Andrew Ross Sorkin’s 1929 is a well-told story about the great Wall Street crash. It has vivid characters, a thrilling plot and sensible observations. It is not too long, not too technical and not too tendentious. It brings into the narrative not only the big Wall Street bankers and speculators of the period but also congressional legislators, cabinet secretaries and three US presidents. A great read, but do we need another book about a stockmarket crash nearly a century ago? Especially one that doesn’t much change a familiar story?
Sorkin would no doubt say we do, and not only because he tells the tale so well. He would probably say — actually, he has been saying — that our circumstances today sufficiently resemble those preceding the great crash to warrant a reminder of how quickly boundless prosperity can tumble into a financial collapse. “We will have a crash; I just can’t tell you when, and I can’t tell you how deep” he told 60 Minutes’s Lesley Stahl recently, adhering to the well-known forecasters’ rule that it is fine to predict an event so long as you don’t specify a date or a magnitude. The Dow Jones Industrial Average has had twenty-seven selloffs of 10 per cent or more over the past forty years, so Sorkin is bound to be right.
The 1929 selloff was something else, not just in size and duration but also because it was associated with the Great Depression, an economic collapse that saw one in four workers in the United States unemployed and a decline in output of around 25 per cent between 1929 and the 1933 trough (after adjusting for the deflation of the dollar). One question about 1929 readily coming to mind is how much similarity there is between, say, 1928 or early 1929 and now. As Sorkin says, the market crash “may not have caused the business depression, but it certainly had a powerful effect.” Might we be cheerfully strolling the same direction?
There are certainly some sharemarket resemblances. One is the vast increase in share prices in a relatively short time. The index of the US tech stockmarket, the NASDAQ, has more than doubled over the past two years. Even the Dow Jones, a wider and more plodding measure, has increased 50 per cent. The rise in US share prices in the two years before the 1929 crash was around 80 per cent, putting it betwixt and between those two contemporary US indices.
A useful signal of market giddiness is the number of years of current earnings that would equal a business’s share price today. This is the price-to-earnings ratio. The more years, the more speculative today’s share price and the more dependent on continuing good news. At the peak in 1929, the price-to-earnings ratio for the Dow Jones index, at 20, was quite elevated. Today the same ratio is 30. Many analysts favour an alternative signal, the Shiller index, which uses ten-year average real earnings instead of current earnings as the denominator. It was 33 at the peak in 1929; today it is 38. On these measures the sharemarket is more speculative today than it was in 1929, just before the crash.
Sorkin’s tale is about the events and the players leading up to the sharemarket crash in late 1929, and what followed. From its dizzy peak in September 1929 to its glum trough three years later, the US sharemarket fell by just short of 90 per cent. Hundreds of thousands of Americans who thought they were well-off were suddenly poor. If they borrowed to buy shares, as many had, they might not only have lost everything but also have debts besides. Business could no longer get cheap capital by issuing shares, a drag on business investment. The impact on confidence contributed to a wider economic slowdown.
Prefaced, like a big Russian novel, with a nine-page cast of characters, Sorkin’s story is told through the conduct of some of the market titans of the time. Most considered themselves models of rectitude and financial probity, though their immense wealth and prestige flowed from an ever-rising sharemarket. Sorkin sticks pretty much to the immediate foreground and the immediate aftermath of the crash, but even so he gets to around 130,000 words, not counting notes and index, without pausing the pace.
Charles Mitchell was the boss of what would become Citigroup, then known as National City Bank. To complete a merger that would make his bank the biggest he needed a high share price. Under his orders the Bank supported its own share price, buying far more of its own shares during the sell-off of 28 October 1929, Black Monday, than it could afford to hold. The consequences would take Mitchell through congressional hearings and the courts, and eventually destroy his reputation. Then there was Thomas Lamont, the leading partner in J.P. Morgan, who led futile attempts to restore market confidence, sustaining large losses and endangering the firm. Congressional committees took an interest in Lamont, unfavourably. Sorkin conveys these men’s perplexity, even horror, as their richly attended lives blew up.
