survival8

The Fluctuation

THE STOCK MARKET—the daytime adventure serial of the well-to-do—would not be the stock market if it did not have its ups and downs. Any board-room sitter with a taste for Wall Street lore has heard of the retort that J. P. Morgan the Elder is supposed to have made to a naïve acquaintance who had ventured to ask the great man what the market was going to do. “It will fluctuate,” replied Morgan dryly. And it has many other distinctive characteristics. Apart from the economic advantages and disadvantages of stock exchanges—the advantage that they provide a free flow of capital to finance industrial expansion, for instance, and the disadvantage that they provide an all too convenient way for the unlucky, the imprudent, and the gullible to lose their money—their development has created a whole pattern of social behavior, complete with customs, language, and predictable responses to given events. What is truly extraordinary is the speed with which this pattern emerged full blown following the establishment, in 1611, of the world’s first important stock exchange—a roofless courtyard in Amsterdam—and the degree to which it persists (with variations, it is true) on the New York Stock Exchange in the nineteen-sixties. Present-day stock trading in the United States—a bewilderingly vast enterprise, involving millions of miles of private telegraph wires, computers that can read and copy the Manhattan Telephone Directory in three minutes, and over twenty million stockholder participants—would seem to be a far cry from a handful of seventeenth-century Dutchmen haggling in the rain. But the field marks are much the same. The first stock exchange was, inadvertently, a laboratory in which new human reactions were revealed. By the same token, the New York Stock Exchange is also a sociological test tube, forever contributing to the human species’ selfunderstanding.
The behavior of the pioneering Dutch stock traders is ably documented in a book entitled “Confusion of Confusions,” written by a plunger on the Amsterdam market named Joseph de la Vega; originally published in 1688, it was reprinted in English translation a few years ago by the Harvard Business School. As for the behavior of present-day American investors and brokers—whose traits, like those of all stock traders, are exaggerated in times of crisis—it may be clearly revealed through a consideration of their activities during the last week of May, 1962, a time when the stock market fluctuated in a startling way. On Monday, May 28th, the Dow-Jones average of thirty leading industrial stocks, which has been computed every trading day since 1897, dropped 34.95 points, or more than it had dropped on any other day except October 28, 1929, when the loss was 38.33 points.
The volume of trading on May 28th was 9,350,000 shares—the seventh-largest one-day turnover in Stock Exchange history. On Tuesday, May 29th, after an alarming morning when most stocks sank far below their Monday-afternoon closing prices, the market suddenly changed direction, charged upward with astonishing vigor, and finished the day with a large, though not record-breaking, Dow-
Jones gain of 27.03 points. Tuesday’s record, or near record, was in trading volume; the 14,750,000 shares that changed hands added up to the greatest one-day total ever except for October 29, 1929, when trading ran just over sixteen million shares. (Later in the sixties, ten, twelve, and even fourteenmillion share days became commonplace; the 1929 volume record was finally broken on April 1st,
1968, and fresh records were set again and again in the next few months.) Then, on Thursday, May 31st, after a Wednesday holiday in observance of Memorial Day, the cycle was completed; on a volume of 10,710,000 shares, the fifth-greatest in history, the Dow-Jones average gained 9.40 points, leaving it slightly above the level where it had been before all the excitement began.
The crisis ran its course in three days, but, needless to say, the post-mortems took longer. One of de la Vega’s observations about the Amsterdam traders was that they were “very clever in inventing reasons” for a sudden rise or fall in stock prices, and the Wall Street pundits certainly needed all the cleverness they could muster to explain why, in the middle of an excellent business year, the market had suddenly taken its second-worst nose dive ever up to that moment. Beyond these explanations— among which President Kennedy’s April crackdown on the steel industry’s planned price increase ranked high—it was inevitable that the postmortems should often compare May, 1962, with October,
1929. The figures for price movement and trading volume alone would have forced the parallel, even if the worst panic days of the two months—the twenty-eighth and the twenty-ninth—had not mysteriously and, to some people, ominously coincided. But it was generally conceded that the contrasts were more persuasive than the similarities. Between 1929 and 1962, regulation of trading practices and limitations on the amount of credit extended to customers for the purchase of stock had made it difficult, if not actually impossible, for a man to lose all his money on the Exchange. In short, de la Vega’s epithet for the Amsterdam stock exchange in the sixteen-eighties—he called it “this gambling hell,” although he obviously loved it—had become considerably less applicable to the New York exchange in the thirty-three years between the two crashes.
THE 1962 crash did not come without warning, even though few observers read the warnings correctly. Shortly after the beginning of the year, stocks had begun falling at a pretty consistent rate, and the pace had accelerated to the point where the previous business week—that of May 21st through May 25th—had been the worst on the Stock Exchange since June, 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? Opinion appears, in retrospect, to have been divided. The Dow-
Jones news service, which sends its subscribers spot financial news by teleprinter, reflected a certain apprehensiveness between the time it started its transmissions, at nine o’clock, and the opening of the Stock Exchange, at ten. During this hour, the broad tape (as the Dow-Jones service, which is printed on vertically running paper six and a quarter inches wide, is often called, to distinguish it from the Stock Exchange price tape, which is printed horizontally and is only three-quarters of an inch high) commented that many securities dealers had been busy over the weekend sending out demands for additional collateral to credit customers whose stock assets were shrinking in value; remarked that the type of precipitate liquidation seen during the previous week “has been a stranger to Wall Street for years;” and went on to give several items of encouraging business news, such as the fact that Westinghouse had just received a new Navy contract. In the stock market, however, as de la Vega points out, “the news [as such] is often of little value;” in the short run, the mood of the investors is what counts.
