The Times for, and against, crashes

For as long as there have been stock markets, there have been stock market panics. The Los Angeles Times, built on the motto "True Industrial Freedom," has always taken a keen interest in these plunges, and this week, with the Dow Jones and Nasdaq in alarming slides, we look back at the many shades of advice — often conflicting — the Times' editorial board has offered in financial crises of the past.

If your memory of the Panic of 1893 is a little hazy, it won't be helped by the Times, which let that event pass with one news story reassuring readers that trading would create "a stronger bottom for good stocks." The editorial board got sufficiently exercised three years later, however, to greet the panic of April 1896 with a rousing call to stay calm and blame populists:

THE FINANCIAL SITUATION — DON'T EXAGGERATE There is a disposition just now to chide the bankers for taking reasonable precautions to protect themselves and their depositors. This is unjust. The interest of the depositing public is the interest of the bankers. With them they stand or fall. This fact was recognized when eastern bankers recently agreed to come to the aid of the government and restore the rapidly-decreasing gold reserve to the $100,000,000 mark. In this action the bankers were not specially moved by patriotic motives — they are probably no more than no less patriotic than any other class of citizens — but they were simply moved by an intelligent self-interest. They clearly recognized the fact that a panic would inure themselves as much as their depositors.[…] Even granting, for the sake of argument, the improbable eventuality that [William Jennings] Bryan should be elected; even then, the end of the sober world will not have been reached. To subvert the national finances a free-silver Congress much be assured. Then, it will take many years for the mines to produce, or the mints to coin, sufficient silver dollars to entirely disrupt the financial status quo. Meantime, experience and reflection will have had a chance to work.[…] At this critical juncture in the affairs of the nation, it is especially desirable than men should not lose their heads, or exaggerate the dangerous possibilities that may lurk in the womb of the future. It is not the highest patriotism, nor even the surest self-protection, to hastily rush to your bank, withdraw your gold, and put it into a safe-deposit vault. This country has withstood graver dangers than the present, and when it was not half as strong. Stand fast? The Republic lives! Long live the Republic!

By May 18, 1901, the Times was on to yet another financial crisis, this one filled with "psychologic" abnormalities:

THE STOCK PANIC. It is difficult to put one's finger on the precise origin of this unparalleled collapse. That men sold recklessly in an effort to save themselves from the consequences of the rapacious operations in Northern Pacific, in which a corner had developed, says the American Banker, may be the explanation of a reaction which became a bedlam of ruinous liquidation by the same psychologic law which had previously generated the inflation. But the reaction is only temporary. The reasoning which made the rise in the market possible rests on the same foundation of the national business expansion. When the air is clear, it will be seen that there has been no slackening of the industrial machinery, though it should not be supposed that a stock market panic never disturbs trade. Business having remained quiescent, balances of interior banks being left undisturbed, and all the factors of speculative activity will quickly return. Retribution will be stored up for the future.

This November 9, 1907 editorial blames timid investors for the Banker's Panic of that year:

WHERE THE ROOTS OF THE TROUBLE LIE. Readers of The Times will recall a statement made several times during the last few months that while in the United States the money supply had increased in ten years 20 per cent, the industrial development of the country had increased in five years 40 per cent. Is it not plain that the strain upon our money power must be excessive under such conditions? The money strength of the country, increasing only 2 per cent. a year while the industrial and commercial activity was increasing 8 per cent. a year — this plainly accounts for the difficulty of financing the business of the country. But these conditions have existed for more than a year, in fact; for several years past. Why do they now culminate? From the secondary cause, but the immediate one, which has brought on all this trouble. The confidence of the general public has been rudely shaken, not reasonably nor necessarily shaken, but shaken to an extent which has made it impossible to meet the ordinary demands for legal tender to liquidate the daily operations of our industries and commerce.[…] Behold what a shaking of the public confidence has done in this country! It has caused unnecessarily timid an suspicious people (the weaker portion of every community, both mentally and morally,) to rush to the banks, draw out their money, and stick it away where it is lost from active use. It is probably no exaggeration to estimate that these weak and timid people have withdrawn from doing its service in the business world a gross sum not less than $500,000,000. Here is one-fifth of all the money in the country suddenly, foolishly and unnecessarily withheld from rendering its service to the world.

