The End of the Roaring Twenties

In October 1929, a Yale economist declared American stocks had reached a permanently high plateau. Nine days later, the Wall Street Crash began unfolding.

New York, October 1929

On the evening of October 15th, Irving Fisher, professor of Economics at Yale, spoke at the Builders Exchange Club in New York in front of a room full of people from the Purchasing Agents Association. The audience listened carefully as Fisher, one of the greatest economists the United States had ever produced¹, declared “Stock prices have reached what looks like a permanently high plateau”.

The Dow Jones Industrial Average had risen from 64 in the summer of 1921 to 381 that September, a near sixfold increase in eight years driven by what seemed like a self-sustaining growth in all sectors. American industry, which had expanded enormously to supply the Allies during World War I, returned to peacetime production through the 1920s and found strong demand both at home — where wartime restrictions had created pent-up consumption — and abroad, where European countries needed everything from steel to machinery to rebuild themselves.

The Federal Reserve was created in 1913 out of a need to maintain the gold standard, provide liquidity to banks, and prevent panics. It required members to hold reserves at one of twelve regional Federal Reserve Banks and gave them the ability to borrow from the Fed against collateral when they needed liquidity. The result was a banking system that could extend more credit. Among the expansions of credit were loans to brokers to fund margin accounts. By 1929 these broker call loans had grown to over $8 billion, with margin requirements falling to as low as ten percent – meaning that an ordinary investor could now buy ten dollars worth of shares for every dollar of their own money.

Beneath the surface, the system was cracking. The number of stocks driving the index higher had been decreasing since the spring. Meanwhile the Fed, in an attempt to cool speculation, had raised rates twice, and the overnight cost of borrowing to buy stocks had spiked sharply as the supply of credit could no longer keep pace with demand.

By the time Fisher spoke in New York, Jesse Livermore, one of the wealthiest and most famous traders in the US, had accumulated a very large short position in the market. The son of a Massachusetts farmer, Livermore quit school at fourteen to post prices on a chalkboard at a Boston brokerage. There he developed a method of reading patterns in charts — what we now call technical analysis — and by twenty had made a small fortune betting on stocks. He shorted stocks in 1907 and made an estimated one million dollars, with a position size so large that J.P. Morgan himself reportedly asked him to stop selling. By 1929 his name was well known across Wall Street, and news of his short position sent jitters through the market.

On October 24th, the market collapsed. There was no single catalyst, but rather sustained market weakness from prior days which had been triggering margin calls on a large scale. When investors could not meet the calls, their stocks were sold automatically by their brokers; the selling drove prices lower, which triggered the next wave of calls. By late morning of the 24th the forced selling had become a cascade. Brokers stood at the trading posts shouting prices into the noise, waving order slips that nobody was taking. Runners moved between the posts and the telegraph room with sell tickets piled in their hands, and the ticker tape, which carried prices to brokerages across the country, was running so far behind that the prices arriving in Boston and Chicago no longer existed in New York. By midday the Dow was down 11%.

Across the street, in a boardroom on the second floor of 23 Wall Street, Thomas Lamont of J.P. Morgan called a meeting. Four other men joined him: Albert Wiggin of Chase National Bank, Charles Mitchell of National City Bank, William Potter of Guaranty Trust, and Seward Prosser of Bankers Trust. Between them they controlled more capital than any other group of men in America. They sat around the table and agreed, without much discussion, that the panic had to be broken before the close. They pooled $130 million between them with the intention of buying blue chips at prices high enough to halt the selling.

Richard Whitney, vice president of the exchange, was instructed to execute the plan. He made his way through the crowd to the post where U.S. Steel was traded and, shouting, placed a bid for 10,000 shares at $205. The price was well above anything that had traded that morning. He then moved to the next post and bid for AT&T, then Anaconda Copper, then General Electric, moving to different posts and placing a bid in each. The men on the floor understood what was happening, and before Whitney could finish his rounds panic had eased. By the close, the market had recovered most of the morning’s losses. That evening Lamont told reporters that the situation was under control and would continue to improve.

While weekend papers carried Lamont’s assurances that the crisis had been contained, when the market opened on Monday the selling resumed. This time though there was no white knight to provide support, and investors resumed the panic selling. By the time the closing bell rang, the Dow was down 13%, the largest single-day decline in its history. The following day was worse still: sixteen million shares traded on the exchange, a volume that would stand as a record for forty years, and the Dow closed another 12% lower. And while the men who only a few days earlier had declared the crisis contained were now watching their $130 million evaporate, Jesse Livermore made roughly $100 million on his short positions across the week.

The Dow would not regain its September 1929 peak until 1954. Over the four years that followed, more than 9,000 American banks failed, and millions of ordinary depositors lost everything they had. Unemployment rose to 25% as consumer demand collapsed and banks stopped lending to the businesses that needed short-term credit to pay for their workers. Meanwhile the Fed, whose mission was to provide liquidity to banks and prevent panics, did neither. Constrained by the gold standard and by an ideology that viewed bank failures as necessary, it raised interest rates in 1931 and allowed the money supply to contract by roughly a third, making the depression worse.

The reforms that followed remain, to this day, the most comprehensive in American financial history. The Glass-Steagall Act of 1933 barred commercial banks from trading stocks with depositors’ money, and introduced a federal insurance scheme to guarantee deposits against future failures. That same year, the Securities Act required public companies to publish audited accounts for the first time. A year later, Congress created the Securities and Exchange Commission, a federal agency with authority to regulate markets, enforce disclosure, and protect investors. It also made insider trading illegal and gave the Fed the ability to set margin requirements for stocks — which were raised from ten to fifty percent. While to this day they remain formally the same, in practice brokers can extend additional credit to clients, allowing leverage of more than 2x.

Nearly a century later, the Wall Street Crash of October 1929 remains a monumental event for modern financial markets. Subsequent collapses — 1987, 2000, 2008 — have been measured against it. The regulatory architecture built in its aftermath has been amended and partially dismantled over the decades, but its core principles — market governance and investor protection — still hold. The figure of Jesse Livermore, meanwhile, has grown into something close to myth and the books that came out of his career — Edwin Lefèvre’s Reminiscences of a Stock Operator and his own How to Trade in Stocks — have become must reads for those interested in markets.

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1. In the words of Joseph Schumpeter, later echoed by James Tobin and Milton Friedman