I

THE trend of American security prices since 1922 presents a remarkable picture. Never before in the history of Wall Street has such a record been displayed. Before the Great War, socalled 'bull markets' sometimes ran two or three years without serious interruption. But now we have witnessed a bull market which had its inception nearly six years ago. And this market, instead of culminating in reaction, depression, or panic, as, according to all orthodox rules of the past, it should long ago have done, has this year been making such spectacular records for itself that the entire financial world has been amazed.

Nearly all of the accredited seers and economic experts have been at a loss to explain it. Most surprising of all, the incurable stock-market optimist and perennial 'bull,' as well as the great army of innocent lambs,' have for several years been led, not to the proverbial slaughter, but to a continuous feast of speculative profits. For the first time within the memory of man, 'tips' galore have made good. The Wall Street stock market, which, according to all rules of the old logic, should have 'petered out' two years ago and was then believed to be overdue for a wide-open crash, has this year displayed new and mysterious force. And even though the country has been going through a moderate business depression, though credit conditions are beginning to dis

play considerable strain, interest rates have long been rising, and brokers' loans have been soaring,—still the great bull market has gone on.

It is not in the stock-market field alone that a remarkable picture is presented of the six-year stretch from 1922. A chart of the investment-bondmarket trend presents a similar though less startling exhibit; and if precise records could be produced showing the expansion in the volume and sale of 'outside' securities, with the broadening in the distribution of all types of investments throughout the country, equally dramatic comparisons with half a dozen years ago could now be made.

As a concrete illustration of what has happened in the Wall Street markets since 1923, certain exhibits of the price changes in standard, representative investment stocks and bonds have recently been compiled by the writer. In the field of railroad stocks, taking twenty-six representative dividendpaying issues, there has been an average advance in prices of about 100 per cent from the levels of 1923. Any investor who had in 1923 diversified a given sum, like $100,000, among these twenty-six railroad issues would recently have had a capital increase to about $200,000. In the public-utility field, an investor who had diversified a similar sum in twenty-seven representative stocks would recently have had a profit of over 200 per cent; his original $100,000 investment would be worth more than $300,000. In the industrial list, an

investment in thirty representative issues (the sum being equally divided between all) recently showed a profit of over 230 per cent; that is, an investment of about $100,000 in 1923 recently had a value of about $330,000. In all of these exhibits no 'skyrockets' or purely speculative stocks were included; the selections were confined entirely to issues of standard character and to the investment classes.

But, as already stated, this continuous upward tendency in security prices since 1923 has not been confined to stocks alone. Investors in the highestgrade seasoned railroad bonds have reaped profits of 20 per cent or more during the period; purchasers of standard foreign dollar bonds in 1923 now find themselves with profits of from 20 per cent to 30 per cent on their original investments. In this general connection, the writer recently compiled a diversified list of American railroad bonds, foreign dollar bonds, railroad, public utility, and industrial stocks, and bank and trust-company stocks. Assuming that an investor had spread the specific sum of $100,000 in this list, in approximately equal amounts, he would now find himself with a capital value of nearly $400,000.

There has been strong emphasis laid for many months on what are called the dangers of the speculative situation and high market values by practically every public commentator. Dangers are present, it is true, and the thoughtless and venturesome speculator in these days runs great risk of having his fingers burned. But the average financial commentator or critic is too prone to hark back to the experiences of the years before the war and draw parallels with years like 1893, 1903, and 1907; years in which great bull movements culminated and were followed by depressions or panics. There is a similar tendency to ring the changes constantly

on what happened immediately at the end of the wild post-war inflation period of 1919 and early 1920. It is confidently asserted that what happened in those years will presently happen again. And yet, notwithstanding the wide and persistent preaching of this orthodox doctrine, we have this year witnessed powerful financial interests and numerous shrewd, 'longpull' investors purchasing vast blocks of high-priced standard shares and putting these shares in their strong boxes.

What is the correct explanation of it all? Is it entirely the commonplace one of unreasoned and excited speculation and manipulation, with nothing more tangible behind it than a dramatic manifestation of crowd psychology? Or are there more fundamental things behind it? A careful examination of all the facts seems to indicate that there are some fundamental factors of moment behind this extraordinary Wall Street situation; and it is the purpose of this article to attempt to bring some of these fundamental things to light.

