Erik’s Blog: Board Shorts and Business Suits

Many reporters, economists, and wanna be economists are comparing the recent stock market crash to the famous crash of 1929. The crash that marked the start of the Great Depression. The crash that changed America. But is it really the same?

Knowing little about the 1929 crash I haven’t really been able to make the parallel myself. I’ve been stuck listening when I’d love to offer my own opinions. So a few weeks back when I was, surprise surprise, waiting in an airport I stumbled across a used book with a title staring back at me. Rainbow’s End: The Crash of 1929.

I decided to buy the book and begin to read it on my 14 hour journey back to Hawaii from the mainland. The back cover seemed to have rave reviews (which rarely happens on a book cover) and the thought of finally figuring out what caused the stock market crash was intriguing enough.

Turns out it was an amazing book. It reads like a story rather than restating facts in dry collegiate language. It kept me reading and interested in something that most would find a boring subject were it not strikingly similar to todays events.

The author, Maury Klein, writes Rainbow’s End not focusing on the events right around 1929, but rather, builds up to the crash. Starting at the turn of the century. He talks about how the automobile transformed American way of life more than any other invention ever had. Klein focuses on the effects the automobile had on how people traveled and interacted with people, the status symbol a car made, the drive by manufacturers to reduce the cost making it more of an minorly-expensive commodity than a luxury item. And most importantly he talks about how automakers begin to shape how companies did business.

He focuses on one big player, with big ideas, Billy Durant who helped create holding companies like GM to brand different cars and build huge conglomerates. Durant lived the American dream and Klein captures the most pivotal moments of that dream.

He goes on to talk about how banks began to transform. He talks about how America used to be a country of men and women who saved, and worked hard to save some more, but began to turn to country that used credit to purchase things. (sound familiar) Fueled by the automobile, large appliances, and other luxuries, America began to buy things now on want rather than on necessity.

He talks about how banking giant of the time National City began to offer trading of securities all over the US, not just to the wealthy in New York and Chicago. How citizens were talked into buying on margin, and that the market would always go up. How the government sat by as banks were allowed to offer whatever they wanted to customers, manipulate stock as they saw fit, and get away with a lot that today would land you in jail.

The parallels, as you can read from above, are amazingly similar to today. The 20’s built into an enormous bubble of lavish spending that burst in late 1929. While Klein doesn’t go into detail much after the crash, he does talk about Hoovers unfortunate taking over of a market on the verge of disaster and his real inability to use the government to overcome a widespread depression.

If you have any interest in the stock market of today, and wish to learn from the past, read this book. Maybe you’ll be able to read the market better and see why the government is so scared of banks collapsing and people losing all of their credit.