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Chapter 1 The Fluctuation
THE STOCK MARKET—the daytime adventure serial of thewell-to-do—would not be the stock market if it did not have itsups and downs. Any board-room sitter with a taste for WallStreet lore has heard of the retort that J. P. Morgan the Elderis supposed to have made to a na?ve acquaintance who hadventured to ask the great man what the market was going todo. “It will fluctuate,” replied Morgan dryly. And it has manyother distinctive characteristics. Apart from the economicadvantages and disadvantages of stock exchanges—theadvantage that they provide a free flow of capital to financeindustrial expansion, for instance, and the disadvantage thatthey provide an all too convenient way for the unlucky, theimprudent, and the gullible to lose their money—theirdevelopment has created a whole pattern of social behavior,complete with customs, language, and predictable responses togiven events. What is truly extraordinary is the speed withwhich this pattern emerged full blown following theestablishment, in 1611, of the world’s first important stockexchange—a roofless courtyard in Amsterdam—and the degreeto which it persists (with variations, it is true) on the NewYork Stock Exchange in the nineteen-sixties. Present-day stocktrading in the United States—a bewilderingly vast enterprise,involving millions of miles of private telegraph wires, computersthat can read and copy the Manhattan Telephone Directory inthree minutes, and over twenty million stockholderparticipants—would seem to be a far cry from a handful ofseventeenth-century Dutchmen haggling in the rain. But the fieldmarks are much the same. The first stock exchange was,inadvertently, a laboratory in which new human reactions wererevealed. By the same token, the New York Stock Exchange isalso a sociological test tube, forever contributing to the humanspecies’ self-understanding.
The behavior of the pioneering Dutch stock traders is ablydocumented in a book entitled “Confusion of Confusions,”
written by a plunger on the Amsterdam market named Josephde la Vega; originally published in 1688, it was reprinted inEnglish translation a few years ago by the Harvard BusinessSchool. As for the behavior of present-day American investorsand brokers—whose traits, like those of all stock traders, areexaggerated in times of crisis—it may be clearly revealedthrough a consideration of their activities during the last weekof May, 1962, a time when the stock market fluctuated in astartling way. On Monday, May 28th, the Dow-Jones averageof thirty leading industrial stocks, which has been computedevery trading day since 1897, dropped 34.95 points, or morethan it had dropped on any other day except October 28,1929, when the loss was 38.33 points. The volume of tradingon May 28th was 9,350,000 shares—the seventh-largestone-day turnover in Stock Exchange history. On Tuesday, May29th, after an alarming morning when most stocks sank farbelow their Monday-afternoon closing prices, the marketsuddenly changed direction, charged upward with astonishingvigor, and finished the day with a large, though notrecord-breaking, Dow-Jones gain of 27.03 points. Tuesday’srecord, or near record, was in trading volume; the 14,750,000shares that changed hands added up to the greatest one-daytotal ever except for October 29, 1929, when trading ran justover sixteen million shares. (Later in the sixties, ten, twelve, andeven fourteen-million share days became commonplace; the1929 volume record was finally broken on April 1st, 1968, andfresh records were set again and again in the next fewmonths.) Then, on Thursday, May 31st, after a Wednesdayholiday in observance of Memorial Day, the cycle wascompleted; on a volume of 10,710,000 shares, the fifth-greatestin history, the Dow-Jones average gained 9.40 points, leaving itslightly above the level where it had been before all theexcitement began.
The crisis ran its course in three days, but, needless to say,the post-mortems took longer. One of de la Vega’s observationsabout the Amsterdam traders was that they were “very cleverin inventing reasons” for a sudden rise or fall in stock prices,and the Wall Street pundits certainly needed all the clevernessthey could muster to explain why, in the middle of an excellentbusiness year, the market had suddenly taken its second-worstnose dive ever up to that moment. Beyond theseexplanations—among which President Kennedy’s April crackdownon the steel industry’s planned price increase ranked high—itwas inevitable that the postmortems should often compare May,1962, with October, 1929. The figures for price movement andtrading volume alone would have forced the parallel, even if theworst panic days of the two months—the twenty-eighth and thetwenty-ninth—had not mysteriously and, to some people,ominously coincided. But it was generally conceded that thecontrasts were more persuasive than the similarities. Between1929 and 1962, regulation of trading practices and limitationson the amount of credit extended to customers for thepurchase of stock had made it difficult, if not actuallyimpossible, for a man to lose all his money on the Exchange.
In short, de la Vega’s epithet for the Amsterdam stockexchange in the sixteen-eighties—he called it “this gambling hell,”
although he obviously loved it—had become considerably lessapplicable to the New York exchange in the thirty-three yearsbetween the two crashes.
THE 1962 crash did not come without warning, even thoughfew observers read the warnings correctly. Shortly after thebeginning of the year, stocks had begun falling at a prettyconsistent rate, and the pace had accelerated to the pointwhere the previous business week—that of May 21st throughMay 25th—had been the worst on the Stock Exchange sinceJune, 1950. On the morning of Monday, May 28th, then,brokers and dealers had reason to be in a thoughtful mood.
Had the bottom been reached, or was it still ahead? Opinionappears, in retrospect, to have been divided. The Dow-Jonesnews service, which sends its subscribers spot financial news byteleprinter, reflected a certain apprehensiveness between thetime it started its transmissions, at nine o’clock, and theopening of the Stock Exchange, at ten. During this hour, thebroad tape (as the Dow-Jones service, which is printed onvertically running paper six and a quarter inches wide, is oftencalled, to distinguish it from the Stock Exchange price tape,which is printed horizontally and is only three-quarters of aninch high) commented that many securities dealers had beenbusy over the weekend sending out demands for additionalcollateral to credit customers whose stock assets were shrinkingin value; remarked that the type of precipitate liquidation seenduring the previous week “has been a stranger to Wall Streetfor years;” and went on to give several items of encouragingbusiness news, such as the fact that Westinghouse had justreceived a new Navy contract. In the stock market, however,as de la Vega points out, “the news [as such] is often of littlevalue;” in the short run, the mood of the investors is whatcounts.
