Crash: Andrew Ross Sorkin’s “1929”
This thrilling account of history's greatest stock market crash is scarily relevant, but in surprising ways.
Today’s US stock market has the appearance of being a leveraged bet on a handful of Big Tech companies selling an AI dream whose numbers simply don’t add up.
Meanwhile, the crypto markets have been in free fall since a flash crash on October 10, a drama that, despite its ostensibly high-tech underpinnings, has a turn-of-the-last-century feel.
Many of us have already experienced an epic crash in our careers: the 2008 subprime-mortgage ‘global financial crisis’. Now the greatest chronicler of that debacle, Andrew Ross Sorkin, whose Too Big to Fail launched the New York Times Dealbook reporter to fame, has published a new history of the granddaddy of stock-market crashes, October 1929.
Whereas Sorkin’s GFC account was practically written in real time, based on Sorkin’s reporting and access, 1929: Inside the Greatest Crash in Wall Street History – and How It Shattered a Nation is the product of eight years of research. This effort, combined with Sorkin’s desire to recreate the fly-on-the-wall experience of his earlier book, makes 1929 a fast-paced, gripping account. It’s both timeless, for the lessons from these episodes are evergreen, and timely, given the current jitters.
The first half of the book describes the events leading up to the October 28 crash and its immediate aftermath, told from the perspectives of top bankers, politicians, and speculators. The second half looks at the depression that followed, culminating with the political changes that enabled serious legislative reforms.
The book remains squarely focused on Wall Street, and doesn’t address wider economic events, such as the crash’s impact on Germany. This enables the author to drill down on the psychology of the crash and its fallout.
“...the forces that drove the market to such stratospheric levels – optimism, ambition, and the belief that the future could be endlessly brighter – did not disappear forever. They never do,” Sorkin concludes. Other factors included leverage, a shaky banking system, and inadequate regulatory responses. Insider dealing and corruption played a secondary role, more emblematic of Wall Street’s ‘everybody else is doing it so it must be ok’ attitude that fueled its peacocky sense of self than the cause of a specific outcome.
It’s fun to see contemporary dopplegangers in these historical characters, brought to life by Sorkin: Democrat fixer and plutocrat John Raskob, an Elon Musk-like figure who did much to convince ordinary Americans to embrace borrowing to play the stock market; Charles Mitchell, boss of the nation’s biggest bank, National City (the precursor to Citibank), a Jamie-Dimon type who combined deposit-taking business with high-risk brokerage; Thomas Lamont, the de facto head of the House of Morgan and a Hank Paulson prototype; Jesse Livermore, the man who shorted the market, just needs a drum kit to remind us of Michael Bury.
We identify with these characters because their strivings are human. Sorkin’s achievement is to return that humanity to the story of what happened to create this epic disaster. This is why we will continue to experience incredible periods of prosperity, as well as painful corrections. In a broad sense, we are fated to repeat history.
Yet we can draw from history to make sense of today’s world, and to try to avoid the worst mistakes.
Ben Bernanke was a student of the Great Depression and it informed his efforts at the Federal Reserve to prevent 2008 from tipping into another conflagration; he succeeded, but only partly. Taking a specific ‘lesson’ out of its context is fraught.
The Bush and Obama administrations remained wedded to the neoliberal belief in fiscal austerity, which hindered the economy’s ability to rebound, leaving us stuck with quantitative easing as the only remedy. That mistake was then over-compensated by Trump and by Biden, who spent America’s way out of the Covid crisis, at the cost of spiraling debt – perhaps setting us up for another calamity. History teaches us lessons but we still have to fix those to current circumstances.
Yet there are other events that we are wise to remember. Remembering requires attention, so we owe Sorkin thanks for this aide-mémoire. The 1920s were a heady time, perhaps more akin to the 1990s than to today. This was when the inventions of the Second Industrial Revolution made their way into households. Radio was the internet of its day. Retail investors hadn’t existed during the railway booms, but now they were eager to participate in a slice of the American dream – usually with borrowed money. Banks extended loans to enable consumers to speculate.
When the crash came, investors were completely wiped out. Speculators great and small were thus unable to get back into the game and sustain another boom. Worse, America had thousands of banks, and most of them were also overextended. Thus a Wall Street event led to several years of bank runs, unemployment, and homelessness. The crash of October 1929 was severe, but didn’t appear fatal: the market lost 10 percent. We’d call this a correction. But the underpinnings of shaky financial architecture, lack of regulation, and leverage, made this correction an albatross.
It took a few years for public pressure to build enough to create political change. President Herbert Hoover, a figure for whom I have sympathy, lacked the vision to turn things around; he was too beholden to Wall Street. Rural and southern politicians such as Senator Carter Glass of Virginia had long harbored a desire to reign in the speculative side of Wall Street, but it took a long time for them to build support for meaningful reforms.
The election of Franklin Roosevelt opened the door to change, but Sorkin notes that it wasn’t the Great Depression that paved the way for FDR: it was his opposition to Prohibition. Hoover had also come to privately favor the repeal of the 18th Amendment, but decided to support it out of a sense of propriety, a spectacular own-goal. (But the economy certainly didn’t help: it was Hoover, in another clunky move, who coined the term ‘depression’ because he thought ‘panic’ was too alarming, a sobriquet that reminded everyone of the economy’s relentless demise.)
