1929

by Andrew Ross Sorkin - a book club review

The selection of Andrew Ross Sorkin’s 1929 as our winter book was an easy choice for our book club.  The conflation of historical events with current markets, coupled with its popularity and positive reviews was right down our lane.  

We started by running around the room for initial thoughts: Chuck noted that while there has been plenty written about the storied shock to our financial system of 1929, this book focused on the people most closely tied to the events. Jeff noted that this was the first time the common man played such an integral role in financial market turmoil.   Developing that topic, Rob recounted how the big guys were able to “bring the dumb money in” and exploit it.   Sorkin’s storytelling highlighted the psychological angle of those wild days, not in a clinical way, but as humans: with hubris, fears, and guts.

Doug remarked on the ubiquity of access to trading for the common man: brokerages present in every hotel, ticker tapes on ships at sea.  Of all the financial innovations from the 1920s, the ease and breadth of access may be among the most consequential. This broad access boosted aggregate demand, driving valuations way beyond those justified by actual earnings.

Rick found many parallels to Sorkin‘s previous book, Too Big to Fail, and by the way, a real pleasure to read: fast, and gripping. Joel appreciated the epilogue, outlining some of the effects the destruction had on future financial regulation. Joel felt that Sorkin could have spent more time on the systemic risk of having investment banking and commercial banking under one roof, but the book was about the people, less about the economics.   On that topic, Bill also read John Kenneth Galbraith‘s The Great Crash of 1929, the highly respected analysis with an historical economics perspective.  He also noted that Winston Churchill had plenty of character flaws often ignored by history; and was a sucker too.  

Pete was inspired by the big things that people did as the markets were unraveling, many “putting money where thir mouths were".  Pete respected Charles Mitchell for democratizing financial markets participation, an innovation discussed earlier.  He also posed the question, how much did those events lead to the Great Depression?  Reasonable arguments can be made for many answers here.

Rob reflected on his own personal experience at JP Morgan, including the swiftness of the crash of October 1987 as juxtaposed to the slower train wreck of October and November 1929 and beyond.   He also noted how the book set the stage for government’s role on the laissez faire vs. regulatory oversight spectrum. 

I found the new technologies, including movies with audio (“talkies“), radio enabling instant mass communication, cars coming into their own, refrigeration and telephones, all as underlying forces for investment and speculation.   If optimism for these new technologies was the foundation for the roaring 20s, high leverage through margin accounts (up to 10:1), a gambling feeling powered by inexorable moneymaking (hello dopamine!) were the rocket fuel, leading to a disconnect between rational mathematical vs. market valuations, and then further driven by growing demand and psychological tailwinds. These turbocharged the danger by limiting investors' ability to make rational mathematical decisions so readily available today. 

There are angels and demons in every domain, and many heroes emerged to bring order to a collapsing system, while others, such as Jesse Livermore, shorted the collapsing system to make $100 million in a single day.  Private players could - and did - move the market. The book described an emergency meeting called by JPM's Thomas Lamont, where six banking executives pledged $20 million each to support a deteriorating market.  Other bankers contributed another $120 million that afternoon.

On the other hand, opportunities for manipulating behavior through false news made room for the worst of unregulated capitalist skullduggery; opacity in financial disclosures opened windows for insider trading and rumor driven price manipulation as well. The demons worked an open field.  Most, however, were just trying to figure it out day by day.

President Hoover’s cautious approach to intervene and support the market was grounded in a belief that the system would self-correct. Roosevelt, on the other hand, powered by an vengeant populist wave, went forth boldly, while also not really understanding where these new regulations would lead.  The question many have debated was posed, did FDR‘s New Deal delay and extend the Depression?  Strong arguments can be made for multiple answers here too.

On this spectrum of laissez-faire versus regulation and rules, many of the post-crash regulations created a structure for capital markets that has endured and functioned well, not perfectly, for nearly a century.  Later deconstruction of these initiatives, such as Graham Leach Bliley (1999) rendering Glass-Steagall (1933) null and void, predictably set the table for the Global Financial Crisis of 2008-2009. They got a lot right. Other later legislation such as Sarbanes-Oxley (2002), poured molasses into the machinery of publicly traded capital markets in the early 2000’s, wasting accountants' time and handicapping public markets.  Some regs go too far.

Have we still not learned lessons from the effects of the Smoot Hawley tariffs?

“This time it’s different,” is a timeless cautionary red flag

We talked about the role of a nascent and emerging Federal Reserve, including its failure to provide liquidity as markets began unraveling in the summer and fall of 1929.   Related to the role of the nascent Fed though, we went back to our book The Lords of Easy Money which demonstrated how easing the money supply benefits those holding assets through asset inflation, (espeially over the ‘90’s to teens), while inflating costs of goods and services for working people who sell their labor in a competitive market.  The social effect of these more recent high financiers may have done more damage to working Americans than a reticent 1929 Fed did by letting the market find its natural level.  And yet, that damage was substantial: 11,000 banks failed across America by 1933.  Such failures did result in the creation of the FDIC, so that “bankers could watch the bankers”, rather than require the average American investor to do so.  That's progress.

Sorkin never challenged Galbraith’s economic analysis, content to bring characters’ actions to life, supporting Galbraith’s analyses: that psychology, excessive leverage, and irrational optimism converged to create such a tinderbox of conditions.  Lack of oversight, opacity, and opportunistic manipulation were force multipliers.

It was interesting to read how the push toward a five-day work week may not have been as altruistic in its origin as it sounded.  One benefit of weekends of leisure was the burgeoning demand for leisure products which Americans would purchase, driving the economy further.  Much as it does today.  Lululemon pants anyone? Time for a new racquet, glove, club, or stick?

The final reckoning resulted in show trials with politicians masquerading as morality police delivering a raft of new regulations, …and plenty of personal bankruptcies.  The house nearly burned down, but emerged, slowly and deliberately, into a more predictable and trustworthy institution; this would lead the world’s financial development for a century, powered by American entrepreneurs and innovators who actually built real businesses with goods and services that free people want in their lives.   It isn’t perfect, but the lesson learned in 1929 were necessary and the results - a system with greater transparency and accountability - still guide and protect economic energy today. That's progress.