Ron Chernow: Everyman's Financial Meltdown





[Ron Chernow is the author of “The House of Morgan” and “Alexander Hamilton.”]

FOR connoisseurs of financial mayhem, the stock market crash of October 1929, which started 80 years ago this week, still holds pride of place. Like a tautly directed drama, it unfolded with graphic horror at the corner of Broad and Wall Streets, captured in grainy black-and-white newsreels. It capped a stylish era in which well-tailored men and chic flappers set a racy tone for stock investing. To the delight of historians, it possessed clear-cut villains, a riveting story line and plenty of palpable abuses for reformersto correct.

In retrospect, the evils of the 1920s seem almost quaint in their simplicity. Finance today is far more esoteric, marked by complex securities sure to baffle reformers as they seek solutions to the problems exposed by last year’s crash.

Before the ’20s, common stocks were deemed unsuitable for ordinary investors. That stigma began to fade during World War I, when Liberty Loan drives encouraged Americans to own government bonds, feeding a taste for securities that persisted into the ’20s. To capitalize on this trend, commercial banks on Wall Street created securities affiliates and hired thousands of young stockbrokers who were untroubled by memories of past panics. Charles Mitchell, the head of National City Bank, prodded his recruits with pep talks and office contests to sell stocks with razzmatazz. The stock market quickly grew fashionable, with brokerage offices installed even on trans-Atlantic liners.

It is tempting to deride the bull market of the ’20s as a case study in mass delusion. There was a widespread belief that history had turned a corner, that a New Era of permanent prosperity had dawned. Long an importer of capital from Europe, the United States had emerged from World War I as the world’s leading creditor, and governments from around the globe flocked to Wall Street for loans.

The stock market of the 1920s was dazzled by the technological innovations of its day. As in every boom, irrational exuberance was merely rational exuberance run amok. Charles Lindbergh’s solo flight to Paris fostered a perfect mania for aircraft stocks, while the invention of “talkies” spurred film company shares to new heights. The decade witnessed an explosion in sales of cars and radios, refrigerators and washing machines, all made affordable by installment plans. Art Deco skyscrapers soared in Manhattan. The infectious excitement obscured the economy’s dangerous lopsidedness, with oil, agriculture and other “sick sectors” undercutting the general prosperity. Long before the crash, community banks were failing at the rate of one per day.

Every stock market spree is sustained by soothing illusions. Investors in the ’20s took comfort from the creation of the Federal Reserve System in 1913. Now buttressed by a central bank, Wall Street believed that the business cycle had been repealed, and the presumed safety net encouraged investors to buy the dips and ride out the most turbulent fluctuations. Three consecutive Republican presidents — Warren Harding, Calvin Coolidge and Herbert Hoover — cut taxes, weakened antitrust laws and promised not to meddle with Wall Street.

The stock exchange was a rigged market that made no claims to fairness. Speculators operated more than a hundred “pools” that openly manipulated individual stocks and sometimes bribed financial journalists. Their flamboyant managers — William Crapo Durant, Michael Meehan, Joseph P. Kennedy and Jesse Livermore — became folk heroes, their raffish exploits reported in gossip columns, giving Wall Street a louche glamour. Hot stock tips, circulated by waiters and bootblacks, made old-fashioned research superfluous. For many participants, a whiff of sin only enhanced the stock market’s seduction. Small investors imagined that the large speculators who dominated the exchange could, if necessary, levitate the market and prevent unpleasant crack-ups...

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