By 1933 the economic situation in the U.S. was dire. So dire, in fact, that the U.S. Senate was forced to do the unthinkable…it held a hearing.
And so began the Investigation of Economic Problems in the hopes of “securing constructive suggestions with respect to the solution of such problems.” People like Irving Fisher, Ben Graham, and others offered up letters, statements, and testimony on how to solve the issue of the Great Depression.
Bernard Baruch was first on the docket. His 67 pages of testimony would cover the gamut — inflation, war, tariffs, taxes, the gold standard, productivity, debt, the federal budget, and widespread fear and doubt in asset prices — including arguing with a senator adamant that extreme devaluation of the dollar was the answer to everything.
But it was one section of his opening statement, titled “The Great Delusion,” that stood out:
The world seems to be subject to curious brainstorms — the crusades, the Mississippi scheme, and the south sea bubble, are examples. Let me quote from Mackay’s Popular Delusions, referring to what he calls the Tulipmania of the seventeenth century:
Everyone imagined that the passion for tulips would last forever. • • • The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favored clime of Holland. People of all grades converted their property into cash and invested it in flowers. Foreigners became smitten with the same frenzy and money poured into Holland from all directions. • • • Holland seemed the very antechamber of Plutus.
You will recognize some of these expressions. It seems incredible that so solid a nation as the Dutch should nearly ruin itself on such a thought, but is it any more credible than that we would go into debt to pay thirty times earning power, and even more, for common stocks of the “New Economic Era” on the theory that we also were going to “banish” poverty by selling billions in manufactures to an almost bankrupt world by the expedient of continually lending our customers more money?
We built up a tinsel tower of paper prosperity out of debts and speculative hopes and such other things as dreams are made of. It lies in ruins, but the debts remain. What shall we do? Are we to try to put, or keep, substance in things which had no substance in the beginning, or shall we clear away the wreck? I think our duty is clear, and that in taking it we must remember that delusions swing between extremes, like pendulums. Delusions of grandeur and unending wealth give place to delusions of unending gloom. One is as unreal as the other.
Baruch was convinced the U.S. suffered from a confidence problem. Too much of it drove the glory days of the late 1920s. None existed in 1933.
The delusions fueling the Roaring 20s were widespread: no more panics, the market cycle had ended, and science and innovation would cure everything. It was a golden age for the economy with no end in sight.
And when the market crashed on Oct. 1929, the delusion was still in full force. For the next two years, “The worst is over!” was repeated by some of the biggest names in government and Wall Street.
But gradually that delusion was replaced by another.
Like we’ve seen so many times before 1929 and since, extreme optimism is always followed by pessimism. Both are highly efficient at feeding on itself and driving what people and businesses do with money.
Investigation of Economic Problems: Hearings Before the Committee on Finance U.S. Senate 1933