Lessons from Market Crashes Past

The Wall Street crash of 1929 is widely regarded as the definitive stock-market collapse of modern times. What’s perhaps less widely known is that it was preceded two decades earlier by the almost equally dramatic crash of 1907. With the 20th anniversary of the global financial meltdown of 2008 now just a few years away, it’s hard to resist drawing parallels between the events that took place a century ago and what’s happening today. Once you start looking for similarities, you see them everywhere. In the 2020s we’re experiencing a wave of right-wing populist protectionism just as intense as the one that swept the globe 100 years ago. Today nationalist sentiment is on the rise as developed countries seek to stem a tide of economic migrants. That also was true in the 1920s, when the United States reversed its long-standing open-door policies. Before the 1929 crash, emerging technologies were threatening traditional livelihoods: Back then the culprits were industrial agriculture and manufacturing. Today the threat is coming from artificial intelligence. It’s perhaps predictable, then, that the New York Times journalist and CNBC coanchor Andrew Ross Sorkin has produced a prequel to his 2009 blockbuster Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves , in which he chronicled the 2008 crisis. The new book is 1929: Inside the Greatest Crash in Wall Street History—and How It Shattered a Nation. It largely follows the narrative structure of the earlier one, presenting a series of dramatized accounts of meetings between various players. Sorkin helpfully provides a cast list, reinforcing this reader’s sense that this book (like his previous one) was designed to be the basis for a screenplay. (It also confirms how much of a boys’ club Wall Street has remained: Only one woman figures in 1929 ’s list of 105 names; just 10 women made the list of 161 for the 2008 crisis.) In 1929 you’ll find all the ingredients of a compelling one-season series for Apple TV+ or Netflix: wealth, ambition, greed, ideology, and stupidity, combining to an inevitable end desired by no one. At the heart of the story are several financial institutions, which in many cases also appear in Too Big to Fail— notably the House of Morgan (today’s JPMorgan Chase) and National City Bank (the forerunner of Citibank). Politicians and government figures include Presidents Hoover and Roosevelt, the steel and banking magnate Andrew Mellon (who served as the U.S. Treasury secretary), and Carter Glass, the U.S. senator who lent his name to the financial reforms that followed the 1929 crash. (The repeal of that legislation is considered by many to be an important contributor to the 2008 crisis.) The book is told in 42 chapters, each describing and discussing a key date in the story of the market collapse. It’s divided into two parts: the buildup to the crash and its immediate aftermath, February to December 1929; and the longer-term fallout and the early years of the Great Depression, April 1930 to June 1933. There are several intertwining storylines, which are at times difficult to keep straight, but this is more than compensated for by the lively writing and compelling historical background. In comparing Sorkin’s crash books—and considering which signals, if any, might alert today’s market watchers to looming peril—two plotlines stick out. In 1929 we meet “Sunshine” Charlie Mitchell, the National City Bank chairman and president, in the book’s prologue. It’s the evening of October 28, 1929, a day before the market collapse, and he’s in the grip of a growing panic. Two months previously he finalized an acquisition that would make his bank the world’s largest, well ahead of its nearest rival, Chase. Shareholders in the subsumed bank (the Corn Exchange Bank) could swap their shares for four-fifths of a share in National City or $360 in cash. However, share prices in National City have started to waver, and Mitchell learns that National City’s traders have been forced to buy unexpectedly large quantities of its own stock to keep the price high enough to tempt Corn Exchange investors to opt for shares over cash. Since National City doesn’t have enough cash on hand to pay for the shares, Mitchell feels obliged to use his own private fortune to cover the purchases. The bank is, in short, confronting a classic liquidity crisis, and its chairman’s driving fear is that if that news leaks, it will trigger a bank run, with depositors racing to withdraw their money before National City runs out of it. Ultimately, Mitchell can not stabilize the stock price, the merger is called off, and although National City Bank itself survives the crash, the onetime Wall Street hero finds himself vilified as the personification of Wall Street’s greed. There are distinct echoes of that crisis in one of the main Too Big Too Fail storylines—that of Lehman Brothers, which, in the absence of a retail deposit base, largely financed its stock and bond trading activities through the wholesale money markets. As word of Lehman’s huge exposure to subprime real-estate spread, triggering repeated sharp drops in its share price, its chief executive, Dick Fuld, realized the firm could no longer secure short-term financing. So he began to desperately search for a deep-pocketed buyer. His failure to find one led to Lehman’s collapse. And as Sorkin explains, Fuld, like Mitchell before him, became the target of a great deal of the ensuing public outrage about Wall Street’s perceived excesses and malpractices. Are there figures like Mitchell and Fuld lurking about today’s Wall Street? Can Sorkin’s recounting of their stories offer any insights into how to avoid future calamities amid this fraught period in global history? Although both 1929 and Too Big Too Fail offer entertaining accounts of how the two crises played out, neither book provides much in the way of economic analysis, let alone suggests what measures we might take to guard against another massive market crash. To be fair, Sorkin didn’t set out with those objectives, and he probably believes that they are unrealizable. Indeed, as he concludes in his epilogue to 1929, “ultimately, the story of 1929 is not about rates or regulation….It is about something far more enduring: human nature.” His prescription: humility. We can always hope that today’s finance chief executives grasp that and have absorbed the lessons of history by now. But unfortunately, it’s all too likely that Sorkin will soon be bringing out a third title in the series: 2029: When Will They Ever Learn?

Lessons from Market Crashes Past

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