The Great Boom and Panic

[Ed. Note: Following is part 5 of a 5-part installment series on Robert T. Patterson's classic work, "The Great Boom and Panic," which examines the stock market crash of 1929, and its application to today's trading environment.]

"Throughout the panic, as throughout the boom, the human factor dominated all others. Hope and fear were both causes and effects of panic developments. But the panic stimulated other emotions besides these, and revealed traits of character that in some cases must have surprised even their possessors. Notwithstanding the herd psychology that surely played a part both in the boom and in the crisis that followed, not all those in apparently similar circumstances reacted in the same degree, or even always in the same way." Human nature—"mob psychology," as Patterson styles it—manifested itself in various ways during those momentous events of 1929 and beyond, events which profoundly influenced the course of our national economic, social and political policy, the effects of which are felt even today. The Great Boom and Panic forever altered the socio-economic and political landscape of America and she has never been quite the same since.

After the Great Crash of 1929 which wiped out so many billions and shattered the lives of untold multitudes, the public immediately went about the task of trying to assign blame for the bubble and subsequent panic. The first target for the collective ire of the public, naturally, were the investment advisers, stock brokers and financial columnists who had praised the virtues of the stock market to the sky and exhorted one and all to invest the sum of their hard-earned labors into this magnificent air castle. Writes Patterson, "Especially were the brokers, bankers, and professional investment analysts and economist downgraded in the eyes of those who had relied on and been influenced by them. Surely, the thought was, these men of background, training, technical knowledge, and supposed financial wisdom should have foreseen at least the possibility of a crash and tempered their overconfidence and often blatant optimism with prudent restraint." But alas, such was not the case. Today's parallel phenomenon possesses its own oracles of ebullient optimism who unceasingly proclaim that a new day of non-stop economic prosperity has arrived and that the stock market will continue forever upward and anon with only temporary setbacks along the way. These false prophets of the Myth of Progress (among them, Abbey Cohen, Louis Rukeyser, Harry Dent, et al) will surely bear the brunt of public outrage when our present bubble collapses.

Today, as in 1929, "day trading" as a mania spread throughout the country, infecting countless millions of traders with the desire to trade impulsively in an out of securities throughout the course of the trading day, day in and day out, which led then, as now, to enormous volatility and wild fluctuations in prices. As day trading gained popularity in 1929, its relative importance in creating market prices increased until eventually it began to dominate the character of trading in any given market session. This must surely have sent a frightful chill into the spine of the more experienced traders and brokers who could not help but foresee what would eventually come of it, if allowed to remain unchecked. Wild volatility occasioned by day traders served as an early warning of things to come in 1929, and even more so in our day is it serving as an advance notice of what is coming our way. Observes Patterson, "It was obvious long before the boom had ended that whatever might be said for security speculation as a skill or an art of the shrewd and perceptive few, for many others it had become scarcely more than betting from day to day on the changing quotations. What most of the crop of boom-nurtured speculators wanted was easy, unearned money, the thrill that came with getting it, and the enhancement of the go, and the proof of Fortune's favor." Insightfully, Patterson remarks, "Perhaps the great majority of people always is blind or deluded in important areas of contemporary life, with reality partly concealed, distorted, and out of perspective at the time."

A more psychological explanation of what had happened was provided by the economist Edward D. Jones, who, writing before the turn of the century wrote: "Even in man those individuals are rare whose judgments are of any value against their interests. Prediction of results is in most cases nothing better than betrayal of preferences. Men as a rule believe that that will happen which they wish to happen."

Jones continued, "An undue concentration of interest resulting in intense emotion is always prejudicial to sound reasoning. The general tendency of emotion is to paralyze thought, and particularly to withhold the mind from those considerations which are out of harmony with itself….The sympathetic influence we are considering is doubtless allied to hypnotic influence." Hypnotic influence! Could we not make such a conjecture that today's mass hysteria over the buying and selling of equities is due to nothing less than such? When hour after hour, day after day, week after week, month after month, and year after year all a person hears from his radio, his television, his newspaper is that one simply MUST be in the market in order to be happy and successful and that, furthermore, you have everything to gain and nothing to lose. Undoubtedly, this is precisely the hypnotic influence that Jones had in mind—and influence which is ten times as intense and ubiquitous now as it was then.

Jones also quoted two British students of speculative cycles. Walter Bagehot: "All people are most credulous when they are most happy….Almost everything will be believed for a little while." Lord Overstone: "So long as human nature remains what it is, and hope springs eternal in the human breast, speculations will occasionally occur, and bring with them their attendant train of alternate periods of excitement and depression."

The causes of the panic, and of the depression that it heralded, were, as Patterson notes, complex and deeply rooted. They were spread out over the world, and they could be ascribed in some degree to World War I, which had begun 15 years before. Even today, economists differ in the emphasis they give to the various influences that were at work. "Most of those influences," writes Patterson, "were associated with the dominant one, namely, inflation; that is, an unwarranted increase in currency and bank credit." Patterson quotes economist E.C. Harwood, who described the situation as follows:

"The inflationary credit that was slowly poured into the channels of business made possible windfall profits for industry, and invited the speculation that began to grow apace. In 1925 and 1926, the speculative mania found an outlet in the great Florida land boom, but thereafter speculation was centered primarily in the stock market. The increasing marginal purchases became a source of more inflationary credit, which flowed out into the channels of business and helped to maintain the business boom on which the speculators were gambling.

"From 1921 to 1929, the degree of inflation was fluctuating, but was slowly increasing. During most of that period, business activity was maintained at levels well above normal. Commodity prices were supported on a plateau nearly 50 percent higher than prewar levels….

"A progressive inflation creates an Alice-in-Wonderland world for the businessmen. Speculative risks that, under ordinary circumstances, no sane man would consider, change their character and become safe investments; that is, they are safe for the time being, at least. Men with long experience in the business world, accustomed to evaluating risks…are actually handicapped by their knowledge during a period of inflation….The older business virtues, thrift, hard work, and the development of character over a period of years, character of which the hallmark is a fine personal integrity, naturally seem unnecessary adjuncts of business life to those who can obtain success by traveling a much easier route."

Patterson's conclusion is ominous: "The variety of explanations of the great boom and panic causes one to suppose that the lessons offered by those destructive episodes are not generally understood or accepted, and so will not be a means of future guidance. Thus it seems reasonable to assume that what happened in the stock market in the autumn of 1929 can happen again—perhaps on a far greater scale."