John Kenneth Galbraith sat before a Congressional Committee, on October 29, 1979, to answer one question. Can it happen again? It was the Great Depression.
For all the worry about repeating the depression, the real talk centered on what preceded it — the Great Crash. And Galbraith offered his expertise on the subject.
Not perhaps since the siege of Troy has the chronology of a great event been so uncertain. As a matter of fact, economic history, even at its most violent, has a much less exciting tempo than military or even political history. Days are rarely important. All of the autumn of 1929 was a terrible time, and all of that year was one of climax. With the invaluable aid of hindsight it is possible to see that for many previous months the stage was being set for the final disaster.
Galbraith then set about clearing up the issue. The Great Crash was not a single day but a sequence of events that started many months in advance. Galbraith’s prepared statement offered a clear timeline that culminated in what everyone knows as the 1929 Crash.
Note: Galbraith refers to The New York Times industrial average. The Dow Jones index data is added as well, along with info from various other sources.
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January 1, 1929 — Calvin Coolidge is President. The bull market is at least four years old. The New York Times average — an index of 25 industrial stocks (the standard at the time) — began 1924 at 110, then began 1925 at 135 (The Dow Jones began 1924 at 95.7 and 1925 at 121.3). The average rate charged on margin loans was slightly under 7% at the start of the year — an attractive rate for lenders. Early on, the debate began as to how best to deflate the bubble.
January 2, 1929 — The Times average closes the trading day at 338.35 (The Dow closed at 307). The climb from 1924 was mostly uninterrupted. Most months ended higher, with the exception of early 1926 and early 1928.
February 1929 — The Federal Reserve issues a warning on margin loans: “a member bank is not within its reasonable claims for rediscount facilities at the Federal Reserve Bank when it borrows for the purpose of making speculative loans.” The market sells off but quickly recovers.
March 4, 1929 — Herbert Hoover is inaugurated as President. The market surged after his November election win and gave him an “inaugural market” surge in March. Days before leaving office, Calvin Coolidge proclaimed that things were sound and stocks were a good buy. Hoover’s memoirs would reveal that the stock market boom was a concern for him. (The Dow closed at 313.9.)
March 26, 1929 — The market sold off. The volume on the day hit 8,239,000, an unheard-of amount at the time.
Once in the early days of the bull market it had been said men might see a five-million-share day. — John Kenneth Galbraith
Margin loan rates peaked at 20% on the day. Charles E. Mitchell, Chairman of National City, stepped up to fend off sellers and ease the margin rates:
We have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert…any dangerous crisis in the money market.
The word spread that National City had money to loan. The market recovered most of the losses by the close (The Dow opened at 298, and reached a low of 282, before closing the day at 297).
June 1, 1929 — The Times average hit 342 (the Dow was 299.1). The market’s final summer blowout began.
July 1, 1929 — The Times average reached 394 (the Dow was 335.2).
July 26, 1929 — The Goldman Sachs Trading Corporation launches the Shenandoah Corporation, an investment trust. It was oversubscribed sevenfold. Only one million, of the five million shares in the intial offering, were issued to the public (the Trading Corporation and Harrison Williams split the other 4 million shares). Stock in Shenandoah was issued at $17.50, opened at $30, and closed the day at $36. A one-day gain of 106%.
August 1, 1929 — The Times average hit 418 (the Dow was 350.6).
August 15, 1929 — “This is truly a new era in which formerly well-established standards of value for securities no longer retain their old significance.” — Col. Leonard P. Ayres, Vice President of Cleveland Trust Co.
August 20, 1929 — The Shenandoah Corporation launches the Blue Ridge Corporation, another investment trust. The twist is that investors can buy the IPO or exchange stock of blue chip companies for shares in Blue Ridge. Bernard Baruch was granted the opportunity to participate in the offerings of both Blue Ridge and Shenandoah. He responded, “The formation of these companies looks like financial whoopee.” The market disagreed.
September 3, 1929 — The day after the Labor Day holiday, The Times average hit 452 — a 25% gain in 90 days (the Dow hit 381.2, a 27% gain in 90 days — it was the top, not to be surpassed until November 26, 1952). A few days later brokers’ loans reached $6,354,000,000. Loans increased by roughly $400,000,000 per month over the prior three months.
