I was watching UPstairs Downstairs where it features the 1929 stock market crash and shows people who ‘lost everything’. Rose, the maid, is in her late 30’s and had invested everything she inherited.
But my question is, was Rose really broke? The market crashed, but only on paper; if she just waited until she was near retirement, since she would be working as a maid for decades longer anyway, the market should have recovered.
I’m not sure if some of the blue chip companies in 1929 were totally bankrupt and never recovered, but US Steel, IBM, etc., did not disappear. Right??
So, Rose in long term = retirement in sunny Brighton, c1955?
Probably not, since investors generally bought on margin – paying only a fraction of the actual price of the stock (I believe they only had to put 10% down). This works out very well if the stock goes up, but if it drops, you have to either put up more cash to meet the margin requirements, or your broker will sell the stock. So you lost the stock along with anything you invested in it.
Of course you are right in theory. A loss in the market is only a paper loss until you actually sell. But there are complications.
If you borrowed money to invest "on margin’ you were screwed when the stocks you bought on credit dived. The brokerage sold your stock without asking you in order to pay at least part of what you owed. You still owed them the rest however.
Even if you paid cash, you were screwed. Some investments did not reach pre-crash levels for decades. Some (real estate, stocks all sorts of stuff) never recovered.
In Benjamin Roth’s very readable The Great Depression, a Diary, he tracks the best investment he knows, real estate on West Federal Street. Repeatedly over the years he laments that if he had just a few thousand dollars he could buy and hold some properties there and wait for the recovery. Well, West Federal Street was done in when downtown declined and the post-revcovery consumer moved to the suburbs. No amount of waiting would have made Roth’s speculation pay off.
Besides, even if your investment in Industrial Steam of America paid off after you held it for say twenty years, how much more could you have made by selling at a loss at the market low and buying something else?
As RealityChuck says, margin calls are what wiped out most investors. And in the 20’s, it was not uncommon to borrow up to 90% of a stock’s value (today the fed limits that to 50%).
However, don’t forget that in the 1920’s many banks invested their assets in the stock market, wiping out savers who didn’t neessarily have a lot of money in the stock market. This is what prompted the Glass-Steagall act in 1933–separating commercial and investment banks–and the FDIC.
Plus, if a company went bankrupt its stock was essentially worthless. Say, because all their customers were broke and stopped buying; or it overexpanded on credit and could not pay its bills; or it was a bank and lent so badly it folded and was bought for pennies on the dollar by a competitor. A bankrupt company is sold and the proceeds pay down all the outstanding debt before shareholders see any.
My impression is that most blue-chip smokestack industries were run very conservatively and still had a basic market out there so they survived. How many actually went bankrupt? But like today’s hype, a lot of people invested on street rumors that the 20’s version of Jeeves.com or some diamond mine was going to quintuple in value within a year…
However, the first 3 years with Hoover, the government cut spending and tightened things up to reduce the deficit and prevent borrowing, and businesses were on their own to sink or swim with no government bailout, so things spiralled even further downward from bad to catastrophic. (All through school I was told “but that will never happen nowadays”.) Even when Roosevelt tried to stimulate the economy, I understand he assumed by 1936 that things were good enough to ease off on the spending and the economy double-dipped.
So from 1929 things went even further in the toilet for 4 years, then barely got back where times were looking up by eight years, until about 11 or 12 years later a war revived spending. So if she could just hold on and keep cleaning toilets for another 12 years, Rose would have been a bit better off.
Howeever, I recall reading that a lot of the contribution to the crash was precisely the hype exacerbated by people buying on margin. Everyone heard the way to get rich was buy stock, buy, buy, buy. Like real estate, stocks only went up. You only pay, say, 10% of the value and the broker lends you the rest based on having the stock available for reselling to cover that loan. If the stock dips 10%, you either come up with more money or they sell. When everyone starts selling and nobody can afford to buy, the amrket crashes.
My father mentioned to me once that streetcar conductors were selling shares in the transit company on the streetcars! On margin, no less. Although the company survived and even flourished during the war, they never really recovered.
Sure, if you were invested without margins in blue chip companies and hung on you would have done well, but everyone else was screwed. Even people whose money was in a bank lost it all–no FDIC. That’s why the first thing Roosevelt did was close the banks for a few days to let everyone catch their breaths. I’ve often wondered if he had any authority to do that. No matter, he just did it.
The other thing is that all stocks were over-valued. So it might have taken a long time to recover. That’s what it means to be bubble. The people who made out really well were those who bought the still-live companies within a few years of the crash at rock-bottom prices.
One of the slams against Canada’s Depression era Prime Minister, Bennett, was that he made money in the Crash. He was a very savvy investor, thought that the market was getting overheated, and pulled out. Then, after the crash, he went back in and bought. Did very nicely, but when he got elected PM, it didn’t look so good…
I recall this famous quote regarding the crash of '29:
The general wisdom these days is that when you’re five years from retirement, you should start shuffling money out of stocks and into bonds, the idea being that the market recovers from most crashes in about that amount of time. After the crash of 1929, the market didn’t fully recover until 25 years later. As noted, if you held stock in companies that went out of business, those stocks were never going to recover; that money was gone for good. But even if your entire portfolio were invested in businesses that survived the Great Depression, they weren’t worth much for a very long time. Anyone planning to retire in 1935 would find that their portfolio was worth about 25% of what it was before the crash.
