The Great Bull Market and the Crash of 1929.  As more Americans began to invest in the stock market, often at very liberal credit terms, the markets went up.  Artificially fueled by increased credit purchases, consumer businesses produced and sold more and more, and the stock market kept pace.  But the market was overbuilt, credit was stretched thin, and when the crash came it came with a huge thud.  When capital dried up, buying slowed down, businesses laid off workers, further hurting consumer spending, and the economy spiraled downward to unimaginable depths.  People who had never wanted for anything found themselves not only unemployed but unemployable.  The situation was unprecedented, collectively and individually, and as the Depression worsened, the country floundered and people surrendered to despair.

From March 1928 through September 1929, prices on the stock market rose spectacularly.  Shares in companies such as General Electric, Radio (RCA), Montgomery Ward, and others seemed to have unlimited growth potential. Prosperity and the possibility of new wealth for millions of investor beckoned.  People mortgaged their homes to get cash with which to buy stocks, and brokers encouraged clients to purchase stock on margin.  A family with $1,000 in cash—a tidy sum in 1929—might be able to purchase $5,000 worth of stock with that down payment.  The brokerage offering the margin purchase would doubtless have borrowed funds from a bank to finance the deal.  As prices continued to rise, the structure became ever more shaky, and words of warning went unheeded.

The chart below and discussion following give an idea of how things suddenly went terribly wrong.

People and the Crash

Looking at the chart above, imagine yourself in a family in March 1928. You and your spouse are comfortable, you own a home, and you have a small amount of savings. But you keep hearing from neighbors, friends, business associates, or maybe you have even overheard gossip in a barbershop or on a train, about how much money people are making in the stock market—it has been been booming throughout the 20s. You decide, why not us? So you go down to the local bank and take out a mortgage on your home for about $4000 and add your savings to it. You find a stock broker and tell him you want to invest your money. Since everything is booming, he may suggest that with your $4000 in cash you may be able to buy two or three times that much stock by purchasing shares on margin. You end up buying $16,000 worth of stock with your $4000 cash—the broker loans you the $12,000 difference.

Eighteen months later, if your stock behaves like the ones above, it has tripled in value. If you are smart, you sell a portion of your stock, pay off the loan to your broker, pay off your mortgage, and you are still way ahead of the game. Many people were not that lucky.

Now let's suppose that you are the same couple, but you walk into the broker's office in September 1929 rather than in March 1928. You go through the same process and wind up buying $16,000 worth of stock on your $4000 mortgage and your $12,000 loan from the broker. (We are ignoring transaction fees and so on for simplicity.) Then the crash hits and it happens so suddenly that before you can gather your wits, the $16,000 worth of stock that you purchased is now worth a fraction of that. Your broker calls in his margin loan, as he must to cover his losses, but of course you can't pay him, and you lose your investment and maybe even your house. It is little comfort that the broker also loses everything, and even less comfort to you that the bank that loaned the broker the money that he loaned to you is also in serious trouble.

The scenario above is oversimplified, but it does demonstrate in a simple way what happened to thousands of people. What is more complicated is the snowball effect that followed from the crash; the Depression started in 1929-1930, but also had roots in other causes.

Causes of the Crash and Depression

The Great Depression was not caused by the stock market crash of 1929—that was only the trigger. The actual depression was caused by a combination of factors of international scope and great complexity. In the United States, for example, the consumerism of the 1920s and the increase in credit buying artificially accelerated the demand for consumer goods beyond what the real market factors would have told. With the stockmarket crash, as purchasing power shrunk and sales of consumer goods slowed, manufacturers were forced to pull back, and more people lost their jobs. As more became unemployed, the demand for consumer goods shrunk even further and the gap widened.

Then banks that held mortgages were unable to collect them, and even if they foreclosed, finding buyers for the repossessed properties was difficult. Many banks ultimately failed, wiping out people's savings, thus making the picture worse. One problem led to another until the entire country was in the throes of a paralyzing economic slowdown. Although some parts of the country were relatively untouched, in others it seemed as though entire towns and villages were without any substantial income. The depression documents that accompany this section will give you some vivid insights into the human problems created by the Depression. Those who lived through it never forgot those times.

