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10/22/1999

Irving Fisher and the Crash of 1929

Someday I''m going to write a book on authors writing books.
Confused? Well, a viewer, Don K., suggested I write a piece on
1929 and the economist Irving Fisher. So what follows is a brief
summary of who Fisher was and his role in the Great Crash.

But first, I have a terrific library in my office which I draw on for
my stories. Anyway, in researching the life of Irving, the first 3
sources I employed describe him as being a Yale professor.
Then I turn to a book by the eminent market historian Robert
Sobel (who recently passed away) and I see "Irving Fisher of
Harvard" and "Fisher.was spending most of his days away
from Harvard." So since I don''t have the time to research the
matter further if I''m to meet my deadline, I am officially
deducing that Fisher is from Harvard and the other authors, some
well known, are just plain lazy. Yes, I''m placing my bet on
Robert Sobel. My 3rd grade detective work leads me to believe
that since there was a Harvard Economic Society which was a
society drawing on the leading economists of "Harvard, Yale,
Princeton, Ohio State, and Michigan" (Sobel), somehow
someone figured Fisher was from Yale and everyone thereafter
copied that author. Now Fisher''s own son has a book out there
somewhere but, sorry folks, I''m not buying it. [Or else Sobel
and I are wrong and this whole last paragraph was a huge waste].

Anyway, in yesterday''s Wall Street Journal, in the op-ed section,
economist Brian Wesbury, who is humping a new book of his
own, said the following: "The U.S. has entered a new era of
wealth that is only beginning." Ah yes, shades of Irving Fisher.

Irving Fisher was a leading economist of his time who had
authored books with the titles "The Purchasing Power of
Money," "The Rate of Interest," and "The Theory of Interest."
It''s easy to view him as the Abby Cohen, Harry Dent, or Jim
Glassman of his day. [Yeah, maybe that''s not fair but it''s my
site!] He was also a member of AAPA, the Association Against
the Prohibition Amendment. One of his own main new era
arguments rested on the benefits he saw flowing from
prohibition, which had begun in 1920. He cited the work of a
Columbia professor, Paul Nystrom, who concluded that a "dry"
nation would increase the efficiency of workers and switch
demand from liquor to "home furnishings, automobiles, musical
instruments, radio, travel, amusements, insurance, education,
books and magazines."

Edward Chancellor attributes John Templeton with the saying,
"The four most expensive words in the English language are
''This time it''s different.''" Does this statement have anything to
do with today''s market environment? Well gather ''round and
here what Fisher and other pundits were saying back in 1929.

In the fall of ''29, as the market was beginning to hiccup, Fisher
continued to believe in the bull''s cause. He declared at one
juncture, "Stock prices have reached what looks like a
permanently high plateau." A few weeks later the market
crashed. 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 was established. By the 1920s 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, as for 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 until this time]. 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.

Fisher denied the likelihood of a crash by September 3rd, the
peak, even while others like Roger Babson forecasted an
imminent debacle (Babson said this Sept. 4th). The market began
to weaken sharply. Rumors of bear pools, led by Jesse
Livermore, which were preparing to drive the market down with
short sales, were rampant. [Don''t worry, we''ll cover Jesse
someday].

Fisher was spending his evenings 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 23rd, the investment trusts began
to collapse and real fears of a crash were developing. That night
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. Who today will suffer the same fate? Who will be
"Fishered?" The Shadow knows.

The End

One interesting sidelight to the Fisher story. Back in 1914,
Fisher thought the European War would cause the belligerents to
sell their American securities to gain funds for munitions; that
Europeans would no longer be able to finance American
companies, that blockades would cut America from her markets
and so destroy the economy. None of this happened. Instead,
European gold came to America for safekeeping and Europeans
purchased American securities as the safest investment to be had.
As a result, share prices rose.

*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 we''re really
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: Dohh!!]
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 67 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

Brian Trumbore

*If you can prove that Fisher went to Yale, outside of the above
sources, please contact me through the "Contact Us" link. I''d be
happy to give you credit in my next column.




