Part 2 (1/2)
By the late 1920s, Irving Fisher was America ' s most famous economist andnancial pundit - a man who, like Keynes, achieved distinction in both academia and businessA professor of economics at Yale University, Fisher became a multimillionaire after his Index Visible Coed with Rand in 1925, with Fisher beco a major shareholder in the new entity In his unique position as theoretician, entrepreneur, and market player, Fisher was a shaular intervals to read the auguries of Wall Street - especially when the great God Market see
Fisher was Wall Street ' s Pollyanna, always ready to offer a reassuring coation His great friend, but professional neer Babson, dubbed ” the Prophet of Loss ” by New York newspapers Babson had presaged a stock market correction since 1926, but, like his fellow unbelievers, had been diser of American prosperity ” by most market watchers However, on September 5, 1929 - just two days after the Dow Jones Industrial Average had recorded an all - tih of 3812 points - Babson ' s apprehensionsnally found an audience In a speech to group of business, and it may be terri cfactories will shut downet in full swing and the result will be a serious business depression
Wall Street fell around 3 percent that day, and the ” Babson break ”
Fisher, unsurprisingly, disputed Babson ' s dark and destabilizing predictions In ht before the Great Crash, the Professor stated, ” Stock prices have reached what looks like a perh plateauI expect to see the stock herwithin a few months” His effort to quell the bears was, however, unsuccessful On theof October 24, 1929 - ” Black Thursday,” as it later became known - the Wall Street bubble was pricked Panic selling gripped the exchange in thestaunched only when a cabal of in uential bankers ostentatiously stepped on to the trading oor, brandishi+ng a pocketful of buy orders
The intervention assuaged skittish investors, but only teh the weekend break provided a respite froyrations of Wall Street, distance frorim vista to spooked shareholders ” Black Monday,” October 28, was a nancial bloodbath The Dow Jones index fell by alest one - day decline in Wall Street ' s history - and in some cases only a lack of buyers arrested the precipitate fall in stock prices The following day -the swarthy theme, ” Black Tuesday ” - witnessed another calamitous decline, this time by a further 13 percent In that last week of October, stock tickervolu after the market had closed - tapped out a staccato requiehtmare on Wall Street Some of the people I knew lost millions I was luckierAll I lost o hundred and forty thousand dollarsI would have lost more but that was all theFisher, that unconquerable optiuine spin to the October meltdown He attributed the severe decline in the Dow Jones index to a ” shaking out of the lunatic fringe ” and in November 1929 volunteered the opinion that ” the end of the decline of the Stock Market will probably not be long, only a few ain tried to convince the ht of his massive exposure, perhaps himself - that ” for the iht” Many others shared Fisher ' s dogged optimism - even Wall Street ' s archrealist, thenancier Bernard Baruch, felt condent enough by mid - Novee that the ”nancial storm [has] de nitely passed”
For a while, it looked as if the black days of late 1929 had indeed been nothing more than a pit stop on the road to prosperity Wall Street was unusually volatile in the wake of the October tempest, but the overall trend was positive - by April 1930 the Dow Jones index was almost 30 percent above the depths plumbed six months earlier But these brief ares of condence turned out to be no more than ” suckers ' rallies,” the last instinctive convulsions of a dying marketWall Street resumed its descent in e stood at a miserable 412 points, a drop of almost 90 percent from its September 1929 peak It would be a quarter of a century before the Dow Jones again reached the heights scaled during the Roaring Twenties
Irving Fisher, like myriad other speculators and investors, iped out He and his immediate family had borrowed money to buy additional Rand shares at the bull market ' s pinnacle, and his son later estimated Fisher ' s loss at around 10 million, well over 100 ed Yale University to buy his house and rent it back to him, with Fisher often unable to pay his new landlord He came to the attention of the IRS for nonpayment of tax, and was forced to borrow money from his wealthy sister - in - law As a neoclassical economist whose professional interest was the study of rational markets, he was, for the re jokes for his na ve faith in ever - ascending stock prices
Prophet Warning Wall Street did have a go yesterday Did you read about it? The big- gest crash ever recordedI have been in a thoroughly nancial and disgusting state of mind all day
-Keynes to Lydia, October 25, 1929 In contrast to his American confrere, Keynes had substantially reduced his exposure to the stock market prior to the Great Crash of 1929 This ht on Keynes ' account Rather, his ” terrifying adventures ” on the speculative ain brought hi, Keynes ' positions in the rubber, corn, cotton, and tin ed to liquidate the bulk of his equities to cover these lossesThe stock exchange upheavals of late 1929 then exacted a heavy toll on what little re - the Austin Motor Car Company - lost over three - quarters of its value in the nal two years of the 1920s In aggregate, Keynes ' net worth declined by more than 80 percent over this period - from 44,000 at the start of 1928 to less than 8,000 two years later - and, for the second time in his life, he found himself poised on the precipice ofnancial ruin
