Galbraith, The Great Crash 1929

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John Kenneth Galbraith

THE GREAT CRASH 1929

Penguin Books 1975 Reprint with revisions

FOREWORD TO THE 1975 EDITION

The pages that follow tell of the greatest cycle of speculative boom
and collapse in modern times -- since, in fact, the South Sea Bubble.
There is merit in keeping alive the memory of those days. For it is
neither public regulation nor the improving moral tone of corporate
promoters, brokers, customer's men, market operators, bankers, and
mutual fund managers which prevents these recurrent outbreaks and
their aftermath. It is the recollection of how, on some past occasion,
illusion replaced reality and people got rimmed.

In the wake of the 1929 crash, and with a view to preventing another
runaway boom and the associated abuse, the Congress passed some
tolerably astringent legislation including the Securities Exchange Act
of 1934. It was not, at the time, especially necessary. Markets and
financial adventure were then and for a long while after restrained
not by the S.E.C. but by the memory of what happened to so many in
1929.

By the sixties this memory had dimmed. Almost everything described in
this book had reappeared, sometimes in only a slightly different
guise. Instead of the investment trusts there were now the mutual
funds. Matching Blue Ridge and Shenandoah in general scope and
financial peril were the International Investment Trust and the Fund
of Funds. Matching and possibly surpassing the vaulting imagination of
Harrison Williams and Waddill Catchings, of Central States Electric
and Goldman, Sachs was that of Edward Cowett and Bernard Cornfeld, the
miracle men of I.O.S. The admiration for skill in deployment of
corporate capital that was once lavished on Samuel Insull and Howard
Hopson settled now on the men who were parlaying smaller firms into
big conglomerates. There were glamour stocks in both periods; in both
periods [*10] glamour was a substitute for substance. Scholars and
politicians lent their names and blessings to the new promotions as
had their counterparts forty years before. In the sixties as in the
twenties men intended by nature for mentally undemanding toil became
rich for a little while. It was only that the market was going up.
Some things in 1970 were worse. Wall Street houses in the sixties were
markedly more incompetent in their management than in the twenties and
expanded much more recklessly. The consequences when the collapse came
were far more troublesome than in 1929.

The new laws were not without effect. The gamiest of the promotions of
the sixties had to be sold to foreigners -- thus the offshore funds.
There was much less speculation on margin. In both periods leverage --
the purchase of common stocks with bonds or debentures allowing the
investor to have all of the increase in value with minimal personal
outlay -- was rediscovered and heralded as the financial innovation of
the age. But the suppression of the holding company kept leverage from
being used as extravagantly in the sixties as in the twenties. In
consequence it went less violently into reverse -- as leverage does
when a firm must pay interest out of declining earnings from common
stock. The collapse of the Van Sweringen railroads in the thirties was
the result of reverse leverage. Penn Central went down only as the
result of gross mismanagement. The day of reckoning in 1970 was
disagreeable -- and the magnitude of the market decline was not so
different from that in the autumn months of 1929. But it did not
become cumulative. And the effect on consumer spending, business
investment and the economy generally was far less severe.

Yet the lesson is evident. The story of the boom and crash of 1929 is
worth telling for its own sake. Great drama joined in those months
with a luminous insanity. But there is the more sombre purpose. As a
protection against financial illusion or insanity, memory is far
better than law. When the memory of [*11] the 1929 disaster failed,
law and regulation no longer sufficed. For protecting people from the
cupidity of others and their own, history is highly utilitarian. It
sustains memory and memory serves the same purpose as the SEC. and, on
the record, is far more effective.

The main body of the text of this edition is identical with that of
its predecessor. I've retained in slightly abbreviated form, in the
pages following, the introduction to the second edition for it tells
of the origins of this book and of the exceedingly lively reception
that it was accorded by the Senate Banking and Currency Committee and
Senator Homer Capehart of Indiana. And there are a few changes in the
final chapter -- which, however, still speculates on the effect on the
economy of the next really great crash. All else is as before.

John Kenneth Galbraith

[*12] ON THE ORIGINS OF THIS BOOK

I

I wrote this book during the summer and autumn of 1954. At the time I
was engaged on the manuscript which eventually became The Affluent
Society. Or, mere precisely, after months of ineffective and
frustrating labour which had produced a set of chapters so vapid in
content and repulsive in style that I could not bear to read them, I
was totally stalled. Suicide seemed the only answer; unfortunately it
was an exceptionally lovely summer in southern Vermont. My neighbour,
Arthur M. Schlesinger, Jr, had once made the modest request that I do
the definitive work on the Great Depression. It would be convenient,
he thought, for his work on Roosevelt. I resolved to compromise and
write a book on the dramatic days that ushered the depression in.

I never enjoyed writing a book more; indeed, it is the only one I
remember in no sense as a labour but as a joy. I did the research in
the Baker Library at Dartmouth College, working under the Orosco
murals on the ground floor. They somehow supported the mood of
unreality, gargantuan excess and hovering disaster of the months
before the crash. And, as might happen toward the end of the morning
or the end of the after- noon if this mood became too overpowering,
one could walk out into the sunshine, across the most exquisite
village common in all New England, and have a martini and a good meal
at the Hanover Inn. I camped my teaching that autumn to work on the
manuscript; when I left it with the publisher, I felt that I was
saying goodbye to a close and valued companion. [*13]

My labours during the autumn had been made to seem rather more
relevant by the contemporary boom in the stock market. This was small
compared with z; it was very small compared with the bidding up of
values and the bidding down of yields that subsequently took place.
But it was plain that an increasing number of persons were coming to
the conclusion -- the conclusion that is the common denominator of all
specu- lathe episodes -- that they were predestined by luck, an
unbeatable system, divine favour, access to inside information, or
exceptional financial acumen to become rich without work.

In the spring the boom, or boomlet, continued. The Democrats had won
the Congressional elections the previous autumn; the Republicans had
the White House for the first time since Hoover. It seemed worth the
while of the Senate Committee on Banking and Currency to see if the
boom portended another bust. Chairman William Fulbright decided that
it would be a quiet and friendly investigation. I was called to
testify. This was not entirely by accident. While testifying a few
weeks earlier on another matter before another Committee, I used the
opportunity to tell Mr Robert A. Wallace and Mr Myer Feldman, two of
the distinguished and self-effacing men who serve the public by
serving Congressmen and their Committees and then staff members of the
Banking and Currency Committee, of what I had under way. An invitation
to testify on the 1929 experience came promptly and was not an
unbearable surprise.

I believe that almost everyone enjoys testifying before a friendly
Congressional Committee or even a moderately censorious one. For the
moment you are an oracle, a minor oracle to be sure, but possessed of
knowledge important for the future of the Republic. Your words go down
in an imperishable, if [*14] sadly unread, record. Newspapermen, one
or two at least, are present to transmit your-better thoughts to the
world or, more frequently, your worst ones, for these, being
improbable, have novelty and seem more likely to merit a minor
headline. An audience is on hand. Except for an exceedingly dramatic
investigation, this audience is always about the same. Apart from
watchdogs from the Executive Departments and one's Mends, it consists
of connoisseurs of the Congressional Hearings who attend them every
day. Quite a few are of advanced years and none has alternative
employment, and if they are not our best, they must at least be our
most widely informed citizenry. Labour rackets, the missile gap,
influence on the FCC, the economic outlook, the organization of the
National Security Council are all grist for their highly diversified
mill. They listen attentively and critically; and Congressional
Hearing has about it a touch of theatre and this is helped by having a
competent and critical house.

The witness at the Congressional Hearing is treated with courtesy and
deference, which in politics is always a trifle more effusive and
therefore a great deal more pleasant than in any other walk of life.
He must, however, expect to be seduced into statements damaging to his
case if that is beneficial to the political needs or beliefs of an
interrogator. This adds interest, and the stakes are not very high. My
professional colleagues occasionally complain of the time they spend
in preparing for or attending these inquiries. This is strictly for
the purpose of impressing the others at the Department meeting. They
enjoy it and wouldn't dream of declining.

3

I testified at the morning session of the stock market hearings on
Tuesday, 8 March 1955. Several witnesses from the financial [*15]
world, including Mr G. Keith Funston and a bevy of vice-commissars of
the New York Stock Exchange had preceded me. The market had reacted to
their testimony with admirable equanimity perhaps because they had
said nothing although they had said it very well. Nor was my testimony
sensational. I had brought along the proofs of this book; I drew on
them to tell what had happened twenty-five years before, in 1928 and
1929. Toward the end I suggested that history could repeat itself,
although I successfully resisted all invitations to predict when. I
did urge a stiff tightening of margin requirements ass precautionary
step. Similar action to minimize the use of credit for speculation had
been taken during the war when the speculative enthusiasm was much
less. Through it all the newspapermen sat gazing with partly open
mouths at the ceiling of the Senate caucus chamber or looking down
briefly to scribble a random note. An aide appeared occasionally,
sidling along the wall behind the Committee, to pass a note to one of
the Senators. The audience, I knew from waiting my turn on earlier
occasions, was following me closely and, on occasion, exchanging a
critical aside on my facts, logic, or diction. As the testimony gave
way to questions, more Senators came in. This is perhaps the most
trying time of any hearing. Each in his turn apologizes graciously for
being late and then asks the question that has occurred to him on the
way over. The question is always the same; and the Senator does not
know that it has been asked before:

SENATOR ROBERTSON: Well, Professor, we have been told by all the
witnesses so far that present stock prices are not too high? What is
your view on that?

SENATOR IVES: You do not think we are faced with a bust, do you?
[*16]

SENATOR MONRONEY: I am wondering if there is any substance to the oft-
repeated reason for the new high levels. That the stock market is
merely catching up with the inflationary boom.

SENATOR PAYNE: I am sorry I came in late ... would you want to
indicate whether or not some of these increases have perhaps more
truly reflected the true value of stocks in relation to their
earnings?

The experienced witness observes that the question, though it bears a
resemblance to some already asked, has been formulated in a novel way.
Then he gives an answer which is the same in substance but decently
different in form from those offered before. The audience is
especially appreciative of able handling of such details.

Toward the end of the morning, interest appeared to increase. First
one and then several photographers appeared. Then a newsreel camera or
two. Through the weariness that develops with even so modest a sojourn
in the public eye, I thought I sensed a certain tension. I remember
noticing that the normal attrition of the Committee -- which on a
subject such as economics can leave one in a matter of an hour or so
with only the Chairman and a precautionary member of the opposition --
was not taking place. All Senators were staying. And soon I was the
only one in the room who did not know the reason. The stock market was
taking a nasty plunge.

I still did not know the reason when the hearing recessed at 12:57,
just as a harried man from CBS came dashing into the chamber followed
by two beasts of burden carrying a vast poundage of electronic
marvels. He had been off in another room photographing Dulles. The
real history had passed him by. In response to his almost tearful
plea, I repeated several minutes of my testimony to an open window.
The substitution of this for the Senators led to a considerable
release from [*17] inhibition. I rather let myself go with the
gestures -- at times grave and statesmanlike, at others perhaps a
trifle flamboyant It was this that the world and my children saw.

I still did not realize what had happened until someone handed me a
paper with a big headline. The New York Times industrials went off 7
points on the day. Stocks lost $3 billion in value on the New York
Stock Exchange.

4

Back in Cambridge the next few days were among the most interesting in
my memory. The phone rang continuously -- so continuously that my
secretary went home in annoyance, leaving me to answer it myself. Some
of the calls were from the very great Ed Murrow, who wanted me to
extend my remarks for an even larger audience. I declined. A few
wanted to know if I was likely to say anything that would affect the
market in the near future. I promised them silence. The rest merely
wished to denounce me for destroying their dream.

The telephone calls were supplemented, beginning the morning after the
testimony, by a mountain of mail. All was unfavourable. Some was
denunciatory; more was belligerent; much was prayerful. The
belligerent threatened various forms of physical violence. My wife
professed particular concern over five communications from a man in
Florida announcing that he was on his way north to kill me. Her alarm
subsided when I pointed out (having thoughtfully checked the point
myself) that all were postmarked Palm Beach. The prayerful all said
they were beseeching their God to have me meet with a bad accident --
some were asking that I be deprived of life, some of limb, and the
minimum request was that I lose all ability to open my mouth. On
Wednesday night, I crawled into bed reflecting, with less than
characteristic piety, on all of the [*18] prayers that were spiralling
up at that moment petitioning my dismemberment or destruction. I
thought of saying a word on my own behalf and then struggled with the
shattering thought that these matters might be decided by majority
vote.

The next morning dawned bright and clear, and my wife and I decided to
take a day away from it all. We went to Mount Snow, Vermont, to ski.
Toward the end of the after- noon I turned from shaded and hard snow
to some that had been softened by the sun and had a bad spill and
broke my leg. The papers carried a note about my mishap. I now heard
from those whose belief in the existence of a just and omnipotent God
had been deeply strengthened.

A few days later, the market started up again. My mail fell off and
stopped. A representative collection of the letters was posted in a
seminar room and viewed admiringly by students for weeks. But there
was more to come.

5

The state of Indiana was then represented in the Senate of the United
States by Homer E. Capehart. He was a Republican, conservative and
wealthy. It is possible, as partisan Democrats, at least, believed,
that the people of Indiana could have had a better representative. But
he was not a wicked man. His colleagues found him pleasant. So had I
on previous brief encounter. These were the diminuendo days of Senator
Joseph McCarthy. Unlike his colleague, William Jenner, Capehart had
never been much involved in McCarthy's crusades. The senior Republican
on the Banking and Currency Committee, he had not been present on the
day I testified.

On 20 March, in the course of a network television programme, Senator
Capehart announced that I would be recalled before the Committee to
answer for having spoken favourably of communism and then, presumably,
having advanced its [*19] cause by collapsing the market. I had had
some warning. A gentleman from the Senator's office had called me a
day or two before to see if I admitted to authorship of the offending
encomium. The programme had been filmed the day before. Also present
on the programme was a good and gallant friend, Senator A. S. Mike
Monroney of Oklahoma. After extemporising a brilliant defence of my
dereliction, he called me to tell me what was coming.

The praise of communism had been extracted from a pamphlet of the
National Planning Association dealing with problems of postwar Europe.
It noted that the communists had a better reputation for sincerity and
determination in attacking old social grievances and that they also
had a solution to the problem of petty nationalism by asserting the
higher loyalty to the worker's state. But Senator Capehart's case was
not without flaw. The kind words were marred by a caveat, expressing
suspicion and distaste of communism on other grounds, which had been
put into the very middle of the paragraph for the precise purpose of
preventing any inconvenient use, a precaution normal in those days.
The Senator had thought it necessary to delete this offending clause,
a distinctly noticeable act. The pamphlet had been based on a lecture
given originally at the University of Notre Dame in, of all states,
Indiana. An earlier version had been published by the University. The
pamphlet had been endorsed in principle by Allen Dulles, the brother
of the secretary of State, and Milton Eisenhower, the brother of the
President, an underwriting which, however, could cause some doubts as
to the utter originality of the ideas advanced. Even a brilliant
improviser like Joe McCarthy might have wished for a better case.

A day or so later the Senator made the further discovery that, at a
meeting of the American Economic Association not long before, a
conservative professional colleague had jeopardized any possible
reputation for understatement by saying [*20] that I was, though
perhaps unconsciously, 'one of the most effective enemies of
capitalism and democracy' in all the land. But this evidence did not
retrieve matters as much as might have been hoped. My friend thought
me dangerous because I was too soft on industrial monopoly.

Like most other liberal academicians, I had been a thoughtful observer
of the methods of the Wisconsin Titus Oates. Two had always seemed to
me worth adopting by anyone attacked. The first was to avoid defence
of one's self and instead assault the accuser. The second was to avoid
any suspicion, however remote, of personal modesty. I put these
methods to test when I heard of the charges. I sent a telegram to the
network carrying the programme, to key stations, the wire services,
and to important papers indicting the Senator for incompetence. I
identified incompetence with failure to know my views and these I
implied -- indeed, I stated -- were an imperishable chapter in the
intellectual history of our time. I followed the wire a few days later
with a press conference, which, by a fortunate accident of travel, I
was able to hold in Indiana.

The effect of my efforts, I am persuaded, was to convert an attack
that otherwise would have been wholly ignored into front-page news.
Neither of us was ever so featured before and I trust will never be so
featured again. But I have no complaint about the press. It concluded
that I had been assailed for being unkind to the stock market. This it
refused to condemn as seriously subversive.

The Senator then took the floor of the Senate for a further
denunciation. Some of this centred on my characterization of communism
as a monolithic force; which be regarded seriously suspect. Mr
President, "monolithic" means like a monument, or a pillar of
strength... That is like describing communism as a monument or as a
pillar of strength; or, as we used to say, like the Rock of
Gibraltar.'

But by now he was losing power. He said, handsomely, that [*21] there
were things in the offending pamphlet with which 'we can all agree'.
It was unfair, he added, to suggest that he had called me a Red. After
some further bickering in the Committee, he subsided. The Senator has
had no further reputation as a witch-hunter. I like to think that he
himself was plucked as a brand from the burning. I sled a further and
rather sanctimonious statement with the Committee but was not
recalled.

6

On 21 April 1955, the book was finally published. The publisher had
some months before decided that the volume needed a good strong
jacket. This turned out to be a bright and very visible red. With this
colour and all the excitement of the preceding weeks, it seemed
certain that the interest in the book would be overwhelming. In the
end the response was admirable but the early market was very orderly.
Indeed, depressingly so. One evening I was coming through the old La
Guardia terminal on my way to Boston and I paused as usual to eye the
window of the little bookshop on the way to the ramp. As usual there
was no sign of the bright red jacket.

The lady asked me if I wanted something and 'I summoned all of my
resources of courage and verisimilitude and said, 'I seem to remember
a lot of recent discussion about a book -- I forget the name of the
author, maybe Galbraith -- but I think it was called The Great Crash.'

She replied, 'That's certainly not a title you could sell in an
airport.' [*22] [*23]

A NOTE ON SOURCES

In recent times numerous authors and publishers have come to suppose
that readers ore offended by footnotes. I have no desire to offend or
even in the slightest way to discourage way solvent customer, but I
regard this supposition as silly. No literate person can possibly be
disturbed by a little small type at the bottom of a page, and
everyone, professional and lay reader alike, needs to know on occasion
the credentials of a fact. Footnotes also provide an exceedingly good
index of the care with which a subject has been researched.

However, there is also a line between adequacy and pedantry. In this
book where I have drawn on public documents, books, magazine articles,
or special sources of any hind I have indicated the source. However,
much of the story of 1929 is to be found is the general and financial
press of the time. Systematic citation of these sources would involve
endless references to the some papers. This I have not done. It means
in general that if no source is given, the reader can assume it was in
the New York Times, the Wall Street Journal, and the other papers of
general circulation of the day. [*24] [*25]

CHAPTER I

A YEAR TO REMEMBER

Some years, like some poets and politicians and some lovely women, are
singled out for fame far beyond the common lot, and 1929 was clearly
such a year. Like 1066, 1776, and 1914, it is a year that everyone
remembers. One went to college before 1929, was married after 1929, or
wasn't even born in 1929, which bespeaks total innocence. A reference
to 1929 has become shorthand for the events of that autumn. For a
decade, whenever Americans have been afflicted with doubt as to the
durability of their current state of prosperity, they have asked 'Will
it be 1929 all over again?' And even after a quarter of a century,
this is still a year with a singular political personality. Just as
Republican orators for a generation after Appomattox made use of the
bloody shirt, so for a generation Democrats have been warning that to
elect Republicans is to invite another disaster like that of 1929. The
defeat of the Democratic candidate in 1952 was widely attributed to
the unfortunate appearance at the polls of too many youths who knew
only by hearsay of the horrors of those days.

It would be good to know whether, indeed, we shall some day have
another 1929. However, the much less pretentious task of this book --
the only task which social science in its present state allows -- is
to tell what happened in 1929 and immediately before and thereafter.
Much of the story concerns the stock market, and in part it represents
an effort to put right an error that has long been fashionable among
economic historians. The stock market crash in the autumn of 1929 has
long been held to have been a somewhat secondary event. [*26]

Beneath its froth more serious forces were at work. These, well prior
to the market collapse and quite apart from anything that happened in
Wall Street, were shaping things up for a serious depression. This
explanation was attractive in downtown New York, for it at least
partially absolved the stock market from the formidable responsibility
of the depression. In my view, this puts the wrong face on matters.
There is an essential unity in economic phenomena; no Chinese wall
separates the fiduciary from the real. Wall Street -- as its prophets
for other purposes concede -- is of considerable importance in the
American economy. The stock market crash and the speculation which
made it inevitable had an important effect on the performance, or
rather the malperformance, of the economy in the ensuing months and
years.

2

As a year, 1929 has always been peculiarly the property of the
economists. It was a year of notable economic events; indeed, in that
year began the most momentous economic occurrence in the history of
the United States, the ordeal of the Great Depression. In many ways
this preoccupation with economics is unfortunate, for 1929 was a year
of many marvels. In particular, it was one of those years that
marvelously illuminate human motives and the very wellsprings of human
behaviour. Historians and novelists always have known that tragedy
wonder- fully reveals the nature of man. But, while they have made
rich use of war, revolution, and poverty, they have been singularly
neglectful of financial panics. And one can relish the varied idiocy
of human action during a panic to the full, for, while it is a time of
great tragedy, nothing is being lost but money.
In the autumn of 1929 the mightiest of Americana were, for a brief
time, revealed as human beings. Like most humans most of the time,
they did some very foolish things. On the [*27] whole, the greater the
earlier reputation for omniscience, the more serene the previous
idiocy, the greater the foolishness now exposed. Things that in other
times were concealed by a heavy facade of dignity now stood exposed,
for the panic suddenly, almost obscenely, snatched this façade away.
We are seldom vouchsafed a glance behind this barrier; in our society
the counterpart of the Kremlin walls is the thickly stuffed shirt. The
social historian must always be alert to his opportunities, and there
have been few like 1929.

