A History Lesson - Part 2 - The Crash

More extracts from Professor Galbraith's classic work: The Great Crash 1929. A more accessible and witty summary of what happened in that year I have yet to read.

I hope the ghost of the Professor will forgive me for inserting the occasional Diogenerian comment here and there, especially as we currently seem to be living through a similar period in our history.

Most of these extracts come from the chapters in his book that are entitled: 'The Twilight of Illusion' and 'The Crash'. I would urge anyone who is interested in such things, and who wishes to understand more of what is going on today, to invest in this modest volume.

Without doubt, the most striking feature of the financial era which ended in the autumn of 1929 was the desire of people to buy securities and the effect of this on values. But the increase in the number of securities to buy was hardly less striking. And the ingenuity and zeal with which companies were devised in which securities might be sold was as remarkable as anything.

The most notable piece of speculative architecture of the late twenties, and the one by which, more than any other device, the public demand for common stocks was satisfied, was the investment trust or company. The investment trust did not promote new enterprises or enlarge old ones. It merely arranged that people could own stock in old companies through the medium of new ones. Even in the United States, in the twenties, there were limits to the amount of real capital which existing enterprises could use or new ones could be created to employ. The virtue of the investment trust was that it brought about an almost complete divorce of the volume of corporate securities outstanding from the volume of corporate assets in existence. The former could be twice, thrice, or any multiple of the latter. The volume of underwriting business and of securities available for trading on the exchanges all expanded accordingly. So did the securities to own, for the investment trusts sold more securities than they bought. The difference went into the call market, real estate, or the pockets of the promoters. It is hard to imagine an invention better suited to the time or one better designed to eliminate the anxiety about the possible shortage of common stocks.

Things like investment trusts are the holy grail to the financial markets. They don't want to be held back by trivial things like 'How much is the company worth?' or 'How many things have we got to sell to people?'. They want to be able to generate huge profits, out of all proportion to their own size. Imagine if a bank could only lend out the equivalent of how much gold it had in it's vaults? How is it meant to grow into a world beating company that can afford to pay it's executives huge bonuses?

The trouble with selling real things is that once you have sold them all, you have to spend money making or buying more of them. You are limited by your assets - what you have in stock. You are never going to get rich that way.

If you want to get rich, it is vital that you come up with some way - be it investment trusts, consolidated debt obligations, securities or derivatives - that enables you to separate your ability to generate money, from any aspect of reality. Reality is far too limiting. You are interested in unlimited growth. Things in the real world don't grow without limit.

The idea of the investment trust is an old one, although, oddly enough, it came late to the United States. Since the eighties in England and Scotland, investors, mostly smaller ones, had pooled their resources by buying stock in an investment company. The latter, in turn, invested the funds so secured. A typical trust held securities in from five hundred to a thousand operating companies. As a result, the man with a few pounds, or even a few hundred, was able to spread his risk far more widely than were he himself to invest. And the management of the trusts could be expected to have a far better knowledge of companies and prospects in Singapore, Madras, Capetown, and the Argentine, places to which British funds regularly found their way, than the widow in Bristol or the doctor in Glasgow. The smaller risk and better information well justified the modest compensation of those who managed the enterprise. Despite some early misadventures, the investment trusts soon became an established part of the British scene.

The managers of the British trusts normally enjoy the greatest of discretion in investing the funds placed at their disposal. At first the American promoters were wary of asking for such a vote of confidence. Many of the early trusts were [literally] trusts - the investor bought an interest in a specified assortment of securities which were then deposited with a trust company. At the least the promoters committed themselves to a rigorous set of rules on the kinds of securities to be purchased and the way they were to be held and managed. But as the twenties wore along, such niceties disappeared. The investment trust became, in fact, an investment corporation. It sold its securities to the public - sometimes just common stock, more often common and preferred stock, debenture and mortgage bonds - and the proceeds were then invested as the management saw fit. Any possible tendency of the common stockholder to interfere with the management was prevented by selling him non-voting stock or having him assign his voting rights to a management-controlled voting trust.

Brilliant! Use their money, but don't allow them to have any say over how it is used. Which is fine as long as the interest keeps rolling in, of course - no one cares too much. It's when it stops and people realise that their money isn't actually their money any more, that things get interesting.