Despite the assault on his wealth, Keynes initially shared Fisher ' s condence that the events of late 1929 were mere ” corrections” He assured readers of the New York Evening Post the day after Black Thursday that ” commodity prices will recover and farmers willnd themselves in better shape” However, by as early as November 1929 his view on the situation had darkened considerably Keynes thought that a major economic downturn was imminent and recommended to his fellow directors that the Independent Investment Company, which was heavily invested in Wall Street, sell its securities and repay outstanding debts By May 1930, Keynes was broadcasting his bleak e to a nized by the great public - that we are now in the depths of a very severe international slust the most acute ever experienced It will require not merely passive movements of bank rates to lift us out of a depression of this order, but a very active and determined policy
The Canary in the Coal Mine It was borrowed ti with the insouciance of grand dukes and the casualness of chorus girls
-F Scott Fitzgerald, ECHOES OF THE JAZZ AGE The events of October 1929 were in fact an early synant maladyThe Wall Street sideshow had diverted attention away from unsustainable imbalances within the wider community - as the economic historian Robert Heilbroner noted, just prior to the Crash, ” some twenty - four thousand families at the apex of the social pyrae as six ely been channeled away from the real economy and intonancial speculation and conspicuous consumption, and while easy money stoked the speculative inferno of the late 1920s, farled with poor prices and ilded mansion of A, perched precariously on the sandy foundations of installin loansThe treht down this house of cardsThere were foreclosures, runs on banks, and, ultimately, masses of men laid off By 1933, a quarter of the United States work force was unemployed, industrial production was only half that of 1929, and real income per capita had fallen to levels not seen since the start of the century Over 5,000 banks had gone to the wall and ” Hoovervilles ” - shanty towns of the dispossessed - scarred the country, like open sores on the body politic
The Wall Street contagion quickly spread beyond A fro their best efforts to quarantine the growing nancial pandemicWorse still, in a Canute - like effort to hold back the deadening tide, Western governher trade barriers In dis the structure of free trade, the developed world was slowly disoose - this protectionist race to the bottom halved the volu the Crash Deprived of the oxygen of commerce, the world swooned into a state of near - paralysis
Carpe Dieuide to current affairs In the long run we are all dead Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storain
-Keynes, A TRACT ON MONETARY REFORM With increasing urgency, Keynes exhorted governments to act decisively to wrest the Western world fro ” into which it had sunk - ” Activity and boldness and enterprise,” he told a radio audience in early 1931,” nored by the practitioners of sound nance Conventional wisdo the hard tie the rottenness out of the system,” in the words of Andrew Mellon, then the United States Secretary of the Treasury These high priests of orthodox nance argued that the slump was no more than a rather spectacular h all developed econoht itself and full e been viewed as an inevitable feature of advanced societies The rst recorded economic forecast had, after all, been Joseph ' s prediction of seven years of plenty followed by seven years of faypt, and Keynes himself had been born in the middle of what had been termed ” the Great Depression ” until it was trumped by the far more serious calamity of the 1930s Indeed, downturns elco, in which underperfor enterprises are ed from the commercial weal Certain ” austere and puritanical souls,” Keynes would later remark, even viewed slumps as a kind of divine retribution by the market, as:an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man ' s speculative spirit It would, they feel, be a victory for the hteousness if so much prosperity was not subsequently balanced by universal bankruptcy
Implicit in the idea of business cycles, however, is the notion that - as surely as spring follointer - the econoe revert to its previous prosperity Classical econo econo systeroans and jerks, and interrupted by tis, outside interference and mistakes
Despite the ferocity of the Great Depression, orthodoxy ' s faith in the efcacy of ly unperturbed by the millions of une of nations Keynes abhorred the easy complacency of classical hardliners, and their serene assurances to the e from the Great Slu their scorched earth policies, he re run we are all dead” In the tireatest crisis, capitalis for the econo the past 12 years I have had very little inuence, if any, on policy But in the role of Cassandra, I have had considerable success as a prophet
