The Decade That Built the Bomb
The 1920s were a real boom, not a fake one. That’s the part people forget when they want a clean morality tale. Henry Ford’s assembly line was doing exactly what the newspapers said it was doing — taking a car that cost a year’s wages and cutting it down to a few months’ wages. Radio, aviation, household electricity, the talkies: all of it was new, all of it was making money, and all of it was American. Between 1922 and 1929, industrial output rose 50%. Corporate profits nearly doubled. Unemployment sat under 4%. A man could walk into a Cleveland foundry in ’23 with a grade-school education and be a foreman with a mortgage by ’28. Nobody made that part up.
The market rode all of it and then kept going. From 1924 to September 1929 the Dow climbed from 100 to 381 — a 280% run in five years. Addy used to describe the mood in his father’s neighborhood in Queens. His father was a dental technician who’d never owned a share in his life, and by the summer of ’29 the fellow was reading the evening paper with a pencil in his hand, writing down closing prices for stocks he didn’t own yet but was going to. Shoeshine boys on the Bowling Green IRT stop were giving tips. Taxi drivers. Housewives with club accounts at the corner broker. The phrase “New Era” meant the country had outgrown its own business cycle. People believed it. Serious people believed it.
That last part is the trap. When the cab driver believes it, you roll your eyes. When the economics professor at Yale believes it, you check your positions.
Margin — The Part That Killed Them
You could buy stock on 10% down in 1929. A thousand dollars of your own money controlled ten thousand dollars of General Electric, or RCA, or U.S. Steel. The broker financed the other nine thousand and held the shares as collateral. Every house did it. The big wire houses — Hornblower, Hutton, Merrill — had bucket-shop cousins that did it on terms even looser than that when the customer had nerve.
In a bull market the math is a drug. Your stock goes up 10% and you’ve doubled your money. You pay the broker his interest out of the capital gain and you’re still flush. You do it again. You add to the position because your equity cushion is now thicker than it was when you started. This is what they called pyramiding and the brokers loved it, because the more of their money a customer had working, the more commissions and interest they earned. Everyone on the chain was rowing the same direction.
The math runs backwards the same way. A 10% decline erases 100% of your cash. Another tick down and you owe the broker. By October 1929 there was $8.5 billion in margin loans outstanding in this country — more than the total currency in circulation. Let that one sit. The paper wealth of the American stock market, at the peak, was propped up by more borrowed money than there were physical dollars in the economy. A structure like that doesn’t need a catalyst to fall. It needs the buying to pause for a week.
The Warnings Nobody Wanted
The Federal Reserve had been tightening since early 1928, openly trying to take the speculators’ punch bowl away. Roger Babson, an economist with a reputation nobody wanted to defend in polite rooms, gave a speech on September 5, 1929, in Wellesley, Massachusetts, and said flat out: “Sooner or later, a crash is coming, and it may be terrific.” The market dropped 3% on the news. The papers called it the Babson Break. By the following week the Dow was back at its highs and Babson was a crank again.
Meanwhile the real economy was already rolling over and nobody on the Street was looking. Steel production was softening. Auto sales were slowing. Housing starts had peaked in 1926 and been grinding down ever since. The farm sector, which still employed one American worker in four, had never recovered from the post-war price collapse and was living in a depression of its own while Manhattan drank champagne. None of it mattered. The ticker said up. The ticker was the only indicator anybody looked at, and the ticker said up.
I’ve seen that specific blindness at close range three times in my career — different decades, different instruments, identical expression on the face of the guy holding the bag. It’s not stupidity. It’s the way the human eye adjusts to bright light and refuses to see the shadow at the edge of the frame.
September 3, 1929
The Dow closed at 381.17 on September 3, 1929. It would not trade at that level again until November 23, 1954. Twenty-five years, two months, twenty days. A man who bought the top on margin and somehow held the paper through the decade of depression and the war was made whole when Eisenhower was in his first term. He would have been bald by then. His kids would be in high school.
The market drifted lower through September and into October without a clear reason. A few percent off, a rally, another leg down, another rally. On October 15, Irving Fisher of Yale — the most respected monetary economist in America, a man who had personally made a fortune inventing the Rolodex — told reporters that stock prices had reached “what looks like a permanently high plateau.” He believed it. He had most of his own money in Remington Rand and he rode the thing to zero. He never recovered financially. He died in 1947 owing money to his sister-in-law.
