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10/30/2009

The 1929 Crash...a look back

It’s the 80th anniversary of the Great Crash, October 29, 1929; a good time to reprise some pieces I did about five and ten years ago.

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 ten years ago, I heard awhile back 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 Laureate 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 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 time.

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 [the bottom…90% decline from 9/3/29.]

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 13.

Brian Trumbore

 



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Wall Street History

10/30/2009

The 1929 Crash...a look back

It’s the 80th anniversary of the Great Crash, October 29, 1929; a good time to reprise some pieces I did about five and ten years ago.

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 ten years ago, I heard awhile back 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 Laureate 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 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 time.

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 [the bottom…90% decline from 9/3/29.]

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 13.

Brian Trumbore