The events leading to the 'Great Crash of 1929' and the development of the 'SEC' which is considered as most successful of all federal regulatory agencies.
The
Great Depression is often called a ‘defining moment’ in twentieth-century
American history. Since equity markets were booming in the 1920s, the decade is
often referred to as the "Golden 20s." However, a few structural
problems did exist that led to the excess money supply in the market and
eventual recession. A few years after World War I, the global economy was still
reeling from the repercussions of the conflict. In 1929, the world was
surprised by an unexpected stock market crash in the USA. It's a one-of-a-kind,
five-sigma event that happens only once in a lifetime. The most lasting impact
of it was the transformation of the role of government in the economy.
On
the New York Stock Exchange, the Roaring Twenties roared most loudly and most
prolonged. The share market skyrocketed. By September 1929, the Dow Jones
Industrial Average had increased six-fold from 63 in August 1921 to 381 in
September 1929. Economist Irving Fisher in 1929 commented that stock prices
have reached "what looks like a permanently high plateau."
In
the end, the boom turned into a cataclysmic bust. The Dow Jones Industrial
Average fell nearly 13 percent on Black Monday, October 28, 1929. The market
fell nearly 12 percent the next day, Black Tuesday. It had lost almost half its
value by mid-November. Its decline continued through 1932, when it closed at
41.22, its lowest value of the twentieth century, 89 percent below its peak.
After the crash, the Dow did not reach its pre-crash levels until November
1954.
After
the Crash, during Great Depression, the American financial market came under
scrutiny, and Securities and Exchange Commission (SEC) was established. In the
New Deal era of President Roosevelt, James Landis played an essential role in
formulating regulations for Wall Street.
In
this review article, I will analyze the events that led to the Great Crash of
1929 and examine James Landis’s contribution in the initial years of the
Securities and Exchange Commission.
The BOOM Period: 1919-1929
In
1919, the USA emerged victorious from World War I. A mood of optimism was in
the air. Britain and its allies were exhausted financially from the wrath of
the war. However, the U.S. economy was thriving. The uncertainties were over. Everyday
life was changing in the 1920s, and electrification, modern
technologies was transforming America. New technologies were coming up –
airplanes, radios, cars, domestic goods that were luxuries by then started
becoming an everyday part of American life. An era of prosperity seems to have begun.
… Buy Now, Pay Later.
A new consumer culture and
mass consumerism have begun on a scale never seen before. For the first time in
history, the credit market started operating in the mass consumer market.
People started buying things on credit and easy EMIs that they could not afford
otherwise. Demand rises in this new economic era of boundless capitalism, and
the market flourishes. This, in turn, changed the American culture and way of
living, which is now generally referred to as the 'American Dream,' that it is
the birthright of every self-respecting American is bound to be rich.
…Liberty Bonds.
Propaganda poster for the Liberty Bond campaign. Via Wikimedia Commons
To help finance the war effort
and give loans to European countries to rebuild after the war, the U.S. Treasury
issued securities termed "Liberty Bonds" in June and October 1917 and
in May and October 1918. Treasury sold large denomination bonds to financial
institutions and bonds with face values as low as $50 directly to individuals.
This attracts first-time investors in the securities market and creates a
culture of investing in ordinary citizens. For the first time, they got
interest payments every six months and could trade the securities. Celebrities
like Charlie Chaplin promoted liberty bonds in massive rallies.
…Charles Mitchell: Wolf of the Wall
Street.
For years, Wall Street, the
center of American finance made up of a small elite group of bankers doing
business with each other in a society closed off to the general public.
However, one man saw an opportunity that changed the face of the financial market
in the world – Charles Mitchell, President of National City Bank. He spotted a
lucrative gap in the market. As people were accustomed to investing with the
introduction of liberty bonds, he thought that all he needed was to market
other investment products like bonds, corporate stocks, and private securities
and convince people that these were good investment opportunities. If people
bought stocks and shares of the companies listed on the New York Stock Exchange,
people like Mitchell could make a profit in the process. This was a very
ambitious dream, but gradually people started investing in stocks breaking the
stigma that stocks are historically risky for ordinary people. The idea took
off, and Mitchell started opening brokerage firms across the country where people
who have the money but not the investment know-how can speculate in stocks and
shares. Share Market became a safe and reliable investment opportunity for the
average American.
…tick tick Ticker Tape.
New technology made the
stock exchange fast in handling this new wave of first-time investors. Ticker
Tape was a machine made with telegraph technology to communicate the stock
prices in real-time. Ticker tapes were all over, from nightclubs, railway
depots to even beauty parlors and sea beaches. The Trans-Lux Company developed
the "movie ticker" in 1923, an illuminated screen that displayed
rapidly changing stock prices. As the ticker tape whizzed by in bright light, a
crowd at a retail brokerage could watch changing stock prices together for the
first time
…Hot stocks… easy money.
