Will run and run

It is probably the best-known image of the Wall Street crash, the stock market panic of 1929 that ushered in the Great Depression of the 1930s. Somewhere in Lower Manhattan, a crowd gathers around as Walter Thornton attempts to sell his car as per the notice on the windscreen.

Presumably Mr Thornton is the dapper-looking cove with his foot on the running board. The car he is offering is an Imperial Roadster, the top-of-the-range model in Chrysler’s line-up that had been introduced to compete with the likes of Cadillac and Lincoln. The 1928 model in the picture has the ‘dickie’ seat and sold for $1,555, upwards of $22,000 (£16,500) in today’s money. So Thornton was offering a bargain, especially as the stock market’s slump had hardly got into its stride – the photo was taken on 30 October 1929, two days after ‘Black Monday’, the ‘official’ start of the crash, when the Dow Jones Industrial Average fell by 13 per cent.

True, we might question whether the picture is authentic. That’s not just because young Mr Thornton appears too well-groomed to be on his uppers, but also because there are versions of the photo both with and without the crowd. Still, posed or not, the picture has come down to us via Otto Bettmann, a New Yorker whose obsession with photographs had expanded into an archive of 19m prints by the time of his death in 1998. The Bettmann Archive is now in Chinese ownership, but its pictures are distributed by Getty Images, from whom readers can buy a made-to-order print, ready-framed if you want.

Best to hang it within easy view of wherever you do your telephone dealing. Then you can’t miss it when you’re gagging to trade on a tip that just can’t fail. Because the whole point of the picture is that it serves to remind us of the three factors that are abundant whenever a bull market spills over into financial mania – optimism, susceptibility and leverage.

Take Mr Thornton’s Wall Street. The aftermath of the First World War was good for the US. The country captured markets that used to be supplied by European production, especially in agriculture, and technological innovation greatly stimulated industrial output. Simultaneously, the US benefited from a pool of cheap labour as millions left the countryside for the cities. As a result, real output grew by 4.2 per cent a year during the 1920s and per capita output expanded by 2.7 per cent.

That was the backdrop for the optimism that stimulated a stock market boom. It also helped that the US kept its interest rates abnormally low to aid Britain’s struggle to keep sterling in the gold standard. As a result, the Dow Jones Industrial Average rose from a level of 73 at the end of 1921 to 300 at the end of 1928, an annual growth rate of 22 per cent.

Such progress generates its own momentum. There were few concerns about how, as the 1920s wore on, farmers were suffering badly as overproduction and the loss of export markets in Europe caused widespread hardship and knock-on failures in savings banks. The unstoppable march to urban affluence, greased by credit and epitomised by the purchase of a Model T Ford and an RCA radiogram, engendered the sort of susceptibility that made plausible the famous quote delivered in early October 1929 from Irving Fisher, one of the leading US economists of the day, that “stocks have reached what looks like a permanently high plateau”.

Meanwhile, those low interest rates plus surging demand persuaded more stock market punters to deal ‘on margin’, effectively to make just a down payment on the shares they had bought and to fund the remainder with money borrowed from their brokers. That was fine, went the blithe theory, as share prices were going to rise anyway, so that would cover the cost of the loan and pay back the debt when the stock was sold. Simultaneously, the effect of leverage meant that all the gain in the stock’s value accrued to the punter.

So, of course, did all the fall in its value. Buy $1,000-worth of stock on a $200 downpayment and its price rises by 20 per cent, then – before dealing costs – a punter has doubled his money. But if the price drops by 20 per cent, then the punter is wiped out. There was plenty of wipe-out on Wall Street as the bad days turned to worse ones.

There was more than one way for leverage to take its toll. Take Goldman, Sachs, for example. In 1929, the investment bank discovered the wonders of leverage via investment trusts. First it launched the Goldman Sachs Trading Corporation, an investment trust whose major holding was its own shares. Then the corporation launched the Shenandoah Corporation, which had the leverage of preferred stock and invested heavily in itself, and in turn launched the Blue Ridge Corporation, which repeated the trick. In less than a month, Goldman, Sachs had issued more than $250m-worth of securities. The incestuousness of this multi-cogged gearing took its toll. The trading corporation’s stock was issued at $104; within weeks it peaked at $222 and by 1932 was at $1¼.

Fast forward almost 80 years and the madness was off the scale. The human element in the excesses that brought the credit crunch of 2008-09 was much the same – optimism and susceptibility. But the leverage wrapped up in collateralised debt obligations (CDOs) was of such complexity that it defies understanding.