The year 1929 can lay claim to being one of the most significant years in modern day economics, especially from the point of view of what it exposed about capitalism and human nature. The month of October in 1929 witnessed a dramatic unravelling of stock prices in the US. Stock prices — that had quadrupled during the 1920s fuelled by credit and margin payments (basically use $1 to buy something that’s priced at $10) — fell drastically as people lost confidence and the bubble burst.
As it happens with dominoes, a small change can lead to massive and widespread consequences. What allowed one misstep to cause the next crises was leverage — or the level of debt investors and companies have on their books.
To understand how massive the stock market crash of 1929 was and how significantly it impacted the US and the global economy, it would help to first look at a more recent crisis — the Global Financial Crisis of 2008 (also referred to as the Great Recession). Many economies trace back their economic as well as societal problems to the Great Recession of 2008 in the US. Most of the disenchantment in Western European countries with immigration and globalisation — for instance Brexit or the rise of populist and strongman leaders (be it far right or far left) — can be traced back to the events and effects of the Great Recession. It led to such massive global upheaval, that while it happened the US unemployment rate peaked at 10% while the GDP (or the total economic output) fell by less than 5%.
Severity of the 1929 crash
During the Great Depression that started with the crash of 1929, the GDP fell by 30% and the unemployment rate soared to 25%. By the time the dust settled, around 9,000 banks had gone under. That speaks of the severity of the crisis. Given the linkage of exchange rate via the gold standard and trade, the crisis reverberated across the world, wrecking economies and lives.
In the lead up to the crash and the eventual economic depression, the 1920s saw a “massive bifurcation” of American society. Technological change had altered farming while credit-fuelled growth of cities created a tremendous inequality between the urban haves and the rural have-nots. Wall Street wealth created a class that was far removed from the common people. President Calvin Coolidge proudly cut taxes and the size of the government as he believed that people could solve their own problems.
Following this, regulation took a back seat and laissez-faire ruled in Washington. Businesses were only too happy to make their own rules. Everything from stocks to cars to home appliances could be bought and sold on credit. The stock market had become the engine of the entire economy, fuelled with speculation and a sense that “this time is different”.
As it turned out, it was — it was the biggest collapse ever seen, before and since.
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Of course, this information is common knowledge and there is no real need to read a detailed book on it — or indeed to write a new book. And yet, noted journalist Andrew Ross Sorkin’s latest book is a must-read because it shows how the crisis unfolded instead of just telling it. He lays out a detailed cast of characters — that included the main protagonists of the story like Thomas Lamont of JP Morgan and Charles Mitchell of the National City Bank as well as the side characters like Evangeline Adams, an astrologer who was known as the “stock market seer” — to recreate the world of 1929.
In doing so, he tells the human story and empowers his readers to draw their own conclusions about what went wrong, why and how. And equally importantly, he leaves the readers to decide if the world today is at the brink of, or heading towards, something similar almost a century later.
Days which shook the global economy
The book reads like a well-written screenplay — each chapter is titled by the date on which a key event happened — as Sorkin takes the reader to the location on a specific day and places them in the room with the people who were taking the decision that ultimately shook the global economy.
For instance, sample the chapter titled October 24, 1929. To be sure, this is the “Black Thursday” when the stock markets collapsed. Here’s how the chapter starts: “As dawn broke on Thursday, October 24, the first rays of morning sunlight cast an angled glow across the façade of the New York Stock Exchange, briefly catching its white marble columns before slipping into shadow…For a few fleeting minutes, the thousands of men filling the street…had to squint against the glare.”
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It is one thing to write these words in a work of fiction. In this instance, Sorkin says he researched even the architectural plans for the places where action happened. And that is the great achievement of this book. Writing his last book on the 2008 crisis — Too Big to Fail — as if one was the proverbial fly on the wall, was one thing, but to do so for a time so far back required tremendous research.
“The book is the product of hundreds of sources — private letters, transcripts, oral histories, architectural plans, memoirs, newspaper accounts, corporate filings, and other archives,” states Sorkin. In the paperback edition the main text occupies around 450 pages followed by 100 pages of notes, bibliography and index.
But as one finishes the book, it is hard not to draw parallels with the present day. The world today is indeed eerily similar.
How similar is it to the world today?
There are several fractures both between countries — think China versus the US for instance — and within them — think of the surge of sentiment against immigrants. Not to mention the fact that, unlike a century ago, governments today are already overleveraged (as they tried to rescue their economies from Covid and supply-chain disruptions during the Ukraine war), and do not have the capacity to absorb more shocks.
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Under the circumstances, a stock market boom led by Artificial Intelligence companies and cryptocurrencies can be a cause of concern. For one, AI can fundamentally upend not just how human beings live and work but also how they interact with the environment (think of the energy requirements) and how it impacts government policies (think welfare).
The meteoric rise of cryptocurrencies even when they lack an underlying asset is another element that creates uncertainty. In such a scenario, the interlinkages and borrowing patterns of AI-related companies such as Nvidia or Open AI or Meta become crucial. President Donald Trump’s push for tariffs further throws mud in the wheels of the global economy.
Sorkin has said he wanted to write this book as a prequel to the book on the 2008 crisis. His inspiration and hope was to emulate Walter Lord’s “A Night to Remember”, which provides the definitive account of the sinking of the Titanic. As good as his writing is, let’s hope he doesn’t have to write a sequel to the 2008 book.
