1929 Inside the Greatest Crash in Wall Street History
The provided text is an adaptation from Andrew Ross Sorkin’s book, 1929: Inside the Greatest Crash in Wall Street History—And How It Shattered a Nation, focusing on the events surrounding the Stock Market Crash of 1929 and the role of Charles Mitchell, Chairman of National City Bank.
The Crisis of October 28, 1929
The Day’s End: On Monday, October 28, 1929, the stock market closed with a devastating 13% drop, the largest yet in a week of convulsions.
Charles Mitchell’s Predicament: Charles Mitchell, the influential chairman of the nation’s largest bank, National City Bank, returned to his office after emergency Federal Reserve meetings, determined to project confidence despite the market’s collapse.
The Unauthorized Purchase: Mitchell was informed by Hugh Baker, who ran the bank’s stock-trading unit, that National City had been obligated to purchase 71,000 shares of its own stock, a commitment of about $32 million, far exceeding what the bank could afford or legally use as collateral.
The Underlying Motivation: This large purchase was a side effect of a risky bet Mitchell had made to finalize the acquisition of Corn Exchange Bank. To ensure the stock-based part of the deal remained attractive, Mitchell had quietly instructed traders to buy National City shares whenever the price slipped, a strategy that failed spectacularly in the chaotic, falling market.
Causes and Context of the 1929 Crash
The Rise of Credit: The 1920s saw the birth of the modern consumer economy, with new goods like cars and radios made possible by credit (“Buy now, pay later”). General Motors, Sears, Roebuck & Co., and Wall Street (led by Mitchell) popularized borrowing.
Stock on Margin: Wall Street offered stock on credit, known as “on margin,” allowing middle-class Americans to buy stock by putting down only 10 or 20 percent and borrowing the rest, fueling optimism and speculation.
Social and Economic Imbalances: The period was characterized by a massive bifurcation of American society, widening the gulf between urban “haves” and rural “have-nots” due to technological changes in farming.
Laissez-Faire Government: An extreme form of laissez-faire reigned in Washington, with President Calvin Coolidge believing the American people could solve their own problems, allowing business to operate with little regulation.
Celebrity and Wealth: Businessmen and Wall Street titans, like Mitchell, joined athletes and Hollywood stars as celebrities, reflecting an era that equated fortunes with brilliance.
Market Chaos: By October 1929, the market’s human apparatus was overwhelmed. The stock ticker fell four hours behind in reporting prices, making accurate trading impossible and pushing prudent traders to sell.
Mitchell’s Response and Personal Risk
Fear of a Bank Run: Mitchell’s paramount fear was that if the bank’s predicament leaked out and its stock continued to fall, a “lack of confidence might bring a run” on National City, the country’s largest bank, a catastrophic scenario.
The Solution: The next morning, October 29, 1929 (Black Tuesday), Mitchell decided to personally borrow $12 million—several times his net worth—to secretly buy the National City stock from the bank.
The Downfall: Although this action helped save his bank at the time, the secret loans and subsequent actions led to Mitchell being discovered engaging in a sham transaction to reduce his tax bill. He was later indicted and arrested, becoming the public face of the crash and providing legislators with the public support needed to break up commercial and investment banks in 1933.
The Lesson of History
Collective Delusion: Lengthy booms create a “collective delusion” where optimism becomes a drug, causing people to lose their ability to calculate risk.
The Through Line of Debt: The author posits that debt is the singular through line behind every major financial crisis, as it draws the wealth of tomorrow into the present. The problem arises when greed takes too much, leading to panic.
