americans controlled over a third of the wealth. This scenario meant that there were no new buyers coming into the marketplace, and nowhere for sellers to unload their stock as the speculation came to a close. In addition, the vast majority of Americans with limited savings lost their accounts as local banks closed, and likewise lost their jobs as investment in business and industry came to a screeching halt.
Finally, one of the most important factors in the crash was the contagion effect of panic. For much of the 1920s, the public felt confident that prosperity would continue forever, and therefore, in a self-fulfilling cycle, the market continued to grow. But once the panic began, it spread quickly and with the same cyclical results people were worried that the market was going down, they sold their stock, and the market continued to drop. This was partly due to Americans’ inability to weather market volatility, given the limited cash surpluses they had on hand, as well as their psychological concern that economic recovery might never happen.
IN THE AFTERMATH OF THE CRASH
After the crash, Hoover announced that the economy was “fundamentally sound.” On the last day of trading in 1929, the New York Stock Exchange held its annual wild and lavish party, complete with confetti, musicians, and illegal alcohol. The U.S. Department of Labor predicted that 1930 would be “a splendid employment year.” These sentiments were not as baseless as it may seem in hindsight. Historically, markets cycled up and down, and periods of growth were often followed by downturns that corrected themselves. But this time, there was no market correction rather, the abrupt shock of the crash was followed by an even more devastating depression. Investors, along with the general public, withdrew their money from banks by the thousands, fearing the banks would go under. The more people pulled out their money in bank runs , the closer the banks came to insolvency (Figure 25.5).
The contagion effect of the crash grew quickly. With investors losing billions of dollars, they invested very little in new or expanded businesses. At this time, two industries had the greatest impact on the country’s economic future in terms of investment, potential growth, and employment: automotive and construction. After the crash, both were hit hard. In November 1929, fewer cars were built than in any other month since November 1919. Even before the crash, widespread saturation of the market meant that few Americans bought them, leading to a slowdown. Afterward, very few could afford luxury cars, like Stutz, Deusenberg, and Pierce-Arrow, so these car companies gradually went out of business in the 1930s. In construction, the drop-off was even more dramatic. It would be another thirty years before a new hotel or theater was built in New York City. The Empire State Building itself stood half empty for years after being completed in 1931.
The damage to major industries led to, and reflected, limited purchasing by both consumers and businesses. Even those Americans who continued to make a modest income during the Great Depression lost the drive for conspicuous consumption that they exhibited in the 1920s. People with less money to buy goods could not help businesses grow in turn, businesses with no market for their products could not hire workers or purchase raw materials. Employers began to lay off workers. The country’s gross national product declined by over 25 percent within a year, and wages and salaries declined by $4 billion. Unemployment tripled, from 1.5 million at the end of 1929 to 4.5 million by the end of 1930. By mid-1930, the slide into economic chaos had begun but was nowhere near complete.
THE NEW REALITY FOR AMERICANS
For most Americans, the crash affected daily life in myriad ways. In the immediate aftermath, there was a run on the banks, where citizens took their money out, if they could get it, and hid their savings under mattresses, in bookshelves, or anywhere else they felt was safe. Some went so far as to exchange their dollars for gold and ship it out of the country. A number of banks failed outright, and others, in their attempts to stay solvent, called in loans that people could not afford to repay. Working-class Americans saw their wages drop: Even Henry Ford, the champion of a high minimum wage, began lowering wages by as much as a dollar a day. Southern cotton planters paid workers only twenty cents for every one hundred pounds of cotton picked, meaning that the strongest picker might earn sixty cents for a fourteen-hour day of work. Cities struggled to collect property taxes and subsequently laid off teachers and police.
The new hardships that people faced were not always immediately apparent many communities felt the changes but could not necessarily look out their windows and see anything different. Men who lost their jobs didn’t stand on street corners begging they disappeared. They might be found keeping warm by a trashcan bonfire or picking through garbage at dawn, but mostly, they stayed out of public view. As the effects of the crash continued, however, the results became more evident. Those living in cities grew accustomed to seeing long breadlines of unemployed men waiting for a meal (Figure 25.6). Companies fired workers and tore down employee housing to avoid paying property taxes. The landscape of the country had changed.
