The Shock of the Great Crash

James N. Rosenberg’s drawing “Dies Irae” evokes the mood of Black Tuesday on Wall Street.

(LIBRARY OF CONGRESS)

On October 21, 1929, 500 powerful men and women traveled to Dearborn, Michigan, to celebrate the fiftieth birthday of Thomas Edison’s light bulb. Their host was Henry Ford, and guests no less luminary than Marie Curie, George Eastman, and John D. Rockefeller, Jr., joined President Herbert Hoover in toasting the inventor. The President spoke of “the great leaders who have converted the pure physics of electricity into a taxable product” and “the rivers of sweat saved from the backs of men and the infinite drudgery relieved from the hands of women.” But even as these giants celebrated the triumph of modern times, the economy they had built was disintegrating. Eight days later, on October 29, 1929, the stock market would finish its famous crash, and the nation’s theme song would change in an instant from “Blue Skies” to “Brother, Can You Spare a Dime?”

In the 1920s there was ample reason to believe the skies would stay blue forever. The United States had emerged from World War I with the strongest economy in the world, thanks in large part to the automobile and the radio. Scientific management and assembly lines increased production, and the idea that everyone could be rich, and soon, was blooming, fertilized by the decade’s optimism. Herbert Hoover forecast during his 1928 campaign, “We shall soon, with the help of God, be in sight of the day when poverty will be banished from this nation.” With their sights set on that day, Americans began stocking up on possessions, taking advantage of a concept popularized in the recent war: buying on credit.

To fund our troops overseas, politicians during the war had encouraged citizens to borrow money from banks to buy Liberty Bonds, which were themselves loans to the U.S. government. In return bondholders earned 4 percent interest per year. When the war ended, Americans held on to the idea of buy now, pay later, purchasing cars and refrigerators on credit. The economy boomed as a result, and Americans watched as investors got rich not from owning oil wells or building railroads but from trading stock certificates. Ordinary people, thinking they had finally found the universal leveler, entered the market the same way they had acquired their new cars. In 1929 borrowers invested almost $4 of every $10 in bank loans. Investors could buy stock with a down payment of as little as 10 percent, using the stock itself as collateral. If the price fell, the broker could sell it to settle the loan. If the stock rose, it would pay for itself. By the end of the decade, the value of outstanding stock debt was triple the federal budget.

Regular Americans invested in record numbers, but they still made up only a sliver of the market. Even so, the market had entrenched itself in popular culture. The radio played songs about it, magazines covered it, and everyone discussed it. And rightly so: It had been rising for eight years and topped 300 for the first time on the last day of 1928. “Stock prices have reached what looks like a permanently high plateau,” said the Yale economist Irving Fisher in mid-October 1929. By then, though, there were signs of trouble in paradise.

The first had come in March. Investors, worried that the new Federal Reserve Board would raise the minimum down payments, began to sell, touching off a panic. Interest rates soared, and brokers sold shares to recoup their loans, which wiped out many investors’ life savings. Charles Mitchell, president of the National City Bank, saved the day by offering $25 million in credit to encourage more investing. The market rebounded, but the economy had begun to slow. Sales dropped, with many consumers heavily in debt, and production followed suit. Even so, the market had a record three months over the summer, and some stocks doubled in value. On September 3 the Dow Jones Industrial Average hit 381.17, its highest yet.

Two days later the economist Roger Babson announced, “Sooner or later, a crash is coming and it may be terrific.” Babson had been branded as unpatriotic for saying that sort of thing in the past, but now investors listened. That day the market began a six-week roller-coaster ride, falling as much as 10 percent in a day but always rallying. Financial leaders remained sanguine, but investors grew nervous. Wednesday, October 23—the last business day for a week that would not come to have the word “black” forever attached to it—a weak market began an epidemic of pessimism. The next day, Black Thursday, saw a selling frenzy, as 12.9 million shares were traded and many brokers found no bids for the rapidly falling stocks. As the market lost $5 billion, a group of bankers tried to single-handedly stop the panic, as had happened in March and many times before, offering a massive amount of credit. Richard Whitney, their envoy and the vice president of the New York Stock Exchange, strode across the trading floor and confidently shouted orders for blue-chip stocks. The market stabilized. The New York Times announced the next day, “Brokerage Houses Are Optimistic on the Recovery of Stocks,” followed Sunday by the New York Herald Tribune headline “Brokers Believe Worst Is Over and Recommend Buying of Real Bargains.”