This mood became manifest within a matter of minutes afterthe Stock Exchange opened. At 10:11, the broad tape reportedthat “stocks at the opening were mixed and only moderatelyactive.” This was reassuring information, because “mixed” meantthat some were up and some were down, and also because afalling market is universally regarded as far less threateningwhen the amount of activity in it is moderate rather than great.
But the comfort was short-lived, for by 10:30 the StockExchange tape, which records the price and the share volumeof every transaction made on the floor, not only wasconsistently recording lower prices but, running at its maximumspeed of five hundred characters per minute, was six minuteslate. The lateness of the tape meant that the machine wassimply unable to keep abreast of what was going on, so fastwere trades being made. Normally, when a transaction iscompleted on the floor of the Exchange, at 11 Wall Street, anExchange employee writes the details on a slip of paper andsends it by pneumatic tube to a room on the fifth floor of thebuilding, where one of a staff of girls types it into the tickermachine for transmission. A lapse of two or three minutesbetween a floor transaction and its appearance on the tape isnormal, therefore, and is not considered by the Stock Exchangeto be “lateness;” that word, in the language of the Exchange, isused only to describe any additional lapse between the time asales slip arrives on the fifth floor and the time thehard-pressed ticker is able to accommodate it. (“The termsused on the Exchange are not carefully chosen,” complained dela Vega.) Tape delays of a few minutes occur fairly often onbusy trading days, but since 1930, when the type of ticker inuse in 1962 was installed, big delays had been extremely rare.
On October 24, 1929, when the tape fell two hundred andforty-six minutes behind, it was being printed at the rate of twohundred and eighty-five characters a minute; before May, 1962,the greatest delay that had ever occurred on the new machinewas thirty-four minutes.
Unmistakably, prices were going down and activity was goingup, but the situation was still not desperate. All that had beenestablished by eleven o’clock was that the previous week’sdecline was continuing at a moderately accelerated rate. But asthe pace of trading increased, so did the tape delay. At 10:55,it was thirteen minutes late; at 11:14, twenty minutes; at 11:35,twenty-eight minutes; at 11:58, thirty-eight minutes; and at12:14, forty-three minutes. (To inject at least a seasoning ofup-to-date information into the tape when it is five minutes ormore in arrears, the Exchange periodically interrupted itsnormal progress to insert “flashes,” or current prices of a fewleading stocks. The time required to do this, of course, addedto the lateness.) The noon computation of the Dow-Jonesindustrial average showed a loss for the day so far of 9.86points.
Signs of public hysteria began to appear during the lunchhour. One sign was the fact that between twelve and two,when the market is traditionally in the doldrums, not only didprices continue to decline but volume continued to rise, with acorresponding effect on the tape; just before two o’clock, thetape delay stood at fifty-two minutes. Evidence that people areselling stocks at a time when they ought to be eating lunch isalways regarded as a serious matter. Perhaps just as convincinga portent of approaching agitation was to be found in theTimes Square office (at 1451 Broadway) of Merrill Lynch,Pierce, Fenner & Smith, the undisputed Gargantua of thebrokerage trade. This office was plagued by a peculiar problem:
because of its excessively central location, it was visited everyday at lunchtime by an unusual number of what are known inbrokerage circles as “walk-ins”—people who are securitiescustomers only in a minuscule way, if at all, but who find theatmosphere of a brokerage office and the changing prices onits quotation board entertaining, especially in times ofstock-market crisis. (“Those playing the game merely for thesake of entertainment and not because of greediness are easilyto be distinguished.”—de la Vega.) From long experience, theoffice manager, a calm Georgian named Samuel Mothner, hadlearned to recognize a close correlation between the currentdegree of public concern about the market and the number ofwalk-ins in his office, and at midday on May 28th the mob ofthem was so dense as to have, for his trained sensibilities,positively albatross-like connotations of disaster ahead.
Mothner’s troubles, like those of brokers from San Diego toBangor, were by no means confined to disturbing signs andportents. An unrestrained liquidation of stocks was already wellunder way; in Mothner’s office, orders from customers wererunning five or six times above average, and nearly all of themwere orders to sell. By and large, brokers were urging theircustomers to keep cool and hold on to their stocks, at least forthe present, but many of the customers could not bepersuaded. In another midtown Merrill Lynch office, at 61 WestForty-eighth Street, a cable was received from a substantialclient living in Rio de Janeiro that said simply, “Please sell outeverything in my account.” Lacking the time to conduct along-distance argument in favor of forbearance, Merrill Lynchhad no choice but to carry out the order. Radio and televisionstations, which by early afternoon had caught the scent ofnews, were now interrupting their regular programs with spotbroadcasts on the situation; as a Stock Exchange publicationhas since commented, with some asperity, “The degree ofattention devoted to the stock market in these news broadcastsmay have contributed to the uneasiness among some investors.”
