Bierman beating the bear; lessons from the 1929 crash applied to today’s world (2010)

BEATING THE BEAR Lessons from the 1929 Crash Applied to Today’s World Harold Bierman, Jr Beating the Bear BEATING THE BEAR Lessons from the 1929 Crash Applied to Today’s World Harold Bierman, Jr Copyright 2010 by Harold Bierman, Jr All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher Library of Congress Cataloging-in-Publication Data Bierman, Harold Beating the bear : lessons from the 1929 crash applied to todayÊs world / Harold Bierman, Jr p cm Includes bibliographical references and index ISBN 978-0-313-38214-7 (alk paper) · ISBN 978-0-313-38215-4 (ebook) Stock Market Crash, 1929 Global Financial Crisis, 2008–2009 Bear markets·History Investments I Title HB37171929.B387 2010 330.973'0916·dc22 2010014496 ISBN: 978-0-313-38214-7 EISBN: 978-0-313-38215-4 14 13 12 11 10 This book is also available on the World Wide Web as an eBook Visit www.abc-clio.com for details Praeger An Imprint of ABC-CLIO, LLC ABC-CLIO, LLC 130 Cremona Drive, P.O Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America I still think keeping that memory green a useful service, if only for the minority so saved John Kenneth Galbraith CONTENTS Acknowledgments ix Introduction xi How High Is High? The Stock Markets in 1929 and 2008 The Events Prior to the 1929 and 2008 Crashes Market Myths in 1929 and 2008–2009 19 The FedÊs Role in Good Times and Bad 29 Practice for the October Crash: The Week of March 25, 1929 55 The 1929 Market in Depth: The Ups and Downs of the 1929 Stock Market 63 The Great Crash of 2008: The 2008–2009 Market in Depth 77 Stopping the Speculators: Margin Buying, Pools, Trusts, Short Selling, and the 1929 Crash 95 The Senate Hearings of 1931 Concerning 1929 109 10 Dispelling the Myths of 1929 115 11 The U.S Government Accuses 141 12 The Prime Cause of the 1929 Crash: The Public Utility Sector 153 194 BIBLIOGRAPHY Committee on Banking and Currency (1933), Stock Exchange Practices, Washington, DC: U.S Government Printing Office Committee on Banking and Currency (1934), Stock Exchange Practices, Washington, DC: U.S Government Printing Office The Commercial and Financial Chronicle Crisp, J., et al (1937), The Hatry Case, Eight Current Misconceptions, London: n.p (Prepared by seventeen friends of Clarence C Hatry Most of the seventeen had impressive credentials.) DeLong, J B., and Andrei Schleifer (1991), „The Stock Market Bubble of 1929: Evidence from Closed-End Mutual Funds,‰ Journal of Economic History (September), 675 – 700 Erleigh, Viscount (1933), The South Sea Bubble, London: Peter Davies Federal Power Commission v Hope Natural Gas Company 320, U.S 591 (1944) The Federal Reserve Bulletin The First National City Bank of New York Newsletter Fisher, I (1930), The Stock Market Crash and After, New York: Macmillan Fisher, Irving Norton (1956), My Father, Irving Fisher, New York: Comet Flood, R P., and P M Garber (1980), „Market Fundamentals versus PriceLevel Bubbles: The First Tests,‰ Journal of Political Economy (August), 745 – 70 Friedman, M., and A J Schwartz (1963), A Monetary History of the United States, 1867, 1960, Princeton, NJ: Princeton University Press Galbraith, J K (1979), „The Great Crash,‰ Journal of Portfolio Management (Fall), 60 – 62 Galbraith, J K (1961), The Great Crash, 1929, Boston: Houghton Mifflin Gordon, R I (1986), The American Business Cycle, Chicago: University of Chicago Press Graham, B., and D L Dodd (1934), Security Analysis, New York: McGraw-Hill Hamlin, C S (1929), Hamlin Diary, Library of Congress, Washington, DC (unpublished) Hard, William (1929), WorldÊs Work (June), 48 Harris, S E (1933), Twenty Years of Federal Reserve Policy, Cambridge, MA: