Rainbow's End
The Crash
Of 1929
Maury Klein
(Oxford)

Rock-a-bye, trader, on the tip top.
When the Board meets, the market will rock.
When the rate rises, quotations will fall.
And down will come trader, margins and all.

---The Wall Street Journal
March 29, 1929

Many years ago I was a reluctant student in a respected Ivy League College. I signed up for every required course and not one whit more.

One of these required courses was a beginner's economics class as taught by the extremely well-known, respected economist (and author of our class-room text book) Paul Samuelson. He was either slumming, or the department head decided that all full professors must teach at least one class in dumbed-down economics.

The class started at 8 a.m., M-W-F. I slept through most of them either in my own very warm bed, or the very hard, deeply-chiseled wooden seats provided for us by the college. Since my last name begins with a "Z" I sat towards the very back of the classroom: in all our classes, we were seated alphabetically for ease of proctor checking.

I recall Samuelson's drone and his very thick glasses which rendered me, I suspect, a big pale blur, even when my head was drooping in dreamland. I was (and am) rather myopic myself --- 20/400 --- but since my eyes were at rest most of the time, it probably didn't make much difference whether Samuelson could see me or I could see him.

My advisor, all tweeds and smoking pipe, was given to much sighing and shaking of the head. By the end of the semester, it was a well-known fact to him and to me (and my long-suffering family) that I was not long for the world of higher learning, not to say higher economics. By June, I was looking for another college that had fewer 8 a.m. classes and more infamous instructors.

I tell you all this because you might want to ignore what I am going to tell you here about the American economy. It comes from one who thinks that the study of economics is a fraud, and that most economic advisors are silly and overpaid. If I were an economics master, I would be doing puts, calls, straddles, spreads and strangles on the Chicago options market, and to hell with teaching soporific freshmen at ungodly hours of the morning.

Be that as it may, because I am entering my seventh decade on earth, I have to tell you that something weird is going on. It comes not so much from my reading or schooling but from my elegant financial experience. How many other people do you know who were out on the job market in 1948, lived through the $25/week jobs of the '50s, watched the market crash of 1962, lived through the last part of the year 1974 when the Dow bottomed at 600, remember the Carter years when interest rates shot up to 20%, lived through the very short crash of the market in 1987 (I lost my ass), and --- despite all this --- is still around, a gummer, watching the present economic idiocy.

Very few of the market commentators have told us that something goofy is going on around here. Alan Abelson of Barron's is one of the exceptions. His research shows that homeowners' equity, once at 70% twenty years ago, has now shrunk to a little more than half. And that buyers typically have four times less disposable income to protect their investment as compared to the figures for 1970.

Right now the price of houses, at least in the large cities, are out of reach of what we used to call the "Middle Class." One-bedroom houses with a tiny yard in the area in which I live in California, a not very glamorous area, now go for $500,000. Ten years ago it would have been on the market at $85,000.

Interest rates on mortgages have dropped to less than 5%. The federal rediscount rate, recently lowered, is around 1%.

Total individual debt --- mortgages, credit cards, second mortgages, revolving credit (all that personal stuff) is over $2,660,000,000,000. Amount by which debt in 2002 exceeded total disposable income : $628,000,000,000. That's an increase of $31,4000,000,000 over the year 2000.

State, county and local debts top $430,000,000,000. California alone is $38,000,000,000 in the hole this year.

Federal debt is now $6,650,000,000,000.

Corporate debt hovers around $4,500,000,000,000.

Some of these figures are preliminary, but it really doesn't make any difference because you and I cannot visualize all those zeros: just know that debt, all debt --- federal, state, local, corporate, individual, is nearing twenty trillion dollars, and is higher than it has been: ever, in the history of the world. It's a full 180% higher than it was even five years ago.

Our president, who, they tell us, nods off during presentations by his highly-paid economists, has, with the assist of congress, just given a dynamite tax-break to anyone who enjoys a pre-tax earnings of $100,000 or more. The higher the earnings, the higher the tax break. They told us it was to "stimulate the economy." A cynic --- which I am not --- might say that people in higher tax-brackets are less messy contributors to the political campaign finances of presidents, senators, and representatives, much less so than those lodged in the $25,000 or under group. This latter bunch, by the way, found themselves shafted so badly by the 2003 tax law they have taken to sitting down very very slowly.

Personal bankruptcies are now up to 1,500,000 a year. One million five hundred thousand individuals taking the big dump --- an annual rise of almost 8%. The figures are, in technical jargon, humungous.

Every time the fed lowers the interest rate, it gets easier, and cheaper, to go further in debt. My friend Katie, who, seven years ago kept her nose clean, kept her one credit card paid up, had no debt whatsoever, now owes close to $400,000. She paid 10% down to buy a two-bedroom house for $325,000. She's maxed out five credit cards. She also just lost her job.

All my younger friends who work, work two jobs; and for husband and wife, they often work two jobs each (and at certain times, three). They all feel they are just barely getting by.

In 1929, credit was easy, very very easy. You could buy stocks for just ten percent down --- just like houses now.

Everyone was sure the market was going to go to the sky. And stay. Or go even higher.

It did for a while there. The Dow reached its peak on 3 September 1929.

According to Maury Klein, author of this eminently readable book, 75% of automobiles were bought on the installment plan in 1927. Today, the figure is closer to 95%

There were few, very few in the late '20s who were willing to predict that we had to pay the piper. Financial writer Alexander Dana Noyes of the New York Times was one. He began preaching caution as early as the fall of 1927, and by the summer of 1929, his columns consistently warned against a collapse of the market.

This book takes us (mostly) through the post-WWI years and up to and through the first crash. It explains the Federal Reserve Banking system in a way that even those of us who flunked Samuelson's course can understand. The most interesting fact: that when they set up the Fed, no one knew what they hell they had or what they were supposed to do.