This mood became manifest within a matter of minutes after the Stock Exchange opened. At 10:11, the broad tape reported that “stocks at the opening were mixed and only moderately active.” This was reassuring information, because “mixed” meant that some were up and some were down, and also because a falling market is universally regarded as far less threatening when the amount of activity in it is moderate rather than great. But the comfort was short-lived, for by 10:30 the Stock Exchange tape, which records the price and the share volume of every transaction made on the floor, not only was consistently recording lower prices but, running at its maximum speed of five hundred characters per minute, was six minutes late. The lateness of the tape meant that the machine was simply unable to keep abreast of what was going on, so fast were trades being made. Normally, when a transaction is completed on the floor of the Exchange, at 11 Wall Street, an Exchange employee writes the details on a slip of paper and sends it by pneumatic tube to a room on the fifth floor of the building, where one of a staff of girls types it into the ticker machine for transmission. A lapse of two or three minutes between a floor transaction and its appearance on the tape is normal, therefore, and is not considered by the Stock Exchange to be “lateness;” that word, in the language of the Exchange, is used only to describe any additional lapse between the time a sales slip arrives on the fifth floor and the time the hard-pressed ticker is able to accommodate it. (“The terms used on the Exchange are not carefully chosen,” complained de la Vega.) Tape delays of a few minutes occur fairly often on busy trading days, but since 1930, when the type of ticker in use in 1962 was installed, big delays had been extremely rare. On October 24, 1929, when the tape fell two hundred and forty-six minutes behind, it was being printed at the rate of two hundred and eighty-five characters a minute; before May, 1962, the greatest delay that had ever occurred on the new machine was thirty-four minutes.
Unmistakably, prices were going down and activity was going up, but the situation was still not desperate. All that had been established by eleven o’clock was that the previous week’s decline was continuing at a moderately accelerated rate. But as the 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 at 12:14, forty-three minutes. (To inject at least a seasoning of upto- date information into the tape when it is five minutes or more in arrears, the Exchange periodically interrupted its normal progress to insert “flashes,” or current prices of a few leading stocks. The time required to do this, of course, added to the lateness.) The noon computation of the Dow-Jones industrial average showed a loss for the day so far of 9.86 points.
Signs of public hysteria began to appear during the lunch hour. One sign was the fact that between twelve and two, when the market is traditionally in the doldrums, not only did prices continue to decline but volume continued to rise, with a corresponding effect on the tape; just before two o’clock, the tape delay stood at fifty-two minutes. Evidence that people are selling stocks at a time when they ought to be eating lunch is always regarded as a serious matter. Perhaps just as convincing a portent of approaching agitation was to be found in the Times Square office (at 1451 Broadway) of Merrill Lynch, Pierce, Fenner & Smith, the undisputed Gargantua of the brokerage trade. This office was plagued by a peculiar problem: because of its excessively central location, it was visited every day at lunchtime by an unusual number of what are known in brokerage circles as “walk-ins”—people who are securities customers only in a minuscule way, if at all, but who find the atmosphere of a brokerage office and the changing prices on its quotation board entertaining, especially in times of stock-market crisis. (“Those playing the game merely for the sake of entertainment and not because of greediness are easily to be distinguished.”—de la Vega.) From long experience, the office manager, a calm Georgian named Samuel Mothner, had learned to recognize a close correlation between the current degree of public concern about the market and the number of walk-ins in his office, and at midday on May 28th the mob of them was so dense as to have, for his trained sensibilities, positively albatrosslike connotations of disaster ahead.
Mothner’s troubles, like those of brokers from San Diego to Bangor, were by no means confined to disturbing signs and portents. An unrestrained liquidation of stocks was already well under way; in Mothner’s office, orders from customers were running five or six times above average, and nearly all of them were orders to sell. By and large, brokers were urging their customers to keep cool and hold on to their stocks, at least for the present, but many of the customers could not be persuaded. In another midtown Merrill Lynch office, at 61 West Forty-eighth Street, a cable was received from a substantial client living in Rio de Janeiro that said simply, “Please sell out everything in my account.”
Lacking the time to conduct a long-distance argument in favor of forbearance, Merrill Lynch had no choice but to carry out the order. Radio and television stations, which by early afternoon had caught the scent of news, were now interrupting their regular programs with spot broadcasts on the situation; as a Stock Exchange publication has since commented, with some asperity, “The degree of attention devoted to the stock market in these news broadcasts may have contributed to the uneasiness among some investors.” And the problem that brokers faced in executing the flood of selling orders was by this time vastly complicated by technical factors. The tape delay, which by 2:26 amounted to fiftyfive minutes, meant that for the most part the ticker was reporting the prices of an hour before, which in many cases were anywhere from one to ten dollars a share higher than the current prices. It was almost impossible for a broker accepting a selling order to tell his customer what price he might expect to get. Some brokerage firms were trying to circumvent the tape delay by using makeshift reporting systems of their own; among these was Merrill Lynch, whose floor brokers, after completing a trade, would—if they remembered and had the time—simply shout the result into a floorside telephone connected to a “squawk box” in the firm’s head office, at 70 Pine Street.
