Economics and The Public Welfare

Chapter 30

The Stock Market Crash of 1929

The stock market prices of September, 1929, and, for that matter, long before September, had reached levels so fantastic that a disastrous break was merely a question of time. Any one of a multitude of circumstances could have started the break, and the break, once clearly started, was certain to go very far.

Break Not Caused by Increasing Money Market Pressure. The break did not come, as had often been the case in our past stock market history, from a sudden great rise in the call loan rate. Financial pressure on the Stock Exchange was relaxing, rather than increasing, when the crash came on October 24.

To be sure, the New York Federal Reserve Bank had raised its discount rate from 5% to 6% on August 9 of 1929. But this was symbolic merely, as it represented a compromise. The other side, and the really important side, of this compromise was that the Federal Reserve buying rate for prime bankers’ acceptances was reduced on the same day from 5 1/4% to 5 1/8%. As the open market rate for acceptances was 5 1/8% at this time, this pulled down the Federal Reserve rate to the level of the market and opened up the Federal Reserve banks to acceptances at the pleasure of the market. Following this there was an increase in acceptances held by the Federal Reserve banks from $72,000,000 on July 31 to $275,000,000 on September 30, which meant a relief to member bank reserves sufficient to ease the money market. The call loan rate dropped from 9.6% on August 10 to 6.2% on October 12. Stock exchange time loans eased from 8.88% on August 10 to 7.75% on October 19.

Federal Reserve Policy Indecisive. The New York Federal Reserve Bank had for a long time been trying to get the consent of the Federal Reserve Board to an increase of its rediscount rate from 5% to 6%. One heard credible reports in the summer of 1929 of animated and even angry telephone conversations between Mr. Gates McGarrah, Chairman of the Board and Federal Reserve Agent of the New York Federal Reserve Bank, and Secretary of the Treasury Mellon, who was a member of the Federal Reserve Board, and who was opposing the increase in the rate upon which McGarrah was insisting. The Federal Reserve authorities from early 1928 on pursued an inconclusive policy based on three partially conflicting motives: (a) the desire to restrain the use of credit for stock market speculation; (b) the desire not to tighten money in foreign countries and not to pull in more gold from abroad; and (c) the desire not to let money grow tight in business uses at home. The conflict among these policies meant that the efforts at restraint were handicapped and inconclusive, and that the wild speculation ran on for a year and nine months after the restraining efforts began.

Hatry Failure in London. It is probable, though not certain, that the first real blow to the market came from foreign selling induced by a radical change in sentiment in London and in Europe, in view of the Hatry failure 1 in London, and the long overdue increase in the Bank of England’s discount rate, from 5 1/2% to 6 1/2% on September 26. Hatry had put out forged securities in London on a vast scale, which had deceived even the great banks, and the disclosure when it came was shocking.

Massachusetts Public Utilities Decision. There came a Massachusetts public utility commission decision regarding the split-up of public utility shares, which probably induced further hesitation and suggested that pencil and paper might properly be of assistance in the evaluation of securities in this field. Various other causes might be assigned.

But Break Long Overdue. But there is no point to assigning any particular cause for the break’s coming at the particular time it did. It was overdue, and long overdue. A great collapse was certain the moment that doubt and reflection broke the spell of mob contagion, while the fantastic structure of prices was doomed the moment any considerable number of people began to use pencil and paper.

Short Selling Returns. Short selling came into the picture once more. The “bears” had been so unmercifully licked in the period of late 1927 to September, 1929, that there was no adequate short interest in the market in midsummer of 1929. Short selling is one of the most wholesome factors in a broad and active stock market. The bear, selling stocks short when they go too high, tends to hold them down, and that same bear, in order to take his profits, must buy stocks when they break. Short covering is thus one of the most helpful influences in a bad market break. Stocks would go a great deal lower than they do if the short were not there buying to take his profits. One great difference between stock market speculation and real estate speculation is to be found in the fact that no one dares to sell a piece of real estate short, since he must deliver that piece of real estate and no other in closing his transaction; whereas if he sells General Motors or United States Steel stocks short, he may make deliveries with any of a good many millions of shares, and he can always get them at a price. The end of the real estate boom and crash is, partly for this reason, a prolonged period of stagnation, while the end of the stock market boom and crash is simply lower prices with activity still going on. Some of the ablest operators in Wall Street began to get active on the bear side in September of 1929. One of them said in September, “I am selling motors short for an investment.”

