A Timely Book for Investors
A few times a year, a book comes out that makes this middle-aged bookworm as excited as a kid on Christmas morning.
October 14th, Andrew Ross Sorkin’s new book, 1929: Inside the Greatest Crash in Wall Street History – and How it Shattered a Nation, was released. I practically chased the Amazon delivery driver down the street.
Sorkin is a financial journalist who has covered markets for several decades for CNBC and the New York Times. He is also a co-creator of the popular showtime series Billions.
This is not a review of the book. I wanted to get a post out while the book is still hot off the press. Given my significant reading list, it may be a few weeks before I can fully tackle Sorkin’s book. But even with a cursory view, I can tell this will be a very important book for investors.
There are several reasons why I have been anticipating this book. First, I have been a student of financial crises and asset bubbles for almost twenty years. Any book touching on those subjects grabs my attention. Second, Sorkin is a serious student of markets. His 2010essons book, Too Big to Fail, is required reading on the 2008-2009 financial crisis.
Learning from History: The 1929 Crash in Context
Sorkin’s new book is the latest contribution to a vast literature on the 1929 stock market crash. Over the years, I’ve devoured many books. These include Charles Morris’s A Rabble of Dead Money, John Kenneth Galbraith’s The Great Crash, Maury Klein’s Rainbow’s End, and Robert Sobel’s The Great Bull Market. These are just to name a few. I expect Sorkin’s book to at least be on par with the others. Sorkin is a master storyteller. He is also writing from the perspective of more recent crises.
The 1929 stock market crash did not directly cause the Great Depression, but it was an event which led to others that did.
How the Market Was Structured Before the Crash
In the 1920s, stocks were linked to the banking system through the call money market. Banks would lend to brokers “on call”, meaning that the banks could demand repayment at any time. Brokers would in turn lend the money to customers, allowing brokerage customers to purchase stock using a significant amount of borrowed money. By the late 1920s, stock purchases were increasingly made “on margin,” with customers often putting down as little as 10% of the stock price. Stocks served as the collateral for these loans.
The Federal Reserve’s Role and Policy Missteps
The thinking among policy makers at the time was that speculation siphoned money away from productive enterprise. By 1928, the Federal Reserve was increasingly worried about rising stock prices. Accordingly, they raised the discount rate to discourage call money lending to the stock market. However, call money rates were still significantly above discount rates, thus allowing banks to earn a significant spread by borrowing from the Federal Reserve’s discount window and lending the money to brokers.
Eventually, the tighter monetary conditions and high stock prices caught up to the market. In October of 1929, stocks began a massive selloff. The most noted trading day was Tuesday, October 29, which became known as “black Tuesday.” The next day, the newspaper Variety ran its famous headline Wall St. Lays an Egg.
From Market Crash to Banking Collapse
Banks were highly exposed to stocks through the call money market. Because of this, the crash led to massive losses in the banking system. Deposit insurance had not been established. The Federal Reserve was a very different institution then compared to now. It did not fully understand its “lender of last resort” responsibilities. As depositors lost confidence in the banking system, they pulled their deposits out in several waves of bank panics throughout the early 1930s. The collapse in the money supply led to chronic deflation, pushing down incomes and asset prices. This in turn led to more loan defaults and further depressed asset prices and incomes. It was not until the mid-1930s that the U.S. began to reflate its money supply, fostering a recovery that lasted until 1937.
Reforms That Reshaped the Financial System
The crash and subsequent depression led to significant reforms of the financial system. Federal deposit insurance was introduced in 1933. The Securities and Exchange Commission (SEC) was established in 1934. The Federal Reserve System was significantly restructured in 1935. These are just a few reforms. Stocks are no longer linked to the banking system to the degree that they were in the 1920s. If you want more context, read our blog post. It is titled Money and Banking Part 3: The Evolution of the U.S. Monetary System. The post covers how these changes shaped the modern financial landscape.
Lessons for Modern Investors
That is not to say that a financial panic is off the table. No one who lived through the 2008-2009 financial crisis should believe that. Although the stock market is unlikely to be the cause of a financial panic, there are plenty of other areas of risk that could adversely impact the broader credit system.
In my opinion, studying financial history helps investors better understand market risk. It also develops an investment edge. As the philosopher George Santayana said, “those who cannot remember the past are condemned to repeat it.” Sorkin’s book can help us avoid the mistakes of the past.
Key Takeaways
- Monetary policy debates often center on what drives inflation — from supply chains to government spending.
- Kevin Warsh represents a monetarist perspective, emphasizing the role of the money supply over short-term factors.
- Understanding these distinctions helps investors anticipate how Fed leadership changes could shape markets.
- Staying informed about monetary policy trends can help guide long-term investment decisions.
Want to dive deeper into the books, tools, and gear we use or mention on the blog?
Check out our links on Amazon for:
- 1929 → https://amzn.to/4n9wgOB
- Too Big to Fail → https://amzn.to/4omTmTc
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