Summary of some of the causes of the Depression:

• Overproduction in farming and manufactures, commodity prices, raw materials too high;
• Too much in profits, not enough in wages, or purchasing power.
• Over-expansion of credit—Margin, installment buying.
• Economic difficulties in Europe from WWI, reparations, debts, loans.
• Silver market depressed, Far East strapped, international trade down everywhere.
• Hawley-Smoot Tariff hurts Europe.
• Trigger effect--failures in one area spill into others.
• Psychological shock.

Hoover’s administration actually he did a great deal to fight the Depression, but it was not enough. Hoover was basically conservative and could not grasp the depths of the crisis. He believed firmly in the American system, and felt that it could recover on its own with a little indirect help from government. By some standards Hoover’s action were bold, perhaps even radical, but far too little, as even the New Deal programs would be. Hoover opposed direct relief (the dole) and favored more or less voluntary approaches to recovery. Hoover was blamed for much that was not his fault, but he failed to meet the needs of the time and paid a steep price, politically and in terms of his legacy. Hoover’s programs included:

• The Reconstruction Finance Corporation provided $500 million for indirect relief by extending credit in order to bolster finances. Government loans were made to financial institutions.
• The Glass-Steagall Act expanded credit and attempted to shore up the currency.
• The Relief and Construction Act extended the scope of the RFC, provided loans for construction projects.
• The Federal Home Loan Bank Act helped bank help for home owners in order to reduce foreclosures and increase construction (and therefore employment.)
• The Norris-LaGuardia Act assisted labor by making yellow-dog contracts illegal and preventing courts from issuing anti-strike injunctions, etc.

[From Frederick Lewis Allen, Only Yesterday, New York: Harper & Row, 1931, pp. 332-335. Allen's book, written in 1931, is a vivid look backward at the Roaring Twenties. His description of the Crash is famous.]

Things looked somewhat better on Friday and Saturday. Trading was still on an enormous scale, but prices for the most part held. At the very moment when the bankers’ pool was cautiously disposing of as much as possible of the stock which it had accumulated on Thursday and was thus preparing for future emergencies, traders who had sold out higher up were coming back into the market again with new purchases, in the hope that the bottom had been reached. (Hadn’t they often been told that "the time to buy is when things look blackest"?) The newspapers carried a very pretty series of reassuring statements from the occupants of the seats of the mighty; Herbert Hoover himself, in a White House statement, pointed out that "the fundamental business of the country, that is, production and distribution of commodities, is on a sound and prosperous basis." But toward the close of Saturday’s session prices began to slip again. And on Monday the rout was under way once more.

The losses registered on Monday were terrific—17½ points for Steel, 47½ for General Electric, 36 for Allied Chemical, 34½ for Westinghouse, and so on down a long and dismal list. All Saturday afternoon and Saturday night and Sunday the brokers had been struggling to post their records and go over their customers’ accounts and sent out calls for further margin, and another avalanche of forced selling resulted. The prices at which Mr.  Whitney’s purchases had steadied the leading stocks on Thursday were so readily broken through that it was immediately clear that the bankers’ pool had made a strategic retreat. As a matter of fact, the brokers who represented the pool were having their hands full plugging up the "air-holes" in the list—in other words, buying stocks which were offered for sale without any bids at all in sight. Nothing more than this could have been accomplished, even if it could have been wisely attempted. Even six great banks could hardly stem the flow of liquidation from the entire United States. They could only guide it a little, check it momentarily here and there.

Once more the ticker dropped ridiculously far behind, the lights in the brokers’ offices and the banks burned till dawn, and the telegraph companies distributed thousands of margin calls and requests for more collateral to back up loans at the banks. Bankers, brokers, clerks, messengers were almost at the end of their strength; for days and nights they had been driving themselves to keep pace with the most terrific volume of business that had ever descended upon them. It did not seem as if they could stand it much longer.