Obviously, haphazard methods like this were subject to error.
On the Stock Exchange floor itself, there was no question of any sort of rally; it was simply a case of all stocks’ declining rapidly and steadily, on enormous volume. As de la Vega might have described the scene—as, in fact, he did rather flamboyantly describe a similar scene—“The bears [that is, the sellers] are completely ruled by fear, trepidation, and nervousness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos.”
Not the least worrisome aspect of the situation was the fact that the leading bluechip stocks, representing shares in the country’s largest companies, were right in the middle of the decline; indeed, American Telephone & Telegraph, the largest company of them all, and the one with the largest number of stockholders, was leading the entire market downward. On a share volume greater than that of any of the more than fifteen hundred other stocks traded on the Exchange (most of them at a tiny fraction of Telephone’s price), Telephone had been battered by wave after wave of urgent selling all day, until at two o’clock it stood at 104¾—down 6⅞ for the day—and was still in full retreat.
Always something of a bellwether, Telephone was now being watched more closely than ever, and each loss of a fraction of a point in its price was the signal for further declines all across the board.
Before three o’clock, I.B.M. was down 17½ points; Standard Oil of New Jersey, often exceptionally resistant to general declines, was off 3¼; and Telephone itself had tumbled again, to 101⅛. Nor did the bottom appear to be in sight.
Yet the atmosphere on the floor, as it has since been described by men who were there, was not hysterical—or, at least, any hysteria was well controlled. While many brokers were straining to the utmost the Exchange’s rule against running on the floor, and some faces wore expressions that have 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 main attraction to the business.”—de la Vega.) But things were not entirely the same. “What I particularly remember is feeling physically exhausted,” one floor broker has said. “On a crisis day, you’re likely to walk ten or eleven miles on the floor—that’s been measured with pedometers—but it isn’t just the distance that wears you down. It’s the physical contact. You have to push and get pushed. People climb all over you. Then, there were the sounds—the tense hum of voices that you always get in times of decline. As the rate of decline increases, so does the pitch of the hum. In a rising market, there’s an entirely different sound. After you get used to the difference, you can tell just about what the market is doing with your eyes shut. Of course, the usual heavy joking went on, and maybe the jokes got a little more forced than usual. Everybody has commented on the fact that when the closing bell rang, at threethirty, a cheer went up from the floor. Well, we weren’t cheering because the market was down. We were cheering because it was over.”
BUT was it over? This question occupied Wall Street and the national investing community all the afternoon and evening. During the afternoon, the laggard Exchange ticker slogged along, solemnly recording prices that had long since become obsolete. (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 five o’clock, straightening out the details of trades, and then went to their offices to work on their accounts. What the price tape had to tell, when it finally got around to telling it, was a uniformly sad tale. American Telephone had closed at 100⅝, down 11 for the day. Philip Morris had closed at 71½, down 8¼ Campbell Soup had closed at 81, down 10¾. I.B.M. had closed at 361, down 37½. And so it went. In brokerage offices, employees were kept busy—many of them for most of the night—at various special chores, of which by far the most urgent was sending out margin calls. A margin call is a demand for additional collateral from a customer who has borrowed money from his broker to buy stocks and whose stocks are now worth barely enough to cover the loan. If a customer is unwilling or unable to meet a margin call with more collateral, his broker will sell the margined stock as soon as possible; such sales may depress other stocks further, leading to more margin calls, leading to more stock sales, and so on down into the pit. This pit had proved bottomless in 1929, when there were no federal restrictions on stock-market credit. Since then, a floor had been put in it, but the fact remains that credit requirements in May of 1962 were such that a customer could expect a call when stocks he had bought on margin had dropped to between fifty and sixty per cent of their value at the time he bought them. And at the close of trading on May 28th nearly one stock in four had dropped as far as that from its 1961 high. The Exchange has since estimated that 91,700 margin calls were sent out, mainly by telegram, between May 25th and May 31st; it seems a safe assumption that the lion’s share of these went out in the afternoon, in the evening, or during the night of May 28th—and not just the early part of the night, either. More than one customer first learned of the crisis—or first became aware of its almost spooky intensity—on being awakened by the arrival of a margin call in the pre-dawn hours of Tuesday.
