Market "Lesson"

Experience, said Oscar Wilde, is the name men give to their mistakes. Although there could be no general agreement as to whether or not the Stockmarket crash of Oct. 23 et seq. was a mistake, last week found most economists and many a businessman looking for the "lesson."

The Bull Market of 1924-29 was sired by the Golden Industrial Age of the corresponding period. It was easy, after the Market had broken, to denounce speculators as fools and speculation as vicious. Yet a few die-hards (such as Yale's Irving Fisher) maintained, even after the Crash, that quotations had never become so weirdly out of touch with reality as prophets-after-the-event were quick to label them. Given a profound conviction that the future of U. S. industry was boundless, that there was no limit to the potential value of U. S. securities, where could the line be drawn between farsightedness and folly? Speculation is the shadow of industry thrown forward on the wall of the future. It had been thrown a long way forward during the late Bull Market, its size swollen, its perspective distorted. But though it was a magnified picture, it was not an imaginary picture. Behind the shadow of Speculation there was still the substance of Prosperity.

October 23. Why then, did a Market which had broken on Oct. 23 demonstrate with a continued crash on Oct. 24 that the end of the Great Bull Market had really arrived? Professor Fisher may stand a discredited prophet, yet apt appeared his analogy between the break on the market and a run on a bank. The Bank was U. S. Industry. Assets of the bank were the real assets of U. S. Industry. Stocks were the paper money which the bank had issued. Now all banks, even the Federal Reserve System, issue more money in paper than they have gold in their vaults. Every bank would be broken if all its depositors simultaneously attempted to exchange paper for gold. And, unhappily, the Industrial Bank had held itself to no fair ratio between cash and paper. Auburn at 514--Johns Manville at 242-- Radio at 114--here were bank-branches with a topheavy proportion of notes to cash. Even the biggest and most secure branches, such as General Electric, American Telephone &Telegraph, United States Steel, constituted inflated currency when their securities stood at 403, 310 and 261 respectively. So long as the depositors did not begin to brood over this inflation, no harm was done. But so soon as the lines started forming at the paying teller's window, the Crash was inevitably swift.

Oct. 23-Nov. 12. Why the crash came on Oct. 23, 1929, is as mysterious (and as unimportant) as why the World War chanced to begin on Aug. 4, 1914. If some trace the War no further than to an archducal assassination, then others might trace the Crash to a variety of such moments as that when Goldman Sachs terminated the syndicate on their Blue Ridge investment trust. Vital point is the undermining of popular confidence that ended in the crash.

Causes of this undermining were: 1) Warnings from the Federal Reserve Board and other prophets of disaster--warnings which, scoffed at when given, nevertheless filled the Market with a conviction of sin. 2) A period of almost two months (since the Babson Break early in September) in which it had taken strychnine-injections to push quotations ahead. The September slump (currently almost ignored in favor of the peculiar theory that the Market crashed without warning) was of tremendous importance in its indication that a Market which could survive only by constant rises had reached the limits of its climb. 3) Most important of all, indications of a slowing tempo in U. S. industry. The motor stocks, for example, had long since fallen from their January highs--a forecast of slackening production in the latter portion of the year. Now steel mills were no longer running at 97% and 98% of capacity. Slowly the Market began to realize that 1929 might be an abnormal year, a high-water year instead of one more level in a still-rising tide. If this fear were well founded, what then of 1930, or 1931, of even more distant times, the anticipated prosperity of which had been already discounted? The Market had mortgaged itself with the future as its security. If that future did not continue rosy, the security had disappeared.

Economics. Apart from the "causes" of the break, many an economic point was made apropos the break. Three widely discussed points were:

1) That corporations which had loaned money "on call" to speculators had contributed more than any other group to an unsound financial situation because many a corporation promptly called in its loan at the first sign of trouble. Five directors of one corporation threatened to resign last week if their company should call its loan. These directors took the honorable position that having once loaned its money to the stockmarket, the corporation should stand by the market so long as its loan was adequately protected by collateral.

2) That speculation had been encouraged by the over-conservative financial reports of corporations. There have always been dishonest concerns which rig their books to show $1 per share profit when actually there was no profit. But suppose an ultra-conservative concern, by scaling its assets to minimum and carrying the liabilities at maximum, shows $1 per share profit when someone else thinks they might presumably have shown $2 per share profit; then the incentive to imagination and hence speculation is great and obvious.

3) That widespread distributions of stock to employes have made hundreds of thousands unduly "stock-conscious."

Results. As to "results" of the break, the most important question could not be answered, i. e.: to what extent would the Bear psychology of the market spread to business generally? Through last week, optimism was certainly more pronounced than pessimism. Stock brokers were far more pessimistic than businessmen. Being, especially in the lower ranks, a provincially Manhattan lot, they seemed to think the Stockmarket would be disgraced if Business did not humbly follow its lead. Outside of lower Manhattan, Detroit was the gloomiest spot, the depths being reached by the jocular motor executive who seemed to feel that never again would any U. S. citizen be able to buy anything except a Ford. Following are three typical "results" variously predicted:

1) That Prosperity would increase because many persons would hereafter do more work and less gambling. Every large organization has contained at least one executive who paid more attention to the Market than to the work for which stock-holders presumably paid him. And thousands of independent little store owners and such have neglected their business with the result that they have sold less of the products of Big Business than they might have.

2) That funds hitherto concentrated in the Stockmarket would go into more legitimate fields (some realtors appeared to think that the public was going to build houses with the money it had lost in the market). Certainly there was much talk of a revival of interest in bonds, which have recently been spurned even by widows and orphans.

3) That the constructive wizardry of Herbert Hoover ("great engineering works") might soon be exhibited to a waiting and ready people.