EIGENTUM DES IN STITUTS MELTWIRTSCHAFT EL R'BLIOTHEK T 15357 THE STOCK MARKET CRASH— AND AFTER THE MACMILLAN COMPANY NEW YORK . BOSTON . CHICAGO . DALLAS ATLANTA . BAN FRANCIRCH MACMILLAN & CO., LiMrrep LONDON . BOMBAY . CALCUTTA MELBOTIRNE THE MACMILLAN COMPANY OF CANADA, LiMiTED TORONTO 919-1926 COMPARED WITH PRECEDING TWO DECADES 400 350 300 | PRIMARY y, HORSEPOWER IR{ A ; MFG. our 20 - Hi 10C NO. OF WORKERS OUT: EE WORKER i ‘ { Posie THE GROWTH OF MANUFACT!IRES } (FED. RES. BOARD DAT? 50 y mr — La iin ie 1899 1904 1909 1914 1919 21 23 25 27 CHART 1.~~The Hoover Committee on Recent Economic Changes reports, for 1922-1927, an increased “tempo” of production due to inventions and improvements in the arts, by which “production per man hour of effort has risen to new heights,” together with “higher per capita income in 1922-1927 than ever before.” This record largely explains the rise of stock prices to a new plateau, which remained after the panic of 1929 (see Chart 4). THE STOCK MARKET CRASH— AND AFTER BY IRVING FISHER JROFESSOR OF ECONOMICS, YALE UNIVERSITY NEW YORK THE MACMILLAN COMPANY 1930 CoPYRIGHT, 1930, By THE MACMILLAN COMPANY. All rights reserved—no part of this book may be reproduced in any form without permission in writing from the publishers. Set up and electrotyped. Published February, 1930. 2 Tent tv ~ 4d v SET UP BY BROWN BROTHERS LINOTYPERS PRINTED IN THE UNITED STATES OF AMERICA BY THE FERRIS PRINTING COMPANY PREFACE Thuis book is the outgrowth of several years’ study of the stock market consequent on the publication by me, in the newspapers, of weekly and daily index numbers of stock prices, sales and values. In trying to appraise the market crash during the autumn of 1929, I have made use of all sources of information available to me to date. Readers will doubtless find some inconsistencies between my previous writings and the present book, as I have modified my opinions from time to time with the march of events and with the unfolding of evidence. I may, and probably shall, further modify them with subsequent developments. The book is in no sense, therefore, an attempt to justify opinions hitherto expressed. It has been written without reference to any previous expressions. I had stated my opinion in September, preceding the panic, that the market had reached its peak, as proved to be the case. I also expressed the view that the recession would not be in the nature of a serious crash, in which I was mistaken. I also predicted that the new plateau of stock prices would survive any recession. This has proved true (see Chart 4). 1 have also tried in this book to set forth the chief ri vii Preface opinions held by others, whether or not they agree with my own conclusions, past or present, in the hope that the reader will in this way have before him all the chief points of view that it is practicable to assemble. To publish the book now may seem audacious, but there is advantage in writing tentative conclusions while impressions and memories are still fresh. Someone has said that the “true perspective’ of the historian really means he waits until everyone who could contradict him has died! It is, of course, too early to reach any absolutely sure conclusions; nothing is more difficult to analyze and understand thoroughly than a panic; especially, a panic so great and so peculiar as that which has visited the American stock market. It stands unique in the annals of finance. But even if some of the views here expressed should later be found in need of revision, I trust this book will have served its purpose by contributing somewhat toward a better eventual understanding of the problem. The ordinary explanations now finding the greatest currency seem to me far too simple and naive. IrviNG FISHER. Yale University, December 15, 1929. ACKNOWLEDGMENTS MANY friends, interested in the causes of the stock market crash and problems arising therefrom, have done me the favor of reading a mimeographed draft of this book. I am indebted to them for their many helpful suggestions. Their names, alphabetized, follow: Luther Blake, Lindsay Bradford, Charles W. Colby, W. J. Couper, Hunt T. Dickinson, Gayer G. Dominick, Allen Dulles, Lionel D. Edie, George W. Fraker, Henry J. Fuller, Edward H. Green, K. G. Karsten, Fred I. Kent, Leonard Kuvin, J. W. Laird, E. P. Maynard, Richard S. Maynard, J. Edward Meeker, Royal Meeker, J. A. Moffitt, George K. Morrow, George B. Roberts, George E. Roberts, Leland Rex Robinson, Malcolm C. Rorty, Melvin Sawin, Laurence H. Sloan, Carl Snyder, Charles T. Treadway, B. L. Winchell and B. L. Winchell, Jr. I wish especially to acknowledge the constructive work of H. Bruce Brougham, who has collaborated with me in the writing of this book. INTRODUCTION MANY causes have been assigned for the stock market crash of 1929. These usually take the form of putting the blame on different individuals or groups. United States Senator Robinson of Arkansas blames President Hoover, Secretary Mellon and Ex-President Coolidge for their “unduly optimistic statements’ about business conditions, which he says, worked the country into a fever of speculation. But United States Senator Robinson, Republican, of Indiana, praises the administration, and holds that John J. Raskob, Chairman of the Democratic National Committee, was among those who were “psychologically” responsible for the collapse, by urging people to buy stocks. Senator Glass blames the “stock gamblers.” The Reverend John Haynes Holmes holds the brokers and their unholy ways responsible. A prominent banker ascribes the Wall Street crash largely to the blocking of the Tariff Bill in Congress. New York State Senator Hastings finds the cause in those who “sold short.” Congressman Clyde Kelly blames “this nation-wide gambling house which is called the New York Stock Exchange.” Mr. Daniel W. Blumenthal finds implicated in the panic certain brokers “who successfully carried xil Introduction out a well-defined wash-sale conspiracy and false circulation campaign” Mr. Durant declares that the President paid no attention to his warning of an approaching crash, and blames the Federal Reserve Board for causing it. He says the Federal Reserve Board should have put down the rediscount rate to 3 per cent, while Mr. H. Parker Willis blames the Reserve Board for not having drastically raised the rediscount rate. Sir George Paish says that the crash came because the bankers had gotten everybody into debt. The Investment Trusts have been blamed for “dumping” on the market. The New York Times praises the banks, but excoriates the “nation-wide army of speculators, large and small, who had engaged in the twoyear bubble-blowing.” Mr. Babson has been blamed for saying that a crash would come “sooner or later.” Dr. John H. Gray blames Mr. Mellon, Mr. Coolidge, and myself for “always insisting that all was well and talking of prosperity, a new era, and increased efficiency of production.” In this catalogue of wholesale and particular blamings one is reminded of that old panic of 1837, in Van Buren’s administration, when the Associated Merchants of New York City published a resolution asking, “On what constitutional or moral grounds can Martin Van Buren defend himself for having caused all the disasters under which the American people are suffering?” Doubtless there is some truth in almost all of these allocations of responsibility for the panic. But " STOCK PRICES ror LAST HALF of 1929 TWO WARNING SIGNALS AND STOCK CRASH 350) 204 X EXCHANGE CLOSED oF 2G 2 if 55k [4 REO a0 HE £683 7d — - * gr ow ww }] ls 38 Jeo [27 | 0 17 2a 3 oc 14 21 [28 (5 ye |@ [26 |2 [9 IB . JULY AUGUST SEPTEMBER _ OCTOBER I NOVEMBER ei Bo DECEMBER ] CHART 2.—The first sharp drop was after the raising of the New York Federal Reserve rediscount rate from § to 6 per cent on August 8. The Hatry failure in London started the British crash on August 30. During September there was heavy liquidation on the New York Stock Exchange. The American crash began October 12, lasting until November 13, when stock prices touched bottom. Kv Introduction rather than appraising such a disaster in terms of praise and blame, an unemotional assessment of it in terms of cause and effect might yield much in public benefit by way of preventing the recurrence of such crises. Intimations of the Panic “Hindsight” is always clearer than foresight. Looking backward now and putting the events of the panic in perspective, we find that there were definite foreshadowings of its coming. As early as April 18, 1929, the National City Bank of New York said in a special circular: “If the rate of credit increase rises above the rate of business growth, we have a condition of inflation which manifests itself in rising prices in some departments of the business structure, overconfidence, excessive speculation, and an eventual crash.” This statement was followed by an analysis that notes a yearly increase in the total volume of business in this country, taking business in all its forms, at a fairly uniform rate of 4 per cent; and that for the year 1928 the total production and the exchange of goods in the United States increased over 1927 at a rate somewhat below this, or about 3 per cent. As against this growth of business and production, the statement measured the growth of credits—s3.1 per cent for the year 1928. This did not appear to be greatly in excess of the normal growth of business requirements. But the statement added: “Taking account of the extraordinary growth of Introduction XV brokers’ loans ‘for account of others’ as reported by both the New York banks and the stock exchange, from $1,627,000,000 at the end of 1927 to $3,361, 000,000 at the end of 1928, we find the total increase of credit, as represented by the bank figures and the loans ‘for others’ combined, to have been from $57,0%717,000,000 to $61,627,000,000, or 8 per cent, a difference as compared with the estimated increase of business which can only spell inflation.” Other observers had noted symptoms of unusual inflation of credit, denoting that the market had reached its high and might be on the verge of decline. Among these were Malcolm C. Rorty,- of the International Telephone & Telegraph Company; Paul Clay, of United States Shares Corporation, and Emerson Wirt Axe. In an article in The Adnnalist of October, 18, 1929, Mr. Axe observed that “no really sustained advance is to be expected” because of the “systematic distributive campaign.” On September sth, in an address at his Annual National Business Conference, Mr. Babson said: “I still repeat what I said at this time last year and the year before ;* namely, that sooner or later a crash is coming which will take the leading stocks and cause a decline of from 60 to 80 points in the Dow-Jones Barometer.” On the same day, in an interview with The Hartford Courant, I stated that while none of us was infallible, “there may be a recession of stock * At that time (1927) the Dow-Jones average was 194; 60 points below which would be 134. The lowest point reached after the crash (Nov. 13, 1929) was 199. xvi Introduction prices.” But I did not at that time believe that there would be anything in the nature of a serious crash. I had said, in an article published in many newspapers, May 12, 1929, that the so-called “Hoover boom” in the stock market had about reached its climax. The “Hoover market” had risen above the forecast line, calculated by the Karsten Statistical Laboratories in New Haven, by from 12 to 25 per cent from the time of Mr. Hoover's election to his taking of the oath of office on March 4th, after which, up to the close of April, it receded to 18 per cent above the line. In this article I remarked that all previous departures from the Karsten so-called “line of fundamentals” had returned within a short period to this forecast line, and added: “The ‘Hoover Market’ can hardly go much further above the forecast line. It may fall below, but in that case it will fall to a higher level than the peaks of the previous booms.” This opinion was fulfilled. As the Karsten chart shows (with the white zone bounding the recorded average of the market each month) the continuous forecast line, based on previous records of various items of business conditions, represents with fair accuracy the long swings of the market. The departures from the line, up or down, represent the “psychological” short swings, as shown on the accompanying chart. These characterized the collapse of the stock market at the onset of the war in 1914; the war boom of 1915-1916; the marked depression of 1917, during the period of Federal financing AOVES SECOND CJOLIDGE ROOM SECOND SOLIDGE “INA IRST OLIDG: re Us GOV... FiNaNCING CHART 3.—Booms, recoveries and panics are here represented by departures from the Karsten “line of fundamentals” which is used to predict the course of stock prices. The Hoover boom and collapse represent the most serious departures from the line since 1913. xviii Introduction through higher taxes and the sale of bonds; the postwar depression of 1920-1921; the recovery and the “Coolidge boom” of 1923-1924, and the second “Coolidge boom” of 1925-1926. The “Hoover boom” fluctuated more violently above the Karsten forecast line than any previous fluctuation, either up or down. In the retrospect it is easy to appreciate that preliminary symptoms of the crash were not lacking. Two Sides of the Picture But it is not so easy to see in the foregoing picture the underlying factors of the panic, and to judge whether it sprang from vital defects of the business structure or from more superficial causes relating to credit and finance. The avalanche came so swiftly, spreading such immediate and widespread disaster, that careful consideration of its origin is requisite. The first symptomatic recession in the stock market in August and early September attracted comparatively little attention. Almost every recession during the course of the long bull market had been followed by recovery equal to the recession, and then progress upwards. But the decline of September, 1929, although followed by an upward recovery, was renewed in October, and developed into terrific crashes lasting into November. Between the 5th of September and the 13th of November the vast bear movement had carried stocks down by about 42 per cent, and reduced the value of stocks listed on Introduction XIX the New York Stock Exchange by an estimated $26,000,000,000. In the bull market stocks had reached a level more than double that of 1926—that is, the prices on the average of stocks on the New York Exchange had risen by more than 100 per cent in three short years. Before the November panic, the stock price level was not only twice the level of 1926, but nearly four times the level of 1913, before the war. And that is not all. What has just been said applies to stocks which were simply ‘“held,” so to speak. If an investor had bought stocks in 1913 and held them in his strong-box until September, 1929, he would have had $400 for every $100 invested sixteen years before, and he would have had $200 for every $100 invested in 1926. Moreover, while stocks ‘‘held” in this way increased on the average at a tremendous rate, stocks in active tradings among the market leaders increased still faster. To be specific, if in 1926 a trader, as distinguished from a strong-box holder, had bought stocks which were then market favorites and had changed his holdings from week to week, so as each week to possess those which had proved most popular that week, instead of having merely the $200 for every $100 invested in 1926, as the strong-box holder had, he, the trader, would have $1,000 for every $100 of his original investment. These statements are evidenced by my two weekly indexes of stocks held and stocks traded—called the Investors’ Index and the Traders’ Index. XX Introduction The public utilities stocks reached such a height that the average yield was only 3 per cent. Allied Chemical & Dye, one of the “blue chips,” was selling so that the yield was only 134 per cent, and there were other stocks higher priced than that, and with correspondingly smaller yields. In many companies, the common stocks had lower yields than the bonds in those same companies. Now with all these facts before us, we are tempted to conclude that such an advance in stock prices was thoroughly unsound, if not that deflation should go on until the level of 1926 should again prevail, or even that of 1913. Based on such a diagnosis, the prognosis would show the business of the country to be in a very bad way. During the rise of the market, brokers’ loans reached the unprecedented total of more than $8,000,000,000, and of this total $3,000,000,000 were cut off within a few weeks. Investment trusts, genuine and so-called, had become the fashion. They had absorbed $3,000,000,000 of investors’ money, $1,000,000,000 of it during the rise of the market in 1929. They had had a rapid mushroom growth, rising from under 200 in number in January, 1929, to 400 or more by the time of the panic. The Federal Reserve Board had issued its warning of an inflated stock market back in March, 1929, with a resultant shutting off of stock market credit that at once precipitated a near-panic. This was alleviated through the action of Charles E. Mitchell, Chairman of the National City Bank of Introduction xxi New York, who made $100,000,000 available to the market at high rates. For this accommodation Mr. Mitchell was severely criticized by Senator Carter Glass, a co-author of the Federal Reserve Act, and by other financial authorities. President Hazlewood, of the American Bankers’ Association, in his annual address before that body, September 1, had complained about the high stock market and the enormous total of brokers’ loans, so that the bankers passed a resolution condemning the situation as dangerous and asking for a thoroughgoing investigation of brokers’ loans. Here is a picture that portended and predicted the disaster that came. In the rapidly mounting aggregate of margin accounts the unsoundness of the situation stands revealed. From it many have hastily concluded that the new plateau of stock prices was wholly unwarranted and merely the result of insane speculation. But there is another side of the picture. Of course, a judge is not fitted to pronounce judgment until he has heard both sides. There is the story of the Irish justice of the peace who heard one side of the case which was so convincingly presented that he said: “Stop. My decision is made.” Whereat the opposing attorney cried, “Your Honor, you have not yet heard my side.” To this the learned judge answered: “I don’t want to hear the other side. It might have a tindency to confuse the court. The case is perfectly clear to me now.” However confusing it may be to study this intri- xxil Introduction cate problem, those legislators and leaders of business and finance to whom the nation looks for guidance, owe it to themselves and their country to function as a fair court and to hear the other side. To begin at the beginning: Since every stock price represents a discounted value of the future dividends and earnings of that stock, there are four reasons that may justify a rise in the price level of stocks: (1) Because the earnings are continually plowedback into business instead of being declared in dividends, this plowing-back resulting in an accumulation at compound interest, so to speak; (2) Because the expected earnings will increase on account of technical progress within the industry; (3) Because less risk is believed to attach to those earnings than formerly; (4) Because the “basis” by which the discounting is made has been lowered. When the situation is calmly examined, it is found that all four of these causes were at work, tending to raise the prices on the stock market during the years preceding the panic of 1929. CONTENTS PREFACE . ACKNOWLEDGMENTS INTRODUCTION . CHARTS . PAGE vii ix xi XXV CHAPTER [. Tue Stock MARKET CrASH II. PresipeENT Hoover Acts . ITI. Causes oF THE Panic IV. Tue THrEaT To BUSINESS V. Prowep-Back EarNINGS . VI. Cuancep Ratio or Prices To EARNINGS VII. Tue Ace oF MERGERS . . VIII. Scientiric ReEsearcH AND INVENTION IX. InpustriaAL MANAGEMENT . . Laror’s CodpeEraTIVE Poricy . Tue Divipenps oF PROHIBITION . REerier in Seven YEARS OF STABLE MONEY FricuT FROM BonDs TO STOCKS . . SpecuLaTiON AND BROKERS’ Loans . REMEDIES AND PrEVENTIVES OF PaNics Tae HoperurL OUTLOOK APPENDIX . X. XI. XII. XIII. XIV. XV. XVI. 21 32 36 66 81 101 119 142 157 175 182 198 218 238 257 271 CHARTS CHART 1. Growth of Manufactures, 1919-1926, Preceding Two Decades Compared with Frontispiece 2. Stock Prices, Last Half of 1929 . . . 3. Booms, Recoveries and Panics, 1914-1929 4. Stock Price Index Numbers, 1870-1929 s. Stock Price Indexes: London, New York, Paris and Berlin, 1927-1929 . . . . . 6. Net Profits and Stock Prices, Railroads . . . . 7. Net Profits and Stock Prices, All Industries . . . 8. Net Profits and Stock Prices, Public Utilities 9. Cash Dividends and Total Earnings As Per Cents of Market Prices . . . . . + . «=10. Price Earnings Ratios, All Industries, Variable Group, 1928-1929 . . . . . . Lo 11. Price Earnings Ratios, 45 Industrials, Fixed Group . 12. Price Earnings Ratios, 25 Rails, Fixed Group . . 13. Mergers Recorded, 1919-1928 . . 4 x 3 14. Prime Cost, Physical Volume of Production and Unit Prime Cost . . . . . . 15. Electricity Displaces Other Power 16. Managerial Control . . 17. Weekly Wage Rate, Hours Worked and Unit Prime Cost oo... 159 18. Industrial Disputes and Workers Involved, 1916-1928 167 19. Wholesale Commodity Prices, 1923-1929 . 186 PAGE xiii xvii 2 CX xxvi Charts CHART 20. Industrial Production—Federal Reserve Credit Control . . . . 189 21. Wholesale Commodity Price Movements, 1800-1930 . 193 22. New Securities Issued=—Stocks vs. Bonds, 1919-1929 . 199 23. Financing by Investment Trusts, etc. . 215 24. Brokers’ Loans and Stock Values 222 25. Sources of Brokers’ Loans 22% PAGE THE STOCK MARKET CRASH— AND AFTER THE STOCK MARKET CRASH— AND AFTER CHAPTER 1 THE STOCK MARKET CRASH THE most rapid and precipitous decline of stock prices in the history of American security tradings commenced on September 6, 1929, and continued, with only minor recoveries, until November 13th, after extraordinary measures had been taken to check the panic. The unexpected advance in Federal Reserve rediscount rate at New York, from 5 per cent to 6 per cent on August 8th, was a percursor of the slump. The average of my daily industrial stock index fell from 195.3 on the preceding day to 191.4; the average of rails descended from 152.9 to 149.6, and of utilities from 239.2 to 233.9. Sharp recoveries, however, carried the market averages to new high levels, as follows: Industrial stock prices climbed to 211.8 on September 7th; rails to 163.7 on September 4th; public utilities reached a new high of 259.3 on September 3rd, then falling off to a level of 250.4 on September 13th, and resuming their climb to a record high of 267.3 on September 24th. The Stock Market Crash—And After Course of Stock Recession From September 7th, there was a steady drop for industrials to a low of 198.9 on the closing of September 3oth, representing a decline of 12.9 points. STOCK PRICE INDEX NUMBERS IRVING FISHER'S INDEX 1926 w~-200 ay ~y RATIO SCALL RIS [Fat 1g - on - MV / MM ‘od 350 300 230 200 100 90 80 To 0 0 4 “if M A A ~V) A, | Ve 8 oreo] — eesmreptmellegmrnt 870 75 80 85 90 95 oo W TT25 wo CHART 4.—~Three Plateaus: 1870-1905, 1905-1913, IQX5-1923; thence sharp upward climb to September, 1929. Inset chart shows October-November crash, 1929, not halfway down from rise since 1926. Railroad shares had dropped to a low of 151.0 on September 30th, and utilities to 260.0. Liquidation continued in October, with the volume of stock trading mounting into record figures. Transactions for October reached the total of 141,664,900 The Stock Market Crash 2 shares, as against the previous record monthly volume of 114,779,500 shares for November, 1928. Trading records for single days were eclipsed, so that on October 29, the turnover amounted to 16,-410,000 shares, as against a previous peak of 8,246,700 shares on March 26, 1929. The March record was beaten on three different days of October, while on October 29th, the New York Curb, the second largest stock market in the world, recorded a five-hour session of 7,096,300 shares. Industrials reached their record low of 122.7 on November 13th, rails touched bottom at 116.3 on that day, while public utilities dropped to 149.1. During this disastrous month the machinery of the New York Stock Exchange was badly clogged, with lagging tickers adding to the confusion, while traders shut their eyes and plunged into the market, trusting almost wholly to luck to get execution for their orders. It was reported that these blind orders resulted in the purchase or sale of stocks five points or more below their current selling price on the tape. Curiously, money rates which had occasioned the first sharp break of August were not a factor in the disastrous liquidation of the two-month panic. Many influences worked together to set the stage and arrange the climax for this great financial drama. The flow-back of funds from October 1st dividend and interest payments released a volume of credit that eased money rates in the New York market and brokers’ loans continued to grow. There had been an appreciable slackening of industry from the be- The Stock Market Crash—And After ginning of July. Mr. Babson's statement, which ordinarily would have made little impression, coupled with the Hatry failure in London, which obliged English holders of American stocks to sell in order to protect their own commitments, directed attention to the overextension of stock market credits and the unsound banking condition. The statement by Philip Snowden, British Chancellor of the Exchequer, that the “orgy of speculation” in this country had been responsible for the advance in the rediscount rate of the Bank of England, whether it was true or not, had a depressing effect on the American market. Every fresh rumor sent the market lower. 4 Meanwhile the unusual ease’ in the money market was helped by the heavy accumulation of funds in New York as the result of subscriptions to new capital issues. The call-money rate, which had run above 15 per cent during the height of the summer speculation, fell to 6 per cent, then to 5 per cent, and later to 414 per cent. Corporations piled in their large loanable balances. The Reserve Banks continued as active buyers of bankers’ acceptances, which enabled the member banks to reduce their indebtedness to the Reserve to the lowest figures reached since 1927. Soon thereafter the volume of commercial loans dropped off, releasing further credits to aid liquidation in a falling market. October was the first month to show greatly reduced totals of new stock issues floated. Foreigners were ordering their holdings of stocks sold out. The Stock Market Crash S That was why brokers’ loans for a time continued to increase, because with each sale by a foreign holder, those who bought applied for loans to carry the surplus supply of securities that had not yet found definite lodgement. “Undigested” Securities The brokers’ underwritings of new stocks or bonds now became an essential factor in the expansion of brokers’ loans. The newly underwritten securities began to pile up, to remain “undigested,” that is, not disposed of for permanent investment. Also, much of the money paid in to Investment Trusts by investors in return for certificates was in cash or lent in the market, and not yet invested in stocks. After the crash began this money waited for the market to touch bottom. The Financial Chronicle of October 12th showed that $649,000,000 in new investment trust shares—1I am not certain how these new “trusts” are classified—were offered by syndicates during September; that this was added to $707,000,000 offered during July and August, bringing the total issues during the first nine months of 1929 to $2,239,000,000. The bulk of these offerings was not absorbed. They were carried along on borrowed money—or purchased outright with other securities, carried on margin in order to provide the funds—creating a New situation in the money market. Stock flotations in 1922 and 1923 had risen to about five billions a year. By 1927 and 1928 the five billions became ten billions yearly. But for the first half of 1929 they 6 The Stock Market Crash—And After amounted to $6,125,000,000 and, during September alone, a total of $1,015,000,000 was added, while brokers’ loans rose by $670,000,000. During the catastrophic month of October the flood of new corporate offerings persisted to the extent of $757,-254,000, bringing new corporate issues for the first ten months of the year to $9,413,451,000, of which common stocks were $6,535,251,000. The financing by investment trusts and trading and holding companies absorbed $2,443,000,000 of the total new issues; the investment trust issues were, of course, a special type of “refunding” rather than new issues. It was largely this tremendous volume of new financing that projected the top-heavy market into the abyss. The Conference of Bankers On October 21st, with the market breaking wide open, the tape two hours late, and sellers of market leaders finding “air pockets” down which their offerings catapulted, leading bank executives gathered at the office of J. P. Morgan & Company. The conference included the heads of four of the greatest banks, representing in excess of $6,000,000,-000 of resources, namely, the National City, Chase National, the Bankers’ Trust and the Guaranty Trust. Later in the day representatives of thirty leading stock exchange houses met in conference. Mr. Lamont of the Morgan firm, spokesman for the gathering of bankers, stated that the break was a “technical” one, not based on anything fundamentally The Stock Market Crash 7 wrong, that the market had run into “air pockets” with urgent and heavy offerings and a marked absence of bids. It was confusion worse confounded, the brokendown machinery making it as difficult to buy as to sell. October 21st was a day of “blind” sales, where stocks sold from ten to thirty points below the quotations recorded on the belated ticker, and with the principal selling appearing to come from large operators in blocks of from five thousand to twenty thousand shares. On October 28th, the greatest single day’s break in the history of the stock market cut many billion dollars from the market values of securities on the New York Stock Exchange and Curb Exchange. General Motors lost $1,00,000,000 in value of its 43,500, 000 shares of stock outstanding. General Electric had dropped 120 points from its high to the low of the reaction on October 24th, Westinghouse Electric & Manufacturing crashed 194 points, American and Foreign Power fell 11114 points, American Telephone and Telegraph sunk 130 points. All groups gave way. On October 28th, General Motors again broke below 50, while Chrysler, the leader of the 1928 bull market in motors, found a new low below 40, off more than 100 points from the year’s high. There was heavy selling in the railroad stocks, which had thus far resisted the weight of liquidation, and wide-open breaks, especially in the higher-priced stocks, which had for weeks held steady. Reports from commission houses dwelt on the appalling cata- 8 The Stock Market Crash—And After logue of accounts cleaned out, with thousands of individuals who had lost their entire speculative capital. A Rich Man's and Poor Man's Panic This was not simply a poor man's panic. Probably it began by the “big fellows” trying to get out from under, followed by short sales in large blocks by “bears.” Only after the first sharp break were the “little fellows” ruthlessly sold out, when they were unable to meet new demands for increased margins. That rich men were involved in the heavy liquidation was shown by the recessions of bank stocks, largely held by the wealthy. Although small bankstock dealers found themselves “long” of bank shares at high prices, because of their price and the limited extent to which they might be bought on margin, bank stocks are in great measure bought by rich traders. But these issues became, at the later stages of the panic, bargains in the counter market, sold and bought through dealers in unlisted securities. Being unlisted, they were especially subject to abnormal fluctuations. First National fell off on October 28th by $500 on the bid price, Bank of the Manhattan Company by $150, and there were great losses in such issues as Bank of America, Bank of United States, Chase National, Chatham-Phenix, National City, and Fifth Avenue—all standard bank securities. Trust Company and insurance shares lost ground with the bank issues. The Stock Market Crash 9 It is significant that the bank stocks should have fallen in price so rapidly, despite the fact that margin requirements in these cases—although they are usually bought outright—ranged from 50 to 80 per cent. Presumably their fall signalized the distress of wealthy operators. The Big Market Drop On the 29th, the day of heaviest trading, not only for October but for all time, declines in a long list of well-known shares ran from 25 to 40 points, some of the highest grade shares showing losses from the previous week’s closing figures ranging from 735 to 87 points. This outpouring of stocks, thrown on the market regardless of price, came in the whirl of blind panic. Many holders later found that they had incurred needless losses, while the buyers of the best of these stocks, at the depth of market demoralization, were fortunate indeed. It was manifest that many and capacious strong-boxes had been emptied of their contents in the midst of the hysteria of selling. Speculative plungers sent in orders from every corner of the land, and added to the chaos in this record speculative panic of stock market history. The outsiders constituted an army of camp followers whose number vastly exceeded those of the better disciplined army of Wall Street. Favorable news made no impression on such a débacle. In vain the United States Steel Corporation reported quarterly earnings with net receipts in August, except for the preceding May, the largest 10 The Stock Market Crash—dAnd After of any month since the War, and, with its total for the quarter, exceeded only in the preceding quarter. The market had no ear for such news, because it was deafened by the stentorian voices of banks calling upon brokers and individuals to repay their loans, while a Babel of brokers’ yells and customers’ bellows made the financial welkin resound like a supernatural jazz band. Deaf, blind, and dizzy, the mar: ket fell, and then fell some more! The groups of men and women who watched the ticker tape unwind as their fortunes dwindled, or sat dumbfounded in customers’ rooms before the board, as their riches took wings, were the visible symbols of silent thousands among the masses of the American people who had dumped their holdings into the lap of the stock market Moloch. One touch of nature had made the stock market trading world kin, and the butcher or baker who had lost a few stocks on margin drew the sympathy of millionaires who had helped swell the enormous totals of brokers’ loans and whose margin defenses had likewise been shattered. Each day on the floor of the Stock Exchange the tumult and the shouting rose to crescendos during the five hours of market trading, dying only to rise again as the avalanche of selling orders fell, carrying prices down with them. Far out at sea the stock break overworked the radio on the ocean liners, putting the passengers into the Wall Street flurry. The crash in the market cut short holidays as hundreds of Ameri- The Stock Market Crash II cans abruptly abandoned their plans for winter vacations and returned to New York in the hope of salvaging something from the wreckage. The sessions of the Stock Exchanges were cut to three hours each on four week days, partly to enable the overworked Exchange houses to catch up with their transactions, but chiefly to put a check upon further short selling and depression of the market. A vigorous closing rally on October 30th prefaced the strong and heartening rise in stock prices on the 31st, when 10,727,320 shares were traded and more than two and one-third billion dollars were regained by sixteen representative stocks. The rally of Thursday, the 31st, continued until noon, when the Exchange was closed for the balance of the week to ease the strain. The Board of Governors of the Stock Exchange announced that it had “reached a point of complete physical exhaustion.” The market recesses gave time to count up the losses in security values, and to gather from the nation’s business, financial and governmental leaders their opinions as to the probable causes and results of the panic and what measures might be taken to prevent a repetition of this painful ‘experience. President Hoover called a series of conferences with business and banking leaders at the White House to devise ways and means of codrdinating the efforts of private business and Government to pre- 12 The Stock Market Crash—And After vent the stock market panic from developing into industrial crisis and depression. From them all, from the President; from Thomas W. Lamont, of J. P. Morgan & Company, leader of the group of bankers meeting at the offices of the House of Morgan, whose powerful support was given to the rallying of the market; from Dr. Julius Klein, Assistant Secretary of Commerce, who announced that the “stock market is not a major barometer of business”; from every outstanding leader competent to speak there came the reassuring note that the commercial structure of the nation continued sound. By the banking group and other financial leaders, including John D. Rockefeller and John D. Rockefeller, Jr., the level of stock prices was regarded as having swung too low during the panic, and these rushed to the rescue of the market not only with words but with huge buying orders. But these orders arrived rather late to check the steep declines. The Record of November The sixty-day decline up to November 1 3th, when “bottom” was touched, was without parallel in the annals of Wall Street. There was the slaughter of prices of November 7th, when United States Steel opened off $7, General Electric off $6, Westinghouse off $9, American Telephone off $5.25, American and Foreign Power off $6, followed by a recovery and turnover of 7,878,000 shares, at the rate of more than 13,000,000 for a normal full-time session and The Stock Marke: Crash 13 with the tape seventy-two minutes behind the floor. The banks gave support which helped the rally, while blocks of from five thousand to seventy-five thousand shares were thrown into the market. It was on November 7th, that the National City Bank Shareholders’ meeting rejected the terms of the merger with the Corn Exchange Bank as proposed September 19th by the National City Directors and accepted by the Corn Exchange shareholders. By this proposed merger the creation of the largest bank in the world had been announced. The proposal had agreed on cash purchase by the National City Bank at 360 of Corn Exchange shares that had not been exchanged for National City stock. The prices of Corn Exchange stock had fallen to 160 at the beginning of November. But stocks broke again in a new rush to sell on November 11th, with United States Steel at the year’s low in an 1134 point drop to 1594 that was succeeded by further declines on two successive days and recorded losses of from one to twenty-five points in other active issues. In the burst of liquidation during the final hour of trading the market was overborne by the dead weight of realizing sales—manifestly representing “distress” selling carried over from the October crisis. Still, call money and rates on collateral time loans remained at 6 per cent, the time-money rate being at its lowest since August, 1928. But leading stocks offered when there were no buyers again encountered ‘‘air pockets.” The 14 The Stock Market Crash—And After first two hours’ trading on the 12th witnessed a turnover of 4,200,000 shares, and of 6,452,770 shares in the three-hour market. On the following day, November 13th, a renewed break in stocks under the push of heavy trading occasioned the following comment by the financial editor of the New York Times: “Yesterday's stock market calls for comment of a different kind than was required on other recent days. It pointed urgently to the exercise of financial common sense. The market’s character and the further heavy break in prices (on transactions nearly twice as large as Monday's) strongly suggested other selling than necessary liquidation [that is, ‘short’ selling]. If the stocks which were pressed at a sacrifice on yesterday's unreceptive market had actually all represented ‘distress holdings’ taken over by strong banks and individuals two weeks ago, then the man. ner of marketing them yesterday would have been most injudicious. It is a cardinal maxim of such emergency relief that liquidation of shares thus taken over should be cautious that it should be pursued in close conformity with the state of the market; that the stocks should never be thrown over hastily in face of crumbling prices. A prudent holder, under such conditions as yesterday, would not think of forcng them to a sale * Plateau of Stock Prices Maintained This comment might have referred to the conviction of a major bear raid in process. It is sig- The Stock Market Crash 15 nificant, that at this nadir of market despair and panic the market “averages” had gone down only to those of February, 1928—well above the old plateau of stock market prices, from the level of which the market had ascended after 1923. The worst panic in history had not destroyed this new price plateau! Industrial stock prices, even at the bottom on November 13, 1929, were 30 per cent above 1926 average, and 300 per cent above the pre-war plateau of 1905-1914! Despite the fact that the price level of many stocks had run too high, the panic was “technical” in its character and largely artificial. This may be understood from the fact that industrial shares had achieved the highest earnings of their history, that the price-earnings ratios were on the average lower during 1929 than in 1928; and that, in over-the-counter transactions, the powerful National City Bank saw its shares sold off by 8o points, opening around 280 and closing at 200. Bank of New York and Trust closed down roo points at 650; Guaranty Trust down 50 points at 560; Bankers’ Trust down 13 at 120; Corn Exchange down 20 at 165, and so on. On November 14th, extraordinary measures were taken. On this day came the announcement of the Proposed cut in income tax, and the notice from Washington of the conferences held at the White House on November 13th. The rediscount rate at the New York Federal Reserve Bank was lowered to 4%2 per cent, which came after a cut from 6 to z per 16 ~~ The Stock Market Crash—And After cent within a fortnight. A further reduction of $710,000,000 in brokers’ loans was announced. The brokers’ loan account showed an aggregate contrac tion from the high level of October 2nd, of $2,632,-000,000 and total borrowings at the lowest point since June 15, 1928. November 14th marked the point of rebound of the market, with speculative leaders rallying by 2 to 14 points and utilities sharing in the further advances, in which merchandising shares also participated. My index of 225 listed industrial common shares recorded the close on November 13th, as down by 42 per cent from the September 3rd peak. Beginnings of Recovery The recovery from the panic began on the 14th with further sweeping advances on the 15th, as the comprehensive program engineered by President Hoover for restoring confidence was being carried on. Many of the pivotal stocks had been “pegged,” by the expedient of placing large standing orders for substantial blocks at fixed prices. In the case of United States Steel a bid was announced as a standing order for 200,000 shares at $150 a share. Certain interests, supposed to be the Rockefellers, bought one million shares of Standard Oil of New Jersey at so. The Wall Street market letters immediately blossomed with bullish predictions, accom. panied by lists of stocks which, in the opinion of the The Stock Market Crash firms issuing them, would show the best results for the “long pull.” Thereafter so-called ‘“normal” conditions prevailed in the stock market with stocks generally moving higher in steady trading, under the impetus of optimistic reports from President Hoover's conference with railroad officials, business leaders, farm leaders and the Governors of the states. These assured the country that every department of the nation’s business would proceed under normal or augmented programs. Open market values of listed stocks on the New York Stock Exchange had fallen by $15,320,979,515 during October. The Stock Exchange statement for December 1st shows the number of listed shares at 1,117,126,726, worth at market prices $63,589,338,-823. The loss in the market value of listed shares during November was therefore $8,163,312,085— about half of the previous loss during October. From the peak of listed share values on September 1st down to December 1st, the loss had been $26,078,938,031, from $89,668,276,854 at the top. The Commerciel and Financial Chronicle gives a minimum estimate of $40,000,000,000 shrinkage of total market values, which includes, of course, curb and over-the-counter unlisted securities. The ratio of member borrowings to listed share values on December 1st was 6.32 per cent—the lowest figure thus far on record. The previous low was 8.06 per cent on September 1, 1927. | 18 The Stock Market Crash—And Afier Members of the banking group had organized, October 24th, to help stabilize conditions in the market; these ceased their conferences after November 13th, the spokesman for the group reporting that the situation had been so far restored as to require no further comment. During all this period money rates in the stock market sank to levels below those preceding the break, with every prospect that the lower rediscount rate made by the Federal Reserve Bank of New York would be followed by reductions in European centers. Hardly a month after the panic market “touched bottom,” the market closed on December 1 1th, at a level for industrial stocks and utilities 21 per cent higher than on November 13th. But this was followed by a secondarv reaction, from which there were distinct signs of recovery during the week ended December 27th. Except in the case of the coppers, this secondary reaction failed to carry any group as low as the bottom of the crash. The following table, derived from my stock price indexes, shows in the first column of figures the percentage at which the low point on the secondary reaction, during the week ended December 27th, stood above the low point of the crash on November 13th. The second column of figures is the percentage of gain made later in the week of December 27th from the bottom of the secondary reaction: The Stock Market Crash Per Cent of Secondary Low Above Crash Low Group All Industrials 1st Grade . 2nd Grade . 3rd Grade . Preferreds . . Public Utilities Rails. . . Steels . Coppers . Oils . . Motors . . . Auto Accessories . Foods . . . Stores . . . . . . . . Miscellaneous (All). . . . All Bonds . . . . ow * Below previous low during crash. 