In 1929 the attendees of a major marketing conference had so little knowledge of a "bear market" that Roger Ward Babson responded by writing a "Special Letter" to his Babson Reports on October 14th explaining twelve characteristics of a "bear market."

Even prior to this response to an already sagging 1929 stock market, Babson had been suggesting that the level of credit (which might more properly called debt) was much too high for a sustainable economy and implored everyone to eliminate his debts less he become sucked into the vortex of a market collapse. In the Retail Ledger of January, 1928 an article runs, "Babson Fears End of Prosperity: Can't Last Forever, He Says in His Year's Message to Business. (Jan. 17)."

Put your business and your personal affairs on a safe foundation.

Get out of debt, wholly if possible, otherwise, reduce your indebtedness as much as possible.

There is no reason why the wheel of fortune will not continue to turn for many generations as it has in the past. Panics and depressions may some day be eliminated, but little has yet been done to bring such a millennium about. The Federal Reserve system may have put banks in an impregnable position, but it has not changed human nature.

People are in debt today to an extent never before. Sooner or later the dam will break, to be followed by unemployment, failures and hard times.

If enough folks will interpret the admonition about the "safe foundation" and the "budget system" as a direct warning that they better have an appraisal right away, "we," speaking editorially and personally, eventually or possibly by about next December may be able to comply with the instructions about debt. But at this writing what with Christmas bills on the one hand and March 15th on the other, we view the suggestion "Get out of debt" with the same perplexity as the bashful young man who had been advised to "assume an easy and graceful attitude in the presence of ladies." However, we'll do our derndest, Roger, and thanks for giving us the idea. It always has seemed to us that what you say about service is the best or at least the safest policy to pursue.

      |       Great Depression
      |   (GDP fell faster than debt)
   2.8|        \    +
   2.6|         \  + +           (Debt increased faster than GDP)
   2.4|          \ + +                                   \   +
   2.2|     1929   +  +                                   \ + +
    ~ |        \  +   +                           1979     +
   2.0|         \ +    ++                             \   +
   1.8|    +    + +    + +   +                         + +
   1.6| +  ++ +++         + +++ +      + + + + + + + +
    ~ | ++ + +             ++  + + + + +
   1.4|   +                       +
   1.2|
   1.0|_________________________________________________________
	   |      |       |      |      |      |       |       |
	  1920   1930    1940   1950   1960   1970    1980   1990
		      Percentage of Debt to GDP
			 from 1920 to 1990

As the picture immediately shows, Babson's sense of high levels of debt in 1929 were quite correct with the ratio of total debt to GDP of just over 1.6 times in 1928. And, we reached this same level of indebtedness again in 1979, and have exceeded it to a ratio of 2.3 as of 1990. In other words, we are at a level of debt that exceeds that of 1929 by about 150%. Extrapolating the rise in debt through to 1998 puts the level of debt just over the top of the chart at a staggering 3.0 or at a level that exceeds that of 1929 by 180%.

And, as the great soothsayer George Santayana said in Life of Reason, "[t]hose who cannot remember the past are condemned to repeat it." Problematically, those who can well remember 1929, say a young investor in his 20's, is most likely not alive today. This compels us to bring Babson's voice from the past into the present.

Oddly, consumer confidence, business confidence, and "basic fundamentals" of the economy appear to have no bearing on the onslaught of a depression. Consumer confidence has risen since the 1992 recession, progressively to this day. Describing the basic fundamentals for 1929 Babson said in the Chicago Commerce, on September 7, 1929:

Statistics show that thus far 1929 has been the best year that the country has ever had, measured by the volume of goods manufactured and sold. Statistics show that 1929 is the best year the country has had since the war [1919], when measuring the volume of business above normal

Moreover, so long as the stock market holds up I see no reason for changing this forecast.

The three greatest factors in the market today are [in keeping it up]: (1) foreign buying, (2) investment trusts, and (3) the reluctance to pay Uncle Sam profit tax.

What Babson had to say about the investment trusts of the 1920's could just as easily be said of the mutual funds of today:

The investment trust has become a great factor in boosting prices by the buying of securities to hold. The average market operator during the last twenty years has bought today and has sold within a week. This means that the selling has always about equalled the buying. Under such conditions a market could be very active without any considerable increase in stock prices.

The investment trust, however, has bought the leading stocks and held them. This means that there has been considerably more buying than selling, by the same people. As a result, the floating supply of these stock has been pretty well cleaned up and it has been very easy to mark up the prices thereof.

In a key article on April 20th, 1929 entitled, "Investment Trust Idea Good if Main Plan is Investment, Not Speculation, Says Babson," Babson says:

There are good, sound dividend paying common stocks which have prospects of a growth in value over a term of years. when, however, an 'Investment' trust engages solely in trying to make a quick profit in the market and disregards entirely dividend yield on the securities bought, it becomes a 'speculation' trust, or in other words merely an incorporated stock pool. (Dallas Morning News)

However, do not forget that the long-term trend in industrial prices continues downward....

Remember that one of the most powerful weapons used in the race for the most business is price cutting.

[and] operations have held remarkably close to capacity...

The public has already absorbed over 40 per cent more cars than in the corresponding period of 1928 -- a continuation of this pace is not justified by the level of purchasing power.

