Why Worry?

Before the Crash of 1929, investors weren't fazed by volatility


Shortly before the 1929 stock market Crash, economic seer Roger Babson predicted a decline that "may be terrific." At about the same time, Professors Joseph Lawrence of Princeton and Edward Kemmerer of Yale saw a bright future for Wall Street. Virtually every book dealing with the Crash mentions Babson as a farsighted forecaster, while Lawrence and Kemmerer are largely forgotten. This is quite common. After most portentous events we look about, wondering why we didn't see the train coming, and then locate those who did, elevating them to super-guru status.

Although the past can't be used to predict the future, there have been some striking similarities -- at least in terms of market volatility -- between the present and the fateful year leading up to the Great Crash of 1929. Now, as then, it remains difficult to tell whether the latest correction is merely the latest buying opportunity ... or the end of the bull market.

Hindsight, of course, is a wonderful thing. In December 1996, Fed Chairman Greenspan wondered aloud whether "irrational exuberance" was causing a "bubble." The next day, the market declined sharply, but then recovered. Some criticized Greenspan for causing the dip, while others praised him for sounding the warning. "If there is a selloff," said economist Henry Kaufman, "then Mr. Greenspan is on record as having warned that this could be a problem." The market went on to set new records, reaching a high of 7085 on March 11, 1997, and then declining 10% by April 14 -- a drop large enough to warrant the traditional "bear-market correction" label -- before moving up once more. Greenspan will be remembered, but for matters other than that December statement.

Any analysis of a past event is made with the knowledge of what happened, information unavailable to the participants as the drama unfolded. That's important in examining the year prior to the Great Crash, which was filled with drama.

On October 24, 1928, the Dow closed at 257, and then rose to 296 on November 28, followed by a slump to 290 on December 5. Prices collapsed on December 6, with the Dow closing at 280, for a nearly 4% loss. Volume was a torrid 5.4 million shares, and the selling started with the opening bell and continued through the session. The Dow skidded further, to 271, the following day on record volume of 6.2 million shares, and to 257 on December 8, which was a half-day Saturday session. In three days, then, stocks declined 33 points, which would translate by today's standards to a more than 900-point selloff.

The market recovered the next session, Monday, December 10, closing up by more than six points, and kept moving higher. Wall Street celebrated the end of the year by hitting Dow 300. Lost in this roller-coaster history is that the December 1928 selloff and recovery weren't unusual to the era's market players. There had been several such corrections in the 1920s. Investors and speculators were accustomed to volatility and had begun to take it in stride. Why not? Didn't stocks always come back? Anyone familiar with the markets of the late 1990s would have been at home in those of 1928-29. Just substitute RCA's David Sarnoff and Alfred Sloan of General Motors for Microsoft's Bill Gates and Intel's Andrew Grove. Media and autos were then what software and microprocessors are today.

Not all of economist Roger Babson's predictions proved to be accurate.

In 1928, RCA, which at the time had never paid a dividend, announced a 5-for-1 stock split. Recently Microsoft, which hasn't paid one either, split 2-for-1.

By early 1929, volatility was so commonplace that some investors were more lulled than alarmed whenever it appeared. Prices declined in late March of that year, as the Fed indicated it wouldn't extend credit for speculative purposes. Then a consortium of banks announced it would provide $20 million in brokers' loans. This prompted a rally that carried into April, but prices fell once again in May, bottoming at Dow 292 on the afternoon of May 27. In early June, the market exploded, rising to 334 by month's end, and going on to 348 by the end of July. A month later, it was at 380, with 400 in sight. Overall, the thrust was up. In less than two years the market, as measured by the Dow, had come close to doubling, with most of the action coming toward the end of that stretch. The DJIA closed on September 5 at 370, after sliding from its peak of 382 reached that morning. From the May 27 low to the September 5 high, less than three and a half months, the market had risen more than 30%.

Consider what might have gone through the minds of those who sold their stocks anywhere along the way, especially during the corrections.

How would you have felt? Stupid, probably, and determined not to repeat your mistake. The Crash came the next month. The morning of Black Thursday, October 24, the market fell from 306 to 273, but then recovered as a bankers' consortium sent NYSE Vice President Richard Whitney to the floor to place orders for key stocks above their quotations. The "big boys" had saved the day. The market rallied, closing at a shade below 300. Try to put what you know happened next out of your mind, and ask yourself whether you would have bought or sold. Remember, there had been crashes before during the bull market, and always the market had bounced back. That October, the news was good, the economic outlook fine.

The market ended at 301 on Friday, and dipped to 299 on Saturday. On Monday prices collapsed to 261. The Wall Street Journal called what had happened a panic, but said those who owned stock outright rather than on margin should remain confident. "They have lost a few tail feathers but in time they will grow again, longer and more luxurious than the old ones." Counseled the New York Times: "The investor who purchases securities at this time with the discrimination that as always is a condition of prudent investing may do so with confidence." These words were read on the morning of October 29, "Black Tuesday," when the market plunged to end at Dow 230 on volume of 16.4 million shares.

What would you have done then? Would you have recalled the Babson prediction and remained on the sidelines? Or was this a buying opportunity?

The next day, stocks rallied to close at 258, almost wiping out the losses suffered on Tuesday, and in the rally that followed, the Dow ended on April 14 at 294. By then, Babson had come out with another recommendation. This time, he urged investors to buy, a prediction that didn't make the history books. A year later, Dow was at 168, and on April 14, 1932, it closed at 63. By then, market followers were able to recognize the bubble that had been created in 1928-29. Isn't hindsight grand?

ROBERT SOBEL, a professor of business history at Hofstra University, is the author of Panic on Wall Street.


  1. Professor Sobel draws parallels between 1929 and 1998. Under what conditions would you expect such comparisons to yield useful forecasts for the market?
  2. If you were asked to present a counter to the arguments made in this article, what would you say?