He didn’t, though Congress granted him the authority retroactively. However, the banks were happy to go along with it, since it prevented a run on them and gave everyone a breather.
I remember my grandfather (who got through the Depression fairly well – his business was steady and the local bank had not got caught up in buy stocks, so remained in business the entire time) talking about how amazing that was to know that you couldn’t go to the bank to get at your money.
I’ve heard people criticize the Dow Jones Industrial average as being unreflective of the market, but let’s use it as an illustration.
DJIA pre-Depression high: August 1929 (376)
Next time it reached that level: November 1954.
So the folks who invested at the height of the market didn’t get back to start for 25 years. And of course, those who had invested on margin or in companies that went bankrupt lost everything.
My grandfather put everything he had in rental real estate. That didn’t work either, because he ended up with a lot of tenants who couldn’t pay rent.
This is true but very misleading. The value of the DJIA does not reflect dividends, and dividends have constitutes the bulk of stock market returns over the past century or so. This was especially true after the Great Crash since the dividend yield of the stock market at reached 14% in a deflationary environment.
The reality is that an investor who bought in at the peak would have recovered his losses (in real terms) in less than 5 years.
GM was able to maintain dividends for awhile out of retained earnings. Bethlehem and U.S. Steel and Anaconda Copper reduced or suspended dividends entirely. The Wabash Railroad went into receivership.
Given the bankruptcies and bank failures, would our hypothetical Rose, the small investor, have had any investment left to ride out?
It’s a myth that Hoover decreased federal spending. He actually was an advocate of government intervention and increased spending. Along with tax hikes and increased trade tariffs, it had the same predictable result as dropping a hammer on a planet with positive gravity.http://www.cato.org/pubs/journal/cj16n2-2.html
I always assumed that since Rose gave the money to Major James Bellamy, he did the risky things: buy on margin. As others have pointed out, margin standards were a lot looser back then. Great if it goes up but disastrous if it falls. As Groucho Marx adlibbed
in “Animal Crackers” when he is brought into the room on a sedan “Take this thing out and sell it. My broker says he needs more margin”.
I wonder if some have forgotten how brutal the stock market was after the Crash. This wasn’t like one of the modern crashes that lasts for a few weeks or months! Shown following are Dow-Jones 30 closing prices for the high that wasn’t bested for 25 years, along with some local lows:
3 Sept. 1929 – 381.17
29 Oct. 1929 – 230.07 (“Black Tuesday”)
13 Nov. 1929 – 198.69
10 Nov. 1930 – 171.60
16 Dec. 1930 – 157.51
2 June 1931 – 121.70
5 Jan. 1932 – 71.24
8 July 1932 – 41.22
Investors sickened by selling on Black Tuesday, probably felt better about their decision (or the margin call!) as prices continued to fall. Investors who bought at the June 1931 low weren’t pleased a year later.
Here’s when those lows were finally bested:
23 Aug. 1932 – 72.13
8 July 1935 – 122.55
5 Mar. 1936 – 157.52
3 Oct. 1936 – 172.44
10 Jan. 1946 – 199.16
4 Oct. 1950 – 231.15
23 Nov. 1954 – 382.74 The 1955 dollar was worth only 39 cents of a 1930 dollar (based on a consumer bundle). In that sense the stock market was still down over 50% even in 1955.
BTW, I don’t think there were index funds in those days, but the indexes generally performed better than most individual blue-chips. Remind Rose to make the trades shown in the Spoiler:
29 Jan. 1930 –
North American was replaced by Johns-Manville.
18 July 1930 –
American Sugar, American Tobacco, Atlantic Refining, Curtiss-Wright, General Railway Signal, Goodrich, and Nash Motors replaced by Borden, Eastman Kodak, Goodyear, Hudson Motor, Liggett & Myers, Standard Oil of California, and United Air Transport.
26 May 1931 –
Hudson Motor, Liggett & Myers, Mack Truck, NCR, Paramount Publix, Radio Corp, Texas Gulf Sulphur and United Air Transport replaced by American Tobacco, Coca-Cola, Drug Inc., International Shoe, IBM, Loew’s, Nash Motors, and Procter & Gamble.
15 Aug. 1933 –
Drug Inc. and International Shoe were replaced by Corn Products Refining and United Aircraft.
13 Aug. 1934 –
United Aircraft was replaced by National Distillers.
20 Nov. 1935 –
Borden and Coca-Cola were replaced by DuPont and National Steel.
4 Mar. 1939 –
IBM and Nash Motors were replaced by AT&T and United Aircraft.
Interesting thread. I had long heard the statistic that if you account for inflation, the Dow didn’t get back up to 1929 peak levels until 1954.
But I’m trying to get my head around this new (to me) information that complicates it, such as factoring in dividends. I assume that in the scenario where dividends speed up the recovery, they’re re-invested? (My ignorance hasn’t been fought yet, but it’s at least been called out).
I would think that the lack of deposit insurance in 1929 put downward pressure on the markets. Even people who put all their money in the bank were unable to “buy low” after the crash if the bank failed.