II

It will be agreed by all thoughtful persons that to interpret the present intelligently one must first turn to a study of the past. But in turning to the past one should first give due weight to the fact that causes which greatly affected events in past years may no longer exist; that laws, customs, methods, perspectives, as well as the position and resources of the nation, may have materially changed. Let us examine for a moment the panic and depression periods of 1893, 1903, and 1907.

These years were all preceded by bull markets which, superficially at least, bore many of the earmarks of the present bull market. There was inflation

then; there is inflation now. Standard stocks at the end of 1906 were selling, on the average, on a lower income basis than now; standard investment bonds were all higher than now. But the panics or depressions that followed closely on the heels of the booms of 1892, 1902, and 1906 were primarily caused, in all three cases, by certain outstanding factors which no longer exist in this country. The panic of 1893 was brought on almost entirely by the unsound currency legislation of the period; by the iniquitous workings of the Sherman Silver Purchase Law and the inadequacy of the National Banking System for coping with the situation. The depression of 1903 was caused primarily by the reckless, crude, and unscientific mania for industrial capitalizing and stockjobbing; by the overambitious railroad consolidation schemes; by the rise of radicalism in politics which largely resulted therefrom; and by the continued aggravation of a faulty banking and reserve system in a country which was growing by leaps and bounds and had far outgrown its credit machinery. The panic of 1907 was directly traceable to the same old panic-breeder, the National Banking Law, and to little else. It is true that the booms or bull markets which preceded these panics or depressions were overdone and were in many ways distinctly unhealthy; but they were unhealthy primarily because of the total absence of adequate banking and credit machinery.

Consequently, in comparing the prewar past with the post-war present, we must first give due weight to the fact that the fundamental causes of the disasters mentioned have now been eliminated. Looking backward, as we now can, it is readily enough demonstrated that in the period of twenty years or more preceding the Great War there never was a time in which VOL. 142-NO. 2

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one could fairly count on a long period of sustained prosperity in this country. Banking conditions were always unsound; a large part of the period was checkered with radical antitrust legislation; socialistic ideas were rampant in all directions; the financing of this initial era of big business was in large part crude, unscientific, and ill considered. It was the period of the 'trustbuster,' the muckraker, and the 'undesirable citizen,' and, in its later years, the shadows of the Great War were dropping down over the world.

The saner method for attempting an analysis of the present is to seek for the background of the years which have gone by since the close of the war; especially those years which have intervened since the deflation collapse of 1920 and 1921. The background of these half-dozen years far more completely explains the present and indicates the probable future than any research, however exhaustive, into the generation which preceded the Great War.

In 1923, business in this country was just beginning definitely to recover from the deflation crash of more than two years before. Liabilities of business firms and corporations had been well liquidated, and acute deflation had done its work in the general fields of industry and finance. Political and labor conditions were becoming increasingly stable, and though Europe was still in the mire, and the GermanFrench situation was acutely bad, there were not lacking signs that the reparation problem was definitely heading toward a solution. Based on these general facts, the belief that better times were ahead was justified; and even had there been nothing else of importance in the situation, it is probable that the following year would have been one of progress.

But, aside from all this, certain other

fundamental facts should be brought to the front. The most important is that the position of the United States in relation to the rest of the world had completely changed. We had become a mighty creditor nation, whereas in the decades before the war we were still a borrowing nation. The sudden and dramatic events of the war period had increased the wealth and resources of this country to an extent which perhaps would not otherwise have been equaled within a generation or more; and, because of the exhaustion of Europe, the relative position of the United States had been made even stronger. An immense increase in our plant and producing capacity had also taken place as a result of abnormal war activities after 1914 and all through the war years. Thus, at the signing of the peace, this country was completely equipped for a vast new expansion in its wealth-producing activities.

