Saturday, September 20, 2008

"The economy is fundamentally sound."

Déjà vu (history, comments and contemporary quotations):

New York Times Industrials close at 331.


New York Times Industrials gain 52 to close at 391.


New York Times Industrials gain 25 to close at 416.


New York Times Industrials gain 33 to close at 449.


9/3: New York Times Industrials close at 452.
In retrospect, the great bull market of the decade comes to an end.

9/5: Market unevenness, with a slight downward trend, starts and continues until mid-October.


Tuesday 10/15: “The industrial condition of the United States is absolutely sound, … and nothing can arrest the upward movement… The markets generally are now in a healthy condition … values have a sound basis in the general prosperity of our country.” —Charles E. Mitchell, President of National City Bank

“Stock prices have reached what looks like a permanently high plateau… There may be a recession in stock prices, but not anything in the nature of a crash… I expect to see the stock market a good deal higher than it is today within a few months.” — Prof. Irving Fisher of Yale

Friday 10/18: New York Times Industrials close down 7.

Saturday 10/19: New York Times Industrials close down 12.

Sunday 10/20: The newspapers agree, and this is also the informed view on Wall Street, that the worst is over. And it is predicted that tomorrow the market will begin to receive organized support… Never was there a phrase with more magic than “organized support.” Almost immediately it was on every tongue and in every news story about the market.

Yet the Sabbath pause had a marked tendency to breed uneasiness and doubts and pessimism and a decision to get out on Monday.

Monday 10/21: A very poor day. Things were bad, but still not hopeless. Toward the end of Monday’s trading the market rallied and final prices were above the lows for the day. The net losses were considerably less than on Saturday.

“The decline represents only a shaking out of the lunatic fringe.” —Irving Fisher

Tuesday 10/22: New York Times Industrials close at 415. A somewhat shaky gain.

“The decline has gone too far.” —Charles E. Mitchell

Wednesday 10/23: New York Times Industrials close down 31 at 384.
That afternoon and evening thousands of speculators decided to get out while—as they mistakenly supposed—the getting was good.

There was also one bit of cheer. It was predicted that on the morrow the market would surely begin to receive “organized support.”

Thursday 10/24: New York Times Industrials close down 12 at 372.
The first of the days which history—such as it is on the subject—identifies with the panic… In New York at least the panic was over by noon.

This was it. The bankers, obviously, had moved in. The effect was electric. Fear vanished and gave way to concern lest the new advance be missed. Prices boomed upward… In its own way, the recovery on Black Thursday was as remarkable as the selling that made it so black… Many had good reason to be grateful to the financial leaders of Wall Street.

Representatives of thirty-five of the largest wire houses assembled at the offices of Hornblower and Weeks and told the press on departing that the market was “fundamentally sound” and “technically in better condition than it has been in months.” It was the unanimous view of those present that the worst had passed. The host firm dispatched a market letter which stated that “commencing with today’s trading the market should start laying the foundation for the constructive advance which we believe will characterize next year.”

“The trouble is purely technical and fundamentals remained unimpaired.” —Charles E. Mitchell

“There is nothing in the business situation to justify any nervousness.” —Eugene M. Stevens, President of the Continental Illinois Bank

“There has been no fundamental change in the oil business to justify concern.” —Walter Teagle

“The steel business has been making fundamental progress toward stability and this fundamentally sound condition is responsible for the prosperity of the industry.” —Charles M. Schwab [“Talk to Chuck”]

“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.” —President Herbert Hoover

“It is undoubtedly beneficial to the business interests of the country to have the gambling type of speculator eliminated.” —Howard C. Hopson, head of Associated Gas and Electric

“There has been a lot of short selling, a lot of forced selling, and a lot of selling to make the market look bad.” —Wall Street Journal

Friday 10/25: Heavy trading, prices slightly up.

Saturday 10/26: New York Times Industrials close at 367.
Heavy treading, prices slightly down

Sunday 10/27: “The financial community now feels secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic… and has relaxed its anxiety.” —New York Times

Almost everyone believed that the heavenly knuckle-rapping was over and that speculation could be now resumed in earnest. The papers were full of the prospects for next week’s market. Stocks, it was agreed, were again cheap and accordingly there would be a heavy rush to buy.

