"Timely, trenchant, and entertaining, Walter Friedman's Fortune Tellers is a captivating history of modern economic forecasting. With graceful prose and penetrating insight, Friedman shows how scientific pretension and cultural persuasion gave birth to a new industry. Through their frustrated attempts to predict the future, Friedman's cast of oracles, gurus, entrepreneurs, and academics finally began to shape it. This is a fascinating tale about doubt and certainty in modern economic life."--Jonathan Levy, author of Freaks of Fortune: The Emerging World of Capitalism and Risk in America
"Economic forecasters attempt to reduce the dimensions of the unknowable, for private profit and the public good.Fortune Tellers is the story of America's first professional forecasters. It explains their methods, quirks, limited successes, and major failures in the Great Depression. Friedman's cast of characters--Babson, Moody, several Ivy League professors, and Herbert Hoover--is a fascinating crew of would-be soothsayers. This is intellectual and business history at its best."--Richard Sylla, New York University
"Who knew that the pioneers of economic forecasting in America were such an eclectic, eccentric, entrepreneurial bunch? In profiling the likes of Roger Babson, John Moody, and Irving Fisher, historian Walter Friedman makes vividly clear their noble motives, occasionally hucksterish tendencies, and sometimes downright bizarre thinking. In the process, he elegantly sketches their different theories for charting the economy's future."--Walter Kiechel III, author ofThe Lords of Strategy
"Fortune Tellers tells the remarkable story of the first generation of economic forecasters in the United States. Like Robert Heilbroner'sWorldly Philosophers, it combines biographical vignettes with intellectual history in an engaging narrative that documents the perilous relationship between professional expertise, economic theory, and cultural norms."--Richard R. John, author ofNetwork Nation: Inventing American Telecommunications
"Fortune Tellers is a deeply researched account of the rise and fall of economic forecasting in early twentieth-century America. Profiling a colorful cast of characters, Friedman deftly documents the careers--and the hubris--of the men who sought to impose predictability and certainty on the modern economy. This is a fascinating, timely book, one with many lessons for our own age of uncertainty."--Stephen Mihm, author ofA Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States
"Timely, trenchant, and entertaining, Walter Friedman's Fortune Tellers is a captivating history of modern economic forecasting. With graceful prose and penetrating insight, Friedman shows how scientific pretension and cultural persuasion gave birth to a new industry. Through their frustrated attempts to predict the future, Friedman's cast of oracles, gurus, entrepreneurs, and academics finally began to shape it. This is a fascinating tale about doubt and certainty in modern economic life."--Jonathan Levy, author of Freaks of Fortune: The Emerging World of Capitalism and Risk in America
"Economic forecasters attempt to reduce the dimensions of the unknowable, for private profit and the public good.Fortune Tellers is the story of America's first professional forecasters. It explains their methods, quirks, limited successes, and major failures in the Great Depression. Friedman's cast of characters--Babson, Moody, several Ivy League professors, and Herbert Hoover--is a fascinating crew of would-be soothsayers. This is intellectual and business history at its best."--Richard Sylla, New York University
"Who knew that the pioneers of economic forecasting in America were such an eclectic, eccentric, entrepreneurial bunch? In profiling the likes of Roger Babson, John Moody, and Irving Fisher, historian Walter Friedman makes vividly clear their noble motives, occasionally hucksterish tendencies, and sometimes downright bizarre thinking. In the process, he elegantly sketches their different theories for charting the economy's future."--Walter Kiechel III, author ofThe Lords of Strategy
"Fortune Tellers tells the remarkable story of the first generation of economic forecasters in the United States. Like Robert Heilbroner'sWorldly Philosophers, it combines biographical vignettes with intellectual history in an engaging narrative that documents the perilous relationship between professional expertise, economic theory, and cultural norms."--Richard R. John, author ofNetwork Nation: Inventing American Telecommunications
"Fortune Tellers is a deeply researched account of the rise and fall of economic forecasting in early twentieth-century America. Profiling a colorful cast of characters, Friedman deftly documents the careers--and the hubris--of the men who sought to impose predictability and certainty on the modern economy. This is a fascinating, timely book, one with many lessons for our own age of uncertainty."--Stephen Mihm, author ofA Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States
FORTUNE TELLERS
THE STORY OF AMERICA'S FIRST ECONOMIC FORECASTERS
By Walter A. FriedmanPRINCETON UNIVERSITY PRESS
Copyright © 2014 Princeton University Press
All rights reserved.
