Stock Market Bubble Burst and a Grim Era Began
While it was happening, the stock market boom of the late 1920s seemed the very flowering of the Coolidge-Hoover prosperity.
“We in America,” Herbert Hoover proclaimed, “are nearer to the final triumph over poverty than ever before in the history of any land.”
Who could have foreseen how soon after Hoover’s 1929 inauguration would come a time of bread lines and soup kitchens and farm prices so low it could make more sense to burn grain for heat than to haul it to market?
The frenzy on Wall Street had seized the popular imagination. Although only one in 50 Americans actually played the stock market in 1929--as compared with half of U.S. households today--they played it with a thrilling abandon.
Swashbuckling stock investors acquired the glamour of Hollywood stars.
Even small investors were encouraged to believe that the smart way to buy stock was “on margin,” with as little as 10% down and the rest borrowed at interest rates of up to 15% from accommodating brokers.
Big-city banks deployed armies of brokers to push dubious securities on their depositors. Wealthy investors, brokerages, even industrial companies formed “stock pools” to manipulate share prices. Trading on inside information was rife--and legal.
Of naysayers who saw a house of cards rising, the bulls demanded: Why shouldn’t the nation’s surging industrial might be matched by a surging stock market? After all, shares of General Motors, American Telephone & Telegraph and U.S. Steel were nothing less than the distilled essence of American know-how.
The brightest star was Radio Corp. of America. Reflecting the magic of the new medium, RCA’s stock value had multiplied fivefold between March 1928 and September 1929.
But in October came the dreaded break.
The causes of the panic are still unclear, although nervousness was rising along with stock prices that summer.
Once the plunge began, however, its severity was multiplied by the forced selling of vast numbers of shares that had been bought on margin and were abruptly dumped on the market to cover the loans.
On Black Thursday, Oct. 24, a torrent of sell orders slammed the market in volume so huge that the ticker tape--normally instantaneous--ran 90 minutes behind the trading.
An attempt by Wall Street bankers to restore confidence with strategic purchases halted the slide only through the weekend. Then retreat turned into full-blown rout.
The Dow Jones industrial average, already down 21% from its Sept. 3 peak, plummeted 13% more on Monday and another 12% on what came to be known as Tragic Tuesday--Oct. 29. By the end, RCA had fallen 72% from its September heights.
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The market rallied fitfully in 1930, then headed south with the global economy. The Dow hit bottom on July 8, 1932, at 41.22, down 89% from its 1929 peak of 381.17. It would not regain that level for 25 years.
As profound a financial and psychological blow as the crash was, most historians agree that it did not cause the Great Depression. Rather, it exposed faults and excesses already in place:
* Farmers had been suffering from weak prices throughout the 1920s.
* Lending innovations such as the installment loan had boosted consumer spending and industrial production to unsustainable levels.
* A protectionist bent in U.S. politics, coupled with Europe’s slow recovery from the Great War, were hobbling trade. That trend would culminate in the notorious Smoot-Hawley Tariff Act of 1930, which all but froze international trade and, not incidentally, deprived much of the world of the means to repay debts to its formerly flush American lenders.
Faced with unpayable foreign loans and margin loans, installment loans and farm loans, banks failed by the hundreds, ruining their uninsured depositors along with them. Between 1929 and 1933, national output fell 30% and manufacturing employment plunged a staggering 40%.
From the years of blame-fixing that followed the crash came reforms that laid the framework for the banking and securities industries we see today. Laws were passed creating federal deposit insurance, separating banks from brokerages, limiting margin lending, outlawing stock pools and insider trading, and establishing the Securities and Exchange Commission as the market policeman.
“But, as ever,” wrote economist John Kenneth Galbraith, “the attention was on the instruments of speculation. Nothing was said or done or, in fact, could be done about the decisive factor--the tendency to speculation itself.”
