The Crash of 1929

The Crash of 1929

Wall Street Lays en Egg

On September 3, 1929, the market averages reached a peak that was not to be surpassed for a quarter of a century. The “endless chain of prosperity” was soon to break; general business activity had already turned down months before. Prices drifted for the next day, and on the following day, September 5, the market suffered a sharp decline known as the “Babson Break”.

This was named in honor of Roger Babson, a frail, goateed, pixyish-looking financial adviser from Wellesley, Massachusetts. At a financial luncheon that day he had sad. “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming.” Wall Street professionals greeted the new pronouncements from the “sage of Wellesley,”, as he was known, with their usual derision.

As Babson implied in his statement, he had been predicting the crash for several years and he had yeat to be proven right. Nevertheless, at two o`clock in the afternoon, when Babson`s words were quoted on the “broad” tape (the Dow Jones financial-news tape, which is an essential part of the furniture in every brokerage house across the country), the market went into a nosedive. In the last frantic hour of trading, two million shares changed hands – American Telephone and Telegraph went down six points, Westinghouse – seven, and U.S. Steel – nine points. It was a prophetic episode, and after the Babson Break the possibility of a crash, which was entirely unthinkable a month before, suddenly became a common subject for discussion.

Confidence faltered. September had many more bad that good days. At times the market fell sharply. Bankers and government officials assured the country that there was no cause for concern. Professor Irving Fisher of Yale, one of the progenitors of the intrinsic-value theory, offered his soon-to-be-immortal opinion than stocks had reached what looked like a “permanently high plateau”.

Eggs. Wall Street Lays en Egg. Illustration by Elena

By Monday, October 21, the stage was set for a classic stock-market break. The declines in stock prices had led to calls for more collateral from margin customers. Unable or unwilling to meet the calls, these customers were forced to sell their holdings. This depressed prices and led to more margin calls and finally to a self-sustaining selling wave.

The volume of sales on October 21 zoomed to over 6 million shares. The ticker fell way behind, to the dismay of the tens of thousands of individuals watching the tape from brokerage houses around the country. Nearly an hour and forty minutes had elapsed after the close of the market before the last transaction was actually recorded on the stock ticker.

The indomitable Fisher dismissed the decline as a “shaking out of the lunatic fringe that attempts to speculate on margin”. He went on to say that prices of stocks during the boom had not caught up with their real value and would go higher. Among other things, the professor believed that the market had not yet reflected the beneficent effects of Prohibition, which had made the American worker “more productive and dependable”.

On October 24, later called “Black Thursday,” the market volume reached almost 13 million shares. Prices sometimes fell $5 and $10 on each trade. Many issues dropped 40 and 50 points during a couple of hours. On the next day, Herbert Hoover offered his famous diagnosis: “The fundamental business of the country… is on a sound and prosperous basis.”

Tuesday, October 29, 1929, was among the most catastrophic days in the history of the New York Stock Exchange. Only October 19 and 20, 1987, rivaled in intensity the panic on the Exchange. Over 16,4 million shares were traded on that day in 1929 (a 16-million-share day in 1929 would be equivalent to something like a billion-share day in 1990 because of the greater number of shares now listed on the New York Stock Exchange). Prices fell almost perpendicularly, and kept in falling, as is illustrated by the following table (in the end of this text), which shows the extent of the decline during the autumn of 1929 and over the next three years. With the exception of “safe” AT&T, which lost only three-quarters of its value, most blue-chips stocks had fallen 95 percent or more by the time the lows were reached in 1932.

Perhaps the best summary of the debacle was given by Variety, the show-business weekly, which headlined the story, “Wall Street Lays en Egg”. The speculative boom was dead and billions of dollars of share values – as well as the dreams of millions – were wiped out. The crash in the stock market was followed by the most devastating depression in the history of the country.

Security, High prices September 3, 1929, Low prices November 13, 1929, Low price for year 1932:

American Telephone and Telegraph Company:

High prices September 3, 1929 – 304

Low prices November 13, 1929 – 197 ¼

Low price for year 1932 – 70 ¼

Bethlehem Steel:

High prices September 3, 1929 – 140 3/8

Low prices November 13, 1929 78 ¼

Low price for year 1932 – 7 ¼

General Electric:

High prices September 3, 1929 – 396 ¼

Low prices November 13, 1929 – 168 1/8

Low price for year 1932 – 8 ½

Montgomery Ward:

High prices September 3, 1929 – 137 7/8

Low prices November 13, 1929 – 49 ¼

Low price for year 1932 – 49 ¼

National Cash Register:

High prices September 3, 1929 – 127 ½

Low prices November 13, 1929 – 59

Low price for year 1932 – 6 ¼

Radio Corporation of America:

High prices September 3, 1929 – 101

Low prices November 13, 1929 – 28

Low price for year 1932 – 2 ½

Sources:

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc