THE '29 CRASH: COULD IT HAPPEN AGAIN?
THE GAMBLE FOR MONEY
Exactly 40 years ago the world, gone mad with wild speculation, suddenly learned the party was over. Now it had to pay the bill
EVEN FOR SEPTEMBER 1929, it was a wild party. The girls were wearing skirts so short you could see the tops of their rolled stockings, and because this was Montreal, not the Volstead-dry U.S.A., there was plenty to drink. Around midnight the girls decided to see how high they could kick in those itsy-bitsy boop-boop-a-doop skirts, and that's when the trouble started..,
Charlie was there with his wife. Charlie was a customers’ man in Montreal, which meant he bought and sold stocks for the clients of the St. James Street brokerage house where he worked. All Charlie’s clients were getting rich, and so
was Charlie. On paper, it was said, he was worth a cool million.
Well, the girls were kicking higher and higher, the party was getting louder and louder, and old Charlie was laughing as hard as anybody. Until — whoops! — one of the girls accidentally kicked Charlie neatly in the back of the neck and knocked him out cold.
Ordinarily, this would have been something you laughed about the next day, and for years afterward. But this was September 1929, remember; and the unfortunate thing was that the flapper’s accidental kick hit a nerve or something, and Charlie wasn’t just knocked out; he was in a coma, and he stayed in a coma for more than a year.
When Charlie woke up it was early in 1931, and the party was very definitely over. His million dollars was long gone — vanished in a swirl of ticker tape that wiped out billions of dollars in paper profits and also wiped out a lot of other guys like Charlie.
Floyd Chalmers, who at the time was editor of The Financial Post, likes to tell that story to illustrate how it was just before the Great Crash and the long, sad Depression that followed.
FOR THE UNITED STATES, the Great Crash, which happened exactly 40 years ago, and the Depression that came on its heels were the most traumatic events since the Civil War. For Canadians, and for people throughout the Western world, it was a nightmare, a betrayal, a disaster that left invisible scars that still persist.
The Depression created at least two generations of Canadians who found it hard to trust anything. If times were good, they knew they were bound to turn bad — because they’d lived through the days when men would come home to
tell their wives they'd received another cut in pay, and be grateful they hadn’t been laid off entirely. A man with a wife and five kids might be making $20 a week. If they felt like taking a holiday, they could think of dozens of reasons not to do it, because they’d lived through the days when companies the size of
Abitibi Pulp and Paper couldn’t meet their payrolls, when hungry men in cloth caps roamed the streets because they had no place else to go.
These were the generations that told their children, as an article of faith: “There are a lot of things you're going to have to do in this world that you don’t want to do.” If you were born any time between 1915 and 1940, that phrase probably still echoes inside your head.
The Great Crash came Tuesday, October 29, 1929 — the day that most people who were then sentient remember as the single point in time when the world suddenly went sour. Forty years ago it happened. But if you went down to the customers' room in any big brokerage house in the country last summer and watched the numbers swim across the stock-quotation board at the front of the room, you would have met people, some of them not even born in 1929, who would look at those numbers sliding downward and shake their heads. Could it ever happen again? The stockbrokers would tell you that the market is better regulated now, that the monetary system is in bet-
ter shape, that margin accounts are more strictly controlled. But finally they would look again at those numbers on the board and shake their heads.
IT IS 1929. The street looks a lot different. On the northeast corner of Toronto's King and Bay streets, where the Bank of Nova Scotia will someday build a vast concrete tomb, there stands an ornate Victorian mansion, built by the Cawthra family and now occupied by a bank. People are wearing cloche hats and low-waisted skirts and pinched-waist suits and snap-brim hats. But they don’t walk in that queer jerky fashion that you remember from old newsreels; these are living men and women, the year is 1929, and they walk just like you and 1.
A little farther up, on Temperance Street, you can see the building that houses the Standard Stock and Mining Exchange. Forty years from now it won’t exist; it will be merged with the Toronto Stock Exchange in the 1930s. But today the place is going crazy. Men are running in and out, the trading floor is pandemonium. The mining camps of northern Ontario are as wild as Dawson City — Timmins, Kirkland Lake, Cobalt. There are fortunes to be made up there, and bigger fortunes to be made down here if you just play those numbers marked up on the board. They’ve been moving upward for years now, and why should they ever stop? Look at the cars! Durants, Hupmo-
biles, Pierce-Arrows, the Essex Super Six! Some 5,358,000 cars were built in the U.S. in 1929, which is almost as many as were sold in the boom year of 1953. Canadians bought 3,611 of the luxurious Graham-Paiges in the first half of 1929; a new Studebaker Dictator, made in Walkerville, Ontario, cost $1,395; and the new 1930 McLaughlin-Buick was two inches lower than last year’s.
Nearly everyone walking along Bay Street this afternoon can remember the days when people who were poor looked poor. But today, on this glorious autumn afternoon in 1929, everyone looks rich. Eaton’s is selling malacca walking-sticks for $30, and off-the-rack suits for $35. The New Method Laundry, as a special service to its Bay Street customers who are summer bachelors, picks up their shirts at the office and returns them, clean and starched, three days later.
Across the country, the nation is moving into the sixth or seventh year of the dizziest, sweetest economic boom in the history of the world. The signs of growth and progress are all around you, and everything that happens across the country and the world is reflected in the endlessly changing numbers that are posted on the boards in the brokerage houses of Bay Street. In Winnipeg, James Richardson, the stockbroker, is planning a threemillion-dollar skyscraper at the corner of Portage and Main. In Montreal, Bell Telephone of Canada has just built a 20story skyscraper on Beaver Hall Hill, on the former site of St. Andrew’s Church. There is a movie theatre in the assembly hall and the directors’ boardroom is paneled in rich-brown koko wood and has
a small marble beaver set into a niche above the fireplace. E. B. Eddy Ltd. is secretly making surveys for a new $1.5million paper mill in Hull, across the river from parliament. Canadian Pacific Railway, the nation’s second-biggest company, is paying out $915 in taxes every single hour. The Bank of Toronto has just opened a new branch in Cold Lake, Manitoba. Ontario has so far produced $300-million worth of gold. The Chateau Laurier has just been completed in Ottawa, after the removal of 37,000 cubic yards of solid rock. Forsyth Limited of Kitchener, Ontario, has just introduced elastic waistbands for pyjamas.
Canada is a country just beginning to realize, after half a century of living off a small-town agrarian economy, that she possesses the means to grow rich. The big money of this decade is in power, pulp and paper — a holy trinity often developed together, since a pulp mill needs lots of water and lots of electricity, and Canadian rivers can supply both, along with the trees. In Montreal, Izaak Walton Killam, who bought Royal Securities Corporation Ltd. from Lord Beaverbrook and used it as his own personal financing vehicle, has become one of the country’s richest men by putting together power companies to serve places as diverse as Calgary and Argentina. Another Montreal financier, R. O. Sweezey, is promoting the Beauharnois Power Company, a firm whose payoffs to politicians are to make it the subject of a Depression scandal. In Sudbury, at the fabulous Frood mine, International Nickel is supplying 90 percent of the world’s supply of that popular metal.
Mining, in fact, has become the stuff of dreams. Along with the rich producers — Inco, Dome, Hollinger, Lake Shore and all the rest — there are hundreds upon hundreds of promotions, all ostensibly aimed at finding another Dome or Hollinger, nearly all of them, in fact, aimed only at enriching their promoters.
The financial newspapers are crammed with the sort of blue-sky advertisements that, 40 years later, securities commissions would never dream of permitting. “We believe that Jack Nutt Mines Ltd. will prove to be not only a big but a rich TIN MINE,” advertises a bucket-shop promoter in Winnipeg. “We urge you to investigate.”
The mining business is spectacularly fraudulent. In the absence of any effective regulation by the stock exchanges or by the securities commissions (which don’t exist yet), many Bay Street brokers are becoming millionaires by using methods that are not only larcenous, but blatantly so. As a matter of course, they will sell millions more shares to the public than are authorized in the company’s treasury, defer delivery of the nonexistent shares, then drive down the price, forcing their customers to pay for stock they never owned. A year from now, a Financial Post exposé of these methods will send 27 brokers, some of them millionaires, to jail.
The brokers, all brokers, make speculation easy: they will lend you nearly all the money you need to buy stock. As long as the stock keeps going up, it is a lovely system. You put down $100, and borrow $900 from your broker, let us say, to buy $1,000 worth of stock. If the value of that stock goes to $1,500, your profit isn’t the 50 percent you would have made if you’d put up all the money yourself. No, on a 10-percent margin (which is common in 1929, but will be outlawed later) you have made 400 percent on your money! So you borrow more to buy more and soon you are a millionaire.
By 1928 the speculative demand had driven the rate for “call money” — brokers’ loans that could instantly be recalled — to unimaginable levels: six,
then seven, then eight, and finally to more than 20 percent. Manufacturers found they could employ their cash more profitably by lending it to speculators than they could by producing goods. By October 1929, U. S. corporations had loaned some $6.6 billion in call money, along with another two billion dollars from the banks.
Not only individual investors were playing the margin game. Many of the big investment trusts — an early version of the mutual fund — also borrowed money to buy stocks; and their shares were sold on margin, too, which meant you had double leverage going for you as long as the market kept rising. An investment trust — some 265 of them were formed in 1929 alone — was simply a company that bought shares of other companies, as mutual funds do today. But there were two important differences. In 1929, many trusts were selling for more than the total market value of the securities they owned — the difference being regarded as a premium paid for the skill of the trust’s managers. More ominously, these trusts routinely issued bonds and preferred shares as well as common stock — which meant they borrowed heavily to finance their purchases, thus bringing in more money to earn more profit for the common shares — so long as the market kept rising.
THE CRASH continued
Many trusts pushed the pyramid still higher by forming and buying into other trusts, which in turn formed and bought into still other trusts. As long as the market continued to rise, everyone got rich.
In these circumstances, the market was fantastically volatile. In November 1928, for instance, Canadian Marconi shares had risen from four to $28, at a time when the company was earning only a penny a share. When Marconi’s chairman, Sir Joseph Flavelle, told The Financial Post he thought the shares were priced too high, Marconi plunged within two days to seven dollars in New York and touched off a brief panic that wiped out an estimated nine billion dollars in share values.
But the market swiftly recovered. By the end of August 1929, stock prices reached fantastic levels. Consolidated Mining and Smelting, for instance, which sold for a high of $50 in 1924, hit a 1929 high of $575.
It had to stop some time, and on September 3 it did. On that day, the DowJones average hit an unprecedented $381.17. (In 1924 it had hit a high of $120.51.) Then the slide began. General Electric dropped 50 points in a month. Consolidated Smelters fell from $450 to $380. There were rallies, some of them lasting only an hour or so, but the trend continued downward until October 23, when the New York Stock Exchange, in an orgy of panic selling, traded more than six million shares, more than three times the volume of an average busy day. Toronto traded 115,060 shares the next day; in normal times, a good day’s volume would have been 20,000.
The next day, a Thursday, started out even worse. The morning’s trading was sheer panic, stemmed only by a group of New York bankers who offered to support the market. They sent Richard Whitney, the Exchange’s vice-president, on to the trading floor to make a dramatic bid of $205 for U. S. Steel, slightly above the current price. Whitney’s gesture stemmed that day’s panic, and the market closed with a 12-point loss, less than a third the drop of the previous day. The volume in New York was nearly 13 million shares.
Prices held fairly firm on Friday and for the half-day’s trading on Saturday. But frightened investors allowed their panic to accumulate all day Sunday; and when the market opened on Monday,
m3 lack Tuesday... what dreams were left collapsed. But a new Black Tuesday is impossible... isn’t it?
