The Explainer: The Great Crash of 1929

Those were powerful images from the era known as The Great Depression, which began with the great stock market crash of 1929. And the tune you heard was one of the most popular, yet tragic and haunting songs of the era: “Brother, can you spare a dime?” sung by the most popular crooner of the time, Al Jolson.

Last week, first Wall Street then the stock markets of the world, all faced a crisis Renowned, even revered, financial institutions collapsed; the markets plunged; governments seemed paralyzed and financiers and ordinary citizens were gripped by panic.

The economists and political pundits all pointed out global finance had last experienced terror and despair on this scale and magnitude almost 80 years ago, in 1929, with the onset of the Great Depression.

But what was the Great Depression? A crash course in the crash of the markets in 1929, is our task for tonight. I’m Manolo Quezon. The Explainer.


I. America’s business is business


Last week, already wobbly from the collapse of Bear Stearns and the taking over by the US Government of Fanny Maye and Freddy Mac, Wall Street was gripped by panic as notable institutions stumbled, with one falling with a great thud. Lehman Brothers collapsed, while the great brokerage house Merril Lynch was bought out. All eyes turned to insurance behemoth AIG, and it took a US government rescue to prevent full-scale panic from taking over the great stock markets of the world.

In this chart from the New York Times, you can see how the Dow Jones Industrial Average plunged on Monday, September 15, upon news that Lehman Brothers had failed to secure both private and public emergency loans over the weekend.

Now we’re going to go into contemporary goings-on in our show next week, but for a year now, a historical event has haunted analysists, policy makers, financiers and the general public. That even was the Great Crash of 1929, which kicked off over a decade of misery known as The Great Depression.

To set the stage, let’s go to the dizzying heights that America found itself in before the Great Crash. We can start during the era of this man, President Calvin Coolidge of America. Known as “Silent Cal,” because he wasn’t in the habit of saying much or saying anything much worth paying attention to, he did capture the spirit of his age by famously asserting, “America’s business is business.”

A passive president from 1923-1929, he presided over a period that’s come to be known as The Jazz Age, where America turned away from the foreign preoccupations of World War I and got obsessed, instead, with shorter hemlines, with cocktails, daring books by Hemingway and F. Scott Fitzgerald, and wild dancing like the Charleston; it was a period of prosperity and extravagance and it was a period of great speculation in real estate and in stocks. Booming business gave another name to the era: the Roaring Twenties.

The invention of the telegraph and later, the telephone, meant that what were once purely local stock exchanges could grow much bigger, with transactions taking place faster and on an ever-widening scale. Since the 1880s,  traders had taken to using the grand-daddy of the crawler you’re used to seeing on the bottom of your screen, listing stocks and their prices. In those pre-digital days, what was used was a stock ticker, a machine that printed out updates on long, thin rolls of paper known as ticker tape which incidentally came in handy during ticker-tape parades.

These machines had a about a 15 minute delay between inputing data and the data arriving in the hands of those subscribed to the ticker tape machines. Remember that lag, because it’s going to feature in our story.

Now in the 1920s flush with cash, and with World War I at an end, the US economy boomed and people began thinking up even more creative ways to raise capital from those who wanted to make quick profits. This was an era of huge pyramid schemes, which we’ve also looked at on this show. It was an era of booming industry, which of course needs to raise funds and the easiest way to do this is to sell shares to the public. Banks began to see how they could basically invent even newer and creative ways to sell stocks and bonds, the debt of companies, and they began to create investment houses: so in 1928, for example, private bankers Goldman Sachs established an investment trust.

There seemed plenty of money to be made by everybody, and the more people plowed their money into the stock and bond markets, the more it seemed possible to make great fortunes in a dizzying amount of time. Between January 1 and October 1, 1929, the New York Stock Exchange added more than 291 million shares to its list, 42.3 million shares being added in September alone with a value of 1.2 billion dollars. And a great deal of these shares were being bought, and held on credit, by the big trading houses.

On September 19, 1929, the New York stock market reached a level so high, it wouldn’t be matched again until November, 1954! Yet the signs of things to come came almost immediately: on September 21, 1929, the market fell 9.84 points or almost 10 percent in value, with 2 million shares exchanging hands in the final hour of trading. The trading was so brisk the ticker tape machine lagged an hour behind transactions.

By October more prudent bankers and economists had begun to ask if the market could hold up, with so many stocks floating around and prices being supported basically not by actual money, since so many stocks were owned on credit, but rather, speculative enthusiasm.

You’ll recall our show on the Philippine Stock Exchange where an official told us our local market has roughly 80,000 individuals and institutions active in it. And yet this relatively small percentage of players makes news every time the market rises or falls. Now imagine a society in which not just the big shots, but ordinary people, all play the market. And imagine, in turn, the consequences of all these people, big and small, who’re invested in the market, suddenly being confronted by a market collapse.

