Friday, June 09, 2006
Babson Break-read very slowly & think
U.S. History 1929-1945
By Earl Rickard
Labor Day, September 2, 1929, no new fortune was made on this day; even in the New Economic Era Wall Street could not make money on a holiday. But everyone knew that on Tuesday the sun would rise and the Wall Street ticker would chatter the news of ever higher profits. As historian Arthur M. Schlesinger Jr. noted, "The New Era knew no skepticism. The nation had reached, it seemed, a permanent plateau of prosperity."
The previous month had been phenomenal: Almost 96 million shares had traded setting a record for any August in market history. The New York Times index of representative stocks increased by over $4 billion. And it wasn't just rich bankers making fortunes: bootblacks, taxi drivers, and grandmothers were investing in the New Economic Era's great bull market. Common opinion held that this New Era had banished the old market cycles; prosperity was permanent and ever upward.
Nevertheless, fundamental problems existed in the in the stock market such as margin buying. Most small investors bought their stocks on margin, some as little as 10 percent. This meant, for example, that they bought a stock valued at $10 for only $1 and owed the balance to their broker with the stock acting as collateral. When the stock's value went up these investors made money. But if the stock's value went down, they had to pay the broker cash for the amount the stock lost in value because the stock had been the collateral for the loan. The great bull market of the late 1920s rested on this ephemeral foundation of credit known as margin buying rather than on the sound foundation of cash. In the words of historian Charles Geisst, "Excessive speculation was creating inflated wealth and a sense of prosperity built upon borrowed money."
For almost three years, noted economist Roger Babson watched this situation develop with great alarm. The New Era notwithstanding, Babson's August 24 statement that he expected a 60 to 80 point stock market crash unsettled many people. During the shortened Labor Day week Babson's forecast caused what became known as "the Babson Break." This break or drop in the market bounced back the following week, broke again, and bounced back again; nevertheless, the general direction was down.
By the end of September this volatility caused "the smart money," like financier Bernard Baruch, to sell their stocks. "I began to sell everything I could...I knew the continuity of confidence was beginning to break." Into October the market continued downward. "Fear is in the saddle" wrote one observer.
At this point the little guys took a beating. Unable to pay cash for margin calls, the small investors were sold out by their brokers, leaving these erstwhile tycoons with no stock and a bill from their broker for the original loan.
Certainly there were still buyers in the market -- speculators looking for good deals. The bottom of a falling market is unknown until after the last thud. So the game went on.
The beginning of the end came on Monday, October 21, 1929, when fear left the saddle and panic began a ride never to be forgotten. It was the first of many days to come when the stock ticker fell behind as it staggered under the volume of sell orders. "Knowing that prices were falling, but not knowing by how much, produced great fear and led many to sell quickly, before prices dipped further," wrote historian Robert S. McElvaine. "Such sales, of course, added to the price declines."
Two days latter, on October 23, just an hour before the closing bell, a free fall in market prices began that would explode the next day into what became known as "Black Thursday." Many brokers and clerks spent Wednesday night and early Thursday trying to catch up with the incredible volume of sales. These bleary-eyed men went to their posts the following morning without sleep and without hope. The opening bell sounded and a tidal wave of sell orders roared across the exchange floor. Blue chip stocks like U.S. Steel and AT&T lost five to ten points in between sales. By noon the ticker fell behind by close to an hour and selling went on without any idea of the actual price. Some stocks failed to find buyers at any price. All of this happened not only at the stock exchange, but also throughout the country and the world. Telephone lines were overloaded, and Wetern Union broke its single day record for cables.
At 1:30 p.m., amidst the frantic calls to "sell, sell, sell at any price," Richard Whitney, vice-president of the New York Stock Exchange and floor broker of J.P. Morgan and Company, walked onto the stock exchange floor. Silence descended over the crowd. Everyone expected Vice-President Whitney to announce an early closing for the market; instead, as representative of of the House of Morgan, he asked for the latest bid on U.S. Steel. "One ninety-five," someone shouted. Whitney promptly announced he was buying 10,000 shares at 205. Cheers rang across the floor. Anyone old enough to remember knew that exactly 22 years to the day, on October 24, 1907, J.P. Morgan and E.H. Harriman along with other wealthy financiers created a $25 million pool to stop the Panic of 1907 in its tracks. Now history was repeating itself; the New Era's wealthiest bankers had met at the offices of J.P. Morgan and Company and formed a pool of $30 million to stop the slide.