Historians have told with wonder of one of the promotions at the time of the South Sea Bubble. It was 'For an Undertaking which shall in due time be revealed'. The stock is said to have sold exceedingly well. As promotions the investment trusts were, on the record, more wonderful. They were undertakings the nature of which was never to be revealed, and their stock also sold exceedingly well.

I'm sure that no one would be this stupid today! Fancy buying something without knowing or understanding what it was.

During 1928 an estimated 186 investment trusts were organized; by the early months of 1929 they were being promoted at the rate of approximately one each business day, and a total of 265 made their appearance during the course of the year. In 1927 the trusts sold to the public about $400,000,000 worth of securities; in 1929 they marketed an estimated three billions worth. This was at least a third of all the new capital issues in that year; by the autumn of 1929 the total assets of the investment trusts were estimated to exceed eight billions of dollars. They had increased approximately elevenfold since the beginning of I927.

The parthenogenesis of an investment trust differed from that of an ordinary corporation. In nearly all cases it was sponsored by another company, and by 1929 a surprising number of different kinds of concerns were bringing the trusts into being. Investment banking houses, commercial banks, brokerage firms, securities dealers, and, most important, other investment trusts were busy giving birth to other trusts.

So a company that has no assets is able to borrow enough money to create other companies, none of which have any assets, and they in turn can borrow money to set up yet more companies, none of which have any assets, and so on, and on.

Yet, had these securities all been sold on the market, the proceeds would invariably have been less, and often much less, than the current value of the outstanding securities of the investment company. The latter, obviously, had some claim to value which went well beyond the assets behind them.

That premium was, in effect, the value an admiring community placed on professional financial knowledge, skill, and manipulative ability. To value a portfolio of stocks 'at the market' was to regard it only as inert property. But as the property of an investment trust it was much more, for the portfolio was then combined with the precious ingredient of financial genius. Such special ability could invoke a whole strategy for increasing the value of securities.

Consider by way of illustration, the case of an investment trust organised in 1920 with a capital of $150 million - a plausible size by then. Let it be assumed, further, that a third of the capital was realised from the sale of bonds, a third from preferred stock , and the rest from the sale of common stock. If this $150 million were invested, and if the securities so purchased showed a normal appreciation, the portfolio value would have increased by midsummer by about fifty percent. The assets would be worth $225 million. The bonds and preferred stock would still be worth only $100 million; their earnings would not have increased, and they could claim no greater share of the assets in the hypothetical event of a liquidation of the company. The remaining $125 million, therefore, would underlie the value of the common stock of the trust. The latter, in other words, would have increased in asset value from $50 million to $125 million, or by a hundred and fifty per cent, and as the result of an increase of only fifty per cent in the value of the assets of the trust as a whole.

This was the magic of leverage, but this was not all of it. Were the common stock of the trust, which had so miraculously increased in value, held by still another trust with similar leverage, the common stock of that trust would get an increase of between seven hundred and eight hundred per cent from the original fifty per cent advance. And so forth.

In 1929 the discovery of the wonders of the geometric series struck Wall Street with a force comparable to the invention of the wheel.

There was a rush to sponsor investment trusts which would sponsor investment trusts, which would, in turn, sponsor investment trusts. The miracle of leverage, moreover, made this a relatively costless operation to the ultimate man behind all of the trusts. Having launched one trust and retained a share of the common stock, the capital gains from leverage made it relatively easy to swing a second and larger one which enhanced the gains and made possible a third and still bigger trust.

Ah, leverage. I learned about this magic when I first read Galbraith's book. It seems to be inherent in the way that all financial markets work, at least nowadays. It is what caused the problems then, and it is what has caused many of the problems now. All the laws and regulations that were put in place after 1929, to stop it happening again, have been slowly removed and repealed.

The thing that immediately occurred to me, the first time I read Galbraith's book, was: 'Well that's ok when things are going well, but what happens when things are not going well?'

Galbraith addresses this very point later on in the chapter.