3

The years following the stock market crash produced a notable
outpouring of books, articles, congressional documents, and reports,
all exposing Wall Street for what it was. A certain amount of dubious
behaviour was brought to light and Wall Street was well pilloried for
its crimes.

It will perhaps already be evident that this book has no similar
motive. I have never adhered to the view that Wall Street is uniquely
evil, just as I have never found it possible to accept with complete
confidence the alternative view, rather more palatable in sound
financial circles, that it is uniquely

Moreover, implicit in this hue and cry was the notion that somewhere
on Wall Street -- possibly at Number 23 and possibly on an obscure
corridor in one of the high buildings --- there was a deus ex machina
who somehow engineered the boom and bust. This notion that great
misadventures are the work, of great and devious adventurers, and that
the latter can and must be found if we are to be safe, is a popular
one in our time. Since the search for the architect of the Wall Street
debacle, we have had a hue and cry for the man who let the Russians
into Western Europe, the man who lost China, and the man who thwarted
MacArthur in Korea. While this may be a harmless avocation, [*28] It
does not suggest an especially good view of historical pro- ceases No
one was responsible for the great Wall Street crash. No one engineered
the speculation that preceded it. Both were the product of the free
choice and decisions of thousands of individuals. The latter were not
led to the slaughter. They were impelled to it by the seminal lunacy
which has always seized people who are seized in turn with the notion
that they can become very rich. There were many Wall Streeters who
helped to foster this insanity, and some of them will appear among the
heroes of these pages. There was none who caused it.

4

To see the events of 1929 in the foregoing light is of some practical
value. It has long been my feeling that the lessons of economics that
reside in economic history are important and that history provides an
interesting and even fascinating window on economic knowledge. For
this reason this book is, perhaps, a bit more than a chronicle. There
are frequent pauses to see how things work and why.

Finally, 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.

In our own day, we can devoutly wish that we may be spared [*29] the
technically superlative disasters we have prepared for ourselves in
order to enjoy the minor vicissitudes of the business cycle -- of
prosperity and depression and inflation and deflation. If we are so
favoured, we can count on some future period of prosperity carrying us
on into a mood of exhilarant optimism and wild speculative frenzy.
Instead of radio and investment trusts, uranium mines or perhaps
portable reactors will be the new favourites. Or the speculative fever
may strike land, oil, or even Boston.

The wonder, indeed, is that since 1929 we have been spared so long.
One reason, without doubt, is that the experience of 1929 burned
itself so deeply into the national consciousness. It is worth hoping
that a history such as this will keep bright that immunizing memory
for a little longer. [*30]

CHAPTER II

'VISION AND BOUNDLESS HOPE AND OPTIMISM'

On 4 December 1928 President Coolidge sent his last message on the
state of the Union to the reconvening Congress. Even the most
melancholy congressman must have found reassurance in his words. 'No
Congress of the United States ever assembled, on surveying the state
of the Union, has met with a more pleasing prospect than that which
appears at the present time. In the domestic field there is
tranquility and contentment ... and the highest record of years of
prosperity. In the foreign field there is peace, the goodwill which
comes from mutual understanding ...' He told the legislators that they
and the country might 'regard the present with satisfaction and
anticipate the future with optimism'. And breaking sharply with the
most ancient of our political conventions, he omitted to attribute
this well-being to the excellence of the administration which he
headed. 'The main source of these unexampled blessings lies in the
integrity and character of the American people.'

A whole generation of historians has assailed Coolidge for the
superficial optimism which kept him from seeing that a great storm was
brewing at home and also more distantly abroad. This is grossly
unfair. It requires neither courage nor prescience to predict
disaster. Courage is required of the man who, when things are good,
says so. Historians rejoice in crucifying the false prophet of the
millennium. They never dwell on the mistake of the man who wrongly
predicted Armageddon. [*31]

There was much that was good about the world of which Coolidge spoke.
True, as liberal misanthropes have insisted, the rich were getting
richer much faster than the poor were getting less poor. The farmers
were unhappy and had been ever since the depression of 1920-1 had cut
farm prices sharply but left costs high. Black people in the South and
white people in the southern Appalachians continued to dwell in
hopeless poverty. Fine old-English houses with high gables, leaded
glass, and well-simulated half-timbering were rising in the country
club district, while farther in town one encountered the most noisome
slums outside the Orient.

All this notwithstanding, the twenties in America were a very good
time. Production and employment were high and rising. Wages were not
going up much, but prices were stable. Al- though many people were
still very poor, more people were comfortably well-off, well-to-do, or
rich than ever before. Finally, American capitalism was undoubtedly in
a lively phase. Between 1925 and 1929, the number of manufacturing
establishments increased from 183,900 to 206,700; the value of their
output rose from $60.0 billions to $68.0 billions.FN1 The Federal
Reserve index of industrial production which had averaged only 67 in
1921 (1923-5 = 100) had risen to no by July 1928, and it reached 126
in June 1929.FN2 In 1926, 4,301,000 automobiles were produced. Three
years later, in 1929, production had increased by over a million to
5,358,000,FN3 a figure which compares very decently with the 5,700,000
new car registrations of the opulent year of 1953. Business earnings
were rising rapidly, and it was a good time to be in business. Indeed,
even the most jaundiced histories of the era conceded,

FN1 U.S. Department of Commerce, Bureau of the Census, Statistical
Abstract of the United States, 1944-45.
FN2 Federal Reserve Bulletin, December 1929.
FN3 Thomas Wilson, Fluctuations in Income and Employment, 3rd ed. New
York (Pitman), 1948, p. 141. [*32]

tacitly, that times were good, for they nearly all join in taxing
Coolidge for his failure to see that they were 'too good to last. This
notion of an iron law of compensation -- the notion that the ten good
years of the twenties had to be paid for by the ten bad ones of the
thirties -- is one to which it will be worthwhile to return.

2

One thing in the twenties should have been visible even to Coolidge.
It concerned the American people of whose character he had spoken so
well. Along with the sterling qualities he praised, they were also
displaying an inordinate desire to get rich quickly with a minimum of
physical effort. The first striking manifestation of this personality
trait was in Florida. There, in the mid-twenties, Miami, Miami Beach,
Coral Gables, the East Coast as far north as Palm Beach, and the
cities over on the Gulf had been struck by the great Florida real
estate boom. The Florida boom contained all of the elements of the
classic speculative bubble. There was the indispensable element of
substance. Florida had a better winter climate than New York,,
Chicago, or Minneapolis. Higher incomes and better transportation were
making it increasingly accessible to the frost-bound North. The time
indeed was coming when the annual flight to the South would be as
regular and impressive as the migrations of the Canada Goose.

On that indispensable element of fact men and women had proceeded to
build a world of speculative make-believe. This is a world inhabited
not by people who have to be persuaded to believe but by people who
want an excuse to believe. In the case of Florida, they wanted to
believe that the whole peninsula would soon be populated by the
holiday-makers and the sun-worshippers of a new and remarkably
indolent era. So great would be the crush that beaches, bogs, swamps,
and common [*33] scrubland would all have value. The Florida climate
obviously did not ensure that this would happen. But it did enable
people who wanted to believe it would happen so to believe.

However, speculation does not depend entirely on the capacity for self-
delusion. In Florida land was divided into building lots and sold for
a ten per cent down payment. Palpably, much of the unlovely terrain
that thus changed hands was as repugnant to the people who bought it
as to the passer-by. The buyers did not expect to live on it; it was
not easy to suppose that anyone ever would. But these were academic
considerations. The reality was that this dubious asset was gaining in
value by the day and could be sold at a handsome profit in a fortnight
It is another feature of the speculative mood that, as time passes,
the tendency to look beyond the simple fact of increasing values to
the reasons on which it depends greatly diminishes. And there is no
reason why anyone should do so as long as the supply of people who buy
with the expectation of selling at a profit continues to be augmented
at a sufficiently rapid rate to keep prices rising.

Through 1925 the pursuit of effortless riches brought people to
Florida in satisfactorily increasing numbers. More land was subdivided
each week. What was loosely called sea-shore became five, ten, or
fifteen miles from the nearest brine. Suburbs became an astonishing
distance from town. As the speculation spread northward, an
enterprising Bostonian, Mr Charles Ponzi, developed a subdivision
'near Jacksonville'. It was approximately sixty-five miles west of the
city. (In other respects Ponzi believed in good, compact
neighbourhoods; he sold twenty-three lots to the acre.) In instances
where the sub- division was close to town, as in the case of Manhattan
Estates, which were 'not more than three-fourths of a mile from the
prosperous and fast-growing city of Nettle', the city, as was so of
Nettle, did not exist. The congestion of traffic into the state became
so severe that in the autumn of 1925 the railroads were [*34] forced
to proclaim an embargo on less essential freight, which included
building materials for developing the subdivisions. Values rose
wonderfully. Within forty miles of Miami 'inside lots sold at from
$8,000 to $20,000; waterfront lots brought from $15,000 to $25,000,
and more or less bona fide sea-shore sites brought $20,000 to
$75,000.FN1

However, in the spring of 1926, the supply of new buyers, so essential
to the reality of increasing prices, began to fail. As 1928 and 1929
were to show, the momentum built up by a good boom is not dissipated
in a moment. For a while in 1926 the increasing eloquence of the
promoters offset the diminishing supply of prospects. (Even the
cathedral voice of William Jennings Bryan, which once had thundered
against the cross of gold, had been for a time enlisted in the sorry
task of selling swampland.) But this boom was not left to collapse of
its own weight In the autumn of 1926, two hurricanes showed, in the
words of Frederick Lewis Allen, 'what a Soothing Tropic Wind could do
when it got a running start from the West Indies'.* The worst of these
winds, on 18 September 1926, killed four hundred people, tore the
roofs from thousands of houses, and piled tons of water and a number
of elegant yachts into the streets of Miami. There was agreement that
the storm had caused a healthy breathing spell in the boom, although
its resumption was predicted daily. In the Wall Street Journal of 8
October 1926, one Peter O. Knight, an official of the Sea- board Air
Line and a sincere believer in the future of Florida, acknowledged
that some seventeen or eighteen thousand people were in need of
assistance. But he added: 'The same Florida is

FN1 These details are principally from two articles on the Florida
land boom by Homer B. Vanderblue in The Journal of Land and Public
Utility Economics, May and August 1927.
FN2 Only Yesterday, New York (Harper), 1931, p. 280. Other details of
the damage resulting from the hurricane are from this still fresh and
lively book. [*35]

still there with its magnificent resources, its wonderful climate, and
its geographical position. It is the Riviera of America.' He expressed
concern that the solicitation of Red Cross funds for hurricane relief
would 'do more damage permanently to Florida than would be offset by
the funds received'.FN1

This reluctance to concede that the end has come is also in accordance
with the classic pattern. The end had come in Florida. In 1925 bank
clearings in Miami were $1,066,528,000; by 1928 they were down to
$143,364,000.FN2 Farmers who had sold their land at a handsome price
and had condemned themselves as it later sold for double, treble,
quadruple the original price, now on occasion got it back through a
whole chain of subsequent defaults. Sometimes it was equipped with
eloquently named streets and with sidewalks, street lamps, and taxes
and assessments amounting to several times its current Value.

The Florida boom was the first indication of the mood of the twenties
and the conviction that God intended the American middle class to be
rich. But that this mood survived the Florida collapse is still more
remarkable. It was widely understood that things had gone to pieces in
Florida. While the number of speculators was almost certainly small
compared with the subsequent participation in the stock market, nearly
every community contained a man who was known to have taken 'quite a
beating' in Florida. For a century after the collapse of the South Sea
Bubble, Englishmen regarded the most reputable joint stock companies
with some suspicion. Even as the Florida boom collapsed, the faith of
Americans in quick, effortless enrichment in the stock market was
becoming every day more evident.

FN1 Vandeblue, op. cit., p. 114.
FN2 Allan, op. cit., p. 282. [*36]

3

It is hard to say when the stock market boom of the nineteen- twenties
began. There were sound reasons why, during these years, the prices of
common stocks should rise. Corporate earnings were good and growing.
The prospect seemed benign. In the early twenties stock prices were
low and yields favourable.

In the last six months of 1924, the prices of securities began to rise
and the increase was continued and extended through 1925. Thus at the
end of May the New York Times average of the prices of twenty-five
industrial stocks was 106; by the end of the year it was 134.FN1 By 31
December 1925, it had gained very nearly another o points and stood at
i8i. The advance through 1925 was remarkably steady; there were only a
couple of months when values did not show a net gain.

During 1926 there was something of a setback. Business was off a
little in the early part of that year; it was thought by many that
values the year before had risen unreasonably. February brought a
sharp fall in the market, and March a rather abrupt collapse. The
Times industrials went down from 181 at the

FN1 Throughout this book I have used the New York Times industrial
averages u the shorthand designation of the level of security prices.
This series is the arithmetical, unweighted average of the prices of
twenty-five of what the Times describes as 'good, sound stocks with
regular price changes and generally active markets'. The selection of
the Times averages in preference to the Dow-Jones or other averages
was largely arbitrary. The Times averages are the ones I have watched
over the years; they are somewhat more accessible to the non-
professional observer than the Dow-Jones averages. Also, while the
latter are much better known, they carry in their wake a certain lore
of market theory which is irrelevant for present purpose. The
industrial rather than the railroad or combined average is cited
because industrial stocks were the major focus of speculation and
displayed the widest amplitude of Movement. Unless there is indication
to the contrary, values given we those at the dose of the market for
the date indicated. [*37]

beginning of the year to 172 at the end of February, and then dropped
by nearly 30 points to 143 at the end of March. However, in April the
market steadied and renewed its advance. Another mild setback occurred
in October, just after the hurricane blew away the vestiges of the
Florida boom, but again recovery was prompt. At the end of the year
values were about where they had been at the beginning.

In 1927 the increase began in earnest. Day after day and month after
month the price of stocks went up. The gains by later standards were
not large, but they had an aspect of great reliability. Again in only
two months in 1927 did the averages fail to show an increase. On 20
May, when Lindbergh took off from Roosevelt Field and headed for
Paris, a fair number of citizens were unaware of the event. The
market, which that day was registering another of its small but solid
gains, had by then acquired a faithful band of devotees who spared no
attention for more celestial matters.

In the summer of 1927 Henry Ford rang down the curtain on the immortal
Model T and dosed his plant to prepare for Model A. The Federal
Reserve index of industrial production receded, presumably as a result
of the Ford shutdown, and there was general talk of depression. The
effect on the market was imperceptible. At the end of the year, by
which time production had also turned up again, the Times industrials
had reached a net gain of 69 points for the year.

The year 1927 is historic from another point of view in the lore of
the stock market. According to a long-accepted doctrine, it was in
this year that the seeds of the eventful disaster were sown. The
responsibility rests with an act of generous but ill-advised
internationalism. Some -- including Mr Hoover -- have thought it
almost disloyal, although in those days accusations of treason were
still made with some caution.

In 1925, under the aegis of the then Chancellor of the Exchequer, Mr
Winston Churchill, Britain returned to the gold [*38] standard at the
old or pre-World War I relationship between gold, dollars, and the
pound. There is no doubt that Churchill was more impressed by the
grandeur of the traditional, or $4.86, pound than by the more subtle
consequences of over- valuation, which he is widely assumed not to
have understood. The consequences, nonetheless, were real and severe.
Customers of Britain had now to use these costly pounds to buy goods
at prices that still reflected wartime inflation. Britain was,
accordingly, an unattractive place for foreigners to buy. For the same
reason it was an easy place in which to sell. In 1925 began the long
series of exchange crises which, like the lions in Trafalgar Square
and the street walkers in Piccadilly, are now an established part of
the British scene. There were also unpleasant domestic consequences;
the bad market for coal and the effort to reduce costs and prices to
meet world competition led to the general strike in 1926.

Then, as since, gold when it escaped from Britain or Europe came to
the United States. This might be discouraged if prices of goods were
high and interest rates were low in this country. (The United States
would be a poor place in which to buy and invest.) In the spring of
1927, three august pilgrims -- Montagu Norman, the Governor of the
Bank of England, the durable Hjalmar Schacht, then Governor of the
Reichsbank, and Charles Risc the Deputy Governor of the Bank of France
-- came to the United States to urge an easy money policy. (They had
previously pleaded with success for a roughly similar policy in 1925.)
The Federal Reserve obliged. The rediscount rate of the New York
Federal Reserve Bank was cut from 4 to 3.5 per cent. Government
securities were purchased in considerable volume with the mathematical
consequence of leaving the banks and individuals who had sold them
with money to spare. Adolph C. Miller, a dissenting member of the
Federal Reserve Board, subsequently described this as 'the greatest
and boldest operation ever undertaken by the Federal Reserve [*39]
System, and ... [it] resulted in one of the most costly errors
committed by it or any other banking system in the last 75 years!'FN1
The funds that the Federal Reserve made available were either invested
in common stocks or (and more important) they became available to help
finance the purchase of common stocks by others. So provided with
funds, people rushed into the market Perhaps the most widely read of
all the interpretations of the period, that of Professor Lionel
Robbins of the London School of Economics, concludes: 'From that date,
according to all the evidence, the situation got completely out of
control.'FN2

This view that the action of the Federal Reserve authorities in 1927
was responsible for the speculation and collapse which followed has
never been seriously shaken. There are reasons why it is attractive.
It is simple, and it exonerates both the American people and their
economic system from any substantial blame. The danger of being guided
by foreigners is well known, and Norman and Schacht had some special
reputation for sinister motives.

Yet the explanation obviously assumes that people will always
speculate if only they can get the money to finance it. Nothing could
be further from the case. There were times before and there have been
long periods since when credit was plentiful and cheap -- far cheaper
than in 1927-9 -- and when speculation was negligible. Nor, as we
shall see later, was speculation out of control after 1927, except
that it was beyond the reach of men who did not want in the least to
control it. The explanation is a tribute only to a recurrent
preference, in economic matters, for formidable nonsense.

4

Until the beginning of 1928, even a man of conservative mind

FN1. Testimony before Senate Committee, quoted by Lionel Robbins, The
Great Depression, New York Macmillan) 1934, p. 53.
FN2. Ibid., p. 33. [*40]

could believe that the prices of common stock were catching up with
the increase in corporation earnings, the prospect for further
increases, the peace and tranquillity of the times, 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, 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
-- of inventing the industrial equivalents of the Florida climate --
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.

There were many indications by 1928 that this phase had come. Most
obvious was the behaviour of the market. While the winter months of
1928 were rather quiet, thereafter the market began to rise, not by
slow, steady steps, but by great vaulting leaps. On occasion it also
came down the same way, only to recover and go higher again. In March
1928 the industrial average rose nearly 25 points. News of the boiling
market was frequently on the front page. Individual issues sometimes
made gains of 10, 15, and 20 points in a single day's trading. On 12
March, Radio, in many respects the speculative symbol of the time,
gained i8 points. On the following day it opened 22 points above the
previous close. Then it lost 20 points on the announcement that the
behaviour of the trading in the stock was being investigated by the
Exchange, gained 15 points, and fell off 9.FN1 A few days later, on a
strong market, it made another 18-point gain.

The March boom also celebrated, beyond anything theretofore, the
operations of the big professional traders. The lore

FN1 Allen, op. cit., p. 297. [*41]

of competitive markets pictures the Stock Exchange as the most
impersonal of markets. No doctrine is more jealously guarded by the
prophets and defenders of the Stock Exchange. 'The Exchange is a
market place where prices reflect the basic law of supply and demand,'
the New York Stock Exchange says firmly of itself.FN1 Yet even the
most devout Wall Streeter allows himself on occasion to believe that
more personal influences have a hand in his destiny. Somewhere around
there are big men who put stocks up and put them down.

As the boom developed, the big men became more and more omnipotent in
the popular or at least in the speculative view. In March, according
to this view, the big men decided to put the market up, and even some
serious scholars have been in- dined to think that a concerted move
catalysed this upsurge. If so, the important figure was John J.
Raskob. Raskob had impressive associations. He was a director of
General Motors, an ally of the Du Ponts, and soon to be Chairman of
the Democratic National Committee by choice of Al Smith. A
contemporary student of the market, Professor Charles Amos Dice of the
Ohio State University, thought this latter appointment a particular
indication of the new prestige of Wall Street and the esteem in which
it was held by the American people. 'Today', he observed, 'the shrewd,
worldly-wise candidate of one of the great political parties chooses
one of the outstanding operators in the stock market ... as a goodwill
creator and popular vote getter.'FN2

On 23 March 1928, on taking ship for Europe, Raskob spoke favourably
of prospects for automobile sales for the rest of the year and the
share in the business that General Motors would have. He may also have
suggested -- the evidence is not entirely

FN1 Understanding the New York Stock Exchange, 3rd ed, New York (Stock
Exchange) April 1954, p. 2.
FN2 New Levels in the Stock Market New York (McGraw-Hill), 1929, p. 9.
[*42]

clear -- that G.M. stock should be selling at not less than twelve
times earnings. This would have meant a price of 225 as compared with
a current quotation of about 187. Such, as the Times put it, was 'the
magic of his name' that Mr Raskob's 'temperate bit of optimism' sent
the market into a boiling fury. On 24 March, a Saturday, General
Motors gained nearly 5 points, and the Monday following it went to z.
The surge in General Motors, meanwhile, set off a great burst of
trading elsewhere in the list.

