A History Lesson - Part 1

The Great Crash 1929
John Kenneth Galbraith

978-0-14-013609-8

This is a book that made a profound impact on me when I read it as a student, more than two decades ago. I wanted to understand the world of stocks and shares, and in order to understand a system, I have always found that one learns more by studying it when it is at its most atypical.

If, to be considered a Diogenerian, one must view the world with, what some might call, a cynical gaze, then this book is, in no small way, responsible for my being able to be so considered.

If you wish to understand something of the current economic crisis, I can think of no guide who is more clear, more witty and more readable than Professor Galbraith. It is with this in mind that I humbly present these extracts from his classic study.

Galbraith starts off by explaining why he spent the Summer of 1954 writing his book.

A good knowledge of what happened in 1929 remains our best safeguard against the recurrence of the more unhappy events of those days. Since 1929 we have enacted numerous laws designed to make securities speculation more honest and, it is hoped, more readily restrained. None of these is a perfect safeguard. The signal feature of the mass escape from reality that occurred in 1929 and before - and which has characterized every previous speculative outburst from the South Sea Bubble to the Florida land boom - was that it carried Authority with it. Governments were either bemused as were the speculators or they deemed it unwise to be sane at a time when sanity exposed one to ridicule, condemnation for spoiling the game, or the threat of severe political retribution.

Until the beginning of 1928, even a man of conservative mind could believe that the prices of common stock were catching up with the increase in corporation earnings, [...] and the certainty that the Administration, then firmly in power in Washington, would take no more than necessary of any earnings in taxes.

Early in 1928, [however,] the nature of the boom changed. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest. It was still necessary to reassure those who required some tie, however tenuous, to reality. And, as will be seen presently, this process of reassurance ... eventually achieved the status of a profession. However, the time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy.

During the same month reassurance came from still higher authority. Andrew W. Mellon [the Secretary to the Treasury] said, 'There is no cause for worry. The high tide of prosperity will continue.'

Mr Mellon did not know. Neither did any of the other public figures who then, as since, made similar statements. These are not forecasts; it is not to be supposed that the men who make them are privileged to look further into the future than the rest. Mr Mellon was participating in a ritual which, in our society, is thought to be of great value for influencing the course of the business cycle. By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great.

You see, being a cynic, I've always been bothered by this notion that house prices always go up. People would keep telling me that, even after I pointed out to them that I could remember two occasions in my lifetime (not counting the present one) when they had gone down, quite dramatically. Of course, what I didn't understand, until I read Galbraith, was that, for these clever people in the money markets of the world, the last thing that they want to do is actually own something.

As noted, at some point in the growth of a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price.

It follows that the only reward to ownership in which the boomtime owner has an interest is the increase in values. Could the right to the increased value be somehow divorced from the other and now unimportant fruits of possession and also from as many as possible of the burdens of ownership, this would be much welcomed by the speculator. Such an arrangement would enable him to concentrate on speculation which, after all, is the business of a speculator.

Such is the genius of capitalism that where a real demand exists it does not go long unfilled. In all great speculative orgies devices have appeared to enable the speculator so to concentrate on his business. In the Florida boom the trading was in 'binders'. Not the land itself but the right to buy the land at a stated price was traded. This right to buy - which was obtained by a down payment of ten per cent of the purchase price - could be sold. It thus conferred on the speculators the full benefit of the increase in values. After the value of the lot had risen he could resell the binder for what he had paid plus the full amount of the increase in price.

The worst of the burdens of ownership, whether of land or any other asset, is the need to put up the cash represented by the purchase price. The use of the binder cut this burden by ninety per cent - or it multiplied tenfold the amount of acreage from which the speculator could harvest an increase in value. The buyer happily gave up the other advantages of ownership. These included the current income of which, invariably, there was none and the prospect of permanent use in which he had not the slightest interest.

The machinery by which Wall Street separates the opportunity to speculate from the unwanted returns and burdens of ownership is ingenious, precise, and almost beautiful. Banks supply funds to brokers, brokers to customers, and the collateral goes back to banks in a smooth and all but automatic flow.

It's marvellous, isn't it. And such is the genius of the markets that it is only a small step to apply this idea - separation of the opportunity to speculate, from the unwanted burdens of ownership - not only to physical assets such as land or buildings, but to the stocks and shares themselves!

People were swarming to buy stocks on margin - in other words, to have the increase in price without the cost of ownership.

One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of all investments. They are protected by stocks which under all ordinary circumstances are instantly saleable, and by a cash margin as well. The money ... can be retrieved on demand. At the beginning of 1928 this admirably liquid and exceptionally secure outlet for non-risk capital was paying around five percent. The rate rose steadily through 1928, and during the last week of the year it reached twelve per cent. This was still with complete safety.

In Montreal, London, Shanghai, and Hong Kong there was talk of these rates. A great river of gold began to converge on Wall Street.

Corporations also found these rates attractive. At twelve per cent Wall Street might even provide a more profitable use for the working capital of a company than additional production. A few firms made this decision: instead of trying to produce goods with its manifold headaches and inconveniences, they confined themselves to financing speculation. Many more companies started lending their surplus funds on Wall Street.

