By way of comment on the great speculative epidemic that spread over the country and indeed throughout the world the past five or six years, it may be observed that stock speculation, once considered a hazardous business, came to be generally regarded as a safe, dignified and profitable occupation. Of a certainty it became general, if nothing else. From a once precarious game of chance, to be indulged in only by daredevils and millionaires, it became so simple and well safeguarded that anyone with a little capital could in a short time double it and quadruple it. It was contended that inasmuch as we had successfully passed the twenty-year cycle in which, according to precedent, stock market panics are wont to occur, such disturbances had been relegated to history, and the Federal Reserve System obviated any possibility of their recurrence. This belief pervaded all classes from millionaires to house servants, and eventually the entire community became[4] inoculated with the speculative germ. It got to be the principal topic of conversation in the clubs, cafes, hotel lobbies, on the street, and any place where two or more people were congregated. The many thousands of brokerage offices throughout the country were jammed to the doors by eager onlookers and participants who devoted themselves exclusively to the market from the opening to the close. Office boys, elevator men, manicures, hotel waiters, hairdressers, cab drivers, and even rural farmers initiated themselves into the game and discussed mergers, split-ups, stock dividends, and all such subjects in high finance with more profuseness and profundity than was ever displayed at a bankers’ convention.

Indeed for years it looked as if stocks could only go one way—up. Therefore the whole speculative fraternity arrayed itself on the up-side; and it actually happened that vast numbers of traders who had formerly bought stocks to sell at only a point or two profit, now accumulated them to keep indefinitely. The trading element, emboldened by one success after another, concluded that we[5] were in a new era—that the stock market millennium had become a reality. In travel we advanced from the stage coach to the automobile and the aeroplane; from the slow sailing craft to the ocean greyhound. The radio and the telephone had linked the whole universe together in conversation, and in the art of creating wealth the old-fashioned slow-moving process of conservatism had become as obsolete as the stage coach. These facts were all too obvious to be disputed. And to prove there was simply no limit to modern inventions the stock market, backed by the new investment trust scheme, supplied a new financial vehicle without any reverse gears. It was fast and easy riding, the sensation was thrilling, and it required neither skill nor experience to operate. In 1924-6 during the try-out period of this marvellous get-rich-quick machine there were many skeptics who doubted its safety and efficiency; but confidence gradually increased and one after another became convinced, until eventually the whole populace clambered aboard.

Business was good, the country was rich and prosperous, and it was argued that a[6] financial structure built upon such confidence and prosperity could not be shaken by anything short of a universal earthquake. Basic values had become so stabilized in the minds of the people that there was no more reason to expect them to crumble than there was to expect the Washington Monument to topple over. Even the gray-haired wizards of Wall Street who had preached caution for two or three years, finally fell into line with the new order of things, and not only did they plunge into the market long after it had passed the point of safety, but they organized more investment trusts running into billions of dollars, and advertised far and wide for the public to buy their stock and join them in amassing fortunes. They would manage everything, and all the people had to do was to furnish the money. These cold-blooded Wall Street magnates, suddenly converted to the theory of universal brotherhood, undertook to espouse the cause in which everybody works for one another. Verily the Biblical prophecy was more than fulfilled; for it came to pass that not only could the lamb lie down in safety with the lion,—he could feed with[7] him at the Wall Street manger. The public was thus taken into these co-operative partnerships and enabled to enjoy all the advantages to be derived from the superior genius and directorship of the giants of wealth and commerce. The small investors and speculators, highly flattered by the opportunity of being admitted into such society, threw their savings into the melting pot with more confidence than as if they were putting them into a savings bank. Many of the trusts were legitimate; others were disguised gambling pools operating on other people’s money, along the lines proposed by the late “Tom” Lawson in the memorable advertising campaign he conducted in Bay State Gas. In most cases these gambling ventures were sponsored by names that inspired confidence; and those who bought participation certificates would undoubtedly have won if the stock market had never stopped going up. It was generally supposed that such men could not go financially wrong—and they didn’t; it was the public that went wrong in buying their certificates. One company after another launched its stock with great display advertisements,[8] and no hungry trout ever bit at a fly with more avidity than the greedy public gobbled up these “investment” issues. Sober-minded people marvelled at the spectacle and wondered where all the money came from. In dozens of cases the advertisements stated that the stock had already been oversubscribed, and the notice appeared only as a matter of record. And so it happened that time and again the insatiate public was obliged to restrap its purse and wait for some new opportunity to be let in. It got so that many people felt it was about as difficult to get into these “closed” issues as it was to gain a membership in one of New York’s fashionable clubs.

