Great Depression: we have history on our side this time

In 24 hours of trading, starting October 28 and continuing into the next day, some 25 per cent of the value of America’s biggest companies vanished on the NYSE. Coming on the heels of big losses a few days earlier, the reversal was stunning. Just six weeks before, stocks had reached their all-time high.

Still, it was possible at first to view the Crash as an isolated event. Most people hadn’t shared in the rising prosperity after World War I, so most didn’t lose money in the Crash. Only about 2 per cent of households owned stocks, says historian David Kyvig, compared with about 50 per cent who have direct or indirect investments in the market today.

A consumer culture was growing — about 80 per cent of households had a radio by the late 1920s — but the middle class was still small. Soon, they would know. Slowly, in irregular waves, people across the country began to feel that things were different.

In New York, the Crash claimed its first victims within hours. The day after, smaller brokerages in the city folded, driven under by “margin” loans to clients who were wiped out. The undertow drew in a number of smaller banks, which in turn had lent money to the brokerages and to stock market players.

The first bread line appeared in New York in February 1930, according to historian William Klingaman. When the images of men lining up for a handout appeared in newspapers and newsreels, they shocked the rest of the nation, which until then had largely been spared. These men — able-bodied, well-dressed — didn’t fit the stereotype of the destitute, he says.

By the middle of 1930, though, the malaise had spread beyond Manhattan. Nine months after the Crash, the national unemployment rate had tripled, claiming more than 10 per cent of the nation’s 48 million workers. By the time Franklin Roosevelt was inaugurated in March 1933, the figure had risen to more than 25 per cent.

The parallels between October 1929 and today are striking. Although the contemporary economy is far larger and more complex than it was eight decades ago, consumers were deeply in debt then, too. The gap between rich and poor had widened, thanks in part to tax cuts for the wealthy. Amid it all, the stock market — lightly regulated — grew into a speculative bubble, driven to unsupportable highs by investors who used borrowed money to buy shares.

One key difference, however, might have been psychological. In 1929, people didn’t have the benefit of history and hindsight. There had been recessions, most recently in 1921 and 1907, but nothing suggested the scale of catastrophe that loomed. The Great Depression was unknown — and perhaps even unthinkable.

After the Crash, the Dow Jones Industrial Average began to climb again. By mid-April of 1930, the average was within a few percentage points of the pre-Crash levels of early October. But then the index began to march downward again; by the time it bottomed out in July 1932, stocks had fallen an average of 89 per cent from their peak.

It would take an entire generation, almost 25 years,for the market to recover fully.