Friday, April 1, 2011

A few thoughts on the crash of '29....

What caused the stock market crash in October 1929, and could this crash have been avoided?

First, a note on expectations. The topic chosen is one that’s been dissected and examined for generations by learned historians, economists, astrologers, and others of the same vein. This poor offering will not bring anything new to the table, but simply represents the authors own views from the perspective of his solipsist world.

The question asked requires three things to be examined and compared. What was the ‘Stock Market Crash of October 1929’, what were its causes, and were they controllable at the time.

While people often consider the ‘Crash’ to be a cataclysmic event that changed our nation in a single day, the reality is far different. The ‘Crash’ took decades to build, years to happen, and can still be felt reverberating through our society today. The New York Times reported on October 29th, 1929 that the market had plummeted in a 14,000,000 share sell off (NYT, 10-29-1929), but only the Sunday before had reported the market-makers were busy even on the day of rest, preparing for more growth. This would seem to be a stunning decline, and it was…. but it was only the culmination of a generations preparation, and what followed that day was far worse than just a simple shareholder sell-off.

The question of what led up to the great decline in 1929 is one that’s been debated steadily since it happened. In this authors opinion, it formed from a ‘Perfect Storm’ of factors, all lending likelihood to exactly what happened. Kenneth Galbraith, noted economist, said of the time: “One of the things you must understand about 1929 and the antecedent years, as about any speculative episode, is the danger… in attributing intelligence to the simple fact that people are associated with large sums of money or large financial operations. We don’t ask whether they’re intelligent. We say, they’re associated with all this money, so they must be intelligent.” (PBS Interview). This highlights a human tendency to follow those we think smarter than ourselves. In this context it led to millions of people who had no business gambling in the stock market to make incredibly bad decisions regarding their money. In an age where the American public was being swept away in an orgy of consumer spending on credit, becoming wealthy on credit seemed like a good idea too… as long as the ‘smart people’ said it was.

Economists at the time were expecting a downwards swing after the first world war, yet it never came as expected. Why not? Because of consumer spending, burgeoning industrial growth, and rapidly opening world markets. These factors, while hugely important to economic growth, were not as eternal as they appeared through the rose colored glasses of popular thought.

Newspapers of the time reported an unending story of buying and selling paper in an ever spiraling trend upwards. “Wave of Buying Sweeps Over Market as Stocks Swing Upward Radio Flashes High; General Motors and Steels Soar” reported Laurence Stern in ‘The World’, on March 15th of 1929. In a time when half the industrialized world had been devastated in war, and the American industrial capacity was filling the gap, such talk inevitably led to an impression that there was only one way for the market to go… up. Taken in that context, placing ones capitol in market ‘investments’ probably seemed like a ‘sure fire’ bet. After all, the best and brightest of the nation were doing it, and money came to them as if by magic. Certainly many people who never before considered gambling on on the stock market had the thought “Why not get my share?”.

Why not…. is a question well answered by Robert Sobel in the prelude of his book, The Great Bull Market. Sobel prefaces his book with the story of Charles Ponzi, and the genesis of ‘The Ponzi Scheme’. His choice seems a perfect one, as the stock market of the 1920’s was indeed a ponzi scheme. It’s ever increasing valuation was not created from industrial production and business growth, but from speculation. The seemingly incredible expansion of the stock market, floating all boats as it rose, relied on the continued import of capitol… and in the 1920’s that capitol was borrowed on margin.

‘The Crash’ didn’t happen in one day, but in wave after wave of boom and bust, rapidly fluctuating daily, almost hourly, on news and rumor (often the same thing). One day people were hit with margin calls, their capitol having already been wiped off the map by plummeting valuations. The next day major bankers were injecting hard cash into the market, attempting to buoy public perception and avoid more panic selling. The market in 1931 was at roughly the same level it was in 1925, but in those six years it had nearly quadrupled in capitol and then crashed back down. This earthquake in the economy transferred incredible sums of money from a great many people to the bank accounts of a very few lucky, and yes… brilliant... people.

What caused the market crash? In this authors view, the main reason that house of cards came tumbling down was it’s construction. It was built on the flimsiest of foundations…. human greed and delusion. The market soared because people wanted it to, because they believed in it…. and human belief is a fickle thing indeed. William Durant, one of the most powerful market players of the day, said “The market will continue to climb as long as people believe in it” (PBS interview with his peers of the time). Only a few years later, William Durant had seen that belief fail, and his own fall back to reality came as much a crash as the market.

Could the crash have been avoided…. begs the question: Were the reasons behind the crash controllable at the time? In fact, it leads to another question: Were the reasons for the crash even visible at the time?

This author would contend… the primary cause of the great crash was common human stupidity, self delusion, and greed. The prospect of easy money without the hard work of earning it became the latest and greatest false god of enough people that an entire economy was swayed by it. The crash was inevitable and predictable… just as the bursting of a balloon steadily filling with air is. The Market was built upon, and filled with, value that didn’t exist in reality. When that value turned back to the vapor it was created from, the market collapsed upon itself in pieces.

Charles Mitchell, a mover and shaker of the 1920’s financial market, was one of those who lost everything in the ‘crash’. His daughter, Rita Mitchell Cushman, during an interview about her experiences of the time, said something strikingly astute. “This house was taken over, of course, and things changed. And I began to know what the real world was all about. It was about time. I was 19 years old.”

I began to know what the world was all about”… as she recovered from what had been nothing but a dream all along.


suz said...

Interesting. Smart, greedy people dangling the you-can-too carrot in front of naive, greedy people.

Old NFO said...

"Prospect of easy money without the hard work of earning it" To me, THAT is the money quote (so to speak)... Good post!