Harvard University Press Harrison, G (1928 –1929), Papers, New York: Archives of the Federal Reserve Bank of New York (unpublished) Hatry, C C (1939), Light Out of Darkness, London: Rich and Cowan Hearing Before a Subcommittee of the Committee on Banking and Currency, United States Senate, Part (1931), Washington, DC: U.S Government Printing Office Hearings of House Committee on Banking and Currency on Stabilization (1928), April–May Hearings of Senate Committee on Banking and Currency on BrokersÊ Loans (1928), February–March BIBLIOGRAPHY 195 Hoover, H (1952), The Memoirs of Herbert Hoover, New York: Macmillan Ibbotson Associates (1988), Stocks, Bonds, Bills and Inflation: 1988 Yearbook, Chicago: Ibbotson Associates Ibbotson, R G., and R A Sinquefield (1982), Stocks, Bonds, Bills and Inflation: The Past and the Future, Charlottesville, VA: Financial Analysts Research Foundation Investment Bankers Association of America (1930), Proceedings of the Nineteenth Annual Convention of the Investment Bankers Association of America, Chicago Jones, F W., and A D Lowe (1935), „Manipulation,‰ in The Security Markets, New York: Twentieth Century Fund Kendrick, J W (1961), Productivity Trends in the United States, Princeton, NJ: Princeton University Press Kindleberger, C P (1978), Manias, Panics, and Crashes, New York: Basic Books Lawrence, J S (1929), Wall Street and Washington, Princeton, NJ: Princeton University Press Liu, T., G I Santoni, and C C Stone (1995), „In Search of Stock Market Bubbles: A Comment on Rappoport and White,‰ Journal of Economic History (September), 647 – 54 Macaulay, F R., and D Durand (1931), Short Selling on the New York Stock Exchange, New York: Twentieth Century Fund (mimeographed) Malkiel, B G (1975 and 1996), A Random Walk Down Wall Street, New York: Norton Mayer, M (1955), Wall Street: Men and Money, New York: Harper McDonald, F (1962), Insull: The Rise and Fall of a Billionaire Utility Tycoon, Chicago: University of Chicago Press Meeker, J E (1932), Short Selling, New York and London: Harper Miller, A C (1935), „Federal Reserve Policies: 1927–1929,‰ American Economic Review (September), 447–56 Mitchell, B (1961), Depression Decade: Volume IX, The Economic History of the United States, New York: Holt, Rinehart and Winston Moggridge, D (1981), The Collected Writings of John Maynard Keynes, Vol XX, London: Macmillan Moggridge, D E (1992), Maynard Keynes, An EconomistÊs Biography, London: Routledge The National Cyclopedia of American Biography (1932), Vol 22, New York: James T White, 75–76 OÊConnor, H (1933), MellonÊs Millions, New York: John Day The October 1987 Market Break (1988), A Report by the Division of Market Regulation, U.S Securities and Exchange Commission (February) Pecora, F (1939), Wall Street Under Oath, New York: Simon and Schuster Pedersen, J (1961), „Some Notes on the Economic Policy of the United States During the Period 1919 – 1932, in Money, Growth and Methodology, H Hegeland (ed.), Sweden: C.W.K Gleerup 196 BIBLIOGRAPHY Pierce, P S (1986), The Dow Jones Averages, 1885–1985, Homewood: Dow Jones–Irwin Rappoport, P., and E N White (1993), „Was There a Bubble in the 1929 Stock Market?‰ Journal of Economic History (September), 549 – 74 Rappoport, P., and E N White (1994), „Was the Crash of 1929 Expected?‰ American Economic Review (March), 271 – 81 Samuelson, P A (1979), „Myths and Realities About the Crash and Depression,‰ Journal of Portfolio Management (Fall) Santoni, G J (1987), „The Great Bull Markets 1924 – 29 and 1982 – 87: Speculative Bubbles or Economic Fundamentals?‰ Federal Reserve Bank of St Louis Review (November), 16 – 29 Schwed, F., Jr (1940), „Where Are the CustomersÊ Yachts?