The Great Crash and its Aftermath
Andrew Ross Sorkin of
CNBC, DealBook, and “Too Big to Fail” fame has written a riveting history the
1929 stock market crash and its aftermath through the eyes of many of its key
participants. His writing style puts you in the room with the leading players
of the day as they experience the exuberance of the boom and then grapple with
grinding bear market that followed. It would have helped if there were an annotated chart of the Dow Jones Industrial average from 1929-1933.
His leading players
are “Sunshine” Charlie Mitchell, president the National City Bank and its
securities affiliate the leading underwriter of new issues in the 1920’s;
Thomas Lamont, the de facto head of J.P. Morgan; Jack Morgan, J.P.’s son and
nominal head of the bank; Russell Leffingwell,
a Morgan partner and a founder of the Council on Foreign Relations;
Albert Wiggins, president of the Chase National Bank; Jesse Livermore,
legendary trader who made $100 million in the crash; Owen Young, president of
General Electric and author of the Young Plan for German reparations; John
Jacob Raskob, General Motors director, chairman of the Democratic National
Committee and developer of the Empire State Building; William Crapo Durant,
General Motors founder and leading speculator; Senator Carter Glass, coauthor of the Federal Reserve
Act of 1913 and the Glass-Steagall Act of 1933 and a leading critic of Wall
Street speculation; and Ferdinand
Pecora, counsel to the Senate Banking Committee taking on the WASP establishment
by investigating Wall Street. We also have cameo appearances of the financier
and advisor to presidents Bernard Baruch, and Winston Churchill who was out of
government and was speculating in the U.S. stock market, and David Sarnoff,
president of RCA, the NVIDIA of its day.
The stock market of
the 1920’s was the wild west where “pump and dump” pools operated, and insider
trading was legal. It was not unheard of for insiders and their friends to receive
newly issued stock at a discount from the official offering price. All the
while margin was freely available where stocks could be purchased with only 10%
of the cash payable upfront. The availability of margin was funded by the call
money market at interest rates of up to 20%. It was the call money market that
sucked in funds from all over the country, and for that matter the world, to
earn high returns. However, this form of leverage could be withdrawn on moment’s
notice thereby triggering a liquidity squeeze.
I learned a few interesting
factoids to comment on. I didn’t know that David Sarnoff was actively involved
in the Young Plan negotiations. Perhaps more interesting, I didn’t know that
Mitchell of National City and Wiggins of Chase actively lobbied Carter Glass to
include J.P. Morgan, as a private bank, in the separation of commercial banking
from investment banking. It seems that Glass was close to Morgan partners
Lamont and Leffingwell. Thus, any allusion to Glass being the Elizabeth Warren
of his day hardly rings true.
As someone who has
read every front page of The New York Times from August 1929 to March 1933 and
has read widely on the subject of the crash and its aftermath, I have a few
issues to raise with Sorkin. The first is that the depression was not an
inevitable result of the crash. It occurred against the backdrop of inept
monetary policy followed by the Fed and more important it was caused by the
imbalances caused by World War One rubbing against the rigidities of the gold
standard. Thus, the root causes were not domestic in origin as Roosevelt
argued, but rather international in origin as Hoover argued. Thus it was no coincidence that the Dow Jones Industrial Average bottomed in June 1932 just when the Lausanne Conference was agreeing to drastic cuts in German reparations payments and the suspension of payments on inter-allied debts.
Sorkin should have
read Tobias Straumann’s “1931” where he quoted the 1932 Annual Report from the
Bank of International Settlements as follows: “In the
circumstance of the German problem- which is largely responsible for the
growing financial paralysis of the world – call for concerted action
Governments alone can take.” (See: https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-tobias-straumanns.html ) It was the very Young Plan that Lamont helped to negotiate that made
Hitler. His attacks on the Young Plan which stretched out the German
reparations to schedule to 1989 and made the payments more rigid, was one of
Hitler’s leading campaign issues that gave his Nazi Party 19% of the vote. The
prospect of future Nazi victories led to a capital flight from Germany and
Austria.
I wish Sorkin would have spent more time on what his players were doing
in June 1930 when Hoover signed the Smoot-Hawley Tariff Act. The day after
Hoover announced that he would sign the bill the Dow Jones Industrial Average
plunged 8%, its worst day of 1930. ( See: https://shulmaven.blogspot.com/2025/04/a-broken-stock-market-and-broken-trust.html ) The Times highlighted the new tariff regime
would make it harder for Germany to make it reparations payments and for
Britain and France to pay its war debt to America.
I also wish that Sorkin were in the room when Britain devalued the Pound
and left the gold standard in September 1931, the worst month in stock market
history. In response to the fears of a gold outflow, the Fed raised its
discount rate from 1.5% to 3.5%. That action was a dagger into the heart of the
economy.
Thus, in my opinion, the triggers of the Great Depression came in the
form of a three-act play. The first was the stock market crash of October 1929,
and the second was the signing of the Smoot -Hawley Tariff Act in June 1930.
The third and final act occurred when the Fed raised the discount rate in
September 1931.
My last quibble is that Sorkin used the wrong source for his comments on
the interregnum period between the Hoover and Roosevelt administrations. He
cites Eric Rauchway’s “Winter War” which
is way too biased against Hoover. (See: Shulmaven: My Amazon Review of Eric Rauchway's "Winter
War: "Hoover, Roosevelt and the First Clash Over The New Deal"
) A more balanced account by Jonathan Alter, a serious liberal, in his
“Defining Moment” noted that it was
Hoover treasury department officials, namely Ogden Mills and Arthur
Ballentine whose drafts ultimately became the Emergency Banking Act in March 1933 thereby
ending the third banking crisis of the depression.
All quibbles aside,
Andrew Ross Sorkin has given us a new take on the elements and personalities
involved in the crash and its aftermath. Can it happen again? In my opinion,
yes. All it takes is human greed combined with lots of leverage accompanied by
institutional rigidities and incompetent regulators.
