Thursday, October 29, 2009

This Day in Business History (Wall Street Experiences “The Great Crash”)

October 29, 1929—With a shuddering fall, the New York Stock Exchange concluded months of speculative frenzy—and strong signals that an abrupt correction was about to ensue—with a full-scale panic. With a record 16 million shares of stock sold, “The Street’s” tickers couldn’t keep pace with the ferocious trading volume.

More than two decades ago, in his memorable novel about a later “Master of the Universe” brought to heel, The Bonfire of the Vanities, Tom Wolfe caught the mania of 1980s speculation at its height with one telling sentence: “It was the sound of well-educated young white men baying for money on the bond market.”

Nearly 60 years before, that same almost animalistic scene was enacted, in a far more frightening fashion, by the disappearance of money. A security guard at the time, quoted in Robin Santos Doak’s Black Tuesday: Prelude to the Great Depression, recalled that traders "hollered and screamed, they clawed at one another's collars. It was like a bunch of crazy men. Every once in a while, when Radio or Steel or Auburn would take another tumble, you'd see some poor devil collapse and fall to the floor."

Black Tuesday brought America face to face with a decade of financial and moral carelessness. Payment was now due on the bill.

In the fall of 2008, the American media were awash with stories about similarities between the Crash of 1929 and the Crash of ’08. What’s remarkable in each instance is how few people who were supposed to know better—including Ben Bernanke of the Federal Reserve, supposedly an expert on the Great Depression—only realized the gravity of the situation when the crisis was upon them.

On March 25, 1929—exactly three weeks after the inauguration of Herbert Hoover as President—what the New York Daily News called a “selling avalanche” occurred, as margin calls wiped out the holdings of many investors, including neophytes to the markets. That should have been a yellow light that something was wrong with the economy. But two days later, the market’s decline was arrested, lowering people’s guards again.

In March 2008, the collapse of Bear Stearns should have served as a warning that major Wall Street institutions were shakier than thought. Again, however, many ignored the signs of the time.

In some respects, the months leading up to Black Tuesday were darkly comic. In what other light can you think of the following events:

* Early in 1929, an astrologer—a confidant not only to Hollywood stars like Charlie Chaplin but also financial types like J. P. Morgan—predicted a rising stock market.

* In August, a brokerage firm run by Michael Meehan opened an office aboard ocean liners, the better to allow passengers on their week-long cruises to Europe to buy and sell shares.(Just think: If sudden lurches on the ocean didn’t make them seasick, the convulsions of the stock market would do the job.)

* Even after the Great Crash, the need for illusion remained great. One post-Crash headline read, “Brokers Believe Worst is Over and Recommend Buying of Real Bargains.”

Did you catch Ron Chernow’s op-ed in The New York Times last week on The Great Crash? He notes that “the blatant stock market abuses were comprehensible to ordinary citizens, quite unlike the exotic credit derivatives and mortgage-backed securities that baffle us today.”

Well, I don’t know about that. If the Great Crash were so simple, why are economists still arguing over its causes? And why did it take so long (a full decade, until the start-up to World War II) to right the economic ship?

In recent years, it has become something of an intellectual fad to decry the “myth” of stockbrokers throwing themselves from buildings upon learning about the Great Crash. But it may be that there’s an underlying layer of truth to these persistent stories.

In this week’s American Experience special on The Crash of 1929, Craig Mitchell, son of National City Bank head Charles E. Mitchell, noted that “By noon on Black Thursday there had been eleven suicides of fairly prominent investors.”

Chernow’s article points out that financial reform of Wall Street following the ’08 crash has not started in earnest. True, but it even took awhile for the supposedly more clear-cut villains of the 1930s to be brought to justice. It should not surprise us that something similar could happen now.

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