October 28, the losses were incredible. Inco dropped $7.75, Brazilian Traction dropped $11.75. Was there no end to it?
Apparently not, for Tuesday — “Black Tuesday,” as it’s been known ever since — was the worst of all. By this time, the small, heavily margined investors had been cleaned out. Now it was the Big Men who were selling, and because they needed cash to cover their margin calls, they were willing to sell at any price.
At the opening of trading in Montreal, one trader almost had his clothes torn off in the wild scramble on the floor. Passersby half a block away could hear the traders shouting like wounded bulls.
In the brokers’ offices, small investors gathered in silent groups to watch their dreams collapse. In Toronto, one man fainted. He was gently laid out at the back of the room while his fellow-victims returned to watching the board.
And still the numbers plunged downward. Inco dropped $13.87. Goodyear dropped $30, National Steel Car from $60 to $39. Comineo, which had touched $525 earlier in the year, closed on Black Tuesday at $235. When the bell rang in Toronto at 3 p.m. to end the day’s trading, the men on the floor cheered.
But the day wasn't over. Along Bay and St. James Streets, usually deserted after business hours, the big black cars came and went until long after midnight, as clients rich enough to afford chauffeured Pierce-Arrows visited their brokers to cover their margins — if they could. On that incredible day, New York had traded 16 million shares. Toronto traded 162,240, Montreal 1,291,141 — the busiest, most disastrous single day of trading in financial history. On that same day, the newspapers carried a statement from A. B. Mackenzie, general manager of the Bank of Montreal. “General conditions in the country,” he said, “are fundamentally sound.”
For some reason, nearly everyone in the business of dispensing reassurance, from U. S. President Herbert Hoover to the general manager of the Royal Bank of Canada, used that same phrase. As the Depression deepened, the phrase “fundamentally sound” became a macabre national joke; but the choice of words
was understandable. It was unimaginable that an economy so palpably vigorous could be affected by the paper losses of a bunch of speculators.
And yet it happened. Economists agree that the market crash didn’t cause the Depression all by itself; already in 1929 there were indications — production levels, car-loadings and so on — that the economy was slowing down. But the crash unquestionably contributed to the psychology of doubt and fear; if the stock of mighty corporations was almost worthless, what could you believe in?
The market cooled down after Black Tuesday, but prices continued to slide. By 1932 they had sunk to levels that were almost comical. Abitibi, which dropped to $35 in 1929, traded for 13 cents in 1933. Inco dropped to four dollars in 1932. People who bought stocks then and held on are rich men today. Broadcaster Gordon Sinclair, one of the few Canadians who had money in the 1930s, bought some stocks then that he still holds today; the value of some of them has appreciated several hundred times.
So maybe there’s a happy ending after all. At this writing, the bear market that began last April has shown no signs of escalating into the kind of blind panic that characterized 1929. It has been an orderly retreat, not a rout; and by the time you read this, the market may be climbing again. The stocks that have been hit hardest are those that deserved to be hit — glamorous electronic and aerospace and other stocks that traded at inflated multiples because everybody, including the big mutual funds, believed they would go up because everybody believed they would go up.
As any broker will tell you, 1969 isn’t 1929. Markets are better managed and regulated, national economies and the world monetary system are more wisely controlled, productivity is real and growing. The recent slump, they’ll tell you, is a healthy sign; it shows that governments are capable of acting effectively to cool off an overheated economy and the market that reflects it.
Still, you have to wonder. One afternoon late last summer I was in a brokerage office on a day when New York dropped 13 points. It was eerie; the phones weren’t ringing, the customers’ men were pacing around on the broadloom, humming to themselves, Chrysler quietly dropped five points because they weren’t selling as many cars as last year, and nobody had any wise answers when I asked what, exactly, was supposed to be happening to the market.
But people in the money business are optimists. They have to be. “Look at it this way,” one customers’ man told me. “The market may be slipping, but the economy’s got to be fundamentally sound. Am I right?” □