9.5 12.4 7-7 6.3 4.8 9.5 B.5 5-3 2.3% 7.0 8.2 2.1 9.5 i1.3 10.5 1.7 Per cent Advance from Secondary Low 3.6 4.1 3.3 3.7 0.1 3.2 2.4 3.9 3.6 2.8 5.5 5.7 2.0 3.2 3.8 0.0 19 By the close of 1929, therefore, the extent of the panic and its immediate after-effects could be gauged. With fair business prospects, it seemed justifiable to look for a rising trend in the stock market. Foreign stock exchanges reacted sympathetically with the American market. My index of French stock prices shows a comparatively moderate rise from early January (167.2) to early September (179.6) and then relative to the American crash a moderate fall to the end of November (134.1). My index for Germany showed relatively less fluctuation than our own stock price level, being 117.6, 108.9, 20 The Stock Market Crash—dAnd After and 83.5, respectively, at the dates named. English stock prices, however, had fallen pretty consistently since the first of 1929, going from 198.9 in the week ended January rith to 167.3 at the end of August, and 91.4 at the end of December, a decline by more than one-half in a year. No doubt the London decline, setting in much earlier than our own, helped give the American crash in stock prices its initial :mpulse. In fact, the British crash, dating from August 30 and starting a full week earlier than the American break, plunged common share averages to a lower level on the London Exchange than in New York (see Chart 5). The extreme range of the American decline was 16 per cent less than the fall of stocks in London. It was a world crash in stocks which started, not in New York. but in London, and wrought havoc in Paris and Berlin as well as on the American Exchanges. CHAPTER II PRESIDENT HOOVER ACTS IT was but natural to expect that so stupendous a crash, with a reduction in listed values of twentysix billions of dollars, would deal a tremendous blow to business. But business was more scared than hurt. By convocation of the President, and under the auspices of the United States Chamber of Commerce, four hundred leading business men set up in Washington, December 5, 1929, a committee of seventytwo “key” men called the National Business Advisory Council. This committee set about devising means for a continuing organization to stabilize business. At its meeting President Hoover defined three possible lines of emergency action. The first step, Mr. Hoover said, was to recover business confidence by the powerful aid of the Fed. eral Reserve System and the strong position of the banks. These were working steadily to diminish interest rates. Money released by the deflation of securities would thus be returned into business. The President noted the effect of this action in making money more abundant in all parts of the country and in strengthening the bond market, in which public issues that had been postponed were beginning to appear. The second step was taken by the President him- 22 The Stock Market Crash—And After self. Through personal interviews and public conferences with leading employers he sought to set standards whereby, so far as they were concerned, there would be no movement to reduce wages. Corresponding assurance was obtained from the leaders of organized labor that they would help allay conflicts in full cooperation with employers, avoiding all issues that involved wage increases. By this cooperation between Capital and Labor, continuity in consumer’s purchasing power was assured, with the removal of fear of general unemployment. This would not, of course, increase consumers’ purchasing power, except to some extent through possible changes in distribution of products among workers, managers, enterprises and capitalists. The point was that purchasing power would be kept from decreasing through any serious stoppage of the wheels of industry. The third step was of a more permanent nature. [In the President's words, it was to ‘‘undertake, through voluntary organization of industry, the continuity and expansion of the construction and maintenance work of the country, so as to take up any slack in employment which arises in other directions.” The President continued : “The greatest tool which our economic system affords for the establishment of stability is the construction and maintenance work, the improvements and betterments and general clean-up of plants in preparation for cheaper production and the increased demand of the future. President Hoover Acts 23 “It has long been agreed by both business men and economists that this great field of expenditure could, by acceleration in time of need, be made into a great balance wheel of stability. It is agreed that its temporary speeding up to absorb otherwise idle labor brings great subsequent benefits and no liabilities. “A very considerable part of our wage earners are employed, directly and indirectly, in construction and the preparation and transportation of its material. In the inevitable periods when the demand for consumable goods increases and labor is fully employed, the construction and maintenance can slacken and we actually gain in stability. No one would advocate the production of consumable goods beyond the daily demands that in itself only stirs up future difficulty.” The President further reported: “Our railways and utilities and many of our larger manufacturers have shown a most distinguished spirit in undertaking to maintain and even to expand their construction and betterment program. The state, county and municipal governments are responding in the most gratifying way to the request to cooperate with the Federal Government in every prudent expansion of public works. Much construction work had been postponed during the Past few months by reason of the shortage of mortgage money due to the diversion of capital to speculative purposes, which should soon be released.” The purpose of the conference, the President stated, was to systematize this movement in all 24 The Stock Market Crash—dAnd After branches of the industrial world. The assurances already obtained by the public service institutions and the governmental works would be a prime factor of stability by enabling construction and maintenance activities for 1930 to reach a ‘“‘higher level than that of 1929.” A second great balance wheel of stability, the President said, was in our foreign trade. But he cautioned that exports should be mainly for development work abroad, such as roads and utilities which increase the standards of living of the foreign nations and thus increase demand for goods from every nation. Finally, the President declared that all these efforts had but one end, namely, to “assure employment¥and to remove the fear of unemployment.” First Concerted Action Against Depression The remedies and preventives proposed to the four hundred business leaders represented the first concerted effort made in this country by government and business to avoid threatened depression. “A more significant experiment in the technique of balance,” Professor Wesley C. Mitchell declared in a paper before the Taylor Society, December 4, 1929, “could not be devised than the one which is being performed before our eyes.” The purpose of this action was magnificent. Its psychological application in allaying fear was, indeed, swiftly effective. It immediately turned the attention of the nation from despairing contemplation of losses to a confident preparation for quick recovery. It was designed to head off industrial con- President Hoover Acts 25 flicts. It attempted to assure producers of a continuance of purchasing power for their goods, and consumers continued maintenance of their standard of living. Finally, it took a step in the direction of “planned and managed prosperity,” indicated as proper in the temporary speeding up of forward construction and expansion programs and stimulation of foreign trade. Whether this supplied the necessary driving power to overcome the momentum of forces that were already turning the volume of production and trade downward with a decline in the general level of prices, remains to be seen. Its underlying theory, that continuity of the productive and distributive process, and hence of the purchasing power of the masses of consumers was of prime importance to reassure business and maintain the continuous flow of production and trade is altogether sound. It was calculated to mend as speedily as possible the dislocation occasioned by the transfer of the mass of traded stock issues to alien and more concentrated ownership at a loss to their former holders. It was a proper emergency measure to take in preventing the worst effects on business from the crash in the stock exchanges. Henry Ford was substantially right, therefore, in a supplemental statement issued by him after the first of the President’s conferences, when he suggested the need, in order to check such effect in its beginnings and as a measure of reassurance, of “increasing the purchasing power of our principal customers—the American people.” Mr. Ford added: 26 ~~ The Stock Market Crash—And After “This may be done in two ways: first, by putting additional value into goods or reducing prices to the level of actual values, and, second, starting a movement to increase the general wage level. Nearly everything in this country is too high priced. The only thing that should be high priced in this country is the man who works. Wages must not come down, they must not even stay on their present level; they must go up.” It may or may not be true that all goods at a given time are too high priced—probably it is not true; it may not be true that prices should be reduced, until costs are reduced; but it is true that the cost of production should be reduced all the time, with consequent enhancement of profits and of consumer income. It may be added that Mr. Ford “made good” upon his words by reducing the prices of his product to the public and increasing the wages of his employees, thus at once showing what might be done by the leader of our greatest industry and manifesting his confidence in the underlying factors of business. But if consumer purchasing power were the desideratum, some method had to be devised for stimulating payments to workers by industries both in large-scale and small-scale production. Not all of these industries were in the fortunate circumstances of Mr. Ford’s, which had benefited by intensive economies and consequent rapid reduction of unit costs. The problem was to benefit the wage earners in the whole gamut of American industries, big and President Hoover Acts 27 little, engaged in all forms of production down to and including the retail trades, and including some backward industries like coal and textiles. How might this universal stimulus be applied? Features of the Business Conference It could not be done merely by conventions and their resolutions. Julius H. Barnes, who as Chairman of the Board of the United States Chamber of Commerce marshalled the National Business Survey Conference, defined, on December 6, 1929, outstanding factors concerning this conference, as follows: “First, that it presented an extraordinary and competitive cross section of the whole fabric of American business represented by leaders, who could speak with conviction and the authority of proved leadership in their lines. “Second, that in taking up any possible slack in wages and employment, an elasticity of new construction and of maintenance is the chief factor; and that maintenance, which means new equipment, and construction, which means not only expansion but improvement of mechanical production and distribution, are naturally justified. “Third, that this implies large capital expenditures for these purposes, and this must be provided from industrial treasuries, or, most largely, by borrowings for capital investment. “Fourth, these borrowings depend upon the ability to obtain money at reasonable rates and in ready and adequate quantity. This situation has devel- 28 The Stock Market Crash—And After oped rapidly in the last few weeks, so that this assurance is present. This is shown by the Treasury refunding today of $325,000,000 at 314 per cent, against its last borrowings at 47 per cent, not long ago. This is probably the most extraordinary change ever recorded in Treasury operations between transactions. “Fifth, that industry, in being assured of available capital requires then only the vision and courage to proceed.” The temporary speeding of public works does not mean merely assurance of increased employment in the cement, steel and building industries. Manifestly there could be no wholesale transfer of the unemployed from shops and unrelated industries into building, even though that building were distributed throughout the states. But buildings have to be furnished. Architects and their staffs are employed. The makers of office furnishing, plumbing and other building equipment feel the fresh demand and take on new help. Housing is stimulated. The furniture dealers, carpet and rug makers, hardware dealers, radio and washing machine makers, and numberless other contributors to house furnishings feel the stimulus of new demands and add to their pay rolls. The workmen in all these industries promptly spend their added total of wages for food, shelter and clothing, so that very quickly the vivifying impulse of new capital outlays is felt in all branches of industry and trade. These outlays might be made directly from the President Hoover Acts 29 large reserves of our leading industries, which had providently plowed-back into surpluses from their expanded earnings of recent years. It could be provided by new public and private issues of securities, especially of bonded securities. For this purpose, Chairman Barnes points out, vast credits are available to such extent that money rates have gone down. Until confidence is fully restored and business is again in full volume there should be the certainty that our credit structure will be more than equal to the extensions demanded. That should tide the country over the period of dislocation. But it might be objected that interest and sinking fund payments would soon become due on the added bond issues—installment payments on the country’s added circulation of purchasing power which will add to public and private burdens. But these burdens can be better carried if the dislocation produced by the panic is prevented from destroying real values in enforced idleness and depreciation of plant and product, unemployment, and business stagnation. Of course added public and private expenditures in emergencies must be controlled in such manner that new credit issues shall not increase faster than the supply of goods. The aim should be an increase in real income; that is, the distribution of greater quantities of goods on a stable level of prices. To achieve this dynamic balance on an expanding program requires the codrdination of data from many sources in indexes of production, trade, employment and consumption. It will require the coordi- 30 The Siock Market Crash—dAnd After nate action of many men and business bodies. It will take time. So that the effect of the President's action cannot, in the nature of things, be soon observable, except as a measure of reassurance. Ultimately the present governmental and banking agencies created for the purpose of systematizing data, together with the statistical organizations of private companies, may suffice to supply information continuously, of a kind that will enable business to achieve and maintain a better equilibrium. In that case President Hoover's expansion program may be turned over to these established agencies when the emergency is past. This, apparently, was the President's purpose in his announcement that the National Business Advisory Council would function only as a temporary body. Through his entire experience as Secretary of Commerce and in the war years as Food Administrator and organizer of relief abroad, Mr. Hoover has found that the method of voluntary codperation between government and business for the meeting of national emergencies is entirely dependable. No new government bureaus are necessary. Business leaders and labor leaders by codperating with each other and the government have the power to stabilize production and consumption. If this great experiment in codperation succeeds—even though other elements of stability will have had the deciding influence in the emergency of the panic of 1929 —a new victory for industrial democracy will be achieved. CHAPTER III CAUSES OF THE PANIC WHAT were the causes of the panic of 1929? That the stock market crash was “primarily precipitated by foreign liquidation” is the view expressed by John S. Sinclair in the New York Times of October 27th. This liquidation accompanied the socalled Hatry Panic on the London Stock Exchange, which resulted in a deeper fall of the London stock price level—45.4 per cent from August 30th to December 27th, according to the British index—than occurred on the New York Stock Exchange between the high point on September 7th and the bottom of November 13th. Few realize today that the greatest fall of stocks in British history, comparable only with the Baring Panic of 1890, preceded and was an actuating cause of the American panic, and that a coincident fall in Paris and Berlin accompanied the British liquidation. It began with the failure of the banking house of Clarence Hatry in August, followed by his arrest in September and subsequent conviction for a gigantic forgery of stock certificates. This started the British liquidation in London and in New York. Barron's W eekly of 32 The Stock Market Crash—And After December 9th, notes that Britons were extremely active in “distributing” stocks at the high level in New York during September, as seen by the movement in sterling exchange. It adds: “Between September 24th and October 24th, sterling swung virtually all the way from our goldimport point to our gold-export point—an astounding reversal for so brief a period. On September 24th sterling was slightly under $4.85; on October 24th, it was above $4.88. This skyrocketting of sterling occurred at a season when it is normally very weak. “No one knows what volume of British withdrawals from Wall Street would be required to send up sterling in this spectacular fashion. Probably no important branch of statistics is so weak as those pertaining to foreign-exchange volume. Maybe $300,000,000 would do it; maybe $800,000,000 would be necessary.” There had been a coincident rapid decline of stock prices on the Berlin and Paris exchanges. In Berlin stocks had declined with little interruption since early in 1928. The liquidation on all three of the principal European exchanges no doubt contributed in important degree to the overthrow of the American stock market, and was largely responsible for the September liquidation in New York, with its tremendous growth of brokers’ loans, partly to take up the holdings relinquished by foreigners. Indeed, there were indications that foreign liquidation in Wall Street persisted into 1930, © Irving Fisher 08 STOCK PRICE INDEXES a * /\ 1 4 LONDON A JS WAS Of an FL 9% MONTHLY DATA 120% WEEKLY DATA oe CHART 5.—At the bottom of the crashes on the London, New York, Paris, and Berlin Stock Exchanges the percentages of fall in common shares from the (weekly) highs before the crashes were: London, 45 per cent fall; New York, 38 per cent; Paris, 26 per cent; and Berlin, 23 per cent. 53 34 The Stock Market Crash—dAnd After Linking of Commercial and Investment Banks Mr. H. Parker Willis, editor of the New York Journal of Commerce, ascribes to the big commercial banks, which had organized speculative pools in the form of investment companies, a causal relation to the crash. I am informed by a country banker in Connecticut that there was a tendency among small banks to copy the big banks in the organization of these investment pools which helped swell the wave of speculation through the country. The big banks, of course, used the funds of their stockholders in speculation under intelligent guidance; the little banks could have no such expert guidance. But in either case there was abuse. The commercial banks are supposed to conduct their operations under close public regulation, but by means of affiliated investment companies, joined as closely as Siamese twins, they have been enabled to act irresponsibly, as is evidenced by the fact that these companies publish no statements and are held to accounting by no public body. Overvaluation of Common Stocks That the prime cause was serious overvaluation of common stocks that had previously been undervalued is the opinion of Mr. Carl Snyder, of the Federal Reserve Bank of New York. In correspondence with me Mr. Snyder says, referring to the war inflation of commodity prices: “The long-sustained rise in the level of commodity Causes of the Panic 35 prices necessarily brought a huge increase in the earnings of common shares, and this naturally forced a valorization of these shares in terms of something like a 57-cent dollar. “On the basis of this higher price level, stocks, through, say, the 1919-1924 period, were, as now seems clear, seriously undervalued. As soon as public confidence in the rate of earnings was established, there began a movement of revalorization that naturally swung to wild extremes, as stock markets always do. With this came a recurrence of the familiar ‘new era’ theory, which seems to blossom about once in a generation with unfailing regularity. All this brought what appears to have been as serious an overvaluation of common stocks as they had previously been undervalued—overvalued, I should say, because it is clear that we have as yet seen no-readjustment of long-term interest rates and bond yields to what look like permanently lower levels. And would not this be inevitable if the high prices attained by the average of stocks were to continue?” It is not clear why long-term interest rates and bond yields should seek “permanently lower levels” —they might properly remain at permanently higher levels, if, because of increases in science and the arts, the “tempo” of business justifies expectation of higher profits and greater real income. But it seems measurably true that common stocks were overvalued precedent to the crash, and that this overvaluation was one of its immediate factors. There is a measure of truth, also, in the judgment pro- 36 The Stock Market Crash—dAnd After nounced by another financial expert, who contributes this statement: Business Recession “In my opinion the basic change was in the business curve and outlook. After nearly two and onehalf years of advance at the rate of 1 per cent per month, in July of 1929 business turned downward, and it became evident that a business recession was in prospect. When prices were as high relative to earnings as they were in 1929, the recession outlook pulls the props from the stock market. The profit outlook had changed fundamentally. There were other causes that had been present for a year or more, but these had not broken the market. This downward turn in the business trend was the one new factor in the picture.” With this view the following statement by Mr. Lindsay Bradford, Vice President of the City Bank Farmers Trust Company of New York, is accordant: “Since early in 1929 considerable liquidation and distribution of stocks of various industries had been going on, and but little notice of it was taken due to the fact that the strength in certain other groups, such as the utilities, and certain outstanding industrials gave the whole market the appearance of such strength. This feature of the market was indicated during the Fall by the fact that when certain stocks were daily making new highs other groups were daily making new lows in the weeks before the Causes of the Panic panic ensued. The reason, it seems to me, that these groups, such as notably the automobile group, were weak was because as early as last June it was apparent that automobile buying was falling off and that the automobile companies as a whole were running into overproduction. Similar weaknesses in the building situation were apparent in the early summer and it is such fundamentals as these which, in my opinion, were the real reasons for the decline in prices.” Decision on Edison Company Stock-Split An important factor which contributed to bringing about the fall in prices, was the refusal of the Public Service Commission of the State of Massachusetts to permit the Edison Company of Boston to split its stock. The statements made in connec tion with this pointed to the high prices at which public utility securities were selling and the relationship which existed between earnings and market prices. Of course, the payment of stock dividends on these somewhat inflated stocks did tend to add to unhealthy speculation. The Public Service Commission's refusal to permit it further, discouraged the holders of public utility stocks in venturing to bid prices higher and so contributed to the break. Tax on Capital Gains The Federal law imposing a tax on capital gains helped bring on the panic. This resulted from overextension on the part of borrowers, largely induced 38 The Stock Market Crash—And After by their holding of stocks at the height of the market. For years the tax law on capital gains had discouraged the taking of profits on securities because their holders were unwilling to sell and pay the tax liabilities incurred; instead, they made new stock purchases, as occasion proved favorable, on borrowed money. The resultant rapid piling up of margin accounts during 1929 put the market in bad techni. cal position, making it vulnerable to bear attacks. Thus the capital gains tax operated to prevent outright selling and buying of stocks. It stimulated holders to enlarge their margin accounts because their own funds were locked up in held securities, thus subjecting them to the risks that finally overthrew the market. Nobody profited by this situation. The banks were burdened with the frozen credits of their customers, in the loans on collateral which they had taken over. The entire body of security holders suffered panic decline in the prices of their securities. The government reaped no revenue from the tax on securities, rather, it suffered losses in its income tax account because of the gigantic deflation of the market. A special warning on this subject was issued by the National City Bank of New York, as far back as April of 1929. This statement found in the capital gains tax a root factor in the overextension of borrowings on the stock exchange which had led to a vulnerable credit situation. It said: “If one could check up on the people leaning on Causes of the Panic 39 borrowed money for the carrying of securities, it would be found that there are an overwhelming aumber of holders, who, because of this tax, do not sell. In our daily experience we find it common that men who are holding securities and desire to purchase additional securities in the market which they consider as having an intrinsic value in excess of the market price, do not feel that they can sell that which they have, but in the satisfaction of this desire they borrow either through their brokers or directly through their bankers funds necessary for such purposes, thereby placing added burden on the credit structure.” This tax on profits on the sale of stocks, bonds, real estate, and so on, was put into the original income tax law in 1913. It had no proper part in such a law, for the simple reason that profits on such sales represent a growth in capital, not a growth in income. In successive annual reports, Secretary Mellon had repeatedly called attention to the fact that such taxes hinder and prevent business transactions which would otherwise take place. If the law were repealed the loss in revenue would be, in a degree, counterbalanced by the encouragement which repeal would give to turning into real profits the paper profits on securities as fast as they accrue. These real profits might then be added to the capital fund of taxpayers, and put to work earning more money that would be taxable. Even during the calendar year 1927, when the long bull market was rising fast, the revenue from 40 The Stock Market Crash—And After sale of capital assets including stocks, bonds and real estate, amounted to less than 10 per cent of total reported individual and corporate incomes. In any event the government would have had little to lose and much to save, by successful agitation for the repeal of this law. During and after the panic the Treasury Department recommended that Congress reduce income taxes during 1930—a one per cent cut on both personal and corporation incomes. The department stated that total ordinary receipts of the government for the current fiscal year through November 20, were $119,000,000 larger than for the corresponding period of 1928; total ordinary expenditures, on the other hand, had been reduced by $107,000,000. This amply permitted a tax cut, with a saving of $160,000,000 a year. It was stated that a further cut of the tax on capital gains, or its repeal, would assure the government against such losses in revenue as were sustained by reason of the fall in stock prices during 1929. In fact, during ordinary years the losses in revenue (allowed to the extent of 12% per cent on capital net loss from sale of real estate, stocks and bonds, other than loss from sale of assets held more ‘than two years) ran into the millions. Thus the Statistics of Income for 1927 states this amount to be $227,878,965. This factor of establishment of loss for income tax purposes tended to hold the stock market down after the crash. Great volumes of securities were sent into the market after the bottom was touched on November Causes of the Panic 41 13th to establish such losses, with the intent later of buying back the same securities or securities of the same class. So the capital gains tax operated both to bring on the crash and then to prevent the recovery of prices following the panic. Excessive Credits Craig B. Hazlewood, President of the American Bankers’ Association, in his address before that body, October 1, 1929, maintained that the market values of securities on the New York Stock Exchange had increased too heavily “after allowing for increases in the number of units listed.” Total values, he said, increased from sixty and one-half billion dollars January 1, 1925, to one hundred and twenty-four billion dollars on July 1, 1929. Mr. Hazlewood named as a blamable cause the increased volume of credit allowances by the bankers of the country which had been employed in carrying stocks to those higher levels. These allowances, he said, amounted to “too large a portion of the available credit of the country.” In considering increase in listed values, it is proper to recall the $12,000,000,000 of sterling bonds listed in the spring of 1928 which is included in this total. Only a few millions of these bonds were actually distributed in this country. Doubtless it is true that the increase of credit allowances was too great. This is because the enlarged credit structure was altogether too susceptible to bear raids—not so much because it boosted 42 The Stock Market Crash—And After prices too high or that it materially diminished the availability of credit in commercial and industrial business, as that investors were overextending themselves on margins. True, overextension of credit raised prices somewhat. Without any overextension, however, such prices might still have risen nearly though not quite so high. [t should be added that up to the time of the panic there had been no great complaint from business circles on account of lack of credits, except in the case of the building industry. It has seemed to me an open question how far such building recession as we have had in 1929 was caused by curtailment of credits, and how far by overbuilding. But funds had been withdrawn from building and loan associations and from banks and other sources of mortgage loans, attracted by the higher rates of call and time loans for financing stock exchange transactions. Even so, it would seem that means might have been devised, from the ample credit resources of the Federal Reserve System, to accommodate the building industry as well as the stock market without curtailing the upward course of stock prices. The efforts of the Federal Reserve System to make money dear in the stock market tended to make it dear in the real estate market as well, despite their desire to avoid such effects. Stock Market Loans by Others Than Banks The American Bankers’ Association in its resoluion demanding an inquiry into the whole subject of Causes of the Panic 43 brokers’ 10ans, laid its finger on another actuating cause of the break in these words: “Industries had been financing working capital more and more through the issuance of securities, and this has resulted in a slower growth of commercial bank loans and a more rapid growth of loans against securities, together with a holding of idle funds periodically by many industries.” These idle funds naturally sought employment at the high rates which the stock market afforded as a consequence of the restrictive policy of the banks. The resolution of the American Bankers’ Association speaks of the resultant total of so-called brokers’ loans as a “spectacular figure, whereas it should be scientific figure.” As a spectacular figure, this reflected stock market fluctuations that were'unsound and detrimental to the public good. The resolution adds that it leads to ‘‘threats of financial legislation, which if carried out, might be even more harmful.” Were Investors Sold Out Rather Than Selling? The Commercial and Financial Chronicle (of November 9, 1929) takes issue with myself and others who have believed that the stock market had attained a permanently high plateau-—not, be it understood, a permanently high peak—above all previous plateaus of stock prices. “In the last analysis,” the Chronicle said, “the break in the market was due to the fact that stocks had been carried to absurdly high levels.” Moreover, the 44 The Stock Market Crash—And After fall in the market was not due to mob psychology, but “rather, the mob held on to the last minute with the greatest tenacity and finally got sold out instead of selling out.” There may be some substance in this view. But the testimony of market operators does not seem to bear out the assertion in any absolute sense. There was the fear of course, on the part of brokerage houses that made them sell their customers’ stock to protect themselves. But if the Commercial and Financial Chronicle be right in its contention, then there was no panic at all, since in a panic the mob psychology of fear predominates in the manner illustrated by a run on a bank when every one strives to draw out his funds before the rest; or a panic in a burning theater, where each tries to get out first. Federal Reserve Policy The Commercial and Financial Chroncile also suggested that the market had been sent on a new upward journey by Federal Reserve action during the early part of August, 1929, in sanctioning an increase in the New York Federal Reserve discount rate from § per cent to 6 per cent, with simultaneous lowering of the buying rate for bankers’ acceptances and the concurrent purchase of acceptances on a large scale. This, the Chronicle says, ‘meant the forcing out of reserve credit by the act of the Reserve System itself, and involved Federal Causes of the Panic Reserve inflation of a peculiarly objectionable type.” 15 Bear Tactics and Outside Calling of Loans The Chronicle assigned yet other causes to the panic: “The latter part of September, however, some of the large groups of operators, having accomplished their purpose in carrying prices to new extremes, began unloading their holdings, and this had the effect of weakening the market . . . but after the decline had been going on for several weeks, there came an entirely new development, namely, the calling of loans on a huge scale, not by the banks themselves, but by the mongrel crowd of outside lenders.” The first was doubtless true; stocks passed from strong to weak holders. The second, the withdrawal of funds in many cases came from the banks first, which caused outside lenders and brokers to call their loans. It soon lost most of its significance in the fact that by this time the demand also fell off; if the supply of funds had been cut off more than the demand, money rates would have risen and they did not. Margins Not Figured Scientifically A series of causes of the panic was described by Fred I. Kent, Director of the Bankers’ Trust Company of New York in his address before the Ameri- 46 The Stock Market Crash—dAnd After can Acceptance Council in New York, November 11, 1929. Mr. Kent found one valid cause in the fact that margins were not sufficiently large to protect borrowers: : “If the base value of securities upon which margins are figured had been at a point slightly below attractive investment prices measured by the interest value of current earnings against prices, is it not probable that the tragedy of those who were sold out would have been avoided?” Although there were stocks selling below even these margin requirements, this plan would have helped, since it would have meant larger margins and better technical position of the market. But it should be borne in mind that margins were actually higher than before in the history of Wall Street, during this inflation period. Paradoxically, the situation was helped during the crash by reducing margins to 25 per cent of the market value of stocks. An economist who has made a special study of the subject says: “Stock Exchange member margins were actually very ample. Statistics covering the first six months of 1929 showed that the average Stock Exchange house was maintaining 40 per cent margins on customers’ securities carried, 65 per cent margins on customers’ debit balances, and the members’ collateral loans were margined with excess collateral to the extent of about 50 per cent. Naturally, no margin can protect the borrower from the price declines. The purpose of a margin is, of course, to protect lenders rather than borrowers. Causes of the Panic 47 Undoubtedly, the decline in prices was accompanied by, and in part caused by, heavy selling out of accounts after more margins had been demanded. But without extensive outright liquidation, a panic would not have occurred.” Fear About the Tariff Many will take seriously Mr. Kent's further contention that the market fell because of fear engendered in the public mind by the action of the coalition bloc in Congress in connection with the tariff bill. In the panicky condition of the market everything added to its fears. But big business had no reason to fear any fall of the tariff and little fear of harm if it were not raised. Representatives of the automobile industry, the country’s largest industry, told the President that they wished lower tariff Protection for their products, some of them even saying that absolute removal of the tariff would not disturb them. No doubt business was disturbed by failure to decide the tariff question, quite irrespective of its merits. It might be argued that fears both of a higher and of a lower tariff hurt business. In any case the tariff is today not a small element in the calculations of the business of the country generally. Mr. Kent is not a lone voice crying in the speculative wilderness when he says: “As soon as dealers in securities who were constantly on the watch for indications as to business changes, realized that this feeling of uneasiness (on account of the tariff bill) was spreading throughout industry, they began 48 The Stock Market Crash—And After selling stocks.” But it was the dilatoriness of the Senate, not the need of a higher tariff, that hurt business. Undigested Securities Mr. Kent presents a most interesting view of the situation in his comment upon the proportion of national income that went into brokers’ loans during 1929. He figures that 914 per cent of the national income is the normal amount available for new securities and increased savings deposits, and that something over five and one-half billion dollars was “all that could be utilized for investment purposes.” He goes on to state that the new security issues of the first three quarters of 1929 amounted to nearly eight and one-half billion, or $2,800,000,000 more than the five and one-half billion which he calculates as available from national income during this period. This amounted to 20 per cent of the national income, as contrasted with the “normal” of 914 per cent. Hence, he concludes, new securities had been created and issued more rapidly than the public could absorb them. The only way they could do so was by overextending themselves. But in this calculation Mr. Kent may not have taken account of the securities issued by investment trusts. These securities were not really new, but merely old securities in the form of new certificates. The same may be said of the multiplying mergers of 1929; every investor in a merger reduces his investment in the constituent companies exactly as much as he increases it in the merger. The same Causes of the Panic 49 is substantially true of investment trust issues— although the investment trusts withheld their purchases of stocks immediately before the panic, thus contributing to the fall in prices. But it is a fact, and an important one, that new investment trust securities had been created and issued more rapidly, at least, than these securities could be fully substituted; many were not yet listed on the Stock Exchange so as to become as readily negotiable as the securities they had displaced. By some fatality the crash seemed to be exactly so timed that many people with plenty of collateral could not use it because it consisted temporarily of investment trust certificates unlisted and non-liquid. That this factor played a part was evidenced by the fact that in the panic many investment trust securities which, a few weeks before, were selling above their liquidation value, thus capitalizing the investment trust management, came to sell below liquidation value; that is, the constituent stocks held by these investment trusts were worth more than the titles to them in the form of the trust’s certificates. Gold Withdrawals Yet another point is suggested by George E. Roberts, Vice President of the National City Bank, in his address at the December, 1929, meeting of the New York Academy of Political Science. Mr. Roberts notes that the export of half a billion of gold during 1927 and 1928, while influencing the attitude of the banks, “did not command the attention it 50 The Stock Market Crash—dAnd After deserved from the speculative public.” This, he says, resulted in the New York City banks withdrawing their support of the growing account of brokers’ loans from October, 1927, to October, 1929, which in turn resulted in the market depending more and more upon the irresponsible loans “for others,” these “others” meaning business concerns having large loanable funds. This constituted an element of instability. On this subject a correspondent comments anonymously as follows: “I feel that the money market aspects of the panic, as far as they arose from the large amount of loans by other lenders, cannot be dissociated from the previous open market policy of the Federal Reserve System, which, through establishing artificially tight money conditions, raised the rate on call loans and attracted other lenders’ funds into them.” Overextension of Loans Another bankers’ view is represented by M. H. Cahill, President of the Plaza Trust Company of New York, and formerly President of the New York State Bankers’ Association. Mr. Cahill says in the Manufacturers’ Record of Baltimore (issue of November, 1929): “Every banker in the country had, for several months previous to the break in the market, been demanding from 40 per cent to 100 per cent margins on collateral loans. This fact in itself was conclusive evidence that the banker knew that the stocks he was accepting as security for loans were priced at fictitious levels. Under Causes of the Panic §1 the policy pursued, he was forced, of course, to insist upon an excessive margin for every loan in order to insure at least a sound margin of safety in the event that a collapse did take place.” Thus Mr. Cahill finds that “the real major cause of the collapse was the rash and reckless purchasing of fictitious values on credit.” Doubtless bankers thought they knew that stocks were being priced at fictitious levels, although the evidence on which they thought so is subject to review and critical analysis. All that they really knew was that stocks had risen rapidly. Undoubtedly bankers were justified in taking alarm, not so much over the rapidly advancing prices of securities, as because of the vast number and amount of borrowings of banks on collateral or of borrowing with brokers as intermediaries, as reflected in the huge totals of margin accounts. Because of this manifest Overextension on the part of thousands of borrowers, the banks were right in demanding high collateral. It is tragically true, whether or not the high level of stock prices was justified, that bankers all over the country, despite their efforts, failed to increase their marginal demands for collateral to a point where the market could maintain a technically sound position. As early as August 12th, Senator Nye, of North Dakota, had claimed that a “tremendous proportion of the country’s money and credit is being sucked up from the interior, and, as one high authority expressed it, ‘phoned’ into Wall Street.” 52 The Stock Market Crash—dAnd After In this remark Senator Nye was merely reflecting the impression of many in assuming that there was only so much credit to go around and that Wall Street was making money scarce and dear for business. Those who held this view ignored the fact that bank reserves were high and that the “tight money” policy of the Federal Reserve System might at any time have been revised. “Boom” Enthusiasm Senator Robinson of Arkansas declared, and with some real basis in fact, in a formal statement on October 30, 1929, that if the foundation of the belief of ruined investors was faith in the strong position of American industry, it was also true that “no less personalities than a former President of the United States, the Secretary of the Treasury, and the former Secretary of Commerce, now President, contributed by unduly and repeated optimistic statements to the creation of enthusiastic if not frenzied ventures in stocks.” No doubt the “Coolidge boom" and the “Hoover boom” engendered such public enthusiasm, accompanied as they were by repeated statements of the country’s prosperity and expected increases in prosperity. These statements led thousands of investors into undue borrowings in order to realize the benefits of this prosperity for themselves. But I cannot entirely agree with Professor Jacob H. Hollander, of Johns Hopkins University, in his view, expressed before the Academy of Political Science in New Causes of the Panic 53 York on November 22, 1929, that the public by bidding up the price of securities, “ignored yield and earnings in the belief that the country’s growth would increase the equity and boost the price” of shares of sound enterprises. No doubt their enthusiasm led them, as Professor Hollander asserts, to make no allowance for business recession, for speculative manipulation, or foreign disturbance. My own impression has been and still is that the market went up principally because of sound, justified expectations of earnings, and only partly because of unreasoning and unintelligent mania for buying. The reasons for this view will be elaborated later. Chief Cause in Unsound Credit Situation The very soundness of these prospects led to an unsound credit situation, that is, to general overextension of margin accounts. Bear raiders cleverly took advantage of this situation, selling “short” in large blocks, many of these stocks which had been unloaded upon the market and thrown into weak hands, thus precipitating distress selling and panic. An authority on the New York Stock Exchange, whose name is withheld, is disposed to assign to the raiders a causal 16le, but not one of supreme importance. He says: “I do not agree with some commentators as to the comparative importance of bear raiding in the break this fall. Undoubtedly, bear raiding was a factor in the decline. Yet the results of the Stock Exchange investigation into this question have shown 54 The Stock Market Crash—dAnd After that actually the short interest in the market was very small at a time when inevitably it would have been extensive had considerable short selling occurred earlier. This, in fact, was one great reason for the ‘air pockets’ in the market. One must always remember that a short seller, when he sells, is forced to become a compulsory buyer of stocks. In panics, frequently the short interest provides the only effective demand for shares, since margin purchasers are frightened or financially crippled, while investors wait for the bottom of the decline before invest ing. In 1914, when war broke out, the New York stock market was fortunate in possessing a very large short interest, and this fact accounts for the remarkable resistance shown by the stock market prices before the Exchange was compelled to close. In 1929, the situation was very different. For years bear traders had been very severely punished, and there had been little short selling in the market and practically no short interest. If we had had more short selling during the summer, it would have of course restrained the undue rise in share prices at that time, and would have provided bids in the market during October and November. The reason for the organization of the so-called ‘bankers’ pool’ arose from just this fact of an inadequate short interest in the market. Of course the Stock Exchange questionnaire was not aimed to halt short selling, although this perhaps was its psychological effect.” But as the panic proceeded, in part, at least, Causes of the Panic 55 through the bear raiding, it produced a vicious circle in which people were selling who wanted to buy. The “short selling” continued to hit the investor when he was down, until prices came to represent, not a lessened estimate of earnings at all, but an increased fear of individual insolvency. As this point was reached, the banks and brokers were protected by the action of the stock market on November 13th, in heading off possible bear raids by requiring all Stock Exchange members to report daily their “short” sales. Then the short selling stopped abruptly, prices rose and liquidation proceeded in an orderly manner. This caused those buyers who had been awaiting their chance to recognize that the market had at last “touched bottom.” They jumped in and bought, thus causing prices once more to register, to some extent, the public’s estimate of future prosbects of business. But this body of investors that took over the distress sales at the bottom constitutes a new public, not the old enthusiasts. These had in large measure been closed out. This new investing public lacks not only the old enthusiasm but also the old knowledge, although they are better controlled. They will be much more cautious than the holders who bid up the stock price level and will buy less on borrowed money. The resultant contraction of demand in the stock market may prevent prices for a long time from regaining their old height on the new plateau. CHAPTER IV THE THREAT TO BUSINESS THE first effect of the stock market crash was to make nearly everybody think that twenty-six billions lost in paper values of stocks listed on the New York Stock Exchange must impoverish the nation. If all that “money” had been lost, approximating the cost of the World War to the United States, what would be its effect on business? True, hundreds of millions of dollars had been put into Christmas Savings funds, and out of these sums much might be accomplished to keep business going until the end of the year. But would not the stock market panic be followed by an industrial panic or crisis, with all these billions of dollars lost in the market? A chill of fear swept the nation. Workmen discussed the panic anxiously with their families. Employers thought of loss of orders, shutdowns and hard times. To some the President's signalizing of the emergency by calling a national conference of business men accentuated the gravity of conditions. Thus Mr. H. Parker Willis, editor of the New York Journal of Commerce, said of Mr. Hoover's conferences: “Their psychology is certainly bad, because they give the impression that there is something very The Threat to Business C57 wrong with business, and that if it were not so, these meetings would be useless and would not be called. But it is certainly highly important to keep business moving steadily, in order to prevent the demand for goods from slowing down too much, and also to enable the customer to keep up his payments on installment purchases. If the Washington conferences really have the effect of maintaining a little more steadiness and activity in business they will probably be worth while.” As President Hoover himself has said, action counts, not words. Of necessity the Washington conferences dealt chiefly in words, because the action following their deliberation required a great deal of time before the moneys pledged for industrial programs could be applied. For the most part the country must take the situation as it is, with an undoubted record in business recession, already achieved. but also with many elements of reassurance. Evidence of Dislocation There are already evidences of some recession, the roots of which were in the declines of automobile production and building before the crash. These declines have doubtless been accentuated by the crash, but they represent a natural slowing down in these industries due to the fact that the public is nearer the “saturation point.” After the war there was a great dearth of building, and the attempt to fill the void led to a building boom which had largely spent itself during 1929. It is quite possible, indeed $8 The Stock Market Crash—dAnd After even probable, that builders and automobile producers, in their eagerness to take advantage of expanding income, overestimated the public capacity to absorb their products. That would naturally lead to a dislocation in application of labor and capital, and in these lines a throwing of men out of work until they could be absorbed in other lines. But such absorption takes time. Many months must elapse before the building program projected by the states and the national government can aid in this process. The effect of the market crash will take time to become fully manifest. Sales have a period of incubation lasting for several weeks or even months, so that a full assessment of the damage wrought by the panic in curtailing sales cannot be made at once. There had already been a fall of commodity prices during the summer of 1929. After seventeen weeks of uninterrupted decline, the general wholesale price level registered a fractional advance; my all-commodity index fell from 99.1, the high point of the year in the week of July 26, to 92.2 for the week ended November 22, a drop of nearly seven points. This was a swifter decline than any since the index attained its base of 1926 as equal to 100. Although the index fell by 7.5 points between November, 1926, and July, 1927, during a rather marked business recession, it then took twice as long as the decline in the index during 1929. Fortunately in neither case was the fall in prices very great, and the latest evidence points to a rise in the index. While prediction The Threat to Business 59 is always hazardous in economic statistics, and I wish to avoid making any definite prediction, it would not be surprising if at about the time this book is published the worst of the depression will have been felt and improvement may be looked for. Probably the slowest in recovery will be the stock market, for the reason that the large buyers who were responsible for high stock prices have had their wings clipped and their buying power destroyed or impaired. Their places cannot soon be taken, as it requires a long time for others to acquire their intimate knowledge of the prospects of individual concerns. Moreover, the faith in those prospects has been shattered by the crash itself, and the general trend toward stocks and away from bonds has been retarded. The business situation is reflected in the analysis of the National City Bank Circular for