After a roller coaster ride from late September to mid October, 1929, the market and individual and institutional investors were paranoid, and thus, panicky. Everything was simply too big, too complicated, and most of all too uncertain. And so everyone, perhaps was psychologically primed to make possible the collapse took place on October 29, 1929. Known as “Black Tuesday.”

But it began the week before on Wednesday, October 23, with a quiet trading day. In  the mid-afternoon Klein says there was a “sharp selloff” of automobile stocks; and as was becoming all too familiar, a sharp selloff took place in the closing hour of trading. 2.6 million shares changed hands and the stock ticker fell behind the closing bell by 104 minutes, filling trader’s officers with anxious investors and traders trying to find out what was going on. The Dow ended up dropping 20.66 points. The ticker churned out numbers past 7 in the evening. Millions of little investors were wiped out.

The Market seemed to calm down on Thursday and Friday, but not quite; Klein quotes the late economist John Kenneth Galbraith as saying that weekends made for mischief in the minds of people invested in the stock market.

Something happened, and that something might have been that having seen their fellow investors already ruined by the crazy market that week, investors big and small decided on Sunday that the best thing to do was sell out on Monday, October 28. The day began with an avalanche of selling, which only got worse, fueled by false rumors of collapsing businesses and even suicides.

A story in this book, “Rainbow’s End: The Crash of 1929” by Maury Klein, illustrates things perfectly.

That afternoon banker Edgar Speyer, a wealthy partner in one of the Street’s most aristocratic Jewish houses, welcomed Claud Cockburn, a visiting British journalist… In a genteel atmosphere of “elegant calm”… they talked of recent poets, of whom Mrs. Speyer was one, until interrupted by odd thumping behind the closed doors leading to the kitchen. When the English butler and footman entered with a saddle of lamb, Cockburn noticed behind the door four or five maids in an angry, excited cluster… the noise grew louder… and unseen hands launched the red-faced butler back into the room.

The butler apologetically asked to speak to his employer:

The perplexed Speyer hesitated, then followed the butler to the kitchen only to return with a look of dismay. The staff, he explained distractedly, had their own ticker tape in the kitchen, being heavily invested in the market, and it was telling them quite incredible things. With scarcely an excuse, Speyer hurried away, leaving his wife and guests to finish their meals alone.


The bankers saw that the panic was growing because it wasn’t being challenged by people of significant enough stature to reassure investors. The Dow plunged 38.33 points, a record, on a volume of 9.2 million shares. The ticker kept churning out number until 5:48 p.m. The ticker showed that besides speculative stocks, the so-called Blue Chip stocks, for household names like General Electric US steel, and bank stocks, had all taken big hits. The big bankers and financiers had failed to stem the panic and had lost enormous amounts trying to prop up the market.

On October 29 the big investors joined the panic. The market opened on Black Tuesday with big chunks of shares for the top corporations being put up for sale, basically at any price: 3.2 Million shares in the first half hour of trading alone. Even the best stocks, says Klein, found no buyers. This triggered orders to sell at any price, and the panic grew; the bankers admitted they were helpless; the US Federal Reserve met, but after six hours failed to issue a calming statement; individuals and banks who’d lent money for other people and institutions to buy shares on credit –shares they couldn’t sell at any price- called in what loans they could, and signaled they weren’t about to throw good money after bad and credit dried up.

The only bright news was that the New York Federal Reserve opened up a 100 million dollar credit line that probably made the fall less severe than it might otherwise have been. But it was awful: the market plunged 30.57 points that day: making for 96 points or 30% of the value of market lost since the week before.

A mind-boggling 16.4 million shares had been traded, a record that wouldn’t be matched until 1968. And the sell-off in New York was echoed in other American markets and in London.

The market would recover somewhat but the trend was there, continuing its overall downward slide until 1932. The initial contagion was there: millions had been wiped out, and being wiped out, defaulted on their home loans, car loans.

The banks, with people unable to pay their debts, and having been exposed to the markets, too, began to sag under the weight of bad loans and sinking confidence. Panic in the market was duplicated by panic-driven bank runs, where depositors taking out their money doomed already shaky banks.

And as businesses failed, people lost their jobs and the downward spiral brought down more with it.

Yet the US government, under Calvin Coolidge’s successor, Herber Hoover, seemed at times paralyzed, or simply indifferent, or perhaps just fatalistic, about what was going on. A growing number of unemployed veterans marched on Washington, asking for a veterans’ bonus and calling themselves the Bonus Army.

They squatted on public land and called their tenements “Hoovervilles,” and Hoover sent in this man-

US Army Chief of Staff Douglas MacArthur, to restore order.

