Professor Irving Fisher set the pace on October 16, 1929. The Harvard man was the most renowned economist of his day. But people should have known he was an idiot.
In WWI, he forecast that the war would be very bad for the United States. The Europeans would withdraw their money from Wall Street, he predicted, because they would need it to finance the war. America would be cut off from trade with Europe, stocks would fall, and the economy would go into a slump.
Of course, what happened was the exact opposite. Europeans bought huge quantities of goods from the US and paid for them with their gold. America enjoyed a great boom.
And then, he was a champion of prohibition. He thought that outlawing booze would increase the nation’s efficiency and boost demand for alternative amusements, such as “automobiles…travel…and education”.
(As to whether prohibition makes a society more prosperous, we are indifferent; even if it were true, it still wouldn’t be worth it, in our opinion).
So when he announced, just days before the big crash, “stock prices have reached what looks like a permanently high plateau,” shrewd investors should have taken it as a sell signal.
The man was the worst sort to have in public life – a world improver through and through. Not only did he believe that man could be improved by forbidding him from having a drink now and then, he believed the US economy had actually been improved by the establishment of the Federal Reserve in 1913. The problems of bubbles and panics had been solved, he said.
What’s more, he maintained that US industry had come under the spell of “scientific management” in which modern, educated leaders, “specially fitted at once to forecast and to mould the future” were in charge.
There were many more reasons to think that a new era really had come. There was new technology – lots of it. There were new investment trusts, an early version of today’s mutual funds, which were a big hit with investors in 1929. America was also the world’s fastest growing major economy…with the strongest currency; overseas investors couldn’t get enough.
Then, in October, the stock market began to shake. There was a sharp drop in the second week of the month – right after Fisher’s famous remark. But he brushed off the decline. It was just “shaking out the lunatic fringe”, he said.
As it turned out, it shook out everyone.
Markets and Money