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Forerunners of Modern Financial Economics

A Random Walk in the History of Economic Thought, 1900–1950

Donald R. Stabile

The economists who began using statistics to analyze financial markets in the 1950s have been credited with revolutionizing the scholarship of investing and with inaugurating modern financial economics. By examining the work of economists who used statistics to analyze financial markets before 1950, Donald Stabile provides evidence about the forerunners of modern financial economics.
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Chapter 6: Evaluating Market Forecasts: Financial Economics in the 1930s

Donald R. Stabile


The decade of the 1930s was the worst of times for the US economy. The Great Depression began in August 1929 and lasted 43 months before hitting the bottom in March 1933. By that time real gross national product (GNP) had fallen by 30 percent and the unemployment rate reached 25 percent. A long, slow recovery brought GNP nearly to its 1929 level by 1937, when another downturn took place. After falling to 14 percent in 1937, the lowest level since early in the depression, the unemployment rate rose to 19 percent in 1938. To be sure, not every industry suffered the same degree of decline. Still, many persons now had qualms about the virtues of the free enterprise system that had seemed to work so well in the 1920s. This brought about many economic reforms during the Roosevelt New Deal. In financial markets, the passage of the Securities Act of 1933 and the Securities and Exchange Act of 1934 began government regulation of stock markets and requirements for companies to provide investors with reliable information. As these securities regulations indicate, investors had lost their faith in the stock market, and for good reason. Prices of stocks declined with the economic downturn. From January 1930 to June 1932, the Dow Jones Index fell from 267.1 to 42.8. Afterward, it began to rise, reaching 187.3 in February 1937; this increase of more than fourfold in five years would be counted as a major upswing, except for its starting so low and...

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