Leverage, it was later to develop, works both ways. Not all of the securities held by the Founders were of a kind calculated to rise indefinitely, much less to resist depression. Some years later the portfolio was found to have contained 5,000 shares of Kreuger and Toll, 20,000 shares of Kolo Products Corporation, an adventuresome new company which was to make soap out of banana oil, and $295,000 in the bonds of the Kingdom of Yugoslavia. As Kreuger and Toll moved down to its ultimate value of nothing, leverage was also at work - geometric series are equally dramatic in reverse. But this aspect of the mathematics of leverage was still unrevealed in early 1929, and notice must first be taken of the most dramatic of all the investment company promotions of that remarkable year, those of Goldman, Sachs.

That's the trouble with financial genius - good on calculating consolidated debt obligations, bad at remembering their school maths lessons.

In the two months after its formation, the new company sold some more stock to the public, and on 21 February it merged with another investment trust, the Financial and Industrial Securities Corporation. The assets of the resulting company were valued at $235 million, reflecting a gain of well over a hundred per cent in under three months. By 2 February, roughly three weeks before the merger, the stock for which the original investors had paid $104 was selling for $136.50. Five days later, on 7 February, it reached $222.50. At this latter figure it had a value approximately twice that of the current total worth of the securities, cash, and other assets owned by the Trading Corporation.

This remarkable premium was not the undiluted result of public enthusiasm for the financial genius of Goldman, Sachs. Goldman, Sachs had considerable enthusiasm for itself, and the Trading Corporation was buying heavily of its own securities. By 14 March it had bought 560,724 shares of its own stock for a total outlay of $57,021,936. This, in turn, had boomed their value. However, perhaps foreseeing the exiguous character of an investment company which had its investments all in its own common stock, the Trading Corporation stopped buying itself in March. Then it resold part of the stock to William Crapo Durant, who re-resold it to the public as opportunity allowed.

That's clever. I don't know if it's legal, but it's very clever.

The spring and early summer were relatively quiet for Goldman, Sachs, but it was a period of preparation. By 26 July it was ready. On that date the Trading Corporation, jointly with Harrison Williams, launched the Shenandoah Corporation, the first of two remarkable trusts. The initial securities issue by Shenandoah was $102,500,000 (there was an additional issue a couple of months later) and it was reported to have been oversubscribed some sevenfold. There were both preferred and common stock, for by now Goldman, Sachs knew the advantages of leverage. Of the five million shares of common stock in the initial offering, two million were taken by the Trading Corporation, and two million by Central States Electric Corporation on behalf of the co-sponsor, Harrison Williams. Williams was a member of the small board along with partners in Goldman, Sachs. Another board member was a prominent New York attorney whose lack of discrimination in this instance may perhaps be attributed to youthful optimism. It was Mr John Foster Dulles. The stock of Shenandoah was issued at $17.50. There was brisk trading on a 'when issued' basis. It opened at 30, reached a high of 36 and closed at 36, or 18.5 above the issue price.

Meanwhile Goldman, Sachs was already preparing its second tribute to the countryside of Thomas Jefferson, the prophet of small and simple enterprises. This was the even mightier Blue Ridge Corporation, which made its appearance on 20 August. Blue Ridge had a capital of $142,000,000, and nothing about it was more remarkable than the fact that it was sponsored by Shenandoah, its precursor by precisely twenty-five days. Blue Ridge had the same board of directors as Shenandoah, including the still optimistic Mr Dulles, and of its 7,250,000 shares of common stock (there was also a substantial issue of preferred) Shenandoah subscribed a total of 6,250,000. Goldman, Sachs by now was applying leverage with a vengeance.

This is all starting to sound a bit incestuous. I don't usually subscribe to the idea of a small clique of rich, powerful people running things behind the scenes, but I am starting to wonder - although this happened in 1929 - I'm sure it's different now.

Having issued more than a quarter of a billion dollars' worth of securities in less than a month - an operation that would not then have been unimpressive for the United States Treasury -activity at Goldman, Sachs subsided somewhat.

Thus, on 1 August the papers announced the formation of Anglo-American Shares, Inc., a company which, with a soigné touch not often seen in a Delaware corporation, had among its directors the Marquess of Carisbrooke, G.C.B., G.C.V.O., and Colonel the Master of Sempill, A.F.C., otherwise identified as the President of the Royal Aeronautical Society, London.

American Insuranstocks Corporation was launched the same day, though boasting no more glamorous a director than William Gibbs McAdoo. On succeeding days came Gude Winmill Trading Corporation, National Republic Investment Trust, Insull Utility Investments, Inc., International Carriers, Ltd, Tri-Continental Allied Corporation, and Solvay American Investment Corporation.