Among the others who were assumed to have put their strength behind
the market that spring was William Crapo Durant. Durant was the
organizer of General Motors, whom Raskob and the Du Ponts had thrown
out of the company in 1920. After a further adventure in the auto
business, he had turned to full-time speculation in the stock market.
The seven Fisher brothers were also believed to be influential. They
too were General Motors alumni and had come to Wall Street with the
great fortune they had realized from the sale of the Fisher- body
plants. Still another was Arthur W. Cutten, the Canadian- born grain
speculator who had recently shifted his market operations to Wall
Street from the Chicago Board of Trade. As a market operator, Cutten
surmounted substantial personal handicaps. He was very hard of
hearing, and some years later, before a congressional committee, even
his own counsel con- ceded that his memory was very defective.

Observing this group as a whole Professor Dice was espe- cially struck
by their 'vision for the future and boundless hope and optimism'. He
noted that 'they did not come into the market hampered by the heavy
armour of tradition'. In recounting their effect on the market,
Professor Dice obviously found the English language verging on
inadequacy. 'Led by these mighty knights of the automobile industry,
the steel industry, the radio industry...' he said, 'and finally
joined, in despair, by many professional traders who, after much sack-
[*43]-cloth and ashes, had caught the vision of progress, the Coolidge
market had gone forward like the phalanxes of Cyrus, parasang upon
parasang and again parasang upon parasang ...'FN1

5

In June of 1928 the market retreated a parasang or two -- in fact the
losses during the first three weeks were almost as great as the March
gains. 12 June, a day of particularly heavy losses, was a landmark.
For a year or more, men of vision had been saying that the day might
come when five million shares would be traded on the New York Stock
Exchange. Once this had been only a wild conversational gambit, but
for some time it had shown signs of being overtaken by the reality. On
12 March, the volume of trading had reached 3,875,910 shares, an all-
time high. By the end of the month such a volume had become
commonplace. On 27 March, 4,790,270 shares were traded. Then on 12
June, 5,052,790 shares changed hands. The ticker also fell nearly two
hours behind the market; Radio dropped 23 points, and a New York paper
began its accounts of the day's events; 'Wall Street's bull market
collapsed yesterday with a detonation heard round the world.'

The announcement of the death of the bull market was as premature as
any since that of the death of Mark Twain. In July there was a small
net gain, and in August a strong upsurge. Thereafter not even the
approach of the election caused serious hesitation. People remained
unperturbed when, on 17 September, Roger W. Babson told an audience in
Wellesley, Massachusetts, that if 'Smith should be elected with a
Democratic congress, we are almost certain to have a resulting
business depression in 1929'. He also said that 'the election of
Hoover and a Republican Congress should result in continued prosperity
for 1929', and it may have been that the public knew it

FN1 Op. cit., pp. 6-7. [*44]

would be Hoover. In any case, during the same month reassurance came
from still higher authority. Andrew W. Mellon 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.

6

Hoover was elected in a landslide. This, were the speculators privy to
Mr Hoover's mind, should have caused a heavy fall in the market. In
his memoirs Mr Hoover states that as early as 1925 be became concerned
over the 'growing tide of speculation'.FN1 During the months and years
that followed this concern gradually changed to alarm, and then to
something only slightly less than a premonition of total disaster.
'There are crimes', Mr Hoover said of speculation, 'far worse than
murder for which men should be reviled and punished.'FN2 As Secretary
of Commerce he had sought nothing so much as to get the market under
control.

Mr Hoover's attitude toward the market was, however, an exceptionally
well-kept secret People did not know of his efforts, uniformly
frustrated by Coolidge and the Federal

FN1 The Memoirs of Herbert Hoover: The Great Depression, 1929-1941,
New York (Macmillan). 1932, p. 5.
FN2 ibid., p. 14. [*45]

Reserve Board, to translate his thoughts into action. The news of his
election, so far from causing a panic, set off the greatest increase
in buying to date. On 7 November, the day after the election, there
was a 'victory boom', and the market leaders climbed to IS points.
Volume reached 4,894,67o shares, or only a little less than the all-
time record of iz June, and this new level was reached on a rising,
not a falling market. On 16 November, a further wave of buying hit the
market. An astonishing 6,641,250 shares changed hands -- far above the
previous record. The Times industrial averages made a net gain of 4
points on the day's trading -- then considered an impressive advance.
Apart from the afterglow of the election, there was nothing particular
to incite this enthusiasm. The headlines of the day told only of the
sinking of the steamship Vesfris and the, epic achievements of the
officers and crew in shouldering aside the women and children and
saving their own lives. 20 November was another huge day. Trading --
6,503,230 shares -- was fractionally smaller than on the sixteenth,
but by common agreement it was much more frantic. The following
morning the Timer observed that 'for cyclonic violence yesterday's
stock market has never been exceeded in the history of Wall Street'.

December was not so good. Early in the month there was a bad break,
and, on 8 December, Radio fell a ghastly 72 points in one day.
However, the market steadied and then came back. Over the whole year
of 1928 the Times industrial average gained 86 points, or from 245 to
331. During the Year Radio went from 85 to 420 (it had never paid a
dividend); Du Pont went from 310 to 525; Montgomery Ward from 117 to
440; Wright Aeronautic from 69 to 289.FN1 During the year 920,550,032
shares were traded on the New York Stock Exchange, as com- pared with
a record-breaking 576,990,875 in 1927.FN2 But there was still another
and even more significant index of what was

FN1 Dice, op. cit., p. ii.
FN2 Year Book, 1929-1930, New York (Stock Rv4.itngs) [*46]

happening in the market. That was the phenomenal increase in trading
on margin.

7

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. Income from the property, or enjoyment of its use, or
even its long-run worth are now academic As in the case of the more
repulsive Florida lots, these usufructs may be non-existent or even
negative. What is important is that tomorrow or next week market
values will rise -- as they did yesterday or last week -- and a profit
can be realized.

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 [*47] 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 stock market also has its design for concentrating the speculative
energies of the speculator, and, as might be expected, it improves
substantially on the crudities of the real estate market. In the stock
market the buyer of securities on margin gets full title to his
property in an unconditional sale. But he rids himself of the most
grievous burden of ownership -- that of putting up the purchase price
-- by leaving his securities with his broker as collateral for the
loan that paid for them. The buyer again gets the full benefit of any
increase in value -- the price of the securities goes up, but the loan
that bought them does not. In the stock market the speculative buyer
also gets the earnings of the securities he purchased. However, in the
days of this history the earnings were almost invariably less than the
interest that was paid on the loan. Often they were much less. Yields
on securities regularly ranged from nothing to one or two per cent.
Interest on the loans that carried them was often eight, ten, or more
per cent. The speculator was willing to pay to divest himself of all
of the usufructs of security ownership except the chance for capital
gain.

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. Margins -- the cash which the
speculator must supply in addition to the securities to protect the
loan and which he must augment if the value of the collateral
securities should fall and so lower the protection they provide -- are
effortlessly [*48] calculated and watched. The interest rate moves
quickly and easily to keep the supply of funds adjusted to the demand.
Wall Street, however, has never been able to express its pride in
these arrangements. They are admirable and even wonderful only in
relation to the purpose they serve. The purpose is to accommodate the
speculator and facilitate speculation. But the purposes cannot be
admitted. If Wall Street confessed this purpose, many thousands of
moral men and women would have no choice but to condemn it for
nurturing an evil thing and call for reform. Margin trading must be
defended not on the grounds that it efficiently and ingeniously
assists the speculator, but that it encourages the extra trading which
changes a thin and anaemic market into a thick and healthy one. At
best this is a dull by-product and a dubious one. Wall Street, in
these matters, is like a lovely and accomplished woman who must wear
black cotton stockings, heavy woollen underwear, and parade her
knowledge as a cook because, unhappily, her supreme accomplishment is
as a harlot.

However, even the most circumspect friend of the market would concede
that the volume of brokers' loans -- of loans collateralled by the
securities purchased on margin -- is a good index of the volume of
speculation. Measured by this index, the amount of speculation was
rising very fast in 1928. Early in the twenties the volume of brokers'
loans -- because of their liquidity they are often referred to as call
loans or loans in the call market -- varied from a billion to a
billion and a half dollars. By early 1926 they had increased to two
and a half billion and remained at about that level for most of the
year. During 1927 there was another increase of about a billion
dollars, and at the end of the year they reached $3,480,780,000, This
was an incredible sum, but it was only the beginning. In the two dull
winter months of 1928 there was a small decline and then expansion
began in earnest. Brokers' loans reached four billion on the first of
June 1928, five billion on the first of [*49] November, and by the end
of the year they were well along to six billion.' Never had there been
anything like it before.

People were swarming to buy stocks on margin -- in other words, to
have the increase in price without the cost of owner- ship. This cost
was being assumed, in the first instance, by the New York banks, but
they, in turn, were rapidly becoming the agents for lenders the
country over and even the world around. There is no mystery as to why
so many wished to lend so much in New York. 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, as noted, 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 per cent. While five per cent is an excellent gilt- edged return,
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. Everywhere men of means told themselves that twelve per cent
was twelve per cent. A great river of gold began to converge on Wall
Street, all of it to help Americans hold common stock on margin.
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.

FN1 The year-end figure was $5,122,258,724. Figures are from the New
York Stock Rr4nge Yew Book 1928-1929, and do not include brokers' time
loans. [*50]

There were still better ways of making money. In principle, New York
banks could borrow money from the Federal Reserve Bank at five per
cent and re-lend it in the call market for twelve. In practice they
did. This was, possibly, the most profitable arbitrage operation of
all time.

8

However, there were many ways of making money in 1928. Never had there
been a better time to get rich, and people knew it. 1928, indeed, was
the last year in which Americans were buoyant, uninhibited, and
utterly happy. It wasn't that 1928 was too good to last; it was only
that it didn't last.

In the January issue of World': Work, Will Payne, after reflecting on
the wonders of the year just over, went on to explain the difference
between a gambler and an investor. A gambler, he pointed out, wins
only because someone else loses. Where it is investment, all gain. One
investor, he explained, buys General Motors at $100, sells it to
another at $150, who sells it to a third at $200. Everyone makes
money. As Walter Bagehot once observed: 'All people are most credulous
when they are most happy.'FN1

FN1 Lombard Street, London (John Murray), 1922 ed., p. 151. [*51]

CHAPTER III

SOMETHING SHOULD BE DONE?

I

Purely in retrospect it is easy to see how 1929 was destined to be a
year to remember. This was not because Mr Hoover was soon to become
President and had inimical intentions toward the market. Those
intentions developed at least partly in retrospect. Nor was it because
men of wisdom could tell that a depression was overdue. No one, wise
or unwise, knew or now knows when depressions are due or overdue.

Rather, it was simply that a roaring boom was in progress in the stock
market and, like all booms, it had to end. On the first of January
1929, as a simple matter of probability, it was most likely that the
boom would end before the year was out, with a diminishing chance that
it would end in any given year thereafter. When prices stopped rising
-- when the supply of people who were buying for an increase was
exhausted -- then owner- ship on margin would become meaningless and
everyone would want to sell. The market wouldn't level out; it would
fall precipitately.

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 [*52] 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 easily be punctured. But to incise it with a needle so
that it subsides gradually is a task of no small delicacy. Among those
who sensed what was happening in early 1929, there was some hope but
no confidence that the boom could be made to subside. 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. (For
nearly a decade the Federal Reserve authorities had been denying their
responsibility for the deflation of 1920-1.) The eventual disaster
also had the inestimable advantage of allowing a few more days, weeks,
or months of life. 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.

2

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 and Directors of
the Federal Reserve Bank of New York. As the most powerful of the
Federal Reserve Banks, and the one with the market at its doorstep,
the New York bank both had and assumed responsibilities which were not
accepted by the other eleven banks of the system. [*53] 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'.FN1
In earlier years, whenever warned that speculation was getting out of
hand, he had comforted himself with the thought that this was the
primary responsibility of the Federal Reserve Board.FN2 The Board was
a semi-autonomous body precisely because Congress wanted to protect it
from excessive political interference by the Executive.

However tender his scruples, President Coolidge could have acted
through his Secretary of the Treasury, who served, ex- officio, as a
member of the Federal Reserve Board. The Secretary also had the
primary responsibility for economic and especially for financial
policy. But on this as on other matters of economic policy, the
incumbent, Andrew W. Mellon, was a passionate advocate of inaction.
The responsibility thus passed to the Federal Reserve Board and the
Federal Reserve Banks.

The regulation of economic activity is without doubt the most
inelegant and unrewarding of public endeavours. Almost everyone is
opposed to it in principle; its justification always relies on the
unprepossessing case for the lesser evil. Regulation originates in
raucous debate in Congress in which the naked interests of pressure
groups may at times involve an exposure bordering on the obscene.
Promulgation and enforcement of rules and regulations is by grinding
bureaucracies which are ceaselessly buffeted by criticism. In recent
times it has become obligatory for the regulators at every opportunity
to confess their inadequacy, which in any case is all too evident.

The great exception to this dreary story is the regulatory activity of
the central bank -- with us, the Federal Reserve System. Here is
regulation of a seemly and becoming sort. No

FN1 The Memoirs of Herbert Hoover, p. 26.
FN2 ibid., p. 11. [*54]

one apologizes for it; men of impeccable conservatism would rise to
espouse such regulation were they called upon to do so, which they
almost never are. This regulation is not the work of thousands of
clerks, statisticians, hearing officers, lawyers, and lesser beings in
a teeming office building on the Mall. Rather it emerges in the
measured and orderly discussion of men of quiet and dignified mien,
each at his accustomed place around a handsome table in a richly
panelled and richly draperied room. 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.

For several years, until late in 1927, the Chairman and guiding genius
presumptive was one Daniel R. Crissinger. He had been trained for his
task by serving as General Counsel of the Marion Steam Shovel Company
of Marion, Ohio. There is no indication that he was an apt student.
However, his background seemed satisfactory to another Marion boy,
Warren G. Harding, who had brought him to Washington, where he was
regarded as a hack politician from Ohio. In 1927 Crissinger was
replaced by Roy A. Young, who for eight years had been Governor of the
Minneapolis Federal Reserve Bank. Young, a more substantial figure,
was undoubtedly aware of what was going on. However, he was a man of
caution who sought no fame as a martyr to the broken boom. His
colleagues [*55] were among the more commonplace of Harding-Coolidge
appointees. With one exception-the erstwhile college professor Adolph
C. Miller -- they have been conservatively described by Herbert Hoover
as 'mediocrities'.FN1

The New York Federal Reserve Bank was under more vigorous leadership.
For several years, until 1928, its governor had been Benjamin Strong,
the first American since Nicholas Biddle to make an important
reputation as a central banker. Strong's views were regarded
throughout the System with only little less awe than the gold
standard. However, in the view of Herbert Hoover -- and in this
instance Hoover's views are widely shared -- Strong, so far from being
concerned about the inflation, was the' man most responsible for it.
It was he who took the lead in 1927 in easing money rates to help the
bard-pressed Europeans. For this Mr Hoover later called him 'a mental
annex to Europe'.FN2

This is unfair. Governor Strong's action was entirely reasonable in
the circumstances and, as noted in the last chapter, it takes more to
start a speculation than a general ability to borrow money. Still, the
New York Federal Reserve Bank, under Governor Strong's leadership, may
not have been sufficiently perturbed by the speculation a block or two
away. 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.

FN1 The Memoirs of Herbert Hoover, p. 9.
FN2 ibid., pp. 9, 10. [*56]

3

In the accepted history of these times, the Federal Reserve
authorities are held to be not so much unaware or unwilling as
impotent. They would have liked to stop the boom, but they lacked the
means. This puts far too elaborate a face on matters. And it largely
disguises the real nature of the dilemma which the authorities faced.

The classic instruments of control were indeed largely useless. These,
as almost every college sophomore knows, are two: open market
operations and the manipulation of the re- discount rate. Open market
sales of government securitiesFN1 by the Federal Reserve bring to the
vaults of the Reserve Banks the cash which is paid for the securities.
There it remains sterile and harmless. Had it stayed in the commercial
banks it would have been loaned to the public in multiple volume and
particularly in those days to people who were buying common stocks.

If such a policy is to succeed, the Federal Reserve System rather
obviously must have securities to sell. One of the inestimable
blessings of the years of depression, war, and deficit-financing since
1930 is a spacious inventory of government debt in the Reserve Banks.
In 1929 the Banks were not so well endowed. At the beginning of 1928,
holdings were $617 million. During the first half of the year there
were heavy sales as part of an effort to dry up the supply of funds
that was feeding the market. Although sales were discontinued in the
latter part of the year in the highly erroneous belief that the policy
had succeeded and that the boom was under control, they couldn't have
been continued much longer in any case. By the end of ia8 the
inventory of government securities of the Federal Reserve System
amounted only to $228 million. Had these all been dropped into the
market, they might

FN1 Or the sale or reduction in inventory of commercial paper. [*57]

possibly have had some effect. But the Board was not given to any such
drastic behaviour which, incidentally, would also have largely denuded
the Reserve Banks of earning assets. Sales were made a few millions at
a time in the early months of 1929, but the effect was
inconsequential. Moreover, even in following this feeble policy the
Board worried lest, in denying funds to the stock market, it might put
a pinch on 'legitimate' business. The Reserve Banks continued to buy
acceptances -- the security that emerges in the course of financing
ordinary non-speculative trade -- and, relieved of the need to carry
this paper, the commercial banks happily loaned more money in the
stock market.FN2

The other instrument of Federal Reserve policy was the rediscount
rate. This is the rate at which member commercial banks borrow from
the Reserve Banks of their district so that they may accommodate more
borrowers than their own resources permit. In January 1929, the
rediscount rate at the New York Federal Reserve Bank was five per
cent. The rate on brokers' loans ranged from six to twelve per cent.
Only a drastic increase would have made it unprofitable for a bank to
borrow at the Federal Reserve in order to lend the proceeds, directly
or indirectly, in the stock market Apart from the general aversion to
drastic action, such an increase would also have raised rates to
ordinary businessmen, consumers, and farmers. In fact, higher interest
rates would have been distressing to everyone but the speculator. A
man who paid, say, an average of ten per cent to carry his holdings of
Radio through 1928 would not have been either deterred or much
disturbed had the rate been twice that high. During the same year, he
made 500 per cent on the appreciation in the value of his investment.

On 1 February 1929, the New York Federal Reserve Bank proposed that
the rediscount rate be raised from five to six per cent to check
speculation. The Federal Reserve Board in [*58] Washington thought
this a meaningless gesture which would only increase rates to business
borrowers. A long controversy ensued in which President Hoover sided
with the Board Wind the Bank. The rate was not increased until late in
the summer.

There was another circumstance which gave the Reserve authorities an
admirable excuse for inaction. That was the previously noted flow of
funds from corporations and individuals to the market During 1929,
Standard Oil of New Jersey contributed a daily average of $69 million
to the call market; Electric Bond and Share averaged over $100
million.FN1 A few corporations -- Cities Service was one -- even sold
securities and loaned the proceeds in the stock market' By early 1929,
loans from these non-banking sources were approximately equal to those
from the banks. Later they became much greater. The Federal Reserve
authorities took for granted that they had no influence whatever over
this supply of funds.

4

In fact, the Federal Reserve was helpless only because it wanted to
be. Had it been determined to do something, it could for example have
asked Congress for authority to halt trading on margin by granting the
Board the power to set margin requirements. Margins were not low in
1929; a residue of caution had caused most brokers to require
customers to put up forty-five to fifty per cent of the value of the
stocks they were buying in cash. However, this was all the cash
numerous of their customers had. An increase in margins to, say,
seventy- five per cent in January 1929, or even a serious proposal to
do so, would have caused many small speculators and quite a few

FN1 Stock Exchange Practices, Report of the Committee on Banking and
Currency pursuant to Senate Resolution 84, Washington, 1934, p. 16.
FN2 ibid., pp. 13-14. [*59]

big ones to sell. The boom would have come to a sudden and perhaps
spectacular end. (The power to fix margin requirements was eventually
given to the Federal Reserve Board by the Securities Exchange Act in
1934, a year in which the danger of a revival of speculation about
equalled that of a renascence of prohibition.)

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.

Yet the boom was continuing. In January the Times industrials gained
30 points, more than during the post-election spree in November.
Brokers' loans went up a whopping $260 million; on five different
days, three of them as the market got off to a boiling start right
after New Year, trading on the New York Exchange exceeded the magic
five-million mark. Effective action would be disastrous; yet some
action seemed unavoidable. Finally the Board decided to write a letter
and issue a press release. It could do no less. [*60] On 2 February,
it addressed the individual Reserve Banks as follows:

A member [commercial bank] is not within its reasonable
claims for re-discount facilities at its reserve bank when it borrows
either for the purpose of making speculative loans or for the purpose
of maintaining speculative loans. The board has no disposition to
assume authority to interfere with the loan practices of member banks,
so long as they do not involve the Federal reserve banks. It has,
however, a grave responsibility whenever there is evidence that member
banks are maintaining speculative security loans with the aid of
Federal reserve credit.FN1

On 7 February, in what may be an even finer example of fiduciary prose
-- connoisseurs will wish to read it backward as well as forward --
the Board warned the public:

When [the Board] finds that conditions are arising which obstruct the
Federal reserve banks in the effective discharge of their functions of
so managing the credit facilities of the Federal reserve system as to
accommodate commerce and business, it is its duty to inquire into them
and to take such measures as may be deemed suitable and effective in
the circum- stances to correct them; which, in the immediate
situation, means to restrain the use, either directly or indirectly,
of Federal Reserve facilities in aid of the growth of speculative
credit.FN2

Almost simultaneously with this warning came the news that the Bank of
England was raising the bank rate from four and one-half to five and
one-half per cent in an effort to diminish the flow of British funds
to the new Golconda. The result was a sharp break in the market. On 7
February, in a five-million share day, the Times industrials dropped
ii points, with a further drop on the day following. Thereafter the
market recovered, but, for February as a whole, there was no
appreciable net gain. Economists have long had a phrase for this

FN1 Thomas Wilson, Fluctuations in Income and Employment, p. 147-8.
FN2. Ibid., pp. 147-8. [*61] action -- it was called the Federal
Reserve's effort at 'moral suasion'. Since the market was only
temporarily checked, there has been ever since virtually complete
agreement that moral suasion was a failure.