People were making easy
money on the stock market. There were wild speculations on all kinds of securities;
from movie companies to aeronautical and automobiles, almost every share was
flying high in Wall Street. Some of the hottest stocks of that time were Radio
Corporation of America, Coca-Cola, U.S. Steel, and General Motors. Everyone
covered the share market through radio shows, magazines, newspapers,
periodicals. People were fascinated to know what stocks the celebrities were
speculating. Even the professional share brokers were also becoming
celebrities. People were following them, eager to know where they were
investing. From the wealthy doctor to the shoe polish boy, almost everyone
invested their life savings in the share market.
One of the exciting
features of the boom period was the participation of women in the share market.
Up until the 1920s, women were not involved in the stock market, partly because
of gender prejudice. It was a common belief that they could not handle the
cruel ups and downs and clever tactics of Wall Street. However, with the
popularisation of the stock market, many women started investing in stocks.
Partly because the 1920s were considered a new chapter in the American feminist
movement; ladies were stepping out, going to college, and eventually taking
care of their own money
…buying share on credit.
 Index of the New York Stock Exchange's brokers' loans and an index of
stock prices. via |
The "buy now, pay
later" tool was now introduced in the stock market. A buyer needed only to
provide a fraction of the required funds, borrow the rest, and enjoy the entire
capital gain less the interest on the borrowed funds. Many economic historians
believe that stock market credit was a crucial element in generating the mania
around the share market. Almost 40 cents of every dollar lent in America was
used to purchase stocks, typically through margin purchases
It is easy to understand
the presumption that a credit expansion fuelled the stock market boom by
looking at Figure 2. Because of the tight money policy of the Federal Reserve,
regular credit on the market was low, but brokerage firms circulated credit in
the stock market due to no tight regulation. Due to the easy credit, the demand
for stocks and shares increased, and in turn, the stock prices reached a record
high
…
Laissez-Faire, devil may care.
Throughout the booming
period, the Republican Party stayed in power on the back of America’s boundless
prosperity. Calvin Coolidge became president in 1923. He was an investor
himself and notably silent on the speculative mania of the stock market. He
believed in the laissez-faire economy and is famous for saying that the
business of America is business. As the economy was flourishing, no one
questioned the non-interventionist nature of the government
Moreover, the president and
top government officials were in close connection with the inner circle of wall
street, giving the elite bankers an immense influence over the government's
financial policy. One of the most influential of these elite bankers were the
bankers of the investment firm, JP Morgan, strategical located opposite of the
New York Stock Exchange. They played an essential role in the working of the
market and the devastating events to come. There were rampant market
manipulation and speculation by amateur investors with no disclosure to the
government—millions of people invested in a market where the government had no
laws and regulations.
…Insider trading.
Bankers, corporate
leaders, and financiers created secret investment "pools" to purchase
shares in glamour corporations like American Telephone and Telegraph (AT &
T) during this time. They then sent bank salespeople out to encourage
clients to purchase stocks on margin in the same company. Sometimes phoney
stories were planted in the press, implying that there were "hot
stocks" to buy. This practice was called "insider trading" and somewhat
legally allowed for gross market manipulation. After a relatively short period,
pool members quietly sold their holdings at inflated rates. When the prices
began to settle down to a more realistic level reflecting the company's actual
earnings power and potential, smaller investors who were not a part of the pool
were left holding the bag and owing large sums of money
…confident outside, skeptical inside:
Harbert Hoover
In March of 1929, Harbert
Hoover of the Republican Party took oath as the president of the USA. In his
inaugural speech, he said, "In the large view, we have reached a higher
degree of comfort and security than ever existed before in the history of the
world"
…the warning: Paul Warburg
In the summer of 1929,
prominent investment banker Paul Warburg issued a warning regarding the bubble
created in the bull market. He stated, “If the orgy of 'unrestrained
speculation' in the stock market does not stop, it will 'bring about a general
depression involving the whole country." However, his comments were
dismissed, and he was even accused of not understanding the changes in the
economy
… the bubble is getting even bigger.
Warburg's prediction fell
on defiance, and between May and September 1929, 60 new companies were listed
on the New York Stock Exchange, adding more than 100 million shares in the
market, fuelling the investment bubble. On September 3, 1929, the Dow Jones Industrial
Average reached 381.2
…cause for concern?