On 13 August the papers also announced that an Assistant U.S. Attorney had visited the offices of the Cosmopolitan Fiscal Corporation and also an investment service called the Financial Counsellor. In both cases the principals were absent. The offices of the Financial Counsellor were equipped with a peephole like a speakeasy.

Do you know, I'm starting to wonder if these were real companies. I think they were just making them up as they went along.

More investment trust securities were offered in September of 1929 even than in August - the total was above $600 million. However, the nearly simultaneous promotion of Shenandoah and Blue Ridge was to stand as the pinnacle of new era finance. It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale.

I'm shocked that a respected economist like Professor Galbraith should describe this behaviour as gargantuan insanity. Clearly he does not understand the complexities of the financial markets, and how they can provide continuous growth and ever-increasing wealth. Forever.

More than the prices of common stocks were rising. So, at an appalling rate, was the volume of speculation.

Brokers' loans during the summer increased at a rate of about $400,000,000 a month. By the end of the summer, the total exceeded seven billions. Of that more than half was being supplied by corporations and individuals, at home and abroad, who were taking advantage of the excellent rate of return which New York was providing on money. Only rarely did the rate on call loans during that summer get as low as six per cent. The normal range was seven to twelve. On one ocasion the rate touched fifteen. Since, as earlier observed, these loans provided all but total safety, liquidity, and ease of administration, the interest would not have seemed unattractive to a usurious moneylender in Bombay. To a few alarmed observers it seemed as though Wall Street were by way of devouring all the money of the entire world. However, in accordance with the cultural practice, as the summer passed, the sound and responsible spokesmen decried not the increase in brokers' loans, but those who insisted on attaching significance to this trend. There was a sharp criticism of the prophets of doom.

There were two sources of intelligence on brokers' loans. One was the monthly tabulation of the New York Stock Exchange, which in general is used here. The other was the slightly less complete return of the Federal Reserve System which was published weekly. Each Friday this report showed a large increase in loans; each Friday it was firmly stated that it didn't mean a thing, and anyone who suggested otherwise was administered a stern rebuke. It seems probable that only a minority of the people in the market related the volume of the brokers' loans to the volume of purchases on margin and thence to the amount of speculation. Accordingly, an expression of concern over these loans was easily attacked as a gratuitous effort to undermine confidence. Thus, in Barren's on 8 July, Sheldon Sinclair Wells explained that those who worried about brokers' loans, and about the influx of funds from corporations, simply did not know what was going on. The call market had become a great new investment outlet for corporate reserves, he argued. The critics did not appreciate this change.

The bankers were also a source of encouragement to those who wished to believe in the permanence of the boom. A great many of them abandoned their historic role as the guardians of the nation's fiscal pessimism and enjoyed a brief respite of optimism. They had reasons for doing so. In the years preceding, a considerable number of the commercial banks, including the largest of the New York houses, had organized securities affiliates. These affiliates sold stocks and bonds to the public, and this business had become important. It was a business that compelled a rosy view of the future. In addition, individual bankers, perhaps taking a cue from the heads of the National City and Chase in New York, were speculating vigorously on their own behalf. They were unlikely to say, much less advocate, anything that would jar the market..

However, there were exceptions. One was Paul M. Warburg of the International Acceptance Bank, whose predictions must be accorded the same prominence as the forecasts of Irving Fisher. They were remarkably prescient. In March 1929, he called for a stronger Federal Reserve policy and argued that if the present orgy of 'unrestrained speculation' were not brought promptly to a halt there would ultimately be a disastrous collapse. This, he suggested, would be unfortunate not alone for the speculators. It would 'bring about a general depression involving the entire country'.

He was clearly a troublemaker - best to ignore him.

Only Wall Street spokesmen who took the most charitable view of Warburg contented themselves with describing him as obsolete. One said he was 'sandbagging American prosperity'. Others hinted that he had a motive - presumably a short position. As the market went up and up, his warnings were recalled only with contempt.