September 5, 1929 — The market broke. The Times average fell 10 points (The Dow also fell 10 points, a 2.6% decline). A day earlier, Roger Babson warned, “Sooner or later a crash is coming and it may be terrific.” It would be labeled the Babson Break. It wasn’t his first warning of a crash, just one of many he’d made over the previous four years.
October 8, 1929 — “Nothing can arrest the upward movement in the United States.” — Charles E. Mitchell
October 16, 1929 — Irving Fisher makes his infamous call:
Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr. Babson predicted. I expect to see the stock market a good deal higher than it is today within a few months. — Irving Fisher
October 19, 1929 — The market experienced the second heaviest trading volume for a Saturday in its history at 3,488,100 shares traded (the market held half sessions on Saturdays back then). The Times average closed down 12 points (The Dow closed down 10 points, a 2.8% decline).
October 21, 1929 — A Monday. Volume hit 6,091,870, the third-highest in history. The ticker tape lagged from the open and wouldn’t catch up until an hour and forty minutes after the market closed. This was a common occurrence on heavily traded days. Except, few cared because most of those days, they ended up richer. This day was different. Nobody knew how much they had lost until after the close. The market recovered off the lows and The Times average ended the day only down 6 points (The Dow opened at 323.7, bottomed at 314.6, and closed at 320.9, a 3-point loss for the day).
October 22, 1929 — Charles Mitchell declares, “the decline has gone too far…the situation is one which will correct itself if left alone.” Roger Babson suggests selling stocks and buying gold.
October 23, 1929 — Motor stocks were down in early trading. Roughly 2,600,000 shares traded in the last hour. The Times average dropped from 415 to 384, losing all its gains since June (the Dow fell from 326.5 to 305.9, a 6.3% loss). Margin calls went out that night. Investors had few choices: forced selling by the broker at whatever price the broker could get the next day or add collateral to back their loans.
…security values in most instances were not inflated. — Irving Fisher, speaking before bankers in D.C.
The decline in stock market prices has carried many issues below their true value. — Charles E. Mitchell
October 24, 1929 — 12,894,650 shares traded. The ticker fell behind early again. This time, people sold because they didn’t know where prices stood.
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. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only wide vertical declines could anyone be induced to bid. — John Kenneth Galbraith.
Panic…with few willing buyers.
Support finally came at noon. The great heads of the New York banks met with Thomas W. Lamont a senior partner at J.P. Morgan. All agreed to pool their resources.
There has been a little distress selling on the Stock Exchange…due to a technical situation rather than any fundamental cause. — Thomas W. Lamont
At 1:30 pm, Richard Whitney, the vice president of the Stock Exchange, walked to the post for U.S. Steel and confidently ordered 10,000 shares at 205 from the specialist, $5 above the current price. He repeated similar orders at other posts, totaling $20 million.
Calm and confidence were restored. The market rallied. The Times average recovered from its lows, closing down 12 points (the Dow opened at 305.9, hit a low of 272.3, and closed at 299.5). U.S. Steel ended the day higher. The ticker wouldn’t stop printing until 7:08 PM that night.
Hornblower & Weeks, a prominent brokerage house, released a market letter after the close:
Commencing with today’s trading the market should start laying the foundation for the constructive advance which we believe will characterize 1930.
October 25, 1929 — Slightly less than 6 million shares traded hands on Friday with the market ending higher on the day (the Dow closed at 301.2). Headlines and quotes published that morning told of the New York banks’ actions the day earlier and confidence in the markets:
Secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence [of panic] the financial community relaxed its anxiety yesterday.” — The New York Times
I am still of the opinion that this reaction has badly overrun itself. — Charles E. Mitchell
There is nothing in the business situation to justify any nervousness. — Eugene M. Stevens, president of Continental Illinois Bank
In my long association with the steel industry I have never known it to enjoy a greater stability or more promising outlook than it does today. — Charles M. Schwab, Chairman of Bethlehem Steel
[It was] undoubtedly beneficial to the business interests of the country to have the gambling type of speculator eliminated. — H.C. Hopson, head of Associated Gas & Electric
The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis. — President Herbert Hoover
S-T-E-A-D-Y Everybody! Calm thinking is in order. Heed the words of America’s greatest bankers. — ad in the Wall Street Journal
October 26, 1929 — Roughly 2 million shares traded on Saturday on a slight sell-off (the Dow closed at 299). The rumor was the bankers, that supported the market by buying shares two days earlier, had sold most of those shares on Friday and Saturday.