Of course, the worst was still ahead, as many investors seemed to realize over the weekend. On October 28, Black Monday, the market fell 22.6 percent—a record that still stands—with some stocks, like AT"T, losing half their value in a single day. The next day, Black Tuesday, set another record: 16 million shares sold. No amount of effort could end the crash now. The exchange’s trading floor was in pandemonium. A sales clerk reported that exchange members acted like “chickens with their head cut off, they didn't know which way to run. They were panicking, screaming. Everybody was bumping into everybody else.” A telephone clerk recalled, “I was supposed to answer everybody yelling at me—I said, ‘What am I supposed to do?’ I mean, nobody knew what the hell to do.” By the time the tickers stopped, two and a half hours later than usual, the market had lost another $14 billion.

The Dow would rise and fall in the coming months, but it wouldn’t top 300 again until 1954. The market lost a third of its value over six days in October 1929, and by January 1930 AT"T had fallen by a third and GE by half, and RCA, the hot stock of the 1920s, was worth only a quarter of its maximum price. The nadir would come on July 8, 1932, when the Dow bottomed out at 41.22, 89 percent below its 1929 high. Millions of people lost their life savings, and not all were investors. Many banks had invested—and lost—their patrons’ money in the market. Frantic customers rushed to close their accounts, causing 9,000 banks to fail. Investments in new business fell $5.8 billion by 1932, and wages fell $20 billion. By the height of the Depression, unemployment topped 25 percent.

As catastrophic as the crash was, most economists agree it didn’t have to lead to depression, or at least not to the Great Depression. They blame deflation in Europe, the precarious American banking system, the Federal Reserve’s decision to tighten the monetary supply after the crash—intended to curb inflation, when the current problem was deflation—and the Smoot-Hawley Tariff Act of 1930, which raised tariffs on and thus lowered demand for U.S. products overseas. Economists still differ 76 years later on the nature of the pre-Depression market. Some, most vociferously the late Robert Sobel, have argued that investors played the stock market like poker, hoping to sell at a profit and never expecting to collect dividends. A company’s stock price, therefore, had nothing to do with its earning potential. Other economists disagree, believing that the bulk of investors were motivated by the chance for higher dividends in the long run, made possible by more efficient production. Even at its peak in 1929, the market’s price-to-earnings ratio was lower than it is today. There were fewer than a million active speculators before the crash, but that small number incurred enough debt to devastate the market.

The Depression didn’t end until the production surge of World War II, but Franklin Roosevelt’s New Deal programs aimed to help. One, the Securities and Exchange Commission, was created in 1934 to shift the job of regulating securities trade from the states to the federal government. Today brokers and dealers must register with the SEC, to prevent price manipulation, and there are strict requirements for the minimum down payments to buy stocks. Of course although we haven’t since experienced a depression on a scale of the one in the 1930s, the SEC hasn’t rendered the stock market crash extinct. On October 19, 1987, the Dow suffered its largest one-day fall since 1914, and on April 14, 2000, it fell 617.78 points, the largest-ever single-day point loss.

“I used to be quite an optimist,” the economist John Kenneth Galbraith once said. “I thought that by keeping the memory of the 1929 crash alive we would have a warning against the kind of feckless, fatuous optimism which caused people to get in and shove up the markets… . and get carried away by the illusion of ever-increasing wealth. I’ve given up on that hope because we’ve had it happen too often again since.”

—Christine Gibson is a former editor at American Heritage magazine.