It's hard to believe that the U.S. stock market, as represented by the Dow Jones Industrial Average, didn't see its 1929 high of 381 surpassed until November 1954, but that's exactly the way it was. At the same time, after World War II the U.S. economy and market embarked on a spectacular period of growth. For its part the Dow, which closed 1948 at 177, finished up 1954 at 404, a none too shabby 128% return over the six-year period. The Dow was also coming off a 44% rise in '54, alone, while the S&P 500 gained 53% that year. But with memories of the Great Depression still fresh in everyone's mind, many were beginning to wonder whether the U.S. was setting itself up for another huge fall. Enter John Kenneth Galbraith.

Galbraith was the Canadian born economist who had developed a reputation as a liberal thinker while hanging his hat at Harvard. One of his main tenets was that America didn't do enough to help the poor, and that no amount of economic growth could solve America's chronic social problems, rather, government needed to step in for the building of schools, hospitals, museums, playgrounds, public housing, and the like. It was his further belief that for all of America's vaunted postwar prosperity, the nation had yet to eradicate poverty. Public enterprises were deteriorating everywhere. As he put it, we were a nation of "private opulence, public squalor." [The purpose of this piece is not to analyze the whole career of Galbraith, but it should be noted that public expenditures on things like the interstate highway system (for which Eisenhower was responsible), the building of airports, and the spending on the military had helped to keep the economy going in the 50s.]

Galbraith was formulating his views for what would become one of the most influential economic tomes ever, "The Affluent Society," which he eventually published in 1958. As he looked at the 50s boom, he saw the role of "the company man" as being the backbone of the new "technostructure." "Be loyal to the company and they will be loyal to you," he said. He wasn't being complimentary.

And then there were his comments on inherited wealth, lucky people as he called them. "Men possessed of money, like men earlier favoured by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality."

The professor also analyzed the difference between modern man and his predecessor. "People at the beginning of the 19th century did not need an adman to tell them what they needed."

But what drew the attention of Wall Street, and Congress, as the bull market was unfolding were Galbraith's views on the Great Crash of 1929. It was known in the investment community that he had just finished up an exhaustive study of that era and his view was that parallels between the 20s and 50s were emerging. Historian Charles Geisst sums it up:

"Swollen price-earnings ratios, aggressive stock promoters, corporate expansion, and a generally favorable regulatory attitude all contributed to the climate…(In addition), hucksterism was becoming more than aggressive selling; it was becoming an art."

And so it was that legendary Senator J. William Fulbright, then chairman of the Senate Banking Committee, launched an investigation into the party on Wall Street. Professor Galbraith was called on March 8, 1955, having just completed his work on the '29 Crash, and holding the proofs of his book as he was testifying.

Galbraith warned of "a substantial element of speculation in the market," and, as he later recalled, "Toward the end I suggested that history could repeat itself, although I successfully resisted all invitations to predict when. I did urge a stiff tightening of margin requirements (to 100%) as a precautionary step."

One senator questioned, "You do not think we are faced with a bust, do you?" The room was packed with photographers and the newsreel cameras were rolling. Someone noticed that as Galbraith was giving his opinions, the stock market was plummeting, down 2% at its worst levels (a huge drop for those days), and other senators began streaming into the committee's chamber. When all was said and done the market had lost 1.8% to the 409 level, and would drop an additional 4% to 391 by March 14. [Galbraith confesses that he was the only person there who failed to realize that his grim prognosis would drive stock prices into a "nasty plunge."] But here's something you won't find anywhere (at least I didn't in my sources), that 391 mark was never approached again, ever, and by the end of 1958, the market was 50% above that level.

It's interesting to note Galbraith's influence in those days, especially in light of the importance we have placed on each one of Federal Reserve Chairman Alan Greenspan's congressional appearances the past few years. Been there, done that.

And just a few final thoughts. Galbraith's "The Affluent Society" is deemed to be largely responsible for the "war on poverty," the professor having been one of President Kennedy's top advisers. Here are a few notable quotes from this work.

--On the term, "conventional wisdom." "(Ironic term for) the beliefs that are at any time assiduously, solemnly and mindlessly traded between the conventionally wise."

--"These are the days when men of all social disciplines and all political faiths seek the comfortable and the accepted; when the man of controversy is looked upon as a disturbing influence; when originality is taken to be a mark of instability; and when, in minor modification of the scriptural parable, the bland lead the bland."

--"It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled seas of thought."

--"The greater the wealth, the thicker will be the dirt."

Sources:

"The New York Times Century of Business," Norris and Bockelmann
"Growth of the American Republic," Morsion, Commager, and Leuchtenburg
"Capitalist Ideas," Peter Bernstein
"The Power of Gold," Peter Bernstein
"The Bear Book," John Rothchild
"The Great Boom" Robert Sobel
"Wall Street: A History," Charles Geisst
"America: A Narrative History," Tindall and Shi
"The Oxford Dictionary of Political Quotations," Antony (sic) Jay

Brian Trumbore