One Summer: America, 1927

you didn’t need money to take part. You could buy on margin – purchasing, say, $100 worth of shares for a down payment of $10, with the balance borrowed from your broker. He in turn borrowed from his bank. From the bankers’ point of view, the arrangement could not have been more pleasing. Banks borrowed from the Federal Reserve at 4 or 5 per cent and lent it on to brokers at 10 or 12 per cent. They were, as one writer put it, ‘in the position of being handsomely paid simply for existing’.
    As long as shares kept rising, the system worked fine, and for much of the 1920s that is exactly what shares did. It was clear to anyone who cared to look, however, that there was little correspondence between the prices of many shares and the values of the companies they supported. While national output (as measured by GDP) rose by 60 per cent in the decade, stocks went up by 400 per cent. Since most of these inflated rises had nothing to do with any underlying profits or productivity, all that kept them so giddily buoyant was the willingness of fresh buyers to bid the prices ever higher.
    What most small investors didn’t realize was that things were often stacked against them. Many of the most respected business leaders in the country took part in syndicates in which share prices were shamelessly manipulated for the sake of a large, quick gain at the expense of innocent investors. One such, reported by the financial writer John Brooks in his classic Once in Golconda , involved such luminaries as Walter J. Chrysler of the Chrysler Corporation; Percy Rockefeller, nephew of John D. Rockefeller; John Jakob Raskob, national chairman of the Democratic Party; and Lizette Sarnoff, wife of David Sarnoff, head of the Radio Corporation of America (RCA). A broker working for them bought large blocks of RCA stock at selected intervals. This had the effect of driving the price from 90 to 109. The rise attracted other investors. The broker then cashed in the syndicate’s holding and themembers shared a profit of nearly $5 million for less than a month’s work. With the syndicate’s money withdrawn, the shares sank back to 87, leaving other, underinformed investors nursing huge losses. There was nothing to be proud of in any of this, but nothing illegal either. Raskob made most of his fortune through such pools. So, too, did Joseph Kennedy, father of President John F. Kennedy.
    In 1929, Raskob gave an interview to the Ladies’ Home Journal that ran under the headline ‘Everybody Ought to Be Rich’ in which he insisted that anyone could get rich by playing the stock market. In fact, he had by then cashed in most of his shares in anticipation of the fall to come. Hypocrisy was not a condition many people recognized in the 1920s.
    Borrowing funded not just a booming stock market but all of life. Thanks to a brilliant new financial invention, Americans could suddenly have things they had never expected to have – and they could have them right now. It was called the instalment plan, and it changed more than the way Americans shopped: it changed the way they thought.
    The idea was simplicity itself. Say a radio cost $100. The customer bought it for $110 by paying $10 down and $10 a month for ten months – and thus had the pleasure of a radio immediately for an additional cost of just $10. The retailer sold the contract to a finance company for $83 which, with the $10 down payment, gave the retailer $93 in hand. At the end of the ten months, the finance company gave the retailer $10 more as a fee for collecting the monthly payments. The upshot is that at the end of the payment period the retailer earned $103, the finance company made $7 on an investment of $83 and the customer owned outright a treasure that previously he could only have dreamed of. As Louis Hyman notes in his history of consumer credit in America, Debtor Nation , the system was so slick that it left everybody happy. Customers buying vacuum cleaners through the Republic Finance Company paid interest of just $1.05 a month for five months, which seemed hardly anything, and yet it gave RFC and its shareholders a return of62 per cent on their money. On such happy mathematics was a new world built.
    ‘Buy now, pay later’ proved such an irresistible concept that soon people were using it to purchase all kinds of things – clothing, furniture, household appliances, bathtubs, kitchen cabinets and above all cars. Instalment buying filled American homes with gleaming