On October 23, 1929, it became clear that the great break was at hand, when one learned that one of the most powerful underwriting syndicates in the country, which was sponsoring an additional issue of a highly rated common stock, had been unable to hold the price of the stock against a short selling attack.

Avalanche of Selling Begins, October 24, 1929—Floor Prices Far Below Tape Prices. In the morning of October 24 the avalanche began. The stock ticker showed drastic declines in prices, but word came from the floor of the stock exchange that the ticker was half an hour behind, and that prices on the floor were far lower than ticker prices. Word came, too, that fine stocks were being offered in large volume “at the market,” which meant at whatever price could be obtained, but were encountering no bids. The stock ticker is a marvelous instrumentality. On ordinary days the customer of a brokerage house can give his order, have it phoned to the floor of the exchange, have it executed, and see his purchase or his sale appear on the ticker in two or three minutes from the time he has given the order, in the case of an active stock. The ticker could carry 2 or 3 million shares a day with great ease. Four or 5 millions had been repeatedly carried, with some strain, but no real embarrassment.

Ticker Swamped by 12,895,000 Shares. On October 23, 1929, 6,369,000 shares had been sold and reported, with the ticker running several minutes behind frequently during the day, and still busy for half an hour or more after the market closed. But on October 24 the recorded share sales ran to 12,895,000, and the ticker was swamped.

Many “Green” Brokers. The problem of executing orders was complicated by the fact that there were a great many “green” brokers on the floor. The New York Stock Exchange, when the price of its seats went up to fantastic levels, had authorized a “seat dividend” of 40%, which made it possible for the holders of old seats to sell fractional shares which new brokers, approved by the Stock Exchange Committee, could purchase, thereby obtaining membership. These new men were all veterans before the great smash was over, but on the first day they were bewildered. There was one incident when one of the new brokers received an order to sell one thousand shares of a high-priced, well-rated railroad stock “at the market,” which he undertook to do—offering it down first a point at a time, and then finally five points at a time in an effort to find a buyer—but there were no bids. Finally, one of the older brokers grabbed his arm and said to him, “This is a disgrace to the New York Stock Exchange. Give me that order! ” The older broker thereupon phoned to his office that this fine stock was being offered with no takers, called for some supporting orders, and delayed the execution of the order. Speedily the supporting orders came and the stock was sold fifteen points above the lowest price at which the young broker had offered it. Men who put in buying orders in the midst of this demoralization were well repaid (provided they sold again by the end of the following day!), as shown by the following figures for the Dow-Jones industrial averages: October 24, high, 312.76, low, 272.32, close, 299.47; October 25, high, 306.02, low, 295.59, close, 301.22.

A situation of this sort had not been unanticipated by the banks or by the brokers. We have already discussed the higher margin requirements and the reduced loan values which had been applied with increasing rigor as the wild boom went on, and have referred to the rigorous examination with respect to liquidity which the Clearing House had inaugurated for the Clearing House banks in 1928.

Noon Conference of heading Bankers, October 24. Most of the heads of the great banks and banking houses had been aware that grave trouble was impending, had had informal conferences with one another regarding it, and had discussed tentative plans for dealing with it if it should come. The chief financial leaders met in the banking house of J. P. Morgan & Company at 23 Wall Street at 12 o’clock on October 24, in the midst of the panic. They were Albert H. Wiggin, head of the Chase National Bank, Charles E. Mitchell, head of the National City Bank, William C. Potter, head of the Guaranty Trust Company, Seward Prosser, head of the Bankers Trust Company and Thomas W. Lamont, a senior partner of the Morgan firm.

