[This is one of a series describing great
Cities at a moment of apogee in their histories]
More than almost any
other great City, New York has had her moments of triumph and her moments of disaster.
The year 1929 saw her experience both extremes – unprecedented prosperity
followed by a gargantuan financial explosion which ushered in 10 years of
severe Depression. Times have greatly changed but human nature much less so.
There are some uneasy parallels between 1929 and 2016, which bear at least a
little sober consideration.
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| President Calvin Coolidge 1923-29 |
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| President Herbert Hoover 1929-33 |
Both 1928 and most of 1929 were times when many Americans
could enjoy the “feel-good factor”. Wages were rising, unemployment was historically
low and glossy consumer goods, cars and radios were becoming more affordable.
Only the farmers were long- suffering, from years of low world prices, and many
of them were heading for the gaudy pleasures and new opportunities in the
bustling industrial cities.
Calvin Coolidge, the Republican president, a laconic and
frugal lawyer, exuded sunshine and was laissez
faire incarnate, earning himself an honoured place in the conservative
Valhalla. Cal’s only memorable phrase was; The
business of America is business and the pursuit of this occupation did not
require any Federal interference. His
successor in March 1929 was Republican Herbert Hoover, a much more pro-active
and energetic type with a record of achievement but who too was shackled by an
ideological horror of using taxpayers’ money to move markets, introduce welfare
or bail out failing enterprises.
The 1929 party was swinging at the Prohibition-era
speakeasies like the 21 Club and the Landmark Tavern while Babe Ruth hit 46
home runs for the Yankees that season; asked why he was paid $80k to Hoover’s
$75k he replied; I know, but I had a
better year than Hoover! For popular entertainment the highest-grossing
talkie was the musical Gold Diggers of
Broadway (its hit-song was Tiptoe
through the Tulips), while topping the pop song charts was Eddie Cantor’s Makin’ Whoopee followed by Ain’t Misbehavin’, memorably croaked by
“Fats” Waller. Higher up the sophistication scale, newly-opened MOMA was
proudly exhibiting Salvador Dali’s wilfully odd Illumined Pleasures.
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| Eddie Cantor |
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| Fats Waller |
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| Illumined Pleasures by Salvador Dali |
Around 6-7% of the population, the richer or at least the
well-to-do, found an immensely engrossing new entertainment investing in the
New York Stock Exchange. Stock prices were consistently strong from 1927 onwards,
no doubt in part as prices caught up with increasing earnings, but the
speculative orgy proper did not start until March 1928. Big-name financiers
like John J. Raskob and William Crapo Durant sang the praises of the bull
market and despite a setback in June and a quiet July, August saw another surge
forward helped by optimistic incantations from the normally silent Treasury
Secretary Andrew W. Mellon. Herbert Hoover won the November 1928 presidential
election by a landslide over Democrat Al Smith, the hero of Manhattan’s Lower East
Side, stimulating share values further.
Investors swarmed Into this bull market; many bought on
margin – putting up 50% or so of the value of the share and borrowing the
balance from their broker on the security of the stock. This leverage allowed
the investor to buy more stock, risk-free while values were rapidly rising, but
it constituted a deadly prior charge in a falling market. There were other
forms too of dangerous leverage. The NYSE was slow to copy the long-established
investment trusts, many of Scottish origin, traded soberly in London. The US public avidly bought the common stock
of new investment trust issues, often on margin, but this ranked behind
preference shares and various types of loan stock. The underlying portfolio was
enough to cover these preferred classes but the common stock was often sold at
a substantial premium to the net assets. This premium was justified by the
alleged “investment expertise” of the promoters, sadly invisible when the Crash
came.
New boys on the block, pushing shares with voracious abandon, were
Goldman Sachs who in 1929 launched Shenandoah Corporation, a multi-layered
investment trust, and its shares went to $100. By 1932 their value was 50c. The
structure of inter-locking holding companies magnified losses with a domino
effect when the Crash came. Goldman Sachs Trading Corporation sold its stock to
the public at $104 and by 1932 this stock was worth $1.75. It took Goldmans
more than 20 years to rebuild their damaged reputation.
Everyone knew the market could not rise indefinitely but the
Federal Reserve Board was staffed by incompetents and it did not play the
proper role of a central bank by cracking down on speculation. It confined
itself to a feeble communiqué. The first crack in the market came in March
1929. A wave of selling hit the Exchange and margin calls went out. Then Charles
Mitchell, chairman of the major NY bank First City, reassured investors that
his bank was ready to lend them more; the boom was saved and the market surged
on. Nobody in authority wanted to get blamed for spoiling the party.
The ride was bumpier but still upwards through the summer
but in late October another round of sell orders hit the market and it fell
sharply. The banking panjandrums met in
camera and delegated the acting President of the NYSE, Richard Whitney, to
restore confidence. He ostentatiously walked through the throng to the stand selling
US Steel and placed an order for 10,000 shares at 220, a higher price than had
been seen that day. The stratagem worked; investors believed a rescue was being
organised and the market bounced back. Alas, the respite only lasted days. On
Monday 28 October stocks fell like a stone, margin calls went unheeded, brokers
liquidated borrowers’ portfolios at whatever price and thousands were ruined
completely, as they had pledged homes and chattels too. While a rash of
suicides from atop skyscrapers is happily an urban myth, a million dreams lay
shattered.
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| October 1929 Headlines |
Mankind is prone to mass hysteria and to irrational
behaviour. Speculative bubbles are well-remembered, starting with the South Sea
Bubble of 1720, the 1907 US stock Panic, the Florida land boom of 1925 and the
Great Crash of 1929. More recently remember the Dot-Com bubble of 2000 and
surely the ongoing London Property Bonanza, when Brits, Americans, Arabs and
Chinese make a bee-line for pretty average London pads and pay out absurd
prices is another bubble waiting to go Pop! Pricked bubbles can leave quite a
mess behind.
The 1929 crash was soon followed by the 10-year great
Depression and fragile US confidence did not survive the failure of banks (346
local banks failed in 1929). A particular blow was the collapse of Credit
Anstalt in Austria in 1931. How will the West fare if there is another major
bank failure in say, Germany or in Italy? Some are known to be vulnerable.
Again, the domino effect can be horrendous. Like 1929 America, the gap in
Europe between the few very rich and the ordinary people is widening and
resentments fester, yet nothing much is being done. This is perilous.
In the Depression one song caught the mood: Brother, can you spare a Dime? I like
the emotional rendering given by Al Jolson, reproduced below. Do we have to
learn his words again?
SMD
5.08.16
Text Copyright © Sidney Donald 2016
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