In 1904, the wealthy family grew destitute after Libby's uncle Ross Holzman (April 1874 - ?) embezzled nearly $1 million of their stock brokerage business. At some point, Alfred changed the family name from Holzman to Holman. Libby graduated from Hughes High School on June 11, 1920, at the age of 16, then entered the University of Cincinnati, graduating on June 16, 1923, with a Bachelor of Arts degree. In the summer of 1924 Libby left for New York City, where she initially took up residence at the Studio Club. Her first theater job in New York was in the road company of The Fool.
Channing Pollock, the writer of The Fool, recognized Libby's talents immediately and advised her to pursue a theatrical career. She followed Pollock's advice and soon became a star. An early stage colleague who became a longtime close friend was future film star Clifton Webb, then a dancer. He bestowed upon her the nickname, "The Statue of Libby." Her Broadway theatre debut was in the play The Sapphire Ring in 1925 at the Selwyn Theatre, she was billed as Elizabeth Holman, it closed after 13 performances.
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