The hardships of the Great Depression threw family life into disarray. Both marriage and birth rates declined in the decade after the crash. The most vulnerable members of society—children, women, minorities, and the working class—struggled the most. Parents often sent children out to beg for food at restaurants and stores to save themselves from the disgrace of begging. Many children dropped out of school, and even fewer went to college. Childhood, as it had existed in the prosperous twenties, was over. And yet, for many children living in rural areas where the affluence of the previous decade was not fully developed, the Depression was not viewed as a great challenge. School continued. Play was simple and enjoyed. Families adapted by growing more in gardens, canning, and preserving, wasting little food if any. Home-sewn clothing became the norm as the decade progressed, as did creative methods of shoe repair with cardboard soles. Yet, one always knew of stories of the “other” families who suffered more, including those living in cardboard boxes or caves. By one estimate, as many as 200,000 children moved about the country as vagrants due to familial disintegration.
Women’s lives, too, were profoundly affected. Some wives and mothers sought employment to make ends meet, an undertaking that was often met with strong resistance from husbands and potential employers. Many men derided and criticized women who worked, feeling that jobs should go to unemployed men. Some campaigned to keep companies from hiring married women, and an increasing number of school districts expanded the long-held practice of banning the hiring of married female teachers. Despite the pushback, women entered the workforce in increasing numbers, from ten million at the start of the Depression to nearly thirteen million by the end of the 1930s. This increase took place in spite of the twenty-six states that passed a variety of laws to prohibit the employment of married women. Several women found employment in the emerging pink collar occupations, viewed as traditional women’s work, including jobs as telephone operators, social workers, and secretaries. Others took jobs as maids and housecleaners, working for those fortunate few who had maintained their wealth.
White women’s forays into domestic service came at the expense of minority women, who had even fewer employment options. Unsurprisingly, African American men and women experienced unemployment, and the grinding poverty that followed, at double and triple the rates of their White counterparts. By 1932, unemployment among African Americans reached near 50 percent. In rural areas, where large numbers of African Americans continued to live despite the Great Migration of 1910–1930, depression-era life represented an intensified version of the poverty that they traditionally experienced. Subsistence farming allowed many African Americans who lost either their land or jobs working for White landholders to survive, but their hardships increased. Life for African Americans in urban settings was equally trying, with Blacks and working-class Whites living in close proximity and competing for scarce jobs and resources.
Life for all rural Americans was difficult. Farmers largely did not experience the widespread prosperity of the 1920s. Although continued advancements in farming techniques and agricultural machinery led to increased agricultural production, decreasing demand (particularly in the previous markets created by World War I) steadily drove down commodity prices. As a result, farmers could barely pay the debt they owed on machinery and land mortgages, and even then could do so only as a result of generous lines of credit from banks. While factory workers may have lost their jobs and savings in the crash, many farmers also lost their homes, due to the thousands of farm foreclosures sought by desperate bankers. Between 1930 and 1935, nearly 750,000 family farms disappeared through foreclosure or bankruptcy. Even for those who managed to keep their farms, there was little market for their crops. Unemployed workers had less money to spend on food, and when they did purchase goods, the market excess had driven prices so low that farmers could barely piece together a living. A now-famous example of the farmer’s plight is that, when the price of coal began to exceed that of corn, farmers would simply burn corn to stay warm in the winter.
As the effects of the Great Depression worsened, wealthier Americans had particular concern for “the deserving poor”—those who had lost all of their money due to no fault of their own. This concept gained greater attention beginning in the Progressive Era of the late nineteenth and early twentieth centuries, when early social reformers sought to improve the quality of life for all Americans by addressing the poverty that was becoming more prevalent, particularly in emerging urban areas. By the time of the Great Depression, social reformers and humanitarian agencies had determined that the “deserving poor” belonged to a different category from those who had speculated and lost. However, the sheer volume of Americans who fell into this group meant that charitable assistance could not begin to reach them all. Some fifteen million “deserving poor,” or a full one-third of the labor force, were struggling by 1932. The country had no mechanism or system in place to help so many however, Hoover remained adamant that such relief should rest in the hands of private agencies, not with the federal government (Figure 25.7).
