As one of America’s most well-known financial journalists and most popular syndicated columnists, Merryle Stanley Rukeyser wrote extensively on the Crash of ’29 and the Great Depression, the worst economic catastrophe of the 20th century. He was also the first to teach courses in economic and financial writing at the Journalism School.
Nation’s Business, December 1929
“When Stock Buyers Go On Strike”
By Merryle Stanley Rukeyser
The day after prices on the Stock Exchange collapsed so suddenly and completely, the staff of NATION’S BUSINESS was besieged with questions from outsiders and from each other. Who or what caused the collapse? Why did the bankers’ consortium come to the rescue and how? What is the significance of this panic—if it was a panic—and what results may be expected? Some of these we had difficulty answering to our own or others’ satisfaction so we turned them over to Merryle Stanley Rukeyser. This article is his reply.
The utter collapse of prices on the Stock Exchange on Black Thursday, October 24, and the following Tuesday, October 29, was ascribable to the temporary repeal of the law of averages.
Banks, life insurance companies and exchanges are conducted in the belief that human beings on the average will act normally in accordance with past experience. The Stock Exchange is a weather-vane reflecting sentiment but having no opinion of its own. Its operations normally rest on past experience which teaches that there will always be some who wish to sell what others want to buy.
The price level at the Stock Exchange is a barometer measuring the ebb and flow of optimism concerning American business prospects. When optimists are more eager to buy than pessimists are to sell, security prices rise. Conversely, when pessimists are more eager to sell than optimists are to buy, the price level recedes. In normal times, the price level perpetually vacillates reflecting quick shifts in the winds of opinion.
Unless buyers and sellers were animated by a vast diversity of objectives, the market could not operate smoothly. If, in times of prosperity, everybody wanted to buy and, if at the approach of a recession, everyone desired to sell, orderly markets would be impossible.
What caused the collapse
On those two October days the market suffered temporarily from the lack of cleavage of opinion concerning stocks. From a mechanical standpoint, it is immaterial whether bids (orders to buy) and offers (orders to sell) flow from logical reasoning, hunches, emotions, or necessary liquidation. They affect prices equally whether they come from analysts or suckers. On Black Thursday before the afternoon rally, speculators and investors temporarily were all sellers, with no articulate buyers to take what they were clamoring to sell.
The explanation of the collapse is as simple as that.
The New York Stock Exchange, in its legal form, is a private club, which provides a meeting place where brokers may buy and sell stocks and bonds for themselves and for their clients. The Exchange is interested only in assuring that transactions are made in accordance with “just and equitable principles of trade.” It is a non-profit-making institution, supported by initiation fees, members’ dues, and listing fees.
The Exchange permits dealing only in 1279 selected stocks which have met its austere listing requirements. These stocks have to do with the genuineness of representations made by companies, rather than valuations.
For convenience trading in a listed stock is confined to one of 18 trading posts. At each post cluster “specialists.” They are members who confine their operations mainly to four or five stocks.
The specialist keeps a separate book for each stock in which he specializes, and in this book he lists all the bids that have been made for the stock, and all the offers to sell. If the bids and offers do not match, the next sale usually is made between the highest bid and the lowest offer.
Bids far below the last sale can be entered in the specialist’s book, where they may remain for months until someone is willing to sell stock at that price. Likewise, optimistic sellers can list offers far above the prevailing market price, hoping that in time someone will be willing to bid that much. However, in practice there are natural price areas above and below the current price beyond which the public imagination, as reflected in orders, does not go. On Black Thursday, prices broke below those natural limits.
On normal days, there are numerous bids and offers at each rung of the price ladder above and below recently prevailing prices. The more active the stock the more numerous are the bids and the offers. These bids and offers, which have been placed with the specialist in advance, are supplemented on active trading days by a continuous current flow of current bids and offers which come over direct telegraph wires and cables throughout the country and the world.
Time is the essence of brokerage machinery.
