1929 - By Andrew Ross Sorkin
Notes
"How did you go bankrupt?" "Two ways. Gradually, then suddenly." That is how confidence, the lifeblood of the economy, disappears.
The greatest product of the 1920s was not the car or the radio, it was credit. It drew the wealth of tomorrow into the present. Problems arise when we get greedy and take too much.
Lengthy, uninterrupted booms produce a collective delusion where optimism becomes a drug. People lose the ability to calculate risk because the future looks like a land of ever-expanding opportunity.
Human history becomes more and more a race between education and catastrophe.
J. Pierpont Morgan believed character was more important than collateral. A man with character but no money could get a loan; a man with property but no character could not. That (he claimed, and possibly even believed) was the rule of business. But who determines character? And when you're misled - what then?
In 1929, Charles Mitchell, head of the largest bank in America, publicly defied the Federal Reserve's order to curb speculation. He argued his obligation to avert a crisis was paramount to any Fed warning and single-handedly pumped $25 million of credit into the market to keep the party going.
Groucho Marx lost a fortune because he listened to a broker who claimed Wall Street was no longer "localised" but a "worldwide market" where prices would rise forever. When the crash hit, the broker simply said, "I guess I made a mistake."
By 1929, women made up 20 per cent of market speculators. Brokerages installed special lounges for them, while critics claimed they were temperamentally unsuited for trading and were "going crazy and mortgaging their homes."
Jesse Livermore's trading rule: Profits take care of themselves, but losses never do. You must insure yourself against big losses by taking the first small loss immediately.
Livermore believed the market is a mirror of the underlying psychology. He distrusted inside information and professors, arguing that if they haven't traded on margin, they know nothing about speculation.
Winston Churchill was a terrible investor who treated the stock market like a casino. He had to be bailed out by financiers and book deals to avoid bankruptcy.
Herbert Hoover changed the name for the economic slowdown from a "panic" to a "depression" to assuage the public. It was a terrible rebranding: panics are short; depressions can last a damned long time.
No specific event produced the debacle. A sufficient number of people simply believed the hour to sell had come, starting a wave of fear that the machinery of the exchange couldn't withstand.
Charles Mitchell was so confident in his bank's stock that he personally borrowed $12 million to buy shares during the crash to prop up the price. He ended up millions in debt and indicted for tax evasion.
Many people "achieve self-approval by cheap and superficial methods, concocting clever excuses to make what we want to do seem admirable so that we can condone our actions and like ourselves."
The "White Knight" of Wall Street, Richard Whitney, was actually pilfering millions from the Stock Exchange's gratuity fund and the New York Yacht Club to cover his bad debts. The Morgan partners knew and covered it up to avoid a scandal.
The crash wasn't caused by the withdrawal of Federal Reserve credit, but it also wasn't helped by the avalanche of "bootleg" credit: loans from corporations and foreign entities that the Fed couldn't control.
Carter Glass, the father of banking reform, initially opposed federal deposit insurance because he believed it rewarded reckless banks and created moral hazard. He had to be browbeaten into accepting it.
After losing his fortune, automobile pioneer William Durant opened his old bank book and declared he was still the richest man in America, "in friends." He died broke.
The story of 1929 is about human nature, not regulation or rates. AKA we will always find new ways to believe the good times can last forever, to mistake hope for certainty.
The antidote to irrational exuberance is not regulation or skepticism, but humility. We must know that no system is foolproof and no generation is exempt.