A History of the United States in Five Crashes

The Dow closed that Tuesday at 381.17, up 0.2 percent for the day and up 27.1 percent for the year. It had more than doubled since the end of 1926, just thirty-two months before. It had nearly quadrupled during the 1920s. Nobody knew it yet, but this was the top. After a drop of 1.56 points the next day, it would take twenty-five years to regain the level reached on September 3, 1929.

Economist John Kenneth Galbraith would later agree with author Frederick Lewis Allen that the “striking thing about the stock market speculation of 1929 was not the massiveness of the participation. Rather it was the way it became central to the culture,” as it had for this girl. The crash began two days later, on September 5, 1929.

The Dow, which had closed at 381.17 on September 3, 1929, would close at 41.22 on July 8, 1932. It wouldn’t make a new all-time high until November 23, 1954, more than twenty-five years after the crash.

Every other modern stock market crash has been fueled by a new financial contraption that was poorly understood and that metastasized at the worst moment. The 2008 stock market crash was fueled by a half-dozen such contraptions.

The vessel for this alchemy was the collateralized debt obligation, or CDO, which promised that the diversification effect was so powerful that if enough crappy tranches were combined with other crappy tranches, the result would deserve a AAA rating.