January, 1930, which compares the panic month of November, 1929, with business conditions during November of 1928. It contains a list of notable recessions, especially in the list of metals, with steel production down by 17.7 per cerit—probably on account of the decline in building and in automobile production, which had declined by 20 per cent, with New York City sales of motor cars down by 30 per cent. Building permits were down by 28 per cent, and building contracts by I7 per cent. Carloadings, an important index, had diminished by 5.4 per cent in this comparison. Consumption of electric power had diminished by 7.8 Per cent, sugar consumption by 25 per cent, rubber 60 The Stock Market Crash—And After consumption by 26 per cent, while exports were down by 17.8 per cent and imports up by 3.8 per cent. The decline in export figures seems to confirm the cabled reports of the position of world commodity markets which indicate a decline ascribed to the forced sales succeeding the American stock market crash and the fall of prices in foreign stock markets. Commodities were reported to have been “dumped” in many centers in order to meet losses incurred through the depression of security values. But this effect, as will be shown below, was chiefly psychological and had no basis in fact. The real effect of the stock market on business is in facilitating or impeding the financing of business enterprises, and in making available stock market profits for consumption. The psychological effect is naturally of a temporary character. In the present case, although it has done so at great expense to stockholders, the stock market has so adequately financed our leading corporations that it should be no great deterrent to business, if it is more difficult to obtain funds for business through the stock market during 1930. Regarding the third point, there is truth in the contention that stock market profits tend as a rule to stay in the market during periods of rising prices so that the makers of these profits, instead of cashing in, very often prefer to increase their paper wealth. On this account the decline in the stock market may not prove to have greatly curtailed consumption of commodities. The Threat to Business 61 But the threat to business most feared, namely, the twenty-six billion deflation in listed paper values, so full of sound and fury, signifies little. It is now more universally recognized that in the fall of paper values there had been merely a transfer of wealth, not a destruction of any physical wealth, even if there were a lowered valuation. This is because the crisis, unlike the 1920 crisis was not a violent fall of an inflated commodity price level. Business stoppage and unemployment could hardly follow a stock panic, because such a case wipes out profits and substitutes losses, and no concern can afford long to run at a loss. But such a loss could hardly follow a stock panic. It is true that there was danger from the panic to business in the huge transfer of security holdings from one set of owners to another set from the poorer to the richer, which might in some measure deplete the purchasing power of consumers of the middle class. But the slump in stock prices destroyed no physical assets. As stock prices gradually rose from the panic bottom it was found that, to a large extent, the crash in prices had robbed thousands of Peters to pay a very few Pauls. There were the same factories in all the centers of industry producing the same line of goods, with a difference, so far as could be observed, that there was now a new set of shareholders. By the transfer there would be some dislocation in demand for goods. The sanguine buyer of stocks at the old high prices would no longer own the 62 The Stock Market Crash—And After nation’s industries; more conservative buyers would own them through their stock holdings. This new set of stock owners will doubtless be more cautious in buying goods. They will save more money for investment. On this account, but chiefly on account of the dislocation, consumer demand will be affected. But if the industrial leaders maintain their confidence in the soundness of business conditions and the prospects of future prosperity, there can be little or no recession in industry. That the purchasing power of the bulk of the nation cannot be greatly impaired may be inferred from the studies, just published, by the National Bureau of Economic Research, which show that 99 per cent of income receivers in the United States have incomes below $9,000 and that 50 per cent of these incomes are below $1,100. It seems inconceivable that any substantial number of those whose incomes are below $1,100 should have suffered loss in the recent stock market crash. It is improbable that a large percentage of the 9g per cent of income receivers having incomes less than $9,000 were in the stock market and suffered serious loss of income. These incomes consist mostly of wages and salaries, and the recipients could have little or no concern with a stock market panic. If this be true, the redistribution of corporate ownership due to the crash is mostly confined to the upper one or two per cent of the population. The result may be a somewhat greater concentration of stock ownership and wealth in the hands of a small The Threat to Business 63 group of the wealthiest class. The probable effect upon consumption and production would seem not to be great. But to the present holders of equity securities the income from their shares will go on as before. The shift in valuations compelled the former holders to sell when they would have liked to buy, because the real values were indicated by the continued income from stocks. Panic prices of stocks did not record the real valuation of them either by sellers or by buyers. They merely recorded distress selling. It should be remembered, also, that the majority of stock holdings were not concerned in the panic tradings, but remained where they were before the panic, namely, in strong-boxes. The owners of these holdings would not care whether the market had gone up or down, because they were not trading in securities ; they were relying upon the income of their stocks and were concerned only in the continuing cash dividends. Chief Danger That of Fear The chief danger, therefore, did not inhere in conditions at all. It was the danger of fear, panicky fear, which might be communicated from the stock market to business. “My only fear is the fear of fear” are the words of a courageous man. The measures taken under the leadership of President Hoover, therefore, were well calculated to allay fear. There was danger that business, out of the contagion of the stock panic, would refuse to make 64 The Stock Market Crash—dAnd After commitments. Because of such fear it might have suspended its plans for building factories. It might have retrenched in expenditures, it might have discharged employees, shut up works, and fallen into a state of paralysis which would spread as the unemployed in industry ceased to have purchasing power to sustain business. In that case, fear would have produced the same effect as if there were some reason in conditions themselves for a business depression. In particular, some business executives who sustained heavy personal losses in the stock market were, indeed, reduced to a state of panic, or overcaution in their commitments, so that they were not so ready to carry forward programs mapped out before the crash. Many executives in the important industrial concerns had believed in their own companies and had invested heavily in them. Undoubtedly this is true of the stocks of hundreds of companies. Under the impact of their losses these executives were actually frightened into beginning to curtail operations, not so much because it accorded with their deliberate and reasoned judgment, but because of the abnormal state. of mind into which they had been thrown because of their personal losses. To the extent that these executives did shut down their shops or withhold business expenditures, their acts, engendered by fear, would cause unemployment and maldistribution of consumer purchasing power. In such a situation the emergency measures taken by the President and the United States Chamber of Commerce were calculated to allay the first effects The Threat to Business 65 of panic, as communicated to business. The state of business itself, its condition and prospects during the years of the long bull market precedent to the panic, need careful and convincing attestment to banish doubts as to its fundamental soundness. This will be the task of the succeeding chapters on plowedback earnings and the ratio which the ascending level of stock prices, culminating in a new plateau, has sustained to profits. If it can be shown that business was in an extraordinarily healthy condition, taken as a whole, during these years and up to the present, it will be seen that the new plateau of stock prices which remains after the panic higher than all previous plateaus, was justified, even though the peak of September, 1929, rose too high. CHAPTER V PLOWED-BACK EARNINGS THE increase both in dividend payments and in plowed-back earnings during 1929 over 1928, was not only a primal cause of the new plateau of stock prices, but gave promise of continuing prosperity to business for 1930. This increase should minimize the effects of the panic, which was largely restricted to the stock market. When earnings are turned back into a business it is in order to increase the rate of profits according to the same method by which interest is compounded on savings. There has always been a plowing-back of earnings, but it has been especially done in the last few years. In measuring the average annual rate of change in the economic movements in the United States from 1922 to 1927, inclusive, President Hoover's Committee on Recent Economic Changes shows that the rate of profits, or earnings, for industrial corporations has increased by 9 per cent yearly, and the rate of dividend payments for industrial and miscellancous corporations has increased yearly by 6.8 per zent. These figures imply that the increase in the average Plowed-Back Earnings 67 annual rate plowed-back for the six years—ig2a-1927, inclusive, was over 9 per cent per annum; in fact, if the dividends to start with were half the earnings, the earnings plowed-back amounted to 11.2 per cent. Edgar L. Smith, in his book Common Stocks as Long Term Investments, made a study of the stock market, in which he found a material increase in prices of common stocks of between 2 to 3 per cent per annum on the average, and sometimes a far greater increase. He inferred that this must be mainly due to plowing-back. Why Stocks Rise Faster Than Earnings The report on Recent Economic Changes includes the record of an advance in the prices of industrial stocks, 1922-1927, at a rate of 14.1 per cent a year, which for that period exceeds the rate of gain in dividend payments and of increase in profits. Yet an important element in the increase in the level of common stock prices was undoubtedly this increased rate at which profits were achieved and plowed-back into industrial undertakings. The percentage increase in prices of stocks should be equal to the percentage increase in earnings per share if the ratio of price to earnings were to remain constant. For common stock this would be faster than the total profits of the company, which were 9 per cent. As the rate of return on preferred stocks, being fixed by contract, cannot increase during prosperity, their share of it is absorbed by the equity shares, which 68 The Stock Market Crash—dAnd After would, therefore, rise in price faster than the increase in rate of company earnings. Since 1927, those gains have been continued. During the whole period since 1922, the wholesale scrapping of old equipment and installation of new machifery and inventions have been accomplished with the increase of prosperity because corporations have become more and more hungry for money to exploit the future. All these new inventions required added capital, and the stockholder has had to forego a large part of his dividends in consequence, while the rate of plowing-back has increased since 1927. The November, 1929, bulletin of the National City Bank of New York includes a summary of net profits in published corporation reports covering the third quarter and first nine months of 1929, with comparative figures for the corresponding periods of 1928. The net profits are calculated after all charges but before any dividends, with few exceptions, and are limited to the broad industrial groups with a view to furnishing a representative picture of American business in its various divisions. The compilation excludes financial organizations such as banks, insurance companies. investment trusts and SO On. Swift Rise in Net Profits The combined net profits of approximately 600 companies in this compilation amounted, for the third quarter of 1929, to $1,142,302,000 as compared with $1,001,244,000 in the third quarter of 1928. Plowed-Back Earnings That was a gain of 14 per cent. For the first nine months the same 600 companies had net profits of $3,223,620,000 as compared with $2,679,934,000 for the corresponding nine months of 1928; a gain of $543,000,000, or 20 per cent! The circular of the National City Bank adds the following comment : “This showing is excellent in itself, but must be regarded as particularly impressive considering the fact that the comparison is with 1928, a year that surpassed all previous records in earnings.” This record is eloquent in justification of a heightened level of common stock prices during 1929. Excluding railroads and utilities, the manufacturing and trading companies revealed in the third quarter of 1929 a gain of 15 per cent over the same Quarter of 1928, and of 26 per cent for the full nine months over the corresponding months of 1928. 1929 Profits Rise Faster Than Stocks That is an increase in profits at a greater rate than the increase in stock prices, even during its record climb of 1928 and 1929, with the exception of two or three months antedating the panic. Similar comparisons of increased gains for industrial utilities and railroads are found in the estimates of total and plowed-back earnings calculated from the averages of the Standard Statistics Company, Inc, and from the compilations of Ernst & Ernst, accountants. The Corporation Earnings Bulletin of Ernst & Ernst for the first nine months of 1929 showed that 22° soo 75 20 RAILROADS 1926 = 100 3TOC” PRICES ~ n=3 Te 1828 1920 CHART 6.—Net railway earnings show an upward trend from the first quarter of 1928 to the fourth quarter of 1929, more marked than the upward trend of stock prices. 22% 200 Tr [ALL INDUSTRIES] 19262100 STOCK PRICES 225) A 4 LY D-SQOFT 30 IO28 1027 1928 1928 ural CHART 7.—Upward trend of industrial net profits since 1927 has been more pronounced than the rise of industrial common stock prices. Plowed-Back Earnings 71 the net earnings of 271 industrials were 27.04 per cent higher than for the corresponding nine months of 1928; of utilities, 17.48 per cent higher, and of railroads, 17 per cent higher. These earnings increased at a faster rate during 1929 than the level of stock prices. This is a prime 22C 200 75 PUBLIC UTILITIES TELEPHONE COMPANIES 1926 =100 A 0) 5TOCK PRICFS-30 Yi, 1926 Yel 2H 1920 Cuarr 8.—Upward trend of Public Utility common shares during latter half of 1929 reflects discounting of anticipated future profits from mergers, . . 2 reason for the increased price level of stocks in 1929 over 1928, and helps justify the conclusion tha ’ . stocks were not so much too high as comm y thought. A comparison of the third quarter of 1929, which included the first month of the stock market break leading to panic, showed for 224 industrials net earnings 15.77 per cent higher than for the third quarter 72 The Stock Market Crash—dAnd After of 1928, but 5.72 per cent lower than for the second quarter of 1929. This estimate approximates that of the National City Bank. Net earnings had increased faster than the level of stock prices during the periods compared. Recession in Fall of 1929 Moreover, the bulletin states that the recessions of profits during the third quarter were not ‘‘entirely attributable to a lessening of regular activity,” because they included seasonal recession during part or all of the third quarter under the divisions of automobiles and trucks, auto parts and accessories, business equipment, restaurant chains, and wearing apparel. Nevertheless, there was some tendency downward in business as a whole during this quarter of 1929, with indications of further recession for the fourth quarter. But the bulletin concludes that normally satisfactory earnings for the year as a whole seemed assured. This was because of the tremendous gain which the nine months’ figures revealed over the corresponding period of 1928, “which, in itself, was a high point of business activity for the post-war years.” In judging earnings for the third quarter, also, it must be considered that there was an unprecedented rate of business operation during the summer months of 1929, when a seasonal recession would be expected. There would then be a slackening of pace for the latter part of the third quarter; yet the earnings figures indicated that the third quarter had in- COMPARISON or CASH DIVIDENDS ano TOTAL EARNINGS INDUSTRIALS AS PERCENTS OF MARKET PRICES PERCENT IO ® ~ LEGEND: [RT XPT vM J_J AS ON 1928 CASH CASH AND PLOWED BACK x A a M A MJ J AS O ND 19209 CHART 9.—~After June, 1929, there was a rapid increase in the rate both of cash dividends and plowed-back earnings. 74 The Stock Market Crash—And After creased satisfactorily over the corresponding period of 1928. That the gains of 1929 were extraordinary as compared with 1928, is indicated in the figures cited above. That the gains of 1928 were extraordinary is also shown by a study of 914 companies published by Ernst & Ernst in their bulletin of May, 1929, that records corporation balance sheets at the end of 1928. These had increased by 9.18 per cent in current assets at the close of 1928, as compared with the close of 1927; in net working capital they had increased by 8.86 per cent and in cash and marketable securities by 19.09 per cent. The latter item shows clearly that inventories and accounts receivable had been carefully controlled, and that inventories were conservative at the close of 1928 in relation to sales, as compared with 1927. Changes in corporation profits during 1923 to 1927, inclusive, according to Recent Economic Changes, show extraordinary increases through the entire range, with the exception of railroad equipment, clothing, textiles and coal, which recorded decreases ranging from .1 per cent to 48 per cent in the average annual rate of change; also, in motor accessories, building supplies and paper, with decreases ranging from 1 per cent to 4.4 per cent. In all the rest of the industries great increases were registered—Ileather and shoes by 28.8 per cent for 1927 as compared with 1923; motors by 22.5 per cent; amusements by 18.9 per cent; miscellaneous industries by 1¢ per cent: machine and machine man- Plowed-Back Earnings 75 ufacturing by 14.9 per cent; metals and mining by 13.9 per cent; stores by 12.4 per cent; chemicals and drugs by 12.3 per cent; rubber by 11.3 per cent; tobacco.by 9.2 per cent; oils by 6.7 per cent; food and food products by 4.7 per cent. Class 1 railroads increased profits by 4.2 per cent in 1927, as compared with 1923. Moreover, dividend and interest payments increased by 7 per cent in average annual rate of change from 1922 to 1927, inclusive. The total dividend payments of street railways, industrial and miscellaneous corporations and steam railroads increased yearly in this period by 6.7 per cent, ranging from 4.5 per cent increase for steam railroads to 12.5 per cent for street railways, with a 6.8 per cent increase for industrial and miscellaneous. In the same period 1923 to 1927, inclusive, of expanding production and rising profits, the report on Recent Economic Changes says that while the number of business failures increased by about 1 per cent a year, yet the liabilities of business failures declined at a rate in excess of ¢ per cent a year. “No-Net-Income” Corporations There remains to be considered the large percentage of returns of corporations which show “no net income.” According to the analysis by the Bureau of Internal Revenue of the U. S. Treasury Department 54.7 per cent of all corporate tax returns are found to be companies with net incomes in 1927. The remaining 45.3 per cent embrace corpo- 76 ~~ The Stock Market Crash—dAnd After rations that are either inactive or have no net income. The lowest percentage of firms reporting net income was registered in 1921, when 48.05 per cent were so conditioned. The highest percentage occurring in 1917, was 66.04. ‘“No-net-income” corporations averaged lowest in 1917 and highest in 1921, with a percentage of 34.91 in 1927; inactive corporations for that year were 10.39 per cent of the total. In addition to these data, a new light is thrown on the question of proportion of no-profit corporations, as well as upon that of the real profits of all corporations by the researches of Carl Snyder, of the Federal Reserve Bank of New York. Mr. Snyder calculates that the average annual net profits of all corporations, year in and year out, amount to about IO per cent on gross income, and that they are not to be reckoned by returns that show “no net profits” for tax purposes. Mr. Snyder finds that of 455,000 corporations some two to three thousand do from 70 per cent to 90 per cent of the nation’s business. Fully three quarters of these reporting do a small business of $200 a week or less. These might, as indeed, a large part of them do, absorb their real net profits in salaries of officials. Such is the case with about half of the reporting corporations, as estimated by Mr. Snyder. In addition, many forms of corporations, such as incorporated estates, make officials of their beneficiaries who absorb profits as salaries. Plowed-Back Earnings No rules have thus far been devised to prevent this concealment of net returns in salaries. Governments cannot fix salaries. In one prosperous concern it was found that the President, holding control, regularly voted himself two-thirds of the net earnings as salary. Stockholders protested, but did not carry their protest to the courts, and finally acquiesced. The inference from income reports, therefore, that an average of 40 per cent of concerns make no profit ignores this factor of officers’ salaries, and is hardly borne out by the average of failures of only one per cent a year to the total of business concerns. At any rate, in a large proportion of 40 per cent reporting no profits for tax purposes, there seems little danger of bankruptcy. Mr. Snyder concludes that a truer picture might be drawn of net incomes for all corporations by figures that include interest, cash dividends, and officers’ salaries. Moreover, he deducts the reported deficits by adding the reserved part of the real earnings, thus arriving at a figure double the reported net earnings. The compensation of officers for 1924, the year last reported, was $2,600,000,000. Itis to be hoped that the custom of reporting this item separately will be resumed in future revenue reports. 77 Net Corporate Incomes, as Revised Mr. Snyder's method of picturing net income finds the $9,673,402,089 net income reported for tax pur-Poses for 1926 expanded to a true or revised net 78 The Stock Market Crash—And After income of $14,033,000,000. Even for the depression year 1921, despite the heavy losses of inventories in that year, the revised net income figure is $5,858,000,000. To these estimates Mr. Snyder adds a reckoning of revised net income reported by individuals doing business and by partnerships. In this he assumes that the percentage of net to gross income is the same as for corporate net to gross. He has also estimated the total gross income of all business which rose from $145,000,000,000 in 1919 to $222,000,000,-000 in 1926. Despite the growing share in total business done by the larger corporations, the revised net income of individuals has also expanded, in Mr. Snyder's calculations, from $3,878,000,000 in 1919 to $6,281,-000,000 In 1929. It appears, therefore, that individuals in business are suffering no extreme hardship in competition with larger corporate units. So long as the larger aggregations of capital can buy the assets of many concerns and fix their prices, they have undoubted advantage over individuals who may not even combine in price agreements that prevent cutthroat competition. The larger corporate form has advantages, also, in economies of largescale production that account for a steady advance in proportion of business done. But it would appear that for the business of the country as a whole, net income is by no means low and there is no dearth of distributed products. These are increasing. But the ratio of reserved profits, of profits saved for a “rainy Plowed-Back Earnings day” or plowed-back into business for larger future corporate returns, has likewise risen. Prosperity Rooted in War Earnings The roots of the prosperity that attended the long bull market were partly in the thrifty corporate handling of profits during the War. As prices rose rapidly in the execution of war contracts, larger and larger proportions of profits were plowed-back into renewals and extensions. of plant. In individual hands these profits might easily have been squandered. But with corporate management —especially with the practice of war-time economy and the wish of the larger stockholders to avoid surtaxes—dividends were quite generally kept at Per cent on par value while earnings kept up to 10 per cent, in some cases, and, even to 25 per cent a year. 79 Such abnormal profits were due primarily to the rising price level, or lessened purchasing power of the dollar, which helped the stockholder at the expense of the bondholder. The withholding of profits, thus effected, increased enormously the reserve productive power of the nation. It fertilized, so to speak, the topsoil of business production and stirred its subsoil. The result was a deeper-rooted growth of business, of which the increased cash returns were the thrifty fruitage from stocks representing adequately the entire market. During this period of war and post-war prosperity the mounting billions of deposits placed in savings 80 The Stock Market Crash—dAnd After banks and with insurance companies, indicated that the harvest of dividends was not being spent too fast in individual consumption. Indeed, there were plausible arguments during recent years that the time had come to spend more in order to utilize the augmented flow of a higher powered industry, since an increased standard of living was what had been sought by all this saving and reinvestment. As wages increased with growing unit production of workers, the wage earners of many corporations shared as investors in their securities, and the augmented investor class received an augmented income from its holdings. All this told in favor of increased demand from the mass of consumers, better proportioned to the increase of the well-directed productive energies of the nation. From this added demand further profits were reaped. During the long bull market there was the record of increased real income, while plowed-back earnings gave promise of future values resident in the productive and consuming plant of the nation that were properly reflected in a heightened level of stock prices. CHAPTER VI CHANGED RATIO OF PRICES TO EARNINGS ARE the conclusions of the preceding chapter, with respect to the increased rate of plowed-back earnings, stated with too great optimism? One friend, who is an authority on prices and earnings, fears that I have put myself “in the position of one who is trying to talk the stock market up from the current level—trying to prove that prices should go higher.” Another friend also feels that my presentation looks like “making out a case” for the one point of view; that it does not give due weight to counterbalancing considerations. Still another puts in a cautioning word that there is “some evidence that recent stock splits and so on, had been tending to reduce the proportion of earnings ‘plowed-in.'” All these friends are qualified experts. Their divergent and sometimes conflicting opinions have been carefully weighed. Whether I am oversanguine with respect to the retention of the present plateau of stock prices—and by this I do not necessarily mean a return to the peak of September, 1929—it is a fact that my original estimates of the proper height of this plateau have undergone some modification. A well-known expert d. PRICE EARNINGS RATIO dont 1929 dabei} i928 ING Ea Ol 1928 Jo2 CREASE — 1929 ALL INDUSTRIALS STANDARD STATISTICS Ce he JAN. FEB. MAR. APR. MAY JUNE JUL. AUG. SEPT. OCT. NOV. DEC CuART 10~—For all Industrial common shares earnings increased far more rapidly than the increase of stock prices during 1929. But this group is open to the objection that it is a variable group of stocks. 3 Changed Ratio of Prices to Earnings 83 who has read a draft of this book believes that twothirds of the rise of stocks since 1926 was justified by earnings; that is, a rectified price level should be at 167, on the basis of 100 for 1926. My own picture of the proper level of the plateau is only slightly higher, say 175, on the basis of 1926. It is, of course, impossible to tell to what extent stock split-ups, and inability to earn future dividends at a rate comparable to the increase of savings at compound interest, are possible for companies plowingback their earnings; or to what extent they are understating their earnings. But a rough measure of their average success in increasing the rate of earnings is to be found in a comparison of the rate of increase in stock prices during 1929 with the rate of increase in total earnings for that year, as compared with 1928. Inflation Preceding the Crash With respect to the quarter immediately preceding the stock market break, it has been stated that stock prices were rising much more rapidly than earnings. Thus Mr. Laurence H. Sloan testifies concerning the calculations of the Standard Statistics Company: “Our index of the market value of 405 leading industrial, utility, and rail issues rose, during the three months immediately preceding mid-September, at the rate of 76 per cent per year. At the same time it was clear that earnings of leading industrial concerns could not, by any stretch of the imagina- 84 The Stock Market Crash—dAnd After tion, increase more than 2§ per cent this year as compared with 1928. Stock prices, therefore, were rising three times more rapidly than earnings. The future was being mortgaged further and further ahead. There was no statistical precedent by which to judge to what degree prices were entitled to outrun earnings, but when stock quotations get to stepping thrice as high and handsomely as the intrinsic values behind them, it should be time for careful people to stop, look, and listen.” It was apparently during this three-month period prior to the break’ that speculation became feverish and unhealthy and stock prices mounted to a dangerous peak. It remains, however, that for the first nine months of 1929 the Standard Statistics computations show that prices of industrial stocks, in their relation to total earnings, distributed and undistributed, averaged lower during 1929, up to the panic of October and November, than during all of 1928. {See Chart 10.) Had there been inflation in the stock price level from the standpoint of earnings due to fundamentally unsound conditions of business and earnings during 1929, it would presumably be reflected in a higher and not a lower ratio of stock prices to earnings. Instead, earnings of stocks on the average went up during 1929 slightly faster than prices on the New York Stock Exchange. It is nevertheless true that the averages fail to give a complete picture. A correspondent notes that the “actual danger lay in an excessive inflation of the Changed Ratio of Prices to Earnings 83 prices of a few active stocks; this was the weak link of the chain; some of the supposedly conservative investment trusts were buying certain stocks at insanity levels.” Doubtless this accounts largely for the rapid increase in price of certain stocks as compared with the increase in their rate of total earnings during the months immediately preceding the break. But it is important to note that during 1929, as compared with 1928, the price earnings ratio fell not only on the average, but for a majority of the individual stocks listed in the Standard Statistics Company’s compilation. The increase in the price earnings ratio for public utilities during the first nine months of 1929 was due to the greatly enhanced expectation of earnings on account of the mergers in this field and accompanying introduction of sweeping economies in operation. Up to a certain point this increase in the ratio was justified. Also, in the cases of the great majority of stocks, while prices were going up, earnings were rising faster than prices. When during 1928 people bought on a high price-earnings ratio, expecting the earnings to go up still further, they were justified so far as the next year, 1929, was concerned, and during that year—at least, until the ninety days preceding the panic—the high market seems to be justified on the basis of anticipated earnings, which were behaving as expected. It seemed extremely probable that 1930 would show still higher earnings and go on justifying the situation of buyers in 1928 on a rising market. PRICE EARNINGS RATIO lL . 1929 25h ahidder Fhlnbd —{c28-i devessne EE GE INDUSTRIALS FIXED GROUP 45 STOCKS 1928 DEC li — 3. JAN, FEB. MAR. APR. MAY JUNE JUL. AUG. SEPT. OCT. Nov. DEC. CHART r1.—Standard Statistics Data. A steady trend downward in the price-earnings ratio during 1928—that is, the number of times industrial common stock prices were of earnings—indicates that while the market price level was climbing earnings were climbing at a greater rate. At the market high during September, the priceearnings ratio actually decreased as compared with September, 1928. 14 PRICE EARNINGS RATIO Ed aessvansee plliranees sespenes Bo = essasactmesnene: To 2 DECREASE arg. ho Tome LAL INCREASE LL RAILROADS XED GROUP 25 STOCKS ECREASE AUG. SEPT. OCT. NOV. DEC. CHART 12.—Standard Statistics Data! Fixed group of rail stocks shows decline in price-earnings ratio during four months preceding October-November break, denoting more rapid increase in rate of earnings than of common’ stock prices. 88 The Stock Market Crash—And After This is borne out by the accompanying Charts Nos. 11 and 12, denoting fixed groups of stocks that recorded a reduction in the price-earnings ratio during the months preceding the panic. The averages do not give a complete picture, and in that sense we cannot use the price earnings ratio as a very reliable comparison unless consideration is given to the behavior of the majority of stocks individually, because of the variability of the expected earnings. There are also difficulties to be faced in the choice of stocks that publish only annual earnings figures, and in those stocks where there is concealment of earnings for tax evasion purposes. Also, we must consider the various types of stocks that might enter into the ratio, seasoned and unseasoned. Thus some stocks are just reviving from the depression with the prospects of a great increase in earnings, but others are of the type of standard old-fashioned corporations without any such expectations. The price-earnings ratios of the old-fashioned type should be perhaps ten times annual earnings, which is the traditional ratio for a fair selling price for stocks during the period prior to 1922. But for the new type of rapidly expanding corporation the price-earnings ratio might be anywhere up to 100 to 1, or even literally to infinity in the initial stages of investment when earnings are not being realized. All corporations pass through this initial stage. During 1929 stocks were being selected with respect to their probabilities of future earnings. In Changed Ratio of Prices to Earnings 89 fact, there had been a careful choice among the general groups of stocks and within those groups. In this process the price-earnings ratio might properly go up in certain cases because the public thought stocks less risky than formerly on account of the principle of “safety through diversification” or for other reasons, or because the rate of interest or its equivalent for stocks as a “basis” of discounted future earnings had been reduced, or because the public expected a more rapid increase of earnings in the future than they did formerly. On these accounts the price-earnings ratio for common industrial stocks appears to have risen in the last few years only from an alleged, traditional ten to one, to a 1324 ratio in September, 1929, or by only 35 per cent. With so many causes at work, the average effect of any one of these causes evidently does not need to be great in order to account for the whole “mystery.” The price earnings ratio for industrials fell to 9.8 in November, 1929, from a high point of 16.2 in January of that year. This ratio of 9.8 is the lowest since May of 1927, the earliest month for which such statistics are available. Prior to November, 1929, the lowest ratio was 11.2 for May, 1927; the highest was 16.2 for January, 1929; so that the fall in November was to a point 40 per cent below the highest recorded. Static Conditions Have Given Way Thus, except for a few months in 1920 preced- 90 The Stock Market Crash—And After ing the panic, it would seem that the level of stock prices was constantly at a slower rate of increase than the rate of earnings of corporations. As compared with 1928, this ratio had been reduced by careful selection of stocks in the market until the panic brought the entire level of stocks down to a point comparable with the old ten-to-one ratio that prevailed prior to the period of increased “tempo” in business, so thoroughly described in the report on Recent Economic Changes. That is too low a ratio of stock prices to earnings. The old static conditions of industry and trade have given way. We are in a dynamic world, where the old conception of any fixed ratio of earnings to prices of stocks as a proper ratio must yield to the demands of shifting scales of industrial effort. THe price-earnings ratio of bonded securities, of course, is relatively fixed for the life of each particular bond. For bonds the term “yield” is synonymous with earnings, while for stocks it is not. Bond yields, the reciprocal of the price-to-cashearnings ratio, during 1929 ranged from 3.4 per cent for Liberty Bonds and 4.3 per cent for municipals, to 4.7 and 4.9 per cent for rails and utility bonds respectively. For industrial bonds it was s.1 per cent. The price earnings ratio for Liberty Bonds, for example, was 33 to 1. Leonard Ayres reports that during the twenty-eight years from 1900 through 1927, the market prices of dividend paying industrial common stocks averaged about sixteen times as much as their dollar dividends; that during the same period the prices of a list of high- Changed Ratio of Prices to Earnings 91 grade rail bonds averaged about twenty-two times as much as their dollar yield. Relationship between the yields was that of eleven to eight. But unlike the fixed relation of bond prices to bond yields, the price-earnings ratio for stock should reflect not only current earnings but expected earnings. That is why the price-earnings ratios should not be fixed to any standard, but wholly with reference to expected earnings of different stocks. At the average price-earnings ratio of ten to one, which prevailed after the panic, however, it should be noted that while the stock exchange had endured the severest break in history, this did not suffice to shake the price level of stocks off a warrantably new high plateau which had been built up since 1922. Within a month the market rebounded to a level 21 per cent higher than the low of November 13th— and that low was 30 per cent higher than the 1926 level of stock prices. A potent reason for the post-panic rebound of 1929 is found in the record of dividend payments and of corporation earnings for the first nine months of 1929. This, as reported by the New York Times, spelled a gain in real income and sound conditions of business that was reflected in cash dividends amounting to $3,122,000,000 during the first three Quarters of 1929, as against $2,395,000,000 during the like period of 1928. Cash dividends aggregated more than $399,000,000 during September, 1929, as contrasted with $278,000,000 during September, 1928, Moreover, greatly as cash dividends increased 92 The Stock Market Crash—dAnd After during 1929, the rate of plowing-back of earnings increased faster. The proportion of cash dividends to all earnings was $71 for every $100 in August, 1927, while the market was rising to its record high; it was $75 in August, 1928; but in August, 1929, this proportion had fallen to $64 for cash dividends— although, in that ratio, they exceeded the total of 1928—that is, $64 for every $100 of the expanded total of earnings, the rate of which rose from 7 per cent during August, 1928, to 714 per cent during August, 1929. It hardly needs emphasizing that enhanced capital values, reflected by such figures of increased earnings, justified in large part the increase of the general level of stock prices during 1929. The high point for the week ended September 6, 1929, on my index of stock prices was 117 points above its lowest level after the beginning of 1926, which was the base year of the index. Rails were 69 points higher. Utilities rose by 167 points. The agricultural equipment groups rose by 427 per cent; the office equipment group rose by 407 per cent; electrical equipment increased by 357 per cent; motors by 269 per cent; chemicals by 251 per cent; coppers by 249 per cent, while various other groups increased by about 100 per cent in price for that week. So the general decline of 38 per cent in the price level from the highest week in September to the lowest week in November is a small fall compared with the rise of this prosperity plateau subsequent to 1926, a plateau of which the foundations stretch down to the recovery from the deflation of 1920-1921. Changed Ratio of Prices to Earnings 93 Selective Character of Market The decreasing ratio of stock prices to earnings during 1929 emphasizes what has already been said about the selective character of the stock market. It suffices to answer perhaps careless talk uttered prior to the panic and during its progress, that the market as a whole had been forced up chiefly by reckless indiscriminate speculation. President Simmons of the New York Stock Exchange drew attention, in his address before the Indiana Bankers’ Association on September 11, 1929, to what he called the intelligently selective nature of current stock price movements. Mr. Simmons commented in terms on the “marked discrimination shown by investors in select. ing certain issues and disregarding others” as a salu. tary consequence of the participation by the public in investment trusts and in experienced financial investment services. As the market marched to its peak about half of the groups listed receded in price, while half went up. Tobacco and tobacco products stocks went down. So did the Standard Statistics Company groups of theaters, motion pictures and amusements; textiles; sugar producing and refining; silk and silk goods; chain stores; retail trade; rayon; meat packing; leather and fertilizers, tires and rubber goods, automobile parts and accessories, automobiles and trucks, and apparel stocks. The rise, also, was selective. This was manifest in agricultural implements, airplanes, building equipment, chemicals, copper and brass, electrical equip- 94 The Stock Market Crash—dAnd After ment, food products, household products, machinery, mining and smelting, miscellaneous manufacturing services, office and business equipment, oil producing and refining, paper and paper products, radios, phonograph and musical instruments, railroad equipment, department stores, shipping and shipbuilding, shoes, steel and iron, United States Steel, utilities operating companies and holding companies, and telephone and telegraph companies. As in the market climb of 1929, sO In its recession of September and October, the selective principle was still largely operative. It is shown in the records of my indexes of stock prices from the high of 209.7 for industrials during the week ended September 6th, based on the average of 1926 as 100. For the week ended November 1 sth, this index fell to 130.1, equivalent to a decline of 38 per cent, while the extreme speculative stocks declined by so per cent. During this interval railroad stocks fell by 26 per cent, while public utilities fell by 43 per cent in price. But during November the best stocks fell, and often because they were the best known, because bought on borrowed money. In the rebound upward during the month following November 15th, to and including the week ended December 13th, the first-grade investment industrials increased by 14 per cent; semi-speculative industrials increased by 11 per cent, while the third or speculative class increased by 1 3 per cent—showing intelligent selection at work favoring the high-grade investment stocks, but not so marked as between the speculative grades. Changed Ratio of Prices to Earnings 95 In no period during 1929 did stocks generally go down together or rise together indiscriminately, except at the height of the panic; but during the entire year, and not excepting the worst of the panic period, the new plateau of the market stood firm on its foundation of unexampled national prosperity. As illustrative of this truth, the Boston News Bureau has published a table showing 1929 low prices, established in most cases during November, and what these prices represent in terms of the former capitalization, after taking into account split-ups and extra stock dividends. The high prices in 1923 are also indicated for comparison. No consideration is given to “rights” or regular stock dividends. In this table it is shown, for example, that Radio Corporation with a 550 per cent appreciation leads the group in percentage rise, while General Electric takes the honors from the standpoint of appreciation in dollars per share. The Bureau states that had consideration been given to the distribution of Electric Bond and Share stock to General Electric shareholders, together with subsequent split-ups and “rights” on that issue, General Electric would unquestionably be the star performer from both angles. The records of such issues as Anaconda, American Telephone, Liggett & Myers “B”, Montgomery-Ward, Reynolds Tobacco “B”, and the railroad shares, would show up better if “rights” were taken into consideration. For instance, the Bureau says, in the case of Montgomery-Ward the “rights” issued in November, 1928, fluctuated between $19¢ and 96 The Stock Market Crash—And After $270 before they expired. “Rights” attached to other issues were not so valuable. The equivalent price in the case of General Motors, for instance, is arrived at by the Bureau in the following manner. The stock which made a 1923 high of 1714 was exchanged on the basis of one new share for each four shares, thus reducing the number of shares to one quarter of the previous number outstanding. Then a 50 per cent stock dividend was declared, followed by a two for one split-up and a still later two and one-half for one split-up. The comparative list, with fractions omitted from the last four of the five columns is as follows * AppreciaTioN oF Pivorar Common SHARES From Tor PRICES OF 1923 To Low Prices DURING 1929 PANIC (Compilation by Boston News Bureau) Equiva lent 1929 low 77 197 s5d 86 90 62 193% 160 70 1953 30 103 633 rho 80} 70 80 68% -3% 80 -R ‘n23 Apprec. Apprec. -h 'n points in % 220 76 175 382 23 170 50 rox 32 26 Air Reduction .......... Allied Chemical ....... Allis Chalmers ......... American Can ......... American Locomotive .. American Smelting ..... American Tel. & Tel... American Tob. “B” .... Anaconda Atchison ......ceenvenn. Atlantic Refining ....... Baltimore & Ohio...... California Packing .... Ches. & Ohio ......... Cons. Gas ,....evuvennn Corn Products ......... DuPont ...oovovvnnnnns. General Electric ...... General Motors ........ Gillette Safety Razor ... Hudson Motors . + - 6 ro 186 193 320 70 195 120 10% 127 160 160 280 560 672 63 376 [33 t 2 59 53 105 160 60 7 24 69 160 148 202 17 292 22 45 40 76 91 120 412 470 46 34 19 75 46 90 132 75 278 235 271 29 3Q Changed Ratio of Prices to Earnings 97 APPRECIATION OF Pivorar ComMmoN SHARES—Continued Apprec. Apprec. in points in % 165 124 118 71 90 83 251 169 49 175 155 446 13 218 550 61 12 9 Int. Harvester ......... Int. Tel & Tel. ........ Kennecott ............. Liggett & Myers “B” ... Loew's, Inc. ............ Mont. Ward ........... Nash Motors ......... Nat. Biscuit ......ou0n.. N. Y. Central .......... North American ........ Otis Elevator .......... Packard Motor ......... Paramount Fam. Lasky. . Pub. Serv. of N. J. ..... Radio Corp. ........... Reynolds Tob. “B” ..... Southern Pacific ........ Stand. Oil of N. J....... Studebaker ........ Texas Corp. ........... Union Carbide ......... Union Pacific .......... United Fruit ........... U.S. Steel ......couvn.. Western Union ......... Westinghouse Elec. ..... Woolworth ............ 6g 23 498 80 12 19% 40 ‘ 140 140 160 160 66% 66 95 390 2 82 i, 105 54 162 26 26 39 i21 1o6 tob 48 = 4b 38% 03 at so 50 J? _ 59 177 67 10 164 *00 200 134 56 39 99 247 187 6o 32 150 210 123 97 80 I55 155 119 36 30 100 110 67 43 64 521 313 200 21 8 3 Here is a record of the appreciation of leading stocks, reckoned at the panic low of 1929, ranging from 8 per cent for Woolworth to 446 per cent for Packard Motors, and 550 per cent for Radio Corporation. This comparison establishes beyond peradventure the substantial appreciation of market values above the old plateau of 1915-22, and at a remarkable average percentage over the highs of 1923, even at the 1929 panic bottom, when the average price of industrial common stocks had fallen to less than ten times earnings. 