Unable to receive aid from the government, Americans thus turned to private charities churches, synagogues, and other religious organizations and state aid. But these organizations were not prepared to deal with the scope of the problem. Private aid organizations showed declining assets as well during the Depression, with fewer Americans possessing the ability to donate to such charities. Likewise, state governments were particularly ill-equipped. Governor Franklin D. Roosevelt was the first to institute a Department of Welfare in New York in 1929. City governments had equally little to offer. In New York City in 1932, family allowances were $2.39 per week, and only one-half of the families who qualified actually received them. In Detroit, allowances fell to fifteen cents a day per person, and eventually ran out completely. In most cases, relief was only in the form of food and fuel organizations provided nothing in the way of rent, shelter, medical care, clothing, or other necessities. There was no infrastructure to support the elderly, who were the most vulnerable, and this population largely depended on their adult children to support them, adding to families’ burdens (Figure 25.8).
During this time, local community groups, such as police and teachers, worked to help the neediest. New York City police, for example, began contributing 1 percent of their salaries to start a food fund that was geared to help those found starving on the streets. In 1932, New York City schoolteachers also joined forces to try to help they contributed as much as $250,000 per month from their own salaries to help needy children. Chicago teachers did the same, feeding some eleven thousand students out of their own pockets in 1931, despite the fact that many of them had not been paid a salary in months. These noble efforts, however, failed to fully address the level of desperation that the American public was facing.
The 1929 Crash
Robert Shiller hadn't even been born at the time of the 1929 crash, but we now know that his CAPE ratio would have put stocks at a record level of 30 just before. That was the end of a 10-year bull market that had started out with the market at a ratio of about five. Which is about the level they returned to when the dust settled in 1930.
The Great Crash of 1929 is mostly associated with plummeting stock prices on two consecutive trading days, Black Monday and Black Tuesday, Oct. 28 and 29, 1929, in which the Dow fell 13% and 12%, respectively. But this double-whammy was only the most dramatic episode in a longer-term bear market.
In 1929, economists couldn't point to the soaring CAPE ratio to explain the Great Crash, but the reasons given for it, then and now, were reasonable. Irrational exuberance among investors pushed stock prices to unsustainable levels. They thought the economic boom would never end. The brashest investors went way out on a limb to buy on margin. And, interestingly, interest rates made borrowing cheap, encouraging speculation.
The Great Crash is considered to be one of the factors contributing to the onset of the Great Depression of the 1930s.
What to Do
It is human nature to regret missing out on a good thing. It’s difficult to hear of other investors making hundreds or even thousands of percent returns in short periods of time with investments you missed out on. This fear of missing out (or FOMO) can be overpowering. But resisting FOMO is vital to good investing behavior. It is completely aligned with Warren Buffett’s advice to “be greedy when others are fearful, and fearful when others are greedy.”
But you don’t need to do nothing. Instead of following the crowd, rebalance by taking gains from your high-flyers and adding to value stocks, international stocks, and non-correlated assets that have been laggards.
Don’t try to time the market by cashing out, but don’t follow the crowd and pile into the investment trend of the day either. Adopt a long-term perspective and stick with your investment strategy. Great investors ignore the noise and stay focused on their long-term goals. This may not be as much fun as day-trading GameStop or cryptocurrencies, but history teaches us you’ll be better off.
A Lesson From the 1929 Stock Market Crash
The children of the Depression forgot the lesson of the ’29 Crash and suffered dearly for it. Today’s investors would be wise to keep that lesson in mind.
Investment fads usually run their course quickly and end badly. The Nifty Fifty captivated investors for the better part of a decade prior to its demise in 1973, but not before reviving the high-risk investing that had been out of vogue since the Crash of ‘29.
The 50 stocks identified by Morgan Guaranty Trust represented some of the fastest-growing companies on the planet in the latter half of the 1960s. Their popularity among institutional and individual investors sparked a quantum shift from “value” investing to a “growth at any price” mentality that resurfaced with a vengeance in the tech-stock bubble a quarter-century later.
The Nifty Fifty’s rise didn’t spring from a typical market mania.
“A lot of the build-up in the market [in the 1960s] was based upon the perception of America’s growing power and strength,” says Charles Geisst, a Manhattan College finance professor and author of Wall Street: A History. The 1973–74 market collapse that followed the Watergate break-in and disillusion with the Vietnam War “ended that period of naïve expectations for the future.”
The Nifty Fifty’s rise didn’t spring from a typical market mania, such as the 1920s excitement over mass production or the 1990s blind zeal over the promise of technology. Instead, it was owing to a change in the zeitgeist of Wall Street.
