1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 48

The United States that bounded full of hope and vigor into the fall of 1929 and the United States that emerged in the dark days of the 1930s were two very different nations.

No cities were bombed or torched in the fall of 1929, and no armies marched on Washington. There were no revolutions or attempted assassinations. No government buildings were taken over by angry mobs. The country faced no earthquakes or floods or fires or pandemics. All the factories remained standing. Most of the farms kept producing. Contrary to conventional wisdom, there was not even any significant loss of life. Popular accounts of despondent stock traders hurling themselves out of windows and leaping off rooftops painted an inaccurate picture. The national suicide rate actually declined slightly that fall, as John Kenneth Galbraith noted in his seminal work The Great Crash 1929 .

But daily life in America certainly felt different. To the nation, experiencing the implosion of the stock market felt like watching a heavyweight champion getting knocked out by an untested, unheralded amateur. It wasn’t the way the world was supposed to work. It was destabilizing. A state of shock set in, accompanied by a paralysis of spirit and loss of confidence. People started questioning all the things they had taken for granted. Did a capitalist society make sense anymore? Could it be depended upon going forward? Or had everyone been duped by the glorious market of the 1920s?

One larger question lay behind all the others—who can be trusted?

The United States entered the 1920s believing it had conquered the vertiginous boom-bust pattern that had hobbled the country since its founding. The primary reason for this confidence was the creation of the Federal Reserve, which was established in the aftermath of the crippling 1907 market crash. Its creation was supposed to guarantee that credit would keep circulating throughout the national economy at all times. It was an imperfect institution, limited in power and scope by the exigencies of political compromise, but it was better than the secretive, backroom approach that it replaced.

It did, however, give false comfort to the financial potentates of the 1920s, who believed they were now protected from the vagaries of human nature.

Could the 1929 crash have been avoided? The short answer is yes. There were plenty of opportunities to arrest the forces of speculation before they got out of hand. The long answer is that it would have taken almost divine prescience to look beyond the short-term incentives for making money and focus instead on the long-term consequences.

One big problem was that the main components of America’s financial infrastructure at the time were simply overwhelmed by the crisis. The New York Stock Exchange itself, in its guise as a Roman Renaissance temple, was an old-fashioned, club-like institution, ill-equipped to deal with the deluge of heavy trading that came its way in the 1920s. So was the self-serving brotherhood that worked there.

The national banking system was weak and fragmented, still made up of many fragile, undercapitalized institutions scattered across sparsely populated rural areas that were struggling as the nineteenth-century agricultural economy withered. As cities grew and rural communities stagnated through the 1920s, the banking system became ever more imbalanced and precarious. Before the crash, countless banks were technically insolvent, barely able to stay a half step ahead of their depositors. When credit dried up, they didn’t stand a chance.

As for the Federal Reserve, it was new and untested, and even the people who created it and governed it did not fully understand its power. Some authors and academics have argued that the great Benjamin Strong, the thoughtful and deeply respected head of the New York Fed, could have held off the crash or at least successfully steered the economy through it, had he not died of tuberculosis in 1928. Strong, this argument goes, had the credibility and authority to get margin lending under control in the spring and summer of 1929, and even had he failed to do so, he would have had the wherewithal to aggressively cut interest rates in the aftermath and keep the banking sector from having to pull back so hard on lending and strangle the economy.

It is easy to want to believe that a single man could have prevented a disaster had he not died. It’s equally easy to single out the fine gallery of rogues that populated the Wall Street of the 1920s as the villains of this tale. The difficulty is that, other than the disgraced Richard Whitney and Albert Wiggin, it is hard to make the case that any of the era’s other major financial figures did anything appreciably worse than most individuals would have done in their positions and circumstances.

Markets are not contests of virtue and honor. By pitting the greed of their participants against one another, they wend their messy way toward fair and reasonable prices. Over time, in the aggregate, the system works, even if at any given moment, it can look like pure chaos. Whitney’s and Wiggin’s actions were consequential only after the fact, serving as proof to the general public that Wall Street was corrupt and had to be punished. However contemptible, their behavior—and that of their fellow Wall Street bankers—did not cause the crash on its own. But by encouraging speculation and promising outsized returns to a new class of investors who had never before participated in markets they barely understood, the titans of Wall Street helped magnify the damage when the collapse finally came.