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-10/22/1999-      
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Wall Street History

10/22/1999

Irving Fisher and the Crash of 1929

Someday I''m going to write a book on authors writing books.
Confused? Well, a viewer, Don K., suggested I write a piece on
1929 and the economist Irving Fisher. So what follows is a brief
summary of who Fisher was and his role in the Great Crash.

But first, I have a terrific library in my office which I draw on for
my stories. Anyway, in researching the life of Irving, the first 3
sources I employed describe him as being a Yale professor.
Then I turn to a book by the eminent market historian Robert
Sobel (who recently passed away) and I see "Irving Fisher of
Harvard" and "Fisher.was spending most of his days away
from Harvard." So since I don''t have the time to research the
matter further if I''m to meet my deadline, I am officially
deducing that Fisher is from Harvard and the other authors, some
well known, are just plain lazy. Yes, I''m placing my bet on
Robert Sobel. My 3rd grade detective work leads me to believe
that since there was a Harvard Economic Society which was a
society drawing on the leading economists of "Harvard, Yale,
Princeton, Ohio State, and Michigan" (Sobel), somehow
someone figured Fisher was from Yale and everyone thereafter
copied that author. Now Fisher''s own son has a book out there
somewhere but, sorry folks, I''m not buying it. [Or else Sobel
and I are wrong and this whole last paragraph was a huge waste].

Anyway, in yesterday''s Wall Street Journal, in the op-ed section,
economist Brian Wesbury, who is humping a new book of his
own, said the following: "The U.S. has entered a new era of
wealth that is only beginning." Ah yes, shades of Irving Fisher.

Irving Fisher was a leading economist of his time who had
authored books with the titles "The Purchasing Power of
Money," "The Rate of Interest," and "The Theory of Interest."
It''s easy to view him as the Abby Cohen, Harry Dent, or Jim
Glassman of his day. [Yeah, maybe that''s not fair but it''s my
site!] He was also a member of AAPA, the Association Against
the Prohibition Amendment. One of his own main new era
arguments rested on the benefits he saw flowing from
prohibition, which had begun in 1920. He cited the work of a
Columbia professor, Paul Nystrom, who concluded that a "dry"
nation would increase the efficiency of workers and switch
demand from liquor to "home furnishings, automobiles, musical
instruments, radio, travel, amusements, insurance, education,
books and magazines."

Edward Chancellor attributes John Templeton with the saying,
"The four most expensive words in the English language are
''This time it''s different.''" Does this statement have anything to
do with today''s market environment? Well gather ''round and
here what Fisher and other pundits were saying back in 1929.

In the fall of ''29, as the market was beginning to hiccup, Fisher
continued to believe in the bull''s cause. He declared at one
juncture, "Stock prices have reached what looks like a
permanently high plateau." A few weeks later the market
crashed. 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 was established. By the 1920s 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, as for 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 until this time]. 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.

Fisher denied the likelihood of a crash by September 3rd, the
peak, even while others like Roger Babson forecasted an
imminent debacle (Babson said this Sept. 4th). The market began
to weaken sharply. Rumors of bear pools, led by Jesse
Livermore, which were preparing to drive the market down with
short sales, were rampant. [Don''t worry, we''ll cover Jesse
someday].

Fisher was spending his evenings 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 23rd, the investment trusts began
to collapse and real fears of a crash were developing. That night
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. Who today will suffer the same fate? Who will be
"Fishered?" The Shadow knows.

The End

One interesting sidelight to the Fisher story. Back in 1914,
Fisher thought the European War would cause the belligerents to
sell their American securities to gain funds for munitions; that
Europeans would no longer be able to finance American
companies, that blockades would cut America from her markets
and so destroy the economy. None of this happened. Instead,
European gold came to America for safekeeping and Europeans
purchased American securities as the safest investment to be had.
As a result, share prices rose.

*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 we''re really
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: Dohh!!]
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 67 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

Brian Trumbore

*If you can prove that Fisher went to Yale, outside of the above
sources, please contact me through the "Contact Us" link. I''d be
happy to give you credit in my next column.