Many of these so-called investment trusts accumulated thousands upon thousands of highly speculative common shares that paid less than 2% income on their market value. Indeed one day in September, 1929, a statistician figured that the twelve most active stocks on the New York Stock Exchange averaged a return of only one and three-fifths per cent. on their selling price, and with no immediate prospect of increased dividends. With dozens of investment companies hoarding[9] securities, all one had to do was buy the active stocks, hold them for a big rise, then unload them onto some new investment trust. The pot was kept boiling by all sorts of rumors of stock dividends, split-ups, consolidations and such-like enticements; and when things quieted down a bit, someone would bring out the old reliable rumor that while the public was taking a breathing spell the big bankers were quietly accumulating large lines. It worked like magic on the inflamed public mind—it always does. If the bankers are buying, why shouldn’t the public buy? Another popular device was to broadcast reports accredited to Messrs. Coolidge & Mellon, to the effect that after scanning the speculative horizon they could discover no reason why the market should not keep on going up. With such a bulwark of confidence there was but little reason to be afraid. It did not matter whether stocks paid small dividends, or no dividends. It did not matter if money loaned at ten, twelve, or fifteen per cent. The rise in values would take care of all that, with ample to spare. Frequently one day’s advance in price would cover a whole year’s interest[10] or more. Nor did it matter that brokers’ commissions had nearly doubled, and that this gigantic “kitty” was taking millions of dollars in toll every day. It works on the same principle as poker: if seven players sit into a game with a “kitty,” it’s only a question of time when at least six of them will go broke. I heard one trader proudly declare that in three years he had paid his broker upward of half a million dollars in commissions, and nearly twice that amount in interest.

Now and again the brokers’ letters and the comments of financial editors contained notes of warning, but the public having got the bit firmly in its teeth was like a runaway team: it could neither see nor hear anything that stood in the way of progress. Facts were more conclusive than theories; and since those arrayed on the constructive side had all the advantage in their favor for an almost uninterrupted period of several years, they indulged themselves in a delirium of dreams from which there appeared to be no awakening. It was as useless to warn people of the inevitable results as it would be to warn a young flapper against the approach[11] of old age, or a carousing young sinner that the Judgment Day is coming. Many speculators were willing to admit that stocks might react sometime, but they were too drunk with prosperity to worry about anything so far in the future. The one thing that annoyed them was the occasional appearance of some venturesome “bear” at their banquet. Whereas in the past the bulls and bears had regarded each other as friendly antagonists, the bulls now came to look upon the bears as the deadly enemies of bullish society, and for a time this animal was threatened with total extinction. Anyone discovered short of stocks was viewed in about the same light as one caught with stolen goods; he was punished accordingly and the feast went merrily on. I know, because I was one of the offenders. But fortunately I got off with a light sentence.

In one of the rush seasons when the stock exchange transactions were running from three to six million shares a day, with the tape lagging an hour or more behind, I knew a man who put in an order to sell a hundred shares short at $190, with a stop loss order at ten points above the purchase price, and an[12] hour or so later, without any advice that the stock had been sold, he got notice that it had been bought in on his “stop” at $200, resulting in a loss of a thousand dollars, plus commission. Next morning, not having received any notice of the short sale, he concluded that in the rush of business the order must have miscarried, and therefore he was long of a hundred shares, on which by the way he had a profit of five points. Shortly after the opening he sold it, and at the same time sold a hundred shares short. Later in the day he got word that his selling order of the day before had been duly executed, but owing to some mixup it had not been promptly reported. This made him three hundred shares short, with the stock climbing a half point or more between sales. Before the close he covered the three hundred shares at a loss of nearly four thousand dollars. The market looked so strong that he decided to recoup his loss on the long side, so he bought two hundred shares. But the following day while the bulls paused for a resting spell the stock slipped back nine points, and being a little upset over the result of his miscalculations,[13] in a fit of disgust he closed out his two hundred shares at an additional loss of seventeen hundred dollars. Next day the bulls again took the stock in hand and advanced it nineteen points. No wonder such maneuvers give traders mental intoxication.

The collapse of the Florida real estate boom—which carried down dozens of banks,—the great Mississippi flood, the devastating earthquakes in California, the failure of a hundred or more banks throughout the Northwest and such-like calamities had no more effect on the Wall Street psychology than they would have had in quelling an epidemic of smallpox. Some of the more conservative element, sensing the danger, sold out their stocks, but after discovering their mistake they bought them back at much higher prices and re-joined the procession. Therefore many traders who had preached caution or moderation when the market was thirty, fifty or a hundred points lower, were found consorting with the most rampant bulls at the top. I know a man who sold out his Montgomery Ward at $15.00 a share, and in 1928 after discovering his error in judgment[14] he bought it back at $425.00 a share. It was generally tipped to go to a $1000—but it didn’t. After the November crash he told me he had been “wiped off the map.”

