Jay Gatsby, the mysterious millionaire, is one of the main characters of F. Scott Fitzgerald’s 1925 novel, The Great Gatsby (you may well be picturing him as Leonardo di Caprio, from the 2013 blockbuster movie version. We encourage that).

The Great Gatsby, a story set in 1920’s New York, has been often been referred to as the ultimate portrayal of the American Dream. It was a decade known for its rebellious youth, jazz, prohibition-fighting speakeasies and finally, economic prosperity.

Of course, with the benefit of hindsight, we know what was to come. And perhaps Fitzgerald was also prescient in trying to issue a warning that after a long party, a super-sized hangover inevitably follows.

As anyone who has read or watched The Great Gatsby knows, the 1920’s was a time of huge economic growth - not only in New York, but across the United States. Post World War I, rural Americans were moving to big cities in the hope of work in the booming industrial sector and a better life. Banks were giving out loans left, right and centre, with big numbers and loose terms. The positive economic outlook was expected to last forever and there was a general belief that the stock market would just keep rising, encouraging more new investors to dive in and to take bigger risks (sound familiar?).

By the end of the 1920s, the writing was already on the wall for those that cared to look: the masses were no longer buying cars, steel production was down and construction was also slowing down. But for the most part, people were still taking loans and investing like the party would never stop. Looking back, it seems easy to do the maths…

The autumn of 1929, and particularly the months of September and October, are now infamous for The Wall Street Crash, also known as the Great Crash. But it was several months before that alarm bells started ringing.

In March 1929, the Federal Reserve, America’s central banking system, warned against excessive speculation. After this, the market suffered a mini-crash, with people selling stock in near-panic mode. There was a momentary rally, after the National City bank fed 25 million dollars into the market in credit. But all this meant in practice was that the interest rate went down from 20% to 8%, and investors’ spending sprees carried on with gusto.

And these weren’t experienced investors - everyone was at it. For a while, the jazz and the speakeasies could continue, but the music would soon come to a stop.

March also saw the election of a new president, Herbert Hoover. He famously said during his campaign “We shall soon, with the help of God, be in sight of the day when poverty will be banished from this nation". Not quite a divine insight into the future, as it would turn out.

The summer of 1929 saw huge amounts of volatility in the market, as stock prices went up and down like a rollercoaster, before coming to a head in October 1929. Thursday 24th of October 1929 became known as the first ever “black” day: Black Thursday was the day the economic bubble finally burst.

(Hoover did try to convince Americans that the economy was safe, and a group of bankers tried to pull the same stunt National city did earlier on in the year, but it was all as useful as one-legged man in an arse kicking competition).

Instead the following week started with Black Monday, followed by Black Tuesday. On Tuesday 29th, full panic mode was reached, with people selling any and all the stock they had, leading to a market drop of over 23% in just two days (recently on 16th March 2020, we saw a drop of -11.98% in just one day, but this was sandwiched between rises on the days either side).

Several attempts were made to turn the tide. Famous elite families, such as the Rockefellers, started buying shares at over market prices in an attempt to rally the market.

Spoiler: It did not rally the market.

And there was more bad news on the horizon, albeit this time masked as good news. A strong wheat harvest meant huge overproduction of wheat, which at first seemed like a positive - wheat for everyone! But this oversupply led to wheat prices crashing, causing the farmers to suffer alongside those in the cities.

This was, in fact, the beginning of a long decline that finally hit the bottom in July 1932 - a 89.2% decline in the Dow Jones index in less that 3 years. (The Dow Jones index only returned to the level of September 1929 nearly 10 years after the end of World War II, in November 1954.)

As mentioned earlier, the Great Crash has also been seen as the start of the Great Recession. It took until the early 1940’s before the United States GDP finally took a turn upwards.

(It’s worth noting however that Gross Domestic Product as a measure is slightly misleading. GDP is a monetary measure giving the market value of all the final goods and services produced in a specific time period. So that GDP increase was mainly driven by war-related governmental spending, and had barely any effect on the quality of life of the average American.)

The Great Crash was also a sign that world economics were more connected than ever. The Wall Street Crash started a series of financial crashes that spread to London and then onto the larger European economy as well.

"Speculation is most dangerous when it looks easiest."

The quote of the infamous magnate Warren Buffet is relevant to investors regardless of the century.

The 1920s saw almost all American industries - from railway to steel to car manufacturing - grow like gangbusters. The net profits of publicly listed companies were enormous, causing ordinary people to not only invest their savings, but to borrow money to invest even more. The rising share prices attracted more and more investors like moths to a flame, which caused the prices to inflate even further.

The resulting levels became completely detached from reality. In fact, the Price to Earnings ratio of S&P Composite stocks in early September reached 32.6, a level only beaten in 2000, before the dot.com crash.

Lessons for today

It’s clear that the 1929 Crash and following Great Depression was a result of multiple events happening over a long period of time. It was not solely caused by Hoover’s campaign comments, nor by rural Americans moving to cities in search of the American dream. It was a series of events that led to the overheating of the market, the much-talked of ‘bubble’.

If we think forward to later crashes, or indeed the situation we are now facing in spring 2020, there are lots of similarities. There was no COVID-19 to worry about in 1929, but many of the indicators we’ve discussed looked very similar to those we have seen in the last year, from companies valued at crazy high prices to a US president promising endless growth in the markets.

We started with The Great Gatsby, and so it seems apt to end that way. Perhaps a quote from Jay Gatsby himself:

“Can’t repeat the past?…Why of course you can!”

Matti Rönkkö
Founder at Cooler Future.
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