Depression Babies’ Buy-In
The group also contained market leaders whose fortunes would vastly fade a few decades hence. They included Eastman-Kodak and Polaroid, undone by digital photography Simplicity Pattern, whose business slumped along with home sewing-machine sales, and S.S. Kresge, a retail chain founded in 1897 that in the 1970s morphed into now-struggling Kmart. Among the Nifty Fifty were fast-food pioneer McDonald’s early technology titans IBM, Texas Instruments and Digital Equipment Corp. soft-drink maker Coca-Cola, then expanding rapidly in foreign markets, and a department-store chain called Wal-Mart in the earliest stages of becoming the world’s largest retailer and private employer.
The Great Depression and World War II draped the nation in despair and uncertainty long after the ’29 Crash. In the ensuing years and up into the 1950s, Americans embraced conservative values that fostered a cautious attitude toward stocks. Risk-averse investors favored stable companies that paid out a sizeable share of profits in dividends, rather than reinvesting earnings in the company’s growth.
Timeline of the 1929 Market Crash
On October 29th, 1979, John Kenneth Galbraith sat before a Congressional Committee to answer one question. Can it happen again?
It was the Great Depression. For all the worry about repeating the depression, the real talk centered on what preceded it — the Great Crash. And Galbraith offered his expertise on the subject.
Not perhaps since the siege of Troy has the chronology of a great event been so uncertain. As a matter of fact, economic history, even at its most violent, has a much less exciting tempo than military or even political history. Days are rarely important. All of the autumn of 1929 was a terrible time, and all of that year was one of climax. With the invaluable aid of hindsight it is possible to see that for many previous months the stage was being set for the final disaster.
Galbraith then set about clearing up the issue. The Great Crash was not a single day but a sequence of events that started months in advance. Galbraith’s prepared statement offered a clear timeline that culminated in what everyone knows as the 1929 Crash.
Note: Galbraith refers to The New York Times industrial average. I’ve added the Dow Jones index data as well, along with info from a few other sources.
January 1, 1929 — The bull market is at least four years old. The New York Times average — an index of 25 industrial stocks (the standard at the time) — began 1924 at 110, then began 1925 at 135 (The Dow Jones began 1924 at 95.7 and 1925 at 121.3). Calvin Coolidge is President. The average rate charged on margin loans was slightly under 7% at the start of the year — an attractive rate for lenders. Early on, the debate began as to how best to deflate the bubble.
January 2, 1929 — The Times average closes the trading day at 338.35 (The Dow closed at 307). The climb from 1924 was mostly uninterrupted. Most months ended higher, with the exception of early 1926 and early 1928.
February 1929 — The Federal Reserve issues a warning on margin loans: “a member bank is not within its reasonable claims for rediscount facilities at the Federal Reserve Bank when it borrows for the purpose of making speculative loans.” The market sells off but quickly recovers.
March 4, 1929 — Herbert Hoover is inaugurated as President. The market surged after his November election win and gave him an “inaugural market” surge in March. Days before leaving office, Calvin Coolidge proclaimed that things were sound and stocks were a good buy. Hoover’s memoirs would reveal that the stock market boom was a concern for him. (The Dow closed at 313.9.)
March 26, 1929 — The market sold off. The volume on the day hit 8,239,000, an unheard-of amount at the time.
Once in the early days of the bull market it had been said men might see a five-million-share day. — John Kenneth Galbraith
Margin loan rates peaked at 20% on the day. Charles E. Mitchell, Chairman of National City, stepped up to fend off sellers and ease the margin rates:
We have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert…any dangerous crisis in the money market.
The word spread that National City had money to loan. The market recovered most of the losses by the close (The Dow opened at 298, reached a low of 282, before closing the day at 297).
June 1, 1929 — The Times average hit 342 (the Dow was 299.1). The market’s final summer blowout began.
July 1, 1929 — The Times average reached 394 (the Dow was 335.2).
August 1, 1929 — The Times average hit 418 (the Dow was 350.6).
August 15, 1929 — “This is truly a new era in which formerly well-established standards of value for securities no longer retain their old significance.” — Col. Leonard P. Ayres, Vice President of Cleveland Trust Co.
