The New Era
Labor Day, September 2, 1929, no new fortune was made on this day; even in the New Economic Era Wall Street could not make money on a holiday. But everyone knew that on Tuesday the sun would rise and the Wall Street ticker would chatter the news of ever higher profits. As historian Arthur M. Schlesinger Jr. noted, "The New Era knew no skepticism. The nation had reached, it seemed, a permanent plateau of prosperity."
The previous month had been phenomenal: Almost 96 million shares had traded setting a record for any August in market history. The New York Times index of representative stocks increased by over $4 billion. And it wasn't just rich bankers making fortunes: bootblacks, taxi drivers, and grandmothers were investing in the New Economic Era's great bull market. Common opinion held that this New Era had banished the old market cycles; prosperity was permanent and ever upward.
Nevertheless, fundamental problems existed in the in the stock market such as margin buying. Most small investors bought their stocks on margin, some as little as 10 percent. This meant, for example, that they bought a stock valued at $10 for only $1 and owed the balance to their broker with the stock acting as collateral. When the stock's value went up these investors made money. But if the stock's value went down, they had to pay the broker cash for the amount the stock lost in value because the stock had been the collateral for the loan. The great bull market of the late 1920s rested on this ephemeral foundation of credit known as margin buying rather than on the sound foundation of cash. In the words of historian Charles Geisst, "Excessive speculation was creating inflated wealth and a sense of prosperity built upon borrowed money."
For almost three years, noted economist Roger Babson watched this situation develop with great alarm. The New Era notwithstanding, Babson's August 24 statement that he expected a 60 to 80 point stock market crash unsettled many people. During the shortened Labor Day week Babson's forecast caused what became known as "the Babson Break." This break or drop in the market bounced back the following week, broke again, and bounced back again; nevertheless, the general direction was down.
By the end of September this volatility caused "the smart money," like financier Bernard Baruch, to sell their stocks. "I began to sell everything I could...I knew the continuity of confidence was beginning to break." Into October the market continued downward. "Fear is in the saddle" wrote one observer.
Latest Articles