Panic Quiets—Supporting Orders. With the announcement of the meeting of these men, the panic began to quiet. Supporting orders from many quarters came into the market. After the conference Mr. Lamont spoke to the reporters, saying that no plan of concerted action to support the market had been agreed upon. Despite this statement Wall Street was convinced that the bankers had agreed to bring support to the market. Whether or not such an agreement was reached, it was reliably reported in brokerage circles later in the day that large orders emanating from these banking houses had been executed on the floor of the exchange shortly after the conference ended.2 The bankers reconvened at 4:30 P.M. on October 24.

Bankers’ Pool, October 25. The next day, October 25, announcement was made that this group, with the addition of George F. Baker, head of the First National Bank, had organized 3 a $200,000,000 banking pool to be used in the market, not for the purpose (as they carefully explained in their statement) of putting the market up or of holding prices, but for the purpose of making the market orderly. Mr. Lamont used the picturesque analogy of air pockets in the market, and the need for supporting bids to fill in air pockets when they occurred for particular stocks. The pool undertook to do in a few minutes what the great market all over the country itself would have done if the ticker had been abreast of the transactions, namely, to buy stocks at a price. This pool is believed to have bought on breaks and to have sold on rallies as the market declined, and it was finally closed out 4 after the trouble was over without having incurred losses.

The great banks, of course, could not directly participate in such a pool, as they were not authorized to buy stocks, but their security affiliates could; and of course J. P. Morgan & Company, being private bankers and primarily investment bankers, could.

Break Resumed October 26—Ends November 13. The rally was short-lived. It lasted through October 25, when the Dow-Jones industrials closed at 301.22. October 28 showed a further violent break, opening at 295.18 and closing at 260.64 with the ticker again badly embarrassed with its load of 9,213,000 shares. October 29, 1929, showed a wide-open “selling climax.” 16,410,000 shares were sold that day, and the ticker was no guide to trading. But by this time the brokerage houses and the “buy and sell” departments of the banks, which executed customers’ orders, had learned how to get reports directly from the floor. The Dow-Jones industrials dropped to a low of 212.33 on October 29. On that day “short covering” showed itself in great volume, and a great many experienced speculators bought stocks with pretty full confidence that a real rally must follow. The close on October 29 was at 230.07. The high of October 30 was at 260.93, and the high of October 31 was at 281.54. Renewed weakness came in the course of the day on October 31. The market continued downward. It closed on November 6 at 232.13 and on November 12 at 209.74. Bottom was reached on November 13, when the Dow-Jones industrials closed at 198.69, a figure only slightly above the low for the day, which was 195.35.

Extent of Break—Industrials 52.9%. Another set of figures showing the magnitude of this break are those of the New York Times stock index. The average price of fifty active stocks, half rails and half industrials, fell from a high point of 311.90 on September 19 to 164.43 on November 13, a break of 47.3%. The twenty-five industrial stocks dropped a good deal more, their high having been 469.49 on September 19 and their low 220.95 on November 13, a drop of 52.9%. Most of this decline came between October 23 and November 13.

Panic in Brokers’ Loans “For Account of Others.” We came through this great smash with the credit position of both the banks and the Stock Exchange unshaken. There was a panic of another kind which showed itself on October 24 and which continued through the resulting violent break down through November 13, when the bottom of the market was reached. It was a panic on the part of the outside lenders to the stock market, a panic in brokers’ loans “for the account of others.” All the great city banks were receiving frightened calls from their customers who had used them as agents for making these loans, instructing them to call the loans. The banks had known that this was coming, and in general were braced for it. One repeatedly heard loan officers saying to such customers over the telephone, “All right, old man, your loan is called, and the money is at this moment credited to your deposit account.” What the bank was doing, in fact, was taking over the loan from the customer and paying him for it, and subsequently deciding whether to call it from the broker, conferring with the broker to find out if it would be convenient for him to pay it. On October 24 it frequently was not convenient! Out-of-town banks also were ordering their loans called on a tremendous scale, and on a tremendous scale the banks of New York City took them over. They stood in the breach. Policy was not uniform among the great banks on this point. One great trust company was arguing with its customers, urging them not to call their loans or to call only a certain percentage in such a crisis, assuring them that the loans were properly margined and that further margin would be obtained, and trying to persuade these frightened lenders to bear their part of the burden. The better policy, however, was that which most of the banks followed, namely, to let the frightened lender out at once, to call the loan where the broker was able to pay it easily, but to take over the loan if it were going to make unnecessary hardship if the broker were required to pay immediately. Usually the broker would voluntarily reduce his loans as his customers sold their stocks and paid off their loans to him.