September 3, 1929 — The day after the Labor Day holiday, The Times average hit 452 — a 25% gain in 90 days (the Dow hit 381.2, a 27% gain in 90 days — it was the top, not to be surpassed until November 26, 1952). A few days later brokers loans reached $6,354,000,000. Loans increased by roughly $400,000,000 per month over the prior three months.
September 5, 1929 — The market broke. The Times average fell 10 points (The Dow also fell 10 points, a 2.6% decline). A day earlier, Roger Babson warned, “Sooner or later a crash is coming and it may be terrific.” It would be labeled the Babson Break. It wasn’t his first warning of a crash, just one of many he’d made over the previous four years.
October 8, 1929 — “Nothing can arrest the upward movement in the United States.” — Charles E. Mitchell
October 16, 1929 — Irving Fisher makes his infamous call:
Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr. Babson predicted. I expect to see the stock market a good deal higher than it is today within a few months. — Irving Fisher
October 19, 1929 — The market experienced the second heaviest trading volume for a Saturday in its history at 3,488,100 shares traded (the market held half sessions on Saturday’s back then). The Times average closed down 12 points (The Dow closed down 10 points, a 2.8% decline).
October 21, 1929 — A Monday. Volume hit 6,091,870, the third-highest in history. The ticker tape lagged from the open and wouldn’t catch up until an hour and forty minutes after the market closed. This was a common occurrence on heavily traded days. Except, few cared because most of those days, they ended richer. This was different. Nobody knew how much they had lost until after the close. The market recovered off the lows and The Times average ended the day only down 6 points (The Dow opened at 323.7, bottomed at 314.6, and closed at 320.9, a 3 point loss for the day).
October 22, 1929 — Charles Mitchell declares “the decline has gone too far…the situation is one which will correct itself if left alone.” Roger Babson suggests selling stocks and buying gold.
October 23, 1929 — Motor stocks were down in early trading. The last hour of trading roughly 2,600,000 shares traded. The Times average dropped from 415 to 384, losing all its gains since June (the Dow fell from 326.5 to 305.9, a 6.3% loss). Margin calls went out that night. Investors had few choices: forced selling by the broker at whatever price the broker could get the next day or add collateral to back their loans.
…security values in most instances were not inflated. — Irving Fisher, speaking before bankers in D.C.
The decline in stock market prices has carried many issues below their true value. — Charles E. Mitchell
October 24, 1929 — 12,894,650 shares traded. The ticker fell behind early again. Only this time, people sold because they didn’t know where prices stood.
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 wide vertical declines could anyone be induced to bid. — John Kenneth Galbraith.
It was panic…with few willing buyers.
Support finally came at noon. The great heads of the New York banks met with Thomes W. Lamont a senior partner at J.P. Morgan. All agreed to pool their resources.
There has been a little distress selling on the Stock Exchange…due to a technical situation rather than any fundamental cause. — Thomas W. Lamont
At 1:30 pm, Richard Whitney, the vice-president of the Stock Exchange, walked to the post for U.S. Steel and confidently ordered 10,000 shares at 205 from the specialist, $5 above the current price. He repeated similar orders at other posts, totaling $20 million.
Calm and confidence were restored. The market rallied. The Times average recovered from its lows, closing down 12 points (the Dow opened at 305.9, hit a low of 272.3, and closed at 299.5). U.S. Steel ended the day higher. The ticker wouldn’t stop printing until 7:08 pm that night.
Hornblower and Weeks, a prominent brokerage house, released a market letter after the close:
Commencing with today’s trading the market should start laying the foundation for the constructive advance which we believe will characterize 1930.
October 25, 1929 — Slightly less than 6 million shares traded hands on Friday with the market ending higher on the day (the Dow closed at 301.2). Headlines and quotes published that morning told of the New York banks’ actions the day earlier and confidence in the markets:
Secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence [of panic] the financial community relaxed its anxiety yesterday.” — The New York Times
I am still of the opinion that this reaction has badly overrun itself. — Charles E. Mitchell
There is nothing in the business situation to justify any nervousness. — Eugene M. Stevens, president of Continental Illinois Bank
In my long association with the steel industry I have never known it to enjoy a greater stability or more promising outlook than it does today. — Charles M. Schwab, Chairman of Bethlehem Steel
[It was] undoubtedly beneficial to the business interests of the country to have the gambling type of speculator eliminated. — H.C. Hopson, head of Associated Gas & Electric
The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis. — President Herbert Hoover
S-T-E-A-D-Y Everybody! Calm thinking is in order. Heed the words of America’s greatest bankers. — ad in the Wall Street Journal
October 26, 1929 — Roughly 2 million shares traded on Saturday on a slight sell-off (the Dow closed at 299). The rumor was, the bankers that supported the market by buying shares two days earlier, had sold most of those shares on Friday and Saturday.