Thank heavens for the regulators, who stop abuses of the system. Otherwise you might get someone setting up a hedge fund which turns out to be no more than a glorified pyramid scheme, which eventually collapses leaving debts of 50 billion.

All this being so, the position of the people who had at least nominal responsibility for what was going on was a complex one. One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

A bubble can be easily punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. The Federal Reserve Authorities. One may doubt if at any time in early 1929 the problem was ever framed in terms of quite such stark alternatives. But however disguised or evaded, these were the choices which haunted every serious conference on what to do about the market.

The men who had responsibility for these ineluctable choices were the President of the United States, the Secretary of the Treasury, the Federal Reserve Board in Washington, and the Governor of the Federal Reserve Bank of New York.

President Coolidge neither knew nor cared what was going on. A few days before leaving office in 1929, he cheerily observed that things were 'absolutely sound' and that stocks were 'cheap at current prices'.

So unlike our own Tony Blair, or even George W Bush.

These men do not issue orders; at most they suggest. Chiefly they move interest rates, buy or sell securities and, in doing so, nudge the economy here and restrain it there. Because the meanings of their actions are not understood by the great majority of the people, they can reasonably be assumed to have superior wisdom. Their actions will on occasion be criticized. More often they will be scrutinized for hidden meanings.

Such is the mystique of central banking. Such was the awe-inspiring role in 1929 of the Federal Reserve Board in Washington, the policy-making body which guided and directed the twelve Federal Reserve Banks. However, there was a jarring difficulty. The Federal Reserve Board in those times was a body of startling incompetence.

The New York Federal Reserve Bank, under Governor Strong's leadership, may not have been sufficiently perturbed by the speculation. Nor was it after Governor Strong died in October 1928 and was replaced by George L. Harrison. A reason, no doubt, was the reassurance provided by people in high places who were themselves speculating heavily. One such was Charles E. Mitchell, the Chairman of the Board of the National City Bank, who on 1 January 1929 became a class A director of the Federal Reserve Bank of New York. The end of the boom would mean the end of Mitchell. He was not a man to expedite his own demise.

Actually, not even new legislation, or the threat of it, was needed. In 1929, a robust denunciation of speculators and speculation by someone in high authority and a warning that the market was too high would almost certainly have broken the spell. It would have brought some people back from the world of make-believe. Those who were planning to stay in the market as long as possible but still get out (or go short) in time would have got out or gone short. Their occupational nervousness could readily have been translated into an acute desire to sell. Once the selling started, some more vigorously voiced pessimism could easily have kept it going.

The very effectiveness of such a measure was the problem. Of all the weapons in the Federal Reserve arsenal, words were the most unpredictable in their consequences. Their effect might be sudden and terrible. Moreover, these consequences could be attributed with the greatest of precision to the person or persons who uttered the words. Retribution would follow. To the more cautious of the Federal Reserve officials in the early part of 1929 silence seemed literally golden.

Then toward the end of the month disquieting news reached Wall Street. The Federal Reserve Board was meeting daily in Washington. It issued no statements. Newspapermen pressed the members after the sessions and were met with what then, as now, was known as tight-lipped silence. There was not a hint as to what the meetings were about, although everyone knew they concerned the market. The meetings continued day after day, and there was also an unprecedented Saturday session.

Soon it was too much. On Monday, 25 March, the first market day following the unseemly Saturday meeting, the tension became unbearable. Although, or rather because, Washington was still silent, people began to sell. Speculative favourites - Commercial Solvents, Wright Aero, American Railway Express - dropped 10 or 12 points or more; the Times industrial average was off 9.5 points for the day. More important, some banks decided that, in the event of a Federal Reserve crackdown, virtue might have a reward above revenue. They began curtailing their loans in the call market, and the rate on brokers' loans went to fourteen per cent.

On the next day, Tuesday, 26 March, everything was much worse. The Federal Reserve Board was still maintaining its by now demoralizing silence. A wave of fear swept the market. More people decided to sell, and they sold in astonishing volume. An amazing 8,246,740 shares changed hands on the New York Stock Exchange, far above every previous record. Prices seemed to drop vertically.

To avoid confusion, I should say at this point that this was not, in fact, the Great Crash. This was simply a minor dip in the apparently ever-rising tide of prosperity. What was soon to come would make this look like the calm before the storm.

26 March 1929 could have been the end. Money could have remained tight. The authorities might have remained firm in their intention to keep it so. The panic might have continued. Each fall in prices would have forced a new echelon of speculators to sell, and so forced prices down still more. It did not happen, and if any man can be credited with this, the credit belongs to Charles E. Mitchell. The Federal Reserve authorities were ambivalent, but Mitchell was not. He was for the boom. Moreover, his prestige as head of one of the two largest and most influential commercial banks, his reputation as an aggressive and highly successful investment banker, and his position as a director of the New York Federal Reserve Bank meant that he spoke with at least as much authority as anyone in Washington. During the day, as money tightened, rates rose, and the market fell, Mitchell decided to take a hand. He told the press, 'We feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert any dangerous crisis in the money market.' The National City, he said, would loan money as necessary to prevent liquidation. It would also (and did) borrow money from the New York Federal Reserve Bank to do what the Federal Reserve Bank had warned against doing. Disguised only slightly by the prose form of finance, Mitchell issued the Wall Street counterpart of Mayor Hague's famous manifesto, *I am the law in Jersey City.*

I'm sure that no on in a position of power would behave in this way today! Pumping huge sums of borrowed money into the system to prevent collapse. How silly can you get!