If the danger to the market from the consequences of margin selling was much less in 1962 than it had been in 1929, the danger from another quarter—selling by mutual funds—was immeasurably greater. Indeed, many Wall Street professionals now say that at the height of the May excitement the mere thought of the mutual-fund situation was enough to make them shudder. As is well known to the millions of Americans who have bought shares in mutual funds over the past two decades or so, they provide a way for small investors to pool their resources under expert management; the small investor buys shares in a fund, and the fund uses the money to buy stocks and stands ready to redeem the investor’s shares at their current asset value whenever he chooses. In a serious stock-market decline, the reasoning went, small investors would want to get their money out of the stock market and would therefore ask for redemption of their shares; in order to raise the cash necessary to meet the redemption demands, the mutual funds would have to sell some of their stocks; these sales would lead to a further stock-market decline, causing more holders of fund shares to demand redemption—and so on down into a more up-to-date version of the bottomless pit. The investment community’s collective shudder at this possibility was intensified by the fact that the mutual funds’ power to magnify a market decline had never been seriously tested; practically nonexistent in 1929, the funds had built up the staggering total of twenty-three billion dollars in assets by the spring of 1962, and never in the interim had the market declined with anything like its present force. Clearly, if twenty-three billion dollars in assets, or any substantial fraction of that figure, were to be tossed onto the market now, it could generate a crash that would make 1929 seem like a stumble. A thoughtful broker named Charles J.
Rolo, who was a book reviewer for the Atlantic until he joined Wall Street’s literary coterie in 1960, has recalled that the threat of a fund-induced downward spiral, combined with general ignorance as to whether or not one was already in progress, was “so terrifying that you didn’t even mention the subject.” As a man whose literary sensibilities had up to then survived the well-known crassness of economic life, Rolo was perhaps a good witness on other aspects of the downtown mood at dusk on May 28th. “There was an air of unreality,” he said later. “No one, as far as I knew, had the slightest idea where the bottom would be. The closing Dow-Jones average that day was down almost thirtyfive points, to about five hundred and seventy-seven. It’s now considered elegant in Wall Street to deny it, but many leading people were talking about a bottom of 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 a profound feeling of depression of a very personal sort among brokers. We knew that our customers—by no means all of them rich—had suffered large losses as a result of our actions. Say what you will, it’s extremely disagreeable to lose other people’s money. Remember that this happened at the end of about twelve years of generally rising stock prices. After more than a decade of more or less constant profits to yourself and your customers, you get to think you’re pretty good.
You’re on top of it. You can make money, and that’s that. This break exposed a weakness. It subjected one to a certain loss of self-confidence, from which one was not likely to recover quickly.” The whole thing was enough, apparently, to make a broker wish that he were in a position to adhere to de la Vega’s cardinal rule: “ Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.”
IT was on Tuesday morning that the dimensions of Monday’s debacle became evident. It had by now been calculated that the paper loss in value of all stocks listed on the Exchange amounted to $20,800,000,000. This figure was an all-time record; even on October 28, 1929, the loss had been a mere $9,600,000,000, the key to the apparent inconsistency being the fact that the total value of the stocks listed on the Exchange was far smaller in 1929 than in 1962. The new record also represented a significant slice of our national income—specifically, almost four per cent. In effect, the United States had lost something like two weeks’ worth of products and pay in one day. And, of course, there were repercussions abroad. In Europe, where reactions to Wall Street are delayed a day by the time difference, Tuesday was the day of crisis; by nine o’clock that morning in New York, which was toward the end of the trading day in Europe, almost all the leading European exchanges were experiencing wild selling, with no apparent cause other than Wall Street’s crash. The loss in Milan was the worst in eighteen months. That in Brussels was the worst since 1946, when the Bourse there reopened after the war. That in London was the worst in at least twenty-seven years. In Zurich, there had been a sickening thirty-per-cent selloff earlier in the day, but some of the losses were now being cut as bargain hunters came into the market. And another sort of backlash—less direct, but undoubtedly more serious in human terms—was being felt in some of the poorer countries of the world. For example, the price of copper for July delivery dropped on the New York commodity market by forty-four one-hundredths of a cent per pound. Insignificant as such a loss may sound, it was a vital matter to a small country heavily dependent on its copper exports. In his recent book “The Great Ascent,” Robert L. Heilbroner had cited an estimate that for every cent by which copper prices drop on the New York market the Chilean treasury lost four million dollars; by that standard, Chile’s potential loss on copper alone was $1,760,000.
Yet perhaps worse than the knowledge of what had happened was the fear of what might happen now. The Times began a queasy lead editorial with the statement that “something resembling an earthquake hit the stock market yesterday,” and then took almost half a column to marshal its forces for the reasonably ringing affirmation “Irrespective of the ups and downs of the stock market, we are and will remain the masters 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 disturbing reports of the market news from abroad, and by 9:45, with the Exchange’s opening still a quarter of an hour away, was asking itself the jittery question “When will the dumping of stocks let up?” Not just yet, it concluded; all the signs seemed to indicate that the selling pressure was “far from satisfied.” Throughout the financial world, ugly rumors were circulating about the imminent failure of various securities firms, increasing the aura of gloom. (“The expectation of an event creates a much deeper impression … than the event itself.”—de la Vega.) The fact that most of these rumors later proved false was no help at the time. Word of the crisis had spread overnight to every town in the land, and the stock market had become the national preoccupation. In brokerage offices, the switchboards were jammed with incoming calls, and the customers’ areas with walk-ins and, in many cases, television crews. As for the Stock Exchange itself, everyone who worked on the floor had got there early, to batten down against the expected storm, and additional hands had been recruited from desk jobs on the upper floors of 11 Wall to help sort out the mountains of orders. The visitors’ gallery was so crowded by opening time that the usual guided tours had to be suspended for the day. One group that squeezed its way onto the gallery that morning was the eighth-grade class of Corpus Christi Parochial School, of West 121st Street; the class’s teacher, Sister Aquin, explained to a reporter that the children had prepared for their visit over the previous two weeks by making hypothetical stockmarket investments with an imaginary ten thousand dollars each. “They lost all their money,” said Sister Aquin.