ISBN: 978-0-691-15911-9
Contents
Preface....................................................................ixIntroduction...............................................................1Chapter 1 Roger W. Babson: The Rule of Past Patterns "The fundamental law
of 'action reaction'"......................................................12Chapter 2 Irving Fisher: The Economy as a Mathematical Model "The
velocity of money".........................................................51Chapter 3 John Moody: The Bright Light of Transparency "An aggregation of
over 440 large industrial, franchise and transportation Trusts"............86Gallery of Business and Forecasting Charts.................................Chapter 4 C. J. Bullock and Warren Persons: The Harvard ABC Chart "The
statistician ... attempts to find a specific analogy existing in an
orderly universe"..........................................................128Chapter 5 Wesley Mitchell and Herbert Hoover: Forecasting as Policy "If
we could foresee the business cycle, there would be none"..................166Chapter 6 Visions of the Future............................................194Postscript.................................................................209Acknowledgments............................................................213Notes......................................................................217Index......................................................................261
CHAPTER 1
Roger W. Babson: The Rule of Past Patterns
Roger Ward Babson (1875–1967) was an unlikely founder of today's economicforecasting services. Academic economists tend to dismiss hiscontributions to the field. John Kenneth Galbraith ridiculed Babson's forecastingmethods as "hocus-pocus" and "mysticism," and even contemporariesregarded him as a confirmed eccentric. George W. Coleman, a longtimebusiness associate, described Babson in 1929 as "a unique personality, complexand baffling to a high degree," possessed of a "restless, driving energy."
Babson actively promoted dubious social engineering schemes rangingfrom the prohibition of alcohol to bizarre dietary reforms and eugenics. Hewas a serial entrepreneur, starting or acquiring businesses for manufacturingcommodities as diverse as fire-alarm boxes, paper towels, sprinkler systems,and gravel. A longtime sufferer from tuberculosis, he redesigned his own homeand office to maximize the flow of fresh air. Babson's lifelong admiration forIsaac Newton culminated in his acquisition of the world's second largest collectionof Newtonia (behind only Cambridge University) and the foundingin 1948 of the Gravity Research Foundation, an organization dedicated toresearching the pull of gravity—with the hope of one day overcoming it. Thestudy of gravity, Babson thought, would help scientists find a way for man tofly without using an airplane and to create a perpetual motion machine.
Yet Babson's outsized personality contributed to his achievements as aneconomic forecaster. His eccentricities—like the folksy, avuncular voice withwhich he dispensed both business predictions and chestnuts of financialwisdom—had the effect of humanizing his forecasts. Babson's Reports, theweekly newsletter Babson and his staff produced from his hometown in theBoston suburbs, was among the first to use systematic statistical analysis ofeconomic data to predict future economic conditions. In it, Babson publishedstatistics on production and manufacturing achievements, bank clearings,stock-exchange transactions, business failures, immigration rates, importand export levels, and gold prices, among other miscellaneous information.Starting in 1911, Babson combined several different types of time-series datainto a compelling graph of economic activity, called the Babsonchart, whichhe relied on to predict the direction of national business activity. Taken together,Babson's graphs and commentary offered his readers a new conceptionof "the economy" as a complex but unified system that operated accordingto its own internal logic and hence could be predicted by means ofsustained, systematic study.