But the worst was still ahead. It came the next day, Tuesday, October 29th.

The big gong had hardly sounded in the great hall of the Exchange at ten o’clock Tuesday morning before the storm broke in full force. Huge blocks of stock were thrown upon the market for what they would bring. Five thousand shares, ten thousand shares appeared at a time on the laboring ticker at fearful recessions in price. Not only were innumerable small traders being sold out, but big ones, too, protagonists of the new economic era who a few weeks before had counted themselves millionaires. Again and again the specialist in a stock would find himself surrounded by brokers fighting to sell-and nobody at all even thinking of buying. To give one single example: during the bull market the common stock of the White Sewing Machine Company had gone as high as 48; on Monday, October 28th, it had closed at 11-1/8 . On that black Tuesday, somebody—a clever messenger boy for the Exchange, it was rumored—had the bright idea of putting in an order to buy at 1—and in the temporarily complete absence of other bids he actually got his stock for a dollar a share!  The scene on the floor was chaotic.  Despite the jamming of the communication system, orders to buy and sell-mostly to sell-came in faster than human beings could possibly handle them; it was on that day that an exhausted broker, at the close of the session, found a large waste-basket which he had stuffed with orders to be executed and had carefully set aside for safe-keeping and then had completely forgotten. Within half an hour of the opening the volume of trading had passed three million shares, by twelve o’clock it had passed eight million, by half-past one it had passed twelve million, and when the closing gong brought the day’s madness to an end the gigantic record of 16,410,030 shares had been set. Toward the close there was a rally, but by that time the average prices of fifty leading stocks, as compiled by the New York Times, had fallen nearly forty points. Meanwhile there was a near-panic in other markets-the foreign stock exchanges, the lesser American exchanges, the grain market.

So complete was the demoralization of the stock market and so exhausted were the brokers and their staffs and the Stock Exchange employees, that at noon that day, when the panic was at its worst, the Governing Committee met quietly to decide whether or not to close the Exchange. To quote from an address made some months later by Richard Whitney: "In order not to give occasion for alarming rumors, this meeting was not held in the Governing Committee Room, but in the office of the president of the Stock Clearing Corporation directly beneath the Stock Exchange floor. . . . The forty governors came to the meeting in groups of two and three as unobtrusively as possible. The office they met in was never designed for large meetings of this sort, with the result that most of the governors were compelled to stand, or to sit on tables. As the meeting progressed, panic was raging overhead on the floor. . . . The feeling of those present was revealed by their habit of continually lighting cigarettes, taking a puff or two, putting them out and lighting new ones-a practice which soon made the narrow room blue with smoke. . . ." Two of the Morgan partners were invited to the meeting and, attempting to slip into the building unnoticed so as not to start a new flock of rumors, were refused admittance by one of the guards and had to remain outside until rescued by a member of the Governing Committee. After some deliberation, the governors finally decided not to close the Exchange.

It was a critical day for the banks, that Tuesday the 29th. Many of the corporations which had so cheerfully loaned money to brokers through the banks in order to obtain interest at 8 or 9 per cent were now clamoring to have these loans called-and the banks were faced with a choice between taking over the loans themselves and running the risk of precipitating further ruin. It was no laughing matter to assume the responsibility of millions of dollars’ worth of loans secured by collateral which by the end of the day might prove to have dropped to a fraction of its former value. That the call money rate never rose above 6 per cent that day, that a money panic was not added to the stock panic, and that several Wall Street institutions did not go down into immediate bankruptcy, was due largely to the nerve shown by a few bankers in stepping into the breach. The story is told of one banker who went grimly on authorizing the taking over of loan after loan until one of his subordinate officers came in with a white face and told him that the bank was insolvent. "I dare say," said the banker, and went ahead unmoved. He knew that if he did not, more than one concern would face insolvency.