And the problem that brokers faced in executing the flood ofselling orders was by this time vastly complicated by technicalfactors. The tape delay, which by 2:26 amounted to fifty-fiveminutes, meant that for the most part the ticker was reportingthe prices of an hour before, which in many cases wereanywhere from one to ten dollars a share higher than thecurrent prices. It was almost impossible for a broker acceptinga selling order to tell his customer what price he might expectto get. Some brokerage firms were trying to circumvent thetape delay by using makeshift reporting systems of their own;among these was Merrill Lynch, whose floor brokers, aftercompleting a trade, would—if they remembered and had thetime—simply shout the result into a floorside telephoneconnected to a “squawk box” in the firm’s head office, at 70Pine Street. Obviously, haphazard methods like this were subjectto error.
On the Stock Exchange floor itself, there was no question ofany sort of rally; it was simply a case of all stocks’ decliningrapidly and steadily, on enormous volume. As de la Vega mighthave described the scene—as, in fact, he did ratherflamboyantly describe a similar scene—“The bears [that is, thesellers] are completely ruled by fear, trepidation, andnervousness. Rabbits become elephants, brawls in a tavernbecome rebellions, faint shadows appear to them as signs ofchaos.” Not the least worrisome aspect of the situation was thefact that the leading bluechip stocks, representing shares in thecountry’s largest companies, were right in the middle of thedecline; indeed, American Telephone & Telegraph, the largestcompany of them all, and the one with the largest number ofstockholders, was leading the entire market downward. On ashare volume greater than that of any of the more than fifteenhundred other stocks traded on the Exchange (most of themat a tiny fraction of Telephone’s price), Telephone had beenbattered by wave after wave of urgent selling all day, until attwo o’clock it stood at 104?—down 6? for the day—and wasstill in full retreat. Always something of a bellwether, Telephonewas now being watched more closely than ever, and each lossof a fraction of a point in its price was the signal for furtherdeclines all across the board. Before three o’clock, I.B.M. wasdown 17? points; Standard Oil of New Jersey, oftenexceptionally resistant to general declines, was off 3?; andTelephone itself had tumbled again, to 101?. Nor did thebottom appear to be in sight.
Yet the atmosphere on the floor, as it has since beendescribed by men who were there, was not hysterical—or, atleast, any hysteria was well controlled. While many brokerswere straining to the utmost the Exchange’s rule againstrunning on the floor, and some faces wore expressions thathave been characterized by a conservative Exchange official as“studious,” there was the usual amount of joshing, horseplay,and exchanging of mild insults. (“Jokes … form a mainattraction to the business.”—de la Vega.) But things were notentirely the same. “What I particularly remember is feelingphysically exhausted,” one floor broker has said. “On a crisisday, you’re likely to walk ten or eleven miles on thefloor—that’s been measured with pedometers—but it isn’t justthe distance that wears you down. It’s the physical contact. Youhave to push and get pushed. People climb all over you. Then,there were the sounds—the tense hum of voices that youalways get in times of decline. As the rate of decline increases,so does the pitch of the hum. In a rising market, there’s anentirely different sound. After you get used to the difference,you can tell just about what the market is doing with youreyes shut. Of course, the usual heavy joking went on, andmaybe the jokes got a little more forced than usual. Everybodyhas commented on the fact that when the closing bell rang, atthree-thirty, a cheer went up from the floor. Well, we weren’tcheering because the market was down. We were cheeringbecause it was over.”
BUT was it over? This question occupied Wall Street and thenational investing community all the afternoon and evening.
During the afternoon, the laggard Exchange ticker sloggedalong, solemnly recording prices that had long since becomeobsolete. (It was an hour and nine minutes late at closing time,and did not finish printing the day’s transactions until 5:58.)Many brokers stayed on the Exchange floor until after fiveo’clock, straightening out the details of trades, and then went totheir offices to work on their accounts. What the price tapehad to tell, when it finally got around to telling it, was auniformly sad tale. American Telephone had closed at 100?,down 11 for the day. Philip Morris had closed at 71?, down8? Campbell Soup had closed at 81, down 10?. I.B.M. hadclosed at 361, down 37?. And so it went. In brokerage offices,employees were kept busy—many of them for most of thenight—at various special chores, of which by far the mosturgent was sending out margin calls. A margin call is ademand for additional collateral from a customer who hasborrowed money from his broker to buy stocks and whosestocks are now worth barely enough to cover the loan. If acustomer is unwilling or unable to meet a margin call withmore collateral, his broker will sell the margined stock as soonas possible; such sales may depress other stocks further,leading to more margin calls, leading to more stock sales, andso on down into the pit. This pit had proved bottomless in1929, when there were no federal restrictions on stock-marketcredit. Since then, a floor had been put in it, but the factremains that credit requirements in May of 1962 were suchthat a customer could expect a call when stocks he hadbought on margin had dropped to between fifty and sixty percent of their value at the time he bought them. And at theclose of trading on May 28th nearly one stock in four haddropped as far as that from its 1961 high. The Exchange hassince estimated that 91,700 margin calls were sent out, mainlyby telegram, between May 25th and May 31st; it seems a safeassumption that the lion’s share of these went out in theafternoon, in the evening, or during the night of May28th—and not just the early part of the night, either. Morethan one customer first learned of the crisis—or first becameaware of its almost spooky intensity—on being awakened by thearrival of a margin call in the pre-dawn hours of Tuesday.