New York Banks Courageously Expand Credit. But there was an unaccustomed time lag due to the immense volume of transactions. It was physically impossible to clear such a vast volume of transactions in the usual time. A stock sold one day was ordinarily paid for the next day. But the brokers could not get their clearance sheets complete in time to do this. The brokerage houses worked until midnight, and still the records were incomplete. Moreover, there were physical difficulties in making the vast volume of stock deliveries. Stocks were not paid for till delivered, and loans could not be repaid easily till stocks were paid for. It was necessary that there should be forbearance in the matter of calling loans, and it was necessary that there should be a great expansion of bank credit to cover the extended clearance interval.

The total decline of brokers’ loans, as shown by the figures reported from the New York Stock Exchange at the month end, was gigantic. At the end of September, 1929, the stock exchange reported total borrowings of $8,549,000,000. By the end of October this figure had dropped to $6,109,000,000, virtually all of the decline having come after October 23. By the end of November the figure was down to $4,017,000,000. The Stock Exchange paid. But in the week of October 23 to 30, the New York banks had to expand loans.

The figures which follow are for brokers’ loans reported by the weekly reporting member banks of New York City—figures which stood far below those reported by the Stock Exchange, since the Stock Exchange got a great deal of its money, not from or through member banks, but directly from private banks, foreign banks, and others.

Brokers’ Loans—Federal Reserve Figures
Date	Total	For own account	For out-of-town banks	For others
August 21, 1929	6,085	926	1,787	3,372
October 9, 1929	6,713	973	1,799	3,941
October 23, 1929	6,634	1,077	1,733	3,823
October 30, 1929	5,538	2,069	1,005	2,464
November 27, 1929	3,450	831	638	1,982
December 31, 1929	3,424	1,167	709	1,548

The reader will observe for the week October 23 to 30 a decline of nearly $1,400,000,000 in the loans for account of “others,” and of over $700,000,000 in loans for out-of-town banks. In the same week the New York banks virtually doubled loans for their own account to the brokers, the increase being approximately $1,000,000,000.

Most of the credit expansion of the New York banks that week was to brokers, but part was to customers who were buying securities on the break, and part was the usual seasonal expansion of loans to country banks for crop-moving. The total loan expansion by the New York City banks, members of the Federal Reserve System, for the week October 23 to 30 was $1,292,000,000. Credit was given freely to everybody who had proper collateral, giving men time to turn around and giving the brokers time to make their delayed clearances.5

Federal Reserve Banks Expand Credit Adequately. The Federal Reserve banks, and above all, the New York Federal Reserve Bank, also acted with promptness and decision in meeting this terrific shock adequately. It has been necessary many times in this book to criticize Federal Reserve policy. But one must give wholehearted commendation to their policy in this panic week. For the Federal Reserve System there was an expansion of credit of $312,000,000; and an expansion in total bills and securities from $1,337,000,000 to $1,649,000,000, an increase of 23.3%. About half of this represented bills discounted, and the other half represented Government securities and bills purchased. This book has often criticized the Federal Reserve banks for buying Government securities when the effect was to create an excess of funds beyond the needs of trade. But one must approve thoroughly the purchases of $150,000,000 of Government securities which the Federal Reserve authorities carried through in the panic week of October 23 to 30.

The Federal Reserve Bank of New York did not reduce its discount rate during the panic week from the 6% figure at which it had been placed on August 9 of 1929, though it did reduce it to 5% November 1 while the panic was still on, and to 4 1/2% on November 15 as the tide was turning. In the first week of the panic, however, on October 25, it reduced its buying rate on acceptances from 5 1/8% to 5%. On November 1 it reduced the rate to 4 3/4%, on November 15 to 4 1/4%, and on November 21 to 4%.