In the end, what moved the political needle was a widespread, white-hot hatred of bankers and of Wall Street. The market crash alone didn’t create this. Rather, it took a series of scandals and high-profile Congressional inquests. A skilled ferret of a prosecutor, Ferdinand Pecora, was utterly unfazed by the flash of money, and he conducted a series of investigations that forced Charles Mitchell, Thomas Lamont, and many other high-fliers to testify under oath.
These inquiries dredged up details of how Wall Street operated, including insider ‘gentlemen’s deals’, ‘bankster’ tactics in pushing leverage on consumers, tax evasion, and outright fraud – the chairman of the New York Stock Exchange, for example, turned out to have stolen customer funds to cover his own speculative losses. Charles Mitchell, the CEO of National City Bank, had been lauded a hero, only to become a hated figure who ended up being prosecuted by the government. Although Mitchell won his case, the practice he had pioneered, of combining retail and investment banking, was discredited.
Glass had been campaigning for years to pass a law separating these functions. With FDR in the White House and the Pecora hearings riling up public anger amid national ruin, Glass’s time had finally come.
But the biggest surprise in Sorkin’s account is that Glass turned out to be a much more conservative figure; the revolution had gotten ahead of him. His reforms were framed narrowly, and meant to allow private banks such as JP Morgan to continue business as usual. Glass went to some lengths to conceal his friendship with senior Morgan executives, but under Pecora’s questioning, the gloss had come off the firm’s reputation.
In the end, before any legislation was passed, some banks decided to act quickly on their own. National City, with its CEO under inditement, announced it would split its securities business from its retail bank. Then Winthrop Aldrich, CEO of the number-two bank, Chase, said this should apply to all banks, be they publicly listed or private. Chase was owned by the Rockefellers, who regarded the Morgan family as arch rivals, and they saw an opportunity to land a blow.
Sorkin writes: “Aldrich’s shrewd maneuvering marked the dawn of a new era on Wall Street. For as long as anyone could remember, the nation’s bankers had agreed on one thing: Interference from Washington benefited none of them. Now, as the inevitability of major reforms sank in, Aldrich and the Rockefellers showed them all the necessity of jockeying for whatever regulatory advantage they could get. This is how the game would be played.”
Glass had no choice but to see a radical version of his legislation enacted. Not only did it impact all of Wall Street, but it also incorporated the reform of deposit insurance, championed by another Southerner, Henry Steagall, a Congressman from Alabama. Glass and Roosevelt both opposed deposit insurance, and bankers hated it, arguing that it created moral hazard. But rural Americans had suffered too many bank runs, and Roosevelt’s political instincts led him to support this.
Carter Glass, for all his plantation bluster, was a sensible reformer of finance: he had been the leading force in Congress behind the creation of the Federal Reserve System, in 1913. Now his other signature legislation, the Glass-Steagall Act, was going to have a dramatic impact on how Wall Street operated.
Glass-Steagall really did change the culture of Wall Street, but it did so because a generation of Americans had been scarred by the stock market crash of 1929 and the subsequent economic chaos. FDR oversaw a massive expansion of the government in American lives. This underpinned decades of prosperity and solidified the creation of the consumer middle class. But the old animal spirits didn’t die, they just went into hibernation. The stagflation of the 1970s had a similar impact on public opinion, which paved the way for Ronald Reagan and free-market ideology. This counter-revolution was so complete that it was Bill Clinton whose signature obliterated the Glass-Steagall Act. The dots connecting this to the 2008 crash easily form a line.
What of today? Wall Street hasn’t changed, or rather, its culture is still that of the Clinton and Bush years. But if we do experience the popping of the AI bubble, it could be more like 1929 than 2008: a correction, followed by turbulence and a gradual deflation of fortunes, with a government unable or unwilling to intervene, a president who’d rather focus on other things, and – in a new twist – too much debt to sustain a response. We could well regret not being able to reprise Bernanke’s swift and decisive action, nor Congress’s bipartisan bailout of banks.
What that would do to the political environment for finance is anyone’s guess. One of the great misses of the 2008 crisis was the White House’s unwillingness to prosecute senior bankers. Neither Bush nor Obama had the guts for it. This was a massive blunder. Such prosecutions in the early 1930s provided fuel for real reform, not the ersatz, compliance-heavy rules that came in after 2008, which did nothing to change Wall Street’s culture except drive lending to the opaque non-banking sector. No bankers went to jail, and this fed grievances that led to the election of Trump.
But if there’s one corner of the markets that is behaving just like Wall Street in the late 1920s, it’s crypto. The shenanigans that Sorkin illustrates, such as the investment pools by insiders, are perfect templates for the crypto rug-pull. The amounts of leverage today are far beyond what was possible a hundred years ago, but figures like Charles Mitchell wrote the code. The attitude is the same, too: operators claim innovation is saving the world and ushering in a new dawn of boundless prosperity. The bitcoin maxis would have fit right in.
“The greater the heights of our certainty,” Sorkin writes, “the longer and harder we fall.”
Sorkin, Andrew Ross, 1929: Inside the Greatest Crash in Wall Street History – and How It Shattered a Nation, Viking (Penguin Random House), 1925.