An order and the report of its consummation have accomplished a round trip across the continent within 60 seconds. Such requests to buy and sell shares at fixed prices are reinforced by a huge volume of orders to buy and sell “at the market.” A market order means that the buyer stands willing to accept the lowest “offer” whatever it may be, and that a seller is willing to accept the highest available bid, whatever it may be.
The law of averages tends to balance bids and offers, though of course not precisely. In normal times, the disparity between the buying urge and the selling urge is offset by activities of professional operators. These operators are of two general classes. First, in and out speculators, who want to buy and resell on the same day. And, second, investment houses, pools, and syndicates interested in sponsoring the market behavior of a particular stock.
Buyers not always at hand
Especially in the less active stocks, there is not always an investor at hand to buy when another investor wishes to sell. If no satisfactory bid for the stock is available, the specialist in normal times will take the stock himself slightly below the natural price. The specialist in this role serves the economic function of making the market continuous, instead of intermittent.
He expects to be rewarded as soon as a real investor comes along, to whom he can sell the stock just bought at its natural price. Of course, if the specialist, who assumes the risk of ownership, misjudges the situation, he is likely to sustain a loss. Besides the specialist, there are free lance floor traders among the other members who also try to scalp fractional profits by trading in and out of the same stock on the same day, supplying a demand when the outside demand has momentarily ebbed. The federal and state stock transfer taxes have reduced the profit in scalping and thus cut down the number of floor traders, who were more effective in keeping the market orderly in previous panics.
Moreover, non-member professional traders, who develop round shoulders over the ticker each trading day, also attempt to amass a profit by dexterously going in and out of the market, supplying bids and offers when more permanent holders are temporarily inarticulate.
The second type of supplementary aid given to market activity comes from the interested bankers and syndicates. In sponsoring a stock, they will supply bids and offers above and below the market. Such operations constitute manipulation, which is an unpopular word. When manipulation is intended to make stocks rise far above their worth for the purpose of unloading them on gullible amateurs, it is a dangerous, unworthy, and antisocial form of financial activity.
On the other hand, some manipulation is merely for the purpose of assuring orderly markets.
A torrential flow of stocks
By 11 o’ clock Thursday, October 24, it was apparent that the usual machinery of the Stock Exchange had broken down. There was a torrential flow of stocks to the market place. It was super-induced by mob psychology and by defects in the marginal system under which one layer of marginal accounts after another became impaired by the very decline of the market itself.
The psychology of the moment which possessed the collective mind, paralyzed the normal buying demand. For a time it seemed that everyone had turned seller. Accordingly, the usual quota of bids for stock on the books of specialists was soon filled by the frantic offers to sell at the market. Furthermore, as the hysteria spread, many who had bids outstanding cancelled them. Accordingly orders to sell at the market were matched against the lowest bid on the specialists’ books.
Sponsoring groups carried their schedule of bids and offers down to a level below the previous day’s close beyond which they estimated that the stock would not break. But stock prices rapidly fell far below these computed boundary lines. When they did, so-called “air pockets” were covered—price areas where there were no bids whatsoever.
Such a situation occurred in Standard Brands, and for a time the specialist informally placed his book under his arm, and walked away from the post. Similar situations occurred in United Gas Improvement, American Telephone and Telegraph, Columbia Carbon, and elsewhere throughout the list.
In the emergency, specialists, floor traders, and outside scalpers were, except in a few instances, afraid to fulfill their usual role of intermediate holders of securities. They were not only saturated with the psychology around them, but they recognized their inability to stand up and buy stocks from millions of excited investors. Outside speculators, too, were discouraged by lack of current information as to what was taking place.
On Black Thursday, the tape was as much as 248 minutes late, and on Tuesday as much as 152 minutes late. The breakdown of the machinery, (which has a capacity of about five million shares a day under present conditions) added to the fear waves.
