R.I.P.: The Financial Experts, 1929-2008

A recent invitation to speak on the "cause or causes of the current financial crisis" made me reflect on another topic: "the cause or causes of the Great Depression." To this day there is no consensus among economists as to what caused the severe depression that lasted from 1929 to 1939. Was it the stock market crash in 1929 that brought about the Great Depression? Was it the subsequent banking panics and monetary contraction? Perhaps it was the reduction in international lending and protectionist policies pursued by the US -- such as the Smoot-Hawley Tariff Act -- that caused the Great Depression. Or perhaps the "great contraction," as Milton Friedman used to call it [1], was caused by the actions of the Federal Reserve, which allowed a decline in the money supply partly to preserve the gold standard. All such explanations are, of course, ad hoc.

The fact of the matter is that the economic "brains" of the 1920s, the so-called experts, could neither foresee the coming disaster nor, once it was under way, could predict correctly its magnitude and duration. In their 1984 book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, Christopher Cerf and Victor Navasky mention many of the predictions and comments made by the economic "experts" during the Great Depression.[2] Among these are the following. On October 17, 1929, seven days before the stock market crash of "Black Thursday," Irving Fisher, the Guru of mainstream economics and professor of economics at Yale University, wrote: "Stocks have reached what looks like a permanently high plateau." Fisher, the "economic expert," did not stop there. After the crash, on November 14, 1921, he wrote: "The end of the decline of the Stock Market will . . . probably not be long, only a few more days at most." A year after the crash, and nine years before the end of the depression, Fisher was still predicting:  "For the future, at least, the outlook is bright." By 1933 the net investment had turned negative, output of goods and services had declined by one third, unemployment rate had risen to 24%, money wages and prices had fallen by one third, nearly 40% of all banks had collapsed and stocks had lost 90% of their value. This was the "bright" future that the eminent professor of economics had promised.

Fisher, however, was not the only "expert" providing authoritative misinformation. Presidential Advisor and stock market "expert" Bernard Baruch made the following prediction on November 15, 1929: "Financial storm has definitely passed." Similarly, the Chairman of the Continental Illinois Bank of Chicago, Arthur Reynolds, predicted on October 24, 1929, that the "crash is not going to have much effect on business." Not to be outdone by these "experts," in the World Almanac of 1929, Thomas C. Shotwell wrote under the "Wall Street Analysis": "The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher." The government experts were not far behind. The US Department of Labor predicted in December of 1929 that the following year will be "a splendid employment year."

To be sure, there are always those who "predict seven of the past two recessions," as the joke goes.  The Great Depression was no exception. The New York Times of October 12, 2008, which reproduced many of the above quotations, added: "Of course, not everyone was so optimistic." According to the Times, "Roger Babson, a well-known businessman and publisher of business and financial statistics," offered this warning in a speech before a business conference on September 5, 1929: "More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails." But as the Times also pointed out, a year earlier, the same Babson had said that "the election of Hoover and a Republican Congress should result in continued prosperity in 1929."