October 28, 1929 — The disaster hit. The first day of a deep selloff began Monday. Trading volume topped out at 9,212,800 shares. The Times average was down 49 points on the day (the Dow sank 38 points, a 12.8% loss).
General Electric was off 47½ Westinghouse, 34½ Tel. & Tel., 34. Indeed, the decline on this one day was greater than that of all the preceding week of panic. Once again a late ticker left everyone in ignorance of what was happening save that it was bad. — John Kenneth Galbraith
At 1:10 pm the market almost seemed to pause on news that Charles E. Mitchell was seen walking into J.P. Morgan. The brief moment of hope turned to hopelessness when the New York bankers stayed quiet. There would be no support. Roughly 3 million shares traded in the last hour alone. As it turned out, Charles Mitchell did walk into J.P. Morgan…to see about a loan.
October 29, 1929 — The day would go down as the worst in stock market history (it remained so until 1987). Buyers were nonexistent. Stock prices crashed. Volume hit 16,410,030 shares, with the ticker falling two and a half hours behind.
When the dust settled, The Times average was down 43 points. It stood at 275. All its gains over the past 12 months were lost (the Dow closed at 230.1, an 11.7% loss). Talks of possibly closing the market began.
October 30, 1929 — The selling finally abated. Volume was high but The Times average closed the day with a gain of 31 points (the Dow gained 28 points to close at 258.5).
During the night of the 29th and into the 30th, reassuring quotes abounded about the “fundamental soundness” of things.
The fundamentally strong position of the nation’s industries justified confidence. — R.R. Reynolds, president of Selected Industries, Inc.
Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks. — John D. Rockefeller
Late that evening, Richard Whitney announced that the market would open late the next day — at noon on Thursday — and be closed Friday and Saturday. The news was applauded.
The brief rally that ended a horrific October was only a respite. By November 13, 1929, The Times average was down to 224 (the Dow fell to 198.7) but it was only the beginning. By July 8, 1932, it would close at 58.46. The Dow hit bottom the same day — 41.2 — an 89% decline from its peak on September 3, 1929.
A brief history of the 1929 stock market crash
- The stock market crashed in 1929, plummeting into a correction.
- Margin buying, lack of legal protections, overpriced stocks and Fed policy contributed to the crash.
- There are ways to protect investors can protect a portfolio from downturns.
On October 16, 1929, Yale economist Irving Fisher wrote in the New York Times that “Stock prices have reached what looks like a permanently high plateau.” Eight days later, on October 24, 1929, the stock market began a four-day crash on what became known as Black Thursday. This crash cost investors more than World War I and was one of the catalysts for the Great Depression. Irving Fisher’s declaration went down as the worst stock market prediction of all time.
Before the 1929 stock market crash: Risks and warning signs
Hindsight is always 20/20 but in the Roaring Twenties, optimism and affluence had risen like never before. The economy grew by 42% (real GDP went from $688 billion in 1920 to $977 billion in 1929), average income rose by about $1,500 and unemployment stayed below 4%. In the wake of World War I, the U.S. was producing nearly half of global output and mass production made consumer goods like refrigerators, washing machines, radios and vacuums accessible to the average household. Investing in stocks became like baseball – a national pastime. As newspaper headlines trumpeted stories about teachers, chauffeurs and maids making millions in the stock market, concerns about risk evaporated.
The 1929 Crash and the $100 Million Profit
This weekend marks the 82nd anniversary of the greatest stock market crash in American history. Given the recent market struggles (which seem miniscule in comparison), it is fitting to highlight an individual who wound up making $100 million dollars in that epic collapse.
It is autumn1929 and the Dow is up five-fold in the last six years. Euphoria is gripping the market and everyone is getting involved. Brokers are promoting loans to buy stocks and the public cannot get enough - putting up less than one third of the purchase price is a great deal for seemingly guaranteed gains. The total outstanding amount of loans begins to balloon, reaching $8.5 billion outstanding, which, fascinatingly enough, is more than the total amount of money in circulation.