The most notable sceptics were provided by the press. They were a great minority to be sure. Most magazines and most newspapers in 1929 reported the upward sweep of the market with admiration and awe and without alarm. They viewed both the present and the future with exuberance. Moreover, by 1929 numerous journalists were sternly resisting the more subtle blandishments and flattery to which they have been thought susceptible.

Thank goodness - at least they could rely on the gentlemen of the press for fair and objective reporting.

Instead they were demanding cold cash for news favourable to the market. A financial columnist of the Daily News, who signed himself 'The Trader', received some $19,000 in 1929 and early 1930 from a free-lance operator named John J. Levenson. 'The Trader' repeatedly spoke well of stocks in which Mr Levenson was interested. Mr Levenson later insisted, howeyer, that this was a coincidence and the payment reflected his more or less habitual generosity.

Main Street had always had one citizen who could speak knowingly about buying or selling stocks. Now he became an oracle. In New York, on the edge of any gathering of significantly interesting people there had long been a literate broker or investment counsellor who was abreast of current plans for pools, syndicates, and mergers, and was aware of attractive possibilities. He helpfully advised his friends on investments, and pressed, he would always tell what he knew of the market and much that he didn't. Now these men, even in the company of artists, playwrights, poets, and beautiful concubines, suddenly shone forth. Their words, more or less literally, became golden. Their audience listened not with the casual heed of people who are collecting quotable epigrams, but with the truly rapt attention of those who expect to make money by what they hear.

That much of what was repeated about the market - then as now - bore no relation to reality is important, but not remarkable. Between human beings there is a type of intercourse which proceeds not from knowledge, or even from lack of knowledge, but from failure to know what isn't known. This was true of much of the discourse on the market. At luncheon in downtown Scranton, the knowledgeable physician spoke of the impending split-up in the stock of Western Utility Investors and the effect on prices. Neither the doctor nor his listeners knew why there should be a split-up, why it should increase values, or even why Western Utility Investors should have any value. But neither the doctor nor his audience knew that he did not know. Wisdom, itself, is often an abstraction associated not with fact or reality but with the man who asserts it and the manner of its assertion.

In later years, a Senate committee investigating the securities markets undertook to ascertain the number of people who were involved in securities speculation in 1929. The member firms of twenty-nine exchanges in that year reported themselves as having accounts with a total of 1,548,707 customers. (Of these, 1,371,920 were customers of member firms of the New York Stock Exchange.) Thus only one and a half million people, out of a population of approximately 120 million and of between 29 and 30 million families, had an active association of any sort with the stock market. And not all of these were speculators. Brokerage firms estimated for the Senate committee that only about 600,000 of the accounts just mentioned were for margin trading, as compared with roughly 950,000 in which trading was for cash.

The striking thing about the stock market speculation of 1929 was not the massiveness of the participation. Rather it was the way it became central to the culture.

By the end of the summer of 1929, brokers' bulletins and letters no longer contented themselves with saying what stocks would rise that day and by how much. They went on to say that at 2 p.m. Radio or General Motors would be 'taken in hand'. The conviction that the market had become the personal instrument of mysterious but omnipotent men was never stronger. And, indeed, this was a period of exceedingly active pool and syndicate operations - in short, of manipulation.

During 1929 more than a hundred issues on the New York Stock Exchange were subject to manipulative operations, in which members of the Exchange or their partners had participated. The nature of these operations varied somewhat but, in a typical operation, a number of traders pooled their resources to boom a particular stock. They appointed a pool manager, promised not to double-cross each other by private operations, and the pool manager then took a position in the stock which might also include shares contributed by the participants. This buying would increase prices and attract the interest of people watching the tape across the country. The interest of the latter would then be further stimulated by active selling and buying, all of which gave the impression that something big was afloat. Tipsheets and market commentators would tell of exciting developments in the offing. If all went well, the public would come in to buy, and prices would rise on their own. The pool manager would then sell out, pay himself a percentage of the profits, and divide the rest with his investors.

While it lasted, there was never a more agreeable way of making money.

Of course, no party can go on forever. In the end, you always have to pay the piper.

On 3 September, by common consent, the great bull market of the nineteen-twenties came to an end. Economics, as always, vouchsafes us few dramatic turning points. Its events are invariably fuzzy or even indeterminate. On some days that followed - a few only - some averages were actually higher. However, never again did the market manifest its old confidence. The later peaks were not peaks but brief interruptions of a downward trend.