If the danger to the market from the consequences of marginselling was much less in 1962 than it had been in 1929, thedanger from another quarter—selling by mutual funds—wasimmeasurably greater. Indeed, many Wall Street professionalsnow say that at the height of the May excitement the merethought of the mutual-fund situation was enough to make themshudder. As is well known to the millions of Americans whohave bought shares in mutual funds over the past two decadesor so, they provide a way for small investors to pool theirresources under expert management; the small investor buysshares in a fund, and the fund uses the money to buy stocksand stands ready to redeem the investor’s shares at theircurrent asset value whenever he chooses. In a seriousstock-market decline, the reasoning went, small investors wouldwant to get their money out of the stock market and wouldtherefore ask for redemption of their shares; in order to raisethe cash necessary to meet the redemption demands, themutual funds would have to sell some of their stocks; thesesales would lead to a further stock-market decline, causingmore holders of fund shares to demand redemption—and soon down into a more up-to-date version of the bottomless pit.
The investment community’s collective shudder at this possibilitywas intensified by the fact that the mutual funds’ power tomagnify a market decline had never been seriously tested;practically nonexistent in 1929, the funds had built up thestaggering total of twenty-three billion dollars in assets by thespring of 1962, and never in the interim had the marketdeclined with anything like its present force. Clearly, iftwenty-three billion dollars in assets, or any substantial fractionof that figure, were to be tossed onto the market now, it couldgenerate a crash that would make 1929 seem like a stumble. Athoughtful broker named Charles J. Rolo, who was a bookreviewer for the Atlantic until he joined Wall Street’s literarycoterie in 1960, has recalled that the threat of a fund-induceddownward spiral, combined with general ignorance as towhether or not one was already in progress, was “so terrifyingthat you didn’t even mention the subject.” As a man whoseliterary sensibilities had up to then survived the well-knowncrassness of economic life, Rolo was perhaps a good witnesson other aspects of the downtown mood at dusk on May28th. “There was an air of unreality,” he said later. “No one,as far as I knew, had the slightest idea where the bottomwould be. The closing Dow-Jones average that day was downalmost thirty-five points, to about five hundred andseventy-seven. It’s now considered elegant in Wall Street todeny it, but many leading people were talking about a bottomof four hundred—which would, of course, have been a disaster.
One heard the words ‘four hundred’ uttered again and again,although if you ask people now, they tend to tell you they said‘five hundred.’ And along with the apprehensions there was aprofound feeling of depression of a very personal sort amongbrokers. We knew that our customers—by no means all ofthem rich—had suffered large losses as a result of our actions.
Say what you will, it’s extremely disagreeable to lose otherpeople’s money. Remember that this happened at the end ofabout twelve years of generally rising stock prices. After morethan a decade of more or less constant profits to yourself andyour customers, you get to think you’re pretty good. You’re ontop of it. You can make money, and that’s that. This breakexposed a weakness. It subjected one to a certain loss ofself-confidence, from which one was not likely to recoverquickly.” The whole thing was enough, apparently, to make abroker wish that he were in a position to adhere to de laVega’s cardinal rule: “Never give anyone the advice to buyor sell shares, because, where perspicacity is weakened, themost benevolent piece of advice can turn out badly.”
IT was on Tuesday morning that the dimensions of Monday’sdebacle became evident. It had by now been calculated that thepaper loss in value of all stocks listed on the Exchangeamounted to $20,800,000,000. This figure was an all-timerecord; even on October 28, 1929, the loss had been a mere$9,600,000,000, the key to the apparent inconsistency beingthe fact that the total value of the stocks listed on theExchange was far smaller in 1929 than in 1962. The newrecord also represented a significant slice of our nationalincome—specifically, almost four per cent. In effect, the UnitedStates had lost something like two weeks’ worth of productsand pay in one day. And, of course, there were repercussionsabroad. In Europe, where reactions to Wall Street are delayeda day by the time difference, Tuesday was the day of crisis; bynine o’clock that morning in New York, which was toward theend of the trading day in Europe, almost all the leadingEuropean exchanges were experiencing wild selling, with noapparent cause other than Wall Street’s crash. The loss inMilan was the worst in eighteen months. That in Brussels wasthe worst since 1946, when the Bourse there reopened afterthe war. That in London was the worst in at leasttwenty-seven years. In Zurich, there had been a sickeningthirty-per-cent selloff earlier in the day, but some of the losseswere now being cut as bargain hunters came into the market.
And another sort of backlash—less direct, but undoubtedly moreserious in human terms—was being felt in some of the poorercountries of the world. For example, the price of copper forJuly delivery dropped on the New York commodity market byforty-four one-hundredths of a cent per pound. Insignificant assuch a loss may sound, it was a vital matter to a smallcountry heavily dependent on its copper exports. In his recentbook “The Great Ascent,” Robert L. Heilbroner had cited anestimate that for every cent by which copper prices drop onthe New York market the Chilean treasury lost four milliondollars; by that standard, Chile’s potential loss on copper alonewas $1,760,000.
Yet perhaps worse than the knowledge of what had happenedwas the fear of what might happen now. The Times began aqueasy lead editorial with the statement that “somethingresembling an earthquake hit the stock market yesterday,” andthen took almost half a column to marshal its forces for thereasonably ringing affirmation “Irrespective of the ups anddowns of the stock market, we are and will remain themasters of our economic fate.” The Dow-Jones news ticker,after opening up shop at nine o’clock with its customary cheery“Good morning,” lapsed almost immediately into disturbingreports of the market news from abroad, and by 9:45, withthe Exchange’s opening still a quarter of an hour away, wasasking itself the jittery question “When will the dumping ofstocks let up?” Not just yet, it concluded; all the signs seemedto indicate that the selling pressure was “far from satisfied.”