Precisely the opposite conclusion could and probably should have been
drawn. It is impossible to imagine a milder, more tentative, more
palpably panic-stricken communiqué than that issued by the Board. The
statement that the Board had no intention of interfering with loans to
support speculation so long as Federal Reserve credit was not involved
is especially noteworthy. Clearly the Federal Reserve was less
interested in checking speculation than in detaching itself from
responsibility for the speculation that was going on. And it will be
observed that some anonymous draughtsman achieved a wording which
indicated that not the present level but only a further growth in
speculation would be viewed with alarm. Yet in the then state of
nervousness even these almost incredibly feeble words caused a sharp
setback.

5

The nervousness of the market and the unsuspected moral authority of
the equally nervous men of the Federal Reserve was even better
illustrated in March. As the new month approached, Mr Coolidge made
his blithe observation about stocks being cheap and the country being
sound. The market surged up in what the papers dubbed 'The Inaugural
Market', and On 4 March, his attitude towards speculators still
unknown, Mr Hoover took over. The market for the next couple of weeks
remained strong.

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, [*62] 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 9-1/2 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 any previous
record. Prices seemed to drop vertically. At the low for the day 20-
and 30-point losses were commonplace. The Times industrials at one
time were 15 points below the previous day's close. Thousands of
speculators, in whose previous experience the market had always risen,
now saw for the first time the seamy side of their new way of life.
Each new quotation was far below the last one. Moreover, the ticker,
unable to cope with the unprecedented volume, was far behind the
market. Not only were things bad, but they had almost certainly become
worse, yet one couldn't tell from the ticker how much worse. Before
the day was out many of these thousands received a peremptory telegram
from their brokers -- a telegram that was in the [*63] starkest of
contrast with the encouraging, half-confidential, rich-uncle tone of
all previous communications. It asked more margin promptly.

Meanwhile the banks continued to trim sails for the storm. It is
probable that some professional traders were selling because they
foresaw the moment when there would be no money with which to carry
stocks on margin. And that moment might be near, for on the morning of
26 March, the rate on call money reached twenty per cent, its high for
the 1929 boom.

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.' [*64] 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. In its monthly
letter a few days later, the bank justified its position and,
incidentally, gave an admirable statement of the dilemma which the
Federal Reserve faced. (The National City was in no doubt which horn
of the dilemma it preferred.) The letter said: 'The National City Bank
fully recognizes the dangers of overspeculation [sic] and endorses the
desire of the Federal Reserve authorities to restrain excessive credit
expansion for this purpose. At the same time, the bank, business
generally, and it may be assumed the Federal Reserve Banks ... wish to
avoid a general collapse of the securities markets such as would have
a disastrous effect on business,'FN1

6

Mitchell did not escape criticism. A Senate investigation was
mentioned. Senator Carter Glass, who as the sponsor of the Federal
Reserve legislation had a keen proprietary interest in its operation,
said: 'He avows his superior obligation to a frantic stock market over
against the obligation of his oath as a director of the New York
Federal Reserve Bank ... the Bank should ask for [his] immediate
resignation.' That the Federal Reserve Board never dreamed of doing
any such thing may be taken as a further indication that its moral
suasion was being administered with a very infirm touch.

FN1 Quoted by Mitchell in Stock Exchange Practices, Hearings,
Subcommittee, Senate Committee on Banking and Currency -- The Pecora
Committee, February-March 2933, Pt 6, p. 1817. [*65]

And the Federal Reserve was criticized 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 Ex- change. If not, the Federal
Reserve should mind its own business.' In a leading article in
Baryon's, a Mr Seth Axley was less even-handed: ' 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.'FN1 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. However, it
was positively kind as compared with the words of a young Princeton
scholar who emerged at this time as a leading defender of Wall Street.
Joseph Stagg Lawrence's book Wall Street and Washington, when it
appeared later in the year bearing the distinguished imprimatur of the
Princeton University Press, was described by a leading financial
journal as a 'breath of fresh air'. The regulatory concern of the
Federal Reserve about Wall Street, Mr Lawrence said in this remarkable
volume, was motivated strictly by bias -- a bias 'founded upon a clash
of interests and a moral and intellectual antipathy between the
wealthy, cultured, and conservative settlements on the seacoast
[including Wall Street] and the poverty-stricken, illiterate, and
radical pioneer communities of the interior'.FN2 The cultured and
conservative Mr Lawrence also had hard words for the defenders of the
Federal Reserve in the Senate, including, oddly enough, the seaboard
senator from Virginia, Carter Glass. 'It seems incredible that in the
year of Our Grace 1929 a body of

FN1 Barron's, 6 May 1929.
FN2 Wall Street and Washington, Princeton (Princeton University
Press), 1929, p. 3. [*66]

presumably intelligent public men should permit fanatical passions and
provincial ignorance to find expression in unrestrained virulence. Yet
this is precisely what has taken place When the Senator from the Old
Dominion rose in that chamber of absurdities, sometimes referred to as
a deliberative assembly, his remarks were characterized by neither
reason nor restraint Blatant bigotry and turbulent provincialism have
joined to condemn an innocent community.'FN1 Some hardened Wall
Streeters may have been surprised when they realized that the
'innocent community' meant them.

7

After the defeat by Mitchell in March, the Federal Reserve retired
from the field. There continued to be some slight anxiety as to what
it might do. 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 precipitate a terrible crash.
The President was noncommittal, and Durant is said to have reduced his
holdings before leaving on a trip to Europe.FN2 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'.FN3 (This also was Wall
Street.) But the Board, in fact, had decided to leave that honest,
intelligent, and public.. spirited community strictly to its own
devices. It realized,

FN1 Wall Street and. Washington, Princeton (Princeton University
Press), 1929, p. v.
FN2 The visit is described by Earl Spading, Mystery Men of Wall
Street, New York (Greenberg), 1930, pp. 3-8. The authority is dubious,
although the author's facts, as distinct from his interpretation, are
frequently accurate.
FN3 Barron's, 10 June 1929. [*67]

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. A firm of investment counsellors in
Boston, called McNeel's Financial Service, describing itself with a
deft Back Bay touch as 'An Aristocracy of Successful Investors',
advertised a new guide to investment. The headline read: 'He made
$0,000 after reading Beating

FN1 Seymour E. Harris, Twenty Years of Federal Reserve Policy,
Cambridge (Harvard University Press), 1933, p. 547. I have made use of
this ultra-conservative but very careful account of Federal Reserve
policy.
FN2 Hoover, Memoirs, p. 17.
FN3 ibid. Mr Hoover, who is careless of such details, including his
dates, describes Whitney as President of the Exchange, which he only
later became. [*68]

the Stock Market.' No doubt whoever it was did. He might have made it
without reading the volume or without being able to read. 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 bands off. Perhaps it was worth being poor for a long time to be
so rich for just a little while. [*69]

The recondite problems of Federal Reserve policy were not the only
questions that were agitating Wall Street intellectuals in the early
mouths of 1929. There was worry that the country might be running out
of common stocks. One reason prices of stocks were so high, it was
explained, was that there weren't enough to go around, and,
accordingly, they had acquired a 'scarcity value'. Some issues, it was
said, were becoming so desirable that they would soon be taken out of
the market and would not reappear at any price.

If, indeed, common stocks were becoming scarce it was in spite of as
extraordinary a response of supply to demand as any in the history of
that well-worn relationship. Without doubt, the most striking feature
of the financial era which ended in the autumn of 1929 was the desire
of people to buy securities and the effect of this on values. But the
increase in the number of securities to buy was hardly less striking.
And the ingenuity and zeal with which companies were devised in which
securities might be sold was as remarkable as anything.

Not all of the increase in the volume of securities in 1928 and 1929
was for the sole purpose of accommodating the speculator. It was a
good time to raise money for general corporate purposes. Investors
would supply capital with enthusiasm and without tedious questions.
(Seaboard Air Line was a speculative favourite of the period in part
because many sup- posed it to be an aviation stock with growth
possibilities.) In these years of prosperity men with vision of still
greater prosperity stretching on and on and forever, naturally saw the
[*70] importance of being well provided with plant and working
capital. This was no time to be niggardly.

Also, it was an age of consolidation, and each new merger required,
inevitably, some new capital and a new issue of securities to pay for
it. A word must be said about the merger movement of the twenties.

It was not the first such movement but, in many respects, it was the
first of its kind. Just before and just after the turn of the century
in industry after industry, small companies were combined into large
ones. The United States Steel Corporation, International Harvester,
International Nickel, American Tobacco, and numerous other of the
great corporations trace to this period. In these cases the firms
which were combined produced the same or related products for the same
national market. The primary motivation in all but the rarest cases
was to reduce, eliminate, or regularize competition. Each of the new
giants dominated an industry, and henceforth exercised measurable
control over prices and production, and perhaps also over investment
and the rate of technological innovation.

A few such mergers occurred in the twenties. Mostly, how- ever, the
mergers of this period brought together not firms in competition with
each other but firms doing the same thing in different communities.
Local electric, gas, water, bus, and milk companies were united in
great regional or national systems. The purpose was not to eliminate
competition, but rather the incompetence, somnambulance, naiveté, or
even the unwarranted integrity of local managements. In the twenties,
a man in downtown New York or Chicago could take unabashed pride in
the fact that he was a financial genius. The local owners and managers
were not. There was no false modesty when it came to citing the
advantages of displacing yokels with a central management of decent
sophistication.

In the case of utilities the instrument for accomplishing this [*71]
centralization of management and control was the holding company.
These bought control of the operating companies. On occasion they
bought control of other holding companies which controlled yet other
holding companies, which in turn, directly or indirectly through yet
other holding companies, controlled the operating companies.
Everywhere local power, gas, and water companies passed into the
possession of a holding-company system.

Food retailing, variety stores, department stores, and motion picture
theatres showed a similar, although not precisely identical,
development. Here, too, local ownership gave way to central direction
and control. The instrument of this centralization, however, was not
the holding company but the corporate chain. These, more often than
not, instead of taking over existing businesses, established new
outlets.

The holding companies issued securities in order to buy operating
properties, and the chains issued securities in order to build new
stores and theatres. While in the years before 1929 the burgeoning
utility systems -- Associated Gas and Electric, Commonwealth and
Southern, and the Insull companies -- attracted great attention, the
chains were at least as symbolic of the era. Montgomery Ward was one
of the prime speculative favourites of the period; it owned its
eminence to the fact that it was a chain and thus had a particularly
bright future. The same was true of Woolworth, American Stores, and
others. Interest in branch and chain banking was also strong, and it
was widely felt that state and federal laws were an archaic barrier to
a consolidation which would knit the small-town and small-city banks
into a few regional and national systems. Various arrangements for
defeating the intent of law, most notably bank holding companies, were
highly regarded.

Inevitably promoters organized some new companies merely to capitalize
on the public interest in industries with [*72] a new and wide horizon
and provide securities to sell. Radio and aviation stocks were
believed to have a particularly satisfactory prospect, and companies
were formed which never had more than a prospect. In September 1929,
an advertisement in the Times called attention to the impending
arrival of television and said with considerable prescience that the
'commercial possibilities of this new art defy imagination'. The ad
opined, somewhat less presciently, that sets would be in use in homes
that fall. However, in the main, the market boom of 1929 was rooted
directly or indirectly in existing industries and enterprises. New and
fanciful issues for new and fanciful purposes, ordinarily so important
in times of speculation, played a relatively small part. No
significant amount of stock was sold in companies 'To Make Salt Water
Fresh -- For building of Hospitals for Bastard Children -- For
building of Ships against Pirates -- For importing a Number of large
Jack Asses from Spain', or even 'For a Wheel of Perpetual Motion', to
cite a representative list of promotions at the time of the South Sea
Bubble.'

2

The most notable piece of speculative architecture of the late
twenties, and the one by which, more than any other device, the public
demand for common stocks was satisfied, was the investment trust or
company. The investment trust did not promote new enterprises or
enlarge old ones. It merely arranged that people could own stock in
old companies through the medium of new ones. Even in the United
States, in the twenties, there were limits to the amount of real
capital which existing enterprises could use or new ones could be
created to employ. The virtue of the investment trust was that it
brought about an almost complete divorce of the volume of corporate

FN1 Walter Bagehot, Lombard Street, pp. 130, 131. [*73]

securities outstanding from the volume of corporate assets in
existence. The former could be twice, thrice, or any multiple of the
latter. The volume of underwriting business and of securities
available for trading on the exchanges all expanded accordingly. So
did the securities to own, for the investment trusts sold more
securities than they bought. The difference went into the call market,
real estate, or the pockets of the promoters. It is hard to imagine an
invention better suited to the time or one better designed to
eliminate the anxiety about the possible shortage of common stocks.

The idea of the investment trust is an old one, although, oddly
enough, it came late to the United States. Since the eighties in
England and Scotland, investors, mostly smaller ones, had pooled their
resources by buying stock in an investment company. The latter, in
turn, invested the funds so secured. A typical trust held securities
in from five hundred to a thousand operating companies. As a result,
the man with a few pounds, or even a few hundred, was able to spread
his risk far more widely than were he himself to invest And the
management of the trusts could be expected to have a far better
knowledge of companies and prospects in Singapore, Madras, Capetown,
and the Argentine, places to which British funds regularly found their
way, than the widow in Bristol or the doctor in Glasgow. The smaller
risk and better information well justified the modest compensation of
those who managed the enterprise. Despite some early misadventures,
the investment trusts soon became an established part of the British
scene.

Before 1921 in the United States only a few small companies existed
for the primary purpose of investing in the securities of other
companies.' In that year, interest in invest-

FN1 One estimate puts the number at about forty. Cf. Investment Trusts
and Investment Companies, Pt I, Report of the Securities and Exchange
Commission, Washington, 1939, p.36 [*74]

ment trusts began to develop, partly as the result of a number of
newspaper and magazine articles describing the English and Scottish
trusts. The United States, it was pointed out, had not been keeping
abreast of the times; other countries were excelling us in fiduciary
innovation. Soon, however, we began to catch up. More trusts were
organized, and by the beginning of 1927 an estimated 160 were in
existence. Another 140 were formed during that year.FN1

The managers of the British trusts normally enjoy the greatest of
discretion in investing the funds placed at their disposal. At first
the American promoters were wary of asking for such a vote of
confidence. Many of the early trusts were trusts -- the investor
bought an interest in a specified assortment of securities which were
then deposited with a trust company. At the least the promoters
committed themselves to a rigorous set of rules on the kinds of
securities to be purchased and the way they were to be held and
managed. But as the twenties wore along, such niceties disappeared.
The investment trust became, in fact, an investment corporation.' It
sold its securities to the public -- sometimes just common stock, more
often common and preferred stock, debenture and mortgage bonds -- and
the proceeds were then invested as the management saw fit. Any
possible tendency of the common stockholder to interfere with the
management was prevented by selling him non-voting stock or having him
assign his voting rights to a management-controlled voting trust.

For a long time the New York Stock Exchange looked with suspicion on
the investment trusts; only in 1929 was listing permitted. Even then
the Committee on the Stock List required an investment trust to post
with the Exchange the book and

FN1 ibid., p. 36.
FN2 And would be more accurately described as an investment company or
investment corporation. However, I have kept here to the less precise
but more customary usage. [*75]

market value of the securities held at the time of listing and once a
year thereafter to provide an inventory of its holdings. This
provision confined the listing of most of the investment trusts to
Curb, Boston, Chicago, or other road company exchanges. Apart from its
convenience, this refusal to disclose was thought to be a sensible
precaution. Confidence in the investment judgement of the managers of
the trusts was very high. To reveal the stocks they were selecting
might, it was said, set off a dangerous boom in the securities they
favoured. Historians have told with wonder of one of the promotions at
the time of the South Sea Bubble. It was 'For an Undertaking which
shall in due time be revealed'. The stock is said to have sold
exceedingly well. As promotions the investment trusts were, on the
record, more wonderful. They were undertakings the nature of which was
never to be revealed, and their stock also sold exceedingly well.

3

During 1928 an estimated x86 investment trusts were organized; by the
early months of 1929 they were being promoted at the rate of
approximately one each business day, and a total of 265 made their
appearance during the course of the year. In 1927 the trusts sold to
the public about $400,000,000 worth of securities; in 1929 they
marketed an estimated three billions worth. This was at least a third
of all the new capital issues in that year; by the autumn of 1929 the
total assets of the investment trusts were estimated to exceed eight
billions of dollars. They had increased approximately elevenfold since
the beginning of 1927.FN1

The parthenogenesis of an investment trust differed from that of an
ordinary corporation. In nearly all cases it was sponsored by another
company, and by 1929 a surprising

FN1 The estimates in this paragraph are all from Investment Trusts and
Investment Companies, Pt III, Chap. 1, pp. 3, 4. [*76]

number of different kinds of concerns were bringing the trusts into
being. Investment banking houses, commercial banks, brokerage firms,
securities dealers, and, most important, other investment trusts were
busy giving birth to new trusts. The sponsors ranged in dignity from
the House of Morgan, sponsor of the United and Alleghany Corporations,
down to one Chauncey I). Parker, the head of a fiscally perilous
investment banking firm in Boston, who organized three investment
trusts in 1929 and sold $25,000,000 worth of securities to an eager
public. Chauncey then lost most of the proceeds and lapsed into
bankruptcy.'

Sponsorship of a trust was not without its rewards. The sponsoring
firm normally executed a management contract with its offspring. Under
the usual terms, the sponsor ran the investment trust, invested its
funds, and received a fee based on a percentage of capital or
earnings. Were the sponsor a Stock Exchange firm, it also received
commissions on the purchase and sale of securities for its trust. Many
of the sponsors were investment banking firms, which meant, in effect,
that the firm was manufacturing securities it could then bring to
market. This was an excellent way of insuring an adequate supply of
business.

The enthusiasm with which the public sought to buy invest- ment trust
securities brought the greatest rewards of all. Almost invariably
people were willing to pay a sizeable premium over the offering price.
The sponsoring firm (or its promoters) received allotments of stock or
warrants which entitled them to stock at the offering price. These
they were then able to sell at once at a profit. Thus one of the
enterprises of the Mr Chauncey D. Parker just mentioned -- a company
with the resounding name of Seaboard Utilities Shares Corporation --
issued 1,600,000 shares of common stock on which the company netted
$10.32 a share. That, however, was not the price

FN1 ibid., Pt III, Chap. , p. 37 ff. [*77]

paid by the public. It was the price at which the stock was issued to
Parker and his colleagues. They in turn sold their shares to the
public at from $ii to $18.25 and split the profit with the dealers who
marketed the securities.FN1

Operations of this sort were not confined to the lowly or the vaguely
disreputable. J. P. Morgan and Company, which (with Bonbright and
Company) sponsored United Corporation in January 1929, offered a
package of one share of common stock and one of preferred to a list of
friends, Morgan partners included, at $75. This was a bargain. When
trading in United Corporation began a week later, the price was 92
bid, 94 asked on the over-the-counter market, and after four days the
stock reached 99. Stock that had been taken up at 75 could be and was
promptly resold at these prices.FN2 That such agreeable incentives
greatly stimulated the organization of new investment trusts is hardly
surprising.

4

There were some, indeed, who only regretted that everyone could not
participate in the gains from these new engines of financial progress.
One of those who had benefited from the United Corporation promotion
just mentioned was John J. Raskob. As Chairman of the Democratic
National Committee, he was also politically committed to a firm
friendship for the people. He believed that everyone should be in on
the kind of opportunities he himself enjoyed.

One of the fruits of this generous impulse during the year was an
article in the Ladies' Home Journal with the attractive title,
'Everybody Ought to be Rich'. In it Mr Raskob pointed out that anyone
who saved fifteen dollars a month, invested it in sound common stocks,
and spent no dividends would be

FN1 ibid., Pt. III, Chap. 2, p. 39.
FN2 Stock Exchange Practices, Report, Washington, 1934, pp. 103-4.
[*78]

worth -- as it then appeared -- some eighty thousand dollars after
twenty years. Obviously, at this rate, a great many people could be
rich.

But there was the twenty-year delay. Twenty years seemed along time to
get rich, especially in 1929, and for a Democrat and friend of the
people to commit himself to such gradualism was to risk being thought
a reactionary. Mr Raskob, therefore, had a further suggestion. He
proposed an investment trust which would be specifically designed to
allow the poor man to increase his capital just as the rich man was
doing.