-Keynes, speech to Members of Parliament, September 16, 1931 As the 1930s stuttered on, there was scant evidence that the developed world was returning to health Economies ed, unes of discontent grew bolder, and las MacArthur and George Patton, and assisted by Dwight Eisenhower in his rst taste of armed con ict - brutally cleared with bayonets and tanks and teargas the makeshi+ft camps of thousands of war veterans who had overnment aid That saed 20 percent nationally, and up to 70 percent in soions - Sir Oswald Mosley, a former Government minister, seeded the British Union of Fascists in the fertile soil of discontent and despair And on Continental Europe, the Great Depression acted as a kind of giant centrifuge - hurling men and women away from the political center, toward the extreravest forebodings had come to pass He had warned that the harsh tribute extracted from the Central Powers under that ” damnable and disastrous document,” the Versailles Treaty, would create insoluble international tensions Later, he predicted that a return to the gold standard at prewar exchange rates would severely distort trade and capital ows And, now, as the world lurched even further into the hbor ” policies of increasingly protectionist govern that: The modern capitalist is a fair - weather sailorAs soon as a storation and even sinks the boats which hbor off and himself in
Civilization, Keynes realized, rested on ” a thin and precarious crust” He believed that the standard nostru ” matters take their natural course ” - was inadequate and, e of already having lived through a decade - long recession in Britain, realized that the Great Depression was more than a merely cyclical phenomenon, and that there were fundamental structural factors which prevented the world fromire He had previously used newspaper articles, pamphlets, open letters to heads of state, and what he coyly described as ” suggestions to the Treasury ” as his soapbox But despite the energy hich Keynes prosecuted his case, he realized so less than a new economic theory which would explain, and solve,” the enormous anomaly of unemployment in a world full of wants”
Keynes would utilize the insights gained from his roller - coaster ride on the nancial markets to develop a revolutionary theory that accounted for the booms and busts of modern economies A central contention of Keynes ' radical thesis would be thatnancial markets were not always efcient, and that upheavals in the world of money could lead to disturbances in the real econoht on a set of investment principles - one of the earliest for philosophy subsequently adopted by the likes of Warren Buffett - which would propel hi Fisher, Keynes had been nancially mauled by the volatile markets of the late 1920s Unlike the unfortunate Fisher, however, Keynes would ee from the slump with his professional reputation burnished and his riches even greater
Chapter 5
Raising a Dust
Into the Daylightthe problele between classes and nations is nothing but a frightful muddle, a tran sitory and an unnecessary muddle
-Keynes, ESSAYS IN PERSUASION In 1930 - as stock thened, and dark clouds of despair shadowed the Western world - John Maynard Keynes, in a characteristically contrarian mood, proffered a vision of civiliza-tion one hundred years hence He invoked a world where, due to the suprele for subsistence ” has been overcome and man has at last been led ” out of the tunnel of econoht” In this utopia, econoated to their proper place in society - ” as humble, competent peo-ple, on a level with dentists,”with a delicate touch the shi+p of state
Keynes predicted that when this economic Eden hasnally been reached: We shall be able to rid ourselves of- ridden us for two hundred years, by which we have exalted some of the most distasteful of huhest virtues
For Keynes, the cult of capitalism fostered a bizarre parallel universe of inverted values, sanctifying some of man ' s least attractive tendencies - ” avarice and usury and precaution ” - into a credo for society He accepted, however, that the ed, [capitalis econoht” Keynes ' atti-tude to capitalism was rather like that of Churchill ' s to democracy - the worst system ever invented, except for all the others It was a neces-sary crutch until man nally reached the sunlit uplands of abundance, upon which ti society could be irace, had been its ef cacy If the free market system relinquished its claier that other, ostensibly less nant, social models would be preferredAs Keynes observed: Modern capitalisious, without internal union, without e-ries of possessors and pursuers Such a system has to be immensely, not merely moderately, successful to survive
The apparent failure of the free oods,” Keynes noted in 1933,to abandon their Faustian pact with capitalism and instead embark ” on a variety of politico - economic experiments”
Despite his own antipathy to many aspects of the system, Keynes believed that capitalism was not fatally awed The profound prob-lenation had a simple cause, he asserted, and were amenable to a simple re orthodoxy, and to ground a new theory more rmly in the realities of everyday econorappled with an uncertain future and were prey to greed, fear, and irrationality
Casting Out the Money Changers There is always an easy solution to every hu
-H L Mencken, PREJUDICES In March 1933, the recently installed leader of a great but humbled nation addressed his countrymen for the rst time in his new capacity Like an Old Testaainst the men ofnance who had iers have ed froh seats in the temple of our civilization We may now restore that temple to the ancient truthsThe measure of the restoration lies in the extent to which we apply social valuesthat ” this Nation asks for action, and action now,” he urged his co to sacri-ce for the good of a common disciplinebecause it ood” If the national eency remained critical, the leader cautioned, he would seek ” broad Executive poweras great as the power that would be given to n foe”