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Wall Street History
https://www.gofundme.com/s3h2w8
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10/29/2004
The Great Wall Street Crash
It’s the 75th anniversary of the Great Crash, October 29, 1929; a
good time to reprise some pieces I did about five years ago, with
a few modifications.
For starters, I appreciate the great input I receive from many of
you. I have a tremendous library here in my office but it always
amazes me how some of the authors I refer to seem to be at odds
when it comes to basic facts, and at times I’m forced to make a
call between two differing opinions. One such case involved the
great economist Irving Fisher. I couldn’t decide from my various
sources what school he had attended, Harvard or Yale. I went
with Harvard. It turned out to be Yale.
And so while I wrote my original tome on Fisher and his role in
the ’29 Crash over five years ago, I heard this past June from
Nora W. at Yale. Fisher attended here, not Harvard, and I was
grateful to Nora for setting me straight. [The author I relied on
in the meantime passed away in 1999.]
Nora also passed along the comments of Nobel Laureat James
Tobin concerning Fisher.
For starters, Fisher “was a great success” at Yale, and in keeping
with the current presidential election and the two candidates,
Fisher was a member of the secret society, Skull and Bones, just
as Bush and Kerry are. Fisher’s PhD in 1891 was the first
awarded in pure economics by Yale, incidentally. Fisher went
on to have a most distinguished career and according to Tobin “is
widely regarded as the greatest economist America has
produced .Much of standard neoclassical theory today is
Fisherian in origin, style, spirit and substance.”
“(But) for all his scientific prowess and achievement,” Tobin
writes, “Fisher was by no means an ‘ivory tower’ scholar
detached from the problems and policy issues of his times. He
was a congenital reformer, an inveterate crusader. He was so
aggressive and persistent, and so sure he was right, that many of
his contemporaries regarded him as a ‘crank’ and discounted his
scientific work accordingly. Science and reform were indeed
often combined in Fisher’s work .
“Fisher was an amazingly prolific and gifted writer, (author) of
some 2000 titles plus another 400 signed by his associates or
written by others about him. Fisher’s writings span all his
interests and causes .They include the weekly releases of index
numbers, often supplemented by commentary on the economic
outlook and policy ”
Yes, it sounds as if Fisher would have been right at home in
today’s environment of instant analysis and punditry.
Fisher did play an important role in the Great Crash. In the fall
of ‘29, as the market was beginning to hiccup, he continued to
believe in the bulls’ case for equities, declaring at one juncture,
“Stock prices have reached what looks like a permanently high
plateau.” A few weeks later the market crashed. Historian
Edward Chancellor writes that “Fisher fell for the decade''s most
alluring idea, that America had entered a new era of limitless
prosperity.”
In 1913 the Federal Reserve had been established and by the 20s
the Fed was hailed as “the remedy to the whole problem of
booms, slumps, and panics.” Bankers and speculators were lulled
into a false sense of security. True, when it came to the economy,
better management brought improvements in productivity and
lower levels of inventory; mismanagement of which had been a
leading cause of boom / busts in the past. Fisher argued that
modern production “is managed by ‘captains of industry.’ These
men are specially fitted at once to forecast and to mould the
future within the realms in which they operate. The industries of
transportation and manufacturers, particularly, are under the lead
of an educated and trained speculative class.”
Fisher was also optimistic because of the relaxation of the
antitrust laws during Calvin Coolidge’s presidency which
allowed for a series of mergers in banking, railroad and utility
companies that promised greater economies of scale and more
efficient production. The gains in productivity, which rose by
over 50% between 1919 and 1927, were ascribed to increasing
investment in research and development. [For example, back
then AT&T was building up to a staff of 4,000 scientists,
unheard of back in those days]. So the widespread use of
technology, the restructuring of corporate America and the Fed’s
ability to control inflation were the cornerstones of the new era
philosophy of Irving Fisher''s day.
Fisher was also a big proponent of investment trusts (the
precursor to today''s mutual funds), a recent innovation and
wildly popular by the fall of 1929. “The influence of investment
trusts is largely toward cutting the speculative fluctuations at
top and bottom, thus acting as a force to stabilize the market.
Investment trusts buy when there is a real anticipation of a rise,
due to underlying causes, and sell when there is a real
anticipation of a fall,” thus ensuring that stocks could move
nearly to their true value. The high turnover of shares in the
investment trust portfolios was hailed as sound management. It
was even argued that investment trusts purchases were providing
stocks with a new “scarcity value.” In reality, the trusts invested
heavily in blue chip stocks and borrowed heavily against their
assets in order to leverage profits, thereby increasing volatility.
[Ed. note: This is the debate today concerning the impact of
hedge funds.]
Fisher denied the likelihood of a crash by September 3, 1929, the
peak, even while others like Roger Babson forecasted an
imminent debacle (Babson said this Sept. 4). The market began
to weaken sharply. Rumors of bear pools, which were preparing
to drive the market down with short sales, were rampant. The
legendary Jesse Livermore was behind much of this action.
Fisher was spending his evenings during this period giving
speeches to banks and business groups, touting his theories of
permanent prosperity. The sharp decline of 10/14-10/19 in the
market didn’t cause a panic. Fisher thought the ongoing collapse
was the “shaking out of the lunatic fringe.”
Finally, on Wednesday, October 23, the investment trusts began
to collapse and real fears of a crash were hard to dismiss. That
evening, Fisher told a banking group that “any fears that the
price level of stocks might go down to where it was in 1923 or
earlier are not justified by present economic conditions.”
Later, Fisher attempted to explain his errors but he was generally
ignored. Following are the thoughts of some other players back
then.