‰ New York: Simon and Schuster Shachtman, T (1979), The Day America Crashed, New York: Putnam Simmons, E.H.H (1930), The Principal Causes of the Stock Market Crisis of Nineteen Twenty-nine, Philadelphia, PA: Transportation Club Sirkin, G (1975), „The Stock Market of 1929 Revisited: A Note,‰ Business History Review (Summer), 223 – 31 Sloan, A P Jr (1963), My Years with General Motors, Garden City, NY: Doubleday Sobel, R (1968), The Great Bull Market, Wall Street in the 1920s, New York: Norton Sobel, R (1968), Panic on Wall Street, New York: Macmillan Soule, G (1962), Prosperity Decade, Volume VIII, The Economic History of the United States, New York: Holt, Rinehart and Winston Stock Market Study (1955), Hearings before the Committee on Banking and Currency, U.S Senate Washington, DC: U.S Government Printing Office Thomas, D L (1967), The Plungers and the Peacocks, New York: Morrow Thomas, G., and M Morgan-Witts (1979), The Day the Bubble Burst, Garden City, NY: Doubleday and Company U.S Senate, Subcommittee of the Committee on Banking and Currency (1933), Stock Exchange Practices Hearings, Washington, DC: U.S Government Printing Office Wanniski, J (1987), „The Smoot-Hawley Tariff and the Stock Market Crash of 1929,‰ Midland Corporate Finance Journal (Summer), – 23 Warburg, P M (1930), The Federal Reserve System: Its Origin and Growth, New York: Macmillan White, E N (1995), „Stock Market Bubbles? A Reply,‰ Journal of Economic History (September), 655 – 65 Wigmore, B A (1985), The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929 – 33, Westport, CT: Greenwood Williams, J B (1938), The Theory of Investment Value, Cambridge, MA: Harvard University Press WorldÊs Work (June 1929) BIBLIOGRAPHY NEWSPAPERS AND OTHER PERIODICALS The Boston Daily Globe, October 1929 The Commercial and Financial Chronicle, October 1929 The Economist, 1929, 1930 The Federal Reserve Bulletin The Financial Times, September 1929 – January 1930 The First National City Bank of New York Newsletter, 1929 – 1930 Forbes, October 15, 1925 The Listener, 1929, London The Magazine of Wall Street, 1929 The New York Herald Tribune, September 6, 1929 The New York Times, 1929 and 1930 The Wall Street Journal, October 1929 The Washington Post, October 1929 197 INDEX AAA ratings, 79, 80, 177 – 78 American Can Company, 71, 120 American International Group, Inc (AIG), 80, 86, 87 American Telephone & Telegraph (AT&T), 127 – 28, 129 Babson, Roger W., 68, 106 Baker, George, Jr., 46 Bank loans, 62, 73, 99, 107 Bank of America, 86 – 87, 107 Bank of England, 106, 168 Banking Act (1933), 44, 60 – 61, 151 Bankruptcy filings, 80 – 82, 84, 91 – 92, 107, 165 Baruch, Bernard, 173 Basel banking standards, 80 Bear market: defined, 179; lessons from, 180 – 82; stock buying during, 179 – 80 See also Stock-market Bear Stearns, 80, 81 – 83, 107 Bernanke, Ben, 91, 184 Black Thursday (October 24, 1929), – 5, 19, 70, 115, 159, 161 Black Tuesday (October 29, 1929), 70, 115, 159 Bluefield Water Works v P.S.C., 154 Blunt, John, 21 Bonbright, James C., 160 Bonds: buying, 49, 56 – 57, 66, 107, 169; common stock vs., 66; as diversifying strategy, 68; financing, 96; government, 52, 71, 89, 93, 108, 118, 125; industrial, 118, 122; mortgage, 174; from Peru, 145 – 46; prices of, 58, 74; public utility, 125; ratings, 78, 79, 181; securing loans with, – 10, 41; to stock, ratio, 128, 171; trading, 91; yields from, 138 Brandeis, Louis, 150 Broker loans See Call rates/loans Buffett, Warren, 90, 100 Burger, E K., 123 Bush, George W (administration), 27, 79 Business credit, 13, 41, 57, 174 Call rates/loans (broker loans): cost of, 58, 60 – 62; decreasing, 23 – 24, 34, 71, 168; as excessive, 106, 118; financing, 22 – 24, 111; increases 200 INDEX in, 10 – 11, 66 – 67, 69 – 70, 96, 97, 110, 176; investigation of, – 10; investment percentage of, 98 – 99; rates for, 58, 176; renewal of, 67; speculation and, 22 – 24, 172 Callaway, Trowbridge, 24, 63, 169 – 70 Calvin, Claud W., 145 – 46 Capital gains tax, 120, 179, 182 Carnegie, Andrew, 66 Case, J H., 111 Cash dividends, 15, 103, 119 – 20, 163 Chandler, Lester V., 22, 31 Chase National Bank, 141, 143, 151 – 52 Citigroup, 80, 85 – 86, 92 – 93, 107 Clearing House Committee, 42 Clews, Henry, 105 Closed-end mutual funds, 100, 101 – College Retirement Equities Fund (CREF), 93 – 94 The Commercial and Financial Chronicle, 66, 67 – 69, 106, 154 Commodity prices, 6, 118, 133 Common stock: in bear market, 183; bonds vs., 66; borrowing cost of, 168; discount rate of, 126; government purchase of, 81; margins for, 97; portfolio mix of, 70, 85, 164; price decreases in, 73, 107, 182; in public utilities, 98, 165; shortselling and, 107; for steel industry, 129; of trusts, 101; value of, – 10, 96, 125, 161, 164; yields, 122 Congress See House Committee on Banking and Currency; Senate Committee on Banking and Currency Consolidated Supervised Entity (CSE) program, 82–83 Continental Can Company, 120 Coolidge, Calvin, 21, 31 Corporations: broker loans and, 111; earnings data for, 120, 130, 134 – 37; performance data, 15; profit by, 78; securities from, 106; spending by, 81 See also specific corporations Credit: for banks, 46 – 47, 50 – 51; for business, 13, 41, 57, 174; discount rate and, 26, 36, 40, 45 – 46, 51; expansion of, 110; Federal Reserve Bank and, 42, 45 – 47, 58, 87; Federal Reserve Board and, 32, 37 – 38, 43, 63, 75, 98, 168; myths about, 25, 172; paying off, 78, 97, 165, 174, 181; policy, 39, 46; price of, 24; ratings, 18, 80, 86, 173, 181, 182, 184; restricting, 10, 17, 22 – 24, 59, 98, 106, 168, 170; for speculation, 12 – 14, 30 – 31, 50 – 60, 63, 67, 74, 111; unfreezing, 81, 85, 181 Credit default swaps (CDSs): counterparty risks with, 181; defined, 18; failure of, 78, 86, 174; fixed fees for, 181; for mortgages, 177 – 78; regulating, 107; subprime mortgages and, 80 CSE See Consolidated Supervised Entity Cunningham, E H., 12, 21, 34 Cuomo, Andrew, 81 Debt: borrowing and, 35, 46; common stock and, 101; defaulting on, 86; equity ratios, 89; excessive, 78, 83, 85 – 86, 165; FDIC guarantee for, 92; as financing, 122, 162; leverage from, 17, 78, 91, 108, 163, 164; long-term, 3, 174; low-cost, 184; on margin, 98, 105, 164; mortgage, 80 – 82, 94, 107, 174, 181; paying off, 84, 150; price-earnings ratio and, 4; reducing, 49; risks from, 87 – 88; for securities, 20, 118, 181; short-term, 174, 182 Department of the Treasury, 183 Derivatives, 89 – 90 Dice, C A., 14 – 15 INDEX Discount rate: credit and, 26, 39, 40, 45 – 46, 51; defined, 23; Federal Reserve Bank and, 40 – 41, 45, 55 – 56, 57, 71, 110 – 11, 168; Federal Reserve Board and, 44, 48, 52, 57; fixing, 13; increasing, 23, 36, 40, 67, 106, 111 – 13, 168; priceearnings ratio and, 126; reducing, 22, 31, 71, 168 Dividends: cash, 15, 103, 119 – 20, 163; dispersing, 53; extra, 71; increasing, 15, 120, 130, 156; payment rates, 125 – 27; price-earnings ratio and, 5, 125; reducing, 85, 152; stock as, 103; stock prices vs., 68, 101, 103, 156; from trusts, 163; from utility stocks, 108; valuation model for, 129, 131; yields, 3, 97 – 99, 122 – 23, 128, 168, 176 Dodd, D L., 129 Dow Jones Industrial Stock Index: in 2008, 77; in 1922–1929, – 5, 43, 127; railroad index, 5, 154 – 55; recovery of, 19; utility index, 154 – 56, 165 Drew, Daniel, 105 Durand, David, 105 Earnings data, 120, 130, 134 – 37 Economic fundamentals, 117 – 18, 132 Economist, – 7, 16, 64 – 65, 100, 155 Edison Electric Illuminating Company, 106, 154, 156 – 60, 168 Efficient