Fred Schwed had a front-row seat to the Great Crash. He worked at a trading desk of a brokerage house since he left college. A week earlier — on October 24 — was the first moment he realized something was off.
October 24th started out like any normal day…until 11 am. The time is important because that was the deadline for margin calls.
The day before, in the final hour of trading “someone had pulled the plug, and an avalanche of common stock had descended on the reluctant and retreating buyers.” That selling triggered margin calls.
If you borrow money to buy stocks, you must meet certain minimum margin requirements. Falling below the minimum triggers a margin call and sticks you with two choices: add cash to your account or sell stocks.
In the booming market of 1929, how many investors using margin had extra cash lying around? Practically none is my guess.
October 24th was the first sign of things to come and no one was prepared for it. At some point, the Dow reached an intra-day low down almost 11% before gaining some ground and closing the day down 2%.
The headlines were brutal and reassuring remarks followed the next day by President Hoover and others.
The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis. — President Hoover, Statement to the Press October 25, 1929
Similar remarks would be repeated by many people over the coming weeks, months, and years.
On the twenty-year anniversary of the ‘ 29 Crash, Schwed would ask and answer the important question of why that day of all days?
Who picked a quarter past eleven, October 24, 1929, to tell that quotation clerk, and me, and all the world, that it now looked as though the whole thing had been a disastrous mistake?
There is an old saying to the effect that you can get used to anything if you stick at it long enough. That is why people can tend their vineyards on the slopes of Vesuvius for generations and still sleep nights. This is also strikingly true of booming economic conditions. Back in 1927, wise heads had been shaken dubiously when brokers’ loans reached the starry figure of nearly $4,000,000,000. (These years they rarely approach $1,000,000,000.) But when, in ’29, they topped $8,500,000,000 and yet nothing seemed to come of it save more of those delectable profits in common stocks, even the wise heads were seduced into becoming more philosophical about it all.
When the common stock of Radio — the old stock — small earner and a stingy payer, crossed 200, it made some of us gasp, but when in the ensuing months, it crossed, like an army with banners, 300 and 400 and 500, it all began to seem more natural. We tended to become used to it. It began to appear that the market advance resembled some surprising fact of nature, which, though very surprising, was an observable fact, like the tides in the Bay of Fundy. It is clearly unreasonable that trillions of tons of water should race uphill in a Fundy tide, for sixty or seventy feet, when the tides we have usually observed amount to only a yard or two. But anyone can go to Fundy and see it happen twice a day, every day, so why argue?
The most intelligent way to investigate the problem of what sent them crashing down for three weeks is first to turn one’s attention to a different marvel. What in the name of all that is logical sent them spinning up for the previous five years? Here is a case in which the sixty-four-dollar question comes first. If we can evolve any reasonable conclusions as to why they went up so high, it will not be too incomprehensible that they finally fell down again. Try to picture what it would be like if they never had fallen down. What would we all be doing now — taking endless luxury cruises? Who would man the liners? The crews would all be rich by now.
What put them up — it would appear now — was a certain proportion of fantasy, resembling the Holland tulip craze, and a certain proportion of hard fact which had to do realistically with our expanding economy. It becomes more and more evident that stock prices are not alone determined by high or low credit, earnings or carloadings. There is another mighty factor which cannot be charted along with the various business indices. It is how high or how low are the hearts of men and women during the given period…
In those days, stocks sold buoyantly for ten, twenty or thirty times their annual earnings. That must be attributed to high hearts rather than high carloadings. In recent years some of the same stocks have been selling lugubriously at six, four and two times earnings. It is not decreased carloadings that account for that.
Many Wall Streeters like to pontificate that “the market anticipates conditions.” This is supposed to mean that the action of the market, in its mysterious wisdom, goes down before conditions get bad and up before they get good. It is not unlike a chicken saying to an egg, “I anticipated you.” The chicken is not entirely wrong, but she is certainly not spectacularly right either. As for the market, that was a dandy little job of anticipating that it was doing in the first quarter of 1929.
Twenty Years Ago This Week