All Fall Down
The collapse of the stock market -- of any stock market -- is one of the few truly predictable events in this life. With remarkable certainty, we know that prices will rise to ridiculous peaks and then plunge or collapse to ridiculous lows. The timing, alas, is a mystery. We have learned, however, that just before crashes and prolonged bear markets, the country often gets happy, even giddy over the market's doing so well so long. Shrewd market watchers take this as the surest sign that a bull market is in the throes of death, even before the decline becomes visible.</br></br>Maury Klein's Rainbow's End recounts the national zaniness that coincided with the decision by millions of Americans to step into the stock market for the first time in the mid- and late 1920s. Many argued that the country's economy had entered a "new era of prosperity," as President Calvin Coolidge expressed it. Who, after all, could argue with what Frederick Lewis Allen later called "a ceaseless flow of new delights": the automobile, the telephone, movies, radios, refrigerators, record players? In corporate boardrooms, something called "scientific management" was taking hold to replace the apparently unscientific management of days gone by, when managers simply did what they thought would make money.</br></br>For the first time in the 1920s, Wall Street firms marketed stocks to the public en masse. The number of "investment trusts," the precursors to today's mutual funds, increased sixfold, with more attention paid to the big names running the funds than to the funds' potential risks and benefits. The number of Americans owning stocks shot from about 500,000 to 15 million. On Oct. 15, 1929, Yale professor Irving Fisher declared (infamously, in hindsight) that "stocks have reached what looks like a permanently high plateau." Nine days later, the Dow Jones Industrial Average began a long and steep plunge that stripped the market of 40 percent of its value in three weeks and continued, with a few interruptions, into 1932. "All I lost was two hundred and forty thousand dollars," Groucho Marx said later. "I would have lost more but that was all the money I had."</br></br>The apparent parallels between the period before the crash of 1929 (the New Era) and the period that led to the market collapse of 2000 and early 2001 (the New Economy) are obvious and have been noted ad nauseum anecdotally in the financial press for two years. Klein, a historian of business and finance, evidently thought it beyond his mission to use the opportunity to explore the similarities, which would have made the book more pointed and useful as a vivid reminder of the ever-present risks intrinsic to equities, which are casually ignored as professionals strive to keep alive the mythology that however bleak the moment, everything will be fine if investors just hold on long enough. One wonders how many investors are aware that after 1929, the Dow didn't regain its pre-crash level until 1954. Twenty-five years is a lot of holding on.</br></br>Klein's book is not the best place to absorb the market's history. It's painfully slow. It advances no particularly new angles or theories. In its lack of analysis, it doesn't demonstrate why the crash is a "pivotal moment" in American history fit for inclusion in the Oxford University Press's series of the same name. The author could not resist the common tendency to see every event as either causal or emblematic of the main event of the '29 crash. Klein suggests, for example, that the fad of flagpole sitting and the craze for flying in the '20s were somehow symbolic of the idea that the market could defy gravity. He is equally unconvincing in his efforts to connect everyone from Babe Ruth to evangelist Aimee Semple McPherson to a "mood" of "escapism" somehow connected with the stock market.