market hypothesis (EMH), 174 The Evening World, 68 Factory production, 6, 118, 133 Fannie Mae/Freddie Mac, 49, 80, 95 Farming productivity, 118 Federal Advisory Council, 36, 48 Federal Deposit Insurance Corporation (FDIC), 92 Federal Power Commission v Hope Natural Gas Company, 154 201 Federal Reserve Act, 12, 38, 50 Federal Reserve Bank: during 2000– 2009, 49; broker loans and, 66, 111; credit and, 42, 45 – 47, 58, 87; Federal Reserve Board vs., 29 – 30, 34 – 49, 52 – 54; government bonds and, 71; 1929 letter to, 50 – 51; real estate market and, 49; rediscount rate and, 40 – 41, 45, 55 – 56, 57, 71, 110 – 11, 168; speculative loans by, 22, 23, 29, 55 – 56, 109 – 11 Federal Reserve Board: broker loans and, 10 – 11; Citigroup rescue by, 80; credit and, 32, 37 – 38, 43, 63, 75, 98, 168; denouncement of, 59 – 60; discount rate and, 44, 48, 52, 57; easy money policies of, 17; Federal Reserve Bank vs., 29 – 30, 34 – 49, 52 – 54; interest rates and, 174; Long-Term Capital Management rescue by, 89 – 91; members before 1929, 21 – 22; role in 2008 crash, 91 – 92, 184; Senate hearings and, 61; speculation and, 9, 23 – 25, 29, 55 – 56, 74 – 75 Federal Reserve Bulletin: broker loans and, 98; credit and, 23, 43, 60, 63; production and, – 6, 118; real economy and, 47; securities loans and, 38 – 39; speculative loans and, 38 Federal Trade Commission (FTC), 160 Financial & Industrial Securities Corporation, 103 Financial Times, 64 – 65, 158 First National Bank, 42, 46 – 47, 110, 176 First National City Bank, 99 – 100 Fisher, Irving: manufacturing sector and, 117; market boom and, 116; market prediction by, 175; priceearnings ratios and, 4; stock decreases and, 72 – 73, 169, 179 Flood, R R., 20 202 INDEX Florence, P Sergeant, 116 Forbes, – 7, 25, 70, 123 Forbes, B C., 66 – 67, 70 Forbes, Harry, 149 Fortune, 86, 169 Friedman, M., 24 Funston, G Keith, 138 Galbraith, John Kenneth, 2, 63 – 64, 72, 116 – 17 Garber, R M., 20 General Electric (GE), 84 – 85, 107, 170 Glass, Carter, 10 – 12, 43 – 44, 54, 59 – 60, 62 Goldenweiser, E A., 38 Goldman Sachs Trading Corporation, 72, 82, 90, 92, 101, 102 – Government bonds, 52, 71, 89, 108, 118, 125 Government policies (2000 – 2009), 77 – 78, 87 Graham, B., 129 Great Depression, 20, 26, 74, 175 Greenspan, Alan, 17, 91 Gross, Daniel, 78 Gross national product (GNP), 5, 124 Guaranty Trust Company, 45, 46, 110 Hamlin, Charles S., 12, 13, 21 – 22, 33, 35 – 37, 112 – 13 Hard, William, 31 Harding, Warren G., 21 Harrison, George, 32 – 42, 44 – 48, 59 – 60, 109 – 11 Hatry investment firm scandal, 106, 113, 168, 176 Hawley-Smoot Act, 26 High-risk securities, 94, 95, 184 Holmes, Oliver Wendell, 32 Hoover, Herbert: discount rate and, 39 – 40; election of, 31, 32; speculation and, 44, 57, 65, 142, 170 – 71 House Committee on Banking and Currency, 9, 12 Ibbotson, R G., 116 Industrial bonds, 118, 122 Industrial production, 6, 125, 129 – 32 Industrial Revolution, 119 Inflation: mortgage loans and, 78; reducing, 52, 65, 69; in securities prices, 11, 154 Insull, Sam, 141, 144, 145 Interest rates: increasing, 41 – 42, 48; long-term, 18, 49; lowering, 77 – 78, 174; real estate prices and, 17 – 18, 77 – 78; speculation and, 17 – 18, 52 – 54 Internal Revenue Service (IRS), 148, 149 Investment Bankers Association of America, 24, 63, 160 – 61, 169 Investment-grade securities, 177 – 78 Investors/investments: in 1929 stockmarket, 65 – 71; call loans and, 98 – 99; environment for, 65 – 71; lessons for, 92 – 93, 174, 181, 183; mutual funds, 89, 100, 101 – 2; outlook concerns for, 68; pools, 103 – 4, 147; psychology of, 175; speculation and, 100 – 104, 107; trusts, 71 – 72, 100 – 102, 163, 164; wealth target for, 182 J P Morgan Chase, 80 – 82, 92, 145, 147 – 