By this point in its life, the paper was also attempting to provide some historical perspective. November 14, 1907:

IN 1893 AND 1907. In the panic of 1893, the premiums offered for currency drew money rapidly from the hiding places into which it had gone and the trouble proved like a summer cloud. Business was greatly depressed in 1893 and is buoyant at this time. Since the acute stage was reached we have drawn nearly $60,000,000 in gold from London. Normal business and banking conditions should return to this country in a very short time. Just as soon as the premium now ruling for currency has had its effect money will become plentiful again. National banks are increasing their note issues by liberal amounts, and that will help. Those who hoard money should "get busy" picking up bargains and getting high rates of premium. Their harvest time will be short.

But on November 19, it turned out that William Jennings Bryan was once again to blame:

WHO SHOOK PUBLIC CONFIDENCE? In answering the question, "Who destroyed the public confidence?" we may as well pass over the originators of the nefarious propaganda. Johann Most and Emma Goldman in a hundred years with all their wildest ranting could never have moved one hundredth part of 1 per cent. of the American people. The influence of those insurrectionists was mainly limited to the lowest, most ignorant and vicious foreign immigrants who had not had time to acquire practical use of our language or to learn the principles or our government or of our business methods. The seeds of that propaganda, whose harvest is class hatred, suspicion and mutual animosity, never took root among us until that political type which organized the Populist party, sockless Jerry Simpson, the bearded Pfeffer and Tom Watson, the ready talker, arose and prepared the soil among the unsuccessful in the competitive race of life. Even these and their pessimistic doctrines produced little effect until twelve years ago, when they and their kind, having seized the rains of government and put their unsound theories into practice, brought about universal paralysis in all our industries and converted America into soup kitchens. In these distressful times the declamatory eloquence of W. J. Bryan did succeed in getting an attentive hearing to his form of the gospel of class hatred, distrust and mutual animosity. But ten fat years of plenty had brought the people back to sanity when the success of the "Commons" in winning a material fortune for Bryan suggested an opportunity to a number of publishers who knew that there is always money to be made from anything that numbers of people can be induced to read. The Hearst dailies, pandering to every evil passion in the human heart, were soon flanked all over the country with weeklies and monthlies which made the daily issues look dull beside their brilliant saffron hues.

Given the long Depression that followed, most people would consider the crash of October 1929 to be The Big One, but the editorial board kept a stiff upper lip at the time. October 25:

THE STOCK MARKET CRASH The long expected and long predicted collapse in stock market prices, reaching almost panic proportions so far as speculators were concerned, has finally arrived and a shrinking in actual and paper profits approximating $8,000,000,000 is the result. There will be small sympathy with the margin players, who have had warnings enough to enable them to avoid the debacle, but it will be generally hoped that most of them could afford it.[…] The break is not likely to have any serious consequences on the business of the country, since business men, for the most part, expected and discounted it. It is only when the price smashes come without warning that they catch well-conducted business unprepared. A stock market panic that does not involve the banks is serious only for those directly involved, and it would be difficult to conceive of banks, under the workings of the Federal Reserve system, being seriously hit by such a break as the present one.[…] The careful and conservative, the backbone and sinew of the nation's industry, have not been hit, it is safe to say. It has been a hyperoptimist's market for some months.

This February 9, 1973 editorial, written at the beginning of a two-year plunge in stock prices, showed the board temporarily in a frenzy:

The Heart of the Money Crisis If the situation were allowed to deteriorate, it could produce an economic war endangering prosperity all over the world as well as NATO and other Western security arrangements. The world's money markets operate much like stock or commodity exchanges. Within limits, what one county's currency is worth in terms of another depends on supply and demand. It depends, that is, on its relative desirability as perceived by banks, corporations, governments and individual speculators dealing in the money market. In practice, however, governments believe that they cannot allow truly free money markets. For one thing, currency values might change so quickly that nobody could be even reasonably sure what exchange rates would be several weeks or months hence. World trade and investment would be obstructed. More important, currency and fluctuations directly affect a nation's ability to sell its goods on world markets; they thus have a direct effect on domestic employment and prosperity.