Many people believed the banker's intervention signaled the bottom of the market and that buying would begin again -- if investors had any money left. Comedian Grouch Marx was wiped out. He asked his broker, "Aren't you the fellow who said nothing could go wrong -- that we were in a world market?" "I lost all my money, too." replied the broker." "Don't let it get you down." said Groucho, "Just remember -- twenty years from now you'll be looking back on these as the good old days." He should have said twenty days, for the worst was yet to come.
Prices held on Friday and during the half-day Saturday session. But Monday the "world market" proved that it was too big for any group to control by plunging downward all day. On "Black Tuesday," October 29, 1929, waves of selling began anew and the bankers quit trying to stem the tide of defeat. General Electric opened at 245 and went straight down to 211; U.S. Steel slid back down past 200 and kept falling. In five hours $9 billion in stock values vanished like fog in the morning sun. A record 16 million shares traded on that day. By week's end the Commercial & Financial Chronicle wrote "The present week has witnessed the greatest stock-market catastrophe of all the ages."
The free falls stopped but the market continued sliding. On November 13, the Times industrials closed at 224, half the September 3 price of 452. Rallies appeared over the next three years, but the actual bottom was not reached until July 8, 1932, when the Times industrial average hit 58.
The New Era, like the Northwest Passage, remains one of history's great illusions. The Jazz Age generation thought they had created a great party that would go on forever, but they could not repeal the laws of economics or human nature. The Wall Street crash of 1929 set the stage; the 1930s would be grim indeed.
Sources:New York Times; Time; Wall Street: A History, Charles R. Geisst; The Age of Roosevelt, Arthur M. Schlesinger.
http://www.suite101.com/article.cfm/us_history_1929_1945/49379/1
By Earl Rickard
Labor Day, September 2, 1929, no new fortune was made on this day; even in the New Economic Era Wall Street could not make money on a holiday. But everyone knew that on Tuesday the sun would rise and the Wall Street ticker would chatter the news of ever higher profits. As historian Arthur M. Schlesinger Jr. noted, "The New Era knew no skepticism. The nation had reached, it seemed, a permanent plateau of prosperity."
The previous month had been phenomenal: Almost 96 million shares had traded setting a record for any August in market history. The New York Times index of representative stocks increased by over $4 billion. And it wasn't just rich bankers making fortunes: bootblacks, taxi drivers, and grandmothers were investing in the New Economic Era's great bull market. Common opinion held that this New Era had banished the old market cycles; prosperity was permanent and ever upward.
Nevertheless, fundamental problems existed in the in the stock market such as margin buying. Most small investors bought their stocks on margin, some as little as 10 percent. This meant, for example, that they bought a stock valued at $10 for only $1 and owed the balance to their broker with the stock acting as collateral. When the stock's value went up these investors made money. But if the stock's value went down, they had to pay the broker cash for the amount the stock lost in value because the stock had been the collateral for the loan. The great bull market of the late 1920s rested on this ephemeral foundation of credit known as margin buying rather than on the sound foundation of cash. In the words of historian Charles Geisst, "Excessive speculation was creating inflated wealth and a sense of prosperity built upon borrowed money."
For almost three years, noted economist Roger Babson watched this situation develop with great alarm. The New Era notwithstanding, Babson's August 24 statement that he expected a 60 to 80 point stock market crash unsettled many people. During the shortened Labor Day week Babson's forecast caused what became known as "the Babson Break." This break or drop in the market bounced back the following week, broke again, and bounced back again; nevertheless, the general direction was down.
By the end of September this volatility caused "the smart money," like financier Bernard Baruch, to sell their stocks. "I began to sell everything I could...I knew the continuity of confidence was beginning to break." Into October the market continued downward. "Fear is in the saddle" wrote one observer.
