Confidence as a Barometer for the Economy
Just as we can measure air pressure, we should be able to measure confidence. In
addition, unlike air pressure, confidence might be subject to influence, in which
case good patriots are morally obligated to support public confidence. Indeed,
Calvin Coolidge, the president of the United States from 1923 to 1929, took it
upon himself to boost public belief in the economy and in the stock market.
There was great controversy over Coolidge’s reassurances, sometimes called
the “Coolidge-Mellon bull tips.” In a 1928 Atlantic article, Ralph Robey
identified a pattern: practically every time the stock market declined
significantly or the public decried speculators’ high level of borrowing to
purchase stocks, either President Calvin Coolidge or Treasury Secretary Andrew
Mellon made a very optimistic statement about the market or denied any
problem with overspeculation.11 Robey doubted that there was any rational basis
for Coolidge’s and Mellon’s optimism, which he interpreted as an effort to
maintain public confidence in the stock market.
The Coolidge-Mellon bull tips may have been part of the administration’s
attempts to mollify the influentials who feared any disturbance of investor
confidence. A 1928 article in the Wall Street Journal observed:
Chief executive of one of our leading industrial corporations was discussing
the market with some friends not long ago. “I am bullish on our own stock for
the immediate pull,” he remarked, “and I would like to take on a line of the
stock. I do not speculate, so of course the stock would be put in my name.
The trouble is selling it. I have all I want to carry for the future but if I sold
any stock the employes would soon hear of it and they are in most instances
shareholders and it might not only disturb them but actually give them a hint
to get out of their investment holdings. Hence I leave what I know to be a
good quick thing alone.”12
The market crashed in October 1929. Eight months earlier, in February 1929,
the Federal Reserve Board had warned that the Federal Reserve would not
support banks that loaned into a rising market. It qualified its statement by
noting that it “neither assumes the right nor any disposition” to pass judgment on
“the merits of a speculation,” but the investing public read between the lines and
reacted intensely and immediately.13 The Washington Post reported on a “hectic

battle between the Federal Reserve and Wall Street,” with Wall Street largely of
the opinion that the Federal Reserve should mind its own business.14 On August
9, 1929, just two and a half months before the crash, the Federal Reserve Bank
of New York raised its rediscount rate (the rate at which it lends to banks). Never
before in the nation’s history had there been a government authority with a
mission that could be interpreted as stabilizing the stock market. The narrative of
the “battle” between Wall Street and the Fed probably added to the contagion of
stories that attached great importance to the stock market crash of 1929 in the
following months. It also led to a widespread impression that people in the know
were sensing overspeculation.
After the crash, disillusionment with prognostications by public officials,
businesspeople, and journalists intensified. In 1930, one observer said,
“Unfortunately, there appears to be a strong tendency among writers on business
subjects to put out nothing but optimistic statements and to avoid all discussion
that might be construed as pessimism.”15 In 1931, Alexander Dana Noyes, the
financial editor of the New York Times, noted, “Men of affairs, when they affix
their names to New Year Day prophecies, will seek for a hopeful side and so
exclude any disagreeable offsets.”16
At the same time, no one wanted to be accused of shouting fire in a crowded
theater, worsening the public’s fears and possibly causing a stampede out of the
markets. The original narrative of a fire in a crowded theater goes back to about
a half century before the crash, to 1884, as reported in the New York Times:
The curtain rose in a crowded house at the performance of “Storm Beaten” in
the Mount Morris Theatre, in Harlem, on Tuesday night. The fire scene was
being enacted, when the cry of “Fire!” three times repeated rang through the
building. Many blanched faces were visible in the audience but the
continuance of the play gave reassurance and a panic, which was imminent,
was averted.… A youth named Francis McCarron, residing at No. 2,446
Fourth-avenue, was pointed out by Louis Eisler as having caused the alarm,
and the Roundsman and Policeman Edmiston took him into custody.…
Justice Welde sent him to the Island for one month.17
The “fire in a crowded theater” narrative did not seem to catch on right away,
however. Later, the narrative was mentioned in a 1919 Supreme Court opinion
written by then Justice (later Chief Justice) Oliver Wendell Holmes, Jr. It thus