The plan, which Mr Raskob released to the public in the early summer
of 1929, was worked out in some detail. (The author stated that he had
discussed it with 'financiers, economists, theorists, professors,
bankers, labour leaders, industrial leaders, and many men of no
prominence who have ideas'.) A company would be organized to buy
stocks. The proletarian with, say, $200 would turn over his pittance
to the company which would then buy stocks in the rather less meagre
amount of $500. The additional $300 the company would get from a
financial subsidiary organized for the purpose, and with which it
would post all of the stock as collateral. The incipient capitalist
would pay off his debt at the rate of perhaps $25 & month. He would,
of course, get the full benefit of the increase in the value of the
stock, and this was something that Mr Raskob regarded as inevitable.
Hammering home the inadequacy of existing arrangements, Mr Raskob
said: 'Now all the man with $200 to $500 to invest can do today is to
buy Liberty bonds...'FN1 The reaction to the Raskob plan was
comparable to the response to a new and daring formulation of the
relation of mass to energy. 'A practical Utopia', one paper called it.
Another described it as 'The greatest vision of Wall Street's greatest
mind'. A tired and cynical commentator was moved

FN1 The Literary Digest, 1 June 1929. [*79]

to say that it looks 'more like financial statesmanship than any-
thing that has come out of Wall Street in many a weary moon!.FN1

Had there been a little more time, it seems certain that something
would have been made of Mr Raskob's plan. People were full of
enthusiasm for the wisdom and perspicacity of such men. This was
admirably indicated by the willingness of people to pay for the genius
of the professional financier.

5

The measure of this respect for financial genius was the relation of
the market value of the outstanding securities of the investment trust
to the value of the securities it owned. Normally the securities of
the trust were worth considerably more than the property it owned.
Sometimes they were worth twice as much. There should be no ambiguity
on this point. The only property of the investment trust was the
common and preferred stocks and debentures, mortgages, bonds, and cash
that it owned. (Often it had neither office nor office furniture; the
sponsoring firm ran the investment trust out of its own quarters.)
Yet, had these securities all been sold on the market, the proceeds
would invariably have been less, and often much less, than the current
value of the outstanding securities of the investment company. The
latter, obviously, had some claim to value which went well beyond the
assets behind them.

That premium was, in effect, the value an admiring com- munity placed
on professional financial knowledge, skill, and manipulative ability.
To value a portfolio of stocks 'at the market' was to regard it only
as inert property. But as the property of an investment trust it was
much more, for the portfolio was then combined with the precious
ingredient of financial genius. Such special ability could invoke a
whole strategy for increasing the value of securities. It could join
in

FN1 ibid. [*80]

pools and syndicates to put up values. It knew when others were doing
likewise and could go along. Above all, the financial genius was in on
things. It had access to what Mr Lawrence of Princeton described as
'the stage whereon is focused the world's most intelligent and best
informed judgement of the values of the enterprises which serve men's
needs'.FN1 One might make money investing directly in Radio, J. I.
Case, or Montgomery Ward, but how much safer and wiser to let it be
accomplished by the men of peculiar knowledge, and wisdom.

By 1929 the investment trusts were aware of their reputation for
omniscience, as well as its importance, and they lost no opportunity
to enlarge it. To have a private economist was one possibility, and as
the months passed a considerable competition developed for those men
of adequate reputation and susceptibility. It was a golden age for
professors. The American Founders Group, an awe-inspiring family of
investment trusts, had as a director Professor Edwin W. Kemmerer, the
famous Princeton money expert. The staff economist was Dr Rufus
Tucker, also a well-known figure. (That economists were not yet
functioning with perfect foresight is perhaps suggested by the
subsequent history of the enterprise. United Founders, the largest
company in the group, suffered a net contraction in its assets of
$301,385,504 by the end of 1935, and its stock dropped from a high of
over $ share in 1929 to a little under 75 cents.)FN2

Still another great combine was advised by Dr David Friday, who had
come to Wall Street from the University of Michigan. Friday's
reputation for both insight and foresight was breathtaking. A Michigan
trust had three college professors -- Irving Fisher of Yale, Joseph S.
Davis of Stanford, and Edmund E. Day then of Michigan -- to advise on
its

FN1 Wall Street and Washington, p. 163.
FN2 Bernard J. Reis, False Security, New York (Equinox), 1937, pp. 117
ff. and 296. [*81]

Policies.FN1 The company stressed not only the diversity of its
portfolio but also of its counsel. It was fully protected from any
parochial Yale, Stanford, or Michigan view of the market.

Other trusts urged the excellence of their genius in other terms. Thus
one observed that, since it owned stocks in 120 corporations, it
benefited from the 'combined efficiency of their presidents, officers,
and the boards of directors'. It noted further that 'closely allied to
these corporations are the great banking institutions'. Then, in
something of a logical broad jump, it concluded, 'The trust,
therefore, mobilizes to a large extent the successful business
intellect of the country.' Another concern, less skilled in logical
method, contented itself with pointing out that 'Investing is a
science instead of a "one-man job".'FN2

As 1929 wore along, it was plain that more and more of the new
investors in the market were relying on the intellect and the science
of the trusts. This meant, of course, that they still had the
formidable problem of deciding between the good and the bad trusts.
That there were some bad ones was (though barely) recognized. Writing
in the March x issue of The Atlantic Monthly, Paul C. Cabot stated
that dishonesty, inattention, inability, and greed were among the
common shortcomings of the new industry. These were impressive
disadvantages, and as an organizer and officer of a promising
investment trust, The State Street Investment Corporation, Mr Cabot
presumably spoke with some authority.FN3 However, audience response to
such warnings in 1929 was very poor. And the warnings were very
infrequent.

FN1 Investment Trusts and Investment Companies, Pt I, p. iii.
FN2 ibid., Pt I, pp. 6i, 62.
FN3 ibid., Pt III, Ch. I, p. 53. [*82]

6

Knowledge, manipulative skill, or financial genius was not the only
magic of the investment trust. There was also leverage. By the summer
of 1929, one no longer spoke of investment trusts as such. One
referred to high-leverage trusts, low-leverage trusts, or trusts
without any leverage at all.

The principle of leverage is the same for an investment trust as in
the game of crack-the-whip. By the application of well-known physical
laws, a modest movement near the point of origin is translated into a
major jolt on the extreme periphery. In an investment trust, leverage
was achieved by issuing bonds, preferred stock, as well as common
stock to purchase, more or less exclusively, a portfolio of common
stocks. When the common stock so purchased rose in value, a tendency
which was always assumed, the value of the bonds and preferred stock
of the trust was largely unaffected.FN1 These securities had a fixed
value derived from a specified return. Most or all of the gain from
rising portfolio values was concentrated on the common stock of the
investment trust which, as a result, rose marvellously.

Consider, by way of illustration, the case of an investment trust
organized in early 1920 with a capital of $150 million -- a plausible
size by then. Let it be assumed, further, that a third of the capital
was realized from the sale of bonds, a third from preferred stock, and
the rest from the sate of common stock. If this $10 million were
invested, and if the securities so purchased showed a normal
appreciation, the portfolio value would have increased by midsummer by
about fifty per cent. The assets would be worth $225 million. The
bonds and preferred stock would still be worth only $100 million;
their

FN1 Assuming they were reasonably orthodox. Bonds and preferred stock,
in these days, were issues with an almost infinite variety of
conversion and participation rights.

[*83] earnings would not have increased, and they could claim no
greater share of the assets in the hypothetical event of a liquidation
of the company. The remaining $125 million, therefore, would underlie
the value of the common stock of the trust. The latter, in other
words, would have increased in asset value from $50 million to $125
million, or by a hundred and fifty per cent, and, as the result of an
increase of only fifty per cent in the value of the assets of the
trust as a whole.

This was the magic of leverage, but this was not all of it. Were the
common stock of the trust, which had so miraculously increased in
value, held by still another trust with similar leverage, the common
stock of that trust would get an increase of between seven hundred and
eight hundred per cent from the original fifty per cent advance. And
so forth. In ia the discovery of the wonders of the geometric series
struck Wall Street with a force comparable to the invention of the
wheel. There was a rush to sponsor investment trusts which would
sponsor investment trusts, which would, in turn, sponsor investment
trusts. The miracle of leverage, moreover, made this a relatively
costless operation to the ultimate man behind all of the trusts.
Having launched one trust and retained a share of the common stock,
the capital gains from leverage made it relatively easy to swing a
second and larger one which enhanced the gains and made possible a
third and still bigger trust.

Thus, Harrison Williams one of the more ardent exponents of leverage,
was thought by the Securities and Exchange Commission to have
substantial influence over a combined investment trust and holding
company system with a market value in ia at close to a billion
dollars-1 This had been built

FN1 Part of it shared with Goldman Sachs, as will be noted presently.
The line between a holding company, which has investment in and
control of an operating company (or another holding company) and [*84]
on his original control of a smallish concern -- the Central States
Electric Corporation -- which was worth only some six million dollars
in 1921.FN1 Leverage was also a prime factor in the remarkable growth
of the American Founders Group. The original member of this notable
family of investment trusts was launched in 1921. The original
promoter was, unhappily, unable to get the enterprise off the ground
because he was in bankruptcy. However, the following year a friend
contributed $500, with which modest capital a second trust was
launched, and the two companies began business. The public reception
was highly favourable, and by 1927 the two original companies and a
third which had subsequently been added had sold between seventy and
eighty million dollars' worth of securities to the public.FN2 But this
was only the beginning; in 1928 and 1929 an explosion of activity
struck the Founders Group. Stock was sold to the public at a furious
rate. New firms with new names were organized to sell still more stock
until, by the end of 1929, there were thirteen companies in the group.

At that time the largest company, the United Founders Corporation, had
total resources of $686,165,000. The group as a whole had resources
with a market value of more than a billion dollars, which may well
have been the largest volume of assets ever controlled by an original
outlay of $500. Of the billion dollars, some $320,000,000 was
represented by the inter-company holdings -- the investment of one or
another company of the group in the securities of yet others. This
fiscal incest was the instrument through which control was maintained
and

Prev. FN1 cont'd an investment trust or company, which has investment
but which is presumed not to have control, is often a shadowy one. The
pyramiding of holding companies and concomitant leverage effects was
also a striking feature of the period.

FN1 Investment Trusts and Investment Companies, Pt. Ill, Ch. 1, pp. 5,
6.
FN2 ibid., Pt. I, pp. 98-100. [*85]

leverage enjoyed. Thanks to this long chain of holdings by one company
in another, the increases in values in 1928 and 1929 were effectively
concentrated in the value of the common stock of the original
companies.

Leverage, it was later to develop, works both ways. Not all of the
securities held by the Founders were of a kind calculated to rise
indefinitely, much less to resist depression. Some years later the
portfolio was found to have contained 5,000 shares of Kreuger and
Toll, 20,000 shares of Kolo Products Corporation, an adventuresome new
company which was to make soap out of banana oil, and $295,00o in the
bonds of the Kingdom of Yugoslavia.FN1 As Kreuger and Toll moved down
to its ultimate value of nothing, leverage was also at work --
geometric series are equally dramatic in reverse. But this aspect of
the mathematics of leverage was still unrevealed in early 1929, and
notice must first be taken of the most dramatic of all the investment
company promotions of that remarkable year, those of Goldman, Sachs.

7

Goldman, Sachs and Company, an investment banking and brokerage
partnership, came rather late to the investment trust business. Not
until 4 December 1928, low than a year before the stock market crash,
did it sponsor the Goldman Sachs Trading Corporation, its initial
venture in the field. However, rarely, if ever, in history has an
enterprise grown as the Goldman Sachs Trading Corporation and its
offspring grew in the months ahead.

The initial issue of stock in the Trading Corporation was a million
shares, all of which was bought by Goldman, Sachs and Company at $100
a share for a total of $100,000,000. Ninety per cent was then sold to
the public at $104. There were no bonds and no preferred stocks;
Leverage had not yet

FN1 Reis, op. cit., p. 134. [*86]

been discovered by Goldman, Sachs and Company. Control of the Goldman
Sachs Trading Corporation remained with Goldman, Sachs and Company by
virtue of a management contract and the presence of the partners of
the company on the board of the Trading Corporation.FN1

In the two months after its formation, the new company sold some more
stock to the public, and on 21 February it merged with another
investment trust, the Financial and Industrial Securities Corporation.
The assets of the resulting company were valued at $235 million,
reflecting a gain of well over a hundred per cent in under three
months. By 2 February, roughly three weeks before the merger, the
stock for which the original investors had paid $104 was selling for
$136.50. Five days later, on 7 February, it reached $222.50. At this
latter figure it had a value approximately twice that of the current
total worth of the securities;, cash, and other assets owned by the
Trading Corporation.

This remarkable premium was not the undiluted result of public
enthusiasm for the financial genius of Goldman, Sachs. Goldman, Sachs
had considerable enthusiasm for itself, and the Trading Corporation
was buying heavily of its own securities. By 14 March it had bought
560,724 shares of its own stock for a total outlay of $57,02I,936.FN2
This, in turn, had boomed their value. However, perhaps foreseeing the
exiguous character of an investment company which had its investments
all in its own common stock, the Trading Corporation stopped buying
itself in March. Then it resold part of the stock to William Crapo
Durant, who re-resold it to the public as opportunity allowed.

The spring and early summer were relatively quiet for

FN1 Stock Exchange Practices, Hearings, April-June 1932, Pt 2, pp.
566, 567.
FN2 Details here are from Investment Trusts and Investment Companies,
Pt III, Ch. 1, pp. 6ff. and 17. [*87]

Goldman, Sachs, but it was a period of preparation. By 26 July it was
ready. On that date the Trading Corporation, jointly with Harrison
Williams, launched the Shenandoah Corporation, the first of two
remarkable trusts. The initial securities issue by Shenandoah was
$102,500,000 (there was an additional issue a couple of months later)
and it was reported to have been oversubscribed some sevenfold. There
were both preferred and common stock, for by now Goldman, Sachs knew
the advantages of leverage. Of the five million shares of common stock
in the initial offering, two million were taken by the Trading
Corporation, and two million by Central States Electric Corporation on
behalf of the co-sponsor, Harrison Williams. Williams was a member of
the small board along with partners in Goldman, Sachs. Another board
member was a prominent New York attorney whose lack of discrimination
in this instance may perhaps be attributed to youthful optimism. It
was Mr John Foster Dulles. The stock of Shenandoah was issued at There
was brisk trading on a 'when issued' basis. It opened at 30, reached a
high of 36 and closed at 36, or 18.5 above the issue price. (By the
end of the year the price was 8 and a fraction. It later touched fifty
cents.)

Meanwhile Goldman, Sachs was already preparing its second tribute to
the countryside of Thomas Jefferson, the prophet of small and simple
enterprises. This was the even mightier Blue Ridge Corporation, which
made its appearance on 20 August. Blue Ridge had a capital of
$142,000,000, and nothing about it was more remarkable than the fact
that it was sponsored by Shenandoah, its precursor by precisely
twenty- five days. Blue Ridge had the same board of directors as
Shenandoah, including the still optimistic Mr Dulles, and of its
7,250,000 shares of common stock (there was also a substantial issue
of preferred) Shenandoah subscribed a total of 6,250,000. Goldman,
Sachs by now was applying leverage with a vengeance. [*88]

An interesting feature of Blue Ridge was the opportunity it offered
the investor to divest himself of routine securities in direct
exchange for the preferred and common stock of the new corporation. A
holder of American Telephone and Telegraph Company could receive
4-70/516 shares each of Blue Ridge Preference and Common for each
share of Telephone stock turned in. The same privilege was extended to
holders of Allied Chemical and Dye, Santa Fe, Eastman Kodak, General
Electric, Standard Oil of New Jersey, and some fifteen other stocks.
There was much interest in this offer.

20 August, the birthday of Blue Ridge, was a Tuesday, but there was
more work to be done by Goldman, Sachs that week. On Thursday, the
Goldman Sachs Trading Corporation announced the acquisition of the
Pacific American Associates, a West Coast investment trust which, in
turn, had recently bought a number of smaller investment trusts and
which owned the American Trust Company, a large commercial bank with
numerous branches throughout California. Pacific American had a
capital of around a hundred million. In preparation for the merger,
the Trading Corporation had issued another $71,400,000 in stock which
it had exchanged for capital stock of the American Company, the
holding company which owned over ninety-nine per cent of the common
stock of the American Trust Company.FN1

Having issued more than a quarter of a billion dollars' worth of
securities in less than a month -- an operation that would not then
have been unimpressive for the United States Treasury -- activity at
Goldman, Sachs subsided somewhat. Its members had not been the only
busy people during this time. It was a poor day in August and
September of that year when no new trust was announced or no large new
issue of securities was

FN1 Details on Shenandoah, Blue Ridge, and the Pacific American merger
not from the New York Times of the period are from Investment Trusts
and Investment Companies, Pt III, Ch. 1, pp. 5-7. [*89]

offered by an old one. Thus, on i August the papers announced the
formation of Anglo-American Shares, Inc., a company which, with a
soigné touch not often seen in a Delaware corporation, had among its
directors the Marquess of Carisbrooke, G.C.B., O.C.V.O. and Colonel
the Master of Sempill, A.F.C., otherwise identified as the President
of the Royal Aeronautical Society, London. American Insuranstocks
Corporation was launched the same day, though boasting no more,
glamorous a director than William Gibbs McAdoo. On succeeding days
came Gude Winmill Trading Corporation, National Republic Investment
Trust, Insull Utility Investments, Inc., International Carriers, Ltd,
Tri-Continental Allied Corporation, and Solvay American Investment
Corporation. On 13 August the papers also announced that an Assistant
U.S. Attorney had visited the offices of the Cosmopolitan Fiscal
Corporation and also an investment service called the Financial
Counsellor. In both cases the principals were absent. The offices of
the Financial Counsellor were equipped with a peephole like a
speakeasy.

More investment trust securities were offered in September of 1929
even than in August -- the total was above $600 millionFN1. However,
the nearly simultaneous promotion of Shenandoah and Blue Ridge was to
stand as the pinnacle of new era finance. It is difficult not to
marvel at the imagination which was implicit in this gargantuan
insanity. If there must be madness something may be said for having it
on a heroic scale.

Years later, on a grey dawn in Washington, the following colloquy
occurred before a committee of the United States Senate.FN2

FN1 E. H. H. Simmons. The Principal Causes of the Stock Market Crisis
of Nineteen Twenty-Nine (address issued in pamphlet form). New York
Stock Exchange, January 1930, p. 16.
FN2 Stock Exchange Practices, Hearings, April-June 1932, Pt 2, pp.
566-7. [*90]

SENATOR COUZENS: Did Goldman, Sachs and Company organize the Goldman
Sachs Trading Corporation?

MR SACHS: Yes,

SENATOR COUZENS: And it sold its stock to the public?

MR SACHS: A portion of it. The firms invested originally in ten per
cent of the entire issue for the sum of $10,000,000.

SENATOR COUZENS: And the other ninety per cent was sold to the public?

MR SACHS Yes, sir.

SENATOR COUZENS At what price?

MR SACKS: At 104. That is the old stock... the stock was split two for
one.

SENATOR COUZENS: And what is the price of the stock now?

MR SACKS: Approximately 12. [*91]

CHAPTER V

THE TWILIGHT OF ILLUSION

THERE was no summer lull in Wall Street that year. Along with the
great investment trust promotions went the greatest market ever. Every
day prices rose; they almost never fell. During June the Times
industrials went up 52 points; in July they gained another 25. This
was a total gain of 77 points in two months. In all of the remarkable
year of 1928 they had gone up only 86 points. Then in August they rose
another 33 points. This gain of 110 points in three months -- from 339
on the last day of May to 449 on the last day of August -- meant that
during the summer values had increased, overall, by nearly a quarter.

Individual issues had also done very well. During the three summer
months, Westinghouse went from 151 to 286 for a net gain of 135.
General Electric was up from 268 to 391, and Steel from i6 to 258.
Even so sombre a security as American Tel and Tel had gone from 209 to
303. The investment trusts were making good gains. United Founders
went from 36 bid to 68; Alleghany Corporation rose from 33 to 56.

The volume of trading was also consistently heavy. On the New York
Stock Exchange it was frequently between four and five million shares.
Only occasionally on a full day did it drop below three million.
However, trading on the New York Stock Exchange was no longer a good
index of the total interest in securities speculation. Many new and
exciting issues -- Shenandoah, Blue Ridge, Pennroad, Insull Utilities
-- were not listed on the Big Board. The New York Stock Exchange in
those days was not a snobbish, prying, or an intolerant [*92]
institution. Most companies that so desired could have their stocks
listed. Nevertheless, there were some who found it wise, and many more
who found ft convenient not to answer the fairly elementary requests
which were made by the Exchange for information. The new stocks,
accordingly, were traded on the Curb, or in Boston, or on other out-of-
town exchanges. Although business on the New York Stock Exchange
remained larger than that on all other markets combined, its relative
position suffered. (In 1929 it had an estimated sixty- one per cent of
all transactions; three years later, when most of the new trusts had
disappeared forever, the Exchange had seventy-six per cent of the
total business.1) It follows that by the summer of 1929 the normally
somnambulant markets of Boston, San Francisco, and even of Cincinnati
were having a boom. Instead of being merely a pale reflection of the
real thing on Wall Street, they had a life and personality of their
own. Stocks were for sale here that couldn't be had in New York, and
some of them had an exceptional speculative kick. By i it was a poor
town, sadly devoid of civic spirit, which wasn't wondering if it too
shouldn't have a stock market.