MacArthur did it with such an iron fist that he permanently stained his reputation. The mood turned ugly in America, there was radicalism in the air, and, in 1933, Hoover stood against Franklin D. Roosevelt for the presidency.

When we return, the consequences, not all of it economic, of the Great Depression.


II. Filipinos don’t need shoes


That was Franklin D. Roosevelt campaigning for the American presidency in 1933. Echoing Lincoln’s proclamation that no nation can be half slave and half free, FDR in 1933 proclaimed that no nation can be half rich and half poor.

The growing misery led to a clamor for the excesses of financiers, to be matched by greater regulation and, more than that, by government doing more to protect the little people. Franklin D. Roosevelt promised action: starting the tradition of counting down the First Hundred Days of his presidency, which presidents the world over have copied.

He inaugurated a New Deal, and an alphabet soup of agencies, all familiar to Americans to this day and copied by governments the world over: a Securities and Exchange Commission to keep an eye on stocks and bonds and the management of companies; public works projects, and institutions such as Social Security.

The Great Depression had a direct effect on the status of the Philippines. In 1916, the US Congress, by means of the Jones Law, had settled the question of Philippine Independence. It would not be a question of if, but rather, when. But most of the 1920s were spent discussing whether that when would come sooner rather than later.

There’s a lunatic fringe that still pines for US statehood for the Philippines, which conveniently ignores the very clear desire of Americans themselves not to consider the Philippines for statehood for economic, military, and racial reasons. The question had been settled in 1916 and because of the Great Depression, the later became sooner for Philippine independence.

This cartoon from 1929 in the Philippines Free Press, shows that our biggest industries, sugar and coconut, faced competition from US interests invested in their own domestic and nearby sugar industries. As the economic crisis grew in America, the interests of American politicians and businessmen came to concentrate on protecting domestic industry and jobs: Philippine economic interests thus had to face negotiating a friendly parting of ways to at least partially protect our markets, or risk Americans panicking a total clampdown on our products.

This illustration from a 1941 magazine shows that after the initial impetus on the part of America to save its industries and set loose the Philippines, slightly cozier terms had been negotiated as part of the transition to independence. It was the growing optimism and renewed expansion of the US economy under FDR, that made for a more accommodating atmosphere.

If the Great Depression ushered in a firm date for Philippine independence, it also ushered in another trend besides joblessness and economic turmoil. Dispirited and financially crushed societies turned to extremism as a means to restore security and prosperity.

Benito Mussolini, in the 1920s, had come to power in the wake of economic collapse in Italy;

Adolf Hitler would come to power in 1933, the same year Roosevelt was elected to office, promising Germans a restoration of pride, power, and prosperity, a return to prestige and a sound defense against Communism. For Communism, too, had begun to sound attractive to more and more people, from Europe, to Asia, including the Philippines, and even America.

In the end, Roosevelt’s reforms in the United States saved capitalism, in the sense that the government proved itself capable of leadership that could earn the trust and confidence of its people. By so doing, FDR made it possible to put forward American capitalism and government as ally to, and leader of, the democracies eventually destined to challenge Hitler and later, the Soviets. In his inaugural address, Roosevelt had firmly declared the only thing people had to fear was fear itself –the fear that had sowed panic in the stock market, then in the banks, and the panic that made people believe in Italy, Germany, Japan, and Russia, that they were prepared to give up their freedoms to move their countries forward.

So when we return, we’ll ask a frequent guest, to walk us through how policymakers look back on the Great Depression for lessons in facing the crises and opportunities confronting us today.


My view


Recently the Philippine Daily Inquirer, in its editorial, pointed out that the global panic over the US economy and stock market, had inspired some people to begin crowing that the free market was dead, capitalism had finally fallen to its knees, and that liberal democracy, so intertwined with capitalism and the open market, was finally being exposed as a sham.

The editorial pointed out that the celebration among today’s soulmates of the Hitlers, Mussolinis and Stalins of yesterday, was premature. In his column, my colleague John Nery said something similar: the particular genius of capitalism, as a system, is that it eventually corrects itself. The same thing could be said of democracy under which capitalism thrives best.

But whatever ism you subscribe to, one great and enduring lesson from the Great Depression is that no force, whether the market, or system, whether Communism, Fascism, or Democracy, should be allowed to prevail to the extent that individuals and their problems and aspirations, feel abandoned and alienated.

Panic may seize whole populations or sectors or people; but at the heart of group terror, is individual terror, a personal fear born of personal desperation. It is fighting that fear, and never surrendering to it, that leaders and followers need to do, then and now. For it is fear that drives to embrace extremism as a form of self-preservation.

Manuel L. Quezon III.

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