I mention the sister-in-law because that’s the part the textbooks skip. Being wrong about the market isn’t a reputational event. It’s a household event. Somebody’s sister-in-law carries it.
Black Thursday
Thursday, October 24. The market opened weak on heavy volume and by midday the Dow was off 11%. The ticker tape — the paper ribbon printing quotes in every brokerage office from Portland to Portland — ran hours late. Customers in Des Moines were putting in sell orders based on prices that had already moved by a dollar. Crowds gathered outside the Exchange at 20 Broad. Mounted police. A man jumped from a window on Wall Street and the rumor spread for three days before anyone confirmed it — and when they did confirm it, it was a different building and a different man than the one the rumor was about.
At noon the heads of the big banks — Morgan, Chase, National City, Guaranty, Bankers Trust — met at 23 Wall Street across from the Exchange and pooled their capital for an intervention. Richard Whitney, vice president of the NYSE and the Morgan interests’ man on the floor, walked out at 1:30 in the afternoon and bid 10,000 shares of U.S. Steel at $205 — several points above where it was trading. He moved from post to post doing the same in the other leaders. The gesture worked. Selling dried up. The Dow closed down only 2% on the day, and the papers that evening celebrated a near-miss. President Hoover made a statement about the fundamental business of the country being on a sound basis. The bankers were heroes. The crisis was over. That was Thursday night.
The Weekend, Then Monday and Tuesday
Saturday and Sunday are the part of the story I think about most. The Exchange was closed. The bankers had gone home to Greenwich and Tuxedo Park. And in kitchens and rented rooms across America, customers stared at Friday’s paper with a pencil and did the math on their margin accounts. Margin calls had gone out over the weekend to thousands of them. A man in Minneapolis who had put up two thousand dollars against a twenty-thousand-dollar portfolio got a Western Union on Saturday morning telling him he needed another thousand in the broker’s hands by Monday open or his position would be liquidated at market. He didn’t have another thousand. Nobody he knew had another thousand.
When Monday came, the selling had nowhere to hide. The Dow fell 12.82% on record volume. No banker rescue this time. The numbers had gotten too big for Morgan and Chase to paper over, and they knew it, and they didn’t try.
Black Tuesday, October 29, was worse. 16.4 million shares traded — a record that stood almost forty years. The Dow dropped another 11.73%. Stocks that had traded at $100 in early September printed at $20 with no bid underneath. Brokers, facing their own ruin if customer equity went negative, sold into any bid they could find. The forced selling fed the decline, the decline fed more margin calls, the calls fed more forced selling. There was no bottom because there was no buyer. The ticker ran four hours and eight minutes late. The final prints came off at 7:45 at night, long after the floor had cleared, and most customers didn’t learn until Wednesday morning what Tuesday had done to them.
Addy’s uncle — his father’s brother, a subway conductor who had about three thousand dollars levered into thirty thousand of U.S. Steel and Anaconda Copper — got his wiped position notice by mail on Thursday. He was the one who told Addy’s family, at Sunday dinner, that the paper profits they’d been bragging about for two years were a debt now. Addy was thirteen. He remembered the exact menu. Pot roast. He told me about it sixty years later and his hand shook slightly when he got to the pot roast.
That’s what a crash is. The pot roast.
The Long Road Down
The October panic was the loud part, and because it was loud, it’s the part history remembers. But the market actually rallied hard in early 1930 — recovered about half the losses by April — and a lot of the surviving bulls interpreted that as proof the whole thing had been an overreaction. A buying opportunity. Come back in, the water’s fine. Those people were wiped out in the second leg, which is how the second leg of every bear market works.
From April 1930 the market resumed falling, and it fell for more than two years. By July 8, 1932, the Dow was at 41.22. That’s an 89.2% decline from the September 1929 high. A ten-thousand-dollar cash portfolio bought at the top was now worth a little over a thousand. A ten-thousand-dollar margined portfolio had been liquidated in November of ’29 and the customer was still making payments to the broker for the deficit, on a subway conductor’s wages, in 1932.
