October 29, 1929: Black Tuesday, Stock Market Crash

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Guest Essayist: John Steele Gordon

Wall Street, because it tries to discern future values, is usually a leading indicator. It began to recover, for instance, from the financial debacle of 2008 in March of the next year. But the economy didn’t begin to grow again until June of 2009.

But sometimes Wall Street separates from the underlying economy and loses touch with economic reality. That is what happened in 1929 and brought about history’s most famous stock market crash.

The 1920’s were a prosperous time for most areas of the American economy and Wall Street reflected that expansion. But rural America was not prospering. In 1900, one-third of all American crop land had been given over to fodder crops to feed the country’s vast herd of horses and mules. But by 1930, horses had largely given way to automobiles and trucks while the mules had been replaced by the tractor.

As more and more agricultural land was turned over to growing crops for human consumption, food prices fell and rural areas began to fall into depression. Rural banks began failing at the rate of about 500 a year.

Because the major news media, then as now, was highly concentrated in the big cities, this economic problem went largely unnoticed. Indeed, while the overall economy rose 59 percent in the 1920s, the Dow Jones Industrial Average increased 400 percent.

The Federal Reserve in the fall of 1928, raised the discount rate from 3.5 percent to 5 percent and began to reduce the increase in the money supply, in hopes of getting the stock market to cool off.

But by then, Wall Street was in a speculative bubble. Fueling that bubble was a very misguided policy by the Fed. It allowed member banks to borrow at the discount window at five percent. The banks in turn, loaned the money to brokerage houses at 12 percent. The brokers then loaned the money to speculators at 20 percent. The Fed tried to use “moral suasion” to get the banks to stop borrowing in this way. But if a bank can make 7 percent on someone else’s money, it is going to do so. The Fed should have just closed the window for those sorts of loans, but didn’t.

By Labor Day, 1929, the American economy was in a recession but Wall Street still had not noticed. On the day after Labor Day, the Dow hit a new all-time high at 381.17. It would not see that number again for 25 years. Two days later the market began to wake up.

A stock market analyst of no great note, Roger Babson, gave a talk that day in Wellesley, Massachusetts, and said that, “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming.” When news of this altogether unremarkable prophecy crossed the broad tape at 2:00 that afternoon, all hell broke loose. Prices plunged (US Steel fell 9 points, AZT&T 6) and volume in the last two hours of trading was a fantastic two million shares.

Remembered as the Babson Break, it was like a slap across the face of an hysteric, and the mood on the Street went almost in an instant from “The sky’s the limit” to “Every man for himself.”

For the next six weeks, the market trended downwards, with some plunges followed by weak recoveries. Then on Thursday, October 23rd, selling swamped the market on the second highest volume on record. The next morning there was a mountain of sell orders in brokerage offices across the country and prices plunged across the board. This set off a wave of margin calls, further depressing prices, while short sellers put even more pressure on prices.

A group of the Street’s most important bankers met at J. P. Morgan and Company, across Broad Street from the exchange.

Together they raised $20 million to support the market and entrusted it to Richard Whitney, the acting president of the NYSE.

At 1:30, Whitney strode onto the floor and asked the price of US Steel. He was told that it had last traded at 205 but that it had fallen several points since, with no takers.

“I bid 205 for 10,000 Steel,” Whitney shouted. He then went to other posts, buying large blocks of blue chips. The market steadied as shorts closed their positions and some stocks even ended up for the day. But the volume had been an utterly unprecedented 13 million shares.

The rally continued on Friday but there was modest profit taking at the Saturday morning session. Then, on Monday, October 28th, selling resumed as rumors floated around that some major speculators had committed suicide and that new bear pools were being formed.

On Tuesday, October 29th, remembered thereafter as Black Tuesday, there was no stopping the collapse in prices. Volume reached 16 million shares, a record that would stand for nearly 40 years, and the tape ran four hours late. The Dow was down a staggering 23 percent on the day and nearly 40 percent below its September high.

Prices trended downwards for more than another month, but by the spring of 1930 the market, badly over sold by December, had recovered about 45 percent of its autumn losses. Many thought the recession was over. But then the federal government and the Federal Reserve began making a series of disastrous policy blunders that would turn an ordinary recession into the Great Depression.

John Steele Gordon was born in New York City in 1944 into a family long associated with the city and its financial community. Both his grandfathers held seats on the New York Stock Exchange. He was educated at Millbrook School and Vanderbilt University, graduating with a B.A. in history in 1966.