Harbert Hoover, the President,
was concerned about the bubble and asked around his friends of wall street if
the situation was of any concern? He then received a memo from the senior
partner of JP Morgan, "there is nothing in the present situation to
suggest that the normal economic forces ... are not still operative and
adequate." Yale Economist Irving Fisher publicly announced that
"stock prices have reached what looks like a permanently high
plateau"
However, Hoover still did not
intervene in the situation. He still believed in self-regulation and the
independent operation of Wall Street. This is clear from his correspondence
with the elites of Wall Street. There was also no clear understanding of who should
regulate the stock market. This can be clear from one of his own writings.
via
Memoirs of Herbert Hoover
The Great Crash: October 1929
Unlike other market
disasters, the Great Crash was a series of events that occurred over the course
of a week, from Wednesday, October 23, to Thursday, October 31. During these
eight frantic sessions, a total of nearly 70.8 million shares were traded-more
than had changed hands in any month prior to March 1928
…Wednesday, October 23, 1929
The great crash started. No
one knows the sudden loss of confidence at the end of Wednesday, October 23.
Out of nowhere, a sharp loss in the automobile stocks provoked a frantic last hour’s
trading. Millions of shares suddenly sold. The industrials dropped 31 points on
that day
…Thursday, October 24, 1929
Black Thursday is often
considered to be the beginning of the crash. When trading opened on Thursday,
October 24, the Dow fell 11% in the first few hours. That day, a tremendous
fall in the stock prices kept people in shock and utter disbelief. A large
crowd was gathering in front of the New York Stock Exchange with a strange murmuring
humming in the air. The Dow Jones index fell by 12.8%
As the general principle of
economics says, good and evil start falling together when people lose
confidence in the economy. On that day, the wolf himself, Charles Mitchell, who
started all this in the first place, fixed a meeting with the partners of the JP
Morgan and other elite bankers. The public outcome of the meeting was that
Richard Whitney, the vice president of the New York Stock Exchange, went onto
the exchange floor and made bids aimed at stabilizing the market. The first
one, a $205-per-share bid for 10,000 shares of U.S. Steel, is one of the most
well-remembered moments in New York market history. Despite selling orders
continuing to flow in the afternoon, the DJIA closed the day at 299.47, or a
loss of only 1.78 percent
The idea worked, suddenly
all the blue-chip stock prices were rising, and the speculators hoped that the
confidence was back again. A record 12,894,650 shares were traded on the New
York Stock Exchange. Thomas Lamont of JP Morgan held a press conference and
reassured the public that there was no cause to worry
…Friday,
Saturday & Sunday, October 25th, 26th & 27th,
1929
The late transactions on
the 24th were so huge in numbers that the ticker tape machine and
the accountants and bookkeepers of Wall Street were falling behind. They worked
all night to keep track of the transactions, but it took till noon of the 25th
to complete the task
…Monday, October 28, 1929
On Monday, the stock
tickers running out of tape, panicking investors were desperate about the fate
of their share prices jammed the telephone lines between New York and other
major cities. Now, many speculators were concerned about the share bought on
easy credit. The problem with stocks bought on credit was that the falling
share prices could disassemble the entire banking machinery. As the collateral
of these loans was the stocks themselves; creditors were concerned that the
loans might not be paid back with the soaring prices. People got mails from the
creditors to bring more cash, as they needed more collateral. If people could
not pay the additional cash, the creditors warned them that they would sell
their shares to recover money. The market began to fall more steeply, and it
was the worst day in Wall Street history until then. Stocks
again went down on Monday, October 28. There were 9,212,800 shares traded
(3,000,000 in the final hour)
…Tuesday, October 29, 1929
On Black Tuesday, tremendous
waves of selling were just kept coming. Some of the famous names of corporate
America saw their share prices plummet – Radio Corporation of America, General
Motors, U.S. Steel, stocks that have been the symbol of the boom years kept
falling. This time the selling of the stocks was so massive that there was no chance
of any meeting of the bankers at JP Morgan. The situation was then entirely out
of hand. The market broke very sharply. The Dow Jones indices fell from 260.64
to 230.07, i.e., a fall of 30.57 points
Dow Jones Industrial Average during the Crash via Value Walk
New York Times on October 30, 1929, via New York Times on Twitter
…Thursday, October 31, 1929
31st regarded
as the last day of the crash. The crash devasted people. There was a great deal
of interest in the psychological effects of the stock market crisis in the
early days. The newspaper commentaries picked up on suicides caused by the
market, like John G. Schwitzgebel of Kansas City, who shot himself in the chest
at the Kansas City Club on October 29
People gathered around New York Stock Exchange via National Geographic.