Then there are the prominent legislators, Carter Glass and Henry Steagall, who would respond to the crash with new laws to separate commercial banks and investment banks. In the White House, Herbert Hoover struggled to remedy an economic collapse vastly more serious than he expected. His successor, Franklin Roosevelt, was more willing to try anything that might work.
Sorkin’s is a nuanced account. He emphasises, for example, that even after the 13 per cent Black Monday plunge, many investors and brokers expected the market to bounce back. Indeed, it did bounce back, and more than once. But each time the selling soon gathered force and down the market went again.
Yet by the end of 1929 the Dow was down only 17 per cent for the year, very much less than the 33 per cent fall in 1921, a year in which America came out of recession rather than went into it. And somewhat less, for that matter, than the 23 per cent it fell on one day, 19 October 1987, without a recession preceding or succeeding it. By March 1930, the market had recovered 40 per cent of its 1929 losses before the selling once again sent it much, much lower.
Nor, despite the severity of the selloff, was the connexion with the larger economy immediately evident. As Sorkin points out, there were no big corporate failures in the immediate aftermath of the 1929 crash. It was widely said that America’s prosperity would continue, and that blowing off the sharemarket froth was on the whole a good thing.
About the crash itself, there is no mystery to reveal. What cannot continue, ends. Earlier in 1929 the US Federal Reserve had increased the cash interest rate above 6 per cent to lean against what it regarded as feckless speculation. Since many investors borrowed to buy shares, the rate rise hurt. It may also have contributed to the downturn in the economy that began in mid 1929. The sharemarket topped out and then began to crumble, driven by forced selling of shares bought on margin loans, then by wariness, and finally by panic as the economic downturn deepened.
Inevitably Sorkin discusses the Great Depression, a far more serious event than the concurrent crash. He accepts, as many do, Milton Friedman’s argument that the Depression was caused by a fall in the money supply, itself the consequence of around 9000 bank failures in America. But there are more elaborate modern explanations.
We know that collapsing business investment contributed mightily to the economic downturn, and that was probably partly related to the stockmarket crash. Former Federal Reserve chairman Ben Bernanke argues that a routine economic recession became a prolonged depression because lenders became reluctant to lend at a time when borrowers had difficulty meeting their debts. The borrowers’ problems were amplified by a deflation, which meant an increase in the real value of nominal debt. At the same time, asset prices were falling, partly reflecting the crash in share prices and the market value of companies and their assets.
The downturn was further compounded by the distress of American farmers, who now faced higher tariffs in their European markets. (Forty per cent of the national population was either on farms or in rural areas.) Farmers could not service their loans; frightened depositors lined up to withdraw their money. Thousands of banks failed and bigger banks beefed up their cash reserves by slowing lending.
Sorkin makes the point that Herbert Hoover’s Republican administration didn’t stand aloof from the economic collapse, as widely supposed. The Reconstruction Finance Corporation was set up in early 1932 while Hoover was still president, a year before his Democratic successor Franklin D. Roosevelt was inaugurated. Its mandate was to lend to sound but liquidity-strapped businesses, a technique widely deployed in the 2008 financial crisis (and led by Ben Bernanke). The Smoot–Hawley tariffs bill was signed into law by Hoover (who had many reservations) in 1930. Many nations increased tariffs at the time, including Australia.
Hoover also pressed corporations to not cut wages. He cut taxes and supported spending on public works. In principle, he was in favour of a balanced budget, but the budget went into deficit anyway. As a share of GDP, it moved from a 1 per cent surplus in 1930 to a 4.6 per cent deficit in 1932, within half a percentage point of the maximum deficit reached under FDR in the 1930s. Roosevelt beat Hoover hands down at the 1932 election, Sorkin argues, not on his economic proposals, which were vague, but on his opposition to prohibition. This is surely a stretch, given that a quarter of American workers were jobless going into the polling booth.