The market rose to such heights that the selling price of securities listed on the New York Stock Exchange—to say nothing of the untold billions listed on other exchanges—reached a figure far in excess of all the money in the world. Though it was reiterated time and time again that customers’ accounts with brokers were amply protected, they were of course margined with other securities, and thus the pyramid grew until it staggered the imagination even of those who built it. Now and then the great top-heavy structure leaned heavily and looked as if it were coming down; but each time powerful props were applied and the timid ones who had run for cover returned with restored confidence. This, like the old cry of “Wolf! Wolf!” was repeated so many times that it got to be the general impression that there was no wolf at all.

The old adage that “stocks are made to sell” gave place to a new slogan, “Stocks are[15] made to buy.” Every sort of industry was incorporated and over-capitalized, and notwithstanding the hundreds of millions of new shares lately issued it was currently reported that stocks were very scarce; that they had nearly all gone into “strong hands;” that they were locked up in strong boxes, and nothing could shake them out. To test the truth of this story, I made inquiries among several brokers and traders of my acquaintance, with this result: I found that almost without exception, traders were carrying more securities on margin than they had ever owned before, and that a vast number of them were pyramiding on their profits. I personally knew one man who prior to Coolidge’s election had never carried more than two or three hundred shares, but thereafter he began buying, and continued to extend his lines until in September, 1929, he was long of 53,000 shares on which he had a profit of well upward of a million dollars—a sum far greater than he had ever dreamed of owning. On a thousand shares of General Electric he had a profit of nearly three hundred thousand dollars. In response to my inquiry if he did[16] not think it wise to cash in a part of his profits, he regarded me with amazement. “That,” said he, “is what everybody told me two years ago. Stocks are all in strong hands; and this market is going on up for at least three more years. And besides, if I cash in I’ll have to pay the government a heavy tax on my profits.”

The stock market does queer things to people; and this sort of psychology is one of its inexplicable effects on the human mind. Imagine for instance, the absurdity of a doctor, or a lawyer, or a business man refusing to collect his accounts in order to escape paying taxes on the profits! And yet any number of men, shrewd in their own business or professions, refused to take stock market profits on account of the tax. The experience of my friend with the fifty-three thousand shares was typical of what happens to those who become afflicted with this peculiar logic. Early in November he was forced to drop half his holdings, and on November 13th he awoke from his dream to find that his brokers had closed out his account, leaving him nearly $15,000 in their debt, and without a dollar to[17] pay it. However, he had the satisfaction of escaping the government tax.

Among the curious aftermaths of the 1929 crash, was a profusion of printed articles by well known “financial experts,” each one searching vainly to find some explanation of what caused the great cataclysm. Some laid it onto President Hoover, some fixed the responsibility on the Federal Reserve Board, while others attributed it to one cause and another; but no one seems to have guessed that it was the distorted psychology of the traders themselves that brought about their own ruin. Since nobody likes to be told that he’s wrong, perhaps those who lost their money found some consolation in reading authoritative opinions that the blame was chargeable to some one other than themselves. One eminent economist has lately written many pages of more or less convincing argument to prove that the liquidation started in London, Paris and Berlin—as if it made any real difference where or how it started. The survivors of a storm-swept area (also the speculators) are more concerned with what happened than they are with how[18] the storm began or where it came from.

There is one great mystery worthy of comment; and that is, how such a tremendous scaling down in values could have been accomplished in so short a time without bankrupting a single one of the major banks or brokerage firms. The answer must be that the public stood the loss—as it usually does. And why not? They had every chance in the world to get out with fabulous profits. For more than a year they had the advice, warning and threats of the Federal Reserve Board displayed on the pages of all the newspapers, and dinned into their ears. But whenever these warnings or any other danger signal appeared, the market manipulators showed their contempt by promptly pushing prices up a few more points. They defied and scoffed at every principle of common sense and business economics, and they got away with it so long and successfully that it seemed they were bound by no laws or limitations except those of their own devising. For years the market was under the dominion of a new generation of dare-devil cliques who manipulated it with an iron arm more daring and[19] more dogmatic than the rule of any tyrant in history; and month after month the cool-headed non-participants read the financial pages with gaping amazement. If the weekly bank statement showed that brokers’ loans had increased a hundred millions or more beyond expectations, it was the signal for a new outburst of bullish enthusiasm; if the interest rates were advanced or even doubled, millions of shares were immediately churned back and forth at advancing prices, in order to prove that the laws of gravity and economics had become subservient to the will of the speculative mob. It happened repeatedly that after some large corporation had issued an unexpectedly poor earnings statement, the stock of that company was immediately taken in hand and forced up several points, on the argument that the “bad news is all out,” and had already been fully discounted. And on the theory that a storm-tossed ship is more apt to sink if standing still than if running under full steam, the market was pushed ahead at breakneck speed with compass and rudder in the hands of a reckless crew that paid no heed whatever to reefs or shoals.

