SKOPJE, Macedonia, July 30 (UPI) -- Claud Cockburn, writing for The Times of London from New York, described the irrational exuberance that gripped the nation just prior to the Great Depression. As Europe wallowed in post-war malaise, America seemed to have discovered a new economy, the secret of uninterrupted growth and prosperity, the fount of transforming technology.
"The atmosphere of the great boom was savagely exciting," he wrote, "but there were times when a person with my European background felt alarmingly lonely. He would have liked to believe, as these people believed, in the eternal upswing of the big bull market or else to meet just one person with whom he might discuss some general doubts without being regarded as an imbecile or a person of deliberately evil intent-some kind of anarchist, perhaps."
The greatest analysts with the most impeccable credentials and track records failed to predict the ensuing crash and the unprecedented economic depression that followed it. Irving Fisher, a pre-eminent economist, who -- according to his biographer-son, Irving Norton Fisher, lost the equivalent of $140 million in today's money in the crash -- made a series of soothing predictions.
On Oct. 22 he uttered these reassuring words: "Quotations have not caught up with real values as yet ... (There is) no cause for a slump ... The market has not been inflated but merely readjusted ..."
Even as the market convulsed on Black Thursday, Oct. 24, 1929, and on Black Tuesday, Oct. 29, The New York Times wrote: "Rally at close cheers brokers, bankers optimistic."
In an editorial on Oct. 26, it blasted rabid speculators and compliant analysts: "We shall hear considerably less in the future of those newly invented conceptions of finance which revised the principles of political economy with a view solely to fitting the stock market's vagaries."
But it ended thus: "(The Federal Reserve has) insured the soundness of the business situation when the speculative markets went on the rocks."
Compare this with Alan Greenspan's congressional testimony this summer: "While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy ... (The Depression was brought on by) ensuing failures of policy."
Investors, their equity leveraged with bank and broker loans, crowded into stocks of exciting "new technologies," such as the radio and mass electrification. The bull market -- especially in issues of public utilities -- was fueled by "mergers, new groupings, combinations and good earnings" and by corporate purchasing for "employee stock funds."
Cautionary voices -- such as Paul Warburg, the influential banker, Roger Babson, the "prophet of loss," and Alexander Noyes, the eternal Cassandra from The New York Times -- were derided. The number of brokerage accounts doubled between March 1927 and March 1929.
When the market corrected by 8 percent between March 18-27 -- following a Fed-induced credit crunch and a series of mysterious closed-door sessions of the Fed's board -- bankers rushed in.
The New York Times reported: "Responsible bankers agree that stocks should now be supported, having reached a level that makes them attractive." By August, the market was up 35 percent on its March lows. But it peaked on September 3 and went downhill after that.
On Oct. 19, five days before Black Thursday, Business Week published this sanguine prognosis:
"Now, of course, the crucial weaknesses of such periods -- price inflation, heavy inventories, over-extension of commercial credit -- are totally absent. The security market seems to be suffering only an attack of stock indigestion ... There is additional reassurance in the fact that, should business show any further signs of fatigue, the banking system is in a good position now to administer any needed credit tonic from its excellent Reserve supply."
The crash unfolded gradually. Black Thursday actually ended with an inspiring rally. Friday and Saturday -- trading ceased in those days only on Sundays -- witnessed an upswing followed by mild profit-taking. The market dropped 12.8 percent on Monday -- with Winston Churchill watching from the visitors' gallery, incurring a loss of $10 billion to $14 billion.
The Wall Street Journal warned naive investors:
"Many are looking for technical corrective reactions from time to time, but do not expect these to disturb the upward trend for any prolonged period."
The market plummeted another 11.7 percent the next day, though trading ended with an impressive rally from the lows. Oct. 31 was a good day with a "vigorous, buoyant rally from bell to bell."
Even John D. Rockefeller joined the myriad buyers. Shares soared. It seemed that the worst was over.
The New York Times was optimistic: "It is thought that stocks will become stabilized at their actual worth levels, some higher and some lower than the present ones, and that the selling prices will be guided in the immediate future by the worth of each particular security, based on its dividend record, earnings ability and prospects. Little is heard in Wall Street these days about 'putting stocks up.'"
But it was not long before irate customers began blaming their stupendous losses on advice they received from their brokers.
Alec Wilder, a songwriter in New York in 1929, interviewed by Studs Terkel in "Hard Times" four decades later, described this typical exchange with his money manager: "I knew something was terribly wrong because I heard bellboys, everybody, talking about the stock market. About six weeks before the Wall Street Crash, I persuaded my mother in Rochester to let me talk to our family adviser. I wanted to sell stock which had been left me by my father.
"He got very sentimental: 'Oh, your father wouldn't have liked you to do that.' He was so persuasive, I said O.K. I could have sold it for $160,000. Four years later, I sold it for $4,000."
Exhausted and numb from days of hectic trading and back office operations, the brokerage houses pressured the stock exchange to declare a two-day trading holiday. Exchanges around North America followed suit.
At first, the Fed refused to reduce the discount rate. "(There) was no change in financial conditions, which the board thought called for its action," although it did inject liquidity into the money market by purchasing government bonds.
Then, it partially capitulated and cut the New York discount rate -- which, curiously, was one percentage point above that of other Fed districts -- by one point. This was too little and too late. The market never recovered after Nov. 1. Despite further reductions in the discount rate to 4 percent, the market had shed a whopping 89 percent in nominal terms when it hit bottom three years later.
Part 2 of this analysis will appear Wednesday.
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