The Lead-Up

In the early 1900s, millions of Americans left farms to take higher paying jobs in metropolitan areas. The banking system was very fragmented, undercapitalized, and struggling as the 19th century agricultural economy withered. As cities grew, the banking system became ever more imbalanced and precarious.

In 1919, GM struck a blow against the American taboo on taking personal loans by selling loans for buying cars. Soon after, Sears offered installment plans for expensive appliances like dishwashers. Wall Street then went one step further and started offering stock on credit. Americans stared sometimes buying stocks paying 80-90% in credit.

New York’s population swelled. In the 1920s New York had become a fundamentally different place than other American cities. By 1929 NYC had ~2,500 buildings of 10 stories or more (and The Empire State Building, Sears Tower, and Rockefeller Center were all in development). Chicago was in second with ~450. Of the ~200 Americans who reported personal incomes of more than 1 million dollars at the time, half were New Yorkers.

The Bubble

By the peak in 1929, the stock market had experienced nearly 7 years of uninterrupted growth, and in the last year doubled what it was in 1928. Then came October 1929, one of the worst month’s in stock market history and the start of an 80% fall over the next 2 years. “I doubt if anyone will ever disclose the specific thing that produced the debacle. It seemed to me that the time came when a sufficient number of people believed their hour to sell had come. Their actions started a wave of fear and everybody tried to sell at once. The machinery of the brokerage houses could not stand the strain, and that added to the panic that ensued.”

A well-known economist made a pessimistic quote about the market, a major English company was on the verge of collapse, and stocks fell as they sometimes do. Then in one week market went down 8%, leading to brokers issuing margin calls to customers. Investors short on cash watched as brokers sold off their positions to recover debts. Actions triggered yet more margin calls and more liquidation. The New York Stock Exchange was not equipped to handle the volume of activity, leading to even more panic and selling. The market dropped 33% over one month.

The momentum for stock market recovery was never more than episodic in the early 1930s. Every market rally eventually reversed course. Some in hours, some in days, some in months. There was no singular moment of high stakes drama, the air simply leaked out of the balloon day after day after day. Stocks ended 1930 down by 1/3 for the year. Then fell by 1/2 the following year. The collapse was not a moment. It was a relentless unraveling. The hope that a new bull market was imminent vanished.

The Aftermath

Major reduction in equity meant little equity to cover great quantities of debt, eviscerating the credit markets. Throughout 1930, small banks throughout the country began to fail. Americans didn’t trust banks anymore. Money was pulled out of banks and stored under mattresses. There was soon mass unemployment, chanty towns, and bread lines. The Great Depression had started.

By 1931, unemployment had nearly tripled and one quarter of American factory workers had lost their jobs. More than 1300 banks failed (mostly in small towns and rural areas). Bank failures were averaging 60 a month, then jumped to 254 one month in November, then 344 the next in December (on one single day 43 banks failed).

Quite surprisingly to me (sorry to my 11th grade history teacher who I know taught me this once…), Hoover most likely did not lose the 1932 election to FDR due to his handling of the economy. Around the election economic turmoil had quieted down, Dow had increased, and 2/3 of Americans polled at the time felt the Great Depression was over and businesses were recovering. Hoover lost because of prohibition - while FDR was against it, Hoover refused to run against it even though 83% of the country was against it by that point. Democrats/FDR agenda was to showcase and put forth the alternative he offered to the Republicans’ hand off approach to business.

New laws in the early 1930s: FDIC insurance for $2500, SEC established, separation of commercial and investment banking.

Miscellaneous Quotes

• “At the time of the crash, many people and many banks could be knocked over by a feather.”
• “Hoover was considering whether to sign the Smoot Hawley tariff bill, which had been inspired by his own campaign promises to help ailing farmers. The bill would raise tariffs on imported goods to an average of nearly 60%. More than 1,000 economists signed a letter condemning it. Hoover had major reservations about the bill, describing it as “vicious” “extortionate” and “obnoxious”. But In the end it came down to the heartland vs Wall Street, and Hoover knew which side he owed his political debts to. He signed the bill into law on June 17th, 1930. Trade between the US and the rest of the world fell by 60% within a year.”
• “In the less affluent areas of big cities and the vast areas beyond metropolitan centers, daily life was unraveling to a degree that wasn’t yet visible or comprehensible to either Wall Street or Washington.”
• “It’s at this point that the story shift. The Great Depression is rolling on, Hoover continues to flail, and FDR is now becoming a prominent replacement candidate. The country is hungry for a hero, and for villains too.”
• There was a push being made by one of the richest men in the world to cut the 5.5 day work week (half day Saturday, which had gone down by 6) down to 5. The pitch was it would improve the economy by leading to more tires and cars and gas, more camping and fishing gear, sports goods, more hotel spending, more shopping, more activity.
• Future famous composer/playwright Gershwin was deciding between two choices: “I can stay in New York and take a pretty tempting offer to write a show I’ve been offered, or toss that up (and the good financial deal that comes with it) and follow a pretty strong urge I have to go to Paris and study theory and orchestration and work out a new idea of mine.” Response from his friend: “My guess is that unless you follow your real desire, you stand a pretty good chance of writing a pretty bad show”. Gershwin took that advice and went abroad, where he wrote “An American in Paris”.
• Congressman Carter Glass in 1902 when he’d asked to be on foreign committees but got put on banking instead: “I don’t know anything about banking, but I guess I can learn.” Read everything he could, and eventually became the top banking expert in all of Congress and was instrumental in creation of the Federal Reserve and the major financial legislation “The Glass-Steagall Act”.