The Exchange’s opening was followed by the blackest ninety minutes in the memory of many veteran dealers, including some survivors of 1929. In the first few minutes, comparatively few stocks were traded, but this inactivity did not reflect calm deliberation; on the contrary, it reflected selling pressure so great that it momentarily paralyzed action. In the interests of minimizing sudden jumps in stock prices, the Exchange requires that one of its floor officials must personally grant his permission before any stock can change hands at a price differing from that of the previous sale by one point or more for a stock priced under twenty dollars, or by two points or more for a stock priced above twenty dollars. Now sellers were so plentiful and buyers so scarce that hundreds of stocks would have to open at price changes as great as that or greater, and therefore no trading in them was possible until a floor official could be found in the shouting mob. In the case of some of the key issues, like I.B.M., the disparity between sellers and buyers was so wide that trading in them was impossible even with the permission of an official, and there was nothing to do but wait until the prospect of getting a bargain price lured enough buyers into the market. The Dow-Jones broad tape, stuttering out random prices and fragments of information as if it were in a state of shock, reported at 11:30 that “at least seven” Big Board stocks had still not opened; actually, when the dust had cleared it appeared that the true figure had been much larger than that. Meanwhile, the Dow-Jones average lost 11.09 more points in the first hour, Monday’s loss in stock values had been increased by several billion dollars, and the panic was in full cry.
And along with panic came near chaos. Whatever else may be said about Tuesday, May 29th, it will be long remembered as the day when there was something very close to a complete breakdown of the reticulated, automated, mind-boggling complex of technical facilities that made nationwide stock-trading possible in a huge country where nearly one out of six adults was a stockholder. Many orders were executed at prices far different from the ones agreed to by the customers placing the orders; many others were lost in transmission, or in the snow of scrap paper that covered the Exchange floor, and were never executed at all. Sometimes brokerage firms were prevented from executing orders by simple inability to get in touch with their floor men. As the day progressed,
Monday’s heavy-traffic records were not only broken but made to seem paltry; as one index,
Tuesday’s closing-time delay in the Exchange tape was two hours and twenty-three minutes, compared to Monday’s hour and nine minutes. By a heaven-sent stroke of prescience, Merrill Lynch, which handled over thirteen per cent of all public trading on the Exchange, had just installed a new 7074 computer—the device that can copy the Telephone Directory in three minutes—and, with its help, managed to keep its accounts fairly straight. Another new Merrill Lynch installation—an automatic teletype switching system that occupied almost half a city block and was intended to expedite communication between the firm’s various offices—also rose to the occasion, though it got so hot that it could not be touched. Other firms were less fortunate, and in a number of them confusion gained the upper hand so thoroughly that some brokers, tired of trying in vain to get the latest quotations on stocks or to reach their partners on the Exchange floor, are said to have simply thrown up their hands and gone out for a drink. Such unprofessional behavior may have saved their customers a great deal of money.
But the crowning irony of the day was surely supplied by the situation of the tape during the lunch hour. Just before noon, stocks reached their lowest levels—down twenty-three points on the Dow-
Jones average. (At its nadir, the average reached 553.75—a safe distance above the 500 that the experts now claim was their estimate of the absolute bottom.) Then they abruptly began an extraordinarily vigorous recovery. At 12:45, by which time the recovery had become a mad scramble to buy, the tape was fifty-six minutes late; therefore, apart from fleeting intimations supplied by a few “flash” prices, the ticker was engaged in informing the stock-market community of a selling panic at a moment when what was actually in progress was a buying panic.
THE great turnaround late in the morning took place in a manner that would have appealed to de la Vega’s romantic nature—suddenly and rather melodramatically. The key stock involved was American Telephone & Telegraph, which, just as on the previous day, was being universally watched and was unmistakably influencing the whole market. The key man, by the nature of his job, was George M. L. La Branche, Jr., senior partner in La Branche and Wood & Co., the firm that was acting as floor specialist in Telephone. (Floor specialists are broker-dealers who are responsible for maintaining orderly markets in the particular stocks with which they are charged. In the course of meeting their responsibilities, they often have the curious duty of taking risks with their own money against their own better judgment. Various authorities, seeking to reduce the element of human fallibility in the market, have lately been trying to figure out a way to replace the specialists with machines, but so far without success. One big stumbling block seems to be the question: If the mechanical specialists should lose their shirts, who would pay their losses?) La Branche, at sixtyfour, was a short, sharp-featured, dapper, peppery man who was fond of sporting one of the Exchange floor’s comparatively few Phi Beta Kappa keys; he had been a specialist since 1924, and his firm had been the specialist in Telephone since late in 1929. His characteristic habitat—indeed, the spot where he spent some five and a half hours almost every weekday of his life—was immediately in front of Post 15, in the part of the Exchange that is not readily visible from the visitors’ gallery and is commonly called the Garage; there, feet planted firmly apart to fend off any sudden surges of wouldbe buyers or sellers, he customarily stood with pencil poised in a thoughtful way over an unprepossessing loose-leaf ledger, in which he kept a record of all outstanding orders to buy and sell Telephone stock at various price levels. Not surprisingly, the ledger was known as the Telephone book. La Branche had, of course, been at the center of the excitement all day Monday, when Telephone was leading the market downward. As specialist, he had been rolling with the punch like a fighter—or to adopt his own more picturesque metaphor, bobbing like a cork on ocean combers.
