Friedman - Fortune tellers: the story of Americas first economic forecasters

FORTUNE TELLERS

FORTUNE TELLERS

THE STORY OF AMERICAS FIRST ECONOMIC FORECASTERS

Walter A. Friedman

PRINCETON UNIVERSITY PRESS
PRINCETON AND OXFORD

Copyright 2014 by Princeton University Press

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Jacket art: (From left) Roger Babson, Irving Fisher, John Moody, Charles J. Bullock, and Warren Persons. James H. Brookmires Barometer (below, right) and Cycle Chart of Business and Banking (bottom). Courtesy of Babson College Archives, Yale University Manuscripts & Archives, American Magazine (September 1922), Harvard University Archives, Brookmire Economic Chart Co., 1913.

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Library of Congress Cataloging-in-Publication Data

Friedman, Walter A., 1962

Fortune tellers : the story of Americas first economic forecasters / Walter A. Friedman.

pages cm

Summary: The period leading up to the Great Depression witnessed the rise of the economic forecasters, pioneers who sought to use the tools of science to predict the future, with the aim of profiting from their forecasts. This book chronicles the lives and careers of the men who defined this first wave of economic fortune tellers, men such as Roger Babson, Irving Fisher, John Moody, C. J. Bullock, and Warren Persons. They competed to sell their distinctive methods of prediction to investors and businesses, and thrived in the boom years that followed World War I. Yet, almost to a man, they failed to predict the devastating crash of 1929. Walter Friedman paints vivid portraits of entrepreneurs who shared a belief that the rational world of numbers and reason could tameor at least foreseethe irrational gyrations of the market. Despite their failures, this first generation of economic forecasters helped to make the prediction of economic trends a central economic activity, and shed light on the mechanics of financial markets by providing a range of statistics and information about individual firms. They also raised questions that are still relevant today. What is science and what is merely guesswork in forecasting? What motivates people to buy forecasts? Does the act of forecasting set in motion unforeseen events that can counteract the forecast made? Masterful and compelling, Fortune Tellers highlights the risk and uncertainty that are inherent to capitalism itself Provided by publisher. Includes bibliographical references and index.

ISBN 978-0-691-15911-9 (hardback)

1. Economic forecastingUnited StatesHistory. 2. Business forecastingUnited StatesHistory. 3. EconomistsUnited StatesBiography. I. Title.

HC102.5.A2F76 2014

330.082'273dc23 2013031457

British Library Cataloging-in-Publication Data is available

This book has been composed in Garamond Premier Pro

Printed on acid-free paper.

Printed in the United States of America

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For you, Susan Burgin

PREFACE

T his book is about early attempts to develop ways to predict the economic future and to sell those predictions to managers, brokers, and individual investors. The modern forecasting field, which emerged in the early twentieth century, had many points of origin in the previous century: in the credit rating agencies, in the financial press, and in the blossoming fields of scienceincluding meteorology, thermodynamics, and physics. The possibilities of scientific discovery and invention generated unbounded optimism among Victorian-era Americans. Scientific discoveries of all sorts, from the invention of the internal combustion engine to the insights of Darwin and Freud, seemed to promise a new and illuminating age just out of reach.

But forecasting also had deeper roots in the inherent wish of human beings to find certainty in life by knowing the future: What will I be when I grow up? Where will I live? What kind of work will I do? Will it be fulfilling? Will I marry? What will happen to my parents and other family members? To my country, to my job? To the economy in which I live? Forecasting addresses not just business issues but the deep-seated human wish to divine the future. It is the story of the near universal compulsion to avoid ambiguity and doubt and the refusal of the realities of life to satisfy that impulse.

Economic forecasting arose when it did because while the effort to introduce rationalityin the form of the scientific methodwas emerging, the insatiable human longing for predictability persisted in the industrializing economy. Indeed, the early twentieth century saw a curious enlistment of science in a range of efforts to temper the uncertainty of the future. Reform movements, including good, bad, and ugly ones (like labor laws, Prohibition, and eugenics), envisioned a future improved through the application of science. So, too, forecasting attracted a spectrum of visionaries. Here were seers, such as the popular prophet Roger Babson, Wall Street entrepreneurs, like John Moody, and genuine academic scientists, such as Irving Fisher of Yale and Charles Jesse Bullock and Warren Persons of Harvard.

Customers of the new forecasting services often took these statistics-based predictions on faith. They wanted forecasts, John Moody noted, not discourses on the methods that produced them. Readers did not seek out detailed information on the accuracy of economic predictions, as long as forecasters proved to be right at least a portion of the time. The desire for any information that would illuminate the future was overwhelming, and subscribers to forecasting newsletters were willing to suspend reasoned judgment to gain comfort. This blend of rationality and anxiety, measurement and intuition, optimism and fear is the broad frame of the story and, not incidentally, why forecasters who were repeatedly proved mistaken, as all ultimately must be given enough time, still commanded attention and fee-paying clients.

The importance of prediction in society is revealed by the many words used to describe it: to divine, augur, foretell, and prophesize are but a few. To prognosticate is to predict from signs or symptoms, including in medicine. Scrying, a fantastic but largely forgotten word, means trying to tell the future from gazing at a crystal ball or mirror.

To forecast is often differentiated from these, for it generally means to anticipate or predict a future condition or event through the analysis of data or through rational study.

Forecast began to be commonly used for economic prediction in the early twentieth century. Today, modern economies are saturated with the wordin discussions of the stock market, gross domestic product, interest rates, housing prices, and innumerable other subjects. Within the term itself is the combination of scientific aspiration and an indication of older traditions. Both parts of the word, fore and cast, carry significance. Fore- means simply in front or beforehand or in advance. But the second part of the word is more interesting. To cast, usually meaning to throw, is an important word, with a remarkable sixty-nine definitions in the Oxford English Dictionary