Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-01-26
STOCK EXCHANGE PANIC LAID
TO HIGH PRICES BY SIMMONS
President of New York Market Agency
Says Stock Dividends and Other Causes
Brought on Decline.
Special Dispatch to The Star

Special Dispatch to The Star
PHILADELPHIA, January .25.-The
primary cause of the October November
panic on the New York Stock Exchange
was undoubtedly the high level of prices
which so many leading American share
issues had attained, said e. H. H. Sim
mons, president Of the exchange, in
speech here tonight before the Trans
portation Club of the Pennsylvania
Railroad.
las q result" said Mr.. Simmons, in
part, various forces making for declin-
ing security values encountered In the
prices rendered it very vulnerable. This
situation is clearer now than it was
only few months ago. In all fairness,
however, it must be said that the price
levels OF the share market are almost
always peculiarly difficult to Judge be-
cause Of the inadequacy of existing
methods for measuring them. Almost
every one interested in the subject is
bound TO use stock indexes or stock av-
erages, and to depend upon them. Yet
q close examination of such price aver
ages shows how unrepresentative they
often are, and in what an offhand man
ner they are frequently composed. /
feel that our statiSticians can do us all
q great service IL they will concentrate
their attention on the production and
critical Interpretation Of better stock
price indexes.
Stock Dividends.
''In this connection I would like to
draw your attention to certain practices
the true effect of which have been mis-
understood by the vast majority of in
veStorS and which contributed in no
small degree to the high level of Secu-
rity prices existing last Summer. The
payment of periodic stock dividends in
stead of cash dividends is a recent de-
velopment Of American finance. While
this practice is essentially sound II the
corporation paying the dividend makes
proper charge to its earnings for the
stock issued as dividend, 1t has. never.
theless, misled many persons who have
considered the market value of the stock
received as the equivalent Of cash div
tdend. In rising market each sue
ceSSive dividend seems to be larger than
the last and security paying such div
idends Is therefore deemed to be more
valuable even II the fundamental fac
tors which ultimately determine real
value remain unchanged. Conversely, in
a declining market, each dividend Is
security is reduced proportionately. The
violent fluctuations of the securities
that were paying periodic stock divi-
bends instead Of cash dividends is elo-
Quent proof that the public miSunder.
stood the true effect of this practice.
Another contributing cause was the
practice Of gauging the value Of securi-
ties by multiplying their most recently
reported net earnings per share by some
factor which was deemed to be APP
plicable TO the industry in which the
company was engaged. This method of
valuation, while perfectly proper, leads
to imitation in periods of great indus
trial activity. 1t is also apt to be mis-
leading II the earnings statements of
our leading companies are not SUM-
GENTLY detailed so as to allow security
owners TO determine whether the COM
pany Is reporting all Of its net earnings
or is concealing part of them by charg-
ing on unusual amounts for deprecia-
ton or otherwise secretly blowing back
large sums into their properties.
Market Was Vulnerable.
ut is obvious, however that the high
level OF share prices last August rem
dered the stock market vulnerable to
q considerable price decline. This de-
cline commenced in an orderly manner
as soon as 1t became evident that there
had been industrial overproduction, par
ticularly In automobiles and steel. This
overproduction, which Is clearly shown
by the indices compiled by both the
Federal Reserve Board and the Stand
ard Statistics, inevitably led to the
slowing up Of industrial operations and
a decline In corporate earnings. The
high level Of prices was in large part
due to the amazing and steady rise In
production OF American industry. When
1t became evident that this process had
reached its peak and had started to
decline, doubt and hesitation as TO the
real value of securities was the natural
consequence. 1t seems strange now that
the public failed last Spring and Sum-
mer TO be more skeptical about the
ability Of American industry to main
tain Its tremendous current rate Of pro-
auction throughout the Winter. But
no one can ever actually tell just wAen
production Is being overdone, especially
IN an ever-growing country possessed Of
such great natural resources as the
United States. But the situation arising
out OF the high level of our security
prices and the change in the rate of our
industrial production did not make a
panic inevitable. An orderly and gradual
decline OF prices such as took place dur.
ing most Of September and the early
part Of October would have brought
about the necessary readjuStment II
we are to look for the actual causes of
the panic we must consider the other
factors which combined to produce
public hysteria and brought about the
huge volume of liquidation with result
Ing conditions Of panic.
Every serious break In the stock
market is always attributed to over
speculation, but il We are to ascertain
Its exact responsibility for the 1929
stock panic we must consider the actual
facts. Many people seem to have the
notion that the volume of trading on
the exchange Is In itself a sign of I'M
sound and harmful speculative condi-
tons and a necessary precursor to stock
pan1cS. This view is, however. not nj
all supported by the facts. When one
studies the volume Of share trading on
the Stock Exchange during recent years.
It becomes at once apparent that the
peak OF activity occurred not before
the crisis of October, 1929, but in Mo-
veniber. 1928. This is all the more
striking because OF the fact that dur
ing 1929 there were added to the list
over $50, 600 additional shares of
stock. Naturally. the only accurate way
to measure Stock Exchange activity Is
to consider the proportion of listed
shares turned over. Figures in this re-
gard show that through the first half Of
1929 share dealings on the New York
Stock Exchange were declining both
actually and in proportion to share Iist-'
ings. If mere volume of dealings or
proportionate velocity of dealings on the
exchange we're cause of the panic, we
should have had panic not last Fail,
but o year ago.
Lack Of Equilibrium.
Actually, It Is not so much the vol
Tune Of dealings In shares which indi-
Gates q dangerous stock market sit1a.
ton as the quality and equilibrium Of
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