Most ordinary Americans at the turn of the twentieth century did notsubscribe to the notion that prices, currencies, employment rates, and othervariables were part of an interrelated, national economy. The economicbooms and busts of the previous century were typically ascribed not to anysort of regular business cycle but to fate, the weather, political schemes, divineProvidence, or unexpected shocks like new tariffs or earthquakes.
Roger Babson, drawing in part on nineteenth-century writing on commercialcycles, saw things differently. Week after week, his newsletter explainedto its readers that economic events were neither random nor uncertain butgoverned by forces that could be understood through careful study. He beganissuing regular forecasts after the Panic of 1907. By 1910 he was one of theNew York Times's featured commentators on economic affairs. Babson soughtto increase the participation of small-time American investors in the marketplace.He built a large sales force to market his newsletter in cities and townsand sent representatives to give talks on the mechanics of the business cycleat regional churches and chambers of commerce.
Academic economists justifiably regard much of Babson's science as suspect.But to leave it at this is to misunderstand his contribution. Babson didnot so much push forward the frontiers of economic theory as identify anappetite. At the turn of the twentieth century, Americans harbored an insatiabledemand for information that could shed light on future economicconditions. Perhaps more than any of his competitors, Babson met this demand,and he made himself rich in the process. He offered prognosticationson everything from prices to employment to sales. After Babson, the forecasterwas an instantly recognizable figure in American business.
Getting Started
Babson's entrepreneurial upbringing equipped him with a nose for opportunitythat would later bring him to economic forecasting. Babson's father solddry goods in the seaport town of Gloucester, Massachusetts, which, at thetime of Roger's birth in 1875, had a population of fourteen thousand. Rogertraveled with his father by horse and buggy to local towns to sell items andcollect bills. His father was a shrewd but conscientious man who kept regularhours, was prompt in paying and collecting bills, and imparted businessadvice, especially on the importance of sound investment for the future—thearea in which Babson built his career. "He explained to me that theworld's greatest invention was six per-cent compound interest, which goes ontwenty-four hours a day, seven days a week, and fifty-two weeks a year," recalledBabson in his 1935 autobiography.
In his mid-and late teens, hardship and tragedy forced Babson to becomeself-sufficient. In 1890, when Babson was fifteen, his father suffered a nervousbreakdown and retired from active business. To help out, Roger workedinstalling electric doorbells and took a part-time job on a highway constructionteam. In 1893 Roger's thirteen-year-old sister Edith drowned in a localpond. Babson's father tried to revive her but failed. Roger was away when ithappened; he had traveled to see the Chicago World's Fair and only managedto return to Gloucester after the funeral. The death "cast a shadow" over hisfamily that "never wholly passed," he later wrote. He would name his firstand only child after her.
After finishing Gloucester High School in 1894, Babson followed his father'sadvice and attended the Massachusetts Institute of Technology (MIT),then located in Boston's Back Bay. Now the nation's leading institution forscience and engineering and located in Cambridge, at the turn of the twentiethcentury "Boston Tech" was primarily a trade school. In 1935, Babsonrecalled that he had "hated the place and all the courses." The institution, hefelt, was stodgy, unimaginative, and devoid of vision. The faculty included"the ablest men in their respective fields ..., yet these professors and instructorsapparently entirely overlooked the great industries which were to developin the twenty years following my graduation." No one at the school,he charged, was perceptive enough in the late 1890s to see in the horselesscarriage—then mostly a novelty—the great automobile industry that woulddevelop after the turn of the century or anticipate the demand for the phonographthat the Edison and Victor companies were then marketing. His professorsalso failed to foresee the importance of the "moving-picture machine,"radio, or air travel, despite the advances in all three technologies during histime as an undergraduate. Instead, he continued, MIT taught railroading,electrical engineering, chemistry, and other "fully-developed subjects." WhileBabson's recollection is self-promotional, it nonetheless captures his sense ofrestlessness at the institution.