Another vital fact which had gone far to stabilize fundamental financial and business conditions in America was the founding of the Federal Reserve Banking System. The new law, passed at the close of 1913, was the culmination of the agitation for sound banking which had been carried on with growing aggressiveness after the free-silver craze of the 1890's had spent itself. During the war period it saved the day for American war finance; it probably saved the day for the Allies. It carried the country through the disastrous deflation period of 1920 and 1921 by a process of orderly liquidation. Everyone who has full knowledge of the matter knows that if we had still been operating under the old banking system in 1920 we should then have experienced the worst financial and commercial panic of all history. By the opening of 1923, the Federal Reserve Law had demonstrated its thorough practicality and value, and thus

had secured the general confidence of the business interests of the country. The old breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, had now been replaced by a modern, scientific reserve system which embodied an elastic currency and an orderly control of the money market.

The foregoing two fundamental facts really constitute the background of the new era in which we are now living. But we may also trace the effect of various other factors which existed in 1923 or were then in the making; all of which have a very direct bearing on conditions as they are to-day, and which go far to explain the phenomena of the 1928 security markets.

The lessons taught by the crude speculative corporate period that preceded the war, culminated in the disaster of 1907, and brought on much antitrust legislation and political unsettlement, had by 1923 been well learned by the majority of big-business minds. The experiences of corporation heads, financiers, and business men through the deflation days of 1920 and 1921 had brought a new impulse of caution to the average producer and distributor, forcing him to adhere to a 'hand-to-mouth' policy in all his activities; thus keeping himself out of debt to the greatest extent possible. The experiences of the war had also, both in America and abroad, caused an immense decline in socialistic and radical sentiment of the pre-war type; our own experiment in government operation of the railways had gone far to blight the growing propaganda of the late pre-war days in favor of public ownership and operation of all utilities. In addition there were in the making, during 1923 and after, certain constructive economic trends of great importance.

After the war had closed and the wild speculative period of profiteering had collapsed, a declining tendency immediately set in in commodity prices. Margins of profit narrowed or entirely disappeared, and thus the old temptation for expanding inventories or buying goods or raw materials in anticipation of sharply rising prices was completely eliminated. A very direct and increasing impetus was thus given to the modern American effort toward the more scientific development of mass production and distribution, the speeding up of production, and the cutting out of waste and excess motion in all industrial activities. After the passage of the Railroad Transportation Act of 1920 and the restoration of the railroads to their owners, a remarkable increase in the speeding up of freight deliveries was developed, which in itself gave new facility to the hand-tomouth policy among merchants and retailers. The new slogan, 'Keep your shelves as bare as you dare,' was taking the place of the old notion that an overstocked store was essential to prosperity.

Coincident with the growing efficiency in manufacturing and business methods, there was fully under way by 1923 a rapid development of new mechanical inventions in almost every business line. Old methods were being eliminated and new labor and timesaving devices installed as never before. Profits were being sought more and more through the elimination and cutting down of unnecessary costs rather than in mere attempts to increase volume and profit through possible advancing prices. This tendency was further accelerated by the continuous trend toward consolidation of small units into large; by the larger develop ment of the chain-store and directdelivery systems, with the resulting elimination of the middle man.

This general evolution in production and distribution was of course immensely stimulated by the perfecting of methods, going on all over the country, for the larger mobilization of investment capital; the gathering together, for the uses of industry and for direct investment in the big business and corporate enterprises of the times, of the surplus savings of the people. We were rapidly becoming a nation of investors investors in our own industries from one end of the country to the other.

With the gradual disappearance of the war and post-war problems and the final adjustment of relations with our former Allies, and with the adjustment of our people to the habit of accepting the higher level of prices and cost of living as 'normal,' a new stabilization of political and labor interests took form. No longer were the people agitated by the pre-war political issues of tariff, antimonopoly, and 'trustbusting'; labor was no longer aggressively urging socialistic legislation; issues which had split the Republican Party in 1912, such as the recall of judges, initiative and referendum, direct election of senators, and woman suffrage, were either settled or forgotten; the League of Nations issue and the 'Wilson policies' had been pushed aside by the return of the Republicans to power in 1920. Labor was being quite uniformly employed on the new and higher wage scales and was beginning to share more and more in the profits of industry, while the general public were feeling the influences of growing stability and prosperity. As increasing numbers became investors in the rising corporate activities of the continent, the sentiment pervaded more and more widely that business enterprise and wealth production thrive best under political noninterference, though with proper and necessary