As we face the new year it seems to me that the installment system has been worked about to its limit. A year ago it was comparatively easy to get people to mortgage their future for the necessities and luxuries of life. Today this is no longer true. Installment business will go on, but it cannot go on by the leaps and bounds of 1927. It has already "hitched business forward." It has already "jacked business up" to another level. We have spent our ammunition, and you cannot shoot the same ammunition twice.

It seems to me that the credit department of a business should study general business conditions intensively. Many concerns have been following a wasteful policy of ignoring the [changes] that occur in business conditions in different localities. Oftentimes it has been the practice to let up on the pressure for the collections during times of good business and to increase the pressure drastically in the times of poor business. It should be the other way around. The psychology of this is simple. When business is good and a customer has plenty of money he does not resent demand for payment. When, however, a customer is "broke," insistence on payment often makes him an enemy, and, moreover, one does not get his money. Wise credit men long ago found this out. A much better policy is to increase pressure at times when business is prosperous, and to be as lenient as possible when business is depressed.

Credit Already Inflated
The best indications of Reserve Bank policy are seen in the open market operations. Recent large sales of government securities by the Reserve Banks show signs of some credit contraction. I am told in Washington that this does not presage a [change] in policy but rather is a gesture in anticipation of Congressional inquiry. The banking situation is shown in the ratio of United States Gold stock to total deposits. This ratio today is higher than at any time since 1920. Still the member banks and the various savings institutions have more money than they can lend. Credit inflation is not a matter of the future; it is already here.

Money Rate
While conservatism would suggest a contraction in stock market loans, there is no indication as yet that the Federal Reserve Board intends to do much in that direction until after the election....

The public, however, does not judge values by earning power but rather by the price which excessive speculative buying develops. For this reason the process of deflation, when it comes, is going to be more drastic and extended than most people now imagine.

Latest Stock Advice And then it happened, the stock market crashed in September and October of 1929 and plunged the entire world into a crushing depression that only ended nearly 10 years later.

And while Babson clearly identified his reasons for his bearishness (as all these accounts demonstrate), he was immediately accused of causing the very depression he predicted.

In the Boston Herald of October 31, 1929 the Financial McNeel's Service ("An Aristocracy of Successful Investors," 126 Newbury St., Boston) took out a full page ad asking "Who Killed Cock Robin ? Are The Prophets of Disaster Now Satisfied?" :

What caused the panic?

What put consternation into millions of American investors? What happened to cause investors from the Atlantic to the Pacific to throw their stocks overboard, all at once, regardless of price?

A few weeks ago all was serene. Men were willing to buy and sell stocks at the then existing prices. Business conditions were fundamentally sound. Financial conditions were fundamentally sound. the world's gold -- a very substantial part of it -- rested in America. The Federal Reserve Banks were seldom in better condition.

Why in the middle of a normal Stock Exchange session did stocks go tumbling down?

Did someone yell, "Fire!"

Although there was no fire, did men become panicky and in an effort to save themselves bring ruin to themselves and others?

A great tribute, perhaps when the American nation reposes such great confidence in anyone, but a national disgrace when such confidence is so unintelligently betrayed.

Men in high positions should properly recognize public responsibility.

When they cry, "Panic!" though there is no panic, do they not themselves create it?

Are there indicators of problems present in our current economy that further compound what Babson might comment about it were he here?

Most certainly there is. We are witnessing record number of corporate and personal bankruptcies which have tipped over 1.3 million per year. We have watched stock markets from Japan to Indonesia to Korea to Russia go down precipitously, often 5 to 10 % in a single day.

We are witnessing the mortgaging of houses beyond imagination where certain lending institutions are lending upwards to 130% of current (greatly inflated) market values, vastly increasing the debts of homeowners such that according to a recent report by the Federal Reserve Board on Family indebtedness, the percentage of family debt in homes has leaped from 50% in 1988 to 65% in 1995 (http://www.bog.frb.fed.us, March, 1997)

Writers such as James Medoff have carefully documented the increasing debt load in The Indebted Society: anatomy of an ongoing disaster (Little, Brown and Co., 1996) and other writers such Professor Juliet B. Schor, The Overspent American (1998), Finally, writers, such as Raveendra N. Batra (Stock Market Crashes of 1998 and 1999: The Asian Crisis and Your Future Dallas: Liberty Press, 1998) and James Davidson and Lord Rees-Moog (The Great Reckoning), predict, indeed, that the "great reckoning" is nearly upon us.

And what should you do to protect yourself but not create a panic? This is the question of the hour.

---

About the author:
Dr. Priest has written on economic and technology issues for over thirty years, especially on matters related to the public welfare. He is co-author of Technological Innovation for a Dynamic Economy (Pergamon Press, 1980) and author of the historical study Risks Concerns and Social Legislation: Forces that led to laws on health, safety and the environment (Westview Press, 1988).

Dr. Priest has contributed dozens of reports and studies to the U.S. Congress and has testified before congressional committees as a chief economist from MIT. He is a long standing member of the American Economic Association.

The Center for Information, Technology & Strategy is a nonprofit organization and has not received any contributions or any funds for the creation of this work. The Center works for the general public interest.

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