After college he worked as a production editor for Harper & Row (now HarperCollins) for six years before leaving to travel, driving a Land-Rover from New York to Tierra del Fuego, a nine-month journey of 39,000 miles. This resulted in his first book, Overlanding. Altogether he has driven through forty-seven countries on five continents.

After returning to New York he served on the staffs of Congressmen Herman Badillo and Robert Garcia. He has been a full-time writer for the last twenty years. His second book, The Scarlet Woman of Wall Street, a history of Wall Street in the 1860’s, was published in 1988. His third book, Hamilton’s Blessing: the Extraordinary Life and Times of Our National Debt, was published in 1997. The Great Game: The Emergence of Wall Street as a World Power, 1653-2000, was published by Scribner, a Simon and Schuster imprint, in November, 1999. A two-hour special based on The Great Game aired on CNBC on April 24th, 2000. His latest book, a collection of his columns from American Heritage magazine, entitled The Business of America, was published in July, 2001, by Walker. His history of the laying of the Atlantic Cable, A Thread Across the Ocean, was published in June, 2002. His next book, to be published by HarperCollins, is a history of the American economy.

He specializes in business and financial history. He has had articles published in, among others, Forbes, Forbes ASAP, Worth, the New York Times and The Wall Street Journal Op-Ed pages, the Washington Post’s Book World and Outlook. He is a contributing editor at American Heritage, where he has written the “Business of America” column since 1989.

In 1991 he traveled to Europe, Africa, North and South America, and Japan with the photographer Bruce Davidson for Schlumberger, Ltd., to create a photo essay called “Schlumberger People,” for the company’s annual report.

In 1992 he was the co-writer, with Timothy C. Forbes and Steve Forbes, of Happily Ever After?, a video produced by Forbes in honor of the seventy-fifth anniversary of the magazine.

He is a frequent commentator on Marketplace, the daily Public Radio business-news program heard on more than two hundred stations throughout the country. He has appeared on numerous other radio and television shows, including New York: A Documentary Film by Ric Burns, Business Center and Squawk Box on CNBC, and The News Hour with Jim Lehrer on PBS. He was a guest in 2001 on a live, two-hour edition of Booknotes with Brian Lamb on C-SPAN.

Mr. Gordon lives in North Salem, New York. His email address is jsg@johnsteelegordon.com.

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May 17, 1792: The Buttonwood Agreement and the New York Stock Exchange

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Guest Essayist: John Steele Gordon

Before independence there was little financial activity in the American colonies. Britain had forbidden the creation of banks and there were no corporations to issue stock and bonds. And while merchants kept their books in pounds, shillings, and pence, the actual money supply was a hodgepodge of foreign coins, warehouse certificates, scrip, and IOU’s.

With independence, that began to change. The Continental Congress issued paper money, called “continentals,” in massive amounts and this fiat money quickly depreciated into near worthlessness. Congress and the various states also issued bonds to help pay the costs of the Revolution. In 1782 the first bank was organized in Philadelphia. By 1790 there were three in operation under the new Constitution that had come into effect the previous year.

And Alexander Hamilton, the first Secretary of the Treasury, pushed through the new Congress a bill for the federal government to assume the debts of the states and to refund its own debt with bonds that were backed by revenue from the new tariff.

He also established the new Bank of the United States, modeled on the Bank of England to act as a central bank. It was to regulate the money supply, provide discipline for state-chartered banks, act as a depository for government funds, and loan money to the government.

Suddenly there were financial instruments—federal and state bonds as well as stock in new banks and insurance companies to be traded—and brokers began to do so.

A broker is someone who brings buyers and sellers together and takes a commission on the sale price. Only relatively recently has it, unmodified, come to mean someone who handles financial instruments. In the 1790’s New York brokers were often involved in a number of different areas. They might be a partner in a private bank, sell insurance, run a private lottery as well as handle securities trading.

While state and federal bonds were the meat and potatoes of the new securities brokerage, the “hottest” security was the stock of the new Bank of the United States. Capitalized at $10 million, a vast sum for that time and place. Twenty percent of the stock was to be held by the government while the rest was to be offered to the public.