98 The Stock Market Crash—dAnd After In the face of this record, the faults leading to the panic cannot be found in the industrial situation, or in the high activity of business and industry, or in the rate of earnings, or in an unsatisfactory range of ratios of stock prices to earnings. There was undoubtedly overextension of loans. There was a fever of speculation during the months immediately preceding the panic, which bid up prices to a peak that rose faster, for the time, than earnings seemed to warrant, But the precipitous fall in the market went too far, in the light of the sound reasons justifying the long bull market, namely, justifiable expectation of great and increasing earnings, the fact that they were so generously plowed-back, the warranted expectation of safety through diversification of investments, and, finally, a consequent lowered basis of discounting the future as apparently reflected in price earnings ratios. Was, then, the high price level of stocks during 1929 completely justified? Or were there also elements of unsoundness which explain the final intemperate rise of the bull market? As shown in Chapter II, Mr. Carl Snyder of the Federal Reserve Bank of New York finds that stocks had been seriously undervalued during the period of 1919 to 1924, as compared with the higher price level of commodities. The long rise in the commodity price level had increased the dollar earnings of common shares in terms of a 57-cent dollar. Bonds and preferred securities were precluded from absorbing their share of this increase, and the invest. Changed Ratio of Prices to Earmmngs 99 ing public during this period had failed to realize that stocks should go up in price not only at the rate of increase in the level of commodity prices, but still higher; because, according to the equity principle, common shares became the residuary legatee, so to speak, of the increased earnings which the preferred securities could not absorb. It was only as the public came to realize, largely through the writings of Edgar Lawrence Smith, that stocks were to be preferred to bonds during a period of dollar depreciation, that the bull market began in good earnest to cause a proper valuation of common shares. This movement was overdone, at any rate during the months immediately preceding the panic. As speculation became uncontrolled, stocks rose too fast and the investing public entered rapidly the phase of marginal overextension. This rendered the market subject to apprehension, bear attacks, and panics that produced a period of acute liquidation, bringing the ratio of stock prices to earnings below the proper expectation of future profits. Yet the overextension that produced this violent reaction was not all foolish. It may even be said that the speculation was, chiefly or largely, due to eagerness to profit by the great opportunities for future earnings that were justifiably expected. People went into debt to acquire stocks because they had sound reasons for these ‘‘great expectations.” Succeeding chapters will show the distinguishing reasons for the greater expectations of future earnings in the increased “tempo” of business and industry. This increased rate of activity is manifest in 100 The Stock Market Crash—And After invention and scientific research, industrial management, in labor’s cobperative policy, in the economies accompanying mergers, in the gains of prohibition, and in seven years of a stable price level and steadied purchasing power of the dollar. In all these respects the experts constituting the Committee on Recent Economic Changes appointed by Herbert Hoover have reported a speeding-up of production and exchange beyond any period of similar length. The conclusions of this committee have not been seriously challenged in any quarter. They have given rise, however, to extravagant claims which their findings do not warrant, to the effect that a “new era” differing radically from the long upward swing of progress that has characterized the industrial revolution is in progress. For those who sponsor these extravagant claims it is well to point out that, in the words of the Hoover Committee, the “distinctive character of the years from 1922 to 1929 owes less to fundamental change than to intensified activity.” But the fruits of jn. tensified activity are real. In a business sense they fructify in earnings, and in the increased expectation of earnings, which is discounted in a manner to increase the price level of common stocks. The chapters devoted to the elements of this intensified activity should enable the reader to gauge more accuratelv the future situation of the stock market than any contemplation of the damage wrought by the panic and its immediate causes would permit. CHAPTER VII THE AGE OF MERGERS THAT 1922-1927, and after, have witnessed an increased “tempo” or acceleration in the formation of mergers will hardly be disputed. One who reads the daily headlines sees that there is a “Race for Mergers in Steel”; “Large Mergers on Way in Utilities”; that there are merger moves in transmission and natural-gas pipe lines with systems of various kinds in nation-wide links, expected for economical reasons; that there is a “Plan Announced to Merge Investment Trusts”; that there is 2 “Vacuum Oil Merger with Standard Oil Near” with agreement for formation of a billion-dollar concern; that a department store merger has been formed; that there is a new aircraft merger afoot; that there is a multiple merger plan for the railroads authorized by Congress and published by the Interstate Commerce Commission; that there are bank mergers formed and forming from coast to coast, heralding the acceptance of branch banking, and that the continued increase in the number of mergers and consolidations in the trade association field is presaged by the steady growth of combinations in trade and industry. Mergers have had much to do with the increase in 101 102 The Stock Market Crash—dAnd After the stock price level during the long bull market. In the public utilities field, especially, mergers are responsible for the increase of stock prices to something like 26 times earnings up to the market crash in October, while the crash itself brought down the price-earnings ratio to 16 to 1 during November— as against only 1324 to 1 for the average of the whole market during the first nine months of 1929. Records of Merger Earnings Today mergers are generally regarded as inevitable, because they make for lower production costs. It is true that the reverse is sometimes the case, as the listed securities on the New York Stock Exchange have shown for many years. In fact, between 1922 and 1923, the Federal Trade Commission’s examination of costs and earnings in sixteen industries showed that the largest mergers were not so profitable as the concerns with investment of between $500,000 and $1,000,000. Of companies engaged in crude petroleum production the investment group recording over $25,000,000 capital had slightly smaller profits than companies averaging from $5,000,000 to $25,000,000; whereas in the petroleum refining group the companies averaging $100,000,000 and over showed the same percentage of return on capital investment as those under $1,000,000. These data, the Committee on Recent Economic Changes says, are by no means conclusive for industry as a whole. It notes as “highly significant” that in eight out of nine large production MERGERS RECORDED 1928 ss 221 11] Sone Hes , 4 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 CHART 13.—A concern “acquired,” means that one of the original companies persisted; nevertheless often an acquisition has the same significance as a merger. A merger, of course, means that several concerns have been organized as an entirely new corporation. Data are obtained from Recent Economic Changes (page 184), recording mergers and acquisitions in manufacturing and mining. 104 The Stock Market Crash—dAnd After industries, locomotives being the exception, the “large concerns have gained more than the middlesized establishments.” The report of the Committee ‘‘assumes that the advance in security prices of a group of concerns within an industry, relative to the other concerns in the industry, indicate that that group is making more of a success of its business than the other concerns.” If this assumption is correct, then the advance in utility stock prices, for example, is solidly based. Mr. Hoover's Committee discloses a situation which, it says, may have any one of several explanations. It adds: “It may indicate that the large concerns are finding the economies which the Federal Trade Commission figures for several years ago did not disclose at that time. It may indicate that the large concerns, because of modern methods and conditions of selling and distribution, are taking a larger and larger share of the nation’s business, as was indicated by the record of individual establishments given above. This may be even at a higher cost than their competitors. Or finally, it may indicate that the same dogma, which expresses itself so often in mergers and consolidations—the belief in the universal advantages of size and large-scale production—is thus expressing itself in the valuation of corporation securities” (pages 199, 200). The Committee's further study indicates that the “large concern will maintain steadier operation than an equivalent number of small concerns.” The explanation follows: The Age of Mergers 103 “The various small concerns will compensate for each other’s fluctuations to some extent, but the large concern will have the advantage in being better able to plan ahead, to study its market, and to take advantage of regional differences in business conditions. Furthermore, while various fluctuations of the small concerns may compensate for each other statistically, they do not do so economically. In each case the concern is required to maintain machinery and equipment sufficient to meet its maximum demand. The result is a total capacity greater than the single large company will find necessary. Finally, the wider fluctuations in the individual small companies will result in continual hiring and discharging of labor. Other small companies may stand ready to hire the man who has just been discharged, but unless a number of small companies are located in the same community, operation by small companies will tend to keep a larger number of men unemployed than when large companies dominate the industry.” Mergers Grow Despite Prejudices These considerations indicate why big business is coming into its own, and men talk in sanguine terms about the “Fordizing” of business. Only a short time ago there was great prejudice against big business of every kind, particularly when it was obtained by combination. But suddenly the pent-up pressure toward larger business units, in spite of public prejudice and the opposition of politicians, has broken free in a wonderful period of expansion. 106 The Stock Market Crash—dAnd After But it should be borne in mind that the economies from mergers take time to develop, while the effect on the stock market of their formation is instant. Sometimes, when from twelve to eighteen months elapse before economies are reflected in added dividends, the ratio of prices of merger stocks to earnings may seem to rise unduly. Yet an eventual continuous bettering of earnings may justify the higher prices. This, with its resultant economies of large-scale production, accounts in large measure for the great appreciation of security values during the last few years. During the Roosevelt and Wilson régimes there was an organized effort at “trust busting”; it was the popular sport of politicians, but in these days under Coolidge and Hoover, governmental authorities have gone the limit to stretch the Sherman Act and the Clayton Act in order to aid the move. ment for business efficiency, because so many now believe the interests of the people of the United States require big business. True, there are still prosecutions under the anti-trust laws, but they are fewer and not trumpeted for political effect. While we avoid the word “trust” today, we do have the same result through “mergers”; these have not fallen heir to the unpopularity of the trusts, but are recognized as a means of economy. In fact, amendments have been from time to time offered considerably modifying the Sherman Anti Trust Act, the Clayton Act and other anti-trust laws. In the last administration President Coolidge The Age of Mergers 107 and members of his cabinet urged this revision. The national Democratic platform included a plank which, while demanding strict enforcement of the anti-trust laws, called for “enactment of other laws” if necessary, to preserve the right of the small merchant and manufacturer by proper associational agreements to ‘earn a legitimate profit from his business.” President Hoover and the Republican party have approved combinations big and little. It is true that here and there a voice is raised against the rapid formation of mergers, such as that of Henry Ward Beer, President of the Federal Bar Association and formerly Assistant United States Attorney General. Mr. Beer predicted that the country would see a ‘new trust-busting crusade” when President-Elect Hoover should assume office. But there has been no crusade, and for obvious reasons. More, Betier, and Cheaper Goods Most mergers produce profits by producing more, better and cheaper commodities and services. That is why the Hahn system has formed a chain of department stores across the country to effect total sales of a billion a year. It is the reason for the pioneer Atlantic and Pacific chain of grocery stores, and for the Woolworth and Kresge chains. It is why Standard Industries, headed by Stone, Webster and Blodgett, Inc., has been formed to concentrate on promising enterprises and ‘‘create a new combination of business leadership and financial control,” 108 The Stock Market Crash—And After reaching all the way through from raw materials to manufacture, advertising, and distribution. Profits due to economies are the lure which brings about a $200,000,000 consolidation of the express systems of Adams, American, and American Railway Express. The $550,000,000 holding company of the International Paper organization; the movement following a ten-year survey, for effecting mergers in the lumber industry; the Fox chain of motion picture theatres with its goal of one million seating capacity in 1929; the merger of Radio Corporation of America and Victor Talking Machine interests, with $626,540,000 “to advance the reproducing art”; the du Ponts’ absorption of the United States Rubber Company; the formation by the Standard Oil Group of an export merger under the Webb Act; the union of six brass concerns to control 20 per cent of the national output of brass and copper; the merger of twelve dairy companies in the southwest; a rayon corporation “to link continents”; a mortgage merger to cover the nation; the merger of the cosmetic and perfume industry; the mergers being considered in the cement industry (the nation’s roads are rapidly being transformed into cement); the authorized mergers of the railway systems under the watchful eye of the Interstate Commerce Commission; the consolidation of power and light companies; the many mergers of great banking institutions; the merger of both wire and wireless telephone and telegraph communications advocated by Owen D. Young ;— The Age of Mergers 109 all these show the drift which has become a rush toward consolidation. These consolidations, existing and proposed, are to effect economies and to increase profits. The subsidiary companies of the old Standard Oil Company, which was dissolved in 1911 by decree of the Federal Supreme Court, have grown into a small group of billion-dollar companies. The New Jersey and California Standard Oil have each securities exceeding a billion in value, while those of the Indiana company are close to this sum, and the Standard of New York has risen to $660,000,000 in market value. The splitting up of the old company merely produced giant offspring, with dividends aggregating, during 1928, nearly $220,000,000 for the thirty components. What will the governmental authorities do with all these lusty “bigger and better” mergers, which operate sometimes contrary to the spirit if not to the letter of the anti-trust laws? That depends largely on what they do with themselves. No doubt holding companies are economically valuable in simplifying the financial structures. They introduce the immensely valuable insurance feature of diversification. The problem is: Can monopolies and unreasonable restraints of trade be prevented while these modern aggregations of capital use their facilities to gather business statistics, guard against inflated inventories. standardize their products, and arrive at price agreements that prevent losses formerly sustained by cutthroat competition ? 110 The Stock Market Crash—dAnd After How to Make Mergers Safe? President Hoover has provided a method for making mergers safe, permitting gains to the public and to investors while eliminating the abuses which were prevalent in the first era of the trust. Briefly, it is a method of trade conferences with the government which avail themselves of cobperation between the agencies of the people and private concerns and whole industries. In his preélection speech at St. Louis, on November 2, 1928, Mr. Hoover recounted at length how this method had worked out as between the Department of Commerce and the various industries. He recalled the agitation in Congress for laws to curb the lumber industry, saying: “In 1923, however, we created a series of committees among associations in the lumber industry, at their request. In the course of a gradual extension over five years we finally perfected a system for the grading of lumber and for guaranteeing those grades to the public, which is now carried out wholly by the lumber industry itself. Consequently during the last few years there has been no suggestion of such legislation from Congress. The savings to the public in the elimination of waste and fraud have been estimated by the industry as upwards of $250,000, 000 a year. “This is a clear case where by coéperative methods we have avoided the necessity of regulation, with the bureaucracy and interferences that flow from it. The Age of Mergers I11 It is also a clear case of building up of selfgovernment.” Similarly, William E. Humphrey, Chairman of the Federal Trade Commission, has described a “new policy” of the commission by “codperation and stipulation,” which gives ‘“‘opportunity for an industry to do away with any fraudulent or unfair practice” and “to regulate itself, to clean its own house, to make rules and regulations by common consent” —in short, to “achieve decency instead of having the government thrust decency upon it.” [t seems clear, therefore, that only when resort to codperation and self-government fails need the “laws with teeth in them” be invoked under President Hoover. Moreover, many exceptions to the law against restraints of trade have already been sanctioned by Congress. In the Clayton Act it was intended to exempt labor unions from the operation of the anti-trust laws, but the Supreme Court in a recent decision has so interpreted the law as to destroy the exemption. The power to approve agreements in “reasonable restraint” of trade made between competing American steamship owners fixing rates and allotting tonnage, was conferred by the Shipping Board Act. The Federal Reserve Act permits banks that compete in this country to cooperate in establishing banks abroad. The Webb Act allows vendors of American merchandise to combine in search of foreign trade. The Interstate Commerce Commission possesses large powers to fix railroad rates in order to prevent competitive rate- 112 The Stock Market Crash—And After cutting. The Capper-Volstead Act empowers agricultural associations to fix prices, restrict output, and limit trading territory. Leading court decisions indicate that, should Congress see fit to make reasonable price agreements legal, the courts would uphold them. Output Needs Controlling In two basic industries, namely, coal and oil, the need is acute for authority to form agreements in order to control production and marketing and thus prevent the enormous wastes due to overinvestment, overproduction, collapse of prices followed by shutting down of plants, wage reductions, and severe unemployment. On the other hand, it is axiomatic that any modification of the anti-trust laws should provide for public supervision and control to prevent great consolidated enterprises from setting unreasonable monopoly prices. Reasonable economy requires that the extraction of petroleum from the ground should be carried on in each producing area by an absolute monopoly instead of by competing companies as at present. Whether petroleum extraction is carried on as a government monopoly or a private monopoly subject to public control, the consumer of gasoline, and the hundreds of petroleum products must be protected. Careful estimates must be made of reasonable requirements of consumers of these products and only that quantity of crude petroleum should be brought to the surface, which will meet those reason- The Age of Mergers 113 able needs. In protecting the consumer, the law should also protect the producer against cutthroat competition with its “profitless prosperity” followed by bankruptcy and curtailment of output, resulting in prices even higher than would have existed under an organization to regulate output and prices. But much has already been done by way of legislation to protect producers and consumers against the wide fluctuations in output and prices in basic industries. Much has been done, also, through the agency of the Federal Reserve Board to stabilize more effectively the general price level for the protection of all producers and consumers everywhere against insidious changes in the value of the dollar, and consequent losses which cannot be guarded against by any trade association or combination. What has been said about the superior economies of mergers, and the consequent increase in the price level of their securities during the long bull market, does not mean that many corporations are not still on trial before the bar of public opinion. Professor William Z. Ripley of Harvard University did a public service a few years ago in exposing the misleading or inadequate financial statements from certain large companies. Professor Ripley contended that visibility might be aided by floodlights of publicity at the point where the Main Street of widespread popular investment crosses Wall Street. This suggestion, by the way, was originally advanced with special reference to railways more than a generation ago by Professor Arthur Twining Hadley, now Presidents 114 The Stock Market Crash—dAnd After Emeritus of Yale University, and even earlier by Charles Francis Adams, Js. Sovereign Remedy of Publicity Publicity is the sovereign remedy against merger evils today. Incidentally it might be pointed out that the real leader in this movement for greater corporate publicity has been the New York Stock Exchange. No other major stock exchange in the world has adopted such strict listing requirements in this and other respects, or has so ruthlessly disregarded its members’ earning power for the sake of prospective benefits to the investor from this source. The Exchange is, of course, unable to control the situation with the same inclusiveness that a national law could. The difficulty lies in the fact that incorporations are actually made by the individual States, and it is difficult, if not impossible, to secure uniform standards among them. The value of fuller corporate publicity has in a measure been shown in the recent stock market by the greater stability of railroad than other listed issues. American railroads must report earnings frequently under standard methods of bookkeeping prescribed by the Interstate Commerce Commission. The investor knows with a railroad security just about what he is buying. This is by no means the case with industrial securities, and the investor is largely forced to speculate on the accuracy of published industrial corporation statements. This ap- The Age of Mergers 1135 plies with particular force to statistics on the relationship between stock prices and their earnings. Our best companies particularly have often understated their earnings by charging off unusual sums for depreciation, and so on. Professor Ripley was right in urging on behalf of one of the minor parties in interest, the stockholders, publicity of corporate accounts. A true and complete balance sheet and income account, constituting a photograph of a company’s present condition and a lengthwise view of its management through a period of time, are essentials to be obtained by a stockholders’ committee or by such agencies as the Federal Trade Commission. Doubtless such a requirement in behalf of the investor is also in the interest of the consumer. Professor Ripley has likened the visitorial committee of stockholders, as an accomplishment in the field of finance, to the introduction of the company union in the field of labor. Thus the management is tied in, not only with its employees, but with a representative body of owners. Perhaps some day it may be tied in, also, with a representative committee of consumers entirely independent of the management. With publicity, the people are increasingly willing to believe, with the accumulation of evidence, that it is best served by large-scale industry engaged in mass production, with relatively large overhead expenses and relatively small running expenses. No one would think today of trying to force Henry Ford to 116 The Siock Market Crash—And After sell his various plants to independent producers and make them compete with each other. Despite the fact that this organization has made Ford one of the richest men in the world, the public appreciates the fact that he has given them a cheap car. The economies he and other captains of large industry have achieved are so surprisingly great that probably nothing can now stem the rising tide of mass production. The big examples of mass production today, as instanced by Henry Ford, General Motors, Westinghouse and General Electric, the great railway systems, the big banks and so on, have reduced costs to the consumer by reducing costs in general. Of course, their aim has been to increase their own profits; but this has usually been accomplished not by raising prices to the consumer but by reducing costs and generally even by reducing prices in order to command broader markets. To go back to the régime of small fixed charges and large unit costs would be detrimental to the consumer interests of the nation. It would mean wasteful production. It would result in-the instabilities of cutthroat competition. The railroads found out long ago, as Hadley expressed it, that “sometimes it pays to run at a loss.” A bankrupt railroad may change hands, but it cannot go out of business. It goes into the hands of a receiver, but it still runs; for to stop running would not stop the interest on the bonds representing the sunk capital. Today the enormous sums that are put into mass production The Age of Mergers 117 cannot be withdrawn any more than the ties of a railroad can be torn up overnight. Certain large industries have gained in public confidence and consequently in the value of their securities by publishing ‘important information about production, earnings, and expenditures. The motion picture industry and the building industry in New York are examples. The practice of retaining a general supervisor to vouch to the public for the honesty and decency of an industry's policies has apparently met with success. The financial reports of certain enlightened corporations, such as the United States Steel Corporation, General Motors, the Philadelphia Company, the Standard Gas and Electric Company, the Consolidated Cement Corporation and others have especially met with general approval as meeting the needs of the investor and the public. Some organizations may find it practicable and profitable to satisfy as fully the consumer interest, by securing independent certifications as to their products, methods and designs. We already have certified milk and other food and medicinal products, as to healthfulness, and certified elevators, boilers, and ships as to safety. The process might be extended. Such certification might be obtained under safeguards like those now thrown about the investigations and reports of public accountants. They would represent a substantial advance in the cause of truth in advertising, with a convincing appeal to the most important party in interest, the consumers, in constantly broadening markets for 118 The Stock Market Crash—And After an age of mass production. The more the industries themselves work in these directions, for the good of the consumer, the less the need of legislative interference and the greater the chance of their free development without hampering restrictions and according to the requirements of large-scale economy. CHAPTER VIII SCIENTIFIC RESEARCH AND INVENTION A PRIME reason for expecting future earnings to be greater was that we in America were applying science and invention to industry as we had never applied them before. [nventing is now a profession. Invention is today recognized as having a high cash value and is eagerly sought after by progressive corporations. The contrast with the past, even with a few years ago, is very great, and the contrast is enormous with a generation or a century ago. We still talk about the wonderful innovations— power looms, steam engines and locomotives and the various elements in the English “industrial revolution” of the eighteenth century—which had such a profound effect on business and banking. But let us see who invented these inventions. James Watt, inventor of the steam engine, was not a professional inventor. He was a maker of mathematical instruments. Richard Arkwright, who invented the spinning Jenny, was a barber. Edmund Cartwright, who invented the power loom, was a clergyman. Robert Fulton, who invented the steamboat, was a portrait painter. Invention was not then 110 120 The Stock Market Crash—dAnd After a vocation and was seldom appreciated until the inventor was dead and not even then unless the inven. tion was important. Even within the memory of men now living the business world looked askance upon inventors and upon scientific work in general, which was largely confined to the universities. The self-made business man would sometimes say that he would have nothing to do with a college-bred man in his establishment. On the other hand, the university man of the academic type, was equally contemptuous of the man who was merely making money. It is said of Professor Louis Agassiz that when he was asked why he did not use his brains to build up a fortune, he replied that he was too busy to make money. J. Willard Gibbs, the greatest scientist America ever produced, the Isaac Newton or Einstein of America, lived out his days obscure and unappreciated except among a small group of specialists. It is now said of Gibbs that unlike any other scientist, none of his work has ever been undone. It is also said that in the metallurgical industry alone, billions of dollars have been made, thanks to J. Willard Gibbs. But it probably never crossed his mind that he was laying the foundations for others to make money. His studies were made from the hope of pure science alone. But after 1919, something happened. The implications of it are not yet sufficiently gauged. It was of enough significance to cause President Hoover's Committee on Recent Economic Changes to remark Scientific Research and Invention 121 that “acceleration rather than structural change is the key to an understanding of our recent economic developments.” The committee added: “But the breadth and scale and ‘tempo’ of recent developments gives them new importance.” What has happened is indicated by the fact that in the United States, eight million three hundred thousand workers produced in 1925 one-quarter more than nine million wage workers turned out during 1919. The new indexes of the Federal Reserve Board measuring industrial production record this gratifying advance which reflects an increase in the American standard of living. The indexes cover, directly and indirectly, four-fifths of the industrial production of the nation—directly in about thirty-five industries, and collaterally in many more. They were occasioned by the striking increase in recent years of the output of many industries. Thus the quantity of automobiles increased by 204 per cent between 1919 and 1925; the output of petroleum refining advanced by 108 per cent; rubber goods by 59 per cent; glass by 78 per cent; cement by 101 per cent; brick, pottery and other clay products by 68 per cent; chemicals and acids by 36 per cent; paints and varnishes by 40 per cent; carpets and rugs by 38 per cent; silk goods by 37 per cent; iron, steel and non-ferrous metals by 32 per cent; and various items of food, drink, and tobacco by from 6 to 51 per cent. The general volume of production had increased between 1919 and 1927, inclusive, by 46.5 per cent; 122 The Stock Market Crash—And After primary power by 22 per cent; and primary power per wage earner by 30.9 per cent (between 1919 and 1925) and productivity per wage worker by 53.5 per cent between 1919 and 1927. During this period (1919-1927), wage earners in factories had decreased by 2.9 per cent, but wages paid increased by 11.4 per cent (1919-1925). Prime cost increased (1919-1925) by 7.2 per cent, but unit prime cost decreased by 24.5 per cent. Productivity per wage earner, which had increased very slightly between 1899 and 1909 and actually diminished from 1909 to 1919, took an unprecedented leap after 1gar, recording its increase by more than one-half from 1919 to and including 1927, at the same time that unit prime costs were diminishing (1919-1925) by nearly one-quarter. The measurement of this astounding increase in production and in values, mainly during the course of the long bull market, is accurate. The new index of production of the Federal Reserve Board being worked by what is I have called the “Ideal Formula” in my book The Making of Index Numbers, shows how far, in this machine-power civilization, man is emancipating himself from the curse of Adam. From the hewing of wood and the drawing of water, the sweat and toil of the old slave population, man has thrust his burden upon the machine. He now watches the index gauges reveal their welcome increases in per capita output. What are the reasons for this throbbing change since 1919, and especially since 1922? RELATIONSHIP oF PRIME COST, PHYSICAL VOLUME oF PRODUCTION, AND UNIT PRIME COST 800 500 INDEX NULBER (1899=100) 400 0C 4 ‘3 PRIME COST 5 * ap w— - ; 0DUCTION 44 7 PRIME = 00 —m—— 1904 1909 CHART 14.—By prime cost is meant the sum of labor and material costs. During the period 1919-1925, large scale production and sales combined with increased product per man to reduce sharply unit orime cost after it had risen for 20 years. 1019 192] 1823 1925 1927 124 The Stock Market Crash—dAnd After Scientific Workers in Industry After the war there was an exodus of professors capable of scientific research from the universities into industry. This was chiefly what may be called an accident, due to war inflation. Professors’ salaries had lost their purchasing power. There was a similar exodus from the scientific bureaus of the government in Washington. In order to live, research students and professors turned increasingly to the higher emoluments of industry, and industry soon found that it had tapped a new and vast resource in human ingenuity backed by scientific training. For almost the first time science in America came to be appreciated for its cash value, the more so, perhaps, because the war had revealed how much farther Germany had made use of such technical science and invention than the rest of the world. Another accidental cause of accelerating “tempo” of invention was that the war left wages I1§ per cent above the previous level and the cost of living only 70 per cent above it. Employers feared to cut wages, lest strikes and diminished output result, and they turned to labor-saving inventions instead. Thus a by-product of inflation, as in the case of the university professors, was pushed into industry to great economic advantage. In the past few years the industries have added gigantic research laboratories to their equipment. In the laboratory of the American Telephone and Telegraph Company today there are 4,000 scientific Scientific Research and Invention 125 men—more than any university could equal. Industry has realized that the continued development of modern life, with its comforts and conveniences, depends upon scientific research. Inventions due to research are now the chief breadwinners of our industrial system. Already more than three hundred substances indispensable to our life today are produced as by-products of the distillation of coal. Chemists have found hundreds of new uses for the former waste of the farm, which used to be so hard to dispose of. One of the chief topics of discussion today wherever employers, workers, engineers, scientists, bankers or educators gather together is scientific research. At a recent meeting of the New York State Chamber of Commerce, Dr. Robert A. Millikan, one of the world’s foremost physicists, took occasion to quote the words of Pasteur: “In our century science is the soul of the prosperity of nations, and the living source of all progress. Undoubtedly the tiring discussions of politics seem to be our guide—empty appearances. What really leads us forward is a few scientific discoveries and their application.” Edison as a Forerunner The fiftieth anniversary of the work of Thomas A. Edison, in bringing forth the incandescent lamp, was celebrated during the summer and fall of 1929. As an inventor and organizer of inventive research, Edison is the symbol of the entrance of science into the industrial renaissance. His latest announcement 126 The Stock Market Crash—And After of the invention of synthetic rubber derived from the common goldenrod is a triumph of organized research. Even at its comparatively high cost this invention of rubber would have checked the exactions of the foreign rubber monopolists and defeated the British plan for restriction of rubber output had it been brought out when Mr. Hoover, then Secretary of Commerce, was inveighing against their monopoly. Mr. Edison’s researches with the object of further cheapening synthetic rabber are in process; in this his great staff may yet achieve another triumph that will be reflected in added economies and higher values of securities of the rubber industry. The life of Edison really links the past, when science was scarcely appreciated, to the present when it is almost idolized. He was the first conspicuous professional inventor. The chief significance of this recent celebration of Edison by the world is not in his own singular contribution to progress, but in the extent of the appreciation of invention by the public. This change, most of which has occurred since the war, and a great part of which has occurred during the time when prices doubled during the long bull market, is reflected in the congestion and recongestion in the Patent Office. Under Mr. Hoover, when he was Secretary of Commerce, the Patent Office had been reorganized in order to catch up with its work. But by the end of the fiscal year 1928-1929, the Commissioner of Patents reported that the “number of cases now awaiting action (103,236) Scientific Research and Invention 127 is so great that at this rate of gain it would take from five to six years to make the work practically current, or so that an applicant who is paying the fees for performing the work may obtain an official action with reasonable promptness.” In this report the Commissioner, Thomas E. Robertson, said: “Tt is a noteworthy fact that more patents have been granted during the last ten years than during the 100 years from President Washington's inauguration in 1789 until President Harrison's inauguration in 1889.” Daily News of Inventions Pick up the daily paper, and note the multiplying reports of new inventions and processes and business methods that are the outcome of scientific research. Almost every day's paper gives half a dozen new instances showing how inventions and the exploitation of them through the use of capital are affecting savings, producing short cuts and increased productivity. A cable despatch from Berlin tells of a new method of producing synthetic helium by which Germany may be freed from the United States, where the chief natural supply exists. The same despatch announces an interoceanic line of Zeppelins, which will require capital. The same paper tells of successful experiments in perfecting the seadrome; so that the model will be succeeded by a real seadrome, weighing some 40,000 tons, to be towed out 350 miles from shore and anchored. The account adds that it will cost $1,500,000,000. Money must 128 The Stock Market Crash—And After always be raised to develop inventions, and the process usually adds to the volume of debt including brokers’ loans. In the same paper there is the announcement of a new all-air line between New York and Los Angeles, spanning the continent in thirty-six hours. On another page is a report that in Poland a rivetless bridge has been constructed by a new process of welding. There is also the news account of: the distillation of coal to make fuel oil. An expert announces that the railroads are saving coal; one line uses 70 pounds now to 170 pounds used ten years ago. There is the recent announcement of the front drive car that is “pulled, not pushed” by its engine. There is the announcement by S. T. Bloom, a consulting engineer, of Chicago, that important new appliances in refrigeration will soon result in the quick freezing of retail meat-cuts, fruits, vegetables, dairy products—in fact, of every perishable foodstuff, and that office buildings, hotels, large stores, and even homes will soon be refrigerated in summer as they are heated in winter. Cornstalks have been recently utilized to make pulp for the production of newsprint paper, and now the chemists at the University of Illinois announce that the refuse from this process may be turned into gas for use on farms. A system of television is being adapted for broadcast service in the homes. The largest and most powerful oil-electric locomotive in the world, a hurtling power plant, with- Scientific Research and Invention 129 out need of a costly third rail or overhead wire system, generates the power it consumes on the Canadian National Railways. Some 300,000,000 pounds of artificial silk, known as rayon among silk manufacturers, was made from cellulose during 1929. Elmer A. Sperry, inventor of the gyroscope compass, super-power searchlights and airway beacons, has just adapted an electrical machine for testing the rails of the great railways’ system of the nation. A “Robot chemist” or an automaton with an electric eye, radio brains and magnet hands recently functioned without human supervision in an improvised laboratory before the New York Electrical Society in New York. It helped in producing an economic cold light, in analyzing a sample weighing a millionth of a gram, and in demonstrating a photo-electric cell used to control analysis in new scientific apparatus. Samuel W. Parr states that the American output of chemical products alone has advanced in fifty years from an insignificant sum to more than $2,000,-000,000 annually. The American Chemical Society reports a tremendous increase in research by which pure and practical science has been advanced, and calls for half a million dollars more for the fund to report scientific knowledge. In his address at Dearborn, Michigan, on October 21, 1929, President Hoover said: “If we would have our country improve its standard of living and at the same time accommos date itself to increasing population, we must main- 130 The Stock Market Crash—dnd After tain, on an even more liberal scale than ever before, our great laboratories of both pure and applied science.” The extent to which industrial research prevails as a new trend in manufacturing progress in the United States is revealed in the survey of the National Bureau of Economic Research, published in 1929 as part of the report on Recent Economic Changes of the President's Unemployment Conference, of which Mr. Hoover was chairman. Of the 599 manufacturing concerns supplying information, the report states, 52 per cent recorded the carrying on of research as a company activity; testing laboratories were conducted by an additional 7 per cent, leaving 41 per cent, or a minority, in which research work had not yet been initiated. These statistics were based on a questionnaire, sent out during 1928 to 5000 manufacturing concerns with a commercial rating of one million dollars or over. In certain industries, such as cement manufacture, leather tanning, gas and electric utilities, codperative research had been organized, taking advantage of the activities of various national associations. In certain other industries such as the manufacture of machinery, machine tools, drugs, cosmetics and pharmaceuticals, individual concerns engaged in highly competitive work were carrying on their own laboratories. Some 58 per cent of those reporting stated that their budgets for research were increasing from year to year, and 39 per cent reported that their research activities had already shown a profit. Scientific Research and Invention 131 The very names of many of the standard stocks on the Stock Exchange symbolize this new inventive and scientific era; as, for instance, the radio, airplane and motion picture stocks, such as Radio Corporation, Curtiss-Wright, and Fox Films. A vast number, whose names are not so indicative, are just as definitely founded on new inventions—such as Maytag and Remington-Rand, while a still larger number, while of older vintage, such as American Telephone and Telegraph, General Electric, Allied Chemical and Dye, and Johns-Manville, have recently transferred or added to their processes new inventions. A whole group of companies are exploiting inventions for the supremely important purpose of increasing power and effecting mergers on the basis of economies achieved through these inventions. Martin J. Insull, the Chicago power magnate, states that as a consequence of the added power which invention has contributed to industry, the forty-five and one-half million workers in the United States have achieved an output equivalent to from six hundred million to nine hundred million workers before the power era. Greater Productivity Per Unit By the enterprise of Mr. Insull, who is a chief executive of the electric power companies distributing power over sections of the Middle West, a flood of light is poured upon a main cause of America’s recent prosperity. This appears in a study entitled 132 The Stock Market Crash—dAnd After America’s New Frontier published by the Middle-West Utilities Company. This company serves four thousand communities of less than ten thousand population, Mr. Insull finds a tremendous saving in the far greater productivity per unit of electric power dis-ELECTRICITY DISPLACES OTHER POWER INDUSTRIAL POWER USA 80) OTHER \" PURCHASED Coarere] "REN JE _ PURCHASED ELECTRICAL POWER PERCENT OF ALL POWER USED IN INDUSTRY 20 30 20 oO dui IRQ0 14). [=] 0 it~ 5 1925 1927 CHART 15~—Total primary factory power applied through electric motors increased, 1919-1927, from 55 per cent to 78 per cent. Inset: 50 per cent purchased, 28 per cent made locally. tributed to small communities, as compared with power units in the congested cities. Until 1910-1912, neither steam power nor early electric power could be distributed beyond the length of the leather transmission belt. Invention came in to permit long-distance transmission. Until then the big cities had had it all their own way in manufacturing. Only compact populations could use such Scientific Research and Invention 133 power cheaply. The farms and small towns were part of the vast American hinterland, isolated, bucolic, remote from the currents of progress. Civilization was based on power, but it was distinctly urban. Up to twenty years ago the burden of the world’s work had, it is true, been largely shifted from the backs of men to machines by power generated by the burning of fuel or the force of waterfalls. Then came mobile electric transmission. Along with it came the speeding of transportation of men and materials on railroads and by means of automobiles. A vast accession of usable power, accelerating every business transaction and means of human intercourse, is now being distributed at the point where it can be used most economically. It is spread more evenly over the land, relieving congestion in one place, remedying sparseness in another. Distributable electric power travels with lightning speed. Qualities by which it quickens decentralizing tendencies in our industries are defined by Owen D. Young, as mobility, divisibility, applicability, and reliability. President Glenn Frank, of the University of Wisconsin, contrasts its advantages with steam ‘power in these words: “In a machine civilization created by steam power, the worker must go to the power; but in a machine civilization created by electric power, the power can be taken to the worker.” The late Guy E. Tripp, Chairman of the Board of the Westinghouse Electric Company, was one of 134 The Stock Market Crash—And After the first to discern the possibilities of the network of more than one hundred thousand miles of high voltage electric power lines, distributing energy over a large part of the United States, and making it an asset, not only in the big cities, but available at almost any point on the map. To this Mr. Tripp added the advantages of improved transportation— the faster rail service, the automobile and the highway systems, all of which made transportation flexible as well as more speedy. These causes work together to explain why the present gain in number of industrial wage earners is vivifying, as it were, the extremities of the nation, in the towns of less than 10,000 population. The smaller communities are living richer lives. They have better schools, they have built new highways. Nearly every family owns a car. Its members visit the metropolitan centers, but they return to the “open spaces” with all the amenities of the city. The amount of primary factory power applied through electric motors has increased from 5 per cent in 1899 to 39 per cent in 1914, and to 78 per cent in 1927. The increase exceeds one-fifth since 1919. By the same speeding process the motor car has increased prosperity and added to expectations of gains in real income. It has created the modern suburb, freeing it from the limited area around the railroad station. At the beginning of 1929 there were 5,426,900 motor vehicles on farms. Of these, 697,300 were motor trucks, and 4,729,600 were Scientific Research and Invention 135 automobiles. Both the car and truck alike contribute to the fullness of life on the modern farm. The truck permits rapid haulage to the railways and prompt shipping to whatever markets offer the best demand at the moment. The motor car not only saves the farmer's time (a vital matter in view of labor shortage) but also gives his wife and children contact with the social advantages of the town. Churches, lectures, schools and the theater are all available to the family which owns a car. As a consequence of this inventive triumph, road construction is going forward in the total yearly investment of $1,500,000,000 for construction and maintenance. American surfaced highways now total 625,000 miles, which is approximately onetenth of all the highways in the world, surfaced or otherwise. The automobile industry has “hooked up” with other revolutionary inventions, the radio, motion and sound pictures, and the network of telephone, telegraph and the electric traction lines, purveying to the fundamental need of communication of all sorts. This is responsible for the great real estate developments that have taken place along parkways and suburban boulevards. The transformation into a motorized existence helps further to explain the increased “tempo” of production and the rapid accretion in value of the securities of all industries that have been affected by the speeding-up processes of scientific research and invention. 