The new Federal Reserve System started life in November 1914 with more problems than prospects. From the first it was a prisoner of paradox: it was supposed to be firmly under public control yet free of political influence; and it was supposed to be free from dominance by private bankers, yet it was dominated by bankers. Who else, after all, understood banking? But few bankers approved of it at first; some denounced it as "authoritarian" and "socialistic," others merely as unworkable. The act offered only broad hints concerning its mission and was even more vague about the methods to be employed.

In other words, they didn't know what they were doing. I would suggest that they still don't.

Adam Smith (the younger) said that "The market is ruled by greed on the upside and fear on the downside." Greed ran it from 1926 late summer 1929. The real fear started on 24 October 1929. Those who were there on Wall Street --- and many came just to watch --- had never seen anything like it before.

On the Exchange a loud, unceasing roar spread upward and spilled into the street outside. As word spread of the excitement, enormous crowds poured into the financial district, jamming the narrow streets. Most of them simply stood and stared at the Exchange building.

One observer traveled to various customers' rooms of the brokerages:

There was not a trace of hysteria, but the ashen faces showed not so much suffering as a sort of horrified incredulity --- the dazed unbelief of men who have been robbed of their all by their dearest and most trusted friend. [It] meant much more than the end of hope. It meant poverty, debt, a fresh start under heavier handicaps.

In many customers' rooms the victims sat long after the market had closed, staring vacantly at the "illuminated strips of opaque glass as darkness fell."

§     §     §

My mother and father lived in the Miami area and went through the Florida land boom of 1925 and the crash of 1926. My father always claimed that what happened in south Florida was just a warning (to those who could hear and see it) to what would be happening three years later.

The present housing market is about as loony as Wall Street, 1926 - 1929. Except you and your family aren't expected to live in a hundred shares of General Motors. This may give another dimension to the upcoming down-side.

It is worth going through this book to get some feel for Absolute Panic --- people dumping everything they own because they have to or because they are scared to death.

The chapter entitled "Rainbow's End" is the best in the book. During meltdown month, they sent 500 cops into Wall Street just in case. Winston Churchill was there. On Black Thursday, several very wealthy ladies toured Wall Street, smoking gold-tipped cigarettes, but left because they found it depressing.

Mr. Klein has written a stately book on an unseemly subject --- when a whole way of living comes to an end. He makes several points about those years:

1. Nobody knew what they were doing, especially the brokers, the bankers, the economists, and the Fed;
2. Nobody understood what was happening, especially the brokers, the bankers, the economists, and the Fed;
3. Nobody knew what to do, especially the brokers, the bankers, the economists, and the Fed.

We get wonderful chapters on how the Fed came into being, and on some of the more interesting characters in the banking and stock business, the money elite of those years, and a fine portrait of Benjamin Strong, governor of the New York Federal Reserve Bank and the one who defined its various roles.

One who writes such a volume is going to be competing with the most readable book on the subject --- John Kenneth Galbraith's The Great Crash. This is Galbraith on the follow-up to the crash:

In three days, November 11, 12, and 13, the Times industrials lost another 50 points. Of all the days of the crash, these without doubt were the dreariest. Organized support had failed. For the moment even organized reassurance had been abandoned. All that could be managed was some sardonic humor.

It was noted that the margin calls going out by Western Union that week carried a small sticker: Remember them at home with a cheery Thanksgiving telegram, the American way for this American day. Clerks in the downtown hotels were said to be asking guest whether they wished the room for sleeping or jumping. Two men jumped hand-in-hand from a high window in the Ritz. They had a joint account.

The Wall Street Journal, becoming biblical, told its readers: "Verily, I say, let fear of the market be the law of thy life, and abide by the words of the bond salesman." The financial editor of the Times, who by this time showed signs of being satisfied with the crash and perhaps even of feeling that it had gone too far, said: "Probably none of the present generation will be able to speak again of a 'healthy reaction.' There are many signs that the phrase is entirely out of date."

And this on the two "slaughters:"

In the first week the slaughter had been of the innocents. During the second week there is some evidence that it was the well-to-do and the wealthy who were being subjected to a leveling 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.

Both Klein and Galbraith fail to make the scary point that almost all critics ignore: the original stock market crash was a catastrophe, but there were continuing mini-crashes over the next three years, what we might refer to as the Dribbling Downs. What most forget to their peril is that it seemed as if there were no bottom: the slaughter dragged on and on.

The market would begin to rise, and investors who had sagely gotten out in August or September of 1929 would gamely get back in, thinking it was done and over with ... and then the market would skitter downwards again, causing new and more horrendous agony.

Then a few months later --- say just before the mini-crash of 11 June 1930 --- it would stabilize, and the smart ones would get back in, and then, boom! --- stocks would plummet even further, taking all that smart money with it.

This went on and on until it reached its absolute nadir on 8 July 1932, being a date that historians should concentrate on as vigorously as 24 October 1929. Galbraith merely says

On November 13, 1929, it may be recalled, the Times industrials closed at 224. On July 8, 1932, they were 58. This value was not much more than the net by which they dropped on the single day of October 28, 1932.

Future historians also should point out what happened in the months just before and after Roosevelt's inauguration. There were during 1933 five months where the Dow made its greatest gain, in terms of percentage, ever. The market went from 50.16 to 108.67 --- a 117% rise. That's an astonishing jump. And the greatest one-day gain, ever, occurred not in 1928 or mid-year 1929 nor even in the dot-com madness of 1999 - 2000 --- but rather on 15 March 1933. That day, the average went up by 15.3% Such a rise is equivalent to an annual return of 5400%.

--- Edgar W. Zimmerman