Trading in the stock began on a when-issued basis in 1791. When it was issued in July of that year, it sold out almost immediately and began to rise, setting off the country’s first bull market. Short sales (the sale of borrowed stock in hopes of a decline in price), and puts and calls (the right to sell or buy a security at a certain price before a certain date) began at this time, greatly increasing the speculative possibilities.

Early trading took place in coffee houses and taverns (as well as on the street in good weather), but brokers also began holding auctions in their offices. In early 1792, John Sutton and his partner Benjamin Jay and several others decided to form a central auction at 22 Wall Street. Sellers would deposit the securities they wanted to sell and buyers would attend the auction and the auctioneers would take a commission on the sale price.

But the system soon collapsed as brokers would attend the auctions just to learn what the prices were and then offer the securities at a lower commission.

To fix that problem, on May 17th, 1792, a group of men gathered beneath a buttonwood tree (today, such trees are called sycamores) outside of 68 Wall Street and signed an agreement. (There is some doubt as to whether the agreement was actually signed beneath that tree, but it became a beloved Wall Street icon until it fell in a storm on June 14, 1865.)

The agreement read as follows: “We the Subscribers, Brokers for the Purchase and Sale of the Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter percent Commission on the Specie value and that we will give preference to each other in our Negotiations. In Testimony whereof we have set our hands this 17th day of May at New York, 1792.”

This is often regarded as the origin of the New York Stock Exchange, although the exchange would not be formally organized and given a constitution for another quarter of a century. Basically, the Buttonwood Agreement was a price-fixing arrangement among brokers not to undercut each other on commissions. And fixed commissions remained a feature of the Wall Street financial market until 1975, when the Securities and Exchange Commission abolished them, forcing brokers to compete in terms of price. The result was greatly reduced commissions and, therefore, greatly increased volume, bringing today’s Wall Street into being.

John Steele Gordon was born in New York City in 1944 into a family long associated with the city and its financial community. Both his grandfathers held seats on the New York Stock Exchange. He was educated at Millbrook School and Vanderbilt University, graduating with a B.A. in history in 1966.

After college he worked as a production editor for Harper & Row (now HarperCollins) for six years before leaving to travel, driving a Land-Rover from New York to Tierra del Fuego, a nine-month journey of 39,000 miles. This resulted in his first book, Overlanding. Altogether he has driven through forty-seven countries on five continents.

After returning to New York he served on the staffs of Congressmen Herman Badillo and Robert Garcia. He has been a full-time writer for the last twenty years. His second book, The Scarlet Woman of Wall Street, a history of Wall Street in the 1860’s, was published in 1988. His third book, Hamilton’s Blessing: the Extraordinary Life and Times of Our National Debt, was published in 1997. The Great Game: The Emergence of Wall Street as a World Power, 1653-2000, was published by Scribner, a Simon and Schuster imprint, in November, 1999. A two-hour special based on The Great Game aired on CNBC on April 24th, 2000. His latest book, a collection of his columns from American Heritage magazine, entitled The Business of America, was published in July, 2001, by Walker. His history of the laying of the Atlantic Cable, A Thread Across the Ocean, was published in June, 2002. His next book, to be published by HarperCollins, is a history of the American economy.

He specializes in business and financial history. He has had articles published in, among others, Forbes, Forbes ASAP, Worth, the New York Times and The Wall Street Journal Op-Ed pages, the Washington Post’s Book World and Outlook. He is a contributing editor at American Heritage, where he has written the “Business of America” column since 1989.

In 1991 he traveled to Europe, Africa, North and South America, and Japan with the photographer Bruce Davidson for Schlumberger, Ltd., to create a photo essay called “Schlumberger People,” for the company’s annual report.

In 1992 he was the co-writer, with Timothy C. Forbes and Steve Forbes, of Happily Ever After?, a video produced by Forbes in honor of the seventy-fifth anniversary of the magazine.

He is a frequent commentator on Marketplace, the daily Public Radio business-news program heard on more than two hundred stations throughout the country. He has appeared on numerous other radio and television shows, including New York: A Documentary Film by Ric Burns, Business Center and Squawk Box on CNBC, and The News Hour with Jim Lehrer on PBS. He was a guest in 2001 on a live, two-hour edition of Booknotes with Brian Lamb on C-SPAN.

Mr. Gordon lives in North Salem, New York. His email address is jsg@johnsteelegordon.com.

Click Here to have the NEWEST essay in this study emailed to your inbox every day!

Click Here to view the schedule of topics in our 90-Day Study on American History.

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