[20]

The Federal Reserve System, instead of being responsible for the crash, was the one agency that saved the whole community, including the banks and brokers, from complete financial chaos by furnishing at the critical moment an abundance of money and credit at low rates.

The theory advanced by some of the economists that the trading public merely lost their paper profits, and practically nothing else was either gained or lost in the tremendous rise and fall of stocks, is a little misleading. One authority says: “For the shrinkage of thirty-five or forty billions of dollars in stock exchange securities nobody is any poorer but on account of things possessed and consumed too soon.” Assuming that the market started at a given point in 1924 and reacted to that point in 1929, it would mean a loss of many hundreds of millions in commissions and interest. It is estimated that in 1929 alone the commissions for transactions on the two “Big Boards” amounted to well upward of five hundred million dollars. Most of the margin traders lost all of their original investment, and many of them all they could[21] borrow on their notes, their life insurance policies, and even their homes.

All this by way of retrospect. The vital question that confronts us is: will traders and investors profit by the experience? Apparently not. The survivors of the late catastrophe promptly formed a “wrecking crew,” and are at the present moment busily engaged in rebuilding the market structure on pretty much the same lines as before. The rumor band has been reorganized and is piping its old-time music into the ears of all listeners. The tipsters are also lined up, and with the cheery cry that the storm is all over they are wheedling and coaxing the public to come out of the storm cellars and get aboard the reconstruction train. They harp persistently on the fact that stocks are cheap,—not because of their dividend return, but because they are selling much below the boom prices. Their calculations are drawn mostly from figures at the big end of the measuring tape. Improved business—which exists more in the imagination than in fact—is employed as a smoke screen to hide the fact that the great majority of the active stocks are still[22] selling far above a reasonable investment basis. At their present prices ten of the best known representative common stocks,—U. S. Steel, General Electric, Westinghouse Electric, Atchison, American Tobacco, Radio, Consolidated Gas, American & Foreign Power, Columbia Gas and Johns-Manville, pay an average return of two and nine-tenths per cent. In other words, at going prices if you bought one share each of these ten stocks the total cost would be $1425 on which you would receive an annual dividend of $41.60, or less than the return on U. S. Government bonds. It is therefore clear that a bull market constructed on this basis must be a highly speculative affair.

In February, 1930, the financial editor of the New York Herald Tribune printed the following comment:—

“The upward pace of the stock market leads one to believe that the financial district is up to its old trick of discounting in advance the recovery of business from the trough it now finds itself in. To the observation that it is going too fast, one can only agree, and add: ‘It always does.’”

[23]

The old split-up, consolidation and stock-dividend chestnuts are being industriously warmed over and the few scattering traders who saved something out of the recent smash are beginning to nibble at the bait. All of which shows that people are quick to forget their stock market troubles and to return for more punishment. I make this observation in the light of many painful recollections of earlier days.

The grist of stocks issued in the recent past is almost incalculable. There are now six industrial companies with an aggregate capital of 171,927,540 shares outstanding; and from the side lines it looks as if there ought to be time enough to start another boom when the stock market gets over its present case of indigestion.

In the final analysis the following essentials should be constantly borne in mind: The stock and grain markets are always capable of playing new tricks on you—of doing things you never dreamed of. Who, for example, could have imagined that with a world shortage of wheat, that staple commodity would be selling in February at considerably[24] under ninety cents a bushel—nearly as low as corn!

Another important thing always to remember is, not to buy more stocks than you can pay for, or margin far below the lowest point you think they can possibly reach. The extra profits to be derived from over-trading are scarcely ever worth the risk incurred.

To sum up the whole situation in a word, those who would make money speculating in the stock market should first understand that it requires as much caution and business acumen as any other money-making enterprise, plus some knowledge of the psychological handicaps; also plus the rare faculty of maintaining a complete mastery over one’s impulses, emotions and ambitions under the most heroic tests of human endurance. All speculations, and even the most conservative investments, have at least some slight element of risk; all lines of business are more or less a gamble; marriage is a gamble; political preferment is a gamble; in fact nearly everything in life, including our very existence, is an uncertainty; yet people are not thereby discouraged from entering into any and all[25] of these ventures. Those who look only for certainties have far to search and little to find in this world.