“Telephone is kind of like the sea,” La Branche said later. “Generally, it is calm and kindly. Then all of a sudden a great wind comes and whips up a giant wave. The wave sweeps over and deluges everybody; then it sucks back again. You have to give with it. You can’t fight it, any more than King Canute could.” On Tuesday morning, after Monday’s drenching eleven-point drop, the great wave was still rolling; the sheer clerical task of sorting and matching the orders that had come in overnight —not to mention finding a Stock Exchange official and obtaining his permission—took so long that the first trade in Telephone could not be made until almost an hour after the Exchange’s opening.
When Telephone did enter the lists, at one minute before eleven, its price was 98½—down 2⅛ from Monday’s closing. Over the next three-quarters of an hour or so, while the financial world watched it the way a sea captain might watch the barometer in a hurricane, Telephone fluctuated between 99, which it reached on momentary minor rallies, and 98⅛, which proved to be its bottom. It touched the lower figure on three separate occasions, with rallies between—a fact that La Branche has spoken of as if it had a magical or mystical significance. And perhaps it had; at any rate, after the third 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 98¾; a few minutes later, at 99; at 11:50, at 99⅜; and finally, at 11:55, it sold at 100.
Many commentators have expressed the opinion that that first sale of Telephone at 100 marked the exact point at which the whole market changed direction. Since Telephone is among the stocks on which the ticker gives flashes during periods of tape delay, the financial community learned of the transaction almost immediately, and at a time when everything else it was hearing was very bad news indeed; the theory goes that the hard fact of Telephone’s recovery of almost two points worked together with a purely fortuitous circumstance—the psychological impact of the good, round number 100—to tip the scales. La Branche, while agreeing that the rise of Telephone did a lot to bring about the general upturn, differs as to precisely which transaction was the crucial one. To him, the first sale at 100 was insufficient proof of lasting recovery, because it involved only a small number of shares (a hundred, as far as he remembers). He knew that in his book he had orders to sell almost twenty thousand shares of Telephone at 100. If the demand for shares at that price were to run out before this two-million-dollar supply was exhausted, then the price of Telephone would drop again, possibly going as low as 98⅛ for a fourth time. And a man like La Branche, given to thinking in nautical terms, may have associated a certain finality with the notion of going down for a fourth time.
It did not happen. Several small transactions at 100 were made in rapid succession, followed by several more, involving larger volume. Altogether, about half the supply of the stock at that price was gone when John J. Cranley, floor partner of Dreyfus & Co., moved unobtrusively into the crowd at Post 15 and bid 100 for ten thousand shares of Telephone—just enough to clear out the supply and thus pave the way for a further rise. Cranley did not say whether he was bidding on behalf of his firm, one of its customers, or the Dreyfus Fund, a mutual fund that Dreyfus & Co. managed through one of its subsidiaries; the size of the order suggests that the principal was the Dreyfus Fund. In any case, La Branche needed only to say “Sold,” and as soon as the two men had made notations of it, the transaction was completed. Where-upon Telephone could no longer be bought for 100.
There is historical precedent (though not from de la Vega’s day) for the single large Stock Exchange transaction that turns the market, or is intended to turn it. At half past one on October 24,
1929—the dreadful day that has gone down in financial history as Black Thursday—Richard Whitney, then acting president of the Exchange and probably the best-known figure on its floor, strode conspicuously (some say “jauntily”) up to the post where U.S. Steel was traded, and bid 205, the price of the last sale, for ten thousand shares. But there are two crucial differences between the 1929 trade and the 1962 one. In the first place, Whitney’s stagy bid was a calculated effort to create an effect, while Cranley’s, delivered without fanfare, was apparently just a move to get a bargain for the Dreyfus Fund. Secondly, only an evanescent rally followed the 1929 deal—the next week’s losses made Black Thursday look no worse than gray—while a genuinely solid recovery followed the one in 1962. The moral may be that psychological gestures on the Exchange are most effective when they are neither intended nor really needed. At all events, a general rally began almost immediately. Having broken through the 100 barrier, Telephone leaped wildly upward: at 12:18, it was traded at 101¼; at 12:41, at 103½; and at 1:05, at 106¼. General Motors went from 45½ at 11:46 to 50 at 1:38.
Standard Oil of New Jersey went from 46¾ at 11:46 to 51 at 1:28. U.S. Steel went from 49½ at 11:40 to 52⅜ at 1:28. I.B.M. was, in its way, the most dramatic case of the lot. All morning, its stock had been kept out of trading by an overwhelming preponderance of selling orders, and the guesses as to its ultimate opening price varied from a loss of ten points to a loss of twenty or thirty; now such an avalanche of buying orders appeared that when it was at last technically possible for the stock to be traded, just before two o’clock, it opened up four points, on a huge block of thirty thousand shares. At 12:28, less than half an hour after the big Telephone trade, the Dow-Jones news service was sure enough of what was happening to state flatly, “The market has turned strong.”