48, 150 J W Seligman & Co., 145 James, George R., 21, 34, 36 Jarvis, Ian, 18 Kansas City Reserve Bank, 31 – 32 Kaufman, Henry, 177 Kendrick, J W., 118 – 19 Keynes, John Maynard, 3, 15 – 16, 19, 116, 175, 179 – 80 Kindleberger, C R., 20, 63 Krugman, Paul, 94 LaFollette, Robert, 10, 64 Latin American loans, 146 INDEX Lawrence, Joseph Stagg, 118, 119, 169 Lehman Brothers, 80, 81 – 84, 91 – 92, 94 – 95, 107 Leinbach, A M., 123 Levy, I M., 56 London Stock Exchange, 106 Long-Term Capital Management (LTCM), 89 – 91 Long-term debt, 3, 174 Long-term interest rates, 18, 49 Lowenstein, Robert, 91 Macaulay, F R., 105 The Magazine of Wall Street, – 7, 9, 67, 71, 98, 120, 123, 125 Malkiel, Burton G., 3, 4, 15, 63, 100, 127, 152 March 1929 panic: Banking Act and, 44, 60 – 61; conclusions from, 62; money rate decrease, 45; overview, 55 – 60; price of credit and, 24; Senate hearings over, 61; stock market crash and, 39, 41 – 47 See also Stock-market (1929) Margins: buyers of, 58, 96 – 100, 175; for common stock, 97; debt on, 98, 105, 164; NYSE and, 96 – 98 Market myths: before 1929, 21 – 22; during 1929, 115 – 17, 171 – 73; during 2009, 27; economic fundamentals and, 117 – 18; Hawley-Smoot Act and, 26; historical data vs., 25 – 26; market levels and, 125 – 27; overview, 19 – 21; production/ productivity and, 118 – 33; Sirkin study and, 131 – 32; stock prices/ value and, 127 – 30; stock speculation and, 22 – 25 Massachusetts Public Utility Commission, 156 – 60, 168, 176, 181 Mayer, Martin, 105 McGarrah, G W., 46 Mellon, Andrew, 42, 45, 55 – 57, 169 Merrill Lynch, 82, 83, 86 – 87 203 Merton, Robert, 89 Miller, Adolph: credit and, 12 – 14; discount rates and, 111 – 12; speculative loans and, 21 – 22, 64; stock market crash and, 30 – 31, 33, 35 – 40, 44, 47; stock prices and, 75 Mills, Frederick C., 12 Mississippi Bubble, 20 Mitchell, Charles E.: March 1929 panic and, 52 – 54, 59 – 62; stock prices and, 142 – 43, 177; tax problems of, 143, 144, 147 – 50; testimony by, 142 – 51 See also National City Bank Mitchell, D E., 40, 42 – 43 Morgan Stanley, 81, 92 Mortgage-backed securities, 83, 174 Mortgages/mortgage payments: defaults, 17, 49, 80, 174; loan requirements for, 79 – 80, 173; securities and, 78, 83 – 85, 89, 177 – 78 See also Subprime mortgages/ markets Mullins, David, 89 Mutual funds, 89, 100, 101 – National Bank of Commerce, 34, 35, 126 National City Bank: call rates and, 24, 43, 52 – 53, 99; growth rate of, 126; lending practices of, 52 – 53, 59 – 62; marketing by, 145; Peruvian bonds and, 145 – 46; speculation and, 122 – 23; stock market crash and, 99 – 100 See also Mitchell, Charles E Net profits data See Earnings data New York Bank, 35 New York City Reserve Bank, 23, 99 New York Evening Post, 15 – 16 New York Stock Exchange (NYSE): Black Thursday, – 2; broker loans and, 34, 66, 70; investment pools and, 103 – 4; margins and, 96 – 98; securitiesÊ value on, 96 – 97; 204 INDEX short-selling and, 105; speculation and, 10, 31, 63, 64; stock market crash and, 74 New York Times, 6, 55, 157, 160 – 61 New York Times Magazine, 66 Newton, Issac, 21 Norbeck, Peter, 109 – 13, 144 Norman, Montagu, 35 Open Market Investment Committee, 34 Pecora, Ferdinand, 52 – 53, 61, 64, 104, 141, 143 – 44, 146 See also Senate Committee on Banking and Currency Pennsylvania Railroad, 130 Peruvian bonds, 145 – 46 Platt, Edmund, 11 – 12, 21, 33, 36, 38, 45, 141 Potter, William C., 45 – 46 Price-earnings ratio (P/E): in 2008, 77; Black Thursday and, – 5; debt and, 4; discount rate and, 126; distribution of, 131; dividends and, 5, 125; growth in, 131; multipliers, 126; stock prices and, 85, 117 – 18, 122 – 23; for utility stocks, 161 Private equity lending, 79 Production/productivity (1920 – 