136 The Stock Market Crash—And After Savings of Packing Industry It is said of the packing industry that it utilizes “all of the pig but the squeal.” The cost of beef, pork and lamb to the consumer is today much less than it would be had not the packing industries organized on a large scale and utilized every part of the slaughtered animal to increase their income and pay the costs of production. These costs were formerly paid for by the meat, the hides, and to a limited extent by the fat, bones and horns. Now every part of the animal contributes its quota to the total revenue. The effect of utilizing these waste products is often to increase the income received by the farmer for his crops, as well as to lower the price of the staple crops to the manufacturer and consumer. In future, factories may well be located in rural districts near the sources of the raw materials that have heretofore been wasted. Costs of farm products will be distributed over a large number of new prodacts which now bring in nothing, and often entail costs up the farmer to get rid of them. An Agricultural Revolution Research is bringing about an agricultural revolution, which is of special significance in this discussion of enhanced values, since agriculture is the source of nearly all food and most raw materials utilized by man. Economists classify agriculture as an extractive Scientific Research and Invention 137 industry, subject to the tyranny of the law of “decreasing returns.” At a given stage of the science and art of agriculture, additional bushels of wheat or of any other crop could be wrested from the soil only with a disproportionately increased expenditure of labor and capital. If there were no changes in the methods of agriculture, foodstuffs and other raw materials and products of the farm must continuously advance in price as population increases and the demand for farm products grows. But this, which was the logic of Ricardo, Malthus and their followers, implies that practices and appliances remain unchanged. Under such assumptions the theory is correct. But economists cannot reckon without taking account of the scientific researchers and inventors who have revolutionized agriculture half a dozen times since the eighteenth century, until today scientific farming has been transformed almost into a manufacturing industry. Subsoil plowing, better fertilizers, better breeds of farm animals, new and improved crops, utilization of waste products, and, last and most important, improved means of transportation have increased manifold the area and productivity of economic land since Ricardo laid down his famous law of rent, based upon the “permanent and indestructible qualities of the soil.” Agricultural chemists long ago taught the farmer the value of soil analysis for showing what lands are suited to particular crops, what kinds of fertilizer to use. These chemists have found hundreds 138 The Stock Market Crash—And After of new uses for the former wastes of the farm, which used to be so hard to dispose of. Cottonseed, which formerly was a nuisance, is now a crop second only in value to the cotton fiber itself. The cellulose of straw is now being worked up into wallboard and building material. Up to the present our corn fields have produced only a single crop, corn, to repay the farmer for his toil and capital outlay. The cornstalks, heretofore largely waste, are now being made into writing paper and other papers of excellent quality, while from the corncobs come furfural, which may supplement or supersede gasoline in our motor cars and gas engines. Bagasse, the waste of sugarcane, makes a standard wallboard. How revolutionary inventions for farming have become is seen in the new Mason Process of drying alfalfa. This invention permits “making hay while it rains” as well as while the sun shines, and makes practicable the growing of this main forage crop in the states of heavy rainfall in the East, where the chief dairy herds are located. It is reducing a dairy system from the need of devoting ten to one hundred acres to pasture per cow to a system whereby three animals can be kept in prime condition on one acre. In his forthcoming book, The Great Food Problem and Its Solution, Dr. Orrin W. Willcox, calculates that the earth’s population may increase in almost unbelievable numbers through application of recently discovered laws of plant growth, chemical fertilization, and transmutation of food properties. These, combined with selection of plants with Scientific Research and Invention 139 highest power to absorb nutrients from the soil, Dr. Willcox says, may permit a maximum density of population of ninety-six thousand people per square mile! What has been said of farming is also true of other basic industries. The wastes of our forest areas have become and will become increasingly the sources of foodstuffs, of specialized building matevials and of chemicals of great value. If research and invention should cease, the Malthusian law of population might begin to. operate rigorously and property grow apace. But we are only just beginning to scratch at the surface of the earth for the material conveniences and sources of power which can be made to minister to our needs and comforts. Our continued progress in well-being rests absolutely upon the ability of the chemists, physicists and engineers to- extract further utilities from the earth faster than the ever-growing population can consume them. But the rate at which they have accelerated this process in recent years readily accounts for the increased real income of the nation, which, with its prospects of still greater income, have warranted the higher plateau of securities by which the nation’s industries and economies are valued. The prospects of still greater income need emphasizing. The difficulty in most cases has been that the securities affected by inventions and rapid growth have often been sold at high prices after and not before the greatest ratio of growth took place. It is future 140. The Stock Market Crash—dAnd After growth, not past growth, that gives value. In recent years the stock market has reflected increasingly through the operations of investment counsel and investment trusts, more intelligent calculations of future growth. Effect of Invention on Price-Earnings Ratio The effect of new inventions on the ratio of the price of stocks to earnings is to increase that ratio, because what gives these new stocks their value is the future earnings after the new process will have had time. This necessarily implies that, in the meantime, the earnings are so small that the price-earnings ratio is high. For instance, the public utilities, up to the September and October breaks in the market, showed a ratio of prices to-earnings of more than 20 to 1. That is, the prices of stocks were over twentyfold the earnings. The reason for this high level of prices relative to earnings lay partly in the increased gains to be expected in the spread of application of new inventions through the power group of industries. There has been much careless talk, since the crash, about stock prices having been inflated far above what earnings warrant. But the people who say this so glibly do not specify the particular stocks. When any actual stock is examined with an unusually high price relative to its current earnings it is almost invariably found that it tepresents a new and very promising invention, and that those who have bought the stock and put its price so high are not so much the ignorant public Scientific Research and Invention 141 as the insiders, who have carefully weighed and measured the future prospects, and who have bought the stock when the current earnings were near zero, making a price-earnings ratio of even over 100 to I for the time being. That is what happens whenever one ‘‘gets in on the ground floor.” The more recent the invention, the higher the ratio of price to- earnings is apt to be, because in its early stages the earnings have not had time to develop. It follows that the larger the number of stocks representing new inventions in the price index, as compared with the number of stocks of the ordinary variety, the higher the price-earnings ratio of the whole group. It further follows that today, with so many more of these new-invention companies listed on the stock exchange, the price-earnings ratio should be higher than formerly. With the increased application of research, American investors are justified in greater expectations of future dividends. CHAPTER IX INDUSTRIAL MANAGEMENT ANOTHER potent reason for the long bull market since 1922 is closely affiliated with that of scientific research and invention emphasized in the last chapter. This added reason is industrial management. Frederick Taylor is coming into his own today. Taylor, like other pioneers and inventors of the past, was not appreciated during his lifetime. He died of a broken heart, especially because the laboring men, the men he was trying most to help, regarded industrial management and stop-watches as a means of further “exploitation.” Under other names Taylor's methods and ideals, as developed by H. L. Gantt, Morris L. Cooke, Wallace Clark, Henry S. Dennison, the Gilbreths, and others, are coming into effect. President Hoover has had his Committee on the Elimination of Waste. We also recognize management engineering in what is called “mass production.” Big business is coming to be not only tolerated but appreciated. The “Fordizing” of business is nearly synonymous with developed management engineering. Data pertaining to business management, obtained by the experts of the National Bureau of Economic 142 Industrial Management 143 Research under the supervision of Henry S. Dennison, are presented in the report of President Hoover's Committee on Recent Economic Changes, as the result of interviews with five hundred people employed by one hundred different concerns, chosen as samples of normal, successfully established businesses in the United States. These were large and small companies making moderate to notable successes in a variety of businesses in different sections of the country, and the survey is believed by the Committee to be a fair example of the group of American business men whose management practices would be considered the prevailing ones. The report states: “The last few years have been extremely favorable in many ways for the development of those intellectual, moral, and social attitudes which lead toward high professional standing. The situation of today holds all the opportunity anyone could desire for the wholesome development of business management into a great profession. “The greater complexity of business problems and of the organization necessary to cope with them, have forced attention upon better methods of coordinating the plans and the work of specialists and executives. Where there are research men, staff men and operating men, a close mutual understanding and counseling among them has been found necessary, whether it is effected by formally arranged conferences and committees, or, as one executive put it, ‘by a great use of shoe leather.’ 144 The Stock Market Crash—dAnd After “Under a pervasive one-man control, where the chief executive disposes of all important questions, such codrdination is, in theory, effected through that man. But the trend is definitely away from control by one man; and even where it exists, his absences may force department heads into conference so frequently that they have, in effect, a system of regular operating committees.” In the hands of such committees management engineering has become a keen instrument. What it means to the captains of industry who are reorganizing their shops and programing their needs months and years ahead—with resultant discounts on future earnings that increase the value of their securities in the present—may be shown by quoting from Wallace Clark. Mr. Clark is a disciple of the late Henry L. Gantt, who, with Carl Barth, was closely associated with Frederick W. Taylor during Taylor’s latter years. Mr. Clark was a member of the Kemmerer Commission which reported on the reconstruction of finances of Poland, and he recommended a reorganization of Poland’s industries by modern methods. For three years he has been aiding the installation of these methods in Poland, Germany, France, Roumania, Switzerland, and Czechoslovakia. I put a series of questions to Mr. Clark concerning his experience, as to the practical benefits resulting from the scientific organization of industrial enterprises. The questions together with his answers are subjoined. MANAGERIAL CONTROL INAMCIAL SCHEDULE TAN TES aR APH FIN LAU OAL OLIGO [OTAL INCOMF OPERATING CONTRO _ _ gis oe —APOUAGE IN S10P je emrmrm CELIYERY PROMAEN © YOR AEAD or 0 2rd \MBEAS mecriven - CC BUAINESS COMDITIONMS BERATING OATH. — FACTORY COATA —OUERMEAD EXPENSE a CAPARITX MAR — —IDLEMESS COST SANYENYORIES —BUAPLUS. S_ARALTIANS. — EITHESANALS CAPITAL ACEOMNIA ADDITIONS a re ARE _-mn AESIRENTA or —Arey gumar a EUTERED EMPLOY ...... w—EARNINGY {AYFHAGEY MAM RECORDS wi St Td rev PRODUCTIO WAR] AF aay | Juke oy HEHE : ann OT JPET: dT a H 1 & oon Ti x. JL J aT in] 1, —— p=- 58,000 ~52,000~— 48,000 =m + 44,000 «£0,000 — -26,000— -32,000 ~ _— | MAR{APR | MAY ; von | vin | AUG | SPT] OCT [NOV | DEC. CHART 16.—Gantt chart as used by Wallace Clark, Consulting Engineer. This is included, not for detailed study by the general reader, but merely to illustrate how modern business is technically guided and controlled by well-conceived management mechanisms. [AG 146 The Stock Market Crash—dnd After Results of Management Methods “Does it take long to introduce scientific method in a business or industrial enterprise?” “No. The second day of the introduction of management engineering in an industrial enterprise yields practical benefits. The first day has been taken up with ascertaining facts, and the next morning, when action is taken on these facts, results begin to be realized in increased production and reduced costs. “It is not necessary to learn all the facts in regard to a plant before taking action. There is nearly always some department which is giving the most trouble, and invariably some of this trouble is found in the machines or equipment. Even one day's record of the idleness of machines and the reasons for it, provides enough information to enable an executive to increase the running time of his equipment, This is when machines are down for repairs or waiting for tools, materials, or operators. When idleness of equipment is due to lack of orders, it takes more time to secure practical benefits because the sales department must study the needs of customers.” “Can you give an example of this relation of sales to running equipment? “In a spinning mill the greatest idleness was found to be in the doubling machines, and the reason was lack of orders. This fixed responsibility on the sales department, which then made a study of the Eo 1 Va Industrial Management 7, Z market and found that it could not cc szuously £ absorb the product of all these doubling waghines. 2 Accordingly, twenty per cent of the machi te dismantled, and those which remained took caré€ normal requirements except in occasional peaks of demand, when a second shift was run. The space released by taking out the doubling machines was used for additional spinning frames for which profitable orders were secured; and costs were reduced because it was no longer necessary to spread over their product the expense of maintaining the doubling machines in idleness.” “Can obstacles which interfere with the workers be quickly ascertained and acted upon?” “Very quickly. These obstacles, physical or mental, are usually revealed by variations in the quantity or quality of a man’s daily output. A record which shows promptly and clearly why a man is not able to reach an agreed standard, is the information needed to reduce these obstacles. “In another department of this same spinning mill, the man record charts showed that the machine operators did not regularly turn out a full day’s work. Investigation showed that the lighting was poor, the ventilation insufficient. Floors were rough and uneven, finished product was placed where it interfered with feeding machines, operators were required to clean their machines and a part of the floor, which distracted their attention from connecting broken threads. The management installed better lighting, improved ventilation, and assigned spe- 148 The Stock Market Crash—And After cial girls to clean machines and floors, and provided containers to hold finished products. The speed of the machines was not changed and nothing was said to the operators about increasing their output, but as these time-consuming obstacles were removed, they increased production within a month by 42 per cent, and greatly improved quality. The wages of the operators increased automatically because they were on piecework. The management found that costs were reduced in spite of the investment in improvements.” Technique of Improved Layout “Does management stop with revealing the obstacles to a free flow of work through a manufacturing plant 2” “Management does not stop here. It has developed a technique of clearing the way for a more swift-flowing stream of material by improving the layout of the plant, by eliminating unnecessary handling of material, by better planning and scheduling, and by more effective direction of a business as a whole.” “How is the layout of a manufacturing plant determined?” “By the flow of work through that plant; that is, the movement of material from one process to another. It is necessary to know the processes through which the material must pass, their sequence, the machines or equipment required, and, if the Industrial Management 149 product is varied, the volume of the various kinds of work. “In any manufacturing plant there are certain things which must have fixed locations, such as walls and columns of buildings, doors, machines and equipment. The problem of plant layout is to arrange and locate these things which are fixed so that the route traveled by the material will be as short as possible and its progress smooth and rapid. The degree of accuracy with which the fixed equipment is located in relation to the flow of work determines the degree of economy which can be secured in the operation of the finished plant. “A good layout is important to the management because it saves money and reduces the time required to manufacture goods. A proper layout increases the satisfaction of the workman in his job, because he does not have to spend a part of his day in taking steps or making motions that are unnecessary, hence he can direct more energy into his productive effort. Obviously it is more easy to secure a good layout when erecting a new building than when rearranging an old one. But it is more often necessary to make use of an existing building and great savings are made possible by a careful study of this problem.” “In the process of making a silver-plated candlestick it traveled by a route 4000 meters long. This route was shortened by relocating the equipment. 150 The Stock Market Crash—dAnd After No changes were made in the processes nor in the walls of the building, which belonged more than a century ago to one of Napoleon’s marshals of cavalry. By this new arrangement the distance traveled by the candlestick was reduced from 4000 meters to 875 meters.” Two Kinds of Factory Planning “What are the benefits of planning for the future, in production, selling and financing?” “In manufacturing there are two kinds of planning: first, for continuous production, and, second, for varied products. “In a plant which is built around a moving assembly the operations of assembling are subdivided until they require approximately equal amounts of time. The length of the moving platform or belt, which carries the material, and the rate at which it moves, are then determined and the number of feet this belt moves per minute becomes the master schedule of the plant. “The rate of production per hour or per day for every department is thus set mechanically, and the task of the Planning Department consists mainly in foreseeing and preventing interruptions. “This mechanical type of scheduling usually entails a heavy investment in material-handling equipment or in special machinery, and is therefore economical only in cases where the products are thoroughly standardized and are manufactured in large quantities. Mass production can never become such an Industrial Management I51 important feature in Europe as in America, because no single country of Europe has the large consuming public which exists in the United States. while, in addition, the habits of different nationalities and the customs barriers limit the markets. “In the second type of scheduling the necessary time is reserved on the various machines which are to do the work on the product, so that when the material is released from the stores-room, it moves through the shop at a definite rate of speed and is ready for delivery on a predetermined date. Scheduling of this kind is used in plants that manufacture diversified products, of which the volume is not sufficiently large to make mechanical scheduling economical. “Tt is this type of scheduling which is particularly applicable to handicraft industries, and it is securing as remarkable results in Europe as it has in America in the increased turnover of capital.” Plans for Sales and Financing “Do the plans comprise sales and finances as well as production?” “This is necessary, for great losses may be incurred if production, sales and finances are not coérdinated and planned in advance. “For example, in one plant the management had concentrated its attention on increasing production and reducing the cost, giving no thought to sales antil it was suddenly discovered that the stores-rooms contained as much finished goods as could be sold 152 The Stock Market Crash—And After in a year. As a result the factory had to be closed down for ten months. “In another plant the sales ran away with the production and the output was sold 18 months in advance, at a time when prices were rising. Wages and costs of material went up so that for this 18-month period there was an actual loss. Both of these cases were due to a lack of co6rdination between production and sales. “But a curve in a broken line can be projected showing the expected sales, say, of a popular standardized product where the sales were always low during the summer and high in the autumn. A solid line would show the production schedule planned to meet the expected sales. In a particular instance the processes required a great deal of skill, and it was, of course, impossible to discharge workers in the summer and get them back in the autumn. Hence it was planned to continue manufacturing throughout the summer and place the product in cold storage ready for the large sales in October and November. This even schedule reduced the cost of production but increased the investment in inventories during the summer. “In order to find out in advance how much money would be required from the banks for this purpose, the expected receipts were charted in comparison with the expenditures for material, labor and overhead. It was found that money was received in bank usually about 60 days after the goods were sold. The chart showed that at the end of September additional financing would be necessary to the extent of Industrial Management 153 about $40,000. Another chart showed that money would come in faster than it would go out during November and December, and that the surplus at the end of the year would equal normal expenses for about a month and a half. “This is a simple example of how manufacturing, sales and finances can be codrdinated by methods of planning. It is not often appreciated that the methods and costs of distributing products frequently need even more careful analysis and planning than manufacturing. Good scheduling of finances makes possible a greatly increased volume of business with the same working capital.” Master-Charting for Executives “Can the executives keep in touch with all phases of operations?” “There are charts which greatly simplify the problems of executives as industries increase in size and as problems of production and selling normally become more complex and difficult. These charts relieve the executive from detail, and yet bring promptly to his attention those things on which it is important that he take action. There is a technique of executive direction which not only tells him what is happening, but shows the tendencies so clearly that he can foresee and control the future. “For example, there is the chief executive of a company which makes refrigerators. First, a plan was drawn up for the year covering the most important phases of the business such as: orders, ship- 154 The Stock Market Crash—And After ments, work ahead of the plant, inventories of raw materials and of finished product, costs and other data. “The figures in the monthly spaces represented the quantities planned for each month. A light line showed what was actually done during the month, and a heavy line showed that cumulative result compared with the plan. If everything had been done as planned, all the heavy lines would end under a large “V”, “This chart showed the chief executive that, al though the orders had been exceeding the quota, there was very little work ahead of his plant and that he had on hand a stock of finished goods equal to five months of normal sales. He, therefore, undertook a more intensive selling campaign. The value of such a chart lies in the fact that the chief executive has before him absolute facts, and he does not need to rely on the opinions or impressions of others. “Similar charts are being used in government and private industries by executives who direct a number of plants which make different products so closely related that any lack of progress in one immediately affects the others. From a single chart of this kind a single executive directs the progress of iron mines, blast furnaces, a rolling mill, a foundry and a large machine shop.” “Does this process of planning and coérdination do away with preconceived notions?” “As the scientific organization of a business enterprise progresses and the methods described are used Industrial Management 155 to remove obstacles to a free flow of work, the personnel gets used to dealing with fact. Their continuing success in securing predetermined results by using these facts brings them to a point where they base all their decisions on facts. This scientific attitude toward the problems of business frees them from tradition and prejudice. “Every business man who has had experience in a specific line of work arrives at certain conclusions as to what things are wise to do and what are not wise. However, some men carry these conclusions over into conditions where they do not fit the facts, and the conclusions then become prejudices. The scientific point of view is that each situation is different, and must be met by judgment and experience which are not influenced by prejudice. “Of the many benefits resulting from the scientific organization of an industrial enterprise one of the most fundamental is this scientific attitude toward the problems of business. This might seem to be an intangible advantage, but it is possibly the most practical of all. With this attitude an organization is no longer held back by the man who regards as impossible things which have not been done before; nor by the man who believes that results accomplished in one industry cannot be expected in another merely because it is different. The scientific man knows that, if a single element in any situation is changed, the entire condition is altered and what was apparently impossible then becomes possible.” It is this scientific objective attitude of dealing with 156 The Stock Market Crash—dAnd After business problems, of fitting men and machines together in the best possible ways, and of codrdinating sales and financing with the programs of production, that is revolutionizing the economies of business and rapidly enhancing the values of business securities. Under the influence of the industrial managers, modern industry saves much waste. This is a basic reason for the long bull market of 1922-1929. CHAPTER X LABOR’S COOPERATIVE POLICY ANYTHING which increases the nation’s productivity will tend to be reflected in a bull market. A reason for rising stock prices closely associated with the growth of management engineering, discussed in the last chapter, is that of the new policy of the labor unions. This new policy is increasingly sympathetic with management and has largely renounced the policy of limitation of output. Therefore it has contributed to increasing production, which is reflected, among other ways, in increased dividend earnings of common stock. The record of greatly reduced strikes and labor disputes during the years since 1922 speaks eloquently of one powerful factor of the long rise of the stock price level. In his address on “Modern Trade Unionism” before the Harvard Union (published by the American Federation of Labor. Washington, D. C., 1925) William Green, President of the American Federation of Labor, said: “The Trade Union movement has been passing through that period when physical controversies and the tactics of force were most effective; it is now in a period when its leaders must seek the conference 187 158 The Stock Market Crash—dAnd After room, and there by exposition and demonstration, convince conferees of the justice and wisdom of labor’s position. In such service labor is finding a special need for trained representatives and effective information. “The new idea of joint responsibility in approaching the solution of industrial problems on the part of the employer, management and employees is being tried in various lines of industry. As a result of the shopmen’s strike in 1922, the management and employees of the Baltimore & Ohio Railroad have been working together in a constructive way and with what seems to be most successful results.” The increasing rapprochement between Capital and Labor meant increased real wages, increased real income, increased profits. The modern position of Labor was described by President Green in his address, “Labor’s Ideals Concerning Management” (Bulletin, The Taylor Society, December, 1925), as follows: “Labor realizes that the success of management means the success of Labor. “Far that reason Labor is willing to make its contribution to assist management and to bring about the right solution of problems dealt with by management. . . . The workers believe that through understanding and codperation the best interests of all those associated with industry can be served . . . through such understanding all the associated productive powers of industry can be mobilized into an sconomic, sustained, impelling force through which RELATIONSHIP of WEEKLY WAGE RATE, HOURS WORKED PER WEEK, AND UNIT PRIME COST 230C 250 INDEX NUMBER (1914 = 100) EEKL' WAGE RATE 20( = su £9 15¢ INIT PRIME COS OC RB ( A 1914 YOURS PER WEE 1919 1920 192 1922 (923 1924 1925 1926 CHART 17.—While the weekly wage rate increased from 1921-1928, unit prime cost diminished, due to the more economical use of materials and labor and increased efficiency in output. 160 The Stock Market Crash—dAnd After economy and production may be completely accomplished. Through the development of a codperative spirit and the establishment of a frank relationship the rewards of the efforts of all those associated with industry can be equitably distributed. “The wisdom of such a policy will be made manifest in a high standard of workmanship, in increased industrial earnings, in waste elimination, and in the personal contact between management and workers which is free from suspicion, antagonism and hatred.” Under the leadership of William Green, Labor now boasts of trying to save waste, realizing that the ultimate source of wages is productivity. “We will rely on facts rather than on force,” President Green announced at the annual convention of his organization in Los Angeles in 1927. This was in comment on the report of the Federation's Executive Council that “unless workers are to be put at a disadvantage in maintaining and advancing wages, unions must gather their own statistics and make their own interpretations of the statistics compiled by statistical bureaus and employers.” John P. Frey, a member of the Council, declared that the Federation's principle that “wages of workmen must keep pace with their increasing power of production, has given the world a new instrument with which to measure wages.” In these statements lies the kernel of labor's new policy of fact-finding in furtherance of its battle for higher wages and increased purchasing power. Pro- Labor’s Codperative Policy 151 duction per worker increases with the advance in the arts. Index Number Instruments of New Policy [ndex numbers must be the tools of this new policy, as enunciated by union labor. They constitute labor’s scorecard. It was by index numbers that Professor E. E. Day and Woodlief Thomas, of the Federal Reserve Board's statistical division, found that from 1889 to 1925 the volume of physical production of manufactured goods in this country increased by 178 per cent, while the relative number of wage earners increased by only 87 per cent, and productivity per worker rose about 49 per cent. The increase in productivity has gained in speed so that the average rate of increase from 1921 to 1925 was about 7 per cent a year, as compared with but one-fourth of 1 per cent increase for the preceding twenty years. By index numbers, again, the National Bureau of Economic Research finds an increase in real income of 27 per cent since 1919; and, as the real income of the farming class has decreased, the industrial population has gained even more. Largely through the incentives produced by watching these index numbers, as the scorecards of productivity, I have no doubt that the welfare of labor is well on the way to be doubled. The substitution of fact-finding for fault-finding, of common council for conflict, coupled with better organization, more humane and enlightened management and greatly 162 The Stock Market Crash—And After increased use of machinery should utimately double or triple the real wages and earnings of labor. The tragedy of the past has been in the opposition of so many misguided labor leaders, who have insisted on limitation of output and the quantities of goods available for wages and profit. The “make work” policy of labor, just as the monopolistic restrictions of employers seeking to extort higher prices, had kept wages lower than they would otherwise be. Baltimore & Ohio Plan The success of the plan of codperation between management and men on the Baltimore & Ohio Railroad, backed by organized labor, is particularly noted in Recent Economic Changes as typical of the increased “tempo” of activities during the past seven years. When at the centenary of this railroad in the fall of 1927, it ran its “Tom Thumb” locomotive, a reproduction of the first one built in America, this observance had a special meaning for American organized labor. It meant that at the close of its first century, the employees of the Baltimore & Ohio Railroad had helped contribute to organized American Industrialism an invention of superior efficiency, quite as significant as that of the steam locomotive. Daniel Willard, president of the road, testified at a meeting of the American Civic Federation to the value of this plan, stating that it was “useless for the road to spend $250,000,000 on improvements Labor's Codperative Policy 163 and fail to get the co6peration of its men in getting the most out of the improvements.” Otto S. Beyer, Jr., consulting engineer for the unions in the conduct of this experiment, has given these figures to show how the so-called “B & O Plan” of employee relationship worked out for better railroading: “Up to the Fall of 1928, on this road, employees had offered 21,900 suggestions for betterment. Of these, 18,551 were adopted and are in practice. Of the remaining number, 1,145 were still under consideration. “Some 326 suggestions were classified to see who benefits from them. Of this number, 168, or 51.5 per cent, were of primary benefit to management, 51, or 15.7 per cent, were of primary benefit to employees, while 107, or 32.8 per cent, were of equal benefit to both employer and employee.” Charles I. Neill, formerly United States Commissioner of Labor, says that the spirit of the plan is as vital and as “revolutionary as the spirit underlying the League of Nations.” President Green has said that “no development in industrial relations has attracted greater attention, here or abroad, than union-management codperation initiated on the Baltimore & Ohio Railroad.” In March of 1923 the agreement went into effect. It is now in force not only in the Baltimore & Ohio shops, but in those of the Canadian National Railways, Chicago & Northwestern, and of the Chicago, Mil- 164 The Stock Market Crash—And After waukee & St. Paul, as well as the Grand Trunk Western. Mr. Willard has said that the only real change in men and management, since the initiation of the plan by the Baltimore & Ohio employees, was ‘above the ears.” Mor. Beyer, acting in behalf of the workers, states these as the main principles of the new policy: “(a) Full and cordial recognition of the federated shopmen’s unions as the agent of the employees. “(b) Conceding to these unions and their spokesmen constructive as well as protective functions in railroad management. “(c) Agreement between these unions and management to cooperate for improved service to the public. “(d) Agreement to share fairly any consequent benefits. “(e) Projection of definite administration machinery to accomplish these purposes.” The benefits of the Baltimore & Ohio experience have undoubtedly contributed to the economies that are being reflected in the higher standards of living enjoyed by this nation. A like satisfying of fundamental human instincts is noted in the report of the Committee on Recent Economic Changes in the contract signed between the Amalgamated Association of Street and Electric Railway Employees of America and the Philadelphia Rapid Transit Railway, agreeing to share in management and ownership of the system. Labor's Codperative Policy 165 Rival unions defeated the attempt to secure unionmanagement codperation when this plan was first broached for Philadelphia in 1911. Without discriminating against union men, however, the plan worked in that city for sixteen years prior to the recent two-thirds vote by the union that made it a plan for organized labor. Like the somewhat different sort of management of the Baltimore & Ohio Railroad in the case of its shopmen, the so-called “Mitten Management” plan justifies its cooperative agreement with organized labor on two grounds: first, organization is needed to protect the rights of labor; and second, labor organized for economic efficiency has the greatest power for public and private good. Both systems freely provide union representation in management, and agreement to share fairly any consequent benefits. European Labor Dogma Reversed Bettered industrial relations are mentioned by the visiting European delegations investigating American industries as one explanation of the growth in our prosperity. Here the workmen have awakened to the fact that improved methods of production are of benefit to themselves as well as to the owner and the public. In the new labor compacts and in the union banks, laborers have become capitalists. This is contrary to the European industrial dogma, but it seems to be winning, because it is based on sound human psychology and philosophy. 166 The Stock Market Crash—And After By coéperation in production, human instincts are satisfied. The instincts or impulses of ownership, loyalty and responsibility are felt by the workers in any enterprise in which they have a voice in the hiring and firing of workers, the distribution and routing of work, the steadiness of employment, the hours of labor, holidays, the rates of wages and earnings, health and safety conditions. The creative instinct is satisfied when the worker is encouraged to use his brains, not only to suggest the best way of doing his job, but to suggest improved types of products and ways of cutting down labortime and other costs. Further, the creative instinct is satisfied when the laborer is given appropriate recognition for a good job well done. Devotion and dependability deserve reward as well as ability and skill. These primitive instincts can be guided but not suppressed. If employers would have their men loyal, efficient, and contented, they must realize— and they are realizing with increasing clearness— that men must have the opportunity to give expression to the best that is in them. For without selfexpression and initiative, no man can lead a normal life and give good service. Reduction of Strikes in New Era As already mentioned, the changed spirit in the relations of Capital and Labor is manifest by the reduction of industrial disputes. “Measured by any standard,” President Hoover's Committee on INDUSTRIAL DISPUTES anp WORKERS INVOLVED 2 0 do 3 300C i 1 n 280( LEGEND: NUMBER OF DISPUTES = WORKERS INVOLVED 300 S00 000 200 wn mo & 3 3 8 N » g 2 3 3 o 1 a CuarT 18.—New policy of cobperation between labor and employers is reflected remarkably in the sharp decline in number of industrial disputes and of workers involved since 1922. 168 The Stock Market Crash—And After Recent Economic Changes says (page 490), ‘the period since 1922 has been remarkably free of upheavals in industrial relations.” The committee finds from the records of the United States Bureau of Labor Statistics a ‘‘sharp decline” since 1922 “over the preceding years from 1916 to 1921.” In the period 1916-1921, there were 3,503 disputes involving 1,789,301 employees per year; in the period 1922-1926, there were but 1,164 disputes involving only 688,538 employees per year. This is despite the fact that 1922, which is included in the period of fewer disputes, was one of large strikes and more properly belongs in the earlier period. President Hoover's committee remarks: “The comparative quiet of those last years is all the more marked in contrast to the state of affairs before 1923, when there took place some of the largest and longest strikes in the history of the country. In 1919, more than 1,000,000 workers were involved in strikes in the coal fields and railroad industry; disputes in the building trades of Chicago and New York resulted in a strike of 250,-000; 100,000 longshoremen along the Atlantic coast stopped work; a strike in the stockyards of Chicago brought out 65,000 strikers; and strikes in the clothing and textile industries several hundred thousands more. Altogether, the reports to the United States Bureau of Labor Statistics indicate more than 4,000,-000 persons involved in industrial disputes in 1919. The following years were quieter but by no means free of strikes. In 1920, there were the large ‘out- Labor's Codperative Policy 169 law’ strikes of railway switchmen and yardmen and the strike of the anthracite miners; in the year following, a strike of the marine workers in all principal ports and conflicts in the clothing, building and packing industry; and in 1922, when the number of reported strikers rose to 1,600,000, there took place the great strikes of the coal miners and of the railroad shopmen.” So in the very years of the long bull market, a new era of comparatively peaceful relations between Capital and Labor helped the average of stock prices to achieve its new plateau. Human Engineering Along with these more peaceful relations have come feats of “human engineering” which have cut sick days among the workers, and shown that periodical physical examinations pay dividends to owners and health to workers. Employers and employees alike profit by mutual benefit arrangements adopted by the big corporations. Group insurance made possible by employers contributing dollar for dollar with the employed has helped reduce the national sick bill and increased general prosperity. Harold A. Ley, President of the Life Extension Institute, reports a reduction of eighteen per cent in mortality in a group of policyholders taking a health service, now standardized under a mutual benefit plan that has been adopted by many great corporations. A study by Doctor A. H. Ryan, of Tufts College, 170 The Stock Market Crash—dAnd After of 600 industrial workers taking periodic health examinations through a series of years, shows that by the time of the third annual examination there was a reduction by sixty-one per cent in the initial disabilities of the group. Employers are finding today that their profits depend upon the productivity of their employees, and this, in turn, depends on the health and attitude of employees toward their employers. Group Insurance Group insurance is the means by which health care in industry is being rapidly extended. This plan has grown amazingly since its beginning in 1914, until by the middle of 1928, some $7,800,000,~ 000 of such insurance, covering 6,500,000 workers, was being carried by nearly 25,000 employers in all lines of industry. Some notion of the savings effected through such group insurance, together with the sickness prevention method it entails, is given by Doctor Quinby, of the Hood Rubber Company, who shows that in twelve plants which lack the health service, the cases of sickness and non-industrial accidents causing absences of over two days were 523 per thousand, against 342 per thousand in his own plant, which included the health service. Doctor Quinby’s testimony is especially competent, because it is backed by six years of well-organized work in sickness prevention. Owen D. Young, Chairman of the General Elec- Labor's Cooperative Policy 171 tric Company, remarked at the convocation of New York University in 1928 that there “seems to be periods in the world’s history when the imagination of man flowers into production; curiously enough, it always has a relation to business and profits.” Thanks to health research and improved hygienic practices, Mr. Young said, plagues are today unknown that in past years wiped out in a single season a sixth to a quarter of London's population. The time of such ravages from disease is past. Periodic health examinations among groups of workers are a powerful instrument for accelerating this process. Doctor James E. Kavanagh, Vice President of the Metropolitan Life Insurance Company, speaking at the convention of the Association of Life Insurance Presidents in 1928, said that group insurance is a leaven working through the nation’s industry to effect “greater codperation between employer and employee, reduction of labor turnover, increased protection of employees against death, sickness, accident and old age; increased thrift and increased effort for better health and working conditions. . . . It is because of its economic advantages that group insurance has spread so rapidly in America. The insurance companies have, in effect, applied the principles of production engineering to merchandizing their goods. Labor profits from good management which considers the welfare of the employee and results in steady employment of wages of high purchasing power.” 