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Title: After the stock market crash of November, 1929
A supplementary chapter to the psychology of speculation issued in 1926
Author: Henry Howard Harper
Release date: May 18, 2024 [eBook #73648]
Language: English
Original publication: Cedar Rapids, IA: The Torch Press, 1930
Credits: Tim Lindell, Craig Kirkwood, and the Online Distributed Proofreading Team at https://www.pgdp.net (This book was produced from images made available by the HathiTrust Digital Library.)
*** START OF THE PROJECT GUTENBERG EBOOK AFTER THE STOCK MARKET CRASH OF NOVEMBER, 1929 ***
Transcriber’s Notes:
Text enclosed by underscores is in italics (_italics_).
Additional Transcriber’s Notes are at the end.
* * * * *
AFTER THE STOCK MARKET CRASH OF NOVEMBER, 1929
A SUPPLEMENTARY CHAPTER
TO THE
PSYCHOLOGY OF SPECULATION
ISSUED IN 1926
BY
HENRY HOWARD HARPER
PRIVATELY PRINTED
BOSTON--MDCDXXX
* * * * *
THE TORCH PRESS
CEDAR RAPIDS
IOWA
AFTER THE STOCK MARKET CRASH OF NOVEMBER, 1929
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
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 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 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
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, 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
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 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 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 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, 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 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 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 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 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 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 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.
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 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 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.’”
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
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 of these ventures. Those
who look only for certainties have far to search and little to find in
this world.
* * * * *
Transcriber’s Notes:
Variations in spelling and hyphenation were retained as they appear in
the original publication, except that obvious typographical errors have
been corrected.
The following change was made:
p. 14: be inserted (to be the)
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