Mitchell's words were like magic. By the end of trading on the 26th money rates had eased, and the market had rallied. The Federal Reserve remained silent, but now its silence was reassuring. It meant that it conceded Mitchell's mastery. The next day the National City regularized its commitment to the boom: it announced that it would insure reasonable interest rates by putting $25 million into the call market - $5 million when the rate was sixteen per cent, and $5 million additional for each percentage point.

Of course, Wall Street doesn't like regulators interfering with it's running, even if it is to their benefit. To try and illustrate this, let's say, hypothetically, that our banks have been forced to accept a bailout package from the Government because they are in danger of going bankrupt. It couldn't possibly happen, of course, but I am speaking hypothetically. Would they be grateful? Or would they complain that the Government wanted too much control over the way that they are run? Would they still refuse to lend money, displaying what some might call a lack of gratitude? Surely only the most cynical would wonder if all of the taxpayer's money that had been pumped into the banks had actually been wasted? Perhaps the only lesson that we can draw is that, seemingly, men who are used to power don't like being told what to do - even if they are being told to get into a lifeboat.

The Federal Reserve was criticized [for interfering in the running of the markets] even more than Mitchell - even though it could hardly have done less than it did. Arthur Brisbane said judiciously: 'If buying and selling stocks is wrong the government should close the Stock Exchange. If not, the Federal Reserve should mind its own business.' In a leading article in Barron's, a Mr Seth Axley was less even-handed:' For the Federal Reserve Board to deny investors the means of recognizing economies which are now proved, skill which is now learned, and inventions which are almost unbelievable seems to justify doubt whether it is adequately interpreting the times.' Since the principal action which the Federal Reserve had taken against investors had been to hold meetings and maintain silence, this was doubtless a trifle harsh.

After the defeat by Mitchell in March, the Federal Reserve retired from the field. There continued to be some slight anxiety [from Wall Street that they might still try to regulate the market]. In April, William Crapo Durant is supposed to have paid a secret night visit to the White House to warn President Hoover that if the Board were not called off it would precipate a terrible crash. The President was noncommittal, and Durant is said to have reduced his holdings before leaving on a trip to Europe. In June from Princeton Mr Lawrence said that the Board was still 'doing its utmost to cast the proverbial monkey wrench into the machinery of prosperity'. He warned the Board that it had 'aroused the enmity of an honest, intelligent, and public-spirited community'. (Some hardened Wall Streeters may have been surprised when they realized that this meant them.) But the Board, in fact, had decided to leave that honest, intelligent, and public-spirited community strictly to its own devices.

If there is one thing that Wall Street demands from it's regulators, it is that they should not try to regulate - only appear to do so. After all, what's a 50 billion hedge fund between friends?

Governor Young said subsequently, that 'while the hysteria might be somewhat restrained', it would have to run its course, and the Reserve Banks could only brace themselves for the 'inevitable collapse'. More accurately, the Federal Reserve authorities had decided not to be responsible for the collapse.

In August the Board finally agreed to an increase in the rediscount rate to six per cent. The market weakened only for a day. Any conceivable consequence of the action was nullified by a simultaneous easing of the buying rate on acceptances.

In fact, from the end of March on, the market had nothing further to fear from authority. President Hoover did ask Henry M. Robinson, a Los Angeles banker, to proceed as his emissary to New York and talk to the bankers there about the boom. According to Mr Hoover, Robinson was assured that things were sound. Richard Whitney, the Vice-President of the Exchange, was also summoned to the White House and told that something should be done about speculation. Nothing was done, and Mr Hoover was able to find some solace in the thought that primary responsibility for regulating the Stock Exchange rested with the Governor of New York, Franklin D. Roosevelt.

Roosevelt, too, was following a laissez-faire policy, at least on the matter of the stock market.

For now, free at last from all threat of government reaction or retribution, the market sailed off into the wild blue yonder. Especially after 1 June all hesitation disappeared. Never before or since have so many become so wondrously, so effortlessly, and so quickly rich. Perhaps Messrs Hoover and Mellon and the Federal Reserve were right in keeping their hands off. Perhaps it was worth being poor for a long time to be so rich for just a little while.

Coming soon: The Twilight of Illusion - The Crash.

Followed by: Things Become More Serious - The Aftermath

Get the Abbey Habit

It's a relief to know that most reputable Building Societies are protecting their director's salaries ... er .. I mean, shareholder's interests ... by ensuring that their flexible mortgage products aren't quite as flexible as they seemed to be.

If you own such a mortgage, I would strongly suggest that you do not watch this video, as it will lead to a lack of confidence, and possibly panic, which, I am sure you will agree, we all wish to avoid in these uncertain times.

I'm sure you won't let me down.