Monday 10/28: New York Times Industrials close down 49 at 318.
Volume was huge, losses were more severe. On this day there was no recovery.

The bankers assembled once more at Morgan’s… They were described as taking a philosophical attitude, and they told the press that the situation “retained hopeful features,” although these were not specified.

Tuesday 10/29: New York Times Industrials close down 43 at 275.
This was the most devastating day in the history of the New York stock market, and it may have been the most devastating day in the history of markets.

The losses would have been worse had there not been a closing rally.

In the first week the slaughter had been of the innocents. During this second week there is some evidence that it was the well-to-do and the wealthy who were being subjected to a leveling process comparable in magnitude and suddenness to that presided over a decade before by Lenin.

“President Hoover has said that the ‘fundamental business of the country’ is sound… The main point which I want to emphasize is the fundamental soundness of the great mass of economic activities.” —Dr. Julius Klein, Assistant Secretary of Commerce

Wednesday 10/30: New York Times Industrials close up 31 at 306.
Why this recovery occurred no one will ever know.

“General business conditions are unquestionably fundamentally sound.” —Waddill Catchings of Goldman, Sachs

“Believing that fundamental conditions of the country are sound … my son and I have for some days been purchasing sound common stocks” —John D. Rockefeller

Thursday 10/31: New York Times Industrials close up 21 at 327.


“A severe depression like that of 1920-21 is outside the range of probability.” —Harvard Economic Society Forecast

Saturday 11/2: Over the weekend the financial community had almost certainly been persuaded by its own organized and spontaneous efforts at cheer.

“Business is sound.” — Alfred P. Sloan, Jr., President of General Motors

“The present recession, both for stocks and business, is not the precursor of business depression.” —Harvard Economic Society

Sunday 11/3: “It was the psychology of panic. It was mob psychology, and it was not, primarily that the price level of the market was unsoundly high … the fall in the market was very largely due to the psychology by which it went down because it went down.” —Irving Fisher

Everyone was feeling cheerful but the public. As before and later, the weekend had been a time of thought, and out of thought had come pessimism and a decision to sell. So, as on other Mondays, no matter how cheerful the superficial portents, the selling orders poured in in volume.

Monday 11/4: New York Times Industrials close down 22.
“It is our belief and conviction that the general industrial and business condition of the country is fundamentally sound and it is essentially unimpaired.” —advertisement by the Commercial National Bank and Trust Company in the New York Times

Tuesday 11/5: Markets closed for election day.

Wednesday 11/6: New York Times Industrials close down 37.
Another sickening slide.

Thursday 11/7: Steady.

Friday 11/8: New York Times Industrials close at 274.
A small drop.

Monday-Wednesday 11/11-13: New York Times Industrials lose 50 to close at 224.

11/30: “Herbert Hoover is easily the most commanding figure in the modern science of ‘engineering statesmanship.’” —Philadelphia Record

“The nation is now aware that it has at the White House a man who believes not in the philosophy of drift, but in the dynamics of mastery.” —Boston Globe


“The steps we have taken re-established confidence.” —President Herbert Hoover

12/21: “A depression seems improbable; we expect recovery of business next spring, with further improvement in the fall.” —Harvard Economic Society



“The worst effect of the crash on unemployment will be ended in sixty days.” —President Herbert Hoover


“We have now passed the worst and with continued unity of effort shall rapidly recover.” —President Herbert Hoover

“Business will be normal by fall.” —President Herbert Hoover


10/15: “Persons high in Republican circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the Administration. Every time an Administration official gives out an optimistic statement about business conditions, the market immediately drops.” —Simeon D. Fess, Chairman of the Republican National Committee.


7/8: New York Times Industrials close at 58.
No one any longer suggested that business was sound, fundamentally or otherwise.


US unemployment temporarily drops below 8 million.


One person in five is still out of work.


