David W. Tice & Assoc., Inc.

The Economic Consequences of Bubbles - Marc Faber
Marc Faber, Ltd.


From: Irving Fisher, Booms and Depressions, New York 1932

"Meanwhile, there was a new trend in corporate finance. From 1921-29, as the boom developed, the new corporate issues took more and more the form of stocks instead of bonds. This policy of reducing the proportion of bonds had one good effect. It left the corporations less encumbered with debt; so that, despite the depression, many corporations kept in a strong position throughout the whole of the depression. This advantage, however, was more than offset by shifting the debt burden from the corporation to the stockholders. That is, in order to buy the stock, many persons borrowed, so that, instead of being indebted collectively in the form of a corporation, they became indebted individually.. This preference for investing in equities instead of bonds was fostered by a number of statistical studies, published in books and articles, which showed that almost always in the past, bonds had produced less income for the investor that had been (or could have been) produced by a diversified assortment of common stocks… The new trend was further intensified by the formation of investment trusts whose express business was to invest the money of the clients in diversified stocks. These trusts began to spring up like mushrooms, and presently became a mania. Many of them operated on borrowed capital, leaving precarious equities…Meanwhile, the investing and speculating Americans were by no means content with the home market. Foreign countries, European and south American, in the throes of reconstruction and elated like ourselves, were soliciting capital; and Americans furnished much of it – to governments, to municipalities and to private corporations. Already, in the sixty years preceding 1931, according to a member of the British Parliament, British investors had lost 10 billion dollars by such loans. Yet, after the World War, American investors with inadequate experience, marched into this field and took the lead…In this way, America promoted and aggravated abroad the same unhealthy boom which was putting both our neighbors and ourselves in position for a slump… In seeking new issues to feed to a ravenous public, disregard for the debtor’s ability to pay, for the possibility of effecting payment by willing and able foreign debtors, and for the existing interest of security holders in concerns to be reorganized or consolidated, mark a high portion of the financing during the period. The governing consideration seems to have been ‘can the issue be sold at a handsome profit?"