--Arthur Lehman of Lehman Brothers expected troubles ahead.
”When I say that the outlook for business is doubtful, I mean it
literally, and not euphemistically, as predicting bad business.
Production has been at a high rate during the past year and it is
difficult to see where in many lines an expansion could take
place.”
--After a plunge in late December 1928, an unsigned New York
Times article was bullish. The market was rallying back and the
theme was, “Don''t sell America short.”
“The underlying strength of the stock market, which brought
sharp gains yesterday in many individual issues, has been about
as much a surprise to Wall Street as was the recent decline. The
professional element of the Street has been certain that a
‘secondary reaction’ of large proportions would follow in the
wake of the sharp decline, and on this theory a sizable short
interest has been built up in the market. Most of these short sales
now show a loss, and short covering furnished a considerable
part of yesterday''s business. Many more brokerage houses are
hopping nimbly over to the bull side of the market, and once
again yesterday many tips were in circulation. No one predicted,
however, that the market would start out once more in a burst of
wild excitement, but professional opinion is that the mid-
December crash was a ‘reaction in a bull market’ rather than ‘the
end of speculative frenzy.’” [Of course, the frenzy in 1929 only
got worse.]
--Time magazine publisher Henry Luce and his staff were
preparing to bring out a new magazine, Fortune, which would be
dedicated to the proposition and the “generally accepted
commonplace that America''s great achievement has been
Business.”
--In early1929, Paul Warburg, the “ancient” leader of Kuhn,
Loeb, spoke of the times. He had lived through the 1907 panic
and now he saw the same signals. Prices were too high. The
market rise was “quite unrelated to respective increases in plant,
property, or earning power.” The “colossal volume of loans” had
reached “a saturation point.” Unless “the orgy of unrestrained
speculation” was ended, a crash would surely follow, and then
would come “a general depression involving the entire country.”
As historian Robert Sobel notes, Warburg was accused of
“sandbagging American prosperity.”
--And then there was Bernard Baruch. He had been
recommending stock purchases while secretly selling his
holdings. “The bears have no mansions on Fifth Avenue,” he told
one reporter. Later on, he would write: “When beggars and
shoeshine boys, barbers and beauticians can tell you how to get
rich it is time to remind yourself that there is no more dangerous
illusion than the belief that one can get something for nothing.”
By the summer of 1929, Sobel writes “There was no sign of
weakness on Wall Street. When the Federal Reserve raised the
rediscount* rate to 6 per cent in August, stocks only rose higher,
disregarding all attempts to curb the boom. The boardrooms of
large brokerages were jammed with speculators and people who
did not own stocks but were curious about the excitement. The
atmosphere was lighthearted and carefree. A year earlier
individuals who had made fortunes on Wall Street were
applauded; now they were commonplace. Speculators, both large
and small, were beginning to accept continued advances as an
expected occurrence. Not even a rise in margin requirements
made by some brokers could dampen the enthusiasm.”
[* The old term for ‘discount’ rate.]
The Saturday Evening Post printed a poem to illustrate this
feeling:
Oh, hush thee, my babe, granny’s bought some more shares
Daddy’s gone out to play with the bulls and the bears,
Mother’s buying on tips, and she simply can’t lose,
And baby shall have some expensive new shoes!
From a September 1, 1929 New York Times article:
“Traders who would formerly have taken the precaution of
reducing their commitments just in case a reaction should set in,
now feel confident that they can ride out any storm which may
develop. But more particularly, the repeated demonstrations
which the market has given of its ability to ‘come back’ with
renewed strength after a sharp reaction has engendered a spirit of
indifference to all the old time warnings. As to whether this
attitude may not sometime itself become a danger-signal, Wall
Street is not agreed.”
*Here are some random, important dates which give you a sense
of the volatility in 1929 and how folks were undoubtedly
suckered in after the Crash, only to see their life savings wiped
out by July 8, 1932.
The “Roaring 20s” really didn’t get off to a spectacular start, at
least as far as the Dow was concerned.
1/2/20 Dow Jones - 108.76
12/31/20 - 71.95 [market meandered up then.]
5/20/24 - 88.33 [the low until long after the Crash]
12/31/27 - 202.40 [high close for the year]
12/31/28 - 300.00 [high close for the year, now the market is
cranking]
9/3/29 - 381.17 [high for bull market]
9/30/29 - 343.45
10/23/29 - 305.85
10/24/29 - 299.47
10/25/29 - 301.22
10/26/29 - 298.97
10/28/29 - 260.64 [market closed the 27th]
10/29/29 - 230.07 [HELP!!!]
10/30/29 - 258.47 [Buy the dip! Buy the dip! C''mon!!]
10/31/29 - 273.51 [See, I told you to Buy the dip!]
11/13/29 - 198.69 [Homer Simpson: Doh!!]
11/21/29 - 248.49 [Just your basic 25% one week rally]
12/31/29 - 248.48
3/31/30 - 286.10 [Yup, no sweat. I got this market thing all
figured out]
4/17/30 - 294.07 [the peak]
12/31/30 - 164.58
7/8/32 - 41.22 [90% decline from 9/3/29 and also the lowest
level for the next 75 years]
Sources:
“Wall Street: A History,” Charles Geisst
“Devil Take the Hindmost,” Edward Chancellor
“Mania, Panics, and Crashes,” Charles P. Kindleberger
“The Bear Book,” John Rothchild
“The Great Bull Market: Wall Street in the 1920s,” Robert Sobel
“The Great Bull Market,” Robert Sobel
Wall Street History returns November 5. Perhaps more on 1929,
depending on the presidential election results.
Brian Trumbore
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