And so it had, but the speed of the turnaround produced more irony. When the broad tape has occasion to transmit an extended news item, such as a report on a prominent man’s speech, it customarily breaks the item up into a series of short sections, which can then be transmitted at intervals, leaving time in the interstices for such spot news as the latest prices from the Exchange floor. This was what it did during the early afternoon of May 29th with a speech delivered to the National Press Club by H. Ladd Plumley, president of the United States Chamber of Commerce, which began to be reported on the Dow-Jones tape at 12:25, or at almost exactly the same time that the same news source declared the market to have turned strong. As the speech came out in sections on the broad tape, it created an odd effect indeed. The tape started off by saying that Plumley had called for “a thoughtful appreciation of the present lack of business confidence.” At this point, there was an interruption for a few minutes’ worth of stock prices, all of them sharply higher. Then the tape returned to Plumley, who was now warming to his task and blaming the stock-market plunge on “the coincidental impact of two confidence-upsetting factors—a dimming of profit expectations and President Kennedy’s quashing of the steel price increase.” Then came a longer interruption, chockfull of reassuring facts and figures. At its conclusion, Plumley was back on the tape, hammering away at his theme, which had now taken on overtones of “I told you so.” “We have had an awesome demonstration that the ‘right business climate’ cannot be brushed off as a Madison Avenue cliché but is a reality much to be desired,” the broad tape quoted him as saying. So it went through the early afternoon; it must have been a heady time for the Dow-Jones subscribers, who could alternately nibble at the caviar of higher stock prices and sip the champagne of Plumley’s jabs at the Kennedy administration.
IT was during the last hour and a half on Tuesday that the pace of trading on the Exchange reached its most frantic. The official count of trades recorded after three o’clock (that is, in the last half hour) came to just over seven million shares—in normal times as they were reckoned in 1962, an unheardof figure even for a whole day’s trading. When the closing bell sounded, a cheer again arose from the floor—this one a good deal more full-throated than Monday’s, because the day’s gain of 27.03 points in the Dow-Jones average meant that almost three-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-warming figures weren’t available until hours after the close, but experienced securities men are vouchsafed visceral intuitions of surprising statistical accuracy; some of them claim that at Tuesday’s closing they could feel in their guts a Dow-Jones gain of over twenty-five points, and there is no reason to dispute their claim.) The mood was cheerful, then, but the hours were long. Because of the greater trading volume, tickers ticked and lights burned even farther into the night than they had on Monday; the Exchange tape did not print the day’s last transaction until 8:15—four and three-quarters hours after it had actually occurred. Nor did the next day, Memorial Day, turn out to be a day off for the securities business. Wise old Wall Streeters had expressed the opinion that the holiday, falling by happy chance in the middle of the crisis and thus providing an opportunity for the cooling of overheated emotions, may have been the biggest factor in preventing the crisis from becoming a disaster. What it indubitably did provide was a chance for the Stock Exchange and its member organizations—all of whom had been directed to remain at their battle stations over the holiday—to begin picking up the pieces.
The insidious effects of a late tape had to be explained to thousands of naïve customers who thought they had bought U.S. Steel at, say, 50, only to find later that they had paid 54 or 55. The complaints of thousands of other customers could not be so easily answered. One brokerage house discovered that two orders it had sent to the floor at precisely the same time—one to buy Telephone at the prevailing price, the other to sell the same quantity at the prevailing price—had resulted in the seller’s getting 102 per share for his stock and the buyer’s paying 108 for his. Badly shaken by a situation that seemed to cast doubt on the validity of the law of supply and demand, the brokerage house made inquiries and found that the buying order had got temporarily lost in the crush and had failed to reach Post 15 until the price had gone up six points. Since the mistake had not been the customer’s, the brokerage firm paid him the difference. As for the Stock Exchange itself, it had a variety of problems to deal with on Wednesday, among them that of keeping happy a team of television men from the Canadian Broadcasting Corporation who, having forgotten all about the United States custom of observing a holiday on May 30th, had flown down from Montreal to take pictures of Wednesday’s action on the Exchange. At the same time, Exchange officials were necessarily pondering the problem of Monday’s and Tuesday’s scandalously laggard ticker, which everyone agreed had been at the very heart of—if not, indeed, the cause of—the most nearly catastrophic technical snarl in history. The Exchange’s defense of itself, later set down in detail, amounts, in effect, to a complaint that the crisis came two years too soon. “It would be inaccurate to suggest that all investors were served with normal speed and efficiency by existing facilities,” the Exchange conceded, with characteristic conservatism, and went on to say that a ticker with almost twice the speed of the present one was expected to be ready for installation in 1964. (In fact, the new ticker and various other automation devices, duly installed more or less on time, proved to be so heroically effective that the fantastic trading pace of April, 1968 was handled with only negligible tape delays.) The fact that the 1962 hurricane hit while the shelter was under construction was characterized by the Exchange as “perhaps ironic.”
