We noted the growth of the credit economy above. Stock brokers even began allowing the purchase of stocks on credit, a practice called “margin”. People who wanted to get into the stock market could put up 10% of the cost of the stock and the broker would lend the rest of the purchase price on favorable terms. (Jennings, p.142) There was little worry that the borrowers would be able to pay off the loans from the profits when stock was sold because it was assumed that the prices of stock would continue to rise. The amount of margin money loaned rose during 1927 from $2.8 billion to $3.5 billion. (Allen, XII, 1) By the summer of 1929 broker loans were approaching six billion dollars. (Id. at 5) That sum exceeded 6.8 billion on October 2, 1929 (Allen, XIII, 1) The amount of margin debt owed by stock speculators was equal to one-half of the debt of the federal government. (John F. Wukovits (ed), America’s Decades – The 1920’s, Greenhaven Press, San Diego, CA 2000, p. 25).
The standard wisdom that one should pay ten times earnings for a share of stock was ignored. Stocks traded for 20, 30, even 100 times their earnings simply on the expectation that share prices would always, sooner or later, continue to rise. (Streissguth, p. 284) In sum, “America was a nation of giddy consumers for whom wishful thinking had become way of life.” (TFC, 96) “[T]he average guy was starting to hear about friends making $20,000 or $30,000 overnight. There was rampant speculation, and if you wanted to take part all you had to do was put up 10%…” (Jennings, p. 141, quoting a college finance student who worked in a brokerage in 1929)
Examples of the rise in stock prices from March 1928 to September 1929 (Allen, XII, 5):
- American Can went from 77 to 181 7/8 – almost 2½ times
- ATT grew 124 1/2 points from 179 ½ to 304,
- General Electric 128 ¾ – 396 ¼ – a little more than 3 times,
- Westinghouse 91 5/8 – 289 7/8 , and
- Union Carbide 145 – 413 5/8 (adjusted).
The speculative rise in stock prices was exacerbated by other manipulations. New securities, from rising merger activity and the formation of holding companies, were issued to take advantage of the rising stock prices. Stock pools, which were not illegal until the 1934 Securities and Exchange Act, took advantage of the boom to temporarily drive up the price of selected stocks and reap large gains for the members of the pool. In stock pools a group of speculators would pool large amounts of their funds and then begin purchasing large amounts of shares of a stock. This increased demand led to rising prices for that stock. Frequently pool insiders would “churn” the stock by repeatedly buying and selling the same shares among themselves, but at rising prices. Outsiders, seeing the price rising, would decide to purchase the stock whose price was rising. At a predetermined higher price the pool members would, within a short period, sell their shares and pull out of the market for that stock. Without the additional demand from the pool, the stock’s price usually fell quickly bringing large losses for the unsuspecting outside investors while reaping large gains for the pool insiders. http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/
The speculative bubble could not last forever. The Dow-Jones index hit its peak of 381 on September 3, 1929 and then slid to 320 on October 21. In the following week the stock market “crashed,” with a record number of shares being traded on several days. At the end of Tuesday, October 29, the index stood at 230, 96 points less than one week before. On November 13, 1929, the Dow-Jones index reached its lowest point for the year at 198—183 points less than the September 3 peak. The Great Depression, sparked by the market crash, had begun.
A Tale of The Ticker (The Stock Market Song) written by Frank Crumit, a Twenties American singer, composer, radio entertainer and vaudeville star, reflects the crazy stock market speculation of the late Twenties. The song presages The Crash that comes in the late Fall of 1929.
This little pig went to market,
Where they buy and sell the stocks.
This little pig came home again,
With his system full of shocks.
I don’t understand their language,
Don’t know what its all about.
For a bull buys up and the bear sells down,
And a broker sells you out.
And here is the song
They sing the whole day long.
Oh the market’s not so good today,
Your stocks look kind of sick.
In fact they all drop down a point,
Each time the tickers tick.
We’ll have to have more margin now,
There isn’t any doubt.
So you better dash with a load of cash,
Or we’ll have to sell you out.
The stock exchange is a funny place,
Its the strangest place in town.
The seats cost half a million cash,
But the brokers won’t sit down.
There’s the broker, the bull, and the bear,
It’s queer but its not a joke.
And the broker says you’re broke.
And here is the song
I hear the whole day long.
The market simply goes to prove,
That we still have loco weeds.
For the bull buys what he doesn’t want,
And the bear sells what he needs.
I bought an elevator stock,
And thought that I’d done well.
Then the little bears all ran downstairs,
And rang the basement bell.
And here is the song
I heard the whole day long.
(A more detailed discussion of and songs about the Stock Market Crash in October 1929 and the resultant Depression can be found in “The Depression” section of this work.)