"Everybody Ought to Be Rich"
By mid-decade, the recession of 1920-21 was only a memory for most, and business was taking in bigger and bigger profits and paying out larger and larger dividends. Plenty of people were looking to cash in on the boom, and the place to do it was the stock market. Though some stock buyers held onto their shares as an investment, others played the market more actively, looking for quick gains. These were the people who gathered around the ticker tape machines, watching for daily market fluctuations and keeping their ears open for hot tips on what to buy next. They were encouraged by rumors about waiters, janitors, and maids who had earned small fortunes by acting on advice from their wealthy employers.
An increasing number of investors bought their shares on margin, meaning they put down only a portion of the value of the stocks (usually 30 to 50 percent) and borrowed the rest from their brokers. The stocks served as collateral, and the broker could sell them if the buyer was unable to repay the loan on demand. But as long as the price of stocks continued to climb higher and higher, that seemed like a slim risk to take, especially with such a likely payoff at stake.
With so many inexperienced stock market players eager to get rich quick, conditions were right for deceptive and unethical schemes to flourish, and so they did. One of the most underhanded methods was the speculation pool, wherein a group of investors would instigate a flurry of activity around a certain stock, sometimes even bribing financial journalists to write about the stock to create interest. Once they had driven up the price, they would sell out their shares, making a handsome profit. The price of the stock would then drop, much to the dismay of those who had followed the pool’s lead.
Though not as blatantly corrupt as the pools, holding companies were also designed to reap large profits for the people who master-minded them. Primarily used by railroads and utilities, holding companies sold shares to the public while keeping enough shares to maintain a controlling interest. With the money raised by the sale of stock, the holding company would then buy a controlling interest in another company. Holding companies were often piled on top of each other, creating complex empires.
Investment trusts were based on a similar scheme. They were corporations that were formed to buy the stocks of other corporations. In other words, they did not create any products or own any physical assets, but existed solely to provide stock portfolios for investors, and, of course, to make a large profit for the owners. Like holding companies, investment trusts were piled on each other, with trusts buying shares in other trusts.
For the first five years or so after the 1920-21 recession, the rise in stock prices seemed to make sense. Corporate earnings were up, and naturally stocks would go up too. But gradually, speculation on the Exchange seemed to take on a life of its own, independent of what was happening in the economy. Prices on so-called glamour stocks skyrocketed beyond all reason. For example, the Radio Company of America, or RCA, sold for $2.50 a share in 1921. By late 1927, it was selling for $85.00 a share, even though it had never paid a dividend. The big bull market was underway, and investors were eager to join in the frenzy and make their fortunes. Even Ladies Home Journal, appealing to the growing number of women speculators, published an article about stock market investing titled, "Everybody Ought to be Rich."
