Business: Market Lesson

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Causes of this undermining were: 1) Warnings from the Federal Reserve Board and other prophets of disaster—warnings which, scoffed at when given, nevertheless filled the Market with a conviction of sin. 2) A period of almost two months (since the Babson Break early in September) in which it had taken strychnine-injections to push quotations ahead. The September slump (currently almost ignored in favor of the peculiar theory that the Market crashed without warning) was of tremendous importance in its indication that a Market which could survive only by constant rises had reached the limits of its climb. 3) Most important of all, indications of a slowing tempo in U. S. industry. The motor stocks, for example, had long since fallen from their January highs—a forecast of slackening production in the latter portion of the year. Now steel mills were no longer running at 97% and 98% of capacity. Slowly the Market began to realize that 1929 might be an abnormal year, a high-water year instead of one more level in a still-rising tide. If this fear were well founded, what then of 1930, or 1931, of even more distant times, the anticipated prosperity of which had been already discounted? The Market had mortgaged itself with the future as its security. If that future did not continue rosy, the security had disappeared.

Economics. Apart from the "causes" of the break, many an economic point was made apropos the break. Three widely discussed points were:

1) That corporations which had loaned money "on call" to speculators had contributed more than any other group to an unsound financial situation because many a corporation promptly called in its loan at the first sign of trouble. Five directors of one corporation threatened to resign last week if their company should call its loan. These directors took the honorable position that having once loaned its money to the stockmarket, the corporation should stand by the market so long as its loan was adequately protected by collateral.

2) That speculation had been encouraged by the over-conservative financial reports of corporations. There have always been dishonest concerns which rig their books to show $1 per share profit when actually there was no profit. But suppose an ultra-conservative concern, by scaling its assets to minimum and carrying the liabilities at maximum, shows $1 per share profit when someone else thinks they might presumably have shown $2 per share profit; then the incentive to imagination and hence speculation is great and obvious.

3) That widespread distributions of stock to employes have made hundreds of thousands unduly "stock-conscious."