There were some who said, cause and effect run from the economy to the stock market, never the reverse. In 1929 the economy was headed for trouble. Eventually, that trouble was reflected in Wall Street.

In 1929 there were good, or at least strategic, reasons for this view, and it is easy to understand why it has become high doctrine. In Wall Street, as elsewhere in 1929, few people wanted a bad depression. In Wall Street, as elsewhere, there is deep faith in the power of incantation. When the market fell many Wall Street citizens immediately sensed the real danger, which was that income and employment - prosperity in general - would be adversely affected. This had to be prevented.

Preventive incantation required that as many important people as possible repeat as firmly as they could that it wouldn't happen. This they did. They explained how the stock market was merely the froth and that the real substance of economic life rested in production, employment, and spending, all of which would remain unaffected. No one knew for sure that this was so. As an instrument of economic policy, incantation does not permit of minor doubts or scruples.

No one seemed to want to admit that the tail had started to wag the dog. That far from the stock market being the speculative froth on top of the solid, sound and, above all, real economy, the sheer amount of speculation was instead capable of overturning and possibly sinking the real economy. A bit like someone in a tree sawing off the very branch they are sitting on.

I'm not sure how that affects us now, here in dear old Blighty, because for many years we haven't really had much production, so most of our wealth seems to be of the more 'frothy' kind anyway.

In the later years of depression it was important to continue emphasizing the unimportance of the stock market. The depression was an exceptionally disagreeable experience. Wall Street has not always been a cherished symbol in our national life. In some of the devout regions of the nation, those who speculate in stocks - the even more opprobrious term gamblers is used - are not counted the greatest moral adornments of our society. Any explanation of the depression which attributed importance to the market collapse would accordingly have been taken very seriously, and it would have meant serious trouble for Wall Street.

Wall Street, no doubt, would have survived, but there would have been scars. We should be clear that no deliberate conspiracy existed to minimize the consequences of the Wall Street crash for the economy. Rather, it merely appeared to everyone with an instinct for conservative survival that Wall Street had better be kept out of it. It was vulnerable.

Professor Galbraith shows himself to have a truely Diogenerian turn of phrase.

It is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who will now change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.

Along with the downturn of the indexes Wall Street has always attributed importance to two other events in the pricking of the bubble. In England on 20 September 1929 the enterprises of Clarence Hatry suddenly collapsed. Hatry was one of those curiously un-English figures with whom the English periodically find themselves unable to cope. Although his earlier financial history had been anything but reassuring, Hatry in the twenties had built up an industrial and financial empire of truly impressive proportions. The nucleus, all the more remarkably, was a line of coin-in-the-slot vending and automatic photograph machines. From these unprepossessing enterprises he had marched on into investment trusts and high finance. His expansion owed much to the issuance of unauthorized stock, the increase of assets by the forging of stock certificates, and other equally informal financing. In the lore of 1929, the unmasking of Hatry in London is supposed to have struck a sharp blow to confidence in New York.

A bit like Northern Rock asking for help from the Bank of England.

Ranking with Hatry in this lore was the refusal on 11 October of the Massachusetts Department of Public Utilities to allow Boston Edison to split its stocks four to one. As the company argued, such split-ups were much in fashion. To avoid going along was to risk being considered back in the corporate gaslight era. The refusal was unprecedented. Moreover, the Department added insult to injury by announcing an investigation of the company's rates and by suggesting that the present value of the stock, 'due to the action of speculators', had reached a level where 'no one, in our judgement ... on the basis of its earnings, would find it to his advantage to buy it'.

Confidence did not disintegrate at once. As noted, through September and into October, although the trend of the market was generally down, good days came with the bad. Volume was high. On the New York Stock Exchange sales were nearly always above four million, and frequently above five. In September new issues appeared in even greater volume than in August, and they regularly commanded a premium over the offering price. On 20 September the Times noted that the stock of the recently launched Lehman Corporation which had been offered at $104 had sold the day before at $136. (In the case of this well-managed investment trust the public enthusiasm was not entirely misguided.) During September brokers' loans increased by nearly $670 million, by far the largest increase of any month to date. This showed that speculative zeal had not diminished.

Ah, Lehmans - whatever happened to them?

