Rcas stock price was 101 on september 3 1929

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earnings multiples. RCA’s stock price was $101 on September 3, 1929, translating into $505 before a 5-for-1 stock split. This price was 32 times RCA’s 1928 earnings of $15.98 a share. Overvalued? Consider that RCA’s 1927 earnings were $6.15 a share, and the 1925 earnings were $1.32. With earnings growing at well over 100 percent a year, a multiple of 32 times trailing earnings is very reasonable by today’s standards. In 1929, earnings and dividends were increasing at a stupendous rate. In the first nine months of 1929, dividends increased 29 percent from the previous year. For September 1929, dividends were 44 per- cent higher than the same month of 1928, even though the dividend payout ratio fell to 64 percent from 75 percent. U.S. Steel’s third- quarter earnings of $51.575 million were $21 million higher than the third quarter of 1928. Analysts predicted $20 a share for earnings for 1929 (this number turned out to be too low). At its 1929 high of $261.75, U.S. Steel shares traded at 13 times earnings estimates for 1929. In August of 1929, the economist Irving Fischer estimated that the forward price-earnings ratio of the market was 13. Tax revenues flooded into the Treasury, and by 1929 the national debt had been reduced from $24 billion to $16 billion. Coolidge had already fulfilled his tax cut promises, but the market saw the big gov- ernment surpluses and predicted even more tax cuts. The market had priced in expectations—at the time rational expectations—that the boom would continue, even stronger than it had been. Hoover was elected to carry on in Coolidge’s footsteps, and Andrew Mellon remained at Treasury. As U.S. industry boomed, however, agricultural interests were GOLD: THE ONCE AND FUTURE MONEY 58
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relative laggards and once again sought a protectionist tariff on agri- cultural products. To win support for the tariff in Congress, the tar- iff’s advocates steadily expanded the scope of the tariff to include a wide range of nonagricultural imports. The prodigious economic expansion was stopped in its tracks in late 1929 by the threat of passage of the Smoot-Hawley Tariff Act, which touched off an explosion of tax hikes worldwide and threw the world into recession and monetary turmoil. The stock market quickly revised its view of the future, from one of tax cuts and roar- ing growth to one of tax hikes, international trade friction, declining corporate profits, and subdued growth prospects. It is often said that the stock market, due to the efforts of investors to predict the future, tends to precede changes in corporate profits by about six months. Profits began to decline in early 1930. The brevity of the 1920–1921 recession, and intensity of the boom that followed, made a great impression on economists of the time, who apparently had proof of the economy’s ability to quickly adjust to a new productive equilibrium at a lower price level. The unemployment rate, which hit 12 percent in 1921 (with nonfarm unemployment near 20 percent), was back under 5 percent by 1922.
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