1929), 118 – 33 Psychology of investment, 175 Public utility stocks/bonds: common stock and, 98, 165; dividends from, 108; Edison Electric Illuminating Company, 106, 156 – 60; electric rates and, 173; investing in, 108; leverage and, 164 – 65; Massachusetts Public Utility Commission, 156 – 58; multipliers, 162 – 63; as overpriced, 163 – 64; prices of, 154 – 55, 161, 181 – 82; rate equity base of, 153; yields, 125 Radio Corporation of America (RCA), 4, 58, 60 Real economy, – 7, 175 Real estate: inflation of, 78; interest rates and, 17 – 18, 77 – 78; price declines, 17, 79, 181 See also Mortgages/mortgage payments Rediscount rate See Discount rate Reynolds, Jackson, 42 Ripley, W Z., 72 Risk vs debt, 87 – 88 Robertson, Dennis, 116 Roosevelt, Franklin Delano, 65, 145 – 47 Ruth, Babe, 70 Samuelson, Paul A., 2, 116 – 17 Scholes, Myron, 89 Schwartz, Anna J., 24, 184 Securities: credit for, 13, 57 – 58; debt for, 20 – 21, 118, 181; depreciation of, 53 – 54, 61; discount rate and, 22; discounting, 67; financing, 58, 64, 142; high-risk, 94, 95, 184; investment-grade, 177 – 78; investment pools and, 104; loans for, 39, 46; mortgage, 78, 83 – 85, 89, 177 – 78; price of, 11, 30, 98, 170, 174; ratings for, 79; selling, 20, 106; speculation and, 91, 97; utility, 164 – 65; value of, 74, 96, 101, 165 Securities Exchange Act, 97 Security and Exchange Commission (SEC), 82 – 83 Senate (U.S.), 3, 23, 63, 64 Senate Committee on Banking and Currency, – 10, 97; Hamlin, Charles S testimony, 112 – 13; Harrison, George L testimony, 109 – 11; Miller, Adolph testimony, 111 – 12; Mitchell, Charles E testimony, 142 – 51; Stock Market Study, 138 – 39; Wiggin, Albert H testimony, 151 – 52 INDEX Short-selling, 104 – 5, 107 – 8, 172, 179 Short-term debt, 174, 182 Simmons, E.H.H., 176 Sinquefield, R A., 116 Sirkin, Gerald, 25, 131 – 32 Sirkin study, 131 – 32 Smoot-Hawley Tariff Act, 74 Snowden, Philip, 64 – 65, 95 Social Security, 27 Soros, George, 107 South Sea Bubble, 20 – 21, 129 Speculation /speculators: broker loans and, 13, 22 – 24, 69; crash of 1929 and, 105 – 7; credit use and, 12 – 14, 30 – 31, 50 – 60, 63, 67, 74, 111; defined, 64 – 65; focus on, 127; Goldman Sachs and, 102 – 3; interest rates and, 17 – 18, 52 – 54; investment pools and, 103 – 4, 147; investment trusts and, 100 – 102; loans and, 55 – 57, 109 – 11; margin buying and, 97 – 100; market myths and, 22 – 25, 171 – 73; short-selling and, 104 – 5, 107 – 8, 172; Soros recommendation and, 107 Standard and PoorÊs (S&P) index, 101 Steuer, Max D., 147 Stock-market (1929): avoidance of, 173; causes of, 16 – 17, 30, 165, 175 – 76; forced accounting and, 68; investment environment of, 65 – 71; investment trusts during, 71 – 72; lessons from, 174 – 77, 180 – 83; market boom, 3, 7, 144; market crash, 3, 7, 26, 113, 115; myths of, 115 – 17, 171 – 73; overview, – 5, 63 – 65, 70; predictions and, 177; real economy and, – 7; reality of, 74; recovery from, 59, 71; short-selling and, 104 – 5; SmootHawley Tariff Act, 74; stock prices during, 105 – 7, 167 – 68 See also March 1929 panic; Market myths; Speculation /speculators 205 Stock-market (2008 – 2009): American International Group and, 80, 86, 87; avoidance of, 173 – 74; Bear Stearns and, 81 – 83; causes of, 78 – 79, 165; Citigroup and, 80, 85 – 86, 92 – 93; College Retirement Equities Fund and, 93 – 94; CSE program audit, 82 – 83; debt and risk with, 87 – 88; FDIC guarantee, 92; Federal Reserve board role, 91 – 92; financial markets during, 78 – 81; General Electric and, 84 – 85; government policies and, 77 – 78; Lehman Brothers and, 80 – 84; lessons from, 92 – 93, 180 – 82, 183; Long-Term Capital Management and, 89 – 91; Merryl Lynch and, 86 – 87; overview, 17 – 18; panic from, 