Other signs indicated that the gods of the New Era were still in their temples. In its 12 October issue, The Saturday Evening Post had a lead story by Isaac F. Marcosson on Ivar Kreuger. This was a scoop, for Kreuger had previously been inaccessible to journalists. 'Kreuger,' Marcosson observed, 'like Hoover, is an engineer. He has consistently applied engineer precision to the welding of his far-flung industry.' And this was not the only resemblance. 'Like Hoover,' the author added, 'Kreuger rules through pure reason.'

In the interview Kreuger was remarkably candid on one point. He told Mr Marcosson: 'Whatever success I have had may perhaps be attributable to three things: one is silence, the second is more silence, while the third is still more silence.' This was so. Two and a half years later Kreuger committed suicide in his Paris apartment, and shortly thereafter it was discovered that his aversion to divulging information, especially if accurate, had kept even his most intimate acquaintances in ignorance of the greatest fraud in history. His American underwriters, the eminently respectable firm of Lee, Higginson and Company of Boston, had heard nothing and knew nothing. One of the members of the firm, Donald Durant, was a member of the board of directors of the Kreuger enterprises. He had never attended a directors' meeting, and it is certain that he would have been no wiser had he done so.

Well, the greatest fraud in history until Bernard Madoff hit the headlines.

On Sunday the market was front-page news - the Times headline read, 'Stocks driven down as wave of selling engulfs the market', and the financial editor next day reported for perhaps the tenth time that the end had come. (He had learned, however, to hedge. 'For the time at any rate', he said, 'Wall Street seemed to see the reality of things.') No immediate explanation of the break was forthcoming. The Federal Reserve had long been quiet. Babson had said nothing new. Hatry and the Massachusetts Department of Public Utilities were from a week to a month in the past. They became explanations only later.

The papers that Sunday carried three comments which were to become familiar in the days that followed. After Saturday's trading, it was noted, quite a few margin calls went out. This meant that the value of stock which the recipients held on margin had declined to the point where it was no longer sufficient collateral for the loan that had paid for it. The speculator was being asked for more cash.

The other two observations were more reassuring. The papers agreed, and this was also the informed view on Wall Street, that the worst was over. And it was predicted that on the following day the market would begin to receive organized support. Weakness, should it appear, would be tolerated no longer.

Never was there a phrase with more magic than 'organized support'. Almost immediately it was on every tongue and in every news story about the market. Organized support meant that powerful people would organize to keep prices of stocks at a reasonable level. Opinions differed as to who would organize this support. Some had in mind the big operators like Cutten, Durant, and Raskob. They, of all people, couldn't afford a collapse. Some thought of the bankers - Charles Mitchell had acted once before, and certainly if things got bad he would act again. Some had in mind the investment trusts. They held huge portfolios of common stocks, and obviously they could not afford to have them become cheap. Also, they had cash. So if stocks did become cheap the investment trusts would be in the market picking up bargains. This would mean that the bargains wouldn't last. With so many people wanting to avoid a further fall, a further fall would clearly be avoided.

In the ensuing weeks the Sabbath pause had a marked tendency to breed uneasiness and doubts and pessimism and a decision to get out on Monday. This, it seems certain, was what happened on Sunday, 20 October.

Monday, 21 October, was a very poor day. Sales totalled 6,091,870, the third greatest volume in history, and some tens of thousands who were watching the market throughout the country made a disturbing discovery. There was no way of telling what was happening.

Previously on big days of the bull market the ticker had often fallen behind, and one didn't discover until well after the market closed how much richer he had become. But the experience with a falling market had been much more limited. Not since March had the ticker fallen seriously behind on declining values. Many now learned for the first time that they could be ruined, totally and forever, and not even know it. And if they were not ruined there was a strong tendency to imagine it. From the opening on the 21st the ticker lagged, and by noon it was an hour late. Not till an hour and forty minutes after the close of the market did it record the last transaction. Every ten minutes prices of selected bonds were printed on the bond ticker, but the wide divergence between these and the prices on the tape only added to the uneasiness - and to the growing conviction that it might be best to sell.

Of course that could never happen today, with modern technology. Provided that the computer's don't crash. Or a particularly virulent computer virus infests the computer networks used by the financial centres. Or a ship's anchor slices through an undersea cable. Or the country becomes the victim of a cyberattack from a hostile nation.