Throughout the financial world, ugly rumors were circulatingabout the imminent failure of various securities firms, increasingthe aura of gloom. (“The expectation of an event creates amuch deeper impression … than the event itself.”—de la Vega.)The fact that most of these rumors later proved false was nohelp at the time. Word of the crisis had spread overnight toevery town in the land, and the stock market had become thenational preoccupation. In brokerage offices, the switchboardswere jammed with incoming calls, and the customers’ areaswith walk-ins and, in many cases, television crews. As for theStock Exchange itself, everyone who worked on the floor hadgot there early, to batten down against the expected storm, andadditional hands had been recruited from desk jobs on theupper floors of 11 Wall to help sort out the mountains oforders. The visitors’ gallery was so crowded by opening timethat the usual guided tours had to be suspended for the day.
One group that squeezed its way onto the gallery that morningwas the eighth-grade class of Corpus Christi Parochial School, ofWest 121st Street; the class’s teacher, Sister Aquin, explained toa reporter that the children had prepared for their visit overthe previous two weeks by making hypothetical stock-marketinvestments with an imaginary ten thousand dollars each. “Theylost all their money,” said Sister Aquin.
The Exchange’s opening was followed by the blackest ninetyminutes in the memory of many veteran dealers, includingsome survivors of 1929. In the first few minutes, comparativelyfew stocks were traded, but this inactivity did not reflect calmdeliberation; on the contrary, it reflected selling pressure sogreat that it momentarily paralyzed action. In the interests ofminimizing sudden jumps in stock prices, the Exchange requiresthat one of its floor officials must personally grant hispermission before any stock can change hands at a pricediffering from that of the previous sale by one point or morefor a stock priced under twenty dollars, or by two points ormore for a stock priced above twenty dollars. Now sellers wereso plentiful and buyers so scarce that hundreds of stockswould have to open at price changes as great as that orgreater, and therefore no trading in them was possible until afloor official could be found in the shouting mob. In the caseof some of the key issues, like I.B.M., the disparity betweensellers and buyers was so wide that trading in them wasimpossible even with the permission of an official, and therewas nothing to do but wait until the prospect of getting abargain price lured enough buyers into the market. TheDow-Jones broad tape, stuttering out random prices andfragments of information as if it were in a state of shock,reported at 11:30 that “at least seven” Big Board stocks hadstill not opened; actually, when the dust had cleared itappeared that the true figure had been much larger than that.
Meanwhile, the Dow-Jones average lost 11.09 more points inthe first hour, Monday’s loss in stock values had beenincreased by several billion dollars, and the panic was in fullcry.
And along with panic came near chaos. Whatever else maybe said about Tuesday, May 29th, it will be long rememberedas the day when there was something very close to a completebreakdown of the reticulated, automated, mind-boggling complexof technical facilities that made nationwide stock-trading possiblein a huge country where nearly one out of six adults was astockholder. Many orders were executed at prices far differentfrom the ones agreed to by the customers placing the orders;many others were lost in transmission, or in the snow of scrappaper that covered the Exchange floor, and were neverexecuted at all. Sometimes brokerage firms were preventedfrom executing orders by simple inability to get in touch withtheir floor men. As the day progressed, Monday’s heavy-trafficrecords were not only broken but made to seem paltry; asone index, Tuesday’s closing-time delay in the Exchange tapewas two hours and twenty-three minutes, compared toMonday’s hour and nine minutes. By a heaven-sent stroke ofprescience, Merrill Lynch, which handled over thirteen per centof all public trading on the Exchange, had just installed a new7074 computer—the device that can copy the TelephoneDirectory in three minutes—and, with its help, managed to keepits accounts fairly straight. Another new Merrill Lynchinstallation—an automatic teletype switching system that occupiedalmost half a city block and was intended to expeditecommunication between the firm’s various offices—also rose tothe occasion, though it got so hot that it could not be touched.
Other firms were less fortunate, and in a number of themconfusion gained the upper hand so thoroughly that somebrokers, tired of trying in vain to get the latest quotations onstocks or to reach their partners on the Exchange floor, aresaid to have simply thrown up their hands and gone out for adrink. Such unprofessional behavior may have saved theircustomers a great deal of money.
But the crowning irony of the day was surely supplied by thesituation of the tape during the lunch hour. Just before noon,stocks reached their lowest levels—down twenty-three points onthe Dow-Jones average. (At its nadir, the average reached553.75—a safe distance above the 500 that the experts nowclaim was their estimate of the absolute bottom.) Then theyabruptly began an extraordinarily vigorous recovery. At 12:45,by which time the recovery had become a mad scramble tobuy, the tape was fifty-six minutes late; therefore, apart fromfleeting intimations supplied by a few “flash” prices, the tickerwas engaged in informing the stock-market community of aselling panic at a moment when what was actually in progresswas a buying panic.
THE great turnaround late in the morning took place in amanner that would have appealed to de la Vega’s romanticnature—suddenly and rather melodramatically. The key stockinvolved was American Telephone & Telegraph, which, just ason the previous day, was being universally watched and wasunmistakably influencing the whole market. The key man, bythe nature of his job, was George M. L. La Branche, Jr.,senior partner in La Branche and Wood & Co., the firm thatwas acting as floor specialist in Telephone. (Floor specialists arebroker-dealers who are responsible for maintaining orderlymarkets in the particular stocks with which they are charged.