172 The Stock Market Crash—And After Summary To sum up: during the past half-dozen years we have come definitely into an age of greater codperation between Capital and Labor, with the rapid growth of plans whereby Labor shares in management, increased efficiency and enhanced health through increased wages and participation in group insurance. It is generally recognized by employers that a very slight decrease in the death rate will save scores of thousands of valuable lives. Under several plans medical examinations and health supervision are furnished to the workers at costs that are shared equally between employers and employees. This bettered relation between Capital and Labor has promoted productivity and so helped the long bull market reach its new plateau. Employers have modified their attitude and prejudices quite as much as have the workers. The more progressive employers, like Henry S. Dennison, have built up their businesses by means of the codperative efforts of their employees. This spirit of liberalism is spreading among industrial managers who have heretofore stood for autocracy rather than democracy in industrial management, Eugene G. Grace, President of the Bethlehem Steel Company, in his 1928 letter on “Prosperity and High Wages” recognizes the importance of this codperative principle in creating prosperity through maintaining the buying power of workers. Mr. Grace says: “In the last ten vears a new order has Labor's Codperative Policy 173 been created in our economic life. It is recognized, first, that high standards of living are based on the greater earning power of labor, and, second, that continued prosperity and high wages go hand in hand.” President Grace holds that one of the chief functions of progressive industrial management is to safeguard the wage rates and earnings of the workers. “Even when profits decline or business falls off,” he said, “efforts are made to economize in other ways than by cutting wages.” Only a few years ago wages were the first item of expense to be cut when business declined. In times of prosperity, also, wages and earnings were watched carefully, and, if they mounted above what was thought by the managers to be proper for workers to receive, a new scale was established which promptly brought them down to “normal.” Today both workers and managers have come to recognize that the end and aim of production is to produce goods that will sell, and not be piled up in warehouses and stores, and that high employee earnings per year may actually mean low labor cost per piece, and, consequently, low prices, large sales, and large profits. Workers today, better than ever before, understand that wages must be in a fair and just relation to production. Wages are far the largest item of cost in the production of most goods. If wage rates per piece are disproportionately high in any industry, the total cost of production in that industry will be 174 The Stock Market Crash—dAnd After boosted to the injury of that industry and all related industries. American industry has reached its present state of unprecedented efficiency and prosperity, and the American stock market has reached a new and probably permanent level of higher prices of securities, partly through the recognition, however dimly, of the fact that, while workers and employers have differences of viewpoint and of interest, their aims are, in the main, in harmony rather than in conflict. CHAPTER XI THE DIVIDENDS OF PROHIBITION ANOTHER basic reason for the new plateau of the stock market is to be found in expectation of future dividends because of prohibition. This is fully elaborated in my book Prohibition Still at Its Worst. Prohibition is a highly controversial subject, but not on the economic side. Whatever else we may think of prohibition, there is no gainsaying its economic value; although we may, of course, differ as to how great its economic value is—whether it is over six billion dollars a year, as I suggested in my book Prohibition at Its Worst, or larger or smaller. Estimates of Money Gains Professor Feldman, who criticizes, and with some justice, the method used in my estimate in his Economic Effects of Prohibition, finds prohibition has become economically important, but he is unwilling to make any estimate in figures. Professor Feldman showed that Herbert Hoover, as Secretary of Commerce, had ascribed to prohibition an increase of efficiency in the individual worker of upward of 10 per cent, stating in positive terms: “There is no [7% 176 The Stock Market Crash—dAnd After question that prohibition is making America more productive.” Dr. Paul H. Nystrom, Professor of Marketing of the School of Business in Columbia University, estimates $5,000,000,000 gained through prohibition, simply by diverting production from a narcotic drug to more legitimate goods. Addressing the National Retail Dry Goods Association in New York City, February 8, 1929, Dr. Nystrom said: “Prohibition, with all its arguments pro and con, undoubtedly is diverting not less than $5,000,000,000 a year, which would normally be expended on alcoholic drink were it not for prohibition, to other classes of commodities and to savings. Place whatever estimate you like on the amount of bootleg liquor sold in this country, and I am sure you will admit, as I have been forced to admit, that a return to the liquor consumption of the pre-Volstead days would mean several billions of dollars less business in home furnishings, automobiles, musical instruments, radio, travel, amusements, jewelry, insurance, education, books and magazines.” Testimony by Employers Professor Feldman says: “Taking into account, also, the concerns which the writer visited, a majority of the total number replied that prohibition had aided individual productivity, while less than half a dozen concerns claimed prohibition to have decreased productivity. This is somewhat surprising, because many executives had The Dividends of Prohibition 177 much to say against the ruinous quality of available liquor. Whatever the ill effects of such liquor may be, there was practically no testimony that it had tended to reduce productivity.” An important detail of the economic gains resulting from prohibition is supplied in the testimony of Joseph E. Gilbert, builder of many of New York's tall structures, in a report of his address to the members of a building firm, published by the New York Times, January 20, 1929. Mr. Gilbert is quoted: “With the coming of prohibition, it was believed in many quarters that the throwing of so many saloon corners on the market would cause a sharp decline in values, which would also have a bad effect on other properties. Such, however, has not been the case. We found that saloons were not the only class of business desirous of obtaining corner locations and paying well for them. Today the value of practically every corner formerly used for dispensing liquor has increased from two to four times.” No Economist Denies Gains So much for the physiological testimony as to the impairment produced by even moderate amounts of alcohol affecting the efficiency of workmen. As for the testimony of economists, Prohibition Commissioner Doran recently issued a statement that he had failed to find any economist who would gainsay that prohibition has been a vast help to welfare in the United States. I can verify this testimony. I was requested by the then President of the American 178 The Stock Market Crash—dAnd After Economic Association to convoke a “round table” on this question at its annual meeting in St. Louis in 1927. It was desired that I have both sides represented, the wet and the dry; yet I could find not a single economist in the United States who was willing to take the wet side in this “round table.” [ found many economists who were opposed to prohibition on the ground of personal liberty, or other grounds, but not one who was opposed to it on economic grounds. The commission sent by the British Government to the United States to examine into the elements of American prosperity, reported prohibition as one of the prime causes for the extraordinary gains in national efficiency and in real income since the war. Fallacy of Revenue Loss Finally, there remains the contention of economic loss on account of deprivation of governmental revenues from excise taxes, levied upon the liquor traffic before prohibition. Thus the Association Against the Prohibition Amendment declares that the “bill for prohibition exceeds the total revenue received by the Federal Treasury from individual income taxes, which in 1928 were $882,727,114.” The pamphlet adds: “The itemized bill which we have made up from government figures on current expenses and official reports of pre-prohibition finances, comes to $9136,000,000.” The Dividends of Prohibition 179 By this argument the Association Against the Prohibition Amendment is appealing to the pocketbook of income taxpayers. Its argument is for the restoration of a trafhc that is generally acknowledged to be parasitic on all productive industry. Of course, the argument is the other way around. All income is dependent upon the productivity of labor and capital. Anything which impairs that productivity will impair the national income. If the “loss” in Federal revenues, which the Association Against the Prohibition Amendment places at $936,-000,000 a year, due to cutting off the former taxes on the outlawed traffic, is to be considered at all, it should be in connection with the economic gains. But this “loss” is, as a matter of fact, not a loss in any true sense. It is a primary economic fact that removal of a tax, while it is a surrender of revenue to the government in a particular direction, is not at all a surrender of income of society. To the extent that it is a “loss” to the public treasury, it is a gain, to the same extent, to those who formerly paid the tax. A tax comes out of the individual pocket and goes into the common pocket of the nation; so it does not get us anywhere to talk about the “loss” sustained by the government which surrenders a tax or shifts the form in which it is applied. This argument is on all fours with the ridiculous assumption of “loss” recoverable by repealing the prohibition of sales of narcotic drugs in placing that tariff under a license 180 The dStock Market Crash—dAnd After tax. The fact that it is a mischievous and parasitic business is, of course, ignored. For every million dollars recovered in taxes by restoring the saloon, the nation would pay many millions directly to the saloons, and many millions more in impaired efficiency of its workers and in productive business replaced by a destructive trafhc. Moreover, in reply to this plea of loss of taxes, to those who allege economic “loss,” Dr. J. M. Doran, Commissioner of Prohibition, on June 15, 1929, met them on their own grounds of government receipts and expenditure. Dr. Doran said: “During the nine years since the effective date of prohibition the expenditures for the Prohibition Bureau, Coast Guard and Customs, incident to the enforcement of the eighteenth amendment, total $141,179,485. The collections from fines and penalties and the revenue from taxes on distilled spirits and fermented liquors total $460,502,792.76. “It is apparent that the collections by far overbalance the expenditures. Even if $72,000,000 estimated in the pamphlet as the cost to the Department of Justice for the enforcement of prohibition should be added, there would still be a balance of $247,-324,307.76 over and above the total expenditures accredited to the enforcement of the orohibition law.” Dr. Doran further disputed the accuracy of the $936,000,000 estimate. But from whatever point of view, the argument to the pocketbook of the income taxpaver is not justified. The Dividends of Prohibition [87 Net Saving in Distributed Wealth Even if the expenditure for illegal beverages be as great as certain estimates make it out to be, it is largely the expenditure of the rich. At $2.50 a pint for whiskey, the poor, who mainly paid the former revenue of the saloon, can no longer afford to buy it. Economists agree that, except in cases where the distribution of income is the same, a comparison of expenditures, dollar for dollar, in two different social strata is illusory, because ten dollars means to a rich man less than one dollar to a. poor man. It would be fairer to compare the present consumption with pre-prohibition consumption, not on a dollar basis, but on a quantity basis, and if, as in my opinion seems to be indicated, alcoholic consumption has been reduced through prohibition to 10 or 15 per cent of what it was, the net saving in distributed wealth is great. Thus prohibition, with all its shortcomings, has probably had a part in raising the national income during the last few years, and so raising the earnings and prices of stocks. CHAPTER XII RELIEF IN SEVEN YEARS OF STABLE MONEY A major reason why expected earnings of corporations should now bulk larger than they did a few years ago, as reflected in the high price levels of stocks, is that since 1922 the United States has had a comparatively stable level of commodity prices, that is, a stable dollar. We have had seven years of stable purchasing power, such as has never existed before in this country. The influence of this factor, while potent, is subtle and generally overlooked. Through what I have called the “money illusion,” the business man generally does not know when the dollar does change, much less does he realize when the dollar does not change. But the harm from the change and the good from the lack of change are very real and powerful. Like the influence of peace as distinct from war, any stability of commodity prices which makes the calculation of the business man, in terms of dollars and cents, more safe than when the purchasing power of the dollar is constantly changing, results in prosperous conditions, bigger earnings, better prospects, and a higher price level of securities. Qs ea Relief in Seven Years of Stable Money 183 The “Money Illusion” In my book The Money Illusion 1 have fully described why it is that we simply take it for granted that “a dollar is a dollar’ —that “a franc is a franc,” and that all money is stable, just as centuries ago, before Copernicus, people took it for granted that this earth was stationary, that there was really such a fact as a sunrise or a sunset, although we know that sunrise and sunset are illusions produced by the earth rotating around its axis. The reason for the “money illusion” within one’s own country. is described in the first chapter of this book, as follows: “Almost everyone is subject to the ‘Money Illusion’ in respect to his own country’s currency. This seems to him to be stationary while the money of other countries seems to change. It may seem strange, but it is true, that we see the rise or fall of foreign money better than we see that of our own. “For instance, after the war, we in America knew that the German mark had fallen, but very few Germans knew it. This was certainly true up to 1922, when, with another economist (Professor Frederick W. Roman), I studied price changes in Europe. On my way to Germany I stopped in London and consulted with Lord D’Abernon, then British Ambassador to Germany. He said: ‘Professor Fisher, you will find that very few Germans think of the mark as having fallen. I said: ‘That seems incredible. Every schoolboy in the United States knows it." But 184 The Stock Market Crash—dAnd After I found he was right. Germans thought of commodities as rising and thought of the American gold dollar as rising. They thought we had somehow cornered the gold of the world and were charging an outrageous price for it. But to them the mark was all the time the same mark. They lived and breathed and had their being in an atmosphere of marks, just as we in America live and breathe and have our being in an atmosphere of dollars. Professor Roman and I talked at length with twenty-four men and women whom we met by chance in our travels in Germany. Among these only one had any idea that the mark had changed. “Of course, all the others knew that prices had risen, but it never occurred to them that this rise had anything to do with the mark. They tried to explain it by the ‘supply and demand’ of other goods; by the blockade; by the destruction wrought by the war; by the American hoard of gold; by all manner of other things—exactly as in America, when, a few years ago, we ourselves talked about the ‘high cost of living,” we seldom heard anybody say that a change in the dollar had anything to do with it.” Gyrations of the Dollar But Germans and Americans alike kept their ac counts in what was, in reality, a fluctuating unit, in one case the mark and in the other the dollar. The dollar, reckoned as a yardstick of goods values, shrinks and expands. Doctor E. W. Kemmerer. who was an expert adviser to the Dawes Relief in Seven Years of Stable Money 185 Commission and has just concluded a study of the finances of China for its government, emphasizes this unstable quality of purchasing power of currency units in all his reports as financial adviser to a dozen European, South American, and African nations. Dr. Kemmerer recently said: “The gyrations in the value of the gold dollar since the end of the last century have been fully as violent as during any equal periods in the history of our country. Between 1900 and the beginning of the World War, the purchasing power of the dollar fell 18 per cent. From 1914 to 1920, it fell §7 per cent, or, from 1896 to 1920, over 70 per cent. From the middle of 1920 to September, 1928, the purchasing power of the dollar rose 56 per cent, but it is still 44 per cent less than in 1896. It is to this unsteady monetary unit that our financial and economic systems are tied.” Professor Kemmerer goes on to show that innumerable contracts, which are promises to pay a given number of dollars at future dates—go days, six months, or in terms of years—divide the nation into debtors and creditors. A depreciating dollar, one that buys constantly less goods, robs the creditors and the wage-earning and salaried classes for the advantage of the debtors. An appreciating dollar robs the debtors for the advantage of the creditors. Dr. W. I. King has estimated that this wholesale robbery took place in a period of five years in the United States to the extent of $40,000,000,000. But since 1922, thanks to measures of control 186 The Stock Market Crash—And After already taken by the Federal Reserve Board, the upward and downward fluctuations in purchasing power of the dollar have been less observable than during any equal period since 1800. There has been a slight tendency to increase in the purchasing power of the dollar. as reflected in a lower wholesale price WHOLESALE COMMODITY PRICES [RVING FISHERS STABILITY 20 17 18¢ 12: 162. 3 'S 1828 18926 1927 1928 ga 1929 CHART 19.—Stable wholesale commodity price level, 1923-1929, (steadied purchasing power of the dollar) has encouraged the making and keeping of business contracts. level since 1925; but this was brought about mainly through reduction in costs by mass production and skilled organization. While the dollar increased in purchasing power during 1926, part of 1927 and during the latter half of 1929, there was slight evidence of deflation that would be shown in the general shutting down of plants and unemployment. That Relief in Seven Years of Stable Money 187 is because the people could not only buy goods with a dollar, but because they had more dollars in their income. We do not often have such an expansion of commodities at reduced prices as has been recorded during the past few years. This expansion has taken place in the greatest burst of speed American industry ever attained. But the reduction in prices was warranted, for the most part, by an equal or greater reduction in unit costs. Had there been a reduction in prices such as that from May, 1920, to June, 1921, when the dollar rose rapidly in buying power, from 40 to 70 pre-war cents, there would have been no such expansion of American industry as the last six or seven years have witnessed, but a repetition of the collapse of industry that took place in the 1920-1921 period. For when prices fell in the summer of 1920 below the level of cost, profits ceased and losses were incurred, factories shut down, workers were turned away by hundreds of thousands, continued purchasing power was reduced and “hard times” came on. Such were the evils of deflation. The evil of inflating the currency is about as great as the evil of deflating it. A workingman who, in 1896, had put $100 into a savings bank found, in 1920, that his principal, plus compound interest at 41% per cent, amounted to about $300. On the face of it he had his principal back and in addition $200 of profit, or accumulated interest. This $200 seemed a genuine reward of thrift. But it was an illusory 188 The Stock Market Crash—And After profit, due to a sort of bogus accounting in terms of a varying dollar. For when this depositor came to spend his $300 in 1920, he found prices nearly four times as high as they had been in 1896. Hence, his entire accumulation of $300 would buy only about three-quarters as much as his original $100 would buy in 1896. Federal Reserve Control of Price Level It was doubtless partly to avoid these upward and downward fluctuations in the value of the purchasing power of the dollar that the Federal Reserve Board has tried to influence the expansion and contraction of the currency on behalf of the nation’s business. Thus in 1922, when the war and efforts at reconstruction had occasioned the flow to America of huge gold reserves that threatened inflation, officials of the Federal Reserve Board realized that all possible steps should be taken to prevent it. Had they not taken such action, but encouraged the banks to continue to follow blindly the profit motive, they would have loaned and reloaned their gold reserves until the credit structure had been doubled. Then the reserve ratio, instead of being, as it was in the fall of 1929, about 70 per cent, would, under the profit motive, have sunk more nearly to the legal ratios— 35 per cent for deposit liabilities and 40 per cent for Federal Reserve notes. This doubled credit structure would probably have led to a doubled price level. There would have been consequent inflation quite comparable to the inflation Relief in Seven Years of Stable Money 18g of 1917-1920, and it might have had as disastrous an end. Such a let-alone policy would not have safeguarded the dollar, but would have depreciated it, in spite of its fixed weight. Method of Discount and Open Market Control So in 1922 the Federal Reserve System set up its Open Market Committee to buy and sell securities, i" 20 10) z 100 8 “EDERAL RESERVE CREDIT CONTROL. 00 2. 5 FeuiartE pe - i “sien hE ee TRAER TT PRR Ri EMBER] NOUS] AL RODUCTIOM egy SET pa I 3 y 10 1922 1923 i924 i928 1826 ae iE 1927 1928 1329 Cuarrt 20~—Influence on industrial output through regulation of the rediscount rate and open market operations. These have been so used as to tend to keep the price level and business steady. especially government bonds, for the purpose of influencing the credit situation. This committee was reorganized in 1923 “with primary regard to the accommodation of commerce and business, and to 190 The Stock Market Crash—dAnd After the effect of such purchases or sales on the general credit situation.” This power, rightly used, makes the Federal Reserve System the greatest public service institution in the world. When the system buys securities it thereby puts money into circulation. When it lowers the Federal Reserve discount rate, it makes loans contracted by the member banks much easier to carry. The people have more money and credit. When the system spells, it thereby withdraws money or credit from circulation and when the rediscount rate is raised it makes loans to the member banks by the Federal Reserve Banks harder to get. Thus by this policy of expansion of credit or contraction of credit, respectively, as deflation or inflation of the commodity price level may be threatened, the Federal Reserve System exercises a strong regulative policy over the purchasing power of the dollar. This policy has prevailed during the past seven years to make the purchasing power of the dollar stable. Thus the Federal Reserve System wields a powerful control over loans, prices and prosperity. Adviser to Banks and Business Moreover, during the year preceding the stock market crash, the Federal Reserve Board, uneasy because of the unusual flow of credits into the stock market in the form of brokers’ loans, although I have criticized its failure to take sufficiently aggressive action, nevertheless, acted as an agency of warning to the public and to the banks. In a radio Relief in Seven Years of Stable Money 191 address broadcast on December 7, 1929, Lewis E. Pierson, formerly President of the United States Chamber of Commerce, said: “Quite apart from its control over currency and credit, the Reserve System has been a tower of strength to American finance through its advisory assistance to the banker in his individual problem. “While I am on the topic of the Reserve Board, let me say—and I have no hesitation in saying— that had it not been for the warning issued by the Board as long ago as last March, the recent stock panic would have been infinitely worse. Bear in mind that as a result of the stock crash loans amounting to $1,750,000,000 were liquidated almost overnight. If our financial institutions had not been in an impregnable position, this forced liquidation would have strewn the country with bank failures. What the country experienced in the dark days a month ago was but a zephyr to the whirlwind that would have struck us but for the advance warning of the Reserve Board. Our banks are sounder and stronger than ever before.” Menace of Gold Shortage It is by no means certain that the seven years of stable money will be followed by ‘equally stable conditions in future. On the contrary, there is now a threat of deflation which cannot be overlooked! The chief reason we have been able to stabilize money for seven years has been in our surplus gold reserve, constituting a slack which would be taken in or given 192 The Stock Market Crash—And After out, as required. But now we are confronted with the disappearance of this surplus, both through the growth of business and the falling off of gold production. It is true that there is the menace of a world gold shortage which should become manifest during the early years of the present decade, with accompanying deflation of the general price level and business depression, unless measures are taken to economize the gold supply. There is still enough gold as the basis of money and credit to supply the expanding needs of business for a year or two to comé. And with proper measures of prevention, the threatened long-term business depression, now comparatively distant, may be averted. But many economists and business men agree that the world decline in commodity prices, only slightly observable in the United States during the past five years, is the beginning of a great secular downward movement in prices spelling depression similar to the movements following the Napoleonic wars and the Civil War. The decline after our Civil War persisted until 1897. Then the discovery of new gold fields and the application of new methods of gold extraction increased the gold output, thus increasing the supply of monetary gold and giving the price level and upward swing. Gold production has increased since the World War, but has not reached the peak of 1915. Present yearly additions to the gold monetary supply are insufficient to meet the added demands for gold from increased business as WHOLESALE COMMODITY PRICE MOVEMENTS 1801 TO DATE 75 150 2% 1926 AV.= 00 175 150 125 00 OL 9 ~ “ 1am, 8 50 Se em mee + xe = = —_—— re Jas 800 BIO 1820 1830 1840 850 1860 1870 1880 1890 1900 1910 1920 1930 CHART 21.—After the Napoleonic wars, 1814-1860, and after the Civil War, 1864-1896, dearth of monetary metals and lack of credit machinery for control of the commodity price level resulted in long-~ontinued deflation of prices and “hard times.” 194 The Stock Market Crash—And After the basis of the money and credit structures throughout the world. With the yearly increase in gold production lagging further and further behind the monetary demand from increased business, we may expect the very elements of our prosperity making for business expansion to accentuate this possible gold crisis in the years to come with consequent business depression—unless measures which are quite practicable shall be taken to prevent it. But whatever the future may have in store, certain it is that we have had seven wonderful years of stable money. Relief Due to Stable Money Unlike the other five causes of increased national productivity enumerated in preceding chapters, namely, mergers, scientific research and invention, management engineering, labor’s new policy, and prohibition, the influence of stable money has been purely negative, consisting as it has in the mere removal of the twin interferences of inflation and deflation. But these interferences, until the last few years, have been so incessant and so ruinous—the last interference being the deflation of 1920-1921, still well remembered—that the relief afforded by their removal must be regarded as of quite enormous importance. This negative cause, together with the five more positive causes, constitute an adequate explanation for the amazing increase in productivity per Relief in Seven Years of Stable Money 195 worker which we find has actually occurred. They also account for the suddenness of this increase, and its rapid rate. The leap upward in productivity began even in the depression year 1921, and behind some of our six causes by two or three years. This was no more than to be expected. The unparalleled advance in “tempo” of production and trade was synchronous with the other causes. The organized advance of scientific research and invention and in management engineering grew out of the war; it began about 1918-1920, and was followed by the change in labor policy which became official when William Green succeeded the late Samuel Gompers as President of the American Federation of Labor in 1924. The bewildering multiplication of mergers began after the war, and increased with the advent of President Coolidge in 1923. National prohibition took effect in 1920, and the open market committee of the Federal Reserve Board began to function in 1922 in a way to stabilize the general level of wholesale prices. Here are six causes, each powerful in itself, and all beginning at or just before the great increase in the rate of productivity, and so of corporate earnings, which has been so marked during the present decade. The prime factor making for prosperity from 1922 to 1927, inclusive, is thus defined by the Report on Recent Economic Changes (page 862): “The old process of putting science into industry has been followed more intensively than before; it has been supplemented by tentative efforts to put 196 The Stock Market Crash—dAnd After science into business management, trade union policy, and government administration. Concrete instances of technical improvements in many mining, metallurgical, and fabricating processes are given in the chapters on industry. The remarkable results achieved are demonstrated statistically from census data showing output per worker. Similar, though less striking, instances appear in the chapter on construction. Without help from any extraordinary invention, the railroads, also, have attained a higher level of operating efficiency. In farming there is an intriguing report of new machines and new methods coming into use. Here, too, the record of average output per worker shows considerable gain. “All this means that since 1921 Americans have found ways of producing more physical goods per hour of labor than ever before. They have received larger average incomes because they have produced more commodities and services.” It was in this intensified upthrust of forces making for increased productivity per worker during the past seven years that the secret of the long bull market stands revealed. From this increased productivity came a more rapid increase of earnings of corporations, together with the ‘“‘plowing-back” of earnings in expectation of greater future gains. This expectation made men content to invest their money for smaller immediate dividends and at higher prices for corporate securities than past earnings had warranted. A further reason was in the reduction of risks due Relief in Seven Years of Stable Money 197 to the rise of investment counsel and investment trusts, consequent upon the new teaching that there was a speculative element in investment in preferred securities with fixed returns, because of fluctuation in the purchasing power of the dollar, and greater residual gains to be expected from the equities of common shares. This phase of the investment market will be discussed in the next chapter. CHAPTER XIII FLIGHT FROM BONDS TO STOCKS A potent reason for the long bull market rising to the plateau of stock prices of 1923-1930, is that there has been a material change during this period in the estimate of the public as to the risk of invest ing in common stocks. Whether this change is justified or not, the change has occurred. Only a few years ago a bond was regarded as far safer than a stock; a stock, in other words, as far unsafer than a bond. Prior to 1923 most investors thought that bonds were safe. They forgot that the dollar was not safe, and that the fixed dollar return from bonds might at any time shrink in purchasing power. In Germany people had lost 9g per cent of their principal and interest on bonds through forgetting that the mark was not safe under the influence of the “money illusion.” I have analyzed this illusion in the preceding chapter. In truth, the “safety” of bonds proved during the war a delusion and a snare. It is only since the tragic downfall of stocks in the crash of 1929 that bonds again afford a contrast on the side of safety. Sometimes, when the dollar was steady, bonds raf Flight From Bonds to Stocks 199 have yielded a steady income. Sometimes, when prices were falling, that is, when the dollar was rising, they have yielded an increasing income measured in purchasing power. Sometimes, when the dollar was falling in purchasing power, they have vielded a shrinking income and a shrunken principal 1400 | NEW SECURITIES ISSUED gonds 10 erocr 300 ) 200 10D 000 900] 800 L ~ - - - NEW CAPITAL . 700 8500 300 400 i 100 | 200 oc ogi {9 1920 1221 1922 1923 1924 1925 926 27 1epr 1929 CHART 22.—Large new security issues since 1924, have been marked by a decided preference by the investing public for common shares as against bonds. in purchasing power. Yet this picking of the bondholder’s pocket was so subtle that he submitted to it without a murmur; or, rather, he murmured only against the high cost of living and not against the insecurity of his investments or of the dollar. As a 200 The Stock Market Crash—And After matter of fact, the crucial element in all investments is the value of the dollar. Among several important books which emphasize the important role of changes in the value of the dollar, none has impressed the investing public so profoundly as certain events that gave rise to investment counsel and investment trusts in America, including especially the publication of Edgar Lawrence Smith's book, Common Stocks as Long-Term Investments (Macmillan). Another excellent book is Kenneth Van Strum’s Investment and Purchasing Power. Stocks vs. Bonds Mr. Smith made about a dozen comparisons to show how the stockholder and bondholder actually fared at different periods. In the various tests, several different methods of selection were used, but all were calculated to favor bonds rather than stocks. Otherwise the superiority in yield of stocks would have been even more pronounced. But even with the choice of securities favorable to bonds and unfavorable to stocks rather than representative of both, in only one case does Mr. Smith find an excess of advantage for bonds. This is Test 6, where Boston investors are supposed to have invested $10,000 in bonds in 1866, and, at the same time, $10,000 in assorted stocks. When they compared notes twenty years later it was found that the total income from stocks was $13,169, and that from the bonds was $12,155, showing a slight excess in Flight From Bonds to Stocks 201 favor of stocks, so far as this item of income is con cerned. But if we count the increase in the capital value of the securities, the advantage was reversed, making a net advantage for bonds of $1,012. This period was, as is well known, a period of rapidly falling prices, so that the bondholder, so far as the element of change in the dollar is concerned, was benefited thereby. On the other hand, during periods of rising prices, such as 1901-1922, the stockholder had a very decided advantage. Test 1, for instance, showed that as between $10,000 invested in 1901 in stocks and $10,000 invested at the same time in bonds, there was a net advantage in favor of the stockholder, of principal and income together, of $10,981. In all these comparisons the advantages are reckoned in the actual dollars received, a reckoning which is imperfect, first, because of the variability of the dollar, and second, because of the unequal distribution in time of the returns from stocks and bonds. Evidently the fairest comparison is to be made by computing the rate of yield in the various investments, in the sense that this phrase is used in the ordinary bond tables. In this way we find the real yield as distinct from the nominal yield. The distinction is somewhat analogous to that between real and nominal wages. The rate of yield on any investment is that rate of interest, which, if used for discounting the income and principal to be received, would give an aggregate discounted value at the time of purchase, equal to the purchase price. Thus the 202 The Stock Market Crash—And After rate realized on a five per cent bond, running twenty years, purchased at par and redeemable at par, will be five per cent. But if purchased at 110, the rate realized will be 4.3 per cent. While if it is purchased at go, the rate is 5.9 per cent. The rate of yield when the calculations are in terms of dollars (uncorrected for variations in purchasing power) differs from the rate calculated in the terms of dollars corrected to a uniform purchasing power, say pre-war dollars. Speculative Character of Bonds If we apply this yield idea to the various tests which Mr. Smith has made we find results as follows. We see, for instance, that the man who in 1866, under Test 6, invested in bonds and redeemed or sold them in 1885, made 6.8 per cent on his money, reckoning in actual dollars, while reckoning in pre-wars, he made 11.7 per cent. Again, under Test 1, 1901-1922, the bondholder nominally made 4 per cent, but really only 1.1 per cent. This analysis indicates clearly enough that during periods of marked fluctuations in the general price level, bonds have a speculative character. The series of writers on this subject have proved, statistically, that bonds are not, as compared with well-selected and diversified stocks, what they have been cracked up to be; that they are especially deceptive during rising prices, and that even when prices are falling they are not usually superior to stocks. These writings threw a bombshell into the invest- Flight From Bonds to Stocks 203 ing world. They evolved five reasons for the now proved fact that stocks are a better investment than bonds: first, because the stockholder stands to win as well as to lose; second, because modern dividend policy is toward steadiness; third, because a portion of the stockholders’ earnings is reinvested for him and ultimately yields further dividends; fourth, because the unstable dollar tricks the bondholder, but any effect on the stockholder is largely neutralized; and fifth, because diversification can correct the irregularities of the stockholder’s income but not that of the bondholder. This fifth reason is much emphasized by these writers, especially by Edgar Smith and Kenneth Van Strum. They show that whatever truth there is in the “risk” carried by the stockholder as compared with the bondholder, this risk can be partly neutralized by diversification. If one invests $10,000 in ten different companies, putting $1,000 into each, while he does run a real risk of losing all that he has invested in some one or two of these companies, this risk is mostly offset by the probability that some other company will prosper exceedingly. Both Smith and Van Strum show how this diversification does neutralize the risk and correct the unsteadiness of the stockholder’s income. The bondholder, like the stockholder, may be said to be “gambling.” In fact, he is more like the man betting on “heads” or “tails.” The dollar will go up or down for all bonds at once, and there is no wav to iron out that gamble by diversification. The 204 The Stock Market Crash—And After only way to stabilize income from bonds is to buy stocks as well, these also being diversified. The truth is, there is no way to get the gamble out of life altogether. Neither stocks nor bonds are really “safe” as to purchasing power. But the individual investor is at a great advantage when he pools his earnings and savings of those of a multitude of others in an investment trust, which with the aid of expert counsel keeps it invested in well-selected diversified stocks and preferred securities. Taking Risk from Speculation A little reasoning permits of a startling corollary. It is this: If we can, by sufficient diversification in investments, get a greater certainty and thus run less risks from our speculation, then the more unsafe the investments are, taken individually, the safer they are taken collectively, to say nothing of profit ableness, provided that the diversification is suffi ciently increased. This paradox is derived directly from exploiting the old-fashioned fear of common stocks and the consequent refusal to deal in them, except well below their “mathematical value.” Now, the mathematical value of a prize at stake is that prize multiplied by the chance of winning it. If a man stakes a dollar on “heads” coming up, the mathematical value of that chance is exactly fifty cents, because there is exactly one chance in two that “heads” will come up. If the prize at stake is Flight From Bonds to Stocks 205 to be won only in case two successive “heads” come up, there is one chance in four and the mathematical value is twenty-five cents. This is so-called “fair” gambling. Any price above the mathematical value is unfair gambling, and none but a real gambler will pay more than the mathematical value, or even so much. The gamblers at Monte Carlo do pay about three per cent more than the mathematical value of their chances; but only conscious gamblers, not investors, participate in rouge et noir. In fact, a sound-minded investor will pay less than the mathematical value for a chance to gain money on a risk. That is, he will trim that price by means of a “caution coefficient,” to use a term which I employed in my book on The Nature of Capital and Income. This “caution coefficient” becomes, in practice, greater and greater as the risk grows. If my chance of getting a dollar is a certainty, there would be no reduction on account of the caution factor. If itis like the chance of betting on “heads” or “tails,” the caution factor may trim the price of the chance down from fifty cents, in mathematical value, to say, forty cents for the chance to win the dollar. That is a reduction on account of caution to 20 per cent. But if one bets on two heads in succession, the reduction on account of caution would be correspondingly greater, so that instead of paying twenty-five cents, the mathematical value, the investor might insist on a reduction of more than 20 per cent to say, fifteen 206 The Stock Market Crash—And After cents. It is both normal and proper that the higher the risk the cheaper the chance of winning can be obtained, compared with its mathematical value. Hence, the more risky the investment would be to a lone individual playing the game, the safer it is, if, by pooling in an investment trust with wide diversification in investment, the individual risk is thereby absorbed. For as the risk grows it can be constantly absorbed by corresponding increases in diversification. Thus the individual member of the trust may gain more on the riskier investments, bought by the trusts at much less than their mathematical value, than if he played the market alone with less risky investments, but bought at much nearer their mathematical value. So the investment trust has proved that speculation can be turned into investment which is much safer than many individual investments in so-called “gilt-edge’ securities. And the paradox is that because of the ‘‘caution factor” the market value of the riskiest investments has been depressed far below their real mathematical value. The investment trusts, carrying the principle of diversification to wide limits, have managed to get a higher average return from investments which individually would have proved quite risky, while at the same time they have extracted from them largely their elements of risk. This principle, so far as I know, never has been definitely formulated in the investment market, but it has been acted upon intuitively by increasing numbers of investors, who have accepted it by employ- Flight From Bonds to Stocks 207 ing investment trusts, investment counsel and other skilled means of diversifying the use of their funds. Naturally this enlightened process has created a tremendous new market for securities that in times past have gone begging. With the increased demand, the price of these formerly despised securities has risen. Thus the change in the caution factor, reducing it to a much narrower margin from the true mathematical value of common stocks as their element of risk have been absorbed by intelligent diversification, has helped put the stock market on its higher plateau. [t constitutes a permanent reason why this plateau will not sink again to the level of former years except for extraordinary causes. Principle of Constant Scrutiny This is more certain because of another principle which may be added to that of diversification. It is the principle of constant inspection or check-up as to the status of companies issuing stocks, and constant turnover accordingly. Of course, bonds require less inspection than stocks; hence in times past when each man was his own investor, the busy man or the lazy man preferred bonds because he could put them in his safe-deposit box and forget them, while investments in common stocks required unusual care and attention in the turnover of his funds—more than he was willing or able to give. For the sound investor in common stocks must turn them over constantly, selling those that are losing in value and investing in those that are gaining 208 The Stock Market Crash—And After This function is performed today by skilled investment counsel to a degree that makes investments in common stocks, guarded by their vigilance, safer than the former investment in bonds by individuals. The old and the new points of view came into comical contrast when investment counsel recently proffered their services to a church committee in an eastern state. They were solemnly assured that such services were “not at all necessary, because the late Bishop, who died a few years ago, had himself personally passed upon all the investments before his death and pronounced them first class and sound!” The church investments were largely in bonds. But it is certain that those bonds, however good they might have been in former years, were not so good an investment as common stocks that are constantly scrutinized by a modern, first-class investment trust. Because of the scientific appraisals of the stock market by the investment trusts and investment counselors, therefore, and the strides in research, invention, elimination of waste and increased productivity due to the other factors described in this book that have characterized the years since the war, what was once speculation or mere gambling in common stocks has changed toward safer investment. The intrinsic value of stocks, present and future, has increased. Along with these influences for a higher market, the commodity price level has been maintained in relative stability since 1921, largely by the action of Flight From Bonds to Stocks 209 the Federal Reserve System codperating with business in the control of credit. A dangerous surplus of gold has been redistributed among the central banks of the world in aid of the post-war resumption of the gold standard. This has steadied the levels of commodity prices in foreign countries and encouraged international trade. The comparative stabilization of gold in terms of goods has given reassurance to the bond market as well as to stock investments. The investment trusts and counsel have led investors to put their eggs in three baskets— common stocks, preferred stocks, and bonds. The high plateau on which the stock market now moves—still far above previous plateaus, despite the panic of 1929—is, therefore, a result of improved order and efficiency in the investment market as well as in American business. Post-Panic Increase of Shareholders While the stock market was falling to its low level during November, 1929—proving the tragic exception to the case for stocks as against investment in bonds—many observers were surprised at the increase of the number of shareholders reported by several large corporations as a result of the break. Of course, there was the taking up of margin accounts for which the shares were previously carried in brokers’ loans, and this explains in a measure the increases in shareholders. But there was an increase of more than fifty thousand shareholders of the Cities Service Company during that 210 The Stock Market Crash—And After month, who were added to the more than 250,000 shareholders already on the company’s books. General Motors, also, gained about 40,000 shareholders during the three months of record declines in the market, representing an increase of more than one-third, while the value of its shares fell by nearly 50 per cent. Preliminary reports by other large corporations led to the same conclusion, namely, that the break in stock prices was not followed by a decline in the relative popularity of common stocks as investments. These increases in shareholders helped confirm the opinion during the sharp declines in brokers’ loans, for example, while prices of stocks were increasing during the week ended November 20th, that stocks carried on margin were being transferred to buyers who paid cash. In fact, the commercial banks reported a heavy stream of orders from customers who were taking advantage of the decline to purchase stocks for cash. They had held back their purchasing power until they saw their favorite issues available, in many instances at the lowest level in two years or more; then they came into the market and bought after the reaction. Such was the momentum of the movement of preference for stocks as against bonds, which persisted after the long bull market since 1922. During the bull market the flight to common stocks away from bonds was shown by the increase in prices of equity securities. Thus total value of long- and shortterm bonds issued during the first eight months of Flight From Bonds to Stocks 211 1925 amounted to $2,353,000,000, while stock issues during that period amounted to only $804,000,-000, exceeding slightly one-third of the total loaned. But during the first eight months of 1929, stock issues amounted to $4,794,000,000 or more than double the long- and short-term bond and note issues, which were only $2,360,000,000. Moreover, the bonds of 1929 had been affected with equity interests in one form or another, such as permission to convert into common stock, or to buy common stock at future dates at a definite price; also, in certain contracts, to receive interest payments in common stock if desired. Stock Conversions of Funded Debt Along with this preponderance of the issues of equity securities during the two years 1928 and 1929, came announcements by leading corporations that they would retire their redeemable funded debt through new stock issues. United States Steel led the way, followed by the Bethlehem Steel Corporation, which announced, during September of 1929, its intention to take up about $90,000,000 longterm bonds callable at 105 to 107; while United States Steel had announced its decision to cancel $271,000,000 of long-term indebtedness redeemable before maturity at 110 and 1135. This movement of converting debts with a mortgage lien into stocks contrasts sharply with the inability of the railroads during the first two years after the war, to sell stock in any considerable amount 212 The Stock Market Crash—And After or to finance their needs except by bonded issues. But, in 1929, the New York, New Haven and Hartford Railroad also decided to fund its bonded indebtedness. While the stock price level rose in the long bull market, investors increasingly took the new view of the relative merits of stocks and bonds for investment. They no longer distrusted company shares. They responded whole-heartedly to the invitation to share the risks and advantages of partnerships. Not only individuals but institutions began to buy stocks in certain proportions through their bonded investments. From Yale University, for example, came the report of the University Treasurer, in October, 1929, that of its investments, bonds comprised only about 38 per cent; mortgage loans 13 per cent; real estate 12 per cent; and stocks about 33 per cent. These proportions were in strong contrast with 1919, when 63 per cent of Yale's investments were in the form of bonds and only 10 per cent in the form of stocks. But Yale had learned her lesson during the war and post-war inflation of commodity prices, which depreciated the purchasing power of the dollar to such extent that a “drive” was instituted to increase the University’s endowment for salaries of its teaching staff by $20,000,000. Savings Institutions Turn to Common Stocks [nvestments in common stocks by large estates had so increased, by 1929, that Arthur W. Loasby, Flight From Bonds to Stocks 213 Chairman of the Board of the Equitable Trust Company of New York, reported during November that 49 per cent of the assets of large estates were in equity securities. Furthermore, savings banks and other fiduciary institutions were seeking added legislation to invest in common shares. Even during heavy declines in stock, for example, the President of the Boston Five Cent Savings Bank said on October 16, 1929: “We must serve our depositors by investing in that type of securities that they desire. It is their money that we are handling. If we do not invest it according to their wishes, then they will withdraw it from our institution. That has been amply demonstrated during the past year. As it is clearly their desire to invest their money in common stocks, we must be able to invest it as they desire when it is left in our charge. “If we are to change our laws so as to permit investments in common stocks of the highest grade, we must necessarily also have the right to increase our surplus, perhaps from 25 to 50 per cent or possibly 100 per cent. With this accumulated surplus there would be large earnings that ought to be applied to the current dividends.” Now the change toward stocks has taken place. The average monthly output of new bond offerings in 1927 was more than four times as large as in 1919; in 1928 it was only three and one-half times as large as in 1919, and for the first ten months in 1929, it diminished to two and one-half times the 214 The Stock Market Crash—And After 1919 total. These figures also show, however, that bonds are still the chief investment. Common Stock Investment May Be Overdone In an article published on May 28, 1928, I said that while the theory is sound, investment in common stocks can be overdone, especially when every one is buying them. The codperative buying of diversified stock securities should be done with full knowledge that it may be affected by overspeculation, and that, after all, common stock investments are not based on guaranteed income. When the average yield of common stock falls below § per cent, the investor must look very sharply at the prospects of the companies in question, and then it is wise for him to buy other securities as well. The purchase of bonds and preferred stocks is more advisable if the commodity price level tips downward, as it has done since 1925. For when the price level of commodities declines, holders of bonds profit by the rise in purchasing power of the dollar, both in their interest and in their principal. Mr. Leland Rex Robinson, whose book on investment trusts is standard, recently called attention to the generally high-grade character of securities purchased by leading investment trusts during 1929, and the great distribution of risks which many of them show in their holdings. Mr. Robinson distinguishes, of course, between investment trusts proper and holding companies which control, manage and finance groups of subsidiaries. These hold- Flight From Bonds to Stocks 215 ing companies differ radically from the true investment trusts in that their function is to manage the securities of the companies which they hold, which means that they fix the policies of those concerns. Their holdings, therefore, are “frozen” while the holdings of a general management trust are liquid. FINANCING ey INVESTMENT TRUSTS AND TRADING AND HOLDING COMPANIES 1929 RA LOO SOURCE! COMMERCIAL & FIN. CHRONICLE, LOC yy MILLIONS OF DOLLARS | yo HET Oricon. JAN. FEB. MAR APR, MAY, JUN. JUL. AUG, SEP. OCT. NOV. DEC. Cuarr 23.