[I happened on this most timely editorial from the '55 American Socialist
this morning. It is an attempt to come to terms with the bull market of
that year, which had many bourgeois economists nervous as is the case today
with our own faltering bull market. In keeping with the spirit of the
editors' attempt to develop a Marxism appropriate for post-WWII realities,
the article does not conclude that the system is in danger of immanent
collapse, but only cautions that despite reasons for "fear and "insecurity"
a comparison with 1929 must be tempered by new realities, including
military Keynsianism.]
The American Socialist, April 1955
Spotlight on the Stock Market
TWENTY-FIVE years have passed since the cataclysm which the theatrical
paper, Variety, summed up so neatly in a famous headline: "Wall Street Lays
an Egg." In that quarter-century, the nation has been reassured again and
again—how many times, it would be impossible to reckon—that what happened
in October 1929 "can never be repeated." Safeguards, watch-dogs, built-in
stabilizers, etc., would never again permit either the speculative frenzy
or the disastrous collapse. But this assurance, like many others that are
cheaply given, was in plentiful supply only so long as the problem remained
a remote one. Now that the stock market boom has made it pressing, the
guarantors are fewer and more
For two decades after the Dow-Jones index of the average price of
industrial common stocks had crashed to a low of $41 a share from a
September 1929 peak of $381, the stock market maneuvered cautiously in the
$100-$200 range. A moderate increase which began in 1949 was encouraged by
the Korean War, and moved upwards until it was close to 300 by 1953. But
the rise was still comparatively gradual. Starting from the end of 1953,
the rise became far steeper.
At first, the boosts in stock prices were encouraged by various tangible
factors which added more actual value to the shares. For one thing,
dividend payments to shareholders were on the increase; for another, the
interest rate on bonds was falling, thus making stocks a more attractive
investment relatively speaking. In this, the present bull market is akin to
that of the twenties, which also, during its early years, was stimulated by
an actual rise in the value of stocks, and became largely speculative only
later on.
Since the fall of 1953, stock prices have risen 54 percent; this is a rate
of increase which has been exceeded only once—in the feverish year before
the collapse of 1929. The overall boom of the market from 1949 to the
present is roughly analogous to the period of the same length from 1922 to
mid-1928—a rise of about 150 percent.
It is objected that comparisons with the twenties are misleading, because
all values are inflated today in comparison with that time. It is true that
economic comparisons are relative and must be made in proportional terms if
they are to be made at all. But, even an this respect, the comparison with
the twenties is not too misleading. Stock prices can be measured against
the yield in dividends. A price equal to ten times the yield is considered
roughly "normal"; the average price of common stocks at present is almost
fifteen times the yield. To be sure, this us not yet the same as September
1929, when the average price was over nineteen times the average yield. But
it is almost as inflated as the price-yield ratio in the beginning of 1929,
when prices were sixteen times the dividend. The market is definitely
speculative; it has departed from a base of tangibles and is soaring into
the blue sky.
"The most wonderful thing about a bull market," one economist has written,
"is that it creates its own hopes. If people buy because they think stocks
will rise, their act of buying sends up the price of stocks. This causes
them to buy still further, and sends the dizzy dance off on another round."
That’s the force which is in operation in the present market. A man who
bought an average cross-section of stocks in November 1952 to the extent of
$100,000 would have about $154,000 in stock "value" today, or $140,500 in
cash if he liquidated successfully, even after paying the maximum capital
gains tax. That kind of news gets around and feeds the boom.
Another difference from the twenties which is cited is that today the
Federal Reserve Board has the power to regulate margins; in other words, it
can curtail buying on credit by raising the amount of cash required to
purchase stocks. The margin (cash) required at present is 60 percent. But
in a rising speculative market, people find ways to get the money from
other sources of credit. Experience of twenty years with margin regulation
has not yet proved that the market can be controlled very much by this
means. It is true that in the twenties people were buying stock with as
little as 10 percent margin, but in the summer of 1929, the brokers
themselves, alarmed at the fabulous volume of credit they were extending,
raised margins to 50 percent—without any effect.