THE ADVENTURE OF THE EDGWARE PHANTOM (Part 1)

It was Manton who out of boredom first asked our faithful retainer Sibbes to go down into the club archives and fetch up something interesting. Sibbes returned presently pulling a large tin box behind him. This he placed in the middle of the floor. “This was the best I could find sir.”

“What is in it?”

“I have no idea sir”

Squatting down upon a stool in front of it, Manton looked it over. The box was dusty and rusted in parts and was marked with the initials MH. He unfastened the leather strapping and threw back the lid. I could see that it was a third full with bundles of paper tied up with red tape into separate packages.

He lifted bundle after bundle glancing at the handwritten wording on each. One said “The Tarleton Murders” and other “The Case of Vamberry”, “The Adventure of the Old Russian Woman”, “The Singular Affair of the Aluminium Crutch”, “Ricoletti”.

“What on earth’s this little lot do you think?”

“I’m sure I couldn’t say, Sir,” said Sibbes.

“Where did you get it from?”

"When I was cleaning out the basement some months ago, after we had that leaking pipe you remember, sir?"

“Yes I recall.”

“...Well I saw the box then and thought it very curious. And when you asked me to bring you something interesting I recalled it to mind.”

"Very good. Well leave it here for now and I will have a look through it more carefully.”

After Sibbes left, I picked out a bundle at random and relaxed back into an armchair with a glass of The Macallan for company and began to read.

THE ADVENTURE OF THE EDGWARE PHANTOM

I had called upon my friend Mr Sherlock Holmes early in January in order to wish him the compliments of the new year. He was sitting upright at his desk, dressed in an old dun-coloured dressing-gown, a glowing meerschaum pipe in one hand and a lens in the other. A silver pair of spectacles lay in front of him and was the evident study that took up his full attention.

"You are busy," said I; "I shall call another time."

"Not at all, Watson. Come in, come in. I should be glad of your company and in any case you might be able to shed some light on this little problem here. The matter is of course quite trivial, but there are one or two points of interest. What do you make of these?” He held out the spectacles then tossed them to me.

I seated myself in front of his fire. The flames danced and gave out a welcomed glow. "Are you working on some case?" I asked, "and are these the clue to some clever crime?”

"No, nothing so ordinary," said Sherlock Holmes, smiling. "What you hold in your hand is the memento of a ghostly visitation upon one of our local shopkeepers Watson. It is said that there are more things in heaven and earth than are dreamt of – well here is the evidence of it in your own hand.” He sat back in his own chair and smiled at the puzzled look upon my face. “You know Jennings, the constable who walks our particular patch of Baker Street?"

“Yes.”

"He dropped those by for me yesterday."

"And why did he do that?"

"He found them and thought they might interest me. But let me tell you the story. Jennings, who as you know is a most diligent law officer, was making his way down the Edgware Road two nights ago on his usual beat. As was his practice Jennings spent some time looking into premises and trying the door handles. But one door he looked into gave him a start. As he tried the handle, it flew open and out shot a man screaming as he went. He pushed passed Jennings and ran out into the street yelling “Lord God Save me! Don’t let it get me.”

“Jennings was in two minds, whether to follow after the man or enter the building to see what caused the fellow to take to his heels in such terror. As the man was halfway up the street by this time, he decided to enter the building which was Mr Comfrey’s patent shoe shop. Making his way through the shop found nothing out of the usual and decided to ascend the stairs to the upper floors. Halfway up, in front of him he saw, in the dim gaslight, a luminous shape, gliding across the landing.”

“A luminous shape?”

“That is how he describes it. But that is not all. Jennings says that the glowing spectre glided right past him and then headed straight though the wall. Jennings made a thorough search of the upper floor but could find nothing.”

"But surely you don’t accept that?"

“If it were anyone other than Jennings I would certainly have my doubts, but you know him as well as I do and he does not strike me as one who would easily be deceived. He is certainly one of the best of our flat-footed friends. No, my dear fellow, I think we have to take the evidence as it presents itself. However, the one thing that Jennings did find was those spectacles you are holding. They were on the floor by the wall at the very place the spectre vanished.

"I presume they belong to the owner of the shop”

"Ah well there lies the problem. He has not been seen these last two days and cannot be traced. Jennings believes that the man who passed him was already wearing glasses which suggests that these belong to another, does it not? Either way they are the only tangible evidence that Jennings was able to recover that might shed any light on the disappearance of the shoe seller.”

"What, then, did Jennings do?"

"He brought the spectacles round to me, knowing how interested I am in such puzzles.

“And what can you gather from these?"

"Only as much as we can deduce."

"Huh! What can you gather from these old things?"

"Here is my lens. You know my methods. What can you gather?”

I turned the spectacles over in my hands rather indifferently. They were handsomely constructed, gold-rimmed spectacles of the sort that were much in fashion a few years ago. They had clearly become worn through constant use. One of the arms had lost its returning spring and one of the lenses was a good deal scratched. The nose pads were also missing and some attempt had been made to replace them rather crudely with cork. For the rest it there was very little remarkable about them. "Beyond the obvious fact that the owner is long-sighted, I can see nothing," said I, handing them back to my friend.