And how should history treat Herbert Hoover? In most rankings of American presidents, Hoover usually falls near the bottom. But there are scholars who have endeavored to rescue him from ignominy, and the case they make is not without merit. As many have observed, Hoover may well have been the most qualified person to ever assume the presidency. He had made a fortune in the mining industry, then distinguished himself as a genuine humanitarian hero during World War I, helping to feed millions of starving Europeans in an impressive feat of diplomatic and logistical prowess. And when the Panic of 1921 struck the stock market and the economy careened into a sharp recession, Hoover, as commerce secretary, was the one person in the hapless Harding administration who seemed to know how to address it, advocating for public spending and rallying the leading economists to declare that recovery was at hand. That strategy worked, or at least appeared to work, in the sense that the economy recovered so rapidly that the Panic of 1921 barely registers in the annals of American history.

For that reason, of all the people who could have been president in 1929, Hoover seemed best prepared to not only handle a crash but maybe even to head one off. On entering the White House, he knew the economy had been running too hot for too long and he tried to make that case to Wall Street, Congress, and the nation. Unable to gain any traction, however, he gave up and turned to other matters. By the time the crash occurred, he had already lost the press—and with it his most powerful tool for shaping public opinion. That vacuum proved fatal. Though he had been a powerful advocate for radio and the first president to install a telephone on his desk, Hoover was, in fact, a terrible communicator. Time , one of the few major media outlets not to endorse him for president, had warned of this deficiency. “ In a society of temperate, industrious, unspectacular beavers,” Time wrote, “such a beaver-man would make an ideal King-beaver. But humans are different.”

Hoover committed the ultimate beaver-man blunder when he tried to assuage the public by changing the name for the economic slowdown from a “panic” to a “depression,” which may be the worst rebranding of all time. The one good thing about a panic, after all, is that it doesn’t last long. Whereas a depression? Who knows how long that might go on.

Roosevelt went down in history as an American hero, but in the midst of his tumultuous first year in the White House when he scrapped the gold standard, there were few who foresaw his path to greatness. Roosevelt’s grasp of the economy, wrote John Brooks, was “ludicrously superficial and his attitude toward it scandalously offhand.” Somehow, Americans grew to trust him anyway, and as the whole wide world fell apart, the United States fed off his abundant confidence. People were desperate to believe in something. They certainly didn’t believe in money anymore.

When I embarked on this book, one of my narrative touchstones was Walter Lord’s A Night to Remember , the definitive and riveting account of the sinking of the Titanic . I aimed to do for 1929 what Lord did for that terrible tragedy of 1912—to restore the texture and detail of the human lives at the center of an epic historical event. Who exactly were the people caught up in it, what did their lives look and feel like? Lord did a masterful job of this. But I have tried to resist making the type of sweeping claims he did. “ Overriding everything else,” Lord wrote, “the Titanic also marked the end of a general feeling of confidence.” Having spent thousands of hours studying the 1920s, it struck me as highly unlikely that “a general feeling of confidence” had somehow vanished before then.

If there is one valuable insight we can learn from the twentieth century, and probably all of history for that matter, it’s that societies are amazingly resilient. People recover from adversity. In that regard 1929 is unique, in the sense that it led to the longest economic malaise in U.S. history. But the trauma of the crash itself passed relatively quickly.

As early as spring of 1930 Wall Street was ready to move on. It was just the rest of the country wasn’t, and Wall Street ultimately lacked the superpower it thought it had. The devastation wrought by the stock market’s decline—not just during the crash itself but for most of the ensuing decade—caused millions of Americans insufferable pain. It caused them to not just turn away from the market but to revile those who made their living buying and selling stocks.

Yet the forces that drove the market to such stratospheric levels—optimism, ambition, and the belief that the future could be endlessly brighter—did not disappear forever. They never do.

Ultimately, the story of 1929 is not about rates or regulation, nor about the cleverness of short sellers or the failures of bankers. It is about something far more enduring: human nature. No matter how many warnings are issued or how many laws are written, people will find new ways to believe that the good times can last forever. They will dress up hope as certainty. And in that collective fever, humanity will again and again lose its head.

The enduring lesson is not that booms can be prevented or that busts can be fully averted. It is that we need to remember how easily we forget. The antidote to irrational exuberance is not regulation by itself, nor skepticism, but humility—the humility to know that no system is foolproof, no market fully rational, and no generation exempt. The greater the heights of our certainty, the longer and harder we fall.