Someday I'm going to write a book on authors writing books. Confused? Well, a viewer, Don K., suggested I write a piece on 1929 and the economist Irving Fisher. So what follows is a brief summary of who Fisher was and his role in the Great Crash.

But first, I have a terrific library in my office which I draw on for my stories. Anyway, in researching the life of Irving, the first 3 sources I employed describe him as being a Yale professor. Then I turn to a book by the eminent market historian Robert Sobel (who recently passed away) and I see "Irving Fisher of Harvard" and "Fisher…was spending most of his days away from Harvard." So since I don't have the time to research the matter further if I'm to meet my deadline, I am officially deducing that Fisher is from Harvard and the other authors, some well known, are just plain lazy. Yes, I'm placing my bet on Robert Sobel. My 3rd grade detective work leads me to believe that since there was a Harvard Economic Society which was a society drawing on the leading economists of "Harvard, Yale, Princeton, Ohio State, and Michigan" (Sobel), somehow someone figured Fisher was from Yale and everyone thereafter copied that author. Now Fisher's own son has a book out there somewhere but, sorry folks, I'm not buying it. [Or else Sobel and I are wrong and this whole last paragraph was a huge waste].

Anyway, in yesterday's Wall Street Journal, in the op-ed section, economist Brian Wesbury, who is humping a new book of his own, said the following: "The U.S. has entered a new era of wealth that is only beginning." Ah yes, shades of Irving Fisher.

Irving Fisher was a leading economist of his time who had authored books with the titles "The Purchasing Power of Money," "The Rate of Interest," and "The Theory of Interest." It's easy to view him as the Abby Cohen, Harry Dent, or Jim Glassman of his day. [Yeah, maybe that's not fair but it's my site!] He was also a member of AAPA, the Association Against the Prohibition Amendment. One of his own main new era arguments rested on the benefits he saw flowing from prohibition, which had begun in 1920. He cited the work of a Columbia professor, Paul Nystrom, who concluded that a "dry" nation would increase the efficiency of workers and switch demand from liquor to "home furnishings, automobiles, musical instruments, radio, travel, amusements, insurance, education, books and magazines."

Edward Chancellor attributes John Templeton with the saying, "The four most expensive words in the English language are 'This time it's different.'" Does this statement have anything to do with today's market environment? Well gather 'round and here what Fisher and other pundits were saying back in 1929.

In the fall of '29, as the market was beginning to hiccup, Fisher continued to believe in the bull's cause. He declared at one juncture, "Stock prices have reached what looks like a permanently high plateau." A few weeks later the market crashed. Chancellor writes that "Fisher fell for the decade's most alluring idea, that America had entered a new era of limitless prosperity."

In 1913, the Federal Reserve was established. By the 1920s the Fed was hailed as "the remedy to the whole problem of booms, slumps, and panics." Bankers and speculators were lulled into a false sense of security. True, as for the economy, better management brought improvements in productivity and lower levels of inventory (mismanagement of which had been a leading cause of boom / busts in the past). Fisher argued that modern production "is managed by 'captains of industry.' These men are specially fitted at once to forecast and to mould the future, within the realms in which they operate. The industries of transportation and manufacturers, particularly, are under the lead of an educated and trained speculative class."

Fisher was also optimistic because of the relaxation of the antitrust laws during Calvin Coolidge's presidency which allowed for a series of mergers in banking, railroad and utility companies that promised greater economies of scale and more efficient production. The gains in productivity, which rose by over 50% between 1919 and 1927, were ascribed to increasing investment in research and development. [For example, back then AT&T was building up to a staff of 4,000 scientists, unheard of until this time]. So the widespread use of technology, the restructuring of corporate America and the Fed's ability to control inflation were the cornerstones of the new era philosophy of Irving Fisher's day.

Fisher was also a big proponent of investment trusts (the precursor to today's mutual funds), a recent innovation and wildly popular by the fall of 1929. "The influence of investment trusts…is largely toward cutting the speculative fluctuations at top and bottom, thus acting as a force to stabilize the market. Investment trusts buy when there is a real anticipation of a rise, due to underlying causes, and sell when there is a real anticipation of a fall," thus ensuring that stocks could move nearly to their true value. The high turnover of shares in the investment trust portfolios was hailed as sound management. It was even argued that investment trusts purchases were providing stocks with a new "scarcity value." In reality, the trusts invested heavily in blue chip stocks and borrowed heavily against their assets in order to leverage profits, thereby, increasing volatility.

Fisher denied the likelihood of a crash by September 3rd, the peak, even while others like Roger Babson forecasted an imminent debacle (Babson said this Sept. 4th). The market began to weaken sharply. Rumors of bear pools, led by Jesse Livermore, which were preparing to drive the market down with short sales, were rampant. [Don't worry, we'll cover Jesse someday].

Fisher was spending his evenings giving speeches to banks and business groups, touting his theories of permanent prosperity. The sharp decline of 10/14-10/19 in the market didn't cause a panic. Fisher thought the ongoing collapse was the "shaking out of the lunatic fringe."

Finally, on Wednesday, October 23rd, the investment trusts began to collapse and real fears of a crash were developing. That night Fisher told a banking group that "any fears that the price level of stocks might go down to where it was in 1923 or earlier are not justified by present economic conditions."

Later, Fisher attempted to explain his errors but he was generally ignored. Who today will suffer the same fate? Who will be "Fishered?" The Shadow knows.

The End

One interesting sidelight to the Fisher story. Back in 1914, Fisher thought the European War would cause the belligerents to sell their American securities to gain funds for munitions; that Europeans would no longer be able to finance American companies, that blockades would cut America from her markets and so destroy the economy. None of this happened. Instead, European gold came to America for safekeeping and Europeans purchased American securities as the safest investment to be had. As a result, share prices rose.

*Here are some random, important dates which give you a sense of the volatility in 1929 and how folks were undoubtedly suckered in after the Crash, only to see their life savings wiped out by July 8, 1932.

The "Roaring 20s" really didn't get off to a spectacular start, at least as far as the Dow was concerned.

1/2/20 Dow Jones - 108.76
12/31/20 - 71.95 [market meandered up then...]
5/20/24 - 88.33 [the low until long after the Crash]
12/31/27 - 202.40 [high close for the year]
12/31/28 - 300.00 [high close for the year, now we're really cranking]
9/3/29 - 381.17 [high for bull market]
9/30/29 - 343.45
10/23/29 - 305.85
10/24/29 - 299.47
10/25/29 - 301.22
10/26/29 - 298.97
10/28/29 - 260.64 [market closed the 27th]
10/29/29 - 230.07 [HELP!!!]
10/30/29 - 258.47 [Buy the dip! Buy the dip! C'mon!!]
10/31/29 - 273.51 [See, I told you to Buy the dip!]
11/13/29 - 198.69 [Homer Simpson: Dohh!!]
11/21/29 - 248.49 [Just your basic 25% one week rally]
12/31/29 -248.48
3/31/30 - 286.10 [Yup, no sweat. I got this market thing all figured out]
4/17/30 - 294.07 [the peak]
12/31/30 - 164.58
7/8/32 - 41.22 [90% decline from 9/3/29...and also the lowest level for the next 67 years]

Sources:
"Wall Street: A History," Charles Geisst
"Devil Take the Hindmost," Edward Chancellor
"Mania, Panics, and Crashes," Charles P. Kindleberger
"The Bear Book," John Rothchild
"The Great Bull Market: Wall Street in the 1920s," Robert Sobel

Brian Trumbore

*If you can prove that Fisher went to Yale, outside of the above sources, please contact me through the "Contact Us" link. I'd be happy to give you credit in my next column."