Despite his impatience with hidebound academics, Babson discovered atMIT several of the intellectuals who would influence his later forecasting. Themain professor to exert a lasting influence on Babson was George F. Swain, acivil engineer who served on state commissions to inspect railway bridges.Swain was, by accounts of former students at MIT and later at Harvard (wherehe moved in 1909), a brilliant and rigorous thinker. Swain is best known forhis book How to Study (1917) and for his articles on statistics and on manufacturing.Along with encouraging Babson's interest in the fields of engineeringand statistics, Swain trained him to use a laboratory-oriented collaborativeapproach to research, a skill Babson employed when he founded BabsonStatistical Organization. Babson's forecasts were produced by teams of statisticians,working together on large tables reminiscent of the MIT laboratory.
Swain also introduced Babson to the works of Isaac Newton (1642–1727),the great English mathematician, astronomer, and alchemist, whobecame, for Babson, the embodiment of scientific wisdom. Throughout hiscareer, Babson would try to associate his own economic writings with Newton'sscientific insights, especially those about gravity. Though these associationswere superficial in nature, Babson's admiration was sincere. He and hiswife spent a fortune acquiring books once owned by Newton and otherNewtonia. In 1953 Babson acquired a graft from the apple tree under whichNewton supposedly discovered gravity when the apple hit his head. The treestands today on the Babson College campus in Wellesley, Massachusetts,where it is surrounded by a metal gate and decorated by a plaque.
Selling Bonds
After graduating, Babson found work at the financial firm E. H. Gay, whichhad offices in Boston and New York. Babson began his career in the bondindustry, the largest sector of the investment business around the turn ofthe century. In 1913, more than $1.5 billion in bonds were marketed in theUnited States. Bonds were the chief source of funding for states and municipalitiesfor public works, for the railroads, and for many industrial corporations.13 Bond houses were increasing in number in New York City, Boston,and elsewhere to raise capital for new enterprises or fund the expansion ofexisting ones.
Babson's first job was to sort and index a pile of bond circulars his employerhad collected for months. Babson then briefly went into the bond-sellingbusiness for himself in New York but without much success. In 1901he began working for a former partner of Gay's, Charles Cummings, whospecialized in selling public-utility bonds. The company was involved in financingthe Syracuse Lighting Company, the Utica Gas & Electric Company,and a large dam on a waterway in upstate New York. These were significantprojects that had the potential to provide essential services for theseregions, but they also presented scheming entrepreneurs with the opportunityfor speculation and fraud.
The securities business taught Babson two lessons he would carry withhim for the rest of his career in the forecasting trade. The first was a cynicismtoward the financial world, particularly that centered in Wall Street. Babsonbelieved that the vast majority of companies in the transportation and electricindustries were organized to sell securities rather than transport peopleor generate power. He also became aware of the extent to which aggressivesalesmanship shaped the market and even determined prices.
The second lesson had to do with the growing complexity of Americanbusiness and of the investment industry in particular. Sorting and indexinghis employer's great heap of miscellaneous bond circulars, Babson had realizedthe potential demand for a more systematic presentation of the growingvolume of business information. In the years after 1900, the number of bondofferings was increasing dramatically and more companies were hiring clerksand occasionally statisticians to track them. In 1913, one expert noted thatthe attitude of Wall Street firms was changing: "One of the greatest houseson the street may still have no statistical department, except that which iscarried home nights under one or two well-rounded hats; but on the otherhand, a firm of national reputation and esteem has recently admitted intopartnership a man whose claim to the distinction is his profound railroadscholarship." The growing number of businesspeople who had attended eithercollege or a commercial school (like Folsom's Mercantile College, whereJohn D. Rockefeller studied bookkeeping) helped stimulate the interest inanalyzing business statistics. As the number of available statistics grew, sodid the demand for people who could make sense of them and decide whichwere worthwhile and which not.