"My dear Watson, you see everything, but discover nothing.”

“Then, pray tell me, what significance do you see in them?"

He picked them up and held them languidly in that peculiar fashion of his that told me his mind was alive with activity. "It is perhaps less suggestive than it might have been," he remarked, "but there are some clear and certain inferences which can be made and one or two guesses which must hold at least a strong balance of probability. That the man has a thin narrow face with an unusually broad nose is of course obvious. He is, as you pointed out, long-sighted with slight astigmatism in his right eye though his left eye has deteriorated to the state where he can see almost nothing out of it. He is around 50 years of age and he has been well off financially until quite recently when he has lost all his money – perhaps through gambling or some other hardship.”

"I don’t see how you see all that in these spectacles.”

“Furthermore, he has a poor memory to the point of being habitually forgetful,” he continued ignoring my interruption, “and since he has no other pair of spectacles than these, their loss will no doubt be much missed. He is a solitary man without wife or friends and spends much of his time alone. He also suffers from low morale.”

“Holmes!”

“Also, by-the-way, it is extremely likely that he has recently redecorated his house and painted his woodwork white within the last month."

“You are certainly joking."

“Not at all." Sherlock Homes sat back and smiled. "I am surprised that after all these years of following my methods you are still unable to see how they are attained?"

"No doubt you think me very simple, but I confess I am still unable to follow you.”

“Well, the shape of his head is plain is it not? The width of these frames is quite narrow, yet the nose rests are unusually broad, thus we have a narrow faced man with a broad nose.”

“Well that is clear enough. What about his age?”

Any optician will tell you that presbyopia is the most common cause of long-sightedness and is the natural result of aging. The ability to focus on near objects declines throughout life and follows a set pattern. The strength of these lenses indicates an age around 50 years when he bought them. The astigmatism is clear from the cylindrical lenses which are evident when you rotate them.

“And his left eye?”

There are deep scratches on the left lens, which you have yourself noted. But they are so deep as to obscure the vision almost totally. I doubt if anyone with half reasonable eyesight could bear to have it obscured to this degree. It is my guess that it has deteriorated to the point where he can see nothing from it.

“Well that is plain enough. And the loss of his fortune?"

"If this man could afford to buy so expensive a pair of glasses three years ago, yet cannot afford to have them repaired now he has surely had a change in fortune. These spectacles are gold rimmed and would have cost a tidy sum.”

“You said they were his only spectacles. How do you know he doesn’t have another pair?”

“My dear Watson, when you see nose pads which have been cut out from cork so roughly as this, it suggests that the man who cut them could not see clearly what he was doing which means that he had no spare pair of glasses to use. For the same reason it is unlikely that he had any friend or close relative who he could have called upon to help him. No, we have here a solitary man who is friendless."

"Well, that is clear enough, certainly. But how about the habitual forgetfulness?"

“The ends of the spectacle arms show small marks that indicate they have been attached to a neck strap. When a man is reduced to wearing his glasses around his neck then one can conclude that he not only misplaces his glasses but does so habitually. And since the neck strap is missing and he has not troubled to replace it, it is also obvious that he has become more careless and indifferent to loss, which is distinct evidence of a lowering of morale, probably linked to his financial losses.”

"You have an answer to everything. And how do you deduce that he has recently been painting his woodwork?”

Sherlock Holmes laughed. "Observe closely how the left lens has some very fine spots of paint which are clearly clean and fresh. You may have seen them through the lens. They are flecks of a glossy white paint, the sort which is used on woodwork and the angle of the droplets indicates that he was painting above head height; hence decorating must come to mind. Satisfied?"

"Well, it is quite obvious now that you explain it.”

Sherlock Holmes had opened his mouth to reply, when there was a sharp rap on the door. It then flew open and Jennings the constable, rushed into the apartment.

"Mr. Holmes! Please come at once, sir!" he gasped.

....to be continued.

The Non-Transitive Voting Paradox

It was around this time of the year that we used to hold the elections for the club president. There are many who scoff at the need for such things and it is true that today most members prefer a much more egalitarian approach to membership and would shy away from any suggestion of a club hierarchy. But it was not always so. There have been 29 successive presidents of the Diogenes Club as indicated on the plaque on the library wall. But that all came to an end the year the elections took a strange turn.

Three people stood for president that year, Anstruther, Baldwin and Caldwell. A poll showed that there was almost equal support for each of the three candidates. One third of the members rated the candidates in order of preference A, B then C. Another third of the members rated the candidates in order of preference B, C then A. The last third of the members rated the candidates in order of preference C, A then B.

ORDER OF PREFERENCE
1/3 A, B, C
1/3 B, C, A
1/3 C, A, B

As a consequence Anstruthers quite rightly claimed that 2/3 of members preferred him to Baldwin. Baldwin claimed that 2/3 of members preferred him to Caldwell. And Caldwell claimed that 2/3 of members preferred him to Anstruthers. And the truth is they were all absolutely correct.

