1929 summary

There were good reasons to be optimistic in the ‘20s. Progress was everywhere. Electric lights illuminated once-dingy streets, automobiles replaced horses, and modern conveniences like vacuum cleaners and washing machines became commonplace. Technological breakthroughs revolutionised culture and generated vast returns. Take radio. Between 1921 and 1928, the Radio Corporation of America, the Nvidia of its day, saw its stock rise from $1 to $85. 

But it was an idea rather than a product that was truly transformative. Borrowing to spend had long been viewed with suspicion in America. For many, it was an act of desperation and an indicator of poor character in fiscal and moral matters alike. General Motors struck the first blow against this old taboo in 1919 when it started selling cars on credit. Within a few years, Americans were using newfangled “instalment plans” to purchase everything from toasters to coats and holidays. Credit was soon the lifeblood of the economy. 

Ordinary Americans didn’t wake up one morning with the idea of opening a margin account in their heads. The idea had to first be planted there. 

Enter Charles E. Mitchell AKA “Sunshine Charley.”

Today’s investors have to put up fifty percent to borrow on margin. If you walked into a National City broker’s office in the twenties, they asked for as little as five percent. 

We’ve seen what happens when prices rise: borrowed money magnifies gains. The problem is, it also magnifies losses when they fall. If a $100 stock drops to $80, an investor’s $10 stake has been wiped out. At that point, his broker issues a “margin call,” a demand that he repay his loan or put up more collateral. If he can’t, his stocks are sold off. Brokers dumping stocks into a falling market is a good sign for others to get out. That, in a nutshell, is what happened in the fall of 1929. But there’s more to the story than plummeting prices. 

The crash wiped out vast amounts of paper wealth, including a good chunk of the $12 billion of stocks sold by National City under Mitchell’s leadership. Confidence, the oxygen of capitalism, was in short supply. But that wasn’t enough to cause a decade-long economic slump. What turned the crash of 1929 into the Great Depression were the decisions made in its aftermath. 

Both the government and the Federal Reserve made mistakes. One of the most serious was a sin of omission: the failure to provide deposit insurance. 

America experienced a legitimacy crisis after the crash. “People have no faith in the Government,” as one senator put it, “and no faith in industrial leaders or bankers, in economists, statisticians, or even in themselves.” The task of restoring some faith in the system fell to Ferdinand Pecora, the lawyer appointed to lead a 1932 investigation of Wall Street.

The son of a Sicilian shoemaker, Pecora put himself through law school before joining the New York District Attorney’s office. A dogged investigator of crimes in high places, he built his reputation going after sleazy politicians and moneymen who thought themselves about the law. His pursuit of the latter earned him the nickname “the Hellhound of Wall Street.”