Tuesday, February 06, 2007

Lessons of the 20th century

In any field or profession, there exists a documented record of past theories and knowledge. When we try to evaluate how valid or useful a particular theory is, we test it against reality and empirical evidence.

When a theory, technique or practice is proven to be false and useless, we discard it entirely. Hence we no longer have witch doctors in the modern world. Conversely, if something is successful, accurate or proven to be true, it is accepted and promoted in the modern world.

This doesn't seem to hold true with economics and political theory however. I bring you these quotes from before the Great Depression.

1929 February:
“…the boom will collapse within a few months.”

Friedrich von Hayek. Austrian Institute of Economic Research Report. One of the few economists to predict the crash….he was awarded the Nobel Laureate in 1974.

1929 Summer:

“…a great crash is coming and I do not want my name in any way connected with it.”

Ludwig von Mises…. The reason Von Mises gave for rejecting a high position at Kredit Anstalt (then one of the largest banks in Europe)… two years later this Austrian bank was declared bankrupt.

“There will be no more crashes in our lifetime.”
John Maynard Keynes, renowned British economist and graduate of Cambridge….is quoted by several sources to have uttered these words to Felix Somary (Austrian School economist and Swiss banker) when warned against buying stock as a crash was imminent.

1929 September:
"Stock prices are not too high and Wall Street will not experience anything in the nature of a crash.”
“Stocks are now at what looks like a permanently high plateau.”
Irving Fisher. Fisher graduated from Yale and was regarded as one of America’s greatest economists. Also an inventor and author, Fisher made a fortune when he sold his index file system to Remington Rand. His reputation was tarnished when he kept insisting throughout the Great Depression that a recovery was imminent.

“Sooner or later a crash is coming, and it may be terrific…factories will shut down…men will be thrown out of work…the viscous circle will get in full swing and the result will be a serious business depression.”

Roger Babson, speaking at his Annual National Business Conference.

1929 October 28th, “Black Monday”….stock market loses 13%.

1929 October 29th, “Black Tuesday”….stock market loses 12%.

1929 October 30th:

“This is the time to buy stocks. This is the time to recall the words of the late J.P.Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic.”

R.W. McNeel, market analyst New York Herald Tribune.

1929 November 10th:

“A severe depression such as 1920-1921 is outside the range of probability. We are not facing a protracted liquidation. ”

Harvard Economic Society.

1929 November 14th:

“The end of the decline of the Stock Market will probably not be long, only a few days at most.”

Irving Fisher, Professor of Economics Yale

1930 June: “The depression is over.”

U.S. President Herbert Hoover.

1932 June…………….. stocks have crashed 91% to a low of 34.


“…the Harvard Economic Society was liquidated in 1932.”
John Rothchild, The Bear Book, John Wiley & Sons, 1998.

John Maynard Keynes: in spite of his brilliance as an economist, Keynes failed to see the crash coming and is reported to have remained fully invested and lost one million English pounds in the Crash of ’29.

Professor Irving Fisher, Ph.D. Economics, held steadfastly to his view of an imminent recovery from the Crash of ‘29, and went on to lose close to $140 million in today’s dollars. Defying his predictions, the Dow lost some 90 per cent over the next two years and investment trusts crashed 95 per cent.