October 28, 1929 — Disaster hits. The first day of a deep sell-off began Monday. Trading volume topped out at 9,212,800 shares. The Times average was down 49 points on the day (the Dow sank 38 points, a 12.8% loss).
General Electric was off 47½; Westinghouse, 34½; Tel. & Tel., 34. Indeed, the decline on this one day was greater than that of all the preceding week of panic. Once again a late ticker left everyone in ignorance of what was happening save that it was bad. — John Kenneth Galbraith
At 1:10 PM the market almost seemed to pause on news that Charles E. Mitchell was seen walking into J.P. Morgan and Company. The brief moment of hope turned to hopelessness when the New York bankers stayed quiet. There would be no support. Roughly 3 million shares traded in the last hour alone. As it turned out, Charles Mitchell did walk into J.P. Morgan…to see about a loan.
October 29, 1929 — The day would go down as the worst in stock market history (it remained so until 1987). Buyers were nonexistent. Stock prices crashed. Volume hit 16,410,030 shares, with the ticker falling two and a half hours behind.
When the dust settled, The Times average was down 43 points. It stood at 275. All its gains over the past 12 months were lost (the Dow closed at 230.1, an 11.7% loss). Talks of possibly closing the market began.
October 30, 1929 — The selling finally abated. Volume was high but The Times average closed the day with a gain of 31 points (the Dow gained 28 points to close at 258.5).
During the night of the 29th and into the 30th, reassuring quotes appeared in newspapers about the “fundamental soundness” of things.
The fundamentally strong position of the nation’s industries justified confidence. — R.R. Reynolds, president of Selected Industries, Inc.
Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchanges during the past week, my son and I have for some days been purchasing sound common stocks. — John D. Rockefeller
Late that evening, Richard Whitney announced that the market would open late the next day — at noon on Thursday — and be closed Friday and Saturday. The news was applauded.
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Fred Schwed, Jr., who worked at a brokerage house at the time of the crash, reflected on that period two decades later:
The Crash and the depression were, of course, two related, but different things, and just what the relationship was is still mostly conjectural. The Crash lasted three weeks. By the time the crocuses blossomed in the spring of 1930, there had been a plucky sustained rise. It appeared for a time that the nightmare, like even the worst of nightmares, was now no more than a memory imperfectly and unpleasantly recalled. The depression was slowly to come, and it lasted years. The Crash had this tiny comment at least to be said of it: it had the quality of a great athlete at the top of his powers suddenly clutching his throat and falling, insensible, down a flight of stairs. But the stock market during the depression was like a frail, wan patient, growing perceptibly frailer and more wan each pitiful month. Another distinction between the two calamities was that The Crash hurt people who had bought common stocks on margin; the depression hurt about everyone who was alive and some not yet born.
The brief rally on October 30th was only a respite from the previous few weeks. Finally, on November 13th, the market hit its low for the year. The Times average fell from a peak of 452 down to 224, a 50% drop in a little over two months (The Dow fell from a peak of 381.2 to 198.7).
But it was only the beginning. The Times average closed at 58.46 on July 8, 1932. The Dow hit bottom the same day — 41.2 — an 89% decline from its peak on September 3, 1929.
This post was updated on October 26, 2022; originally published on March 25, 2020.
Sources:
The Great Depression, Can It Happen Again?
Once in Golconda
Oh Yeah?
Twenty Years Ago This Week
Related Reading:
Oh Yeah? Forecasting Follies Around the ’29 Crash
1929 Crash: An Industry Breakdown
Cartoons of the 1929 Crash
Ben Graham on the ’29 Crash
