Abstract
Traflet’s project chronicles the efforts made to erase the long shadow cast over Wall Street by the 1929 stock market crash. She has painstakingly trawled through academic and popular journals as well as having scoured numerous archives in search of the inside story of how the New York Stock Exchange (NYSE) strove to rebuild investor confidence. The extent of this work is charted in the lengthy reference section and the author’s own essay on her methodology – together these make up a quarter of the entire book.
A useful opening chapter sets the scene by giving a broad overview of the lead-up to and the aftermath of the crash of 1929. Without its causes being fully understood at the time, scapegoats were eagerly sought by those wishing to direct attention away from their own role in the crisis. Who better to blame than the untutored ‘little man’, the small shareholder who recklessly put his money into financial instruments of which he had little understanding? The herd mentality of the investing masses offered a plausible explanation for the panic that led to share prices plummeting. Leading economists, such as Irving Fisher, who had manifestly failed to spot that the roaring twenties could not end well, found this a very convenient cover story. But this was no new phenomenon. Traflet reflects on LeBon’s treatise in The Crowd: A Study of the Popular Mind published in 1895, but she could have gone back another 50 years to Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, for the tulip mania of the seventeenth century was not so different from the unbridled desire to hold scraps of paper (company shares) which the twentieth century witnessed more than once.
Traflet examines the reforms brought in through the 1930s, although for an accounting audience there is too little detail of the legislation brought in to set up the Securities and Exchange Commission. The need for proper disclosure in financial statements and the role of auditors to enhance the quality of information receive hardly any attention. In contrast, the PR disasters suffered by the NYSE are covered in detail, perhaps since these are likely to have more appeal to the general audience. For instance, readers are reminded of a scandal in 1938 when the former President of the NYSE was found to have pillaged the NYSE’s pension fund. Also useful is the reminder that the market did not hit bottom in 1929; the price of shares on the NYSE fell further during the 1930s and in 1942 hit the lowest point since 1914.
The focal point of Traflet’s work is the Own Your Share (OYS) campaign, begun in 1953 in an attempt to expand the investments of ordinary investors. The charismatic President of the NYSE, Keith Funston, was the architect of the OYS scheme and it was he who wanted to see America become a nation of small shareholders. But the need to tread carefully was acknowledged and clear caveats appeared on any promotions extolling the virtues of investing in stocks and shares.
A year earlier, the influential Brookings Report had revealed how relatively limited was the spread of ordinary shareholding. Only 6.5 million Americans owned shares and most of those held shares in fewer than four companies. More ordinary Americans had to be persuaded of the benefits of owning shares. Not only would this be good for the financial markets, in the fervently anti-communist atmosphere of the time it was seen as the patriotic thing to do. The NYSE was a bastion against communism. Traflet records how various measures were introduced to help persuade ordinary people of the advantages in holding stocks and shares: gradually attitudes towards advertising were relaxed, Merrill Lynch were the first to abolish commissions and to pay their sales force straight salaries; Monthly Investment Plans (MIPs) were introduced to enable regular savings to be channelled into equities; these became even more effective when administered through a company’s payroll system.
Perhaps for an academic readership, especially noteworthy is the effort made to increase the financial education of the general population reflected in the appointment at the NYSE of a Director of Education in 1955. Seminars, pamphlets and books were produced in an effort to make the US more of a shareholding democracy. These measures may account for the growth in investment clubs which began to spring up. Further momentum was added to the trend when legislation was passed which allowed children to hold shares, and over the years various tax allowances were introduced to enable parents to gift investments to their children. The possibility that this route would help to fund a child’s university education provided an added appeal. What perhaps is missing in Traflet’s analysis is some indication of how much lobbying or pressure was being applied at State and Congressional level to get the various pieces of new legislation introduced.
The effectiveness of the various measures may be seen in the doubling of the proportion of the population holding shares from 1952 to 1962, but still it was less than 10 per cent of the population. Interestingly, the number of women holding shares was about the same as men at both points in time.
The title of Traflet’s work may evoke for British readers Napoleon’s dismissive description of England as a nation of shopkeepers, thereby suggesting that it would prove to be an ineffectual military foe. In fact, when it came to Cold War America, there was much propaganda value in the US being seen as a nation of small shareholders. If large numbers of ordinary people could be persuaded to invest in stocks and shares, this would counter the Soviet allegation that American capitalism served only the interests of the wealthy minority.
Traflet concludes that the OYS campaign did indeed help to remove the fear of investing in the stock market which had persisted since 1929. However, the campaign’s success brought about its own end in the late 1960s by which time the very large number of small trades in shares eventually flooded the offices of many of the NYSE’s members, especially those which had not invested in the technology to handle high trading volumes. The MIP which had piggy-backed on the success of the OYS lasted a little longer, finally being abolished in 1976.
Since then patterns of share ownership have continued to fluctuate, depending on prevailing sentiment and conditions, with the bull market of the 1980s attracting more investors and the crash of 2001 producing a loss of faith in investing. Oddly, there is no mention whatsoever of Enron and other debacles which must have done so much to harm the credibility of Wall Street at the start of the current century. What might have painted a clearer picture is the provision of detailed statistics of shareholdings over the twentieth century. Some figures are given but not enough to allow the reader to see the complete picture.
This is a well written and well researched piece of work. Whether it has much appeal to audiences outside the US is a different matter altogether.