The dollar volume of US production first returns to the level of 1929.

Observations, comments, and could it happen again?

There were many ways of making money in 1928. Never had there been a better time to get rich, and people knew it. 1928, indeed, was the last year in which Americans were buoyant, uninhibited, and utterly happy. It wasn’t that 1928 was too good to last; it was only that it didn’t last.

Only in the case of the rarest individuals can speculation be a part-time activity. Money for most people is far too important.

Perhaps it was worth being poor for a long time to be so rich for just a little while.

I am not given to prediction; one’s foresight is forgotten, only one’s errors are well remembered. But there is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then, for reasons that will endlessly be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way.

Always when markets are in trouble, the phrases are the same: “The economic situation is fundamentally sound” or simply “The fundamentals are good.” All who hear these words should know that something is wrong.

Preventive incantation required that as many important people as possible repeat as firmly as they could that it wouldn’t happen. This they did. They explained how the stock market was merely the froth and that the real substance of economic life rested in production, employment, and spending, all of which would remain unaffected. No one knew for sure that this was so. As an instrument of economic policy, incantation does not permit of minor doubts or scruples.

Perhaps never before or since have so many people taken the measure of economic prospects and found them so favorable as in the two days following the Black Thursday disaster. The optimism even included a note of self-congratulation. Colonel Ayres in Cleveland thought that no other country could have come through such a bad crash so well. Others pointed out that the prospects for business were good and that the stock market debacle would not make them any less favorable. No one knew, but it cannot be stressed too frequently, that for effective incantation knowledge is neither necessary nor assumed.

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on October 24; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.

If one has been a financial genius, faith in one’s genius does not dissolve at once… Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves.

One of the oldest puzzles of politics is how is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is how is to make wise those who are required to have wisdom.

Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped.

There seems little question that in 1929, modifying a famous cliché, the economy was fundamentally unsound… Five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:

1) The bad distribution of income. In 1929 the rich were indubitably rich… It seems certain that the 5 per cent of the population with the highest incomes in that year received approximately one third of all personal income… This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both…

2) The bad corporate structure… American enterprise in the twenties had opened its hospitable arms to an exceptional number of promoters, grafters, swindlers, impostors, and frauds…

3) The bad banking structure… When one bank failed, the assets of others were frozen while depositors elsewhere had a pregnant warning to go and ask for their money. Thus one failure led to other failures, and these spread with a domino effect… It would be hard to imagine a better arrangement for magnifying the effects of fear…

4) The dubious state of the foreign balance…

5) The poor state of economic intelligence… It seems certain that the economists and those who offered economic counsel in the late twenties and early thirties were almost uniquely perverse. In the months and years following the stock market crash, the burden of reputable economic advice was invariably on the side of measures that would make things worse.

The sound and responsible adviser urged that the budget be balanced… The balanced budget was not a subject of thought. Nor was it, as often asserted, precisely a matter of faith. Rather it was a formula… Mass unemployment in particular had altered the rules. Events had played a very bad trick on people, but almost no one tried to think out the problem anew… The rejection of both fiscal (tax and expenditure) and monetary policy amounted precisely to a rejection of all affirmative government economic policy. The economic advisors of the day had both the unanimity and the authority to force the leaders of both parties to disavow all the available steps to check deflation and depression. In its own way, this was a marked achievement—a triumph of dogma over thought. The consequences were profound.

In some respects, the chance for a recurrence of a speculative orgy remains good No one can doubt that the American people remain susceptible to the speculative mood—to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share.

The market will not go on a speculative rampage without some rationalization. But during any future boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices—indeed, almost any price—to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith.

Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.


If you've stayed with me this far, you should know that all the data, quotations, and opinions above were extracted from John Kenneth Galbraith's The Great Crash 1929 (published in 1955), and rearranged by me to stress the chronology. I highly recommend that you read this book, in its entirety (it's only 194 pages), before next weekend.

[The reason for the erratic presentation of the New York Times Industrial index data is that the book frustratingly sometimes gives the closing value, and at others just the day's rise or fall.]

Jim Horning

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