Optimism and the Market Crash, 1929

In 1928, Herbert Hoover became the Republican Party's candidate for president, and Alfred Smith, governor of New York, was the candidate for the Democrats. Hoover and the Republicans played the role of the morally superior and supported prohibition, and they promised farm relief including higher tariffs against farm imports. The Republicans made much of Smith being from the big-city and a Catholic, and Smith's candidacy revived the Ku Klux Klan temporarily. Smith, on the other hand, opposed prohibition, and he and the Democrats described Republican policies as leaving "agriculture prostrate, industry depressed and workmen without employment." And the Democrats tried their hand on the morality issue and denounced what they called the "sordid corruption and unabashed rascality" of Republican rule. Their moralizing proved futile. Hoover won forty of the forty-eight states. And the Republicans retained their majorities, with 56 seats in the Senate against 39 for the Democrats, and 267 seats in the House against 167 for the Democrats.

Hoover's victory and reputation stimulated great hopes, causing Hoover concern that the nation was seeing him as too much of a superman. The year 1928 ended with the stock market industrial average up 48 percent for the year. As described on the previous page, economic dislocation, the relation between the ability to produce and the ability to consume was being ignored. So too was a speculation bubble. There was one aspect of the problem that Hoover did see: after he took office in March he continued what had been his criticism of excessive speculation and excessive use of borrowed money in buying stocks. He remained an economic conservative insofar as he believed that little government intervention in the economy was necessary during peacetime, but he believed that too much money was being put into unproductive speculation.

Hoover's powers over the stock market were limited. The Federal Reserve Board was an independent body, and the legal authority to curb Wall Street lay with the governor of New York rather than the President of the United States. And the new Governor of New York, Franklin D. Roosevelt, was one of those who dismissed Hoover's concerns. Until he had become governor-elect in November 1928, Roosevelt had been gleefully participating in the stock market boom. And others on Wall Street had joined Roosevelt's opposition to Hoover's views on the market, complaining in effect that if things were not broken no one should try to fix them.

After taking office on March 4, 1929, Hoover expressed concern about economic instability abroad, and he was concerned, too, about weakness or a lack of soundness in banking. He called on Congress to examine the banking structure and to recommend legislation. Congress ignored his request. Then he asked Congress to pass legislation that would require every commercial bank to join the Federal Reserve System and require banks to submit to inspections. Congress ignored these requests.

Buying on credit (borrowed money) by the middle and upper classes was extensive, and the Federal Reserve Board was concerned. The Board had been both raising and lowering interest rates, and when word spread that it might again raise interest rates – to discourage borrowing – the stock market dipped slightly. Then, instead of raising interest rates, the Board tried to discourage borrowing through moral persuasion. Interest rates remained low, which encouraged continued borrowing, and stocks recovered and continued their phenomenal rise.

Everybody with an extra dollar was investing in stocks, from the wealthy to the postman and the corner grocer. They believed that the United States was onto something good and that the boom would go on uninterrupted. There were investors who saw as reasonable the prices of stocks in relation to the earnings of the popular US companies. Among them were the British economist John Maynard Keynes and also Winston Churchill. But there was not a good amount of money available for bidding the prices of stocks higher and higher as some people were now investing were hoping would happen.

In August the US economy went into decline. Business had the good sense to slow production to meet the fact that buying was in decline. Production was falling at an annual rate of 20 percent and personal income for that August was down at an annual rate of 5 percent. Also in August came news from Britain that scared some investors in the United States. Talk had arisen of Britain raising its interest rates to stem its outflow of gold – the gold supply in Britain having become uncomfortably low, threatening British currency, which was pegged to gold. This, some believed, would attract money out of the US stock market and back to Britain. In August, the Federal Reserve Bank of New York increased its discount rate from 5 to 6 percent to restrict lending. The Dow Jones Industrial Average continued to rise, reaching a new high on September 3, at 381.2. But later in the month stock prices leveled and began a moderate decline.

On October 11 the Dow Jones Industrial Average reached 446, but there were not enough buyers to keep stocks climbing. A significant minority could impact the market by selling, and by October 21 the stock market had fallen back to 409 – a decline of eight percent in ten days.

Since 1927 from her New York City studio above Carnegie Hall, the famous fortune teller and astrologer Evangeline Adams had been forecasting rises in stock market prices. She was believed to have foretold Rudolph Valentino's death and to have prophesied the 1923 Tokyo earthquake. She had been selling a monthly newsletter to a readership of around 100,000, and four thousand people were writing her daily. A few of her clients were wealthy financiers, and a few, like Mary Pickford, were famous. On October 22, stock prices were to end the day up slightly. But just after noon Adams forecast that stocks would fall the next day. On the 23rd, stock prices rose in the morning. Then prices began a steep fall. And by the end of the trading day, stock prices were down 7.5 percent, with the ticker tape 1.5 hours in delay. It was the second largest day in trading volume in the exchange's history.

The following day is known as Black Thursday. There were many more who wanted to sell than buy, making prices fall and stock prices declined 3.2 percent, the Dow Jones Industrial Average down to 372. People flocked to Adam's studio for guidance. She told them of a favorable conjunction and interrelationship of certain planets that were creating "spheres of influence over susceptible groups," and she predicted good times ahead. After the last of her clients had wandered away, her broker told her she was down $100,000. Apparently stocks had declined more than she had expected, and apparently her loss caused her to panic. Lacking confidence in the forecast she had given her clients, she told her broker to sell at the opening of the market the following day.

The following day, Friday the 25th, the market held, closing at 372. On Saturday, the market dropped another 1.5 percent, to 367. On Monday came the market's biggest slide, falling nearly 12 percent, to 318. On the 29th it dropped another 13.5 percent, to 275. It was a thirty-three percent drop in one week.  Investors who had bought stocks on credit had lost enough in the value of their stocks that they were obliged to pay back the loans. If they could not pay they were obliged to sell their stocks, and many who had bought stocks on borrowed money lost all of their stocks. Some lost all they had invested and their life savings, and some of these people were still in debt. A few who lost everything committed suicide.

For every seller there had to be a buyer. Some, in other words, were still buying stocks, believing that at lower prices the stocks were a bargain. A short rally began. On October 30 and 31 stock prices surged to 327 – a nineteen percent gain in two days. But during November, prices began drifting lower again, to 238.95, below what prices had been on the dark day of October 29.

In December, stock prices steadied, and the Dow Jones Industrial Average closed the year at 248. For the year, the Dow was down only twelve percent, and stock prices were well above what they had been in 1927 and 1928. But enthusiasm for investing had declined. The shine was off the market. Newspapers and journals were focused on the decline in the value of stock market equities, and some were editorializing with cries of shame. A few people believed that the stock market had made a normal correction and would now begin to recover. And stock prices began a minor recovery into April 1930, causing some people to believe that the bull market had returned. But, in late April, the Dow began falling again. In May, Hoover announced that "we have passed the worst." But more decline was on the way.

Copyright © 1998-2014 by Frank E. Smitha. All rights reserved.