More than the prices of common stocks were rising. So, at an appalling
rate, was the volume of speculation. Brokers' loans during the summer
increased at a rate of about $400,000,000 a month. By the end of the
summer, the total exceeded seven billions. Of that more than half was
being supplied by corporations and individuals, at home and abroad,
who were taking advantage of the excellent rate of return which New
York was providing on money. Only rarely did the rate on call loans
during that summer get as low as six per cent. The normal range was
seven to twelve. On one occasion the rate touched fifteen. Since, as
earlier observed, these loans provided all but total safety,
liquidity, and ease of administration, the interest

FN1 Estimates are from Stock Exchange Practices, Report, Washington,
1934, p. 8. [*93]

would not have seemed unattractive to a usurious moneylender in
Bombay. To a few alarmed observers it seemed as though Wall Street
were by way of devouring all the money of the entire world. However,
in accordance with the cultural practice, as the summer passed, the
sound and responsible spokesmen decried not the increase in brokers'
loans, but those who insisted on attaching significance to this trend.
There was a sharp criticism of the prophets of doom.

2

There were two sources of intelligence on brokers' loans. One was the
monthly tabulation of the New York Stock Exchange, which in general is
used here. The other was the slightly less complete return of the
Federal Reserve System which was published weekly. Each Friday this
report showed a large increase in loans; each Friday it was firmly
stated that it didn't mean a thing, and anyone who suggested otherwise
was administered a stern rebuke. It seems probable that only a
minority of the people in the market related the volume of the
brokers' loans to the volume of purchases on margin and thence to the
amount of speculation. Accordingly, an expression of concern over
these loans was easily attacked as a gratuitous effort to undermine
confidence. Thus, in Barron's on 8 July, Sheldon Sinclair Wells
explained that those who worried about brokers' loans, and about the
influx of funds from corporations, simply did not know what was going
on. The call market had become a great new investment outlet for
corporate reserves, he argued. The critics did not appreciate this
change.

Chairman Mitchell of the National City Bank, by nature an equable man,
was repeatedly angered by the attention being given to brokers' loans
and expressed himself strongly. The financial press was also
disturbed, and when Arthur Brisbane later in the year questioned the
propriety of a ten per cent call [*94] rate, The Wall Street Journal
reached the end of its patience. 'Even in general newspapers some
accurate knowledge is required for discussing most things. Why is it
that any ignoramus can talk about Wall Street?'FN1, (It does seem
possible that Brisbane thought the rate was ten per cent a day rather
than a year.)

Scholars also reacted against those who, deliberately or otherwise,
were sabotaging prosperity with their unguarded pessimism. After
soberly viewing the situation, Professor Dice concluded that the high
level of brokers' loans should not be 'as greatly feared as some would
have us believe'FN2. In August the Midland Bank of Cleveland made
public the results of calculations which proved that until loans by
corporations in the stock market reached twelve billion there was no
cause for concern.FN3

The best reassurance on brokers' loans was in the outlook for the
market. If stocks remained high and went higher, and if they did so
because their prospects justified their price, then there was no
occasion to worry about the loans that were piling up. Accordingly,
much of the defence of the loans consisted in defending the levels of
the market. It was not hard to persuade people that the market was
sound; as always in such times they asked only that the disturbing
voices of doubt be muted and that there be tolerably frequent
expressions of confidence.

In 1929 treason had not yet become a casual term of reproach. As a
result, pessimism was not openly equated with efforts to destroy the
American way of life. Yet it had such connotations. Almost without
exception, those who expressed concern said subsequently that they did
so with fear and trepidation. (Later in the year a Boston firm of
investment counsellors struck a modern note with a widely publicized
warning that America had no place for 'destructionists'.)

FN1 The Wail Street Journal, i9 September 1929.
FN2 New Levels in the Stock Market, p. 183.
FN3 New York Times, 2 August 1929. [*95]

The official optimists were many and articulate. Thus in June, Bernard
Baruch told Bruce Barton, in a famous interview published in The
American Magazine,FN1 that the 'economic condition of the world seems
on the verge of a great forward movement'. He pointed out that no
bears had houses on Fifth Avenue. Numerous college professors also
exuded scientific confidence. In light of later developments, the
record of the Ivy League was especially unfortunate. In a statement
which achieved minor notoriety, Lawrence of Princeton said that 'the
consensus of judgement of the millions whose valuations function on
that admirable market, the Stock Exchange, is that stocks are not at
present over-valued'. He added: 'Where is that group of men with the
all-embracing wisdom which will entitle them to veto the judgement of
this intelligent multitude?'FN2

That autumn Professor Irving Fisher of Yale made his immortal
estimate: 'Stock prices have reached what looks like a permanently
high plateau.' Irving Fisher was the most original of American
economists. Happily there are better things -- his contributions to
index numbers, technical economic theory, and monetary theory -- for
which he is remembered.

From Cambridge slightly less spacious reassurance came from the
Harvard Economic Society, an extracurricular enter- prise conducted by
a number of economics professors of unexceptional conservatism. The
purpose of the Society was to help businessmen and speculators
foretell the future. Forecasts were made several times a month and
undoubtedly gained in stature from their association with the august
name of the university.

By wisdom or good luck, the Society in early 1929 was

FN1 The American Magazine, June 5929.
FN2 Wail Street and Washington, p. 179. These passages were later
quoted editorially by the New York Times and are reproduced in turn
from there. [*96]

mildly bearish. Its forecasters had happened to decide that a
recession (though assuredly not a depression) was overdue. Week by
week they foretold a slight setback in business. When, by the summer
of 1929, the setback had not appeared, at least in any very visible
form, the Society gave up and confessed error. Business, it decided,
might be good after all this, as such things are judged, was still a
creditable record, but then came the crash. The Society remained
persuaded that no serious depression was in prospect. In November it
said firmly that 'a severe depression like that of 1920-21 is outside
the range of probability. We are not facing protracted liquidation.'
This view the Society reiterated until it was liquidated.

3

The bankers were also a source of encouragement to those who wished to
believe in the permanence of the boom. A great many of them abandoned
their historic role as the guardians of the nation's fiscal pessimism
and enjoyed a brief respite of optimism. They had reasons for doing
so. In the years preceding, a considerable number of the commercial
banks, including the largest of the New York houses, had organized
securities affiliates. These affiliates sold stocks and bonds to the
public, and this business had become important. It was a business that
compelled a rosy view of the future. In addition, individual bankers,
perhaps taking a cue from the heads of the National City and Chase in
New York, were speculating vigorously on their own behalf. They were
unlikely to say, much less advocate, anything that would jar the
market.

However, there were exceptions. One was Paul M. Warburg of the
International Acceptance Bank, whose predictions must be accorded the
same prominence as the forecasts of Irving Fisher. They were
remarkably prescient. In March 1929, he called for a stronger Federal
Reserve policy and argued that if [*97] the present orgy of'
unrestrained speculation' were not brought promptly to a halt there
would ultimately be a disastrous collapse. This, he suggested, would
be unfortunate not alone for the speculators. It would 'bring about a
general depression involving the entire country'.FN1

Only Wall Street spokesmen who took the most charitable view of
Warburg contented themselves with describing him as obsolete. One said
he was 'sandbagging American prosperity'. Others hinted that he had a
motive -- presumably a short position. As the market went up and up,
his warnings were recalled only with contempt.FN2

The most notable sceptics were provided by the press. They were a
great minority to be sure. Most magazines and most newspapers in 1929
reported the upward sweep of the market with admiration and awe and
without alarm. They viewed both the present and the future with
exuberance. Moreover, by 1929 numerous journalists were sternly
resisting the more subtle blandishments and flattery to which they
have been thought susceptible. Instead they were demanding cold cash
for news favourable to the market. A financial columnist of the Daily
News, who signed himself 'The Trader', received some $19,000 in 1929
and early 1930 from a free-lance operator named John J. Levenson. 'The
Trader' repeatedly spoke well of stocks in which Mr Levenson was
interested. Mr Levenson later insisted, however, that this was a
coincidence and the payment reflected his more or less habitual
generosity.FN3 A radio commentator named William J. McMahon was the
president of the McMahon Institute of Economic Research, an
organization that was mostly McMahon. He told in his

FN1 The Commercial and Financial Chronicle, 9 March 1929, p. 1444.
FN2 Alexander Dana Noyes, The Market Place, Boston (Little, Brown),
1938, p. 324.
FN3 Stock Exchange Practices, Hearings, April-June 5932, Pt 2, pp. 601
ff. [*98]

broadcasts of the brilliant prospects of stocks which pool operators
were seeking to boom. For this, it later developed, he received an
honorarium of $250 a week from a certain David M. Lion.FN1 Mr Lion was
one of several whom the Pecora Committee reported as making a business
of buying favourable comment in the necessary amount at the proper
moment.

At the other extreme was the best of the financial press. The
established financial services like Poor's and that of the Standard
Statistics Company never lost touch with reality. In the autumn Poor's
Weekly Business and Investment Letter went so far as to speak of the
'great common-stock delusion'.FN2 The editor of The Commercial and
Financial Chronicle was never quite shaken in his conviction that Wall
Street had taken leave of its senses. The weekly reports on the
brokers' loans were regularly the occasion for a solemn warning; the
news columns featured any available bad news. However, by far the
greatest force for sobriety was the New York Times. Under the guidance
of the veteran Alexander Dana Noyes, its financial page was all but
immune to the blandishments of the New Era. A regular reader could not
doubt that a day of reckoning was expected. Also, on several occasions
it reported, much too prematurely, that the day of reckoning had
arrived.

Indeed the temporary breaks in the market which preceded the crash
were a serious trial for those who had declined fantasy. Early in
1928, in June, in December, and in February and March of 1929 it
seemed that the end had come. On various of these occasions the Times
happily reported the return to reality. And then the market took
flight again. Only a durable sense of doom could survive such
discouragement. The time was coming when the optimists would reap a
rich harvest of discredit. But it has long since been forgotten that
for many

FN1 Stock Exchange Practices, Hearings, April-June 1932, Pt 2, pp.
676
FN2 Quoted by Allen, Only Yesterday, p. 322. [*99]

months those who resisted reassurance were similarly, if less
permanently, discredited. To say that the Times, when the real crash
came, reported the event with jubilation would be an exaggeration.
Nevertheless, it covered it with an unmistakable absence of sorrow.

4

By the summer of 1929 the market not only dominated the news. It also
dominated the culture. That recherché minority which at other times
has acknowledged its interest in Saint Thomas Aquinas, Proust,
psychoanalysis, and psychosomatic medicine then spoke of United
Corporation, United Founders, and Steel. Only the most aggressive of
the eccentrics maintained their detachment from the market and their
interest in auto- suggestion or communism. Main Street had always had
one citizen who could speak knowingly about buying or selling stocks.
Now he became an oracle. In New York, on the edge of any gathering of
significantly interesting people there had long been a literate broker
or investment counsellor who was abreast of current plans for pools,
syndicates, and mergers, and was aware of attractive possibilities. He
helpfully advised his friends on investments, and pressed, he would
always tell what he knew of the market and much that he didn't. Now
these men, even in the company of artists, playwrights, poets, and
beautiful concubines, suddenly shone forth. Their words, more or less
literally, became golden. Their audience listened not with the casual
heed of people who are collecting quotable epigrams, but with the
truly rapt attention of those who expect to make money by what they
hear.

That much of what was repeated about the market -- then as now -- bore
no relation to reality is important, but not remarkable. Between human
beings there is a type of intercourse which proceeds not from
knowledge, or even from lack [*100] of knowledge, but from failure to
know what isn't known. This was true of much of the discourse on the
market. At , the knowledgeable physician spoke of the impending split-
up in the stock of Western Utility Investors and the effect on prices.
Neither the doctor nor his listeners knew why there should be a split-
up, why it should increase values, or even why Western Utility
Investors should have any value. But neither the doctor nor his
audience knew that he did not know. Wisdom, itself, is often an
abstraction associated not with fact or reality but with the man who
asserts it and the manner of its assertion.

Perhaps the failure to visualize the extent of one's innocence was
especially true of women investors, who by now were entering the
market in increasing numbers. (An article in The North American Review
in April reported that women had become important players of 'man's
most exciting capitalistic game' and that the modern housewife now
'reads, for instance, that Wright Aero is going up.. . just as she
does that fresh fish is now on the market. . .' The author hazarded
the guess that success in speculation would do a lot for women's
prestige.) To the typical female plunger the association of Steel was
not with a corporation, and certainly not with mines, ships, rail-
roads, blast furnaces, and open hearths. Rather it was with symbols on
a tape and lines on a chart and a price that went up. She spoke of
Steel with the familiarity of an old friend, when in fact she knew
nothing of it whatever. Nor would anyone tell her that she did not
know that she did not know. We are a polite and cautious people, and
we avoid unpleasantness. Moreover, such advice, so far from
accomplishing any result, would only have inspired a feeling of
contempt for anyone who lacked the courage and the initiative and the
sophistication to see how easily one could become rich. The lady
operator had discovered she could be rich. Surely her right to be rich
was as good as anyone's. [*101]

One of the uses of women is that their motivations, though often
similar, are less elaborately disguised than those of men. The values
of a society totally preoccupied with making money are not altogether
reassuring. During the summer, the Times accepted the copy of a dealer
in the securities of the National Waterworks Corporation, a company
which had been organized to buy into city water companies. The
advertisement carried the following acquisitive thought: 'Picture this
scene today, if by some cataclysm only one small well should remain
for the great city of New York -- $1.00 a bucket, $100, $1,000,
$1,000,000. The man who owned the well would own the wealth of the
city.' All cataclysmically minded investors were urged to get a long
position in water before it was too late.

5

The polar role of the stock market in American life in the summer of
1929 is beyond doubt. And many people of many different kinds and
conditions were in the stock market, Frederick Lewis Allen pictured
the diversity of this participation in a fine passage:

The rich man's chauffeur drove with his ears laid back to catch the
news of an impending move in Bethlehem Steel; he held fifty shares
himself on a twenty-point margin. The window-cleaner at the broker's
office paused to watch the ticker, for he was thinking of converting
his laboriously accumulated savings into a few shares of Simmons.
Edwin Lefèvre (an articulate reporter on the market at this time who
could claim considerable personal experience) told of a broker's valet
who made nearly a quarter of a million in the market, of a trained
nurse who cleaned up thirty thousand following the tips given her by
grateful patients; and of a Wyoming cattleman, thirty, miles from the
nearest railroad, who bought or sold a thousand shares a day.FN1

Yet there is probably more danger of overestimating rather

FN1 Only Yesterday, p. 315. [*102]

than underestimating the popular interest in the market. The cliché
that by 1929 everyone 'was in the market' is far from the literal
truth. Then, as now, to the great majority of workers, farmers, white-
collar workers, indeed to the great majority of all Americans, the
stock market was a remote and vaguely ominous thing. Then, as now, not
many knew how one went about buying a security; the purchase of stocks
on margin was in every respect as remote from life as the casino at
Monte Carlo.

In later years, a Senate committee investigating the securities
markets undertook to ascertain the number of people who were involved
in securities speculation in 1929. The member firms of twenty-nine
exchanges in that year reported them- selves as having accounts with a
total of 1,548,707 customers. (Of these, 1,371,920 were customers of
member firms of the New York Stock Exchange.) Thus only one and a half
million people, out of a population of approximately 120 million and
of between 29 and 30 million families, had an active association of
any sort with the stock market. And not all of these were speculators.
Brokerage firms estimated for the Senate committee that only about
600,000 of the accounts just mentioned were for margin trading, as
compared with roughly 950,000 in which trading was for cash.

The figure of 600,000 for margin traders involves some duplication --
a few large operators had accounts with more than one broker. There
were also some traders whose operations were insignificant. However,
some speculators are included among the 950,000 cash customers. Some
were putting up the full purchase price for their securities, although
speculating nonetheless. Some were borrowing money outside the market
and posting the securities as collateral. Though listed as cash
customers, they were in effect buying on margin. However, it is safe
to say that at the peak in 1929 the number of active speculators was
less -- and probably was much less -- than a million. Between the end
of 1928 and the end of July [*103] 1929, a period when the popular
folklore has Americans rushing like lemmings to participate in the
market, the number of margin accounts on all of the exchanges of the
country increased by only slightly more than fifty thousand.FN1 The
striking thing about the stock market speculation of 1929 was not the
massiveness of the participation. Rather it was the way it became
central to the culture.

6

By the end of the summer of 1929, brokers' bulletins and letters no
longer contented themselves with saying what stocks would rise that
day and by how much. They went on to say that at a p.m. Radio or
General Motors would be 'taken in hand'.FN2 The conviction that the
market had become the personal instrument of mysterious but omnipotent
men was never stronger. And, indeed, this was a period of exceedingly
active pool and syndicate operations -- in short, of manipulation.
During 1929 more than a hundred issues on the New York Stock Exchange
were subject to manipulative operations, in which members of the
Exchange or their partners had participated. The nature of these
operations varied somewhat but, in a typical operation, a number of
traders pooled their re- sources to boom a particular stock. They
appointed a pool manager, promised not to double-cross each other by
private operations, and the pool manager then took a position in the
stock which might also include shares contributed by the participants.
This buying would increase prices and attract the interest of people
watching the tape across the country. The interest of the latter would
then be further stimulated by active selling and buying, all of which
gave the impression that something big was afloat. Tipsheets and
market

FN1 Stock Exchange Practices, Report, 1934, PP. 9,10.
FN2 Noyes, op. cit., p. 328. [*104]

commentators would tell of exciting developments in the offing. If all
went well, the public would come in to buy, and prices would rise on
their own. The pool manager would then sell out, pay himself a
percentage of the profits, and divide the rest with his investors.FN1

While it lasted, there was never a more agreeable way of making money.
The public at large sensed the attractiveness of these operations, and
as the summer passed it came to be supposed that Wall Street was
concerned with little else. This was an exaggeration, but it did not
discourage public activity in the market. People did not believe they
were being shorn. Nor were they. Both they and the pool operators were
making money with the difference, only, that the latter were making
more. In any case, the public reaction to inside operations was to
hope that it might get some inside information on these operations and
so get a cut in the profits that the great men like Cutten, Livermore,
Raskob, and the rest were making.

As the market came to be considered less and less a long- run register
of corporate prospects and more and more a pro- duct of manipulative
artifice, the speculator was required to give it his closest, and
preferably his undivided attention. Signs of incipient pool activity
had to be detected at the earliest possible moment, which meant that
one needed to have his eyes on the tape. However, even the person who
was relying on hunches, incantations, or simple faith, as distinct
from the effort to assess the intentions of the professionals, found
it hard to be out of touch. Only in the case of the rarest individuals
can speculation be a part-time activity. Money for most people is far
too important. Of the South Sea Bubble it was observed that 'Statesmen
forgot their Politics, Lawyers the Bar, Merchants their Traffic,
Physicians their Patients, Tradesmen their Shops, Debtors of Quality
their Creditors, Divines the Pulpit, and even the Women themselves
their Pride and

FN1 Stock Exchange Practices, Report, 1934. pp. 30 ff. [*105]

Vanity!'FN1 And so it was in 1929. 'Brokers' offices were crowded from
10 a.m. to 3 p.m. with seated or standing customers who, instead of
attending to their own business, were watching the blackboard. In some
"customers' rooms" it was difficult to get access to a spot from which
the posted quotations could be seen; no one could get a chance to
inspect the tape.'FN2

It follows that to be out of touch with the market, ever so briefly,
was a nerve-racking experience. Happily, this was not often necessary.
Ticker service was now nationwide; a local telephone call would get
the latest quotations from almost anywhere. A journey to Europe
provided one of the few trouble- some exceptions. As The Literary
Digest pointed out during the course of the summer, 'Transoceanic
brokerage business has been growing to immense proportions ... But
there has been an interlude of uncertainty and inconvenience for
speculators crossing the ocean.'FN3 In August even this interlude was
eliminated. Progressive brokerage houses -- a leader was M. J. Meehan,
the specialist in Radio and a veteran of many notable manipulations --
installed branches on the big ships under special regulations laid
down by the Exchange. On ii August, the Leviathan and the lie de
France left port fully equipped for speculation on the high seas.
Business on the lie the opening day was described as brisk. One of the
first transactions was by Irving Berlin, who sold 1,000 shares of
Paramount-Famous-Lasky at 72. (It was a shrewd move. The stock later
went more or less to nothing and the company into bankruptcy.)

In Spokane an anonymous poet on the editorial staff of the Spokesman-
Review celebrated the seagoing boardrooms.

We were crowded in the cabin
Watching figures on the Board;

FN1 Viscount Erleigh, The South Sea Bubble, New York (Putnam), 1933,
p. 11.
FN2 Noyes, op. Cit., p. 328.
FN3 The Literary Digest, 31 August 1929. [*106]

It was midnight on the ocean
And a tempest loudly roared.

. . . .

'We are lost!' the Captain shouted,
At he staggered down the stairs.

'I've got a tip,' he faltered,
'Straight by wireless from the aunt
Of a fellow who's related
To a cousin of Durant.'

At these awful words we shuddered,
And the stoutest bull grew sick
While the brokers cried, 'More margin!'
And the ticker ceased to tick.

But the captain's little daughter
Said, 'I do not understand -- Isn't
Morgan on the ocean
Just the same as on the land?"

7

Labour Day brought the summer of 1929 to its conventional end on 2
September. There was a severe heat wave, and on the evening of the
holiday returning motorists tied up the roads around New York for
miles. In the end many were forced to abandon their vehicles and make
their way home by train or subway. On 3 September the city continued
to swelter in what the Weather Bureau reported was the hottest day of
the year.