Stocks level off and start to decline in September 1929, and Jesse Livermore, one of the most renowned traders in history, sees his opportunity. He begins to heavily short the market, despite the cautioning of his counterparts. It does not take long for his bet to pay off.
In the following weeks, the stock market experienced what has become known as the “Great Stock Market Crash of 1929” – the most destructive stock market collapse in the history of the United States. The decline included a two-day, 25% drop on what is now referred to as “Black Monday (October 28th)” and “Black Tuesday (October 29th).”
The Dow plunged 47% from the market high of 381.17 on September 3rd, 1929, to its interim bottom of 198.60. The official low was not seen until 1932, when the market hit 41.22 – an 89% drop in 3 years.
Livermore, as a result, benefitted greatly. His profit from the initial drop and the decline that followed is one of the largest wins by a stock trader in history - $100 million dollars.
Born in 1877, Jesse got his first job at the age of 14 writing stock quotes on a chalkboard in a broker's office. He would watch the prices change and try to find patterns. By the age of 15 he had already made his first $1,000 from trading, a sizable sum at the time – not to mention for someone his age.
His career progressed and he continued to trade his own money in the small brokerage houses (referred to as bucket shops at the time), despite their objections. He quickly became known as “the boy plunger” for his ability to suck money out of the market.
In the 1907 crash, Jesse was 30 years old and solidified his reputation as a real market participant. It was during that collapse, that he made his first million.
1929, however, provided him with his crowning achievement. The short positions he took just before the “Great Crash,” earned him a profit of $100 million dollars, which, in today's figures equates to $1.327 billion dollars!
Throughout his trading career, Livermore made and lost huge amounts of money, and actually wound up going bankrupt on numerous occasions.
Despite his many successes, Livermore battled constant depression, and in 1940 wound up taking his own life.
The classic novel, Reminiscences of a Stock Operator, was written by Edwin Lefèvre and is based on the author's interviews with Mr. Livermore. It remains one of the bestselling stock market related books of all time.
In 1939 Jesse penned his own book, How to Trade in Stocks, which outlines his methods, insights and personal journey.
Jesse's $100 Million Key
Livermore's methods were relatively simple and logical but required two of the most important characteristics of a successful trader - discipline and patience. While he had many trading rules, there was one primary form of analysis that he used.
Livermore used what he referred to as “pivotal price levels” to determine entry points and stop levels. He would watch the strongest stocks in the strongest sectors, and as they rose, he would buy as the stocks made new highs. He would then let his profits ride, and would add to positions which continued to move in his favor.
Eventually these stocks would stop going higher, and would begin to decline. If shares could not make new highs again on the retest, Livermore took it as a warning sign that the broader market would turn down. He figured that if the strongest stocks could not go up anymore, it was exceedingly unlikely the broader market could continue higher for much longer.
It was this method of analysis that allowed Jesse to see the market turning and profit to the tune of $100 million from the ensuing decline in 1929.
The following are summaries of some of his other rules, which he used to find entries, exits, and control his trades:
• Buy strong stocks in a bull market. Short weak stocks in bear market. Only trade with the overall trend of the stock market.
• Trade only at the pivotal points in a stock, and if there are no clear signals do not trade.
• Good trades usually show a profit quickly. Let these profits run and close losing trades promptly. If trading at pivotal points being “right” or “wrong” should be evident within a few trading sessions.
• Trade with a stop and adhere to it.
• Add to positions which show a profit, never add to positions which show a loss.
• Focus on a few stocks which are moving well. Don't try to trade or track too many stocks.
• Always trade with a well formulated plan.
• Do not deviate from the plan.
Despite continually making and losing massive amounts of money in the stock market, Jesse Livermore is considered one of the greatest traders off all time. His ability to capitalize on trends, both up and down, is rarely matched to this day.
He admitted that on the occasions which he lost money, it was because he deviated from his tested methods.
Frequent bouts with depression and other personal issues likely kept him from achieving his full potential, however, the lessons he left behind provide valuable insight into the movement of markets that still apply today.
The underlying elements of speculation do not change, and is epitomized perfectly in his quote: "There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."