~The classification of “Investment Trusts” on which the Commercial and Financial Chronicle bases its figures is not to be identified with the stricter classification bv Leland Rex. Robinson. — [n addition there are investment companies that are likewise sometimes called investment trusts. There are finance companies, also, that are sometimes called investment trusts, although they are promotional companies and manage the concerns in which they are interested. Even financial trading companies which answer to the term of “blind pools” have at times assumed the name of investment trusts or have 216 The Stock Market Crash—And After been called investment trusts. These organizations are avowedly of the most speculative type and are more risky than the investment trust proper, because they may heavily concentrate their holdings. It is concerning investment trusts proper that Mr. Robinson says: “It 1s important to bear in mind that even in the recently closed period of excessive common stock emphasis, there were many investment trusts which were consistently buying in less buoyant foreign markets and giving their securities portfolios a strong anchor to windward in the form of large bond holdings. A high proportion of seasoned and marketable securities, the ownership of bonds as well as stocks, and the ability to liquidate on foreign market have all contributed to give some investment trusts a further purchasing power during the recent doldrums.” Mr. Robinson finds that the investment trust movement as a whole seems to have been “relatively free from such systematic abuses as might have been feared in view of its recent origin, its amazingly rapid growth, and the unprecedented situation in the stock market.” He adds that it does not appear likely that the American companies as a whole will pass through “any such term of painful reconstruction, both of financial structures and of public confidence, as many of the British financial companies and investment trusts did in the years 1890 to 1896.” The majority of them show comparatively large ratios of total investment funds raised by issuance of capital stock. Flight From Bonds to Stocks 217 Conversely, funded indebtedness is absent, or the restriction of such indebtedness as compared with total paid-in capital, so that bondholders and shareholders are both protected. Also, there has been comparatively little borrowing of banks, the investment trusts, Mr. Robinson says, “having only in exceptional cases exceeded the limits of prudence in the use of short-term credits.” He finds that many leading funds and companies were in reasonably liquid position at the time the most serious price declines started. Many had been strongly fortified late in October by a relatively high proportion of call loans and cash items. Of the public financing to a total of $2,440,000, 000, reported by the Commercial and Financial Chronicle for “investment trusts and trading and holding companies” during the first ten months of 1929, it is stated that over 9§ per cent was in stocks. Mr. Robinson observes that the greater part of all this capital was ‘“‘obviously raised for finance, trading, and holding companies, rather than for investment trusts.” For this reason he warns against the easy habit of lumping together such radically different companies, funds, and common law trusts. When they are properly defined, it will be found that investment trusts proper weathered the panic in much better condition than the speculative pools and individual operators, chiefly through their steady reliance upon the principle of diversification and skilled scrutiny in making and changing their investments. CHAPTER XIV SPECULATION AND BROKERS' LOANS UNDOUBTEDLY the contagion of the long bull market had encouraged unwise speculation. But the main trouble was that so much borrowed money was used. It might have been entirely proper had the speculators used their own money in following a generally sound judgment to profit by reasonably expected gains in the future. Speculation in itself may do either good or harm. It does good when it reduces the inequality of prices at different times. It does harm when it aggravates this inequality. In the first case, which may be called the normal one, the interests of the speculator and the public are to a large extent identical. When the speculator is correct in his prognostications, he will make a profit. His object is to make a profit when prices are rising, but he can do so only by mitigating the rise. Likewise his object is to make a profit when prices are falling, but he can do so onlv by mitigating the fall. His profits are, as it were, a reward paid him by the community for mitigating price changes. If he makes a mistake in either form of speculation, he suffers losses, and these losses may be regarded as a sort of penalty he suffers for aggravating the inequal-218 Speculation and Brokers’ Loans 219 ities in prices. Since the interests of the speculator and of the public are thus normally parallel, there is a premium put on wise and beneficial speculation and a penalty on unwise and injurious speculation. It is unfortunately true, however, that in spite of the penalties for unwise and injurious speculation much speculation is of this latter character. This is partly due to the fact that many engage in speculation who have no adequate equipment for so doing, and no independent judgment as to the causes making for a rise or a fall in prices. The ultimate justification for speculating must rest in the wisdom and independence of those who speculate. Speculation which merely follows a “tip” has no independent value. If every person who speculates for a rise or a fall should do so on a basis of his own best independent judgement, the chances are that the stakes of those who are overconfident in either direction would largely offset each other. Speculation That Is Gambling During the recent years of the long bull market, no doubt too many of the general public were beguiled into the folly of entering the speculating market as individuals. Swayed by a superstitious regard for “tips,” they played the game alone without the benefit of investment counsel, and without participation in investment trusts conducted on sound principles. But as individuals the general public have usually little special knowledge of market conditions, and their participation in the market except through 220 The Stock Market Crash—And After expert guidance is almost as apt to aggravate as to alleviate the inequalities in prices. [n such cases speculation becomes little more than gambling. In fact, it is worse than gambling, for the evils are more extensive, being communicated to others than the gamblers themselves. Such evils of speculation are especially grave when, as usually happens, the general public speculates in a mass, that is, all in the same direction. We see, then, that the chief evils of speculation are largely the work of the unprofessional speculators, just as the chief evils of reckless automobile driving are due to untrained chauffeurs. [t must not be supposed, however, that the professional speculator is always a public benefactor. Not only may he also make mistakes which cost him and society dear, but he may sometimes “rig the market” and manipulate prices. There is a vast difference between merely anticipating the market and manipulating it. When a professional speculator merely attempts to take advantage of an impending rise or fall of prices, he is usually a public benefactor; but when he attempts to create the rise or fall, of which he is to take advantage, by false reports, by “cornering,” or by sudden and great short selling, especially in conspiracy with others to cause a panic, he becomes a mischief maker. In short, the speculator who correctly anticipates, and so mitigates, price changes does good, while he who manipulates, and so aggravates price changes does harm. Speculation and Brokers’ Loans 221 Undoubtedly the contagion of the long bull market had encouraged unwise speculation. But for the most part it was unwise in a peculiar sense, namely, that it would have been entirely proper had the speculators used their own money in following a generally sound judgment to profit by reasonably expected gains in the future. Function of Brokers’ Loans Did brokers’ loans rise too high during the period preceding the panic? If so, should there be some method of governing their output and of restricting them to prevent undue speculation? President E. H. H. Simmons of the New York Stock Exchange, in an address before the Indiana Bankers’ Association at Evansville, September 11th, defended brokers’ loans, notwithstanding their abuse in inflating the stock market, and notwithstanding the discrimination against them embodied in the Federal Reserve Act. “To wipe out brokers’ loans or violently reduce them,” Mr. Simmons told the Indiana bankers, “would inevitably slow up American industry; if not totally halt its continued progress.” Before new securities will appeal to outright investors, he pointed out, they must be seasoned. New industries and new extensions of industry need tremendous outlays if they are to get promptly into large-scale production, with its attendant economies and lower prices. This need is met, in part, by holding the new 222 The Stock Market Crash—And After securities in the market as a floating supply until investors will buy them at prices mutually advantageous to them and to the industries. By this process brokers’ loans aided mass production for the motor car industry; they hastened the day of the radio in every home, and of the photoplay in every neighborhood and hamlet. They SIMILARITY IN MOVEMENTS : AROKERS Loans —1 5T0CK VALUES ====1926 * 100 ik Los A CHART 24.—As stock prices increased, reflecting greater expectations of profits due to improved processes, the public resorted more and more to borrowing in order to share in prospective gains. may help to establish the American airplane industry on a scale greater than would otherwise be possible. How did the extraordinary growth in brokers’ loans come about? Fred I. Kent has made a study of the expansion of these loans during 1929, the substance of which is embodied in his address before the American Acceptance Council on November 11, 1929. The study is linked with an accounting of new security flotations, Speculation and Brokers’ Loans 223 of which brokers’ loans constituted 7 per cent during the five years ended with 1928. But during the first nine months of 1929, brokers’ loans rose by $1,700,000,000, or by about 20 per cent of the value of new issues, of which the total was $8,419,000,000. Here was a striking increase in loans from 7 per cent of new security issues during the five years preceding 1929, to 20 per cent during the first three quarters of 1929. Overextension of Credits On the assumption that national income during these three quarters was $58,500,000,000, Mr. Kent finds that an abnormal amount of this national income went into brokers’ loans. He figures that 915 per cent of income is the normal amount available for new securities and increased saving deposits, and that $5,557,500,000 was “all that could be utilized for investment purposes.” But the new security issues during the first three quarters of 1929 amounted to $8,419,000,000, or $2,811,000,000 more than this $5,557,500,000 available from income. Moreover, $2,884,000,000 was involved in the “rights” for the total of new securities issued during this interval, swelling the total to $11,303,000,000 for the first nine months of 1929, or 20 per cent of the national income during that period. Inasmuch as brokers’ loans rose by $1,700,000,000, Mr. Kent estimates that the balance must have come from abroad and from the addition which brokers’ loans made against securities. 224 The Stock Market Crash—And After New Problems Due to Discounting of Gains He draws the conclusion that there were sound business reasons for the rise in securities, but that the discounting of expected business gains gave rise to a new set of problems which resulted in the security markets going forward too fast. Mr. Kent summarizes as follows: “We find that sound business growth was at the bottom of the normal rise in the price of securities, that politics as exercised in the capital-gain tax prevented sales of securities which would have acted to hold the prices within bounds, that uncertainties caused by political blocs in Congress changed the forward-looking national psychology into one of uncertainty, that new securities were created and issued more rapidly than the public could absorb, and that their intrusion in brokers’ loans and other security loans was not intelligently understood; that certain of these forces worked to create high prices for securities and others to undermine such prices after they had been attained.” Mr. Kent has taken an important view of the growth of brokers’ loans. But he fails to make clear that these loans do not necessarily represent real money or added drafts on the national income. To a large extent they are simply “indices of suspended titles.” To show this a friend who has given it special study supplies an example: Assume first that “A” owns one share of New York Central stock which cost him $65; that “B” Speculation and Brokers’ Loans 22% has $35 in cash; that “‘C” has $50 in cash; and that “D" is a broker. Now let “B” buy the share from “A” at $100 through “D,” paying $35 cash and leaving $65 as a brokers’ loan, this being provided by a call loan of $65 from “A” to “D.” Then let “C” buy from “B” at $150, paying $50 cash and leaving $100 as a broker's loan, the increase in the total of brokers’ loans from $65 to $100 being provided by a call loan of $35 from “B” to “D.? As the final result of the preceding transactions we have the same single share of stock in existence, but with an increase in market price from $65 to $150. There is no change in the total cash, which was originally $85, except that “A” now has $35 and “B” $50, while “C” has no cash. And the total of brokers’ loans, or $100, represents not only the rise from $65 to $150 in market value, but also the diminished equity of “C” in the share, that is, $50, as compared with the $65 original equity of “A”. Furthermore, all transactions have been “paper’’ transactions and have involved no recourse even to bank credit. To continue this example in the reverse direction, “C” might, after a market crash, sell the share to “A” for $65, with the result that “A” would have his original share plus $35 cash, “B” would have $50 cash as before (plus his loss of $35 to “D”), and “C” would have less than nothing to the extent of the $35 still owing to “D.” 226 The Stock Market Crash—And After Influence of Gold Exports Mr. Kent's analysis is supplemented by the view of Mr. George E. Roberts of the National City Bank of New York. Addressing the Academy of Political Science of New York on November 22, 1929, Mr. Roberts discussed the influence of the plethora of gold that came to this country because of what he calls the abnormal social, political and economic conditions in Europe after the war; this was followed by our export of gold to aid European reconstruction during 1927 and 1928, when many countries were returning to the gold basis and a large aggregate of foreign loans was floated in the American market. By the export of gold in this period we suffered a net loss of $500,000,000 in the basic standard metal. Mr. Roberts says: “The change in the situation effected by the loss of gold, while influencing the attitude of the banks, did not command the attention it deserved from the speculative public. The market was under too much momentum to take it seriously. The market was strong in the opinion that it could get what money it needed by paying higher interest rates, and proceeded to demonstrate that theory with considerable success. Of course, it is known that higher interest rates will attract money. They have a saying in London that 10 per cent will draw gold out of the ground.” As a reason for these high rates Mr. Roberts furnishes this example: “Throughout the four years 1918 to 1921, New SOURCES OF BROKERS’ FUNDS BILLIONS oF & 5 f » Ny £ { KR 1.0 3 5 30 > 8 2 0 ].5§ YM rm a ]. r 3. X 1926 1927 1908 1929 ~o . : 3% fe CHART 25.~—The long bull market was largely sustained by the Dew banking business improvised by “others,” chiefly corporations that had piled up loanable funds out of earnings or the proceeds of [EW Security issues. 2A 228 The Stock Market Crash—dAnd After York Central stock was selling around $65 a share. It was paying § per cent dividends, and at the market price the yield was nearly 8 per cent. After 1920, capital was accumulated, gold was pouring in and enlarging the basis of credit. By the middle of 1922 time loans on mixed stock exchange collateral were down to 44 per cent and call loans much of the time lower. The average renewal rate on call loans for the whole year 1924 was 3.1 per cent. “The public is quick to take advantage of such an opportunity as that to borrow money on a 3 or 4 per cent basis and carry New York Central stock on a 7 or 8 per cent basis. That was the first impetus to the stock market. And when a market gets well under way it travels on its own momentum. It is able of itself to attract support. Of course, such movements go too far. More people do things because other people are doing them than because they know the reasons, and that is progressively so of a bull market. The market had occasional back-sets in 1925 and 1026, but on the whole gained confidence on the recoveries, until in the fall of 1927 something happened.” That something was the withdrawal of the half billion dollars gold to Europe. Mr. Roberts shows that the New York City banks withdrew their support of the growing account of brokers’ loans and were not responsible for its growth from October, 1927, to 1929. The high interest rates of the call loan markets attracted funds from Speculation and Brokers’ Loans 229 other sources. The loans for “other,” namely, corporations and individuals who instructed the banks of which they were patrons to lend funds for them in the call market, amounted to $922,000,-000 in October, 1927. In October, 1929, the loans for “others” amounted to $3,907,000,000, having more than quadrupled in two years. The loans for out-of-town banks increased by 50 per cent. Both classes of loans increased by $3,500,000,000. “The market,” Mr. Roberts says, “had found a way to go around the banking system to the original sources of funds, that is, in savings, profits and other free funds that would normally go into permanent investments.’ Higher Foreign Discount Rates But the rising interest rates called American capital from its employment abroad and transferred foreign capital to this country. By October, 1929, we had recovered one-half of the half billion gold exported during the preceding two years. This alarmed the central banks in Europe. fifteen of which raised their rediscount rates during 1929, while Canada and Argentina set up embargoes on gold exports to this country. With the increase in the Bank of England discount rate to the unusual figure of 614 per cent on September 26, New York exchange depreciated, indicating the withdrawal of foreign funds from our market. The situation was aggravated by the failure of the issuing house of 230 The Stock Market Crash—And After Hatry in London, which was the signal for a recession on the London Stock Exchange, followed by a decline on the Paris and Berlin Exchanges. The withdrawal of foreign funds was signalized by a rise in brokers’ loans in New York while the market was falling, which indicated that the withdrawal forced American borrowing to replace the funds exported. Panic Shrinkage of Brokers’ Loans However, this was the last influence that tended to work the brokers’ loan account upward. Thenceforward the weekly reports of the Federal Reserve Board recorded unprecedented declines. After the climb to $6,804,000,000, reported September 25 by the Federal Reserve Board, there was a shrinkage in the total by $2,440,559,111 during October. With the report of December 26th by the Federal Reserve Board, the account had declined to the lowest point since September 28, 1927. There had been a cut of $3,483,000,000, or more than 50 per cent. The foregoing analysis of Mr. Roberts is the best I know of regarding the factors of gold and credit. The essential points are: (1) After 1920, as a post-war and post-crisis reaction, gold accumulated in America, artificially depressing the short-time rates of interest in the money market, below the rates justified by underlying economic conditions. (2) These low short-time rates contrasted sharply with the high yields on common stocks, the prices of Speculation and Brokers’ Loans 231 which were then far too low, not having yet been adjusted to the results of war-inflation. Through that inflation the dollar had lost a third of its purchasing power. But the public had not yet been convinced that the change was permanent and were loath to revalue stocks on the basis of permanently inflated dividends in terms of dollars. (3) These two contrasted rates, the abnormally low interest rates and the abnormally high stock yields, led to borrowings at 3 or 4 per cent to buy stocks yielding 7 or 8 per cent, thus initiating the bull movement. (4) The withdrawal of gold to Europe in 1927, consequent on the resumption there of the gold standard and the later withdrawal of American bank funds from the stock market, failed to stop the movement because, by this time, corporations had acquired so prosperous a cash position as to supply the brokers’ loans themselves. (5) The net result was a rise in interest rates which reattracted gold from Europe and led to European central banks raising their rates. (6) This may have helped precipitate the crash in London, and the drop on the Paris and Berlin Exchanges, which in turn, reénforced the growing bearish pressure on the New York Stock Exchange. New York Banks Lend Aid During the market crisis the Reserve Bank at New York released credit to the member banks, which 232 The Stock Market Crash—And After enabled them to take over one billion dollars of market loans that had been made by outside lenders. This action Mr. Roberts justifies, although he admits that ‘‘it might be said to be for a purpose not contemplated in the Reserve Act.” He adds: “It is to be considered, however, that the ultimate purpose of the Reserve system is to stabilize and protect the general credit situation. In pursuance of this purpose the action was amply justified, and on the basis of this justification it is possible to go even further and say that intervention would be warranted for the purpose of averting an impending disaster. This would be admitting that the exercise of judgment would be warranted in a critical situation, which, of course, would mean that opinions might differ among the Reserve authorities as to the gravity of a situation.” Mr. Roberts defends the restriction of use which member banks could make of Federal Reserve funds against financing transactions in stocks and bonds. These funds were, according to the intentions of those who framed the Federal Reserve Act, to be used only for short loans, to aid in financing seasonal turnover of trade. This financing is limited and the funds are soon released, whereas “there is no end to the amount of credit which might be tied up in financing stocks and bonds,” and this would not be of short duration. The Reserve banks had kept out of a situation that involved an increase in brokers’ loans from three billion dollars to eight and one-half billion dollars within two and one-half years and were Speculation and Brokers’ Loans 233 in prime condition to provide ample credits for trade and industry. Federal Reserve Policy Useful as the Federal Reserve System has proved during the emergency in furnishing ample credit facilities to replace the tremendous withdrawals of “bootleg” loans from “others,” representing corporations and individuals who had helped inflate the totals of brokers’ loans, the Federal Reserve Board had not functioned so acceptably during the prior period that led up to this abnormal development. In a statement issued February 6, 1929, it looked as though the Reserve Board had assumed an aggressive policy. It issued a warning with respect to the accumulation of speculative credits that was, in a sense, epoch-making. For the first time it asserted its responsibility and authority to manage the credit facilities of the system in the interests of commerce and business. It said: “When it [the Board] finds that conditions are arising which obstruct Federal Reserve Banks in the effective discharge of their function, of so managing the credit facilities of the Federal Reserve System as to accommodate commerce and business, it is its duty to inquire into them and to take such measures as may be deemed suitable and effective in the circumstances to correct them; this, in the immediate situation, means to restrain the use, either directly or indirectly, of Federal Reserve credit facilities in aid of the growth of speculative credit.” 234 The Stock Market Crash—dAnd After This statement had been preceded by a letter to the Reserve Banks, dated February 2, defining their obligations as to what credit should and should not be granted at that time. The statement noted the record of six years of remarkable economic activity, and their unprecedented volume of production and consumption of goods. It declared: “The economic system of the country has functioned efficiently and smoothly. Among the factors which have contributed to this result an important place must be assigned to our credit system, and, notably, to the steadying influence and moderating policies of the Federal Reserve System.” As the guardian of business, therefore, the Reserve Board assumed responsibility for credit control in efficient and smooth functioning of the nation’s economic system. The New York Reserve Bank was reported as urging an advance in the rediscount rate to 6 per cent from its § per cent level. This the Federal Reserve Board declined to sanction. The measure would have brought the rediscount rate close to general market rates, thus making it effective. But the Board at Washington, torn by differing opinions, backed and filled during the Spring and Summer, trying to isolate one part of the money market by discriminatory measures against brokers’ loans. It was urged that a rise in the discount rate would “hurt business” and would deprive Europe of needed gold. But had this aggressive policy been pursued from the beginning it would have been found that business could have stood the higher rate during a period of Speculation and Brokers’ Loans 23% expanding prosperity, while keeping the rate artificially low served to stimulate speculation instead of checking it. People were borrowing at low rates in order to make high rates in expanding business. Even had business been hurt by the proposed higher rate, there would have been but a few months of business recession followed by easier money conditions, and the panic, with its untoward results involying far greater damage, would have been averted. In his recent address before the Academy of Political Science in New York. Dr. Benjamin Haggott Beckhart notes: “The management and direction of our banking system in the past few years leaves much to be desired. The Reserve Banks have failed to develop a philosophy of credit control, due in part no doubt to the division of counsel within the system. Commercial banks, largely by virtue of extraneous circumstances over which they had no control, but partly volitionally, have greatly increased their holdings of bonds and security loans, whose ‘liquidity’ depends on a rising or at least stable security market.” In the same vein Mr. Benjamin M. Anderson, Jr., economist of the Chase National Bank of New York, characterized as unfortunate the “cheap money policy” of the Federal Reserve Board in his address December 30, 1929, before the American Economic Association in Washington. Mr. Anderson declared that the ideal situation would have been a rediscount rate above the market, buttressed bv the 236 The Stock Market Crash—dAnd After Board’s open market policy, which would have been helpful in holding down both customers’ and brokers’ loans. For several years the country has had surplus gold, with potentialities of credit inflation that have been restricted by devices of “earmarking” and the policy of buying and selling government securities in the open market under the auspices of the Federal Reserve Board's Open Market Committee. This has been supplemented by business methods restricting inventories to actual trade demands. But the policy of the Federal Reserve Board during the year preceding August, 1929, when the Reserve Bank at New York was belatedly permitted to increase the =ediscount rate to 6 per cent, encouraged the inflation of the stock market with surplus credits. While the country was enjoying unparalleled commercial prosperity and stability, and while the inflated stock market credits aided in financing American industries, the outcome has proved disastrous to American security holders. This might have been avoided by a sharp increase in the discount rate during the Fall of 1928 or at any time up to the Spring of 1929, with comparatively little consequent hardship to business. The overissuance of shares during August and September would have been prevented, and any shortage of credit to business would have been largely remedied through an orderly deflation of brokers’ loans. The ultimate effect of such an aggressive policy would have been a gradual decline in the peak of stock prices. The new plateau would Speculation and Brokers’ Loans 237 have shown a level, say, 15 per cent below the peak actually attained in September, instead of the abrupt declivity 42 per cent below that peak, with its drastic shrinkage of values on the New York Stock Exchange by $26,000,000,000. CHAPTER XV REMEDIES AND PREVENTIVES OF PANIC WHAT measures were applied to alleviate the stress of the panic? What remedies were proposed to prevent its repetition ? Governmental and Banking Relief To the reassurance afforded the nation by the President’s conferences with business leaders, was added the cut of $160,000,000 in income taxes, passed by Congress on December 14th, at the suggestion of Secretary Mellon. This reduced the tax by one per cent of the incomes of all individuals and corporations taxes on incomes for the calendar year 1929. It was passed as a measure of reassurance to business, as taking in earnest the statement by Secretary Mellon that: “The indications are that business profits, dividends, interest, and wage payments in 1929 will considerably exceed those of the year 1928. Our estimates indicate that the government should close both the fiscal years of 1930 and 1931 with a surplus.” The banks lent powerful support after the loans to brokers by non-banking lenders declined during Octo-~9Q Remedies and Preventives of Panic 239 ber, 1929, by two billion dollars. This withdrawal of funds from the call-loan market was by foreign lenders, investment and trading companies, and other corporations and individuals. In addition, loans to brokers for out-of-town banks including loans for account of their customers, diminished by $800,000,-000. In these circumstances, the New York City banks came to the rescue, increasing loans for their own account by $1,000,000,000; also, they increased their security and other loans to customers, and their investments. The weekly reporting member banks in leading cities increased their total loans and investments in this way from October 2d to October 30th, by $1,600,000,000. Most of this increase was in New York City banks, whose net demand deposits rose by $1,500,000,000 from October 23rd to October 3oth. With this increase their reserve requirements grew, adding to their reserve balances with the Federal Reserve Bank by $240,000,000. During this crowded week the Reserve Bank of New York added $150,000,000 to its discounts from member banks; and let loose a fresh stream of credits by purchasing $150,000,000 worth of United States Government securities in the open market. By such measures money rates eased during the height of the panic. Call-money rates had prevailed at eight to nine per cent during September, but fell to six per cent in the latter part of October, and, through the panic and subsequent liquidation, ranged at and below six per cent to 414 per cent. On October 31st, the Federal Reserve Bank of New York 240 The Stock Market Crash—And After lowered its discount rate to five per cent and a little later to 414 per cent. Thus “tight-money” conditions were obviated, and a billion dollars of extra credit was provided, proving the strength and resourcefulness of the Federal Reserve System. Inquiry Concerning “Bear Raids” Another measure of undoubted efficacy was the New York Stock Exchange inquiry concerning evidence of “bear raids.” The exchange on November 13th called on members to report in detail about stocks they had lent or borrowed on which there had been a failure to deliver, with the exception of odd lots. No explanation accompanied this action. Undoubtedly its purpose was to identify such “big bear operators” as were, possibly, responsible for the repeated attacks on the market. The very nature of such an inquiry was deterrent in discouraging organized short-selling of the character that would further unbalance a panic-stricken market. The inquiry was slightly retroactive, requiring information as of the close of business November 12, 1929; it required subsequent daily reports of changes involving failure to deliver listed stocks that had been loaned or borrowed up to November 25th, when the daily questionnaire was abandoned. The decision to call for this information was made at a time when stocks were at their lowest point and seemed to be at the mercy of bear raiders. Members of the voluntary banking group that had met for several days in the Remedies and Preventives of Panic 241 offices of J. P. Morgan & Company were understood to have been informed as to the general results shown by this questionnaire. While no great concentration of short interest was revealed, it is understood that the absence of such interest was due to hurried covering immediately before the calling for the questionnaire. Immediately upon announcement of the inquiry a sharp covering movement became manifest on the exchange, and it was reported that the subsequent rally in stocks had been naturally helped by the measure as a check to bear operators. In fact, this measure in all probability saved the market from further disaster. Waiving of Margin Requirements Still another measure was, in part, involuntary. During the height of the panic many brokers admitted that they had declined to sell out insolvent accounts, waiving margin requirements. Margin calls had been sent out on October 28th, for example, with the idea that the market had “touched bottom.” It was expected that accounts would need only small additional margins, at worst. But the market fell severely on that day. Adequate margins could not be deposited in time to cover many of the accounts, and the brokers faced the dilemma of throwing more stocks on the falling market, which would involve actual losses to the brokers in addition to wiping out their customers’ accounts or of keeping them at possible loss to themselves. The ac. counts were carried over until, with tardy rallyings 242 The Stock Market Crash—And After of the market, the withheld securities might be judiciously fed into the stream of sales. These rallies were further helped by the expedient of extra dividend declarations on the part of such market leaders as United States Steel, American Can and others, out of their ample surpluses, derived, in most cases, from earnings plowed-back into the companies over a series of years. Aid to Stock-holding Employees Many large corporations which had sold stocks to employees, including United States Steel and Standard Oil of New York, undertook to protect the holdings of their employees by making loans on the stock above the prices which had prevailed on the New York Stock Exchange. Thus the Standard Oil Company of New York accepted its own shares for loans to employees at a price $11 above the prices which had been ruling. It was reported, however, that less than one per cent of employees of this company required any aid whatever. Proposal to Examine Banks Inasmuch as the banks, in coming to the rescue of the market, became involved in the carrying of large blocks of “frozen” loans on securities, one financial newspaper, the New York Journal of Commerce, has urged that the government put the banks throughout the country into a position to resist strain imposed on them by such a situation. It urged careful and effective bank examination for several Remedies and Preventives of Panic 243 months to come, and application of necessary remedies as indicated, saying: “The result undoubtedly will be the reorganization of a great many banks which have become overburdened with doubtful paper. This happened after the panic of 1920, and has also happened in the case of practically all preceding panics.” Without attempting to prejudge this proposal, it should be remembered that the panic of 1929 was unlike all preceding panics. Under its unique conditions, the member banks were well out of debt to the Federal Reserve banks. The banking system met the demand for additional loans without disturbing money market rates. Had they not met it, these rates would have soared, as is usual in panics, when men and institutions must borrow at any rate to preserve their solvency. Proposal of an Artificial “Floor” of Minimum Prices A very constructive proposal by James H. Rand, Jr., but unfortunately not acted upon, was that the New York Stock Exchange establish an artificial “floor” at the minimum of prices as of a given day of the panic. This expedient had already been employed at the reopening of the stock exchange on the outbreak of the World War in 1914, after the five months’ suspension of its activities. The application of this measure is described by H. G. S. Noble, President of the Exchange at that time, in his book, The New 244 The Stock Market Crash—dnd After York Stock Exchange in 1914 (published by the Country Life Press, 1915). Mr. Noble says: “The reopening was accompanied by the restraint of certain arbitrary minimum prices, below which securities could not be sold. It was felt that, owing to the critical and indecisive state of the war, there was a continuing possibility of some news that might renew a crisis in the market. While this possibility lasted, the maintenance of minimum prices furnished an automatic check upon sudden panic, which would avoid raising the question of a second closing of the exchange. In order to regulate these minimum prices and so change them from time to time and to keep them in accord with normal supply and demand, it was necessary to appoint a committee, and the original Five were continued in office with this sole regulative power. As bonds were similarly restricted, the Committee of Three [in charge of the bond side of the market] also lingered on the scene for the same purpose. The two committees performed this unusual function up to the first of April, 1915, when the very marked improvement in conditions led to the abandonment of this last vestige of artificial restraint.” Thus from December 15, following the report of the Special Committee of Five to the governing committee of the Stock Exchange announcing that it might be reopened, until the following April of 1915, the Exchange explained that prices of securities were restricted as a safeguard against some unforeseen shock to confidence. Remedies and Preventives of Panic 245 The contention is that during the 1929 break the governing authorities of the Exchange might have come to its rescue in order to save the market from a price level which was universally admitted to be far below any reasonable estimate of the worth of stocks traded. It has been said that the same scheme was partly balked in 1914 by a ‘“‘gutter” market which spontaneously sprang up. This showed that it was impossible to keep traders from each other very long against their will. There is a big difference between a long and a short period; the essence of the scheme in 1929 was of a moratorium—to extend enough but not too long the time for getting buyers. That is, the virtue of the idea was not to fix the minimum price, so much as thereby to give reasonable time for a natural price to appear in place of the artificially low price of suddenly forced sales. Auctioneers have a minimum price on each article offered at auction for any one day. Foreclosures on mortgages require time, and ample notice given through advertisement in order to gather buyers to the scene of the foreclosure, from whom a natural competition is to be expected to produce a reasonable price for the foreclosed property. The stock exchange is the only place of public sale where the forced selling of property is made instantaneous—to the great detriment, during panic, of transfers by any proper estimate of the value of stocks. It is not always a practicable requirement. Every action requires time. There are records that the London and Conti- 246 The Stock Market Crash—And After nental Exchanges have acted at such junctures to establish an artificial floor of prices at the minimum of the market, as of certain dates. Informally, also, the jobbers who are invariably the intermediaries between brokers on the London exchange have been known at times to ‘‘desert’” the market, thus automatically shutting off trading, when they judged that the prices of securities were declining to panic levels and no longer represented a true estimate of values. But, unlike the market specialists of the New York Stock Exchange, the London jobbers are an essential factor in the transfer of stocks on the London Exchange; they are forbidden to take any commission in stock transactions, and would hardly be suspected of ulterior motives of valorizing or sustaining prices, if they quitted the market and virtually closed the exchange when they deemed the level of prices to have run dangerously low. In the case of the New York Stock Exchange, some action by the governors themselves would be requisite to place this automatic check upon panic prices in such an emergency as developed during October and November, 1929. In addition to the 1914 precedent, there is precedent for this measure in the rules of the New York Stock Exchange whereby securities listed on the Exchange are stricken from the list or trading therein is suspended by the governing committee in cases wherein the committee deems there is no fair market in such securities. In specific cases the governing committee has provided that contracts shall not be closed under the provisions Remedies and Preventives of Panic 247 of this rule until the governing committee has determined that there is a fair market. Proposed Safety Fund for Emergencies In place of an informal and voluntary committee of bankers acting unofficially, such as sustained the market in the initial stages of the panic of 1929, I am indebted to Mr. H. B. Meek, a Yale graduate student, for the suggestion of a safety fund to be used in such emergencies, accumulated over a series of years from small payments subscribed by Stock Exchange members. In the course of twenty years or so, this safety fund would amount to a considerable sum, to be employed in a manner similar to bankers’ consortium fund. to stabilize the market. Proposed Definite Collateral Loan Policy Another suggestion for market stabilization is made by M. H. Cahill, President of the Plaza Trust Company of New York, and formerly President of the New York State Bankers’ Association. Mr. Cahill’s proposal, published November 11, 1929, follows * “If the banks of the country, acting as a unit, would adopt a definite loaning policy under which they would not extend a collateral loan in excess of 75 to 80 per cent of the value of the security offered, as determined by appraisal based on the previous quarterly statement of earnings, the appraisal not to exceed twenty times the net earnings, it would, ipso facto, stabilize the market level of securities and 248 The Stock Market Crash—And After prevent the purchase of speculative values on credit.” Such a policy, Mr. Cahill asserts, would stabilize security values on a basis where their purchase price bears a direct relation to earnings. He believes it would regulate credit to a point where a 25 per cent margin would be sufficient, ‘because based on actual and not on fictitious values.” Mr. Cahill declares that he is not sure whether this would do away with speculation entirely, but that it would quite definitely “prevent rash speculation with borrowed funds.” Proposed Basis of Value on Margins Yet another suggestion for stabilizing the market, is that of Mr. Fred I. Kent, Director of the Bankers’ Trust Company of New York. Mr. Kent recommends: Create a joint committee of the New York Clearing House and Stock Exchange, whose duty it should be to develop a basis of value upon which margins for stocks should be figured from time to time on the principle of net earnings to price, which would represent interest returns, and having due regard to current and near-future money values, and in the case of new issues, on clearly defined prospects.” Proposed Repeal of Capital Gains Tax Mr. Kent makes four other suggestions, the first of which is “Legislation removing the Federal Tax on capital gains, also that in New York State and any other state where such a tax may be in force.” Remedies and Preventives of Panic 249 Proposed Report on Loans for Carrying Securities His second further proposal is to “Require changes in methods of bookkeeping of all houses which buy securities for distribution, in such manner as to enable them to report to the Stock Exchange, and to enable the banks to report to the Federal Reserve System, total loans that represent funds obtained for the purpose of carrying securities for distribution.” Proposed Money Market Research His third further suggestion is: “An exhaustive research carried on under the auspices of the Federal Reserve Bank of New York, with the codperation of the New York Clearing House and Stock Exchange, of our money market; having in mind all the questions involved that have a bearing upon the sources of supply, both domestic and foreign, the methods of use, the market for bankers’ acceptances, and the requirements of agriculture and industry, to be followed by recommendations for such changes in procedure, if any, as may he found to be necessary for the public good.” Proposed Committee on Listing of New Issues His fourth suggestion is to create a joint committee of the New York Clearing House and Stock Exchange, the lenders and the borrowers, to pass on the listing of contemplated new security issues. This Mr. Kent would have done on the basis of the fig- 250 The Stock Market Crash—And After ures showing the progress of total loans obtained for the purpose of carrying securities for distribution, together with the general conditions which prevail in the money market. Most of the preceding suggestions are evidently based on the idea that safety standards should be set up as to loans in relation to stock prices, earnings and all other pertinent facts, just as standards have been set up as to lines of credit extended by banks to corporations as related to quick assets and liabilities. This project is a highly technical one which bankers and brokers should grapple with until, as Mr. Lounsdale said, the brokers’ loans should mark a “scientific” figure. Rediscount for Brokers’ Loans [ would add this further proposal, that if the Federal Reserve Banks were authorized to rediscount brokers’ loans, the influence of the Federal Reserve System, Federal Banks and Federal Reserve Board would be more easily exerted upon the member banks and less easily evaded. As it is now, a member bank, while it cannot rediscount a broker's loan, can rediscount other paper to take its place, and by indirection can really evade the law which now attempts to prevent the rediscount of loans with collateral security. If the rediscount of brokers’ loans were permitted the banker would be far more likely to lay his cards on the table instead of attempting any evasion; he would become more subject to Remedies and Preventives of Panic 2§1 the advice, influence and even discipline of the Central Reserve Banks than at present. So instead of proceeding, as some have hastily suggested, with drastic legislation to put brokers’ loans even further outside the pale. and attempting to solve the problem by law and strong-arm methods, it would be far better to let the bankers and brokers solve the question out of court, so to speak, by such conferences as President Hoover has organized in the past. Ad New Method of Financing Security Purchases A yet more comprehensive proposal would provide a substitute for brokers’ loans. This may be considered by those who have faith that the panic of 1929 may occasion a thoroughgoing change in the stock market. These argue that the panic of 1907 was caused by a shortage of money due to our inadequate banking system, and has therefore come to be known as a money panic. In order that such a panic might not come again the Federal Reserve System was started, and it has proved its worth during subsequent crises. Also, the panic of 1920 and 1921 was due largely to inflated inventories and speculation by manufacturers and merchants in raw materials and finished goods — primarily because of inflation of credits. This led to the “ear-marking” of surplus gold that would otherwise work for inflation, and to hand-to-mouth buying and rigid inventory control—methods that 252 The Stock Market Crash—And After showed their worth during the last half of 1929, since there was no stoppage in the even flow of goods due to excessive inventories. Those who hope for like salutary changes flowing from the present situation hold that the stock market panic of 1929 was brought about by the system of collateral loans that is now being used. There was overspeculation and overextension of marginal accounts. There should have been a restriction in the price level of securities to, say, 10 or 15 per cent below the peak of September, 1929; but when the market began automatically to make this correction, it caused forced selling from the weakest marginal accounts. This selling brought prices lower, again making necessary additional selling by the next weaker accounts. At the same time the lowering of security prices reduced the purchasing power of those who wanted to buy, and a panic ensued. If, therefore, we wish to avoid panics of this particular type in future, it would seem necessary that a new method of financing purchases of securities be devised, and that such new method be substituted, at least in part, for the present system of margins. 