The expansion of bank credit for the United States in this panic week was virtually all in the City of New York. Outside New York the expansion of reporting member banks was only $156,000,000-$65,000,000 in the Chicago Federal Reserve District, $39,000,000 in the Cleveland District, $22,000,000 in the Philadelphia District, and $13,000,000 in the Boston District. There was no change in Atlanta, and there was a decline of $8,000,000 in Richmond. All the other districts showed slight gains.

Rapid Liquidation of Emergency Credit. There was rapid liquidation of this emergency credit. Federal Reserve bank credit declined $119,000,000 between October 30 and November 20, and New York City member bank loans on securities, which had expanded $1,200,000,000 from October 23 to October 30, declined $1,100,000,000 from October 30 to November 20.

Another form of credit relief to the market in this great break was a prompt revocation of unusual margin requirements, and of loan values below the market. The New York banks did this promptly in 1929. In 1937, the Federal Reserve authorities, in whose hands the Congress had placed margin requirements in the reform legislation of the early 1930’s, moved to reduce margin requirements much too late and much too little in the great break of that year, as we shall later see.

Strict Brokers’ Loans Were Good. The banks had no problem regarding margins on the strict brokers’ loans made at the “money desk” of the Stock Exchange in the regular way. Sometimes there were problems connected with slower loans made to brokers in their capacity of customers. At about seven o’clock one evening, on a day when stocks had had a particularly bad break, a visit was made to the loan department of a New York bank to see how margin calls were being met. Loan clerks had been watching the ticker through the day on every stock that was in the collateral to secured loans, and margin calls had gone out to every broker whose margins were impaired. The head of the department said that all such calls had been met except two or three, and that he was sure that additional collateral in those cases would come during the evening. Then he broke into a spontaneous panegyric on the immense fabric of good faith that held in Wall Street. He was not a sentimentalist. He was a very tough and hard-headed man. He had to be to hold that job.

Bottom of 1929 Market, November 13. The bottom of the market came on November 13. There was more gloom in Chicago and Milwaukee that day than in New York. Brokers in Chicago at the luncheon hour were saying to the waitresses as they looked over the menus, “That order is priced at 95¢. I think it’s too high. Put in my bid at 90¢. I think I’ll get it.” And the waitresses understood the joke and brought the order, but charged 95¢ on the check. The same thing was happening in the stock market. You could no longer put in bids below the market with confidence that they would be executed. It was a grand selling climax. Stocks had already hit bottom. Short-sellers were covering, and investors were buying. There were cushions and springs at the bottom. Incidentally, the volume that day, though very great, was manageable. It was 7,761,000 shares, greater than the volume of the two preceding days by a couple of millions, but nothing like the 13,000,000 of October 21 or the 16,400,000 of October 29. The break had run its course.

Symbolized by Two Gestures: Secretary Mellon and Rockefeller. Some sort of gesture was needed to symbolize this, and two such gestures were provided. Without them the market would have risen anyhow, but they improved the atmosphere. One was an announcement by Secretary of the Treasury Mellon that he would recommend a reduction of income taxes payable the following year. The other was an announcement that someone had placed an order for a million shares of Standard Oil of New Jersey at $50 a share. This was supposed to have been placed by John D. Rockefeller or his son. As a result of this announcement, the stock, which had closed at 50 3/4 on November 13, opened at 59 on November 14, and closed at 58 1/2. It is interesting to note in this connection that in the preceding wild boom Standard Oil of New Jersey did not go above 83. It was reported at the time that one of the most reckless leaders of speculative pools had tried to put Standard Oil of New Jersey up. He had bought the stock all one day in the effort to break through 83. But the resistance was insurmountable. When deliveries came the following day, a great deal of the stock that was delivered was said to have been in the name of John D. Rockefeller. The pool leader thereupon quit, so far as that stock was concerned.

The market turned up. The Dow-Jones industrials, which had closed at 198.69 on November 13, had a low of 205.61 on November 14, and closed at 217.28; closed at 227.56 on November 185 at 245.72 on November 22, and at 258.44 on December 11.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.