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Wall Street History
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08/17/2001
Radio, Part II
Last week we discussed the beginnings of commercial radio, this
week we''ll take a look at the role of Radio Corporation of
America (RCA) and how its performance mirrored the bull
market of the Roaring Twenties.
In 1921, you could have purchased a share of RCA, if you could
find it in the over-the-counter market, for under $2. 8 years later,
at its peak, a single share would have cost you $500. In the
stock''s heyday, the price would move in $10 and $20
increments. When you couple this price action with the fact that
RCA was a symbol of the, then, new technology, the parallels to
the great tech boom.and bust that we have just witnessed is
eerily similar.
Of course the bull market of the 20s, and our recently completed
one, were largely fed by a speculative fever the likes of which
come around every generation or so.
In the 1920s it was the force of consumer credit that helped to
shape equity market behavior. For the first time, many
Americans, including those in the middle class, were purchasing
not just automobiles on credit, but also appliances, clothes,
radios, and even medical care. So it should have come as no
surprise that the wheeler-dealers on Wall Street would figure out
a way to tap into this sentiment. It was "margin." And those
who took advantage of being able to purchase stocks for 90%
margin were classified as speculators.
By 1926 Wall Street''s salesmen were telling consumers that
buying stock on margin was no different than paying for a radio
on a time loan. As historian Robert Sobel relates, "The
purchaser of a (radio) receiving set would pay for an item which
remained constant in value, or depreciated, while a share of RCA
stock might double in less time than it took to pay off the note."
Back then you might put down $10 for a $50 RCA model, but
you could purchase one share of a highflying stock at $100 for
just $10 on 90% margin. And the stock may then rise from $100
to $200. But with the radio you would end up paying off about
$60 over a 12-month period.
Put another way, in 1926, one could purchase 100 shares of RCA
at $32; using margin it would have cost only $320 plus
commission to control $3200 in stock. By 1928, you could have
sold that RCA for $420, meaning that after you paid off your
margin loan, you''d still have over $38,000. I imagine some
investors were smart enough to do that, but just as many, if not a
lot more, got burned on the way down. You can see, however,
that for a $75-a-week laborer or salesman back then, buying on
margin in a market where everything went up was awful
tempting.
While the Dow Jones Industrial Average stood at 72 at the start
of 1921 and rose to the 200 level by the end of 1927, the
parabolic rise took place from the spring of 1928 to the fall of
1929, when the index almost doubled. It was at this time that
the investment pool operators took center stage.
To give you a sense of the burgeoning level of speculation, the
level of margin debt (the amount that brokers lent out) in 1920
was about $1 billion. By the time of the Crash in October 1929,
this figure was $8.5 billion. [Just two months later, though, by
the end of ''29, margin debt had collapsed to $4.1 billion.]
By 1928 the stock exchanges were flooded with investors who
had no prior experience in buying and selling securities. Per the
previous example of a purchase of RCA stock, the new class of
speculators had dreams of enormous wealth. Enter the likes of
Michael Meehan, the specialist in the stock of RCA, who put
together investment pools, initially consisting of money from
friends and family, for the purposes of either going "long" or
"short" a particular issue. In the case of RCA, Meehan and his
cronies took in $12 million in subscriptions. At the start of ''28
he had purchased 7 Exchange seats, offices throughout the
nation, and even locations on Cunard Lines'' ocean liners.
Known as the "Outsiders," (as opposed to those investing with
J.P. Morgan & Co., who were the "Establishment"), the
investment pools hyped their favorite stocks by spreading
rumors, planting tips, and paying off compliant newspaper and
radio reporters to help them tout the companies.
A.N. Plummer is one such example. A former public relations
agent, he was hired by Meehan and the other pools to place items
in newspapers. Financial columnists from the Wall Street
Journal, the New York Times, and the Herald Tribune, among
others, were eager to do the pool operators'' bidding, all for a
check from Plummer. The reporters did end up losing their jobs,
though they were never indicted.
None of this action was a secret on the Street. It was common
knowledge that reporters were being paid off and the specialists
saw it as simply part of the game. By 1929, tipsters and con-
artists were almost deemed to be respectable. Radio was also
booming by this time and you had folks like the "Old
Counselor", a University of Chicago professor who would tout
stocks on his show, while millions listened in.
Back to Meehan and his RCA pool, in March 1928 shares in the
stock rose from $95 to $160 in just ten days. Meehan then got
his investors out, raking in $millions. The Dow had been
languishing in the 190-200 area for about 8 months and the
action in RCA was credited with reviving the bullish sentiment
that then propelled the Dow to its all-time level of 381 on
September 3, 1929. That day shares in RCA traded over $500.
You know what happened to the Dow, as it closed at 230 on
Black Tuesday, October 29. RCA collapsed as well, and by the
end of the year was trading around $130 (pre-split). It would
rally in 1930, with the rest of the market, to back over $300, but
then as the Dow Jones plummeted to its all-time low of 41.22 on
July 8, 1932, shares in RCA were about $3. Three measly
dollars.
At the height of the euphoria in the spring and summer of 1929,
some brokerage firms, worried about the excess speculation,
raised the margin requirements for many of their clients. But
most were like the poem that the Saturday Evening Post printed
around this time.
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!
It''s amazing how the lessons of history are so often ignored. It''s
a major reason why I think that for many Wall Street
professionals, history is the best academic field to study in
college (I was a political science major, myself). RCA was the
technology high-flyer of its day and it became a symbol of the
speculative fervor that enveloped the investing public.
Nowadays, you can look at stocks like Cisco and Juniper
Networks, or Ciena and Nortel, only hopefully those investing in
these shares had thought about 1929 and the lessons stocks like
RCA taught us, before it was too late.
Next week, the power of radio on the propaganda front.
Sources:
Same as part one.in addition.
"Devil Take the Hindmost," Edward Chancellor
Brian Trumbore
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