The aftermath of the Crash
A
third of the U.S. economy fell between 1929 and 1932, from $103.1 billion to
$58.0 billion. To what extent was the stock market collapse responsible for the
collapse? July 1932 marked the Dow's lowest point (40.56 points). The long
decline resulted in a substantial loss of wealth, which affected consumption
immediately. More than $20 billion was lost by investors (sometimes referred to
as 600,000 widows and orphans) after the stock exchange
Many
companies closed their operation after the crash. There was rampant
unemployment in the country. Banks were closing, and as there was no insurance
of the deposits in the bank, people lost their life savings. Unemployment and
homelessness was the face of American cities. There were people living in tiny
houses made up of cardboard; these colonies were called Hooverville.
…Hoover’s Response
In keeping with his
non-interventionist principles, Hoover's response to the crash focused on two
very common American traditions: Asking individuals to work harder and he asked
the business community to voluntarily help sustain the economy by retaining workers
and continuing production. The U.S. president immediately convened a conference
of leading industrialists in Washington, DC, encouraging them to maintain their
current wages during the short economic crisis. He told business executives
that the disaster was not part of a more significant downturn and that they had
nothing to be concerned about. Similar discussions with CEOs from power
companies and railroads resulted in promises of billions of dollars in new
construction projects, while labor leaders agreed to hold off on pay demands
and workers continued to work. In addition, Hoover pushed Congress to pass a
$160 million tax cut to boost American incomes
Roosevelt and the New Deal.
Franklin D Roosevelt was
elected to the presidency four times, serving from March 1933 until he died in
office in April 1945. As president, he started changing the American
administration known as the ‘New Deal, a package of federal legislation. The
New Deal was inspired by a spirit rather than a blueprint for action., as
Roosevelt said, of “bold, persistent experimentation,” in which he would “take
a method and try it: if it fails, admit it frankly and try another.”
He moved fast to safeguard
bank depositors and put a stop to dangerous banking practices. He pushed
through measures in Congress to combat securities fraud. He aided indebted
landowners and farms on the brink of losing their homes and property. In
addition, he attempted to promote inflation in order to support the economy's
declining prices and salaries.
Formation of Securities and Exchange Commission
There has not been another
era of similar crisis and recognized the need for a fundamentally fresh
strategy to financial regulation since 1929-33. Congress established the
Securities and Exchange Commission (SEC) in 1934 as the first federal
securities regulator. It is an independent regulatory agency charged with
safeguarding investors, ensuring the fair and orderly operation of securities
markets, and enabling capital formation. The SEC regulates regional stock
exchanges, investment businesses, investment advisers, over-the-counter
markets, corporate reporting activities, accounting practices, and several
specialized disciplines such as public utility holding companies, bankruptcies,
and overseas corrupt practices. The agency had expanded from a modest office of
approximately 150 employees in 1934, when it was founded during the New Deal,
to a vast bureaucracy of about 2000 employees today.
The Securities Act of 1933
(Securities Act) and the Securities Exchange Act of 1934 (Exchange Act), the
laws that had the largest impact on the securities market, were key components
of the regulatory protections put in place during the Depression. The
Securities Act's primary goal is to govern issuers' initial distribution of
securities to public investors. The Act necessitates filing a registration
statement for securities offered through interstate commerce or the mails. The
purpose of registration is to provide complete and accurate information on the
securities offered to the public. The Exchange Act regulates the securities
exchange markets as well as the activities of firms listed on national
securities exchanges (such as the New York and American stock exchanges)
The SEC's success can be
attributed in significant part to the initial approach devised by its founders.
The Securities and Exchange Commission (SEC), led by Joseph P. Kennedy, James
M. Landis, and William Douglas, tried to restore public confidence in the
capital markets and persuade regulated interests to assist in the enforcement
of the public policy. The SEC pushed for building private-sector regulatory
frameworks, utilizing its power and influence to promote what became known as
"public use of private interest"
Roosevelt was at the head
of all the policies, but there were two more interesting gentlemen whose
presence made the SEC successful. One was Joseph Kennedy, the investor himself
and, as mentioned earlier, one of the few men who made out the crash without
financial loss. Kennedy was a master manipulator as an investor on Wall Street.
So, he knew all the ways in which bankers and investors in Wall Street
manipulated the market and committed fraud. So there were no other men suitable
to prevent fraud apart from the fraud himself. Another one is the Harvard
fellow James Landis, who later taught the world how to regulate the financial
world.
Conclusion
Men have been swindled by
other men on many occasions. The autumn of 1929 was, perhaps, the first occasion
when men succeeded on a large scale in swindling themselves
Overall, the Great Crash of 1929 had a profound impact on financial regulation in the United States, leading to the creation of the SEC, the expansion of banking regulation, increased transparency, and strengthened enforcement of financial regulations. These reforms helped to restore confidence in the financial markets and prevent similar crashes in the future.
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