Away from Wall Street this was a very quiet day in a very tranquil
time. Years later Frederick Lewis Allen went to the newspapers for
that day and in a charming article told all that he found.' There
wasn't much. Disarmament was being discussed in that customarily
desultory fashion which doubtless

FN1 Quoted in The Literary Digest, 31 August 1929.
FN2 'One Day in History', Harper's Magazine, November 1937. [*107]

in the end will destroy us. The Graf Zeppelin was nearing the end of
its first round-the-world flight. A tri-motored plane of
Transcontinental Air Transport had crashed in a thunder-storm in New
Mexico, and eight were killed. (The line had only recently inaugurated
a forty-eight-hour service to the West Coast -- railway sleeper to
Columbus, Ohio, plane to Waynoka, Oklahoma, sleeper again to Clovis,
New Mexico, and a plane the rest of the way.) Babe Ruth had knocked
out forty home runs so far in the season. As a best-seller, All Quiet
on the Western Front held a commanding lead over Dodsworth. Women's
dresses were all emphasizing a decidedly flat look without anyone's
saying so. From Washington it was announced that Harry F. Sinclair,
then in the District of Columbia jail for being in contempt of the
Senate during the Teapot Dome investigations, would henceforth be more
closely confined. Previously he had been going daily by automobile to
the office of the jail physician whom he was serving as a
'pharmaceutical assistant'. Earlier in the year Sinclair's stock
market operations were on a huge scale, and they were later the
subject of detailed investigation. It was never shown whether the
Washington sojourn involved any important interruption. It seems most
unlikely that it did. Mr Sinclair was one of the most resourceful and
resilient entrepreneurs of his generation.

On 3 September sales on the New York Stock Exchange were 4,438,910
shares; call money was nine per cent all day; the rate at the banks on
prime commercial paper was six and a half per cent; the rediscount
rate at the New York Federal Reserve Bank was six per cent. The market
was strong with what the market operators called a good undertone.

American Tel and Tel reached 304 that day. U.S. Steel reached 262;
General Electric was 396; J. I. Case, 350; New York Central, 256;
Radio Corporation of America, adjusted for earlier split-ups and still
not having paid a dividend, was 505. The brokers' loan figures of the
Federal Reserve, when [*108] they were released, also showed another
huge increase -- $137,000,000 in one week. The New York banks were
also borrowing heavily from the Federal Reserve to carry the
speculative superstructure -- their borrowings during the week
increased by $64,000,000. In August the flow of gold to New York from
abroad had continued large. Yet the new month seemed to be opening
well. There were several expressions of confidence.

On 3 September, by common consent, the great bull market of the
nineteen-twenties came to an end. Economics, as always, vouchsafes us
few dramatic turning points. Its events are invariably fuzzy or even
indeterminate. On some days that followed -- a few only -- some
averages were actually higher. However, never again did the market
manifest its old confidence. The later peaks were not peaks but brief
interruptions of a downward trend.

On 4 September, the tone of the market was still good, and then on 5
September came a break. The Times industrials dropped 10 points, and
many individual stocks much more. The blue chips held up fairly well,
although Steel went from 255 to 246, while Westinghouse lost 7 points
and Tel and Tel 6. Volume mounted sharply as people sought to unload,
and 5565,28O shares were traded on the New York Stock Exchange.

The immediate cause of the break was clear -- and interesting.
Speaking before his Annual National Business Conference on September,
Roger Babson observed, 'Sooner or later a crash is coming, and it may
be terrific.' He suggested that what had happened in Florida would now
happen in Wall Street, and with customary precision stated that the
(Dow-Jones) market averages would probably drop 60-80 points. In a
burst of cheer he concluded that 'factories will shut down ... men
will be thrown out of work ... the vicious circle will get in full
swing and the result will be a serious business depression'.FN1

This was not exactly reassuring. Yet it was a problem why

FN1 The Comr4erdal and Financial Chronicle, 7 September 1929. [*109]

the market suddenly should pay attention to Babson. As many hastened
to say, he had made many predictions before, and they had not affected
prices much one way or another. Moreover, Babson was not a man who
inspired confidence as a prophet in the manner of Irving Fisher or the
Harvard Economic Society. As an educator, philosopher, theologian,
statistician, forecaster, economist, and friend of the law of gravity,
he has sometimes been thought to spread himself too thin. The methods
by which he reached his conclusions were a problem. They involved a
hocus-pocus of lines and areas on a chart. Intuition, and possibly
even mysticism, played a part. Those who employed rational, objective,
and scientific methods were naturally uneasy about Babson, although
their methods failed to foretell the crash. In these matters, as often
in our culture, it is far, far better to be wrong in a respectable way
than to be right for the wrong reasons.

Wall Street was not at loss as to what to do about Babson. It promptly
and soundly denounced him. Barton's, in an editorial on 9 September,
referred to him with heavy irony as the 'sage of Wellesley' and said
he should not be taken seriously by anyone acquainted with the
'notorious inaccuracy' of his past statements. The Stock Exchange
house of Hornblower and Weeks sternly told its customers: 'We would
not be stampeded into selling stocks because of a gratuitous forecast
of a bad break in the market by a well-known statistician." Irving
Fisher also took issue. He noted that dividends were rising, that the
suspicion of common stocks was receding, and that investment trusts
now offered the investor 'wide and well-managed diversification'. His
own conclusion was: 'There may be a recession in stock prices, but not
anything in the nature of a crash." Developing a slightly different
theme, a Boston investment trust told the public that it should be

FN1 Quoted in The Wall Street Journal, 6 September 1929.
FN2 Edward Angly, Oh, Yeah!, New York (Viking), 1931, p. 37. [*110]

prepared for slight setbacks, but it should realize that they would
soon pass. In large advertisements it pointed out that 'When temporary
breaks come, indentations in the ever-ascending curve of American
prosperity, individual stocks, even of the most successful companies,
go down with the general list...' However, it also stated on its own
behalf that 'Incorporated Investors lands on a cushion'.

The Babson Break, as it was promptly called, came on a Thursday. The
market raffled on Friday and was firm on Saturday. People seemed to be
over their fear. It looked as though the ever-ascending curve would
start up again, as so often before and Mr Babson notwithstanding. Then
on the following week -- the week of 9 September -- prices were again
ragged. On Monday, the Times, with the caution born of much premature
pessimism, hinted that the end had come and added, 'It is a well-known
characteristic of "boom times" that the idea of their being terminated
in the old, unpleasant way is rarely recognized as possible.' On
Wednesday, in a fine example of market prose, The Wall Street Journal
observed that 'price movements in the main body of stocks yesterday
continued to display the characteristics of a major advance
temporarily halted for technical readjustment'.

The unevenness continued. On some days the market was strong; on
others it was weak. The direction was slightly, erratically, but,
viewed in retrospect, quite definitely down. New investment trusts
were still being formed; more speculators were flocking to the market,
and the volume of brokers' loans con- tinued sharply up. The end had
come, but it was not yet in sight.

Perhaps this was as well. The last moments of life should be
cherished, as Wall Street had been told. On ii September, in keeping
with a regular practice, The Wall Street Journal printed its thought
for the day. It was from Mark Twain:

Don't part with your illusions; when they are gone you may
still exist, but you have ceased to live.

[kylies...@yahoo.com]

[*111]

CHAPTER VI

THE CRASH

According to the accepted view of events, by the autumn of 1929 the
economy was well into a depression. In June the indexes of industrial
and of factory production both reached a peak and turned down. By
October, the Federal Reserve index of industrial production stood at
117 as compared with 126 four months earlier. Steel production
declined from June on; in October freight-car loadings fell. Home-
building, a most mercurial industry, had been failing for several
years, and it slumped still further in 1929. Finally, down came the
stock market. A penetrating student of the economic behaviour of this
period has said that the market slump 'reflected, in the main, the
change which was already apparent in the industrial situation'.FN1

Thus viewed, the stock market is but a mirror which, perhaps as in
this instance, somewhat belated, provides an image of the underlying
or fundamental economic situation. Cause and effect run from the
economy to the stock market, never the reverse. In 1929 the economy
was headed for trouble. Eventually that trouble was violently
reflected in Wall Street.

In 1929 there were good, or at least strategic, reasons for this view,
and it is easy to understand why it has become high doctrine. In Wall
Street, as elsewhere in 1929, few people wanted a bad depression. In
Wall Street, as elsewhere, there is deep faith in the power of
incantation. When the market fell many Wall Street citizens
immediately sensed the real danger, which was that income and
employment -- prosperity in general

FN1. Thomas Wilson, Fluctuations in Income and Employment, p. 143.
[*112]

-- would be adversely affected. This had to be prevented. Preventive
incantation required that as many important people as possible repeat
as firmly as they could that it wouldn't happen. This they did. They
explained how the stock market was merely the froth and that the real
substance of economic life rested in production, employment, and
spending, all of which would remain unaffected. No one knew for sure
that this was so. As an instrument of economic policy, incantation
does not permit of minor doubts or scruples.

In the later years of depression it was important to continue
emphasizing the unimportance of the stock market. The depression was
an exceptionally disagreeable experience. Wall Street has not always
been a cherished symbol in our national life. In some of the devout
regions of the nation, those who speculate in stocks -- the even more
opprobrious term gamblers is used -- are not counted the greatest
moral adornments of our society. Any explanation of the depression
which attributed importance to the market collapse would accordingly
have been taken very seriously, and it would have meant serious
trouble for Wall Street. Wall Street, no doubt, would have survived,
but there would have been scars. We should be clear that no deliberate
conspiracy existed to minimize the consequences of the Wall Street
crash for the economy. Rather, it merely appeared to everyone with an
instinct for conservative survival that Wall Street had better be kept
out of it. It was vulnerable.

In fact, any satisfactory explanation of the events of the autumn of
1929 and thereafter must accord a dignified role to the speculative
boom and ensuing collapse. Until September or October of 1929 the
decline in economic activity was very modest. As I shall argue later,
until the market crash one could reasonably assume that this downward
movement might soon reverse itself, as a similar movement had reversed
itself in 1927 or did subsequently in 1949. There were no reasons for
expecting disaster. No one could foresee that production, [*113]
prices, incomes, and all other indicators would continue to shrink
through three long and dismal years. Only after the market crash were
there plausible grounds to suppose that things might now for a long
while get a lot worse.

From the foregoing it follows that the crash did not come -- as some
have suggested -- because the market suddenly became aware that a
serious depression was in the offing. A depression, serious or
otherwise, could not be foreseen when the market fell. There is still
the possibility that the downturn in the indexes frightened the
speculators, led them to unload their stocks, and so punctured a
bubble that had in any case to be punctured one day. This is more
plausible. Some people who were watching the indexes may have been
persuaded by this intelligence to sell, and others may then have been
encouraged to follow. This is not very important, for it is in the
nature of a speculative boom that almost anything can collapse it. Any
serious shock to confidence can cause sales by those speculators who
have always hoped to get out before the final collapse, but after all
possible gains from rising prices have been reaped. Their pessimism
will infect those simpler souls who had thought the market might go up
forever but who will now change their minds and sell. Soon there will
be margin calls, and still others will be forced to sell. So the
bubble breaks.

Along with the downturn of the indexes Wall Street has always
attributed importance to two other events in the pricking of the
bubble. In England on 20 September 1929 the enter- prises of Clarence
Hatry suddenly collapsed. Hatry was one of those curiously un-English
figures with whom the English periodically find themselves unable to
cope. Although his earlier financial history had been anything but
reassuring, Hatry in the twenties had built up an industrial and
financial empire of truly impressive proportions. The nucleus, all the
more remarkably, was a line of coin-in-the-slot vending and automatic
photograph machines. From these unprepossessing [*114] enterprises he
had marched on into investment trusts and high finance. His expansion
owed much to the issuance of un- authorized stock, the increase of
assets by the forging of stock certificates, and other equally
informal financing. In the lore of 1929, the unmasking of Hatry in
London is supposed to have struck a sharp blow to confidence in New
York.FN1

Ranking with Hatry in this lore was the refusal on 1 October of the
Massachusetts Department of Public Utilities to allow Boston Edison to
split its stocks four to one. As the company argued, such split-ups
were much in fashion. To avoid going along was to risk being
considered back in the corporate gas- light era. The refusal was
unprecedented. Moreover, the Department added insult to injury by
announcing an investigation of the company's rates and by suggesting
that the present value of the stock, 'due to the action of
speculators', had reached a level where 'no one, in our judgement ...
on the basis of its earnings, would find it to his advantage to buy
it'.

These were uncouth words. They could have been important as,
conceivably, could have been the exposure of Clarence Hatry. But it
could also be that the inherently unstable equilibrium was shattered
simply by a spontaneous decision to get out. On 22 September, the
financial pages of the New York papers carried an advertisement of an
investment service with the arresting headline, OVERSTAYING A BULL
MARKET. Its message read as follows: 'Most investors make money in a
bull market, only to lose all profits made -- and sometimes more -- in
the readjustment that inevitably follows.' Instead of the down- turn
in the Federal Reserve industrial index, the exposure of Hairy, or the
unnatural obstinacy of the Massachusetts Department of Public
Utilities, it could have been such thoughts stirring first in dozens
and then in hundreds and finally in thousands of breasts which finally
brought an end to

FN1 Hatry pleaded guilty and early in 1930 was given a long jail
sentence. [*115]

the boom. What first stirred these doubts we do not know, but neither
is it very important that we know.

2

Confidence did not disintegrate at once. As noted, through September
and into October, although the trend of the market was generally down,
good days came with the bad. Volume was high. On the New York Stock
Exchange sales were nearly always above four million, and frequently
above five. In September new issues appeared in even greater volume
than in August, and they regularly commanded a premium over the
offering price. On 20 September the Times noted that the stock of the
recently launched Lehman Corporation which had been offered at $104
had sold the day before at $136. (In the case of this well-managed
investment trust the public enthusiasm was not entirely misguided.)
During September brokers' loans increased by nearly $670 million, by
far the largest increase of any month to date. This showed that
speculative zeal had not diminished.

Other signs indicated that the gods of the New Era were still in their
temples. In its iz October issue, The Saturday Evening Post had a lead
story by Isaac F. Marcosson on Ivar Kreuger. This was a scoop, for
Kreuger had previously been inaccessible to journalists. 'Kreuger,'
Marcosson observed, 'like Hoover, is an engineer. He has consistently
applied engineer precision to the welding of his far-flung industry.'
And this was not the only resemblance. 'Like Hoover,' the author
added, 'Kreuger rules through pure reason.'

In the interview Kreuger was remarkably candid on one point. He told
Mr Marcosson: 'Whatever success I have had may perhaps be attributable
to three things: one is silence, the second is more silence, while the
third is still more silence.' This was so. Two and a half years later
Kreuger committed suicide in his Paris apartment, and shortly
thereafter it was [*116] discovered that his aversion to divulging
information, especially if accurate, had kept even his most intimate
acquaintances in ignorance of the greatest fraud in history. His
American underwriters, the eminently respectable firm of Lee,
Higginson and Company of Boston, had heard nothing and knew nothing.
One of the members of the firm, Donald Durant, was a member of the
board of directors of the Kreuger enterprises. He had never attended a
directors' meeting, and it is certain that he would have been no wiser
had he done so. During the last weeks of October, Time Magazine, young
and not yet omniscient, also featured Kreuger on its cover -- 'a great
admirer of Cecil Rhodes'. Then a week later, as though to emphasize
its faith in the New Era, it went on to Samuel Insull. (A fortnight
after that, its youthful illusions shattered, the weekly news magazine
gave the place of historic honour to Warden Lawes of Sing Sing.) In
these same Indian summer days, The Wall Street Journal took notice of
the official announcement that Andrew Mellon would remain in the
cabinet at least until 1933 (there had been rumours that he might
resign) and observed: 'Optimism again prevails the announcement ...
did more to restore confidence than anything else.' In Germany Charles
E. Mitchell announced that the 'industrial condition of the United
States is absolutely sound', that too much attention was being paid to
brokers' loans, and that 'nothing can arrest the upward movement'. On
15 October, as he sailed for home, he enlarged on the point: 'The
markets generally are now in a healthy condition values have a sound
basis in the general prosperity of our country.' That same evening
Professor Irving Fisher made his historic announcement about the
permanently high plateau and added, 'I expect to see the stock market
a good deal higher than it is today within a few months.' Indeed, the
only disturbing thing, in these October days, was the fairly steady
downward drift in the market. [*117]

3

On Saturday, 1 October, Washington dispatches reported that Secretary
of Commerce Lamont was having trouble finding the $xoo,000 in public
funds that would be required to pay the upkeep of the yacht Corsair
which J. P. Morgan had just given the government. (Morgan's
deprivation was not extreme: a new $3,000,000 Corsair was being
readied at Bath, Maine.) There were other and more compelling
indications of an unaccustomed stringency. The papers told of a very
weak market the day before -- there were heavy declines on late
trading, and the Times industrial average had dropped about 7 points.
Steel had lost 7 points; General Electric, Westinghouse, and
Montgomery Ward all lost 6. Meanwhile, that day's market was behaving
very badly. In the second heaviest Saturday's trading in history,
3,488,100 shares were changing hands. At the dose, the Times
industrials were down iz points. The blue chips were seriously off,
and speculative favourites had gone into a nosedive. J. I. Case, for
example, had fallen a full 40 points.

On Sunday the market was front-page news -- the Times headline read,
'Stocks driven down as wave of selling engulfs the market', and the
financial editor next day reported for perhaps the tenth time that the
end had come. (He had learned, however, to hedge. 'For the time at any
rate,' he said, 'Wall Street seemed to see the reality of things.') No
immediate explanation of the break was forthcoming. The Federal
Reserve had long been quiet. Babson had said nothing new. Hatry and
the Massachusetts Department of Public Utilities were from a week to a
month in the past. They became explanations only later.

The papers that Sunday carried three comments which were to become
familiar in the days that followed. After Saturday's trading, it was
noted, quite a few margin calls went out. This meant that the value of
stock which the recipients held on margin had declined to the point
where it was no longer [*118] sufficient collateral for the loan that
had paid for it. The speculator was being asked for more cash.

The other two observations were more reassuring. The papers agreed,
and this was also the informed view on Wall Street, that the worst was
over. And it was predicted that on the following day the market would
begin to receive organized sup- port. Weakness, should it appear,
would be tolerated no longer.

Never was there a phrase with more magic than 'organized support'.
Almost immediately it was on every tongue and in every news story
about the market. Organized support meant that powerful people would
organize to keep prices of stocks at a reasonable level. Opinions
differed as to who would organize this support. Some had in mind the
big operators like Cutten, Durant, and Raskob. They, of all people,
couldn't afford a collapse. Some thought of the bankers -- Charles
Mitchell had acted once before, and certainly if things got bad he
would act again. Some had in mind the investment trusts. They held
huge portfolios of common stocks, and obviously they could not afford
to have them become cheap. Also, they had cash. So if stocks did
become cheap the investment trusts would be in the market picking up
bargains. This would mean that the bargains wouldn't last. With so
many people wanting to avoid a further fall, a further fall would
clearly be avoided.

In the ensuing weeks the Sabbath pause had a marked tendency to breed
uneasiness and doubts and pessimism and a decision to get out on
Monday. This, it seems certain, was what happened on Sunday, 20
October.

4

Monday, 21 October, was a very poor day. Sales totalled 6,091,870, the
third greatest volume in history, and some tens of thousands who were
watching the market throughout the country made a disturbing
discovery. There was no way of [*118] telling what was happening.
Previously on big days of the bull market the ticket had often fallen
behind, and one didn't discover until well after the market closed how
much richer he had become. But the experience with a falling market
had been much more limited. Not since March had the ticker fallen
seriously behind on declining values. Many now learned for the first
time that they could be ruined, totally and forever, and not even know
it. And if they were not ruined there was a strong tendency to imagine
it. From the opening on the 21st the ticker lagged, and by noon it was
an hour late. Not till an hour and forty minutes after the close of
the market did it record the last transaction. Every ten minutes
prices of selected bonds were printed on the bond ticker, but the wide
divergence between these and the prices on the tape only added to the
uneasiness -- and to the growing conviction that it might be best to
sell.

Things, though bad, were still not hopeless. Toward the end of
Monday's trading the market rallied and final prices were above the
lows for the day. The net losses were considerably less than on
Saturday. Tuesday brought a somewhat shaky gain. As so often before,
the market seemed to be showing its ability to comeback. People got
ready to record the experience as merely another setback of which
there had been so many previously.

In doing so they were helped by the two men who now were recognized as
Wall Street's official prophets. On Monday in New York, Professor
Fisher said that the decline had represented only 'shaking out of the
lunatic fringe'. He went on to explain why he felt that the prices of
stocks during the boom had not caught up with their real value and
would go higher. Among other things, the market had not yet reflected
the beneficent effects of prohibition which had made the American
worker 'more productive and dependable'.

On Tuesday, Charles E. Mitchell dropped anchor in New York with the
observation that 'the decline had gone too far'. (Time and sundry
congressional and court proceedings were to [*120] show that Mr
Mitchell had strong personal reasons for feeling that way.) He added
that conditions were 'fundamentally sound', said again that too much
attention had been paid to the large volume of brokers' loans, and
concluded that the situation was one which would correct itself if
left alone. However, another jarring suggestion came from Babson. He
recommended selling stocks and buying gold.

By Wednesday, 23 October, the effect of this cheer was somehow
dissipated. Instead of further gains there were heavy losses. The
opening was quiet enough, but toward midmorning motor accessory stocks
were sold heavily, and volume began to increase throughout the list.
The last hour was quite phenomenal -- 2,600,000 shares changed hands
at rapidly declining prices. The Times industrial average for the day
dropped from 415 to 384, giving up all of its gains since the end of
the previous June. Tel and Tel lost 15 points; General Electric, 20;
Westinghouse, 25; and J. I. Case, another 46. Again the ticker was far
behind, and to add to the uncertainty an ice storm in the Middle West
caused widespread disruption of communications. That afternoon and
evening thousands of speculators decided to get out while -- as they
mistakenly supposed -- the getting was good. Other thousands were told
they had no choice but to get out unless they posted more collateral,
for as the day's business came to an end an unprecedented volume of
margin calls went out. Speaking in Washington, even Professor Fisher
was fractionally less optimistic. He told a meeting of bankers that
'security values in most instances were not inflated'. However, he did
not weaken on the unrealized efficiencies of prohibition.