The "Man Who Would Not Die"
These lessons helped shape Babson's career, which, at the turn of the century,was just beginning. For a time, however, personal life took precedence. In1900, Babson married Grace Knight and they bought a house in Wellesley,outside Boston. Grace was the daughter of a preacher, the Reverend RichardKnight. She had briefly attended Mount Holyoke College and was workingas a nurse at Massachusetts General Hospital when Babson married her.Babson's reflections, in his autobiography, about the union were not particularlyromantic. "It was a mixture of human nature, sex urge, and true love,without any of these forces predominating," he wrote. But she was a "goodpartner" who played a significant role in many of Babson's plans.
After the wedding, the two moved to a new home in Wellesley. But themarriage was soon tested. In the fall of 1901, Babson contracted what seemedto be a cold that lingered for many months. In February 1902, at the age oftwenty-six, he learned that he had tuberculosis—a disease that then affectedmillions of Americans, including forecasters Irving Fisher and Warren Persons.Although the pathology of the disease was well-known by 1902, effectivetherapies were few until the discovery of the antibiotic streptomycin in1946. Before then, consumptive patients could do little more than seek outfresh air. Patients lived, ate, and slept outside, even in the depths of winter, inthe hope that cold, dry air would send the disease into remission. Sometimesthe fresh air cure helped, but even after years or decades of remission, dormanttubercular lesions in the lungs or elsewhere could become active again.From the patient's perspective, a diagnosis of tuberculosis was not so much adeath sentence as a sentence to a life in limbo. As medical historian SheilaRothman wrote, "almost every aspect of consumption was marked by an uncertaintythat bred apprehension and bewilderment." In search of a milderclimate and higher altitude, Roger and Grace Babson, like many others at thetime, traveled west to Colorado Springs and eventually to California. Theyreturned to Wellesley within two years, however, to see if Babson could recoverat home in the New England winter.
Babson's disease played an important role in his choice of career. Large,dense cities were thought to be unhealthy for tuberculosis sufferers, so, on hisreturn from the West, Babson resolved to start a business out of his suburbanhome. Inspired by a speech he heard by Booker T. Washington in Wellesleyadvising young people to specialize narrowly in a single field rather thanspreading themselves too thin, Babson decided to make his contribution inthe nascent field of business statistics.
While working in the securities industry, Babson had seen how financialfirms were giving increasing time and attention to the compilation and analysisof information. Every bank, investment house, and brokerage laboriouslycompiled and analyzed bond listings, and Babson saw that there was muchduplication of effort. It would be far more cost-effective for firms to outsourcethe collection and distribution of market data to a specialized company.Babson was neither the first nor the only entrepreneur to recognize the growingdemand for such publications at the time. The business information industrywas quickly emerging at the time, with Henry Varnum Poor as the truepioneer of the field; he had started publishing financial information, includingearnings, on railroads in the mid-nineteenth century. New Jersey nativeJohn Moody had published a manual of statistics about industrial companiessince 1900. The leading business periodicals were the Wall Street Journal,which had been founded in 1889, and the Commercial and Financial Chronicle(1865). But there was no single source of information on all bond offerings,so Babson decided to enter that field.
At age twenty-nine, Babson founded the Babson Statistical Organizationwith a total capital of $1,200 for the purchase of a typewriter, an adding machine,and office supplies. Babson's first business product was the BabsonCard System. It provided to subscribers descriptions on individual indexcards of bonds offered by different companies. He soon started a parallel servicewith information about stocks. These products lowered the cost thatfirms had traditionally paid when they gathered this information on their own.Babson directed the Babson Statistical Organization from his home, wherehe could attend to his health by making fresh air a priority. He designed aspecial winter coat, with a slot for a heating pad in the back, and slept withthe windows open throughout the year. He worked outside and required thesame of his assistants, mostly young women from the town. In cold weather,Babson remembered, his assistants wore robes and mittens and hit the typewriterkeys with "rubber hammers." Grace Babson also played an importantrole in her husband's business, serving as treasurer for many years.
(Continues...)Excerpted from FORTUNE TELLERS by Walter A. Friedman. Copyright © 2014 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
