Taking stock of the Great Crash

Popular mythology has it that brokers were falling like leaves on Wall Street in October 1929. Not so. Only one person jumped out of a window on the day of the stock market crash (the death was confirmed by none other than Winston Churchill, who was in the exchange gallery that day).

The other myth is that the stock market crash started the Great Depression.

Almost all economic historians say that's rubbish. It marked the eve of the Great Depression, but political meddling, protectionism and panic, rather than a failure of markets, were what caused the long economic slump.

The crash happened in October, but like the warning tremors before a major earthquake, the markets were shaky in September 1929. The first major shudder came on Black Thursday, Oct. 24, and the real thing followed the next week.

On Oct. 28, commonly referred to as Black Monday, the Dow Jones dropped 12.82 per cent. The next day it fell 11.73 per cent. 

Apart from the occasional "sucker rally" — where investors are fooled into buying only to see shares fall again — the Dow kept falling until July 1932, when it was off 90 per cent from the high. It took until 1954 for the Dow to rise to its pre-1929 levels.

That's why it is called the Great Crash.

Canadian fallout

Stock markets in Canada and the rest of the world followed the U.S. selloff. The turmoil on Wall Street was felt in Montreal, the largest exchange in the country at the time, and in Toronto, then home to an active mining market where brokers also faced ruin.

On Black Tuesday, blue chip mining firm Noranda in Toronto opened at $37.50 and closed at $27, a drop of 33 per cent in one day. In Montreal, then home to the country's industrial and financial stars, the big losers were Montreal Power, Brazilian and International Nickel.

On the day of the big crash, traders in Toronto and Montreal were swamped with sales orders, and prices fell like a stone.

"It was hard to find a buyer, because everyone wanted to get out fast," said Gerard Bongard in Gold Diggers of 1929, a book on the Canadian crash by Doug Fetherling. "There was a hell of roar and it was pretty smoky so it was awfully hard on your voice."

After the smoke cleared, many Canadian fortunes had been wiped out. There are numerous tales of economic and personal misery in the aftermath of the Great Crash.

"There were people in Toronto who jumped off the Bloor Viaduct," the late Harold Crang told me in October 1979 on the 50th anniversary of the Great Crash. "Other people would find ways to kill themselves so it didn't look like suicide and their families could collect the insurance."

In 1979, he was long retired and agreed to an interview with CBC National News at his imposing house in Toronto's Forest Hill. Crang described how he was a young broker at the time of the stock market crash. It destroyed what money he had, but he was young and able to make it back. Later, he started his own firm, which became Crang, Ostiguy and Hudon.

Another man, the late Douglas Ward, also gave us an interview, though he was too shy to appear on camera. Ward was the honorary chairman of Dominion Securities at the time. He, too, was wiped out, as were many of his clients. An honourable man horrified at losing his clients' money, Ward spent most of the 1930s making the money back and covering the losses of his customers.

Hindsight

Much like today, there was a rush to find people to blame. In New York, Richard Whitney, president of the New York Stock Exchange, went to prison. In Toronto, several mining promoters went to jail for stock fraud.

The crash of 1929 came after a long rise in markets that fuelled the delightful decadence of the 1920s. Like the Credit Default Swaps that take part of the blame for the crash of October 2008, there were newfangled financial instruments in the 1920s. There was also a speculative bubble fuelled in part by ordinary people buying stocks and mutual funds on margin or credit.

Few people ever see market crashes coming or believe the predictions of the doomsayers in good times. The same was true of the crash of 1929.  Still, there were people who predicted the crash, including Sir Charles Gordon, president of the Bank of Montreal. In May 1928, the Bank of Nova Scotia sent out a memo warning speculation was over the top.

"Values on the whole have continued to rise, and so widespread has speculation become that to-day [sic] we have an unhealthy, if not dangerous, situation confronting us."

At the time of the crash, Joseph Kennedy, patriarch of the family that spawned a president, three senators and a congressman or two, was worth only about $4 million US — around $50 million in today's money. By the mid 1930s he was worth $180 million, or about $2.3 billion in today's money. The reason: he sold out before the crash.

The anecdote is that a bellhop or an elevator operator gave Kennedy a stock market tip in 1928. He is said to have figured that if hotel staff were giving market tips, it was time to bail.

Time magazine gave a simpler reason for Kennedy's market acumen, saying it was "… because he possessed a passion for facts, a complete lack of sentiment and a marvelous sense of timing."