In describing the breakdown of the law of averages, Professor Irving Fisher of Yale, the bull economist, pointed out:
“During the recession from the September high my index of 225 industrial common stocks moved from 209 ½ to 139. Yet this drop of more than one-third in the price level of stocks was accompanied by no disturbance of the nation’s high-record prosperity.
“I would compare it rather to a run on a bank.
“It should not be taken as commentary on a bank’s management, necessarily, that there should be a run on it. It often means merely that people have got panicky. When they all simultaneously wish to draw out their deposits the bank is unable to pay.
“That is the psychology that prevailed in the stock market. The prime fault lay in the credit structure. There had been an undue eagerness to invest, and people tried to do business on a shoestring.
“They had speculated with margin accounts (putting up a third or less of the purchase price and borrowing the remainder through the broker) which were unsafe, hence when the bear raiders began their final drives of the last week in October, they caught thousands of small holders who had to sell at a sacrifice. After the general level had been reduced, a new crop of forced sales was harvested, and then, with still lower prices, the same thing happened over and over again.”
Sought help from bankers
In times of crisis, groups instinctively turn to their natural leaders, and on Black Thursday pleas for help were rushed to the House of Morgan. Thomas W. Lamont, acting head of the House in the absence of J.P. Morgan, at once summoned the foremost commercial bankers of the city for a conference—George F. Baker, Jr., Charles E. Mitchell, Albert H. Wiggin, Seward Prosser and William C. Potter.
By noon, they had formed a consortium, which agreed to buy pivotal stocks for which there were no other buyers. They agreed to put bids in below the market so that liquidation could go on. Accordingly, they not only assured continuity at the market place, but also by making their intentions public temporarily turned the tide, and declining prices were momentarily checked. Before the gong was run at 3 o’ clock, prices had recovered sharply from the lowest level of the day.
The banking intervention steadied the market on Friday and Saturday, but by Monday the stream of uncompleted liquidation again flowed freely and reached its maximum violence and volume on Tuesday, when more than 16 million shares passed from sellers to buyers, a larger number than ever before in the entire history of the Stock Exchange.
Although the bankers’ motive was to bring order out of chaos in the interest of all, their technique was that of manipulation. The manipulation was four-fold in character. They sought to influence supply and demand by adding to the demand for stock. They sought to allay the panicky fears in the lay mind by setting a public example of sanity and courage, and through reassuring public statements. They sough to turn back the economic forces of destruction by enlisting moral and financial cooperation from wealthy individual outside capitalists, including John D. Rockefeller, Sr. and Jr. And they influenced the situation by cutting down marginal requirements on bank loans to brokers at the height of the panic and by increasing by 992 million dollars in a single week the loans of the New York banks to brokers, rapidly replacing the funds withdrawn from the loan market by frightened out-of-town banks and by corporations, investment trusts, wealthy individuals, and others who had been lending money.
Short sellers encouraged
The support maneuver encouraged profit taking by short sellers who had been operating in the hopes of profiting from a decline. Such short sellers had previously sold at higher prices stock which they did not own. Instead of delivering their own stock to the buyers at 2:15 the next afternoon, in accordance with the rules of the Stock Exchange, they borrowed stock from a third party, and delivered the borrowed stock.
They induced the holder of the borrowed stock to accommodate them by advancing him a fuller cash loan against the stock than any bank would give. Accordingly, these pessimists, bears, or short sellers were on the lookout for an opportunity to rebuy the stock at lower prices, and repay with stock the person from whom they had borrowed certificates.
The bear wanted of course to buy back the stock as cheaply as possible, but when he saw that the bankers were supporting the market he got nervous and tended to join the buying forces, adding to the velocity of the upturn in prices. The extent of the decline suggested an inadequate short interest in the market.
Although they did brilliant and courageous work in turning back the destructive forces of passion and fears, the big bankers were roundly criticized. The shorn lambs, who had lost what they had staked, hated to see the so-called rescue forces buy up stocks below their value at prices which seemed destined to net them a handsome profit.