In the America of the 1920s, production and employment was high and going up, consumer prices were stable, and manufacturing was seeing a dramatic increase of output. 

Stock prices began rising steadily from 1927, reflecting good corporate earnings. But from early 1928 the market began to be de-anchored from underlying values. There was “a mass escape into make-believe” economist JK Galbraith writes.

Glamor stocks such as Radio Corporation of America went from 85 to 420 cents (without ever having declared a dividend), Du Pont from 310 to 525, and Montgomery Ward from 117 to 440. Does this remind you of some of today’s stocks?   

The conventional explanation was that low interest rates were to blame for the frothy market. 

Low rates meant people could borrow cheaply to buy stocks on margin and earn fantastic returns. 

But far more important was a mentality that had developed among ordinary people that, seeing so many millionaires being minted, they were meant to be rich too. Banks were giving constant reassurance that stock values were reasonable and would keep rising. 

The frenzy was also fuelled by brokers’ loans to private individuals. Brokers could borrow from the Fed at 5% and lend out at 12%, yet these stiff rates still seemed reasonable for people seeing their stocks double or triple in a few months.

In the summer of 1928, many big stocks like Westinghouse and General Electric jumped 30-40 per cent in value, and not only the New York exchange but smaller exchanges around the country were booming. 

As 1929 began there were a few contrarian voices, but they were dismissed as “un-American” and anti-prosperity. 

Not everyone was putting money into stocks (between one and two million people had trading accounts, out of a population of 120 million), but the frenzy captured the public’s imagination. Many people were making considerably more from holding stock than they were earning in wages.