In the course of meeting their responsibilities, they often havethe curious duty of taking risks with their own money againsttheir own better judgment. Various authorities, seeking toreduce the element of human fallibility in the market, havelately been trying to figure out a way to replace the specialistswith machines, but so far without success. One big stumblingblock seems to be the question: If the mechanical specialistsshould lose their shirts, who would pay their losses?) LaBranche, at sixty-four, was a short, sharp-featured, dapper,peppery man who was fond of sporting one of the Exchangefloor’s comparatively few Phi Beta Kappa keys; he had been aspecialist since 1924, and his firm had been the specialist inTelephone since late in 1929. His characteristic habitat—indeed,the spot where he spent some five and a half hours almostevery weekday of his life—was immediately in front of Post 15,in the part of the Exchange that is not readily visible from thevisitors’ gallery and is commonly called the Garage; there, feetplanted firmly apart to fend off any sudden surges of would-bebuyers or sellers, he customarily stood with pencil poised in athoughtful way over an unprepossessing loose-leaf ledger, inwhich he kept a record of all outstanding orders to buy andsell Telephone stock at various price levels. Not surprisingly, theledger was known as the Telephone book. La Branche had, ofcourse, been at the center of the excitement all day Monday,when Telephone was leading the market downward. Asspecialist, he had been rolling with the punch like a fighter—orto adopt his own more picturesque metaphor, bobbing like acork on ocean combers. “Telephone is kind of like the sea,” LaBranche said later. “Generally, it is calm and kindly. Then all ofa sudden a great wind comes and whips up a giant wave. Thewave sweeps over and deluges everybody; then it sucks backagain. You have to give with it. You can’t fight it, any morethan King Canute could.” On Tuesday morning, after Monday’sdrenching eleven-point drop, the great wave was still rolling; thesheer clerical task of sorting and matching the orders that hadcome in overnight—not to mention finding a Stock Exchangeofficial and obtaining his permission—took so long that the firsttrade in Telephone could not be made until almost an hourafter the Exchange’s opening. When Telephone did enter thelists, at one minute before eleven, its price was 98?—down2? from Monday’s closing. Over the next three-quarters of anhour or so, while the financial world watched it the way a seacaptain might watch the barometer in a hurricane, Telephonefluctuated between 99, which it reached on momentary minorrallies, and 98?, which proved to be its bottom. It touched thelower figure on three separate occasions, with rallies between—afact that La Branche has spoken of as if it had a magical ormystical significance. And perhaps it had; at any rate, after thethird dip buyers of Telephone began to turn up at Post 15,sparse and timid at first, then more numerous and aggressive.
At 11:45, the stock sold at 98?; a few minutes later, at 99; at11:50, at 99?; and finally, at 11:55, it sold at 100.
Many commentators have expressed the opinion that that firstsale of Telephone at 100 marked the exact point at which thewhole market changed direction. Since Telephone is among thestocks on which the ticker gives flashes during periods of tapedelay, the financial community learned of the transaction almostimmediately, and at a time when everything else it was hearingwas very bad news indeed; the theory goes that the hard factof Telephone’s recovery of almost two points worked togetherwith a purely fortuitous circumstance—the psychological impactof the good, round number 100—to tip the scales. La Branche,while agreeing that the rise of Telephone did a lot to bringabout the general upturn, differs as to precisely whichtransaction was the crucial one. To him, the first sale at 100was insufficient proof of lasting recovery, because it involvedonly a small number of shares (a hundred, as far as heremembers). He knew that in his book he had orders to sellalmost twenty thousand shares of Telephone at 100. If thedemand for shares at that price were to run out before thistwo-million-dollar supply was exhausted, then the price ofTelephone would drop again, possibly going as low as 98? fora fourth time. And a man like La Branche, given to thinking innautical terms, may have associated a certain finality with thenotion of going down for a fourth time.
It did not happen. Several small transactions at 100 weremade in rapid succession, followed by several more, involvinglarger volume. Altogether, about half the supply of the stock atthat price was gone when John J. Cranley, floor partner ofDreyfus & Co., moved unobtrusively into the crowd at Post 15and bid 100 for ten thousand shares of Telephone—justenough to clear out the supply and thus pave the way for afurther rise. Cranley did not say whether he was bidding onbehalf of his firm, one of its customers, or the Dreyfus Fund, amutual fund that Dreyfus & Co. managed through one of itssubsidiaries; the size of the order suggests that the principalwas the Dreyfus Fund. In any case, La Branche needed onlyto say “Sold,” and as soon as the two men had madenotations of it, the transaction was completed. Where-uponTelephone could no longer be bought for 100.
There is historical precedent (though not from de la Vega’sday) for the single large Stock Exchange transaction that turnsthe market, or is intended to turn it. At half past one onOctober 24, 1929—the dreadful day that has gone down infinancial history as Black Thursday—Richard Whitney, thenacting president of the Exchange and probably the best-knownfigure on its floor, strode conspicuously (some say “jauntily”) upto the post where U.S. Steel was traded, and bid 205, theprice of the last sale, for ten thousand shares. But there aretwo crucial differences between the 1929 trade and the 1962one. In the first place, Whitney’s stagy bid was a calculatedeffort to create an effect, while Cranley’s, delivered withoutfanfare, was apparently just a move to get a bargain for theDreyfus Fund. Secondly, only an evanescent rally followed the1929 deal—the next week’s losses made Black Thursday lookno worse than gray—while a genuinely solid recovery followedthe one in 1962. The moral may be that psychological gestureson the Exchange are most effective when they are neitherintended nor really needed. At all events, a general rally beganalmost immediately. Having broken through the 100 barrier,Telephone leaped wildly upward: at 12:18, it was traded at101?; at 12:41, at 103?; and at 1:05, at 106?. GeneralMotors went from 45? at 11:46 to 50 at 1:38. Standard Oil ofNew Jersey went from 46? at 11:46 to 51 at 1:28. U.S. Steelwent from 49? at 11:40 to 52? at 1:28. I.B.M. was, in itsway, the most dramatic case of the lot. All morning, its stockhad been kept out of trading by an overwhelmingpreponderance of selling orders, and the guesses as to itsultimate opening price varied from a loss of ten points to aloss of twenty or thirty; now such an avalanche of buyingorders appeared that when it was at last technically possible forthe stock to be traded, just before two o’clock, it opened upfour points, on a huge block of thirty thousand shares. At12:28, less than half an hour after the big Telephone trade, theDow-Jones news service was sure enough of what washappening to state flatly, “The market has turned strong.”