In certain respects, the controls over today’s market are stronger than
those of the twenties. Curbs on margin buying, while they may not slow down
a rise in the market, help to slow down a falling market, because
shareholders will not be wiped out as quickly if they have more cash behind
their holdings. In addition, the present regulations on "short selling" (an
operation which is based upon an expectation of falling stock prices) make
it harder for the market to be driven down and demoralized by determined
speculators in a falling market, as was done with great profit to a few in
1929-30. Another presumed difference with the twenties sometimes mentioned
is that at that time "everybody" was in the market. This is really in the
class with the "silk-shirted workingmen" myth; actually the number of
speculators did not exceed one million, which is probably less than the
total today. And now the fly-by-night uranium and oil stocks that are
beginning to appear, the competition among brokerage houses for customers,
the growing volume of credit issued by brokers to their customers—all of
these features are beginning to sound the more hysterical notes of the
twenties. Nothing like a comparable pitch has been reached, but the
characteristics are all present, including even the mass tipsters like
Winchell.
Having drawn all of these parallels with the twenties—and many more could
be pointed out—the questions remain: Are we heading towards a stock-market
collapse like that of 1929, and if there is such a collapse will it bring
in its wake a cataclysmic depression like that of the thirties? Without
entering into predictions of the future course of stocks—we leave that to
those who play the market (the percentage of these among our readers is
very small, we are sure) —this much can he said: The peregrinations of the
market over a long period are a reflection of confidence or lack of
confidence in the economy. It is thus the prospects for the economy which
are fundamental in the matter.
Here too, there is a similarity to the twenties. The productive capacity of
the economy has expanded more rapidly than the purchasing capacity of the
population. But in one most important respect, the difference with the
twenties is great. At present, the government budget, mainly for the
military, guarantees a market for fully one-fifth of the products of the
economy. In addition, the governmental apparatus is permanently alerted to
increase its spending in case of danger. These special factors make a
cataclysmic and dramatic bust like that of 1929 unlikely. It is more
probable that the inner diseases of the system will continue to eat away at
its core in the form of an extended stagnation, lack of growth, gradual
swelling of unemployment, slow attrition against the living standards of
the people, etc. In other words, the war ‘budget and the other governmental
measures may subdue the more volcanic manifestations of capitalism’s fatal
disease, but cannot alter the basic trend of decline.
The stock market boom may itself very well reflect that basic disease.
Competitive bidding for shares in the nation's industry such as has pushed
the price of stocks up during the past year can reflect a plethora of
capital looking for fields for investment; this at the very moment when the
expansion of the nation’s industry is running up against barriers in the
form of limited consumer purchasing power. If that turns out to be the
significance of the present bull market, it can have the gravest import for
the prospects of the American capitalist system.
IN the face of this situation, the recent developments around the Fulbright
hearing on the stock market show that the administration’s policy is one of
continuing to encourage the boom even at the risk of a disastrous bust.
Every authoritative administration voice at the hearings has stressed
Washington’s worry—not about the market itself, but about the hearings and
what they may do to impair "confidence." In obtuseness, this is a line
which rivals the celebrated Hooverian "the economy is sound" prologues to
the plunge of 1929.
The most significant feature of the Fulbright investigation—-or "friendly
study" as the Senate committee prefers to call it is the revelation of the
shakiness of confidence. Much of the expert testimony has been to the
effect that "it can happen again, contrary to the heavy blanket of
propaganda of recent years. The committee’s prize witness, Secretary of the
Treasury George M. Humphrey—-probably the most authoritative voice in
Washington on domestic matters—told the committee that, as the N.Y. Times
summarized it, "Confidence in this country’s economy is such a fragile that
it can be lost in a day."
This lack of confidence in the economy contrasts so sharply with official
and semi-official propaganda with which the ruling coterie bombards the
country that it should make those who have been impressed by the propaganda
sit up and take The present worried consideration which the stock market
has bee getting in the committee hearings and in the press is more
important than a thousand glowing predictions from Eisenhower, from the
Join Congressional Committee on the Economy Report, or from Fortune
magazine. It has momentarily stripped away the pretentious and boastful
facade and shown the cankers of fear and insecurity behind it.
Louis Proyect
Marxism mailing list: http://www.marxmail.org/