There was still plenty of cause for concern on Thursday morning. After a period of panic selling, the market has a habit 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, and immediately before the start of the truly disastrous slide that was to continue for years and precipitate the great depression—the Dow-Jones gain had been 28.40, representing a rebound ominously comparable to this one. In other words, the market still suffers at times from what de la Vega clinically called “antiperistasis”—the tendency to reverse itself, then reverse the reversal, and so on. A follower of the antiperistasis system of security analysis might have concluded that the market was now poised for another dive. As things turned out, of course, it wasn’t. Thursday was a day of steady, orderly rises in stock prices. Minutes after the ten-o’clock opening, the broad tape spread the news that brokers everywhere were being deluged with buying orders, many of them coming from South America, Asia, and the Western European countries that are normally active in the New York stock market. “Orders still pouring in from all directions,” the broad tape announced exultantly just before eleven. Lost money was magically reappearing, and more was on the way.
Shortly before two o’clock, the Dow-Jones tape, having proceeded from euphoria to insouciance, took time off from market reports to include a note on plans for a boxing match between Floyd Patterson and Sonny Liston. Markets in Europe, reacting to New York on the upturn just as they had on the downturn, had risen sharply. New York copper futures had recovered over eighty per cent of their Monday and Tuesday-morning losses, so Chile’s treasury was mostly bailed out. As for the Dow-Jones industrial average at closing, it figured out to 613.36, meaning that the week’s losses had been wiped out in toto, with a little bit to spare. The crisis was over. In Morgan’s terms, the market had fluctuated; in de la Vega’s terms, antiperistasis had been demonstrated.
ALL that summer, and even into the following year, security analysts and other experts cranked out their explanations of what had happened, and so great were the logic, solemnity, and detail of these diagnoses that they lost only a little of their force through the fact that hardly any of the authors had had the slightest idea what was going to happen before the crisis occurred. Probably the most scholarly and detailed report on who did the selling that caused the crisis was furnished by the New York Stock Exchange itself, which began sending elaborate questionnaires to its individual and corporate members immediately after the commotion was over. The Exchange calculated that during the three days of the crisis rural areas of the country were more active in the market than they customarily are; that women investors had sold two and a half times as much stock as men investors; that foreign investors were far more active than usual, accounting for 5.5 per cent of the total volume, and, on balance, were substantial sellers; and, most striking of all, that what the Exchange calls “public individuals”—individual investors, as opposed to institutional ones, which is to say people who would be described anywhere but on Wall Street as private individuals—played an astonishingly large role in the whole affair, accounting for an unprecedented 56.8 per cent of the total volume. Breaking down the public individuals into income categories, the Exchange calculated that those with family incomes of over twenty-five thousand dollars a year were the heaviest and most insistent sellers, while those with incomes under ten thousand dollars, after selling on Monday and early on Tuesday, bought so many shares on Thursday that they actually became net buyers over the three-day period. Furthermore, according to the Exchange’s calculations, about a million shares—or 3.5 per cent of the total volume during the three days—were sold as a result of margin calls. In sum, if there was a villain, it appeared to have been the relatively rich investor not connected with the securities business—and, more often than might have been expected, the female, rural, or foreign one, in many cases playing the market partly on borrowed money.
The role of the hero was filled, surprisingly, by the most frightening of untested forces in the market —the mutual funds. The Exchange’s statistics showed that on Monday, when prices were plunging, the funds bought 530,000 more shares than they sold, while on Thursday, when investors in general were stumbling over each other trying to buy stock, the funds, on balance, sold 375,000 shares; in other words, far from increasing the market’s fluctuation, the funds actually served as a stabilizing force. Exactly how this unexpectedly benign effect came about remains a matter of debate. Since no one has been heard to suggest that the funds acted out of sheer public-spiritedness during the crisis, it seems safe to assume that they were buying on Monday because their managers had spotted bargains, and were selling on Thursday because of chances to cash in on profits. As for the problem of redemptions, there were, as had been feared, a large number of mutual-fund shareholders who demanded millions of dollars of their money in cash when the market crashed, but apparently the mutual funds had so much cash on hand that in most cases they could pay off their shareholders without selling substantial amounts of stock. Taken as a group, the funds proved to be so rich and so conservatively managed that they not only could weather the storm but, by happy inadvertence, could do something to decrease its violence. Whether the same conditions would exist in some future storm was and is another matter.
In the last analysis, the cause of the 1962 crisis remains unfathomable; what is known is that it occurred, and that something like it could occur again. As one of Wall Street’s aged, ever-anonymous seers put it recently, “I was concerned, but at no time did I think it would be another 1929. I never said the Dow-Jones would go down to four hundred. I said five hundred. The point is that now, in contrast to 1929, the government, Republican or Democratic, realizes that it must be attentive to the needs of business. There will never be apple-sellers on Wall Street again. As to whether what happened that May can happen again—of course it can. I think that people may be more careful for a year or two, and then we may see another speculative buildup followed by another crash, and so on until God makes people less greedy.”
Or, as de la Vega said, “It is foolish to think that you can withdraw from the Exchange after you have tasted the sweetness of the honey.”