On this day in economic and business history...
It is a peculiar function of prophecy that often awards greater recognition to those who get it wrong than to those who get it right. The Crash of 1929 produced a number of tragically inaccurate prophecies, most notably that of Irving Fisher, whose claim that stocks had reached a "permanently high plateau" a month after the Dow Jones Industrial Average (DJINDICES: ^DJI ) peaked has proven one of the worst calls in market history.
However, it also produced at least one prophecy that became self-fulfilling. That prediction, issued on Sept. 5, 1929 by statistician Roger Babson (founder of Babson College) at the National Business Conference in Wellesley, caused a stampede of sales in the market's final hour once it came across the news tickers on Wall Street. Two million shares exchanged hands between 3 p.m. EDT and the closing bell, the Dow fell by 2.6%, and by the end of the day 5.7 million shares had been traded in 840 different stocks. Both the volume and the breadth of the day's trading set all-time records. Here is what Babson said to cause such a stock market exodus:
I repeat what I have said at this time last year and the year before, that sooner or later a crash is coming which will take in the leading stocks and cause a decline of from 60 to 80 points in the Dow Jones Barometer.
Fair weather cannot always continue. The economic cycle is in progress today, as it was in the past. The Federal Reserve System has put the banks in a strong position, but it has not changed human nature. More people are borrowing and speculating than ever before in our history. ...
Some day the time is coming when the market will begin to slide off, sellers will exceed buyers, and paper profits will begin to disappear. Then there will immediately be a stampede to save what paper profits then exist. Investment trusts will first begin to sell. They have so broadly advertised their paper profits that they will be very anxious to cash in on them. ... The general public will then follow with a desire to cash in, and then margin accounts will be closed out, and there may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed.
Babson was, if anything, far too conservative. An 80-point drop at that time would have merely brought the Dow down to 290 points -- a 25% decline from its Sept. 3 top. That level was breached at the end of October and, after a brief rally into the spring of 1930, was not seen again until 1953. Babson's failure to appreciate the depths to which the Dow might ultimately sink have prevented his prediction from gaining wider notoriety in later years. His annual warnings of doom also undermined his seeming prescience on this occasion; if you predict a crash every year, you're bound to be right eventually.
Irving Fisher, proponent of the permanently high plateau, immediately refuted Babson's dire warning. In a statement to The New York Times, Fisher said:
Stock prices are not too high and Wall Street will not experience anything in the nature of a crash. ...
The present high levels of stock prices and corresponding low levels of dividend returns are due largely to two factors: one is the anticipation of large dividend returns in the immediate future and the other is the reduction of risk to the investor, largely brought about through investment diversification made possible for the investor by the investment trusts.
We are living in an age of increasing prosperity and consequent increased earning power of corporations and individuals. This is due in large measure to mass production and inventions such as the world never before has witnessed. ... This is a new and tremendously powerful factor in the industrial world.
It's worth closing on an apt observation from John Kenneth Galbraith, who would write years later in The Great Crash, 1929:
Always when markets are in trouble, the phrases are the same: 'The economic situation is fundamentally sound' or simply 'The fundamentals are good.' All who hear these words should know that something is wrong.
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