And there in a nutshell was the problem. The more deep thinking amongst us then realised that a clever committee could decide who would get the post by simply deciding the order of the voting. If they decided to vote first between A and B, then A would win, and the final run off vote between A and C would mean that C would win overall. But if we started off with a first vote between B and C, then B would win and the final runoff vote with A would see A winning. It didn't depend on the members wishes but on who was put forward first.

Well, when the members realised this, then they understood that it meant that the whole democratic voting system was faulty. It was not a problem with the three candidates, but a problem with the system itself. How often has a candidate come in first with less than half of the vote, which meant that more people didn't want him than did.

Every voting system was faulty and the members decided to have nothing more to do with it. So we did what any logical club would do. We did away with voting and with presidents altogether. And much better we have all been for it.

2.7182... and the meaning of e

The year 2009 promises to be a very interesting one as far as banks and credit are concerned. The banks have been bailed out by government but they have not been so keen to pass on their good fortune to other less powerful industries. On Monday of this coming week the last Woolies shop will close its doors and others such as Adams have gone into receivership. How many more before the end of the this year?... well only time will tell.

Entwhistle, or "The Prof" as one of our more distinguished club members is known, was muttering about 'exponential increases' and other mathematical terms that had some members hot under the collar. "what is all this exponential stuff about?" asked Carruthers blithely.

The Prof looked at him as though he were addressing an ignorant student. "There are two mysterious numbers. One is pi and the other is e. Pi = 3.14159... and e = 2.7182... Most people know about the first but have not heard much about the second.

"Look has this got anything to do with banking?" asked Carruthers.

"Oh quite a bit," said the Prof, "if you will just give me a moment of your time.

"Is it going to affect my savings?" interjected Manton.

"Well if will affect how you understand them. For instance suppose you borrow £1 and suppose the interest rate is 100% per annum."

"Bit steep isn't it?"

"You wait until next year!" shouted someone from the back. "It won't be far off that!"

"Anyway," said the Prof, ignoring the interruptions. "After one year you owe £1 borrowed plus £1 interest making £2 in all."

"That clear enough," said Carruthers.

"Yes but the bank wants to get more than that. And it can do it by not putting up the interest rate."

"How can it do that?"

"Simply by spreading the interest out over a number of payments and making it compound." People looked perplexed so he continued. "Look, if they split the interest to two payments of 50% every six months what would you pay then?"

"The same."

"No. You would owe £1 borrowed plus £0.50 first interest plus £0.75 second interest equals £2.25 total. Which is the same as (1+1/2)² It compounds because you owe £1.50 after the first six months and so interest is more. Not a bad way to earn even more."

"The banks know all the tricks," said someone.

"And if you make the interest monthly, then that becomes (1+1/12)¹² = 2.6130 which you end up owing."

"It gets more every time."

"Exactly. and if they could make it daily interest you would be paying (1+1/365)³⁶⁵ = 2.71457. Of course if you paid interest at smaller and smaller intervals you would pay more, but there is a limit and that limit is 2.7182 which is exponential number that is given the symbol e. If you take 1000 intervals you get 2.7169, and if you take an infinte number you end up with e. Strange isn't it? It is one of those special beautiful numbers that are always turning up in mathematics. It can't be expressed as an exact fraction, just like pi, but it is important never the less."

"Is it going to help us with the credit crunch Prof?"

"I doubt it very much. But it will help you with your calculus problems." The Prof looked very pleased with himself. But no one else did. He always did go off on a tangent.

"Happy new year, Prof!"

A Ghost Story for Christmas

I was sitting in a comfortable armchair by the log fire and had a warming brandy in my glass to keep out the cold weather when Charters came over and dropped himself into the chair next to me. I could see he was a little troubled and he started poking the fire. Eventually he spoke.

“Do you believe in ghosts?” he asked without even looking up.

"Well there are a lot of queer things around," I ventured.

He poked the fire a bit more and then put down the poker and stared vacantly into the flames.

“Are you alright Charters?" I asked.

He looked up at me. There was an expression of consternation across his face.

“Look you had better tell me all about it old man." He slumped back in his chair and looked exhausted. “Here let me get you something to drink.” I summoned our retainer. “Davenport! Get me another double brandy.”

“Yes sir.”

Charters went on, "You know I used to have a brother?"

"Lived somewhere out in the country didn’t he?"

That’s right. It’s over Shillingstone way. It was an isolated spot. His was the only house for miles, and I think that sometimes it got on his nerves, especially when the weather was bad like it has been recently with all the snow about. He often used to get blocked in and then he could be cut off for days.”

The brandy arrived and Charters held it pensively in his hands for a moment then took a large swig.

"He was on his own wasn’t he?" I asked.

“That’s right. Well last year...to this very day in fact, he rang me up. He was very distraught. He thought he’d had prowlers around the house. It was late evening, the snow was still falling and he had gone outside to put out some rubbish. And that’s when he realise someone had been sneaking around.”

I raised an eyebrow.

“He saw footprints.”

“What kind of foot prints?”

“A man’s. They were clear as anything in the snow. He looked around but couldn’t see anyone. He thought they must have been made by a passerby. But they went round the side of the house. So he followed them until he came back to the front again. They went all around the house.” He took another gulp of brandy and finished it off. “And there wasn’t a trace of anyone and no idea where they came from. There was just him and the trees and the snow and empty silence. He rang me up and told me. He wasn’t too worried though, not the first day.”

