Thank you for downloading the More or Less podcast. We are weekly guides to the numbers in the news, in life and in financial crises. Andrew Ross Sorkin is no strange to them. He's the author of Too Big to Fail, a behind-the-scenes account to the banking crisis of 2008, and a financial journalist at both The New York Times and CNBC. His new book looks further back. It's titled 1929 Inside the Crash. Andrew, welcome to More or Less. Thank you for having me. Andrew, for those of us who are familiar with the history of finance, there is no bigger date than 1929. But for people who blessedly have forgotten, what was the Great Wall Street Crash? The Great Wall Street Crash of 1929 was considered the first and most critical crash in the United States stock market. The 1920s was this remarkable roaring period. You had automobiles and radio and all this excitement about new technologies are going to change the world. It was the first time that ordinary people could invest in the stock market. They watched the market climb and climb and climb and climb. In October of 1929, it crashed and it crashed hard. I wanted to get a sense of just the scale of this crash. It's called the Great Crash. Is it fair to say it's the biggest financial crisis in history? Is there any way of putting a number on any of that? I think if you look over not just 1929, but between 1929 and 1933, you're looking effectively at something on the order of about a 90% fall in the total price of the market. Now, it's worth knowing in 1929 itself, the stock market oddly enough, despite the fact that we all think about it as this grand crash, ended the year only down about 17%. But between October and November of 1929, the stock market fell about 50%. So if you closed your eyes and just looked at the beginning of the year and the end of the year, you would have thought maybe nothing happened, except for the fact that this extraordinary 50% down draft at a time when most ordinary people were investing in the stock market for the first time, oftentimes with remarkable amounts of debt, 10 to 1 in some cases. It's worth unpacking that then. So if I've got $100, but then I borrow $1,000 and I buy $1,000 worth of stock and then that falls to $500, I've lost five times more than I ever had. You've got a big, big problem. And that really explains what I think of as the first domino in a series of dominoes that leads, as we just mentioned by the time you're in 1932, 1933, to this 90% drop. And by the way, you also had 25% unemployment in 1932. One of your jobs, Andrew, is to appear on the TV talking about finance and while you're talking, numbers go along the bottom of the screen. This is the stock market is up, the stock market is down, individual shares up, down, the dollar, crude oil. There's an absolute ubiquitous availability of data. So in 1929, there was a ticker tape printing stock prices, but things were quite different. So what was different and did the lack of data then make it better or worse? Oh, I would argue to you the lack of data and more importantly, the lack of timely data was not just a problem. It is actually what in some cases you could describe as creating the crisis. We don't know what the price is now because the ticker tape is 15 minutes hours behind. Oh, 15 minutes. We were literally in some cases four, five, six hours behind. When you see those famous black and white pictures of thousands of people during the great crash standing around the New York Stock Exchange, you may have seen those pictures over the years. If you ever say to yourself, what are they doing? Why are all those people standing in the street? All of those people had come down to Wall Street to physically try to find out what had happened to their money. They didn't know what the stock prices were because if you were at a brokerage house, literally on Fifth Avenue in the 40s, you could have been three hours behind and forget about it if you were in Europe or if you were on a boat somewhere and by the way people were trading on boats, you could be two days behind. One of the things that happened was people recognized just how out of date the ticker was and said, I'm going to sell everything. I can't even play in this. Is there a way of understanding how vulnerable to a crash you are? From the point of view of the historian, you can plot indices, you can plot graphs, but is there any way to tell at the time? The thing that I always focus on is debt. The leverage in the system to me is the match that lights the fire. The thing that I'm always looking for, whether it's in the moment or afterwards, is how much debt is in that system at any given time because that's what oftentimes tips things over and oftentimes often helps inflate the multiple. That's actually something else you could look at in terms of what is the multiple at any given moment. You could use a price to earnings ratio or any given metric to try to understand what stock is being priced out relative to others. By multiple, a classic one is just to say, how expensive is this stock relative to the profits that the company is making? If the company is making a dollar a year and the stock is $10, the multiple is $10, if the company is making a dollar a year per share and the stock is $100, then the multiple is $100. There have been efforts to try to draw these price earnings multiples or price earnings ratios over the very long term. I know Robert Schiller, Nobel Laureate. He's done this work. He's a Nobel Prize-winning economist. Let's describe some graphs on the radio. It's my favorite thing to do. Oh goodness. I mean, it's like a mountain. It's like you can see the peak. You can see if you go back and look at it. In the moment, you might not have realized it is the thing. You know it's gone up. You just don't know whether it's going to go up any further. You don't know if you're at the peak of the mountain or if the mountain is going to continue above the tree line, if you will. By the way, you can similarly look at mountains in the 1970s. You can look at mountains in the late 90s. Actually, I'd like to do that because of course, one of the reasons why 1929 is so interesting. It's a fascinating story the way you tell it, but it's also fascinating because it tells us something about today. It tells us something about other crises. If you look at that mountain, the price earnings ratio, which is a kind of indicator of, well, how expensive is it for me to buy a slice of profits now? How does the mountain peak in 1929 compare to say the 1970s or the dot-com bubble or even to today? Well, it looks high, but on a relative basis to those peaks, it is a smaller summit, if you will. But on a relative basis, in that moment, you'll see it go up, up, up, up, up, up, up. It's really sharp. Really steep. You can see the drop off like a true roller coaster. Now I'm mixing my metaphors. So in 1929, this graph peaks. It's a really sharp peak, just above 30. So 30 is the share price is 30 times the average of profits over the previous 10 years. Then it falls back, never gets anywhere near that. Then in the late 90s, early 2000s, the dot-com mania, it goes even higher. So it goes above 40. Then it falls back again. It is now back above 40. For only the second time in history, it's even higher than it was at the peak of the 1929 crash. Can we conclude anything from that? Absolutely. We can conclude that we are likely at some point, but we don't know when going to tip over again. And that is the big existential question for all of us. I've been talking to Andrew Ross Sorkin. Thank you, Andrew. Thank you for having me. Andrew's book is 1929 Inside the Crash. Please keep your questions and comments coming in to more or less bbc.co.uk. We'll be back next time. And until then, goodbye.