And so it had, but the speed of the turnaround producedmore irony. When the broad tape has occasion to transmit anextended news item, such as a report on a prominent man’sspeech, it customarily breaks the item up into a series of shortsections, which can then be transmitted at intervals, leaving timein the interstices for such spot news as the latest prices fromthe Exchange floor. This was what it did during the earlyafternoon of May 29th with a speech delivered to the NationalPress Club by H. Ladd Plumley, president of the United StatesChamber of Commerce, which began to be reported on theDow-Jones tape at 12:25, or at almost exactly the same timethat the same news source declared the market to have turnedstrong. As the speech came out in sections on the broad tape,it created an odd effect indeed. The tape started off by sayingthat Plumley had called for “a thoughtful appreciation of thepresent lack of business confidence.” At this point, there wasan interruption for a few minutes’ worth of stock prices, all ofthem sharply higher. Then the tape returned to Plumley, whowas now warming to his task and blaming the stock-marketplunge on “the coincidental impact of two confidence-upsettingfactors—a dimming of profit expectations and PresidentKennedy’s quashing of the steel price increase.” Then came alonger interruption, chock-full of reassuring facts and figures. Atits conclusion, Plumley was back on the tape, hammering awayat his theme, which had now taken on overtones of “I toldyou so.” “We have had an awesome demonstration that the‘right business climate’ cannot be brushed off as a MadisonAvenue cliché but is a reality much to be desired,” the broadtape quoted him as saying. So it went through the earlyafternoon; it must have been a heady time for the Dow-Jonessubscribers, who could alternately nibble at the caviar of higherstock prices and sip the champagne of Plumley’s jabs at theKennedy administration.
IT was during the last hour and a half on Tuesday that thepace of trading on the Exchange reached its most frantic. Theofficial count of trades recorded after three o’clock (that is, inthe last half hour) came to just over seven million shares—innormal times as they were reckoned in 1962, an unheard-offigure even for a whole day’s trading. When the closing bellsounded, a cheer again arose from the floor—this one a gooddeal more full-throated than Monday’s, because the day’s gainof 27.03 points in the Dow-Jones average meant that almostthree-quarters of Monday’s losses had been recouped; of the$20,800,000,000 that had summarily vanished on Monday,$13,500,000,000 had now reappeared. (These heart-warmingfigures weren’t available until hours after the close, butexperienced securities men are vouchsafed visceral intuitions ofsurprising statistical accuracy; some of them claim that atTuesday’s closing they could feel in their guts a Dow-Jonesgain of over twenty-five points, and there is no reason todispute their claim.) The mood was cheerful, then, but thehours were long. Because of the greater trading volume, tickersticked and lights burned even farther into the night than theyhad on Monday; the Exchange tape did not print the day’s lasttransaction until 8:15—four and three-quarters hours after ithad actually occurred. Nor did the next day, Memorial Day,turn out to be a day off for the securities business. Wise oldWall Streeters had expressed the opinion that the holiday, fallingby happy chance in the middle of the crisis and thus providingan opportunity for the cooling of overheated emotions, mayhave been the biggest factor in preventing the crisis frombecoming a disaster. What it indubitably did provide was achance for the Stock Exchange and its memberorganizations—all of whom had been directed to remain at theirbattle stations over the holiday—to begin picking up the pieces.
The insidious effects of a late tape had to be explained tothousands of na?ve customers who thought they had boughtU.S. Steel at, say, 50, only to find later that they had paid 54or 55. The complaints of thousands of other customers couldnot be so easily answered. One brokerage house discoveredthat two orders it had sent to the floor at precisely the sametime—one to buy Telephone at the prevailing price, the other tosell the same quantity at the prevailing price—had resulted inthe seller’s getting 102 per share for his stock and the buyer’spaying 108 for his. Badly shaken by a situation that seemed tocast doubt on the validity of the law of supply and demand,the brokerage house made inquiries and found that the buyingorder had got temporarily lost in the crush and had failed toreach Post 15 until the price had gone up six points. Since themistake had not been the customer’s, the brokerage firm paidhim the difference. As for the Stock Exchange itself, it had avariety of problems to deal with on Wednesday, among themthat of keeping happy a team of television men from theCanadian Broadcasting Corporation who, having forgotten allabout the United States custom of observing a holiday on May30th, had flown down from Montreal to take pictures ofWednesday’s action on the Exchange. At the same time,Exchange officials were necessarily pondering the problem ofMonday’s and Tuesday’s scandalously laggard ticker, whicheveryone agreed had been at the very heart of—if not, indeed,the cause of—the most nearly catastrophic technical snarl inhistory. The Exchange’s defense of itself, later set down indetail, amounts, in effect, to a complaint that the crisis cametwo years too soon. “It would be inaccurate to suggest that allinvestors were served with normal speed and efficiency byexisting facilities,” the Exchange conceded, with characteristicconservatism, and went on to say that a ticker with almosttwice the speed of the present one was expected to be readyfor installation in 1964. (In fact, the new ticker and variousother automation devices, duly installed more or less on time,proved to be so heroically effective that the fantastic tradingpace of April, 1968 was handled with only negligible tapedelays.) The fact that the 1962 hurricane hit while the shelterwas under construction was characterized by the Exchange as“perhaps ironic.”