Nor did the Federal Reserve stand aside. It had raised the cash interest rate to 6.25 per cent in mid 1929, leaning heavily against what it regarded as a speculative bubble in stocks. A year later the rate was around 0.5 per cent. It came too late to prevent widespread failures, but during the Hoover administration congress authorised the Federal Reserve to support banks.
While these Hoover measures helped, they didn’t help much. They were too little. Though charged with lending to cash-strapped businesses like railroads, the Reconstruction Finance Corporation proved conservative. Nor, as Maynard Keynes pointed out, did low interest rates much encourage investment when confidence had vanished. What was needed was unlimited support for viable banks, more spending on jobs programs, a sharp rise in the official gold price (and therefore a devaluation of the dollar), farm price supports and variety of other measures — some useful, some not — all of which Roosevelt provided in rapid order, along with good cheer and fireside chats. Even then the economic recovery in the United States took much longer than recovery in Britain or Australia.
This takes us back to the question hovering over Sorkin’s book. Are our circumstances today replicating the runup to the 1929 crash, and if so might there be another Great Depression on the way?
There are those very high price earnings ratios. And while the increase in the broad index of sharemarket values in the United States over the past few years is somewhat less than the rise in share prices in the two years preceding the crash in September 1929, the resemblance is closer over a longer period. In the past ten years the Dow index has very nearly trebled in value. In the past thirty-three years it has increased fourteenfold, and this includes the big selloffs in 2008 and 2020 and an eighteen-month rough patch from the end of 2021.
It is a formidable increase, and all the more pertinent because the total market value of US listed stocks is much greater compared to US GDP now than it was in 1929. In fact the value of listed shares in the US is more than double annual US GDP. In 1929 a large public sharemarket was a relatively recent innovation with far fewer listings. All up it looks like the value of listed shares was considerably less than GDP at the time.
If the value of the market is proportionally much bigger than it was ninety-six years ago, so too is the breadth of shareholding. In 1929 only a small share of the population owned shares. Today participation is much higher, not only directly but also, more importantly, indirectly though pensions schemes.
Given toppy valuations, a share-price correction — and perhaps a big one — can confidently be predicted. No doubt we will feel very glum about it when it comes. It seems to me a much deeper sharemarket crash, one like 1929, would probably need a wider economic contraction to help it along: after all, it was the 1929–33 economic slump that prolonged and deepened the sharemarket slump.
An economic downturn will usually cause or deepen a decline in share prices, while a decline in share prices need not of itself cause a significant economic contraction. This is especially so if governments and central banks stand ready to support demand and lending, as today they usually do. The 1987 share price collapse was an example. Despite the Australian Financial Review declaring a depression imminent, the economy kept going. The most spectacular collapse of recent times, the 2008 crisis, was caused by speculative trading in off-market mortgage debt rather than a frothy sharemarket.
The most commonly instanced risk is that the vast spending on data centres for AI doesn’t actually pay, causing shares in some of the high-flying data-centre builders and AI providers to tank. That is quite possible. Projections suggest AI investment, including data-centre investment by the big four American tech companies, could amount to $750 billion over two years. It is a big number, but over two years would be not much more than 1 per cent of US GDP. If it evaporated, business investment in the US would be hit hard. Depending on how it played out and what financial tangles were revealed, there could be a recession. But a prolonged business depression would by no means be certain.
A share price correction is inevitable at some point, but a prolonged economic contraction is not. So the real question hovering over Sorkin’s book is not whether a share-price fall is likely but whether a sustained global economic depression would follow. Sorkin doesn’t go there, and in this review neither will I, except to say that despite the nuttiness of the Trump administration, despite the turbulence of global and local politics, despite wars, despite US–China rivalry, despite stretched share prices, there are no convincing signs of it yet. Amazing, really. •
1929: The Inside Story of The Greatest Crash in Wall Street History
By Andrew Ross Sorkin | Allen Lane | $39.99 | 592 pages