78; shortselling, 107 – 8; Troubled Asset Relief Program and, 81; warnings ignored, 94 See also Market myths Stock Market Study, 138 – 39 Stock prices: bonds and, 56 – 57; for commodities, 6, 118, 133; comparisons of, – 4; decreases in, 17, 42 – 43, 54, 62, 67, 110; dividends and, 68, 101, 103, 156; increases in, 17, 49, 117 – 18, 128 – 33; myths about, 25, 127 – 30, 172; priceearnings ratio and, 85, 117 – 18, 122 – 23; for public utilities, 154 – 55, 161, 181 – 82; speculation and, 57; with splits, 157 – 58, 182; values and, 67, 116, 119, 127 – 30 Strong, Benjamin, 22, 23, 30 – 34 Subprime mortgages/markets: Citigroup and, 85 – 86; credit default swaps and, 18, 78, 80; debt and, 81 – 82, 94, 107; default of, 17, 182; expansion of, 177 – 78, 181; financial requirements for, 77 – 78; real estate prices and, 49; riskiness of, 88, 173 – 74; value of, 84 Supreme Court (U.S.), 32, 150 206 Taylor, Myron C., 64, 170 Temporary National Economic Committee of Congress, 151 The Times, 14, 60, 144 – 48, 152, 156 – 57, 160, 164 Treasury bonds See Government bonds Troubled Asset Relief Program (TARP), 81, 184 Trusts, 71 – 72, 100 – 102, 163 – 64 Tulip Bubble, 20 U.S Electric Light & Power, 165 U.S Government accusations, 141 – 42 U.S Steel, 66, 68–69, 71, 129–30, 170 Utility stocks See Public utility stocks/bonds Variety (magazine), 15 INDEX Walker, Jimmy, 160 Wall Street Journal, 5, 6, 17, 65, 102, 103, 159 – 60, 164 Wanniski, J., 74 Warburg, Paul M., 48 Wessel, David, 91 Western Electric Company, 128 – 29, 151 Wiggin, Albert Henry, 64, 141 – 42, 144, 151 – 52 Wigmore, Barrie, 4, 96, 97, 100, 123 Williams, J B., 128 – 29 Willis, H Parker, 10 Wingo, Effiegene Loeke, 14 Wingo, Otis, 12 – 14 Young, Owen G., 170 Young, Roy, 10 – 11, 13 – 14, 22; broker loans and, 10 – 11; credit and, 57; speculation and, 65, 171; stock market crash and, 21 – 22, 32 – 36, 38 – 44, 48, 60; testimony of, 13 – 14 ABOUT THE AUTHOR HAROLD BIERMAN, JR is the Nicholas H Noyes Professor of Business Administration at the Johnson Graduate School of Management, Cornell University A graduate of the U.S Naval Academy, Annapolis, he received his MBA and his Ph.D from the University of Michigan A Cornell faculty member since 1956, Professor Bierman formerly taught at Louisiana State University, the University of Michigan, and the University of Chicago He has also taught at INSEAD in Fountainebleau, France and KUL in Belgium He was a visiting scholar at Cambridge University He was a recipient of the Dow Jones Award from the American Assembly of Collegiate Schools of Business for his outstanding contributions to collegiate business education He served as a financial consultant at Prudential Bache Securities in New York in 1986 His industrial experience includes consulting for Corning Glass Corporation, Eastman Kodak, Sun Oil Company, Exxon Oil Corporation, IBM, Emerson Electric, and Xerox Corporation He has written thirty-two books, including The Capital Budgeting Decision (with Seymour Smidt), Financial Accounting, Managerial Accounting, Quantitative Analysis for Business Decisions, and more than a hundred-eighty journal articles .. .BEATING THE BEAR Lessons from the 1929 Crash Applied to Today’s World Harold Bierman, Jr Beating the Bear BEATING THE BEAR Lessons from the 1929 Crash Applied to Today’s World Harold Bierman, ... Crash: The Week of March 25, 1929 55 The 1929 Market in Depth: The Ups and Downs of the 1929 Stock Market 63 The Great Crash of 2008: The 2008–2009 Market in Depth 77 Stopping the Speculators:... stock market In 2008, the stock market again crashed The 2008–2009 crash was actually more severe than the 1929 1930 crash We should look to the events of 1929 in order to better understand the