4 Method That Has Worked Over a year ago I wished to purchase a block of common stock in one of the companies in which I was interested, but realizing the danger of carrying this stock in a margin account I cast about for a better method. The result of this study was an option agreement, by means of which I secured Remedies and Preventives of Panic 253 the control of a block of stock that was entirely undisturbed during the decline. Had there been more such option agreements in use and fewer margin accounts I feel sure that the market would have given a much better account of itself. The Appendix presents a complete copy of this agreement, omitting only the name of the company and the specific price at which the stock changed hands. In a margin account the purchaser of the security obtains a loan against the security as collateral, this loan being subject to call at any time. Theoretically such a loan is the safest type of loan, since the lender may at any time demand repayment, and, failing to receive it, he may sell the collateral held on the market. But it was found in actual practice during the panic that it was impossible to sell in so short a space of time all the collateral that stood behind weakened loans, therefore many lenders were forced to abstain from calling their loans, if only to protect themselves from the losses that would ensue. The securities behind these loans then hung over the market to be sold as soon as prices rose sufficiently to liquidate the loans. We have seen, therefore, that while in ordinary times the collateral loan may be perfectly safe, in times of stress it is not safe. Because of the ease with which surplus funds may be put into the call loan market and withdrawn when needed, and in view of the ordinary safety of such loans, they are usually made at a very low interest rate. We have become accustomed, due to the large 254 The Stock Market Crash—And After demand for this type of loan, to pay a high rate of interest; but looking back over several years we find that the rate was usually around between 3 and 4 per cent and has only occasionally risen above 6 per cent. This is as it should be, since, if the lender accepts only the minimum of risk, he should also receive only the minimum return. In my plan the accepter of the option agreement voluntarily assumes a certain share of the risk for which he receives a relatively high payment in return. The purchaser of these securities assumes the larger part of the risk, and is in a position to receive the larger part of the profit in the event of advance in price. He is also willing to pay more highly for the funds that he is borrowing, since he is assured of not being sold out in the event of a decline. It is essentially a method of financing purchases for the “long pull.” It is not suitable for the trader who desires to be in and out of the market. The volume of stock retained for long-term holding is probably far greater in total than that used by the trader, and were it lifted from the marginal loan system there would be little opportunity for a break of large magnitude to develop. But even should it develop, the makers of these option agreements would find their holdings undisturbed. There was one difficulty that I found, however, in making these option agreements. That was the lack of an organized financial institution equipped to make contracts of this character. It was therefore necessary for me to approach private investors, and Remedies and Preventives of Panic 253 point out the advantages of the option agreement to them individually. But if this idea should gain favor, we might hope to see agencies develop which would handle this class of paper. They could probably simplify the type of agreement, work out the risks attached, and charge a rate which would absorb these risks and yield a profit. The panic has shown this credit difficulty in our banking system. The option agreement is offered as one available solution of the problem. Should it be found not satisfactory, I hope that other economists and bankers will continue to put forward suggestions until some method is found which will make impossible transfers by losses in such huge totals of the country's invested funds. Resolution of American Bankers’ Association for Inquiry Perhaps all these proposals, as well as other suggestions for a permanent control against the recurrence of panic, might properly await the inquiry planned in the resolution passed by the American Bankers’ Association in San Francisco, October 3, 1929. This inquiry would go into the whole subject of brokers’ loans by the Federal Reserve Board, in cobperation with Stock Exchange authorities and bankers. It would investigate all underlying facts in connection with brokers’ loans, study the possibility of effecting greater stabilization of the money rate, and then recommend such changes in procedure as might be found advisable. Such an investigation 256 The Stock Market Crash—And After should be had, at any rate, before any resort to hasty and ill-considered legislation. The inquiry might be extended to include the investigation into the banking system recommended by President Hoover, relating to the development of “group” and “chain” banking systems. The President suggests that expansion of such systems without restraint might dangerously concentrate con trol of credits and prevent their proper direction within those areas which furnish banking deposits. But if legislation and voluntary remedial action are held in abeyance pending inquiry on these weighty matters, it is incumbent upon the investigators to do their work promptly. The nation endured many panics and listened to many elaborate reports on banking reform before comprehensive action was taken to provide the conduct of its business with an elastic money system. This system won unanimous support only after the Act had been applied. Will the serious lessons of the panic of 1929 be ignored and their application postponed until the nation runs into another similar catastrophe? CHAPTER XVI THE HOPEFUL OUTLOOK IN the introduction and first chapter of this book I have presented a picture of the market crash in all its untoward aspects. There was a panic which duplicated the great recession on the London Stock Exchange, only in the United States the fall in prices was swifter and sharper than that on the London exchange or of any previous panic. When the market touched bottom on November 13, twentysix billions had been cut* from the value of shares listed on the New York Stock Exchange. But in subsequent chapters I have shown that the factors leading to the crash of the American stock market were not factors of depression but of prosperity, unexampled prosperity. They were factors identical with those which should bring about the recovery of the long bull market, that had lasted with but minor interruptions from the close of 1922. It was in the main over-eagerness to profit by these factors which produced the crash. The prime fault lay in the credit structure. Just because there were golden opportunities to invest, opportunities for future dividends and profits that were not illusory but real, there had been an undue haste, an undue 25% 258 The Stock Market Crash—And After eagerness to invest, and people had tried more and more to do business on borrowed money. Too many had speculated with margin accounts and had thus made the market vulnerable to bear raiders, despite the fact that margins were large. The raids caught thousands of small holders of stocks who had to sell at a sacrifice. After the general level had been reduced, a new crop of forced sales was harvested; and then, with still lower prices, the same thing happened, through successive layers, over and over again. This book has presented reasons for believing that the long bull market could not be explained by the simple formula that it “went up because it went up.” But the fall in the market was very largely due to that psychology by which it went down because it went down. It was a case of forced liquidation, of distress selling. At the end of the panic the prices in the stock market were absurdly low, inviting the entry of new funds as the general public in this country woke up to the fact that the Stock Exchange presented one of the most wonderful bargain-counters ever known to investors. Rich Nations Suffer Crises M. Clement Juglar, the French financial writer, says in Des Crises Commerciales (1889, pages 44-45): “Paradoxical as it may seem, the riches of nations can be measured by the violence of the crises which they experience.” Similarly, in his book, The Hopeful Qutlook 259 Financial Crises and Periods of Industrial and Commercial Depression (1902), Theodore E. Burton says: “ . . A more important problem is the explanation of the conceded fact that during crises and periods of depression, the aggregate wealth of the communities affected does not give indication of such decrease as would be expected, and that those countries which seem to suffer most from these disturbances show, from decade to decade, the greatest increase in wealth and material prosperity.” [f ever these words were applicable, they are singularly applicable to this situation. President Hoover, ex-President Coolidge, and Secretary Mellon have been excoriated for prompting the investing public to too great optimism concerning our prosperity. They have been accused of making political capital of it, just as Chairman Raskob of the Democratic National Committee was accused of making political capital of it at the Houston convention while the bull movement was being called the “Smith Boom.” But it was not a factitious boom, the figment of political imaginings. On the studies of the remarkable rise in earnings of corporations during the bull movement, as presented in this book, I would venture the opinion that between two-thirds and three-fourths of the rise in the stock market between 1926 and September, 1929, was justified. There was a remainder which was not justified. Its unjustified character is best betokened by the 260 The Stock Market Crash—And After abnormal swelling of brokers’ loans. People who were eager to profit went into debt for this purpose, erecting a great credit structure more topheavy than had previously been erected. Mr. Carl Snyder is right in saying that the structure was a house of cards. But this house of cards was built on a solid mountain, the height of which dwarfed the house of cards on its top. After the tremendous fall in the stock market it has become the fashion to decry the phrase “the new era,” which so many were using and believing in. That phrase may perhaps be exaggerated in its implications. Mr. Snyder has pointed out that the general rate of growth of production has been fairly constant over long periods, and that it was interrupted by diminishment in the rate of production per worket during the war and immediately after the war. But from 1899 to 1922, the product per worker hardly increased at all, and since 1922 it has increased in a steeply ascending line to the highest rate of production known in history. For this reason I believe that the Hoover Committee on Recent Economic Changes was right when it reported that “production per man hour of effort has risen to new heights,” with “higher per capita income in 1922-1927 than ever before.” Even a slightly increased “tempo” of production finds a great magnification in the stock market. That is because, as pointed out in the chapter on “The Flight from Bonds to Stocks,” the rate of rise of common stocks is much faster than that of fixed or The Hopeful Outlook 261 senior securities. That is, the common stock absorbs the advantage which bonds, because of their fixed return in dollars, cannot absorb. The common stock will go up to the extent that the bonds and preferred stocks cannot go up. A Public Schooled in Borrowing There had been an initial rise in the value of common stocks because the dollar had depreciated in purchasing power during the war, and here again common stocks, because of this equity principle, absorbed the lion's share of increased dollar earnings. It was not until the general public realized that stock prices should rise even faster and higher than the rise in the post-war level of commodity prices that the great boom in common stocks began. Investment had also been encouraged by the war “drives” to promote the sale of government bonds. The public had been trained to “borrow to buy bonds” and from that it was but a step to borrowing to buy common stocks. After the war and post-war inflation and deflation came the stabilizing of all prices on a higher level, and on top of this stabilization came the marvelous increase in the rate of production, with resultant rises in earnings and in the rate at which earnings were plowed back into business. All this justified the expectation of prosperity and boosted the stock price level still higher. Industry had found that in its research laboratories, staffed by scientists from 262 The Stock Market Crash—dAnd After the universities, was the most profitable investment ever made. Also, the war, with its inflation and deflation, had resulted in a stoppage in immigration. This helped to keep wages high and organized labor was strong enough to resist that recession of wages which would have followed naturally upon the business depression of 1920-1921. The heads of industry decided that high wages must be continued, and that, therefore, it was up to them to save labor by means of labor-saving inventions. In addition to the great impulse toward laborsaving inventions, owners economized on labor by introducing industrial management as never before. The war had pyramided industrial mergers, which by common consent were condoned. The willing codperation of labor with management followed upon the conversion of the whole country to the advantages of higher production per man by the aid of science. The studies of the relation of stock prices to earnings during this period of great increase in wealth and earning power of corporations, made it clear that the old arbitrary fashion of estimating ten times the annual earnings as a fair selling price for common shares was inadequate. With the rapid changes in outlook of individual businesses, the price-earnings ratio becomes meaningless as a guide to investment without that constant scrutiny of prospects which the machinery of investment counsel and investment trusts has lately provided. Earnings have been increasing more steeply than formerly and rT d ™ 2 Q | ma 4 n §] n t Fy — y g 3 The Hopeful Outlook 263 have been discounted further and further into the future. The consequence is that the average justifiable price-earnings ratio has risen. For the reasons enumerated in this book it will hardly return to the old level so long as there is still a prospect of rapid future increases in earnings. But even so, in most of the comparisons of 1929 with 1928 as to the average price-earnings ratios, there is seen a decline in those ratios preceding the stock market panic. This indicates that, with the exception of two or three months immediately preceding the panic, the market was not much, if any, overinflated. Panic Might Have Been Avoided Had there been no such piling up of margin accounts as the totals of brokers’ loans revealed, incidental in some degree to the issuance of nearly eight and one-half billions worth of new securities during the first nine months of 1929, there would probably have been no panic. Or, had there been no Hatry failure, which precipitated a panic and consequent fall in prices on the London Stock Exchange to a deeper bottom than on the New York Stock Exchange, thus occasioning the immense withdrawals of funds of British holders from the American stock market, it is quite arguable that there would have been no American panic. The increase in the brokers’ loan account during the early stages of the American crash gave some measure of the selling by British holders, with the con- 264 The Stock Market Crash—dAnd After sequent necessity of American borrowings to take over the surrendered securities. Again, Paul M. Warburg, formerly member of the Federal Reserve Board, has pointed out that had the rate of interest been raised in sympathy with the investment opportunities in America, instead of being lowered in accordance with Federal Reserve easy money policy, the panic might not have occurred. In my book on The Theory of Interest (Macmillan, 1930) I have emphasized the important influence of inventions on the rate of interest. When a flood of new inventions gives opportunity to make more than the current rate of interest there is always a tendency to go into debt, in order to make money out of inventions, and to the ordinary investor this comes in the form of investing in common stocks. At such a time the rate of interest should be high, embracing as it does the opportunity to invest for a high rate of return over cost. If there is a great discrepancy between the rate to be realized to the investor from his investment, and the rate of interest on which he can borrow, he will be inclined to borrow all the more. But after the war our rate of interest was kept artificially low, partly because we had so much gold. After the inflation’ of 1919, much of this gold was impounded and “ear-marked” for the purpose of getting Europe back on the gold standard. The Reserve Board kept the rate of interest low in order that this gold might not be reattracted to America. The Hopeful Outlook 265 Finally, when the long bull market asserted itself in the high levels of 1927-1929, the Reserve System still wished to prevent an exodus of gold back from Europe to the United States; it kept the rediscount rate low, partly for this purpose and partly to maintain ‘“‘easy money” for business. This easy money encouraged speculation, despite the efforts to discriminate against brokers’ loans. The Reserve authorities tried in vain, when speculation was in full swing, to discourage it by discrimination against brokers’ loans at quarterly periods, when the “bootleg” lenders, to get cash for their quarterly dividends, withdrew their loans temporarily from the market. Perhaps a once-for-all sharp increase in the rediscount rate two years ago might have hurt business to some extent then, but it might have prevented the overgrowth of brokers’ loans, and might have prevented the market crash later. This is not the first instance of how the age-long prejudice against high interest rates has done harm. But, of course, it is easy to be wise after the event and to criticize what was done. The Federal Reserve System has, in general, acted with great wisdom and even in this particular problem of the stock market we must not forget that it kept the banks liquid and strong so as to prevent tight money and bankruptcies when the crash came. In that emergency the whole banking machinery of the country from the Federal Reserve Board down to the member banks worked splendidly. 266 The Stock Market Crash—dnd After Other Factors Apart from Justifying Causes It is also possible that had there not been certain other factors quite unassociated from the fundamental justifying causes of the long bull market, that operated with the momentum of long and short-term swings in the October-November crash, the crash might have been prevented. There was the downward turn in the business trend resulting in a rather rapid decline in the average of wholesale prices during the summer of 1929; but this was not so great as the 19277 down-turn had been, and it could not alone account for the panic. There was the tax on capital gains, discouraging the active selling of stocks to take profits and encouraging the buying of new securities by the help of loans instead of by the proceeds of sales of stocks. There was the sudden increase of a billion dollars’ worth of new securities by the investment trusts, with a lag in their reinvestment of the proceeds in the stock market. Finally, there was the “boom” enthusiasm which during the three months preceding the panic, to a considerable degree, ignored yields and earnings in its extravagant belief in the future growth of business. This enthusiasm doubtless had its hold upon intelligent speculators who had substantial grounds for their optimism as well as upon the “lunatic fringe’ that always attends the performances of rising markets. It is not altogether unlikely that there were other facts and situations now unknown or hidden, which The Hopeful Outlook 267 may later be unearthed, which played important roles in bringing about the panic. All the untoward cases operated to produce a collapse from the high level of September 7th to the low average of November 13th—a 42 per cent decline in my daily index of daily market prices. Overenthusiasm may have raised the September market to a point fifteen to twenty per cent higher than was warranted by the substantial justifying causes of the bull market. Plateau of 1926-1929 Remains But because of these substantial reasons the general plateau of the stock market is still the plateau of 1926-1929, still 55 per cent higher than it was in 1926, and still vastly higher than any previous plateau. During the period between 1913 and 1926 the new plateau had risen, according to the Dow-Jones average, by 88 per cent, as contrasted with a 40 per cent rise in commodity prices. That represented the absorption of advantages from a higher general price level into the equities of common shares. Since 1926 there has been a continued and increasing absorption into these equities of advantages resulting from increased earnings and the plowing-back of earnings into business at increasing rates. In addition, these equities have absorbed still greater advantages from the revolution in the estimate of future earnings because of the mass production of inventions by gigantic research laboratories, bettered business management, merger econ- 268 The Stock Market Crash—dAnd After omies, labor cobperation, prohibition and other causes. All these advantages have been heightened by a more secure expectation of increased earnings residing in the stable purchasing power of the dollar during the past seven years. As theretofore unstable money had hindered business, so now stable money promotes business. With this promotion there has been an economic change in the attitude of investors toward the risks of investment in common stock. Bonds were once regarded as safe, and stocks as unsafe; now, with the elimination of risks in diversified investments, and in changing investments as a result of constant scrutiny of business prospects, common shares have become popular because of their comparative safety. I still hazard the statement that in spite of the tremendous harm that has been done to common stocks during the panic of 1929, investment trusts have made it safer to invest in common stocks than ever before. Because of these solid achievements of the past seven years, their present continuance, and the assurance that they will be prolonged into the immediate future, I feel that the threat to business due to the dislocation of purchasing power by reason of transfers of stock holdings will be temporary. Fulfilment of the pledges by the nation’s business leaders that industrial programs will be adhered to, that wages will not be reduced, and that the “tempo” of production on which all our prosperity has been built will be maintained, should suffice to bridge across the business recession that slightly antedated The Hopeful Qutlook 269 and accompanied the crash. The effects of the crash were largely psychological. President Hoover's instant realization that the panic of 1929 was peculiarly dominated by the psychological factor, enabled him to give useful reassurance to the nation in the business conferences held in Washington. Of course, he did well to emphasize the purely temporary help to be derived from an extended program of public works. He was not tripped by the ‘“‘make-work” fallacy, and he regarded the expedient merely as a balance-wheel in an emergency. When increased business again suffices to take up the slack in unemployment, public works should be restricted accordingly. In the circumstances Mr. Hoover's remedy, which consisted chiefly of reassurance, was more efficacious than any of the other remedies to counteract a repetition of the panics that are discussed in this book. As a means of further present reassurance I trust that the book itself will be of some use, besides affording substantial reasons for practical optimism for the future. The only “fly in the ointment” is the danger in a few years of gold shortage and long gradual deflation like the deflations after the Civil War and after the Napoleonic Wars. And even this danger may be averted if wise banking policies and gold control are adopted in time. For the immediate future, at least, the outlook is bright. APPENDIX The option agreement, given in full below, may be more briefly described as follows: According to its terms I would, for instance, sell John Smith one thousand shares at $20 per share, which is much below the market price of, say, $30 a share. I would have the right to re-buy at $21 within six months, at $22 within twelve months, at $23 within eighteen months, and so on, at an advance in price of $1 every six months during five years, at the expiration of which the contract would automatically terminate and the repurchase price at that time would be $30. In addition I would guarantee Smith a dividend return of 7 per cent on the $20,000 received from him. The advance in the repurchase price means that, if the option is exercised, Smith would receive not only his 7 per cent, but $2 per share per annum above the original purchase price of $20; that is, 10 per cent per annum in addition to the 7 per cent, or 17 per cent per annum altogether. The chance that Smith would not get the full 17 per cent is simply the chance that within five years the stock would be below $30, when Smith received the stock. The only chance that Smith would not get back his principal is the chance that the market price "M1 272 Appendix would be below $20 at the end of five years. In that case he would lose on his principal the difference between $20 and whatever the stock would be worth at the end of five years. Smith, by taking these small chances of loss, has the guarantee of 7 per cent per annum, and the probability of 10 per cent more; while I am enabled by thus distributing the risk, in small lots among Smith and others, to avoid a large debt. The plan is a form of sharing profit or loss with others, instead of giving to the creditor a rigid lien. OPTION AGREEMENT A SUBSTITUTE FOR BROKERS’ LOANS THis AGREEMENT, made and entered into this ...._...._____ day of 192... in the City of New Haven, County of New Haven, and State of Connecticut, by and between Irving FISHER, of said City of New Haven, party of the first part; and .._. of the city of cereesy State of ----y Party of the second part; Witnesseth: THAT, for and in consideration of the sum of One Dollar ($1.00), by each of the parties hereto to the other of them in hand paid at or before the ensealing and delivery of these presents, the receipt whereof is hereby interchangeably acknowledged ; and of the mutual covenants herein contained ; the parties hereto have mutually and severally agreed, and by these presents do mutually and severally agree, as follows: First. Immediately following the execution of this agreement, and as nearly as possible contemporaneously therewith, the party of the first part will sell and deliver, or cause to be delivered, to the party of the second part, a certificate or certificates representing ....... Appendix 273 {.<seserne.) shares of the common capital stock of .................. ceceaens ne weeeeneny @ cCOTPoOration duly organized and existing under and by virtue of the laws of the State of Delaware; which certificate or certificates shall be duly endorced in such form that the stock represented thereby may be transferred into the name of the party of the second part upon the books of said ........ sereeeneeneees UUpoN the delivery of the said certificate or certificates to the party of the second part, the said party of the second part will pay to the party of the first part, or his nominee, in cash............. _— erereceemraesenees DO11ATS (eee) 5 Which sum shall be paid and received in full satisfaction of the price of the said stock, at twenty dollars ($20.00) per share. SeconD. In consideration of the agreement of the party of the first part to sell the said .............. eee (..ceseeemene.) shares of stock to the party of the second part at the price of o.oo. reeeeremeeeseanneenen 011ATS (.-eereeeie.), and in further consideration of the guarantee of dividends by the party of the first part to the party of the second part as hereinafter set forth, the party of the second part hereby covenants and agrees that, at the option and request of the party of the first part, at any time within five (5) years from the date of this agreement, the party of the second part will sell and deliver, or cause to be delivered, to the party of the first part, certificate or certificates representing .... creer (iecreereeennn.) shares of the said common capital stock of said . ee ee eveeennry endorsed in such form that the stock represented thereby may be transferred into the name of the party of the first part, or his nominee, upon the books of said eernen enn anenens eereeccenneny, Which stock shall be sold and delivered at the times, and for the prices, hereinafter set forth. It is specifically understood and agreed, however, that the party of the first part shall not be required to purchase any portion of said eevee eee (eee) shares of stock from the party of the second part, unless he 274 Appendix shall desire so to do; that the said party of the first part, in order to avail himself of this option, need not purchase the entire amount of snecrcsnenizgs Cosistmpmenne) shares during any one of the periods hereinafter specified, or at any other time; but that the party of the first part, in order so to avail himself of this option, need purchase from the party of the second part, during any one of said periods, or at any other time, only such portion of said total amount of Lo. eeresrreneneineeones (conan...) shares as he shall desire, and shall request the party of the second part to deliver to him accordingly. The party of the first part may, pursuant to the option hereby granted, purchase the said reese eee (eceeeeeas.) shares of said stock, or such smaller amount thereof as he may determine, at one time during any one of the periods hereinafter specified; he may purchase the said aggregate amount of — weereree (eeeeeenns) shares partly during one of said periods, and partly during any or all of the other of said periods, as he may decide and notify the party of the second part. It is specifically understood and agreed, by and between the parties hereto, that the granting of the foregoing option to the party of the first part was a controlling factor in inducing the party of the first part to sell thesaid ........._ siemens (cel) shares of stock to the party of the second part at the said priceof Dollars (coon), and that, if the said option had not been granted to the party of the first part upon the terms herein specified, the party of the first part would have demanded a much higher price for the said stock than the aforesaid sum of vrivcenees Dollars (coy. THirp. In full payment of all stock purchased by the party of the first part from the party of the second part, pursuant to the option granted by Paragraph Seconp of this agreement, the party of the first part shall pay, and the party Ry Appendix 275 of the second part shall accept, the following prices in cash, increasing every six months: If sold at or before 4 year from date at $21 a shr. 1 year from date at $22 a shr. 1% years from date at $23 a shr. 2 years from date at $24 a shr, 2% years from date at $25 a shr. 3 years from date at $26 a shr, 3% years from date at $27 a sh. 4 years from date at $28 a shr. 4% years from date at $29 a shr. § years from date at $30 a shr, FourtH. In consideration of the granting by the party of the second part to the party of the first part of the foregoing option to purchase ........ .. weemnme (cones) shares of the common capital stock of said ........... . .... at the prices hereinbefore stated, the party of the first part hereby guarantees that the party of the second part shall during the life of this contract receive dividends at the rate of at least one and three-quarters per cent (134%) every three months upon the purchase price of all stock acquired under this agreement and still outstanding at any time, that is not rebought by the party of the first part. To this end, if any regular quarterly dividend declared and paid by the said corporation shall be at the rate of less than one and three-quarters per cent (134%), the party of the first part will pay to the party of the second part an amount sufficient to bring said quarterly dividend so declared and paid up to the full rate of one and three-quarters per cent (134%) as if the same had been regularly declared and paid by the said corporation. It is specifically understood and agreed that the party of the second part shall be entitled to all dividends declared and paid by the said corporation upon the said stock, whether or not the same shall exceed one and three-quarters per cent (134%) per quarter on said purchase price; and that the foregoing guaranty of a minimum quarterly dividend of one and three-quarters per cent (134%) shall not have the effect of limiting in any way the amount of dividends which the party of the second part 276 Appendix may be entitled to receive from the said corporation upon the said stock, If, however, the party of the first. part shall fail to make any payments as in and by this paragraph provided, for a period of thirty (30) days after the mailing of a written notice by the party of the second part requiring the party of the first part to make such payment, the party of the. first part shall, following the said default, have no further right to purchase the said arremne anon een (-rneeeeeie.) shares of capital stock from the party of the second part, or any portion thereof, nor further right to exercise the option to purchase the said .._....___ tb mmm—————— (-reeeeneer.) shares given him by this agreement. Fiera. All deliveries of stock pursuant to this agreement shall be made, and all payments by either party hereto shall be made, in the City of New Haven, Connecticut ; which said City is hereby declared to be the place of the performance of all the terms and provisions of this agreement. Sixt. All the terms and provisions of this agreement shall be binding upon, and shall enure to the benefit of, the heirs, legal representatives and assigns of the respective parties hereto. IN WiTnESs WHEREOF, the parties hereto have set their hands and seals, the day and year first above written. cecemeneee (LS) reeceoennen (1.8) StaTE oF CoNNECTICUT | S58. County oF New Haven § 192 Personally appeared Irving F ISHER, the signer and sealer of the foregoing instrument, and duly acknowledged the same to be his free act and deed, before me. Notary Public Appendix 274 STATE oF County OF Personally appeared the signer and sealer of the foregoing instrument, and duly acknowledged the same to be his free act and deed, before me. . ! $$. 1G2 Notary Public - INDEX Adams, Charles Francis, Jr., 114 Agassiz, Louis, 120 Agricultural revolution due to scientific invention, 136-7 Amalgamated Association of Street and Railway Employees, 164 Amalgamations. See Mergers American Acceptance Council, 46, 222 American Bankers’ Association, 42-3, 255 American Federation of Labor, 157, 160, 195 American Telephone & Telegraph, wire and wireless mergers, 108 America’s New Frontier, 132 Anderson, Benjamin M., 235 Ad nnalist, The, xv Artificial “floor” proposed for New York Stock Exchange, 243-7 Association Against the Prohibition Amendment, 178-9 “Atlantic and Pacific” stores, 107 Automobiles: overproduction, 37; sales, 59; effect of their increase on American life, 134-5 Axe, Emerson Wirt, xv Avres, Leonard, go Bank: mergers, 108; pool, 54; stocks, 8, 9 (for list, see Stocks) Bankers’ acceptances, 4, 44 Bankers’ conferences, 6-7, 18 Bankers’ Trust Co., 6, 15° Bank of England rediscount rate, 4, 229 Baring panic, 1900, 31 Barnes, Julius H,, 27 Barron's Weekly, 31 Bear tactics, 43, 53-4, 240 Beckhart, Benjamin H., 235 Beer, Henry Ward, 107 Berlin Stock Exchange, 32, 230 Bethlehem Steel Company, 172-3, 211 Beyer, Otto S., Jr., 163, 164 Blumenthal, Daniel W., xi Sonds: safety of, vs. stocks, 198; their speculative character, 202 “Boom” enthusiasm as cause of panic, 52-3 Boston Five-Cent Savings Bank, 213 Boston News Bureau, 95, 96 Bradford, Lindsay, 36 Brass merger, 103 Brokers’ loans, xv, xxi, 16, 42-3, 221, 250-2 Building decline, 1929, 42, 57, 59 Burton, Theodore E., 259 Business recession, 1929, 36 Babson, Roger W., xii, xv, 4 ‘Baltimore & Ohio plan,” 162-5 Cahill, M. H., 50, 247 27Q 280 Calling of loans, 45 Call-money rate, 4 Canadian National Railways, 163 Capital gains, Federal tax on, 37-41, 248 Capper-Volstead Act, 112 Car loadings decline, 59 Causes of the panic, various theories of, 31ff. “Caution factor” in buying, 205-7 Cement merger, 108 Chance, element of, in buying stocks and bonds, zo4-7 Chase National Bank, New York City, 6 Check-up on status of stock-issuing companies, as safety principle, 207-8 Chicago & Northwestern, 163 Chicago, Milwaukee & St. Paul, 164 Cities Service Co., 209 City Bank Farmers Trust Co, New York City, 36 Clark, Wallace, 142, 144, 145 Clay, Paul, xv Clayton Act, 106, 111 Collateral loan policy proposed to avert panic, 247-8 Commercial and Financial Chronicle, The, 5, 17, 43-4 Committee, joint, proposed for passing on new issues, 249-50 Common Stocks as Long Term Investments (Smith), 67, 200 Comparison of rates of increase in stock prices over earnings, and vice versa. See Stock Prices Conferences: Oct. 2, 6-7; at White House, Nov. 13, 13, 17, 18. See National Business Advisory Council Index Construction and maintenance work expanded for stabilization, 22-3, 28 Cooke, Morris Llewellyn, 142 Coolidge, Calvin, xi “Coolidge boom” as cause, 52-3 Corn Exchange Bank, 13 Corporate incomes: net, 77-3; profits absorbed, reserved, or plowed back, 78-9; understated, 82; gains in, 1929, 74-5 Corporations: showing “no net income,” 75-7; publicity desirable for financial operations of, 114-8 Cosmetic and perfume merger, 108 Credits: growth of, 1928, xiv, xv; available after panic, 29; increased volume of, allowed by bankers, 41-2; overextension of, 98, 223 Crises Commerciales, Des (Juglar), 258 Currency, unstable purchasing power of, 182-97 Dairy merger, 108 Day, E. E,, 161 Deflation of currency, 187-8, 194 Dennison, Henry 8. 142, 143, 172 Diversification in buying securities, 203-7 Dollar, fluctuating value of, 182ff, Doran, J. M,, 177 Dow-Jones barometer, xv Du Pont-U. S. Rubber combination, 108 Earnings, 1929, 9x Economic Effects of Prohibition (Feldman), 173 Index 281 Economists’ opinions of Prohibi- Federal tax on capital gains, tion, 177-8 37-41, 248 Edison, T. A., 7, 125-6 Federal Trade Commission, 111 Edison Company stock split, de- Feldman, Herman, 175, 176 cision on, 37 Financial Crises (Burton), 259 Electric power; productivity per Fisher, Irving, his forecast of unit increased, 131, 132; effect decline, xv on American life, 133-4 Tord, Henry, 25-6, 115, 116 Employees’ insurance, 169-71 “oreign stock exchanges, 18-20, Employment levels after the 230, 231; crash starting in panic, 22 London, 20; liquidation in Engineering: applied to indus- New York, 31-2; artificial try, 142-56; in Europe, 144; “floor” of prices, 245-6 length of time needed to get Frank, Glenn, 133 results, 146; diagnosing diffi- Frey, John P.. 160 culties, 147; improving plant layout, 148-50; factory planning for the future, 150-3; charts for executives, 153-4; benefits of scientific management, 154-6 Engineering, “human,” to improve welfare of workers, 169-70 Equitable Trust Co., New York City, 213 Equity securities, preponderance of, 1928-9, 211 Ernst & Ernst, 69, 74 Exports, decline in, 60 Express company consolidation, tof Gantt, H. L., 142 General Electric, 116 General Motors, 116, 210 Gibbs, J. Willard, 120 Gilbert, Joseph E., 179 Glass, Carter, xi, xxi Gold: exports to Europe, 226-7, 264; reserve threatened, 191 4; withdrawals, 49-50 Grace, Eugene G., 172-3 Grand Trunk Western R. R., 164 Great Food Problem and Its Solution (Willcox), 138 Green, William, x57, 158. 160. 195 Group insurance for emvloyees, 170-X Guaranty Trust, 6, 15 Hadley, Arthur Twining, 113, 116 Hastings, New York State Senator, xi Hatry failure, London, 4, 31, 230 Hazlewood, Craig B., xxi, 41 “Held” stocks increase in value of, xix Holding companies, 214, 217 Failures in business, 1923-7, 75 Federal Reserve Act, xx, III, 232; Board, xx, 113, 186, 188, 230, 232ff., 264-5; System, 21, 42, 50, 189, 240; advance in rediscount rates, 1, 15, 18, 44-5; indexes of industrial production, 121; influence on dollar stability, 186-91; adviser to banks and business, 190; rediscount brokers’ loans, 220-1 282 Hollander, Prof. Jacob H., 52-3 Holmes, Rev. John Haynes, xi Hoover, President, xi, 12, 16, 17, 2tff, 57, 100, 104, 106, 110, 111, 126, 129, 142, 175, 256 “Hoover boom,” xvi ‘Human” engineering, 169-70 Humphrey, William E.. rr: “Ideal Formula” for index of production, 122 [ncome-tax cut, 1930, 13, 40, 238 Index numbers in production, 161 Industrial disputes reduced, 168 Industrial production, increase in, due to science, 120ff. Industrials, 2, 3, 15, 16, 114 Industry organized for stabilization, 22-3 Inflation. See Credits Insull, Martin J., 131 Insurance for workers, 169-71 Interest rates, short-time, depressed after 1920, 228, 230-1 International paper, 108 [nventions of value to industry, 127, 129, 131 Investment companies organized by commercial banks, 34 Investment trusts, 49, 56, 204, 206, 214, 216 Investment and Purchasing Power (Van Strum), zoo Journal of Commerce, 34, 242 Juglar, Clement, 258 Karsten chart, xvi Karsten Statistical Laboratories, xvi Kavanaugh, James E., 171 Kemmerer Commission, 144 Kemmerer, E. W., 134, 185 Kent, Fred I., 222-4, 226, 248-0 Index King, W. I., 185 Labor: in relation to industrial productivity, 157; to management, 162-5 Labor's Ideals Concerning Management (Green), 158 Lamont, Thomas W., 6, 12 Legislation proposed, to avert panics, 248 Ley, Harold A. 169 Liquidation, Oct. Nov., 1929, causes of, 3, 9, 31ff. London Stock Exchange, 20, 230 Lumber industry regulated by trade conferences. 110 Making of Index Numbers, The (Fisher), 122 Management of industry and business: scientific methods applied to, 142-56; shared by Labor, 157-74; examples of codperation, 162-5 Manufacturers’ Record, so-1 Margin system, substitute for, as safeguard against panic, 251-2 Margins: too small to protect borrowers, 46, 47; waived after Oct. 28, 241; new proposal to figure, on value basis, to avert panic, 248 Mark, the German, 183-4 Market, money, research proposed, to study causes of panic, 249 Mass-production, advantages of, 115 Meek, H. B., 247 Mellon, Andrew W., xi, 39 Mergers, 101-18; their increase, 101-2; effect on production costs, 102, 104; on employment, 105; now legitimate. Index 283 106-7; benefits, 107-9; how eral Reserve System, 189-90, they may be made safe, rroff. 236 Millikan, Robert A., 125 Option agreements proposed for Mitchell, Charles E., xx-xxi stock purchase instead of Mitchell, Wesley C., 24 margin accounts, 252-3 Mitten Management, 164-5 Overextension of loans, 50-1, 53, Modern Trade Unionism 98, 223 (Green), 157 Overvaluation of common stocks, Money, fluctuating value of, 34 182-97 Money Illusion, The (Fisher), 183 Moratorium, 245 Morgan, J. P. & Co, 6, 12, 241 Motion picture company chain, 108 Packing industry, advance in, 136 Paish, Sir George, xii Panic of 1837, xii Panic, fall, 1929: advance indications of, xivff.; chronology, including preliminary period: (March 26, 3; April 18, xiv; May 12, xvi; Sept. 5, xv, xviii; Sept. 7, 2; Sept. 30, 2; Oct. 18, xv; Oct. 21, 6, 7; Oct. 28, 7, 8; Oct. 29, 2, 9; Oct. 30, 11; Oct. 31, 11; Nov. 7, 12, 13; Nov. 11, 13; Nov. 12, 14; Nov. 13, xviii, 3, 12, 14, 15; Nov. 14, 15, 16; Nov. 15, 16; Dec. 1, 17; Dec. 11, 18; Dec. 27, 18); “technical” character of, 15; contrast with other panics, 243 Paris Bourse, 31, 230 Parr, Samuel W., 129 Patent Office, U. S., congestion of recent inventions in, 126-7 Philadelphia Rapid Transit cooperative plan, 164-5 Pierson, Lewis E,, 191 Plaza Trust Co, New York City, 50, 247 Plowed-back earnings, xxii, 29, 66-80 Population problems, foodstuffs, etc, how solved by scientific October 29 described, 9-10 inventions, 138-9 Open market committee of Fed- Power and light mergers, 108 National Bureau of Economic Research, 130, 142, 161 National Business Advisory Council, 2:ff., 27 National City Bank, New York City, xiv, XX, 8, 13, 15, 49, 5% 68-9, 226 Nature of Capital and Income, The (Fisher), 203 Neill, Charles P., 163 Net profits, swift rise in, 68-9 New capital issues, 4, 5, 6 New owners of stock since crash, 55, 62, 63 New York Stock Exchange in 1914 (Noble), 243-4 New York Times, xii, 14, 31, 91, 177 N.Y, N. H. & H. R. R,, 212 Noble, H. G. S., 243-4 “No net income’ corporations, 284 Preventives of future panics, 238-56 Price agreements, legalizing of, 1x2-3 Prices of commodities, 25-6; stability in, 182; fall of, 58, 187; Federal Reserve control of, 188 Prices of stock. See Stock Prices Productivity, increased by scientific management, 142-56; its relation to labor, 161 Profits, corporate, absorbed as salaries, 76-7 Prohibition, its economic effects, 175-81 Prohibition Still at Its Worst (Fisher), 173 Psychological effect of the panic, 56, 60, 63-4 Public =~ Service Commission (Mass.) decision in Edison Co. stock split, 37 Publicity, advantages of, in relations between business and consumer, 117 Quinby, Dr., of Hood Rubber Co., 170 Railroad mergers, 108 ; stocks, 2, 3, 7; publicity given to earnings of, 114 Raskob, John J. xi, 259 “Rate of yield” defined, 201 Ratio of stock earnings to prices. See Stock Prices Rayon merger, ros R. C. A—Victor merger, 108 “Real” vs. “nominal” yield on investments, 201-2 Real estate values, effect of Prohibition on, 177 Recent Economic Changes re-Index port, 67, 75, 90, 130, 143, 162, 164, 166, 195-6, 260; Committee, 100, 102, 104, 120 Recovery from panic, 16, 21ff,, 59 Rediscount rates, Bank of England, 4; on brokers’ loans, 250-1, 264-5. See Federal Reserve Revenues “lost” through Prohibition, 178-80 Ripley, William Z., 113, 115 Roberts, George E., 49-50, 226 Robertson, Thomas E., 127 Robinson, Leland Rex, 214 Robinson, Senator J. T. (Ark.), xi, 52 Robinson, Senator A. R. (Ind.), xi Rockefeller, John D., and John D., Jr, 12, 16 Roman, Frederick W., 183-4 Rorty, Malcolm C., xv Ryan, A. H., 169 Safety fund proposed for emergencies, 247 Safety standards proposed for averting panics, 242 Scientific inventions in relation to industry, 119-41 Scientific management, 142-56 Selective character of 1929 market, 93-4 Selling-out forced by brokers? 43-4 Shareholders, numbers of, in. creased since panic, 209-10 Sherman Act, 106 Shipping Board Act, 111 Simmons, E. H. H., 93, 221 Sinclair, John 8. 3x Sloan, Laurence H., 83 Smith, Edgar Lawrence, 67, 99, 200 Index Snowden, Philip, Chancellor of the Exchequer, 4 Snyder, Carl, 34, 76-8, 98, 260 Speculation, 218-37; on borrowed money, 218: the kind that is gambling, 219-20 Stabilization, measures taken toward, 21-30 Stable money since 1922, 182 “Standard Industries,” 107 Standard Oil of New York, 242 Standard Oil subsidiary companies, 109 Standard Statistics Co., 69, 83, 84 Sterling exchange, 32 Stock conversions of funded debt, 211-12 Stock Exchange, New York, 11, 17, 114 Stock exchanges, foreign. See Foreign Stock Exchanges Stock prices rising faster than earnings, 67-8, 83-4; slower, 69-72; inflation of, 83-100; no fixed ratio now possible, go-1; justifiable level, 98-9; effect of inventions on ratio, 140-1 Stocks: volume traded, 1929, 2-3; common, safety of, vs. bonds, 198-217; purchase of by individuals and institutions in 1929, 210-214 Stocks mentioned in this book: Air Reduction, 96 Allied Chemical, xx, 96, 13% Allis Chalmers, 96 American and Foreign Power, 7, 12 American Can, 96, 242 American Locomotive, 96 American Smelting, 96 American Tel. & Tel, 7, 12, 95, 96, 131 American Tobacco “B,” 96 2835 Stocks mentioned in this book: Anaconda, 95, 96 Atchison, 96 Atlantic Refining, 96 Baltimore & Ohio, 96 California Packing, 96 Chesapeake & Ohio, 96 Chrysler, 7 Consolidated Gas, 96 Corn Products, 96 Curtiss-Wright, 13x Du Pont, 96 Electric Bond & Share, 95 Fox Films, 131 General Electric, 7, 12, 95, 96, 131 General Motors, 7, 96 Gillette Safety Razor, 96 Hudson Motors, 96 [nternational Harvester, 97 International Tel. & Tel, 97 Johns-Manville, 131 Kennecott, 97 Liggett & Myers “B,” 95, 97 Loew’s, Inc, 97 Maytag, 131 Montgomery Ward, 95, 97 Nash Motors, 97 National Biscuit, 97 New York Central, 97, 228 North American, 97 Otis Elevator, 97 Packard Motor, 97 Paramount Famous Lasky, 97 Public Service of New Jersey, 97 Radio Corporation, 95, 97, 131 Reynolds Tobacco “B,” 93, 97 Remington-Rand, 131 Southern Pacific, 97 Standard Oil of New Jersey, 16, 97 286 Index Stocks mentioned in this books Studebaker, g7 Texas Corporation, 97 Union Carbide, g7 Union Pacific, g7 United Fruit, 97 U. 8. Steel, 9, 12, 13, 16, 94, 97, 242 Western Union, 97 Westinghouse E. and M,, 7, 12, 97 Woolworth, g7 Unlisted Stocks: Bank of America, 8 Bank of New York and Trust, 15 Bank of U. 8, 8 Bank of the Manhattan Co., 8 Bankers’ Trust, 15 Chase National, 8 Chatham-Phenix, 8 Corn Exchange, 13 Fifth Ave. Bank, 8 First National Bank, 8 Guaranty Trust, 15 National City Bank, 8, 15 Strikes, reduced in new era of codperation, 166-8 Synthetic helium, 127 Synthetic rubber, 126 Trade unions in relation to productivity, 157; represented in management, 162-5 Tripp, Guy E., 133-4 “Trust-busting” in Roosevelt and Wilson administrations, 106 “Undigested” securities, 5, 48 Union-management codperation, 162-5 U. S. Rubber absorbed by Du Pont, 108 U. 8. Steel, 211 Utilities, 2, 3, 16 Van Buren, President, xii Van Strum, Kenneth, 200 Voluntary codperation between business and government, zy-30 Wages: maintained after panic, 22; relation to costs, 173 War business, its relation to recent prosperity, 79-80 Warburg, Paul M,, 264 Westinghouse, 116, 133 Willard, Daniel, 162 Willis, H. Parker, xii, 56 Woolworth stores, 107 Workers: their health, insurance, etc, 169-71; efficiency promoted by Prohibition, 175-6 Tariff, its relation to the Panic, 47 Tax, Federal, on sale of stocks, etc, 37-41 Taylor, Frederick Winslow, 142, 144 Theory of Interest, The (Fisher), 264 Thomas, Woodlief, 161 Trade conferences to obviate industrial legislation, 110-131 Yale University, 212 Year 1929, better business than 1928, 69-75 Yield, real vs. nominal on investments, 201-2 Young, Owen D.,, 108, 133, 170-1 x sC Ba Ss aie L 3 = Ja (2 NY \ T% PO on > nN NJ oS ll 0 pie i Fr i! 'z mt B — * Labor’s Codperative Policy 165 Rival unions defeated the attempt to secure unionnagement codperation when this plan was first ached for Philadelphia in 1911. Without disninating against union men, however, the plan .tked in that city for sixteen years prior to the ent two-thirds vote by the union that made it a n for organized labor. Like the somewhat different sort of management the Baltimore & Ohio Railroad in the case of its 'pmen, the so-called “Mitten Management” plan tifies its cooperative agreement with organized or on two grounds: first, organization is needed to tect the rights of labor; and second, labor organd for economic efficiency has the greatest power public and private good. oth systems freely provide union representation management, and agreement to share fairly any sequent benefits. European Labor Dogma Reversed Bettered industrial relations are mentioned by the ting European delegations investigating Ameriindustries as one explanation of the growth in * prosperity. Here the workmen have awakened the fact that improved methods of production are benefit to themselves as well as to the owner and public. In the new labor compacts and in the on banks, laborers have become capitalists. This ontrary to the European industrial dogma, but it ms to be winning, because it is based on sound nan psychology and philosophy. Cai NO dd rr t