On Tuesday, Charles M. Mitchell dropped anchor in New York with the observation that 'the decline had gone too far'. (Time and sundry congressional and court proceedings were to show that Mr Mitchell had strong personal reasons for feeling that way.) He added that conditions were 'fundamentally sound', said again that too much attention had been paid to the large volume of brokers' loans, and concluded that the situation was one which would correct itself if left alone.

However, another jarring suggestion came from Babson. He recommended selling stocks and buying gold.

That afternoon and evening thousands of speculators decided to get out while - as they mistakenly supposed - the getting was good. Other thousands were told they had no choice but to get out unless they posted more collateral, for as the day's business came to an end an unprecedented volume of margin calls went out.

Thursday, 24 October, is the first of the days which history - such as it is on the subject - identifies with the panic of 1929. Measured by disorder, fright, and confusion, it deserves to be so regarded. That day 12,894,650 shares changed hands, many of them at prices which shattered the dreams and the hopes of those who had owned them. Of all the mysteries of the Stock Exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. 24 October 1929, showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid.

The panic did not last all day. It was a phenomenon of the morning hours. The market opening itself was unspectacular, and for a while prices were firm. Volume, however, was very large, and soon prices began to sag. Once again the ticker dropped behind. Prices fell further and faster, and the ticker lagged more and more. By eleven o'clock the market had degenerated into a wild, mad scramble to sell. In the crowded boardrooms across the country the ticker told of a frightful collapse. But the selected quotations coming in over the bond ticker also showed that current values were far below the ancient history of the tape. The uncertainty led more and more people to try to sell. Others, no longer able to respond to margin calls, were sold out.

By eleven-thirty the market had surrendered to blind, relentless fear. This, indeed, was panic.

Outside the Exchange in Broad Street a weird roar could be heard. A crowd gathered. Police Commissioner Grover Whalen became aware that something was happening and dispatched a special police detail to Wall Street to ensure the peace. More people came and waited, though apparently no one knew for what. A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump.

In New York at least the panic was over by noon. At noon the organised support appeared.

A bit like our Government pumping £37 billion into our banking system. They are about to do it again, presumably because it worked so well the first time. Get banks lending. Get people spending. Get back to normal.

Or maybe we are starting to get a glimpse of just how little real money we have really got, and see just how successful - or unsuccessful - some companies, including banks, really are. That is, when you take away the make-believe money that the financial markets seem to work with.

At twelve o'clock reporters learned that a meeting [of the chief executives of the major banks] was convened at 23 Wall Street at the offices of JP Morgan and Company. A decision was quickly reached to pool resources to support the market. Prices firmed at once and started to rise.

Then at one thirty Richard Whitney appeared on the trading floor and went to the post where steel was traded. [...] He bid 205 for 10,000 shares. This was the price of the last sale, and the current bids were several points lower.

This was it. The bankers, obviously, had moved in. The effect was electric. Fear vanished and gave way to concern lest the new advance be missed. Prices boomed upwards.

On Friday and Saturday trading continued heavy - just under six million on Friday and over two million at the short session on Saturday. Prices, on the whole, were steady - the averages were a trifle up on Friday but slid off on Saturday. It was thought that the bankers were able to dispose of most of the securities they had acquired while shoring up the market on Thursday. Not only were things better, but everyone was clear as to who had made them so. The bankers had shown both their courage and their power, and the people applauded warmly and generously. The financial community, the Times said, now felt 'secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence [of panic]'. As a result it had 'relaxed its anxiety'.

Almost everyone believed that the heavenly knuckle-rapping was over and that speculation could be now resumed in earnest. The papers were full of the prospects for next week's market.

Stocks, it was agreed, were again cheap and accordingly there would be a heavy rush to buy. Numerous stories from the brokerage houses, some of them possibly inspired, told of a fabulous volume of buying orders which was piling up in anticipation of the opening of the market. In a concerted advertising campaign in Monday's papers, stock market firms urged the wisdom of picking up these bargains promptly. 'We believe', said one house, 'that the investor who purchases securities at this time with the discrimination that is always a condition of prudent investing, may do so with utmost confidence.

On Monday the real disaster began.

Coming soon: Things become more serious - The Aftermath