But a few months, later, with an editorial discussing the wise men running the economy, the board appeared to have returned to its early-20th-century form. June 6, 1973:

Economy: Crisis of Confidence What we face is a crisis of confidence. The men and the institutions controlling large flows of money are, in effect, expressing their skepticism that a Watergate-weakened President Nixon will be able to deal effectively with this country's economic problems. On the world money markets, the dollar is under heavy pressure once more as oil sheiks, speculators and multinational corporations trade dollars for gold in this country, the stock market fluctuates up one day and down another, but overall price levels are down. As [Treasury Secretary George] Shultz indicated, the American economy is simply not in the kind of trouble that would justify such market behavior.[…] The restoration of confidence in the nation's economy requires more than the right decisions on wage and price restraints, taxes, government spending and interest rates. It requires also the restoration of confidence in the government's ability to govern.

On October 20, 1987, a day after the largest one-day percentage decline in history, the board predicted (accurately) that the economy would remain strong and opined that the country was suffering from "undertaxation":

The Market and the Economy There is one crucial truth to keep in mind in the face of the staggering collapse of stock market prices: This is not a measure of the American economy, nor does it measure the health of American industry. This is not to downplay the seriousness of the crash, which will have wide repercussions — nearly all of them bad. But it is useful to remember that in the world at large, commerce and industry in the United States — and the record high employment that has been created by continued expansion of the economy — are the envy of most. There may be no choicer place for investment. The weaknesses in the economy — including the federal deficit driven by undertaxation, the increasing consumer indebtedness and a stubborn trade imbalance — in no way justify the failure of confidence reflected in the sell-off of stocks.

By October 23, the board had decided the economy was in fact sick (apparently because President Reagan had claimed it was healthy), but praised the president for considering a tax increase:

The President Must Act The President deserves credit for making, grudgingly, an important concession during his press conference in the East Room of the White House Thursday night: his willingness to at least discuss a possible tax increase with Congress in order to reduce the federal budget deficit. "I'm putting everything on the table with the exception of Social Security," he said in his opening statement. But, as he did the other day in response to questions from reporters, the President seemed to start pulling chips back to his side of the table. He resorted to his old posture of blaming Democrats in Congress for every penny of budget deficits over the past 50 years, and he retreated again to the discredited and illogical beyond-supply-side dictum that tax increases do not raise money for the government. The President again expressed his confidence in the general health of the economy, but cautioned Americans that further market plunges may occur. It would be a mistake to maintain, as he did late Monday, that nothing is wrong with the economy and that there seemed to be no need for leadership or action from the White House. Clearly, plenty is wrong with the economy, and the psychology of a panic like this requires the proper mix of optimism and determination to act.

And when the dot-com bubble was falling apart, the ed board got it all sewed up. In the process, the board (special pleading alert) took the opportunity for a sarcastic kick at this whole internet fad. April 6, 2000:

Icy Splash for Investors The spectacular gyrations of the leading stock markets, especially the plunge and partial recovery of the Nasdaq Tuesday, had no clear cause. But the extraordinary action could do some good if it shocks investors back to economic reality. The roller-coaster ride sent the Nasdaq composite index, which is loaded with technology and Internet stocks, plunging 574 points, or 13.6%, by shortly after 10 a.m. PDT — then almost as steeply upward to recover much of the loss.[...] Speaking to a White House conference Wednesday on the so-called new economy, Greenspan admitted that "something profoundly different" is happening across the U.S. economy, not all of which is readily apparent to traditional economists. What Tuesday's stock market frenzy proves again is that economic uncertainty goes hand in hand with stock market volatility. Investors who have flocked to the market in recent fat years need to bone up on business fundamentals, gaining some understanding of the companies they're investing in. It's a good time to hedge risks with knowledge.

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