“The first day?”

“Yes, next day there was more snow and more footprints. There wasn’t a soul. And that’s what got to him. That really shook him that did. One set of footprints you can put down to an over curious person just looking round. But the second time... well that’s something else. And he wasn’t going to put with that. He rang me again and told me he was going to make damn sure that there would be no more prints the next day. Any more brandy?”

“What did he do?”

He set up a mantrap. Yes, I know it’s not the done thing. And I tried to talk him out of it, but he was adamant. I said I’d come over and see him but he would have none of it. I wish I’d gone over there now.” He stared back at the fire then to his glass. “Davenport, another brandy!”

“Right away, sir”

“He’d had a trap in the barn for goodness knows how long... inherited it with the place. Well he was always good with his hands was Frank. He’d cleaned it up and stuck it on the wall as a souvenir of the bad old days. But it was working. Oh yes he had tried it out and it nearly snapped his hand off.

“Isn’t that illegal old chap, mantraps and things?”

What I’ve found out is that when a man is driven to the end of his tether he doesn’t think about things like that. He doesn’t think straight. Anyway my brother was always one for acting first and thinking afterwards. But I’ll give him this; he first went and put up a sign at the front gate warning people not to trespass. “Danger, trespassers do so at their own risk.” Then he took the trap and he set it up round the side of the house, right where the footprints had gone. It was where the footpath narrows. There are bushes there, jutting out and there’s one point so narrow you could not avoid it. That’s where he would put it. He sprung it back and it took some force I can tell you, I’ve seen it working and it takes two men normally to do it, but my brother had fashioned up some leverage device that meant that he could just about manage it alone. Have you ever seen one of them? It’s a vicious thing, break your leg and leave you trapped in agony until the person who set it came to release you, or if he didn’t, you’d die from exposure and pain.”

Davenport arrived with the brandy and refilled the glass. “I have to remind you sir that Club rules do not permit any further refills sir.”

“Are you suggesting I can’t hold my liquor Davenport?” he asked.

“It’s not me sir, club policy sir,“ and he politely withdrew.

Charters just stared at him and then continued. “Where was I? ...Oh yes, so he set this thing up in the snow and covered it with leaves and waited. It was the first time he slept easy that night knowing his defences were up and he had the upper hand at last.” He drained his brandy in one. “He didn’t know what to expect in the morning – nothing really because there had been no noise, no disturbance, no snap of the iron jaws and no screams in the night. It was what he found later that had scared him and now more than ever.”

He put his glass down and I waited patiently for him to continue.

“Anyways, he got up early and decided to go out and check the trap before breakfast. There had been another fall of fresh snow during the night and the previous footprints were almost obliterated. But when he got to his garden path, there they were – new footprints wandering around the house in the same way. Someone had been here again and been to the trap. Well it was time to see what he had caught, but not before he had gone back for his shot gun. There was no knowing what he would find. “

“But why hadn’t he heard anything? Nothing could have got round that path without being caught. He loaded the gun and tucked it under his arm and followed the footprints round the house. They were perfectly clear in the crisp snow. He felt like he was stalking some elusive prey. Gun at the ready he turned the corner and approached the trap. The footprints went right to the trap and then right through it and then on round the house. He stopped where he knew the trap should be. The leaves that covered it were themselves covered in snow and the footprints lay right through the centre as though some ghostly phantom had passed that way.”

“At first he thought the trap had failed. There must be something faulty with the mechanism. No one could leave a trail like that and not trip the lever. He bent down closer to examine it. He could just make out the edges of the trap. They were there, unmarked. He couldn’t understand it. How could the trap not be sprung? If he walked through it, there’s no doubt it would have caught him and any other person too. He kicked out pushing the trap along with his foot. Nothing happened. It’s broken, he thought, that must be it. He could just discern the pressure plate though the leaves. The trap had failed to spring. He stood back and pushed the shoulder of his gun on the pressure plate.”

“With a violence that completely took him unawares the steel jaws sprang to life and snapped shut on the gun. It was a miracle the gun did not go off. If it had it would have been nasty as it was pointed upwards and directly towards him. He sat down in the snow with a bump, the shock echoed through his bones.”

“Back in the house he took stock. Whatever this prowler was, he was lucky. He had come round the house for the third time and had walked right though the man trap and been very, very lucky. Well he was going to make darn sure that he didn’t escape again. Luck was about to run out for this phantom.”

“That evening he set to work rigging up his contraption. It didn’t take him long and when he had finished he went back inside and thought he had solved his problems and was in for a good night’s sleep.”

“But that night he didn’t sleep well. Half awake and half asleep he heard a noise coming from outside. A plaintive noise more a weeping than a yelling. He peered through the windows but could nothing but swirling snow in the dark night air. And yet there it was again like the soulful whimpering of a trapped dog. The sound was caught on the air and sinewed its way through the open window and echoed round the house. The sound seemed to amplify in his head till he could stand it no longer and he clapped his hands to his ears to blot it out rocking back and forth on the bed. In desperation he rang me about and told me he was going out to get it. I pleaded with him to wait until morning. But he put the phone down and that was the last I heard of him.”