At this point the little guys took a beating. Unable to pay cash for margin calls, the small investors were sold out by their brokers, leaving these erstwhile tycoons with no stock and a bill from their broker for the original loan.
Certainly there were still buyers in the market -- speculators looking for good deals. The bottom of a falling market is unknown until after the last thud. So the game went on.
The beginning of the end came on Monday, October 21, 1929, when fear left the saddle and panic began a ride never to be forgotten. It was the first of many days to come when the stock ticker fell behind as it staggered under the volume of sell orders. "Knowing that prices were falling, but not knowing by how much, produced great fear and led many to sell quickly, before prices dipped further," wrote historian Robert S. McElvaine. "Such sales, of course, added to the price declines."
Two days latter, on October 23, just an hour before the closing bell, a free fall in market prices began that would explode the next day into what became known as "Black Thursday." Many brokers and clerks spent Wednesday night and early Thursday trying to catch up with the incredible volume of sales. These bleary-eyed men went to their posts the following morning without sleep and without hope. The opening bell sounded and a tidal wave of sell orders roared across the exchange floor. Blue chip stocks like U.S. Steel and AT&T lost five to ten points in between sales. By noon the ticker fell behind by close to an hour and selling went on without any idea of the actual price. Some stocks failed to find buyers at any price. All of this happened not only at the stock exchange, but also throughout the country and the world. Telephone lines were overloaded, and Wetern Union broke its single day record for cables.
At 1:30 p.m., amidst the frantic calls to "sell, sell, sell at any price," Richard Whitney, vice-president of the New York Stock Exchange and floor broker of J.P. Morgan and Company, walked onto the stock exchange floor. Silence descended over the crowd. Everyone expected Vice-President Whitney to announce an early closing for the market; instead, as representative of of the House of Morgan, he asked for the latest bid on U.S. Steel. "One ninety-five," someone shouted. Whitney promptly announced he was buying 10,000 shares at 205. Cheers rang across the floor. Anyone old enough to remember knew that exactly 22 years to the day, on October 24, 1907, J.P. Morgan and E.H. Harriman along with other wealthy financiers created a $25 million pool to stop the Panic of 1907 in its tracks. Now history was repeating itself; the New Era's wealthiest bankers had met at the offices of J.P. Morgan and Company and formed a pool of $30 million to stop the slide.
Many people believed the banker's intervention signaled the bottom of the market and that buying would begin again -- if investors had any money left. Comedian Grouch Marx was wiped out. He asked his broker, "Aren't you the fellow who said nothing could go wrong -- that we were in a world market?" "I lost all my money, too." replied the broker." "Don't let it get you down." said Groucho, "Just remember -- twenty years from now you'll be looking back on these as the good old days." He should have said twenty days, for the worst was yet to come.
Prices held on Friday and during the half-day Saturday session. But Monday the "world market" proved that it was too big for any group to control by plunging downward all day. On "Black Tuesday," October 29, 1929, waves of selling began anew and the bankers quit trying to stem the tide of defeat. General Electric opened at 245 and went straight down to 211; U.S. Steel slid back down past 200 and kept falling. In five hours $9 billion in stock values vanished like fog in the morning sun. A record 16 million shares traded on that day. By week's end the Commercial & Financial Chronicle wrote "The present week has witnessed the greatest stock-market catastrophe of all the ages."
The free falls stopped but the market continued sliding. On November 13, the Times industrials closed at 224, half the September 3 price of 452. Rallies appeared over the next three years, but the actual bottom was not reached until July 8, 1932, when the Times industrial average hit 58.
The New Era, like the Northwest Passage, remains one of history's great illusions. The Jazz Age generation thought they had created a great party that would go on forever, but they could not repeal the laws of economics or human nature. The Wall Street crash of 1929 set the stage; the 1930s would be grim indeed.
Sources:New York Times; Time; Wall Street: A History, Charles R. Geisst; The Age of Roosevelt, Arthur M. Schlesinger.
http://www.suite101.com/article.cfm/us_history_1929_1945/49379/1
# posted by tagthatstock @ 2:11 PM 