There was still plenty of cause for concern on Thursdaymorning. After a period of panic selling, the market has ahabit of bouncing back dramatically and then resuming its slide.
More than one broker recalled that on October 30,1929—immediately after the all-time-record two-day decline, andimmediately before the start of the truly disastrous slide thatwas to continue for years and precipitate the greatdepression—the Dow-Jones gain had been 28.40, representing arebound ominously comparable to this one. In other words, themarket still suffers at times from what de la Vega clinicallycalled “antiperistasis”—the tendency to reverse itself, thenreverse the reversal, and so on. A follower of the antiperistasissystem of security analysis might have concluded that themarket was now poised for another dive. As things turned out,of course, it wasn’t. Thursday was a day of steady, orderlyrises in stock prices. Minutes after the ten-o’clock opening, thebroad tape spread the news that brokers everywhere werebeing deluged with buying orders, many of them coming fromSouth America, Asia, and the Western European countries thatare normally active in the New York stock market. “Orders stillpouring in from all directions,” the broad tape announcedexultantly just before eleven. Lost money was magicallyreappearing, and more was on the way. Shortly before twoo’clock, the Dow-Jones tape, having proceeded from euphoriato insouciance, took time off from market reports to include anote on plans for a boxing match between Floyd Patterson andSonny Liston. Markets in Europe, reacting to New York on theupturn just as they had on the downturn, had risen sharply.
New York copper futures had recovered over eighty per centof their Monday and Tuesday-morning losses, so Chile’streasury was mostly bailed out. As for the Dow-Jones industrialaverage at closing, it figured out to 613.36, meaning that theweek’s losses had been wiped out in toto, with a little bit tospare. The crisis was over. In Morgan’s terms, the market hadfluctuated; in de la Vega’s terms, antiperistasis had beendemonstrated.
ALL that summer, and even into the following year, securityanalysts and other experts cranked out their explanations ofwhat had happened, and so great were the logic, solemnity,and detail of these diagnoses that they lost only a little of theirforce through the fact that hardly any of the authors had hadthe slightest idea what was going to happen before the crisisoccurred. Probably the most scholarly and detailed report onwho did the selling that caused the crisis was furnished by theNew York Stock Exchange itself, which began sending elaboratequestionnaires to its individual and corporate membersimmediately after the commotion was over. The Exchangecalculated that during the three days of the crisis rural areas ofthe country were more active in the market than theycustomarily are; that women investors had sold two and a halftimes as much stock as men investors; that foreign investorswere far more active than usual, accounting for 5.5 per cent ofthe total volume, and, on balance, were substantial sellers; and,most striking of all, that what the Exchange calls “publicindividuals”—individual investors, as opposed to institutional ones,which is to say people who would be described anywhere buton Wall Street as private individuals—played an astonishinglylarge role in the whole affair, accounting for an unprecedented56.8 per cent of the total volume. Breaking down the publicindividuals into income categories, the Exchange calculated thatthose with family incomes of over twenty-five thousand dollars ayear were the heaviest and most insistent sellers, while thosewith incomes under ten thousand dollars, after selling onMonday and early on Tuesday, bought so many shares onThursday that they actually became net buyers over thethree-day period. Furthermore, according to the Exchange’scalculations, about a million shares—or 3.5 per cent of the totalvolume during the three days—were sold as a result of margincalls. In sum, if there was a villain, it appeared to have beenthe relatively rich investor not connected with the securitiesbusiness—and, more often than might have been expected, thefemale, rural, or foreign one, in many cases playing the marketpartly on borrowed money.
The role of the hero was filled, surprisingly, by the mostfrightening of untested forces in the market—the mutual funds.
The Exchange’s statistics showed that on Monday, when priceswere plunging, the funds bought 530,000 more shares thanthey sold, while on Thursday, when investors in general werestumbling over each other trying to buy stock, the funds, onbalance, sold 375,000 shares; in other words, far fromincreasing the market’s fluctuation, the funds actually served asa stabilizing force. Exactly how this unexpectedly benign effectcame about remains a matter of debate. Since no one hasbeen heard to suggest that the funds acted out of sheerpublic-spiritedness during the crisis, it seems safe to assumethat they were buying on Monday because their managers hadspotted bargains, and were selling on Thursday because ofchances to cash in on profits. As for the problem ofredemptions, there were, as had been feared, a large numberof mutual-fund shareholders who demanded millions of dollarsof their money in cash when the market crashed, butapparently the mutual funds had so much cash on hand thatin most cases they could pay off their shareholders withoutselling substantial amounts of stock. Taken as a group, thefunds proved to be so rich and so conservatively managed thatthey not only could weather the storm but, by happyinadvertence, could do something to decrease its violence.
Whether the same conditions would exist in some future stormwas and is another matter.
In the last analysis, the cause of the 1962 crisis remainsunfathomable; what is known is that it occurred, and thatsomething like it could occur again. As one of Wall Street’saged, ever-anonymous seers put it recently, “I was concerned,but at no time did I think it would be another 1929. I neversaid the Dow-Jones would go down to four hundred. I saidfive hundred. The point is that now, in contrast to 1929, thegovernment, Republican or Democratic, realizes that it must beattentive to the needs of business. There will never beapple-sellers on Wall Street again. As to whether whathappened that May can happen again—of course it can. I thinkthat people may be more careful for a year or two, and thenwe may see another speculative buildup followed by anothercrash, and so on until God makes people less greedy.”
Or, as de la Vega said, “It is foolish to think that you canwithdraw from the Exchange after you have tasted thesweetness of the honey.”
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