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.These extracts come from the chapter in his book entitled: 'Things Become More Serious'. 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.
A common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.
Tuesday, 29 October, was the most devastating day in the history of the New York stock market, and it may have been the most devastating day in the history of markets. It combined all of the bad features of all of the bad days before. Volume was immensely greater than on Black Thursday; the drop in prices was almost as great as on Monday. Uncertainty and alarm were as great as on either.
Selling began as soon as the market opened and in huge volume. Great blocks of stock were offered for what they would bring; in the first half-hour sales were at a 33,000,000-a-day rate. The air holes, which the bankers were to close, opened wide. Repeatedly and in many issues there was a plethora of selling orders and no buyers at all.
Once again, of course, the ticker lagged - at the close it was two and a half hours behind. By then, 16,410,030 sales had been recorded on the New York Stock Exchange - some certainly went unrecorded - or more than three times the number that was once considered a fabulously big day. The Times industrial averages were down 43 points, cancelling all of the gains of the twelve wonderful months preceding.
But the worst thing that happened on this terrible day was to the investment trusts. Not only did they go down, but it became apparent that they could go practically to nothing. Goldman Sachs Trading Corporation had closed at 60 the night before. During the day it dropped to 35 and closed at that level, off by not far short of half. Blue Ridge, its offspring once removed, on which the magic of leverage was now working in reverse, did much worse. Early in September it had sold at 24. By 24 October it was down to 12, but it resisted rather well the misfortunes of that day and the day following. On the morning of 29 October it opened at 10 and promptly slipped to 3, giving up more than two-thirds of its value. It recovered later but other investment trusts did less well; their stock couldn't be sold at all.
The worst day on Wall Street came eventually to an end. Once again the lights blazed all night. Members of the Exchange, their employees, and the employees of the Stock Exchange by now were reaching the breaking point from strain and fatigue. In this condition they faced the task of recording and handling the greatest volume of transactions ever. All of this was without the previous certainty that things might get better. They might go on getting worse. In one house an employee fainted from exhaustion, was revived, and put back to work again.
In the first week the slaughter had been of the innocents. During this second week there is some evidence that it was the well-to-do and the wealthy who were being subjected to a levelling process comparable in magnitude and suddenness to that presided over a decade before by Lenin. The size of the blocks of stock which were offered suggested that big speculators were selling or being sold. Another indication came from the boardrooms. A week before they were crowded, now they were nearly empty. Those now in trouble had facilities for suffering in private.
The bankers met twice on the 29th - at noon and again in the evening. There was no suggestion that they were philosophical. This was hardly remarkable because, during the day, an appalling rumour had swept the Exchange. It was that the bankers' pool, so far from stabilizing the market, was actually selling stocks! The prestige of the bankers had in truth been falling even more rapidly than the market. After the evening session, Mr Lament met the press with the disenchanting task of denying that they had been liquidating securities - or participating in a bear raid. After explaining again, somewhat redundantly in view of the day's events, that it was not the purpose of the bankers to maintain a particular level of prices, he concluded: 'The group has continued and will continue in a cooperative way to support the market and has not been a seller of stocks.' In fact, as later intelligence revealed, Albert H. Wiggin of the Chase was personally short at the time to the tune of some millions. His cooperative support, which if successful would have cost him heavily, must have had an interesting element of ambivalence.
The rumour recurred that the 'organized support' was selling stocks, and Mr Lament, on meeting the press [again], added a minor footnote to this now completed story. He said he didn't know - the organized support was really not that well organized. The most plausible explanation is that everyone was feeling cheerful but the public. As before and later, the weekend had been a time of thought, and out of thought had come pessimism and a decision to sell. So, as on other Mondays, no matter how cheerful the superficial portents, the selling orders poured in in volume.
By now it was also evident that the investment trusts, once considered a buttress of the high plateau and a built-in defence against collapse, were really a profound source of weakness. The leverage, of which people only a fortnight before had spoken so knowledgeably and even affectionately, was now fully in reverse. With remarkable celerity it removed all of the value from the common stock of a trust. As before, the case of a typical trust, a small one, is worth contemplating. Let it be supposed that it had securities in the hands of the public which had a market value of $10,000,000 in early October. Of this, half was in common stock, half in bonds and preferred stock. These securities were fully covered by the current market value of the securities owned. In other words, the trust's portfolio contained securities with a market value also of $10,000,000.
A representative portfolio of securities owned by such a trust would, in the early days of November, have declined in value by perhaps half. (Values of many of these securities by later standards would still be handsome; on 4 November, the low for Tel and Tel was still 233, for General Electric it was 234, and for Steel 183.) The new portfolio value, $5,000,000, would be only enough to cover the prior claim on assets of the bonds and preferred stock. The common stock would have nothing behind it. Apart from expectations, which were by no means bright, it was now worthless.
This geometrical ruthlessness was not exceptional. On the contrary, it was everywhere at work on the stock of the leverage trusts. By early November, the stock of most of them had become virtually unsaleable. To make matters worse, many of them were traded on the Curb or the out-of-town exchanges where buyers were few and the markets thin.
Never was there a time when more people wanted more money more urgently than in those days. The word that a man had 'got caught' by the markets was the signal for his creditors to descend on him like locusts. Many who were having trouble meeting their margin calls wanted to sell some stocks so they could hold the rest and thus salvage something from their misfortunes. But such people now found that their investment trust securities could not be sold for any appreciable sum and perhaps not at all. They were forced, as a result, to realize on their good securities. Standard stocks like Steel, General Motors, Tel and Tel were thus dumped on the market in abnormal volume, with the effect on prices that had already been fully revealed. The great investment trust boom had ended in a unique manifestation of Gresham's Law in which the bad stocks were driving out the good. The stabilizing effects of the huge cash resources of the investment trusts had also proved a mirage. In the early autumn the cash and liquid resources of the investment trusts were large. Many trusts had been attracted by the handsome returns in the call market. (The speculative circle had been closed. People who speculated in the stock of investment trusts were in effect investing in companies which provided the funds to finance their own speculation.) But now, as reverse leverage did its work, investment trust managements were much more concerned over the collapse in the value of their own stock than over the adverse movements in the stock list as a whole. The investment trusts had invested heavily in each other. As a result the fall in Blue Ridge hit Shenandoah, and the resulting collapse in Shenandoah was even more horrible for the Goldman Sachs Trading Corporation.
Under these circumstances, many of the trusts used their available cash in a desperate effort to support their own stock. However, there was a vast difference between buying one's stock now when the public wanted to sell and buying during the previous spring - as Goldman Sachs Trading Corporation had done - when the public wanted to buy and the resulting competition had sent prices higher and higher. Now the cash went out and the stock came in, and prices were either not perceptibly affected or not for long. What six months before had been a brilliant financial manoeuvre was now a form of fiscal self-immolation. In the last analysis, the purchase by a firm of its own stock is the exact opposite of the sale of stocks. It is by the sale of stock that firms ordinarily grow.
However, none of this was immediately apparent. If one has been a financial genius, faith in one's genius does not dissolve at once. To the battered but unbowed genius, support of the stock of one's own company still seemed a bold, imaginative, and effective course. Indeed, it seemed the only alternative to slow but certain death. So to the extent that their cash resources allowed, the managements of the trusts chose faster, though equally certain death. They bought their own worthless stock.
Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves.
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