CRASH REDUX?
Listen to this story
(Note: Producer Matthew Algeo's narrative is in lower case, while all quotes from interview subjects are in upper case)
In 1929, Stuart Baker graduated from college -- and began looking for a job on Wall Street.
ALL OF A SUDDEN THEY WERE FIRING PEOPLE LEFT AND RIGHT -- EXECUTIVES DOWN TO THE SECRETARIES.
It was October, and the stock market was crashing. Stu Baker had a little money in stocks -- and he didn't like what was happening:
THE GENERAL PERSON THAT WAS IN STOCKS WAS GOING THROUGH A HORRIBLE PERIOD BECAUSE IN A MATTER OF DAYS SOMETHING THAT WAS WORTH 50 WOULD BE WORTH 25.
Stuart Baker at his desk (Photo: Matthew Algeo)
|
Back then, Wall Street was not heavily regulated -- and that meant added risk for investors. Chris Catanese of the Museum of American Financial History in New York says shady brokers could manipulate stock prices:
THEY HAD ACCESS TO THE NEW MEDIUM OF RADIO. AND, YOU KNOW, THERE'S EVIDENCE OF TAMPERING AND RIGGING THE MARKET BY CREATING NEWS STORIES ABOUT CERTAIN COMPANIES, ABOUT CERTAIN STOCKS, THAT JUST WEREN'T TRUE. JUST TO INFLATE THE PRICES AND MAKE A PROFIT.
Another problem was that investors could buy stock on 90 percent margin. That meant you could buy a share of stock worth a hundred dollars for ten bucks -- and borrow the rest. That was fine as long as the price of the stock went up; but if it went down just ten percent, you'd be wiped out. Which is exactly what happened in 1929.
Across the country, worried investors followed the action on tickers, which spit out stock prices on long, narrow strips of paper. The tickers told a terrible tale that October: In one week the Dow fell nearly 30 percent. Chris Catanese says the crash destroyed public confidence in the stock market for years:
Chris Catanese of the Museum of American Financial History in New York. (Photo: Matthew Algeo)
|
ULTIMATELY THE EFFECTS OF THE CRASH WERE IN A LOT OF WAYS PSYCHOLOGICAL. THERE WAS SUCH A PESSIMISTIC VIEW OF THE MARKET AT THAT POINT. AND IT WASN'T TILL 1954 WHEN IT REACHED ITS 1929 HIGH AGAIN OF 381.
The crash took an especially heavy toll on the nation's banks. Many had made loans to stock market speculators that could never be paid off -- and simply ran out of money.
SOUND OF DRIVE-THROUGH AT CITIZENS BANK IN CHATSWORTH, ILLINOIS.
It's a Tuesday afternoon, and the drive-through window at Citizens Bank in Chatsworth, Illinois is busy as usual -- which isn't surprising, since it's the only bank in this town of 1,200. Citizens Bank was founded by a German immigrant named Stephen Herr in 1903. It was one of a handful of small, family-owned banks in rural Illinois to survive the Depression. James Herr is Stephen Herr's grandson, and he was on the bank's board of directors for more than 30 years. Herr says his grandfather did something unusual during the Depression: he guaranteed deposits through a kind of personal insurance fund:
Citizens Bank in Chatsworth, Illinois. (Photo: Matthew Algeo)
|
MY GRANDFATHER PLEDGED ALL OF HIS ASSETS EXCEPT HIS HOUSE -- AND HE OWNED HUNDREDS OF ACRES OF LAND -- AND THAT ATTRACTED DEPOSITORS.
But that wasn't the only thing that saved the bank. Herr says public pressure helped keep it open, too:
I WILL GIVE YOU AN EXAMPLE. THERE WAS DEBTOR THAT OWED THE BANK WHO WANTED TO MOVE OUT OF THE COMMUNITY, HE WENT DOWN TO THE TRAIN STATION WITH HIS WIFE AND HIS FARM ANIMALS AND THE STATION MASTER KNEW OF HIS DEBT TO THE BANK AND REFUSED TO LOAD HIS FAMILY AND HIMSELF ON THE TRAIN UNTIL HE GOT A NOTE FORM THE BANKER THAT THE BANK WAS PAID IN FULL.
Citizens Bank may be the only family-owned bank in Illinois to survive the Depression and remain in the same family's hands today:
I AM THOMAS E. HERR. I'M KNOWN AS TOM THE ATTORNEY. AND I'M THOMAS R. HERR -- KNOWN AS TOM THE BANKER.
Tom the attorney is the bank's chairman; Tom the banker is its president. They're cousins -- great-grandchildren of the bank's founder. Tom the attorney says the lessons learned in the wake of the crash still guide the bank to this day:
Tom the attorney on the left, Tom the banker on the right. A photo of their great-grandfather Stephen Herr in the middle. (Photo: Matthew Algeo)
|
WE'VE ALWAYS REGARDED OUR -- YOU KNOW, THE MONEY WE HOLD ON DEPOSIT AS -- WE'RE TRUSTEES OF THAT MONEY. AND THAT HAS SERVED THE BANK WELL.
Citizen's Bank was lucky to survive. During the Depression, more than 9,000 banks failed nationwide. The stock market crash and subsequent bank failures cost ordinary Americans billions of dollars -- and left many wondering whether their money was safe *anywhere*.
NOWADAYS, THINGS ARE VERY DIFFERENT, AND THERE'S A BIG CONTRAST BETWEEN NOW AND THEN IN SO MANY WAYS.
Janet Bodnar is a personal finance expert and a columnist for Kiplinger's magazine. She points out that after the crash the government created the Securities and Exchange Commission to regulate the stock market -- and prosecute fraudulent brokers. And you can't buy stocks on 90 percent margin anymore:
THERE ARE MUCH TIGHTER MARGIN REQUIREMENTS. YOU HAVE TO PUT A LOT MORE CASH -- A LOT MORE OF YOUR OWN CASH -- ON THE LINE.
The percentage of American households owning stock in 1929 was probably less than ten percent. Today it's about 50 percent -- largely because of retirement plans like 401(k)s. Bodnar says that increase is a good thing, because it spreads the risk. She says it's also led to better-informed investors:
Stuart Baker - in 1929.
|
IN 1929, IT WAS A RELATIVELY SMALLER NUMBER OF PEOPLE WHO WERE DOING IT AND IT WAS A MUCH MORE SPECULATIVE MARKET THEN. NOW WE HAVE A LOT MORE EDUCATION AS FAR AS INDIVIDUAL INVESTORS ARE CONCERNED. AND THAT'S REALLY A BIG HELP AND REALLY MAKES IT LIGHT YEARS DIFFERENCE BETWEEN 1929 AND NOW.
Bodnar says banks are much safer today, too, since the industry is highly regulated and the FDIC now insures deposits. But she says...
PEOPLE ALWAYS NEED TO THINK SMART. DON'T BE GREEDY. THINK SMART IN THE WAY THEY INVEST AND DIVERSIFY YOUR ASSETS AND PAY ATTENTION TO WHAT'S GOING ON.
All the rules and regulations in the world are no substitute for common sense. That's one thing that hasn't changed since 1929. I'm Matthew Algeo for Sound Money.
LISTEN TO THIS FEATURE
