March 4th, 1929 Washington D.C. The inauguration of Herbert Hoover. “We have reached a higher degree of comfort and security than ever existed before in the history of the world” says America’s 31st president, “Through liberation from widespread poverty, “we have reached a higher degree of individual freedom than ever before”. Hoover’s campaign had focused on prosperity. Though he had not personally approved it, a local campaign flier had stated that republican policies had put a chicken in every pot, and a car in the backyard. “In no nation are the institutions of progress more advanced.”In no nation are the fruits of accomplishments more secured.” “In no nation is the government more worthy of respect, No country more loved by its people.” “I have an abiding faith in their capacity, integrity and high purpose.” “I have no fears for the future of our country. It is bright with hope.” Black Thursday is six months away.
The month of Hoover’s inauguration, one number is on the lips of every trader on Wall Street 381 An all-time high for the Dow Jones Industrial Average. From the outside, the economy looks strong but there are worrying signs. For nine years, the stock market has climbed, increasing six-fold from its level in1921. And the relentless upward trend makes investments look like a sure thing and throughout the second half of the 1920s, more people buy into the market than ever before And not just stock brokers or captains of industry; Factory workers, restaurant owners and even shoeshine boys are all putting money in. One market analyst says the Dow has reached a permanently high plateau Steady gains make investing seem like easy cash.
Especially because you don’t even need money to get into the market, because stockbrokers at the bank offer loans for investors to buy stock, a practice called “buying on the margin.” And the beauty is everybody makes money, with the upward climb of the market, you can put down 10% of a stock’s worth, take out a loan from your broker for the rest, and then sell the stock when the value goes up high enough to pay off The loan and net yourself a profit. People mortgage their homes, even their businesses to buy stock, sinking all their savings into it. And why not?
It’s a sure thing… Unless, there’s a margin call, because the stock is actually the collateral for the loan, so if a value of a stock drops, the down payment the investor has provided has essentially shrunk. In that case, the broker who lends the money can ask the investor to immediately provide more money to repay a minimum amount of the loan, and if they can’t, the investor then has to sell the stock to cover the loan But investors aren’t the only ones borrowing money. Easy loans and installment buying have fueled the economic boom of the 1920s Businesses take out loans to expand, families buy new household goods and home improvements, and Henry Ford offers the Model T in installments, creating a massive boom in Auto Sales, that in turn fuels the American steel glass, petroleum and rubber industries. And most crucially, farms borrow money to mechanize.
Pushed to surge crop production during World War One, farmers borrow money to both expand their acreage and by tractors, harvesters and other equipment. The problem is, this new production capacity floods the market with cheap agricultural goods, making it now more difficult for the leveraged farms to make money. In other words, America is stuffed with bad loans. In fact by 1929, the Federal Reserve Bank of New York is so worried about buying on the margin, that they raise the lending rate to discourage borrowing. But this, unfortunately, has a knock-on effect. Central banks in Europe now feel they have to match the new rate, sending many of those nations, still recovering from World War I, into recession. This sudden uncertainty, along with a well-respected analyst saying that they believe the market is overvalued and might crash, trigger a few market shocks in October, but the Dow always recovers its value before the end of the day.
Until- October 24th, 1929- Black Thursday. The shouting starts right after the opening bell… (Sell, sell, and sell) A Feeding frenzy. No one knows what’s happening, but investors sentiment has soured and the panic is infectious. Minutes into the trading day, the market loses 11% of its value. Floor traders shove, scream. So many trades happen so fast, the stock ticker that brings the market real-time to traders across the country can’t record the wild fluctuation in price, meaning stock brokers in Chicago and California are trading based on prices that are four hours old. People begin gathering outside on the street, sensing the chaos. Rumors fly around Wall Street, that stockbrokers are committing suicide, leaping from the windows of their buildings. But these reports are false, fed by the death of a German chemist who had really “though accidentally” fallen out of a hotel window.
However in the panic, the public takes these rumors as gospel. In a back room, several titans of banking meet to try to halt the chaos. There’s the head of chase National Bank, the head of Morgan Bank, and the head of National City Bank of New York. These men remembered the last financial Crisis. The panic of 1907, where the market had lost half of its value within three weeks. And the market only steadied when JP Morgan had gathered a consortium of banking friends to make big investments in both the stock market and the banks.
They decide to do the same. Between them, they gather a pot of money and hand it to Richard Whitney, vice-president of the New York Stock Exchange He walks onto the trading floor, attracting everyone’s attention, and it makes a huge buy of US Steel, offering a price well above what it’s currently trading at. Then, he does the same for other major companies, showing his faith in the market. It has the desired effect – the market begins to climb, and at the closing bell, it’s only lost six point three eight points, but it isn’t over. Though the market has temporarily calmed, that big drop has shaken traders’ faith. The margin calls start going out. And all over America: dinner cooks, busboys and farmers, pick up their phone to find out they suddenly owe their brokers money, due immediately. Some amounts are massive; $500, $1,000. Sums that, in 1929, you might not even be able to cover by selling a car or a house, even if you could sell a car or a house that fast. But people most certainly try.
October 28th, Black Monday; The opening bell signals pandemonium. Floor traders shout and shove everyone wants to get out of the market; well, some don’t want to, they have to. Selling stocks to repay loans because their clients couldn’t pony up enough for the margin call. And everyone wants out, fast. Values are tanking so quickly, that the difference between selling now and selling 30 minutes from now could mean another 10 percent of value loss. And there’s such trading volume, that some trades are never even recorded, and by the end of this day, the Dow has lost another 12.82% of its value, and the panic continues. October 29th, Black Tuesday. The market won’t stop bleeding. People are getting into fistfights on the trading floor. The problem is that even though everyone is selling, no one’s buying. It keeps going down, down, down Shell-shocked floor traders look at each other, trading slips spilling out of their pockets. Some are now so worthless, they leave them on the floor. The market has dropped 23% in two days, and would keep dropping.
Another emergency stock purchase by banking consortiums would lead to a one-day boost, and it would even rally the next month. But the Dow entered a steady descent that would not hit bottom until mid 1932, in the depth of the Great Depression. But it’s important to remember that the crash and the depression are not the same thing. Historians still argue about how connected they were. In fact the depression proper would not hit until months later, when banks started to fail from bad loans and unemployment rose. Then, as today, it’s important to remember that the stock market isn’t the same thing as the economy. The Dow Jones recovered faster than the country as a whole. But the crash shook consumer confidence and wiped out the savings of small investors, leading to fewer purchases of items like cars at a time when auto manufacturing was a large part of the American economy. Whether responsible for the depression or not, the 1929 crash would symbolize the start of very hard times. Within a few short years Ford’s assembly line ground to a halt, sending unemployment in Detroit to 34%. Half of construction workers were without work. The country watched the US Army deploy tanks and tear gas against a World War one veteran’s protests, and great dust storms tore across the plains making its snow red in New England. A decade of disasters: ecological, financial, and deeply personal, all heralded by The Wall Street Crash. And while I’m sure we’ll cover the depression in more detail someday, for now, it is good to remember that as hard as those times were, we got through them. It took perseverance and cooperation, but we did recover, even when things looked dark, we came back. Until next time stay safe everyone