Charters was about to call out for another brandy but thought better of it. If someone looked like they needed a brandy then it was him. “Here old man, have mine.” And I offered him my glass.

“Thanks,” he took another sip. “They had found him the next morning outside. He was caught in the mantrap and the side of his face had been blown off by a shot gun. The police came round and investigated everything of course. Their forensic pathologists went over it all with a fine tooth comb. They said he had set up a booby trap with his own shotgun. There was some tripwire thing apparently. He had constructed it in the garden out of wooden stakes and thin twine. They couldn’t understand what made him do it. The inquest said it was probably suicide.”

“Did they check out the footprints? Did you tell them about the footprints?” I asked.

“Yes. Oh yes, they looked at them most carefully. And they came up with nothing. They were quite adamant about one thing though. All the footprints, all of them mind you; they were all the same, made by the same person.... They were all made by my brother.”

“Are they sure?”

“Absolutely – they matched only his shoes. He was his own phantom.”

The Top Ten Christmas Movies of all Time

The Diogenes Club met for its annual festive gathering in a little out of the way pub in a quaint Dorset village - which shall remain nameless - if only because we want to keep it as a quite retreat and wouldn't like it to become too popular. During our evening conversation over a glass or two of mulled wine the vexed topic of which were the best movies to watch over Christmas came up. And as usual no two members could agree.

So in the absence of any definitive list, I humbly offer here my own top ten of Christmas movies, and make no apologies if they seem set in a "certain age". I confess to you now that modern movies are rather lacking from my list. They may have the action and the Computer Generated Watsits but sadly lack the character and the atmosphere of what I consider to be a good movie. So in reverse order:

10 The Bishop’s Wife (1947)
Cary Grant, David Niven
The bishop (David Niven) is preoccupied with the plans for a new cathedral, while his wife is struggling to make Christmas for the family. An Angel called Dudley (Carey Grant) is sent to help but the bishop becomes jealous of Dudley’s popularity , especially with his wife and daughter. A parable on what is truly important in life. Nominated for 5 Academy Awards in 1948.

9 Bell, Book and Candle (1958)
James Stewart, Kim Novak, Jack Lemon
Kim Novak is a witch who falls in love with a mortal (James Stewart) and starts to lose her powers, all over Christmas.

8 Going My Way (1944)
Bing Crosby, Barry Fitzgerald
Parish life at his first "assignment" includes gossip, youth mischief, and a rather shady landlord, but young Father O'Malley (Crosby) seems to land on his feet. As older Father Fitzgibbon (Fitzgerald) watches Father O'Malley in action, he feels his days as pastor of his flock may be numbered.

7 The Bells of St. Mary's (1945)
Bing Crosby, Ingrid Bergman
Father O'Malley (Bing Crosby) is sent to St. Mary's to revitalize the school and finds himself at odds with Sister Benedict (Ingrid Bergman), but the skinflint Horace P. Bogardus is going to have the school condemned. Sequel to Going my Way. Nominated for 8 Oscars in 1946.

6 It’s a Wonderful Life (1946)
James Stewart
George Bailey (James Stewart) has lost $8000 and feels that his life has made no difference to anyone and so he is about to end it. So Clarence the angel is sent to take George back in time, to show George the tremendous difference he made in the lives of the people around him. Some say it is the most popular Christmas movie ever made, but in my opinion not quite.

5 A Christmas Carol (1951)
Alastair Sim
The classic Christmas story by Charles Dickens, in which the miserly Scrooge learns that amassing money is not the ultimate goal of life; Without doubt the 1951 version is head and shoulders above every other.

4 We’re no Angels (1955)
Humphrey Bogart, Aldo Ray, Peter Ustinov, Basil Rathbone
Three convicts escape from Devil’s Island and stay with kindly Leo G Carroll and his family over Christmas and help him deal with his difficult and pompous cousin (Rathbone). The humorous conflict between Rathbone and Bogart is a sight to be seen.

3 White Christmas (1954)
Bing Crosby, Danny Kay
Bob Wallace (Bing Crosby) and Phil Davis (Danny Kaye) get together after the war as the top variety entertainers. They perform their Christmas show in Vermont in the inn owned by their former general, who has fallen on hard times. Romance ensues as the foursome tries to put together the perfect show to help the general.

2 The Man Who Came to Dinner(1941)
Bette Davis, Monty Woolley, Jimmy Durante, Anne Sheridan.
Sheridan Whiteside (Monty Woolley) the rudest author and broadcaster in the world (and the prototype for Gregory House) slips on the front porch of his hosts home and has to stay over Christmas where he does what he does best – interfering in other lives to great hilarity

1 Miracle on 34th Street (1947)
Edmund Gwen
A nice old man (Edmund Gwen) is institutionalized for claiming that he really is Santa Claus. Fred believes the old man, and arranges the legal hearing to let Kris prove himself. An undisputed Christmas classic nominated for four Academy Awards and two Golden Globes in 1948, and miles better than the Richard Attenborough remake.