The economy went with it:
- Unemployment peaked at 24.9% in 1933 — one working-age American in four with no job
- Over 9,000 banks failed between 1930 and 1933, which meant the savings of millions of people who had never owned a share of stock in their lives were gone
- U.S. industrial production fell 47% from the 1929 peak
- Real GDP fell 30%
- International trade collapsed 65%, dragging every other economy in the industrial world into the pit with us
- Farm income fell 50%, and the Dust Bowl finished what the grain price collapse started
The Depression lasted a decade. It didn’t end with clever policy. It ended when the country started building ships and tanks for a war nobody wanted. A generation of Americans came out of it with a bone-deep distrust of banks that they carried to the grave. My mother’s parents kept cash in a coffee tin in the pantry until 1971. I saw the tin. It had $640 in it, most of it in fives.
What Came Out of It, Legally
The regulatory framework that governed American markets from 1934 until the late 1990s was essentially the response to this one decade:
- The Securities Act of 1933 — issuers had to register and disclose before selling
- The Securities Exchange Act of 1934 — created the SEC, gave it teeth, put Joseph Kennedy in charge, which was the joke of the generation because Kennedy had run pools that would have been illegal under the Act he was now enforcing
- The Glass-Steagall Act of 1933 — commercial banks on one side, investment banks on the other, no speculating with depositors’ money
- FDIC deposit insurance — $2,500 originally, which was meaningful money in 1933
- Margin authority delegated to the Federal Reserve, which set Reg T at 50% and left it there — where it remains today, decades later, because the one thing Washington learned from 1929 and has never forgotten is what 10% margin does to a civilian
None of that prevents a crash. No rule on earth prevents a crash. What the framework did was make it harder for the next crash to take down the banks and the depositors with the speculators. We found out in 2008 how much of the Glass-Steagall wall had been quietly dismantled by then, and we paid for finding out.
What’s Still True
The 1929 crash is nearly a century old and the mechanics are exactly the same today as they were then. Every major bust since — 1987, the dot-com bubble, the 2008 financial crisis — has run the same playbook, with different instruments and different uniforms:
- Leverage is the killer, every time. 10% margin in 1929, portfolio insurance in 1987, tech stocks on margin in 1999, CDO-squared in 2007, 100x crypto perps in 2021. The vehicles change. The math of a levered position in a fast decline does not. This is why position sizing is not a preference — it’s the decision that decides whether you’re in the game next month.
- Timing a bubble kills shorts as surely as longs. Men shorted the market in 1928 on valuation and got carried out feet first before the thing proved them right a year later. Being correct about direction is worthless if your book can’t survive the wrong direction first.
- Cash is a position. The best trade I ever made on the block desk was a three-week stretch in August 1987 where I did almost nothing and took a lot of squash lessons at the NYAC with a pro named Hector who beat me 15-2 every session. Hector taught me to wait for the ball to come to me instead of lunging at it — a lesson I promptly ignored in October when the thing hit and I got myself into positions I should have stayed out of. Cash is a position. Sitting is a position. Patience is a skill you have to actually practice or it goes away.
- Narrative is the opiate. “New Era” in 1929. “Information economy” in 1999. “Housing never falls nationally” in 2006. Every bubble brings a story that makes the bubble look rational. The only counter is to stop listening to the story and look at the leverage, the valuations, and the base rate of how this has ended before. The base rate is not kind.
Livermore shorted the 1929 crash and is said to have made a hundred million dollars on the short book — in 1929 dollars, which is something closer to two billion today. He gave it all back inside a few years by breaking his own rules. The market does not care about your past wins. It didn’t care about Livermore’s. It won’t care about yours.
One Last Thing About Addy
Addy Cartwright retired off the Salomon block desk in 1991. He was 74 and they finally pushed him out because the new managing director thought he made the desk look old. I had lunch with him at the Harvard Club in the fall of ’93 — not because he went to Harvard, he didn’t, his wife did, and members could bring guests. He was a courtly man. He ordered a Manhattan at eleven-thirty in the morning, which was his way of signaling that he was retired now and they could all go to hell.
I asked him, because I was writing something down for myself at the time, what he thought the single biggest lesson of 1929 was for a guy like me who was still on a desk. He thought about it for a long time. Then he said: “The market in 1929 was full of men who believed they were smart. Some of them were. It didn’t matter.” And that was it. He didn’t expand. He ordered another Manhattan.
He died in 2002. I miss him.
See also: The Dot-Com Bubble, The 2008 Financial Crisis, The Flash Crash of 2010.