The papers that night went to press with a souvenir of a fast
departing era. Formidable advertisements announced subscription rights
in a new offering of certificates in Aktiebolaget Kreuger and Toll at
$23. There was also one bit of cheer. It was predicted that on the
morrow the market would surely begin to receive 'organized support'.

5

Thursday, 24 October, is the first of the days which history -- such
as it is on the subject -- identifies with the panic of 1929.

Measured by disorder, fright, and confusion, it deserves to be so
regarded. That day 12,894,650 shares changed hands, many of them at
prices which shattered the dreams and the hopes of those who had owned
them. Of all the mysteries of the Stock Exchange there is none so
impenetrable as why there should be a buyer for everyone who seeks to
sell. 24 October 1929, showed that what is mysterious is not
inevitable. Often there were no buyers, and only after wide vertical
declines could anyone be induced to bid.

The panic did not last all day. It was a phenomenon of the morning
hours. The market opening itself was unspectacular, and for a while
prices were firm. Volume, however, was very large, and soon prices
began to sag. Once again the ticker dropped behind. Prices fell
further and faster, and the ticker lagged more and more. By eleven
o'clock the market had de- generated into a wild, mad scramble to
sell. In the crowded boardrooms across the country the ticker told of
a frightful collapse. But the selected quotations coming in over the
bond ticker also showed that current values were far below the ancient
history of the tape. The uncertainty led more and more people to try
to sell. Others, no longer able to respond to mar- gin calls, were
sold out. By eleven-thirty the market had surrendered to blind,
relentless fear. This, indeed, was panic.

Outside the Exchange in Broad Street a weird roar could be heard. A
crowd gathered. Police Commissioner Grover Whalen became aware that
something was happening and dispatched a special police detail to Wall
Street to ensure the peace. More people came and waited, though
apparently no one knew for what. A workman appeared atop one of the
high buildings to accomplish some repairs, and the multitude assumed
he was a [*122] would-be suicide and waited impatiently for him to
jump. Crowds also formed around the branch offices of brokerage firms
throughout the city and, indeed, throughout the country. Word of what
was happening, or what was thought to be happening, was passed out by
those who were within sight of the board or the Trans-Lux. An observer
thought that people's expressions showed 'not so much suffering as a
sort of horrified incredulity'? Rumour after rumour swept Wall Street
and those outlying wakes. Stocks were now selling for nothing. The
Chicago and Buffalo Exchanges had closed. A suicide wave was in
progress, and eleven well-known speculators had already killed
themselves.

At twelve-thirty the officials of the New York Stock Ex- change closed
the visitors' gallery on the wild scenes below. One of the visitors
who had just departed was showing his remarkable ability to be on hand
with history. He was the former Chancellor of the Exchequer, Mr
Winston Churchill. It was he who in 1925 returned Britain to the gold
standard and the overvalued pound. Accordingly, he was responsible for
the strain which sent Montagu Norman to plead in New York for easier
money, which caused credit to be eased at the fatal time, which, in
this academy view, in turn caused the boom. Now Churchill, it could be
imagined, was viewing his awful handiwork.

There is no record of anyone's having reproached him. Economics was
never his strong point, so (and wisely) it seems most unlikely that he
reproached himself.

6

In New York at least the panic was over by noon. At noon the organized
support appeared.

FN1 Edwin Lefèvre, 'The Little Fellow in Wall Street', The Saturday
Evening Post, 4 January 1930. [*123]

At twelve o'clock reporters learned that a meeting was convening at 23
Wall Street at the offices of J. P. Morgan and Company. The word
quickly passed as to who was there -- Charles E. Mitchell, the
Chairman of the Board of the National City Bank, Albert H. Wiggin, the
Chairman of the Chase National Bank, William C. Potter, the President
of the Guaranty Trust Company, Seward Prosser, the Chairman of the
Bankers Trust Company, and the host, Thomas W. Lamont, the senior
partner of Morgan's. According to legend, during the panic of 1907 the
elder Morgan had brought to a halt the discussion of whether to save
the tottering Trust Company of America by saying that the place to
stop the panic was there. It was stopped. Now, twenty-two years later,
that drama was being re-enacted. The elder Morgan was dead. His son
was in Europe. But equally determined men were moving in. They were
the nation's most powerful financiers. They had not yet been pilloried
and maligned by New Dealers. The very news that they would act would
release people from the fear to which they had surrendered.

It did. A decision was quickly reached to pool resources to support
the market.FN1 The meeting broke up, and Thomas Lamont met the
reporters. His manner was described as serious, but his words were
reassuring. In what Frederick Lewis Allen later called one of the most
remarkable understatements of all time,FN2 he told the newspapermen,
'There has been a little distress selling on the Stock Exchange.' He
added that this was 'due to a technical condition of the market'

FN1 The amounts to be contributed or otherwise committed were never
specified. Frederick Lewis Allen (Only Yesterday, pp. 329-30) says
that each of the institutions, along with George F. Baker, Jr, of the
First National, who later joined the pool, put up $40 million. This
total -- $240 million -- seems much too large to be plausible. The New
York Times subsequently suggested (March 1938) that the total was some
$20 to $30 millions.
FN2 op. cit., p. 330. [*124]

rather than any fundamental cause, and told the newsmen that things
were 'susceptible to betterment'. The bankers, he let it be known, had
decided to better things.

Word had already reached the floor of the Exchange that the bankers
were meeting, and the news ticker had spread the magic word afield.
Prices firmed at once and started to rise. Then at one-thirty Richard
Whitney appeared on the floor and went to the post where steel was
traded. Whitney was perhaps the best-known figure on the floor. He was
one of the group of men of good background and appropriate education
who, in that time, were expected to manage the affairs of the
Exchange. Currently he was vice-president of the Exchange, but in the
absence of E. H. H. Simmons in Hawaii he was serving as acting
president. What was much more important at the moment, he was known as
floor trader for Morgan's and, indeed, his older brother was a Morgan
partner.

As he made his way through the teeming crowd, Whitney appeared
debonair and self-confident -- some later described his manner as
jaunty. (His own firm dealt largely in bonds, so it is improbable that
he had been much involved in the turmoil of the morning.) At the Steel
post he bid 205 for 10,000 shares. This was the price of the last
sale, and the current bids were several points lower. In an operation
that was totally devoid of normal commercial reticence, he got 200
shares and then left the rest of the order with the specialist. He
continued on his way, placing similar orders for fifteen or twenty
other stocks.

This was it. The bankers, obviously, had moved in. The effect was
electric. Fear vanished and gave way to concern lest the new advance
be missed. Prices boomed upward.

The bankers had, indeed, brought off a notable coup. Prices as they
fell that morning kept crossing a large volume of stop-loss orders --
orders calling for sales whenever a specified price was reached.
Brokers had placed many of these orders for their own protection on
the securities of customers who had not [*125] responded to calls for
additional margin. Each of these stop- loss orders tripped more
securities into the market and drove prices down further. Each spasm
of liquidation thus ensured that another would follow. It was this
literal chain reaction which the bankers checked, and they checked it
decisively.

In the closing hour, selling orders continuing to come in from across
the country turned the market soft once more. Still, in its own way,
the recovery on Black Thursday was as remarkable as the selling that
made it so black. The Times industrials were off only 12 points, or a
little more than a third of the loss of the previous day. Steel, the
stock that Whitney had singled out to start the recovery, had opened
that morning at 205-1/2, a point or two above the previous close. At
the lowest it was down to 193-1/2 for a 12-point loss.FN1 Then it
recovered to close at zo6 for a surprising net gain of 2 points for
this day. Montgomery Ward, which had opened at 83 and gone to 50, came
back to 74 General Electric was at one point 32 points below its
opening price and then came back 25 points. On the Curb, Goldman Sachs
Trading Corporation opened at 81, dropped to 6, and then came back to
80. J. I. Case, maintaining a reputation for eccentric behaviour that
had brought much risk capital into the threshing machine business,
made a net gain of points for the day. Many had good reason to be
grateful to the financial leaders of Wall Street.

7

Not everyone could be grateful, to be sure. Across the country people
were only dimly aware of the improvement. By early afternoon, when the
market started up, the ticker was hours behind. Although the spot
quotations on the bond ticker

FN1 Quotations have normally been rounded to the nearest whole number
in this history. The steel quotation on this day seems to call for an
exception. [*126] showed the improvement, the ticker itself continued
to grind out the most dismal of news. And the news on the ticker was
what counted. To many, many watchers it meant that they had been sold
out and that their dream -- in fact, their brief reality -- of
opulence had gone glimmering, together with home, car, furs,
jewellery, and reputation. That the market, after breaking them, had
recovered was the most chilling of comfort.

It was eight and a half minutes past seven that night before the
ticker finished recording the day's misfortunes. In the boardrooms
speculators who had been sold out since morning sat silently watching
the tape. The habit of months or years, however idle it had now
become, could not be abandoned at once. Then, as the final trades were
registered, sorrowfully or grimly, according to their nature, they
made their way out into the gathering night.

In Wall Street itself lights blazed from every office as clerks
struggled to come abreast of the day's business. Messengers and
boardroom boys, caught up in the excitement and untroubled by losses,
went skylarking through the streets until the police arrived to quell
them. Representatives of thirty-five of the largest wire houses
assembled at the offices of Hornblower and Weeks and told the press on
departing that the market was 'fundamentally sound' and 'technically
in better condition than it has been in months'. It was the unanimous
view of those present that the worst had passed. The host firm
dispatched a market letter which stated that 'commencing with today's
trading the market should start laying the foundation for the
constructive advance which we believe will characterize 1930'. Charles
E. Mitchell announced that the trouble was 'purely technical' and that
'fundamentals remained unimpaired'. Senator Carter Glass said that
trouble was due largely to Charles E. Mitchell. Senator Wilson of
Indiana attributed the crash to Democratic resistance to a higher
tariff. [*127]

8

On Friday and Saturday trading continued heavy -- just under six
million on Friday and over two million at the short session on
Saturday. Prices, on the whole, were steady -- the averages were a
trifle up on Friday but slid off on Saturday. It was thought that the
bankers were able to dispose of most of the securities they had
acquired while shoring up the market on Thursday. Not only were things
better, but everyone was clear as to who had made them so. The bankers
had shown both their courage and their power, and the people applauded
warmly and generously. The financial community, the Times said, now
felt 'secure in the knowledge that the most powerful banks in the
country stood ready to prevent a recurrence [of panic]'. As a result
it had 'relaxed its anxiety'.

Perhaps never before or since have so many people taken the measure of
economic prospects and found them so favourable as in the two days
following the Thursday disaster. The optimism even included a note of
self-congratulation. Colonel Apes in Cleveland thought that no other
country could have come through such a bad crash so well. Others
pointed out that the prospects for business were good and that the
stock market debacle would not make them any less favourable. No one
knew, but it cannot be stressed too frequently, that for effective
incantation knowledge is neither necessary nor assumed.

Eugene M. Stevens, the President of the Continental Illinois Bank,
said, 'There is nothing in the business situation to justify any
nervousness.' Walter Teagle said there had been no 'fundamental
change' in the oil business to justify concern; Charles M. Schwab said
that the steel business had been making 'fundamental progress' toward
stability and added that this 'fundamentally sound condition' was
responsible for the prosperity of the industry; Samuel Vauclain,
Chairman of the [*128] Baldwin Locomotive Works, declared that
'fundamentals are sound'; President Hoover said that 'the fundamental
business of the country, that is production and distribution of
commodities, is on a sound and prosperous basis'. President Hoover was
asked to say something more specific about the market -- for example,
that stocks were now cheap -- but he refused.FN1

Many others joined in. Howard C. Hopson, the head of Associated Gas
and Electric, omitted the standard reference to fundamentals and
thought it was 'undoubtedly beneficial to the business interests of
the country to have the gambling type of speculator eliminated'. (Mr
Hopson, himself a speculator, although more of the sure-thing type,
was also eliminated in due course.) A Boston investment trust took
space in The Wall Street Journal to say, 'S-T-E-A-D-Y Everybody I Calm
thinking is in order. Heed the words of America's greatest bankers.' A
single dissonant note, though great in portent, went unnoticed.
Speaking in Poughkeepsie, Governor Franklin D. Roosevelt criticized
the 'fever of speculation'.

On Sunday there were sermons suggesting that a certain measure of
divine retribution had been visited on the Republic and that it had
not been entirely unmerited. People had lost sight of spiritual values
in their single-minded pursuit of riches. Now they had had their
lesson.

Almost everyone believed that the heavenly knuckle-rapping was over
and that speculation could be now resumed in earnest. The papers were
full of the prospects for next week's market.

Stocks, it was agreed, were again cheap and accordingly there would be
a heavy rush to buy. Numerous stories from the

FN1 This was stated by Garet Garrett in The Saturday Evening Post (28
December 1929) and it is generally confirmed by Mr Hoover in his
memoirs. According to Mr Garrett the bankers' consortium asked the
President for the statement, which suggests that the reassurance, like
the support, was tolerably well organized. [*129]

brokerage houses, some of them possibly inspired, told of a fabulous
volume of buying orders which was piling up in anticipation of the
opening of the market. In a concerted advertising campaign in Monday's
papers, stock market firms urged the wisdom of picking up these
bargains promptly. 'We believe', said one house, 'that the investor
who purchases securities at this time with the discrimination that is
always a condition of prudent investing, may do so with utmost
confidence.' On Monday the real disaster began. [*130]

CHAPTER VII

THINGS BECOME MORE SERIOUS

In the autumn of 1929 the New York Stock Exchange, under roughly its
present constitution, was 112 years old. During this lifetime it had
seen some difficult days. On 18 September 1873, the firm of Jay Cooke
and Company failed, and, as a more or less direct result, so did fifty-
seven other Stock Exchange firms in the next few weeks. On 23 October
1907, call money rates reached one hundred and twenty-five per cent in
the panic of that year. On 16 September 1920- the autumn months are
the off-season in Wall Street -- a bomb exploded in front of Morgan's
next door, killing thirty people and injuring a hundred more.

A common feature of all these earlier troubles was that, having
happened, they were over. The worst was reasonably recognizable as
such. The singular feature of the great crash of 1929 was that the
worst continued to worsen. What looked one day like the end proved on
the next day to have been only the beginning. Nothing could have been
more ingeniously de- signed to maximize the suffering, and also to
ensure that as few as possible escaped the common misfortune. The
fortunate speculator who had funds to answer the first margin call
presently got another and equally urgent one, and if he met that there
would still be another. In the end all the money he had was extracted
from him and lost. The man with the smart money, who was safely out of
the market when the first crash came, naturally went back in to pick
up bargains. (Not only were a recorded 12,894,650 shares sold on 24
October; precisely the same number were bought.) The bargains then
[*131] suffered a ruinous fall. Even the man who waited out all of
October and all of November, who saw the volume of trading return to
normal and saw Wall Street become as placid as a produce market, and
who then bought common stocks would see their value drop to a third or
a fourth of the purchase price in the next twenty-four months. The
Coolidge bull market was a remarkable phenomenon. The ruthlessness of
its liquidation was, in its own way, equally remarkable.

2

Monday, 28 October, was the first day on which this process of climax
and anticlimax ad infinitum began to reveal itself. It was another
terrible day. Volume was huge, although below the previous Thursday --
nine and a quarter million shares as compared with nearly thirteen.
But the losses were far more severe. The Times industrials were down
49 points for the day. General Electric was off 48; Westinghouse, 34;
Tel and Tel, 34. Steel went down 18 point& Indeed, the decline on this
one day was greater than that of all the preceding week of panic Once
again a late ticker left everyone in ignorance of what was happening,
save that it was bad.

On this day there was no recovery. At one-ten Charles E. Mitchell was
observed going into Morgan's, and the news ticker carried the magic
word. Steel rallied and went from 1 to 198. But Richard Whitney did
not materialize. It seems probable in light of later knowledge that
Mitchell was on the way to float a personal loan. The market weakened
again, and in the last hour a phenomenal three million shares -- a big
day's business before and ever since -- changed hinds at rapidly
falling prices.

At four-thirty in the afternoon the bankers assembled once more at
Morgan's, and they remained in session until six- thirty. They were
described as taking a philosophical attitude, [*132] and they told the
press that the situation 'retained hopeful features', although these
were not specified. But the statement they released after the meeting
made clear what had been discussed for the two hours. It was no part
of the bankers' purpose, the statement said, to maintain any
particular level of prices or to protect anyone's profit. Rather the
aim was to have an orderly market, one in which offers would be met by
bids at some price. The bankers were only concerned that 'air holes',
as Mr Lamont dubbed them, did not appear.

Like many lesser men, Mr Lamont and his colleagues had suddenly found
themselves overcommitted on a falling market. The time had come to go
short on promises. Support, organized or otherwise, could not contest
with the overwhelming, pathological desire to sell. The meeting had
considered how to liquidate the commitment to support the market
without adding to the public perturbation.

The formula that was found was a chilling one. On Thurs- day, Whitney
had supported prices and protected profits -- or stopped losses. This
was what people wanted. To the man who held stock on margin, disaster
had only one face and that was falling prices. But now prices were to
be allowed to fall. The speculator's only comfort, henceforth, was
that his ruin would be accomplished in an orderly and becoming manner.

There were no recriminations at the time. Our political life favours
the extremes of speech; the man who is gifted in the arts of abuse is
bound to be a notable, I not always a great figure. In business,
things are different. Here we are surprisingly gentle and forbearing.
Even preposterous claims or excuses are normally taken, at least for
all public purposes, at the face value. On the evening of the 28th no
one any longer could feel 'secure in the knowledge that the most
powerful banks stood ready to prevent a recurrence' of panic. The
market had reasserted itself as an impersonal force beyond the power
of any person to control and, while this is the way markets [*133] are
supposed to be, it was horrible. But no one assailed the bankers for
letting the people down. There was even some talk that on the next day
the market might receive organized support.

8

Tuesday, 29 October, was the most devastating day in the history of
the New York stock market and it may have been the most devastating
day in the history of markets. It combined all of the bad features of
all of the bad days before. Volume was immensely greater than on Black
Thursday; the drop in prices was almost as great as on Monday.
Uncertainty and alarm were as great as on either.

Selling began as soon as the market opened and in huge volume. Great
blocks of stock were offered for what they would bring; in the first
half-hour sales were at a 33,000,000-a-day rate. The air holes, which
the bankers were to close, opened wide. Repeatedly and in many issues
there was a plethora of selling orders and no buyers at all. The stock
of White Sewing Machine Company, which had reached a high of 48 in the
months preceding, had closed at ii the night before. During the day
someone -- according to Frederick Lewis Allen it was thought to have
been a bright messenger boy for the Exchange -- had the happy idea of
entering a bid for a block of stock at a dollar a share. In the
absence of any other bid he got it., Once again, of course, the ticker
lagged -- at the close it was two and a half hours behind. By then,
16,410,030 sales had been recorded on the New York Stock Exchange --
some certainly went unrecorded -- or more than three times the number
that was once considered a fabulously big day. The Times industrial
averages were down 43 points, cancelling all of the gains of the
twelve wonderful months preceding.

FN1 Only Yesterday, p. 333. [*134]

The losses would have been worse had there not been a closing rally.
Thus Steel, for which Whitney had bid 205 On Thursday, reached 167
during the course of the day, although it rallied to 174 at the close.
American Can opened at 130, dropped to 110, and rose to 120.
Westinghouse opened at 131 -- on 3 September it had closed at 286 --
and dropped to 100. Then it rallied to 126. But the worst thing that
happened on this terrible day was to the investment trusts. Not only
did they go down, but it became apparent that they could go
practically to nothing. Goldman Sachs Trading Corporation had closed
at 6o the night before. During the day it dropped to 35 and closed at
that level, off by not far short of half. Blue Ridge, its offspring
once removed, on which the magic of leverage was now working in
reverse, did much worse. Early n September it had sold at 24. By 24
October it was down to 12, but it resisted rather well the misfortunes
of that day and the day following. On the morning of 29 October it
opened at 10 and promptly slipped to 3, giving up more than two-thirds
of its value. It recovered later but other investment trusts did less
well; their stock couldn't be sold at all.

The worst day on Wall Street came eventually to an end. Once again the
lights blazed all night. Members of the Ex- change, their employees,
and the employees of the Stock Ex- change by now were reaching the
breaking point from strain and fatigue. In this condition they faced
the task of recording and handling the greatest volume of transactions
ever. All of this was without the previous certainty that things might
get better. They might go on getting worse. In one house an employee
fainted from exhaustion, was revived, and put back to work again.

4

In the first week the slaughter had been of the innocents. During this
second week there is some evidence that it was the [*135] well-to-do
and the wealthy who were being subjected to a levelling process
comparable in magnitude and suddenness to that presided over a decade
before by Lenin. The size of the blocks of stock which were offered
suggested that big speculators were selling or being sold. Another
indication came from the boardrooms. A week before they were crowded,
now they were nearly empty. Those now in trouble had facilities for
suffering in private.

The bankers met twice on the 29th -- at noon and again in the evening.
There was no suggestion that they were Philosophical. This was hardly
remarkable because, during the day, an appalling rumour had swept the
Exchange. It was that the bankers' pool, so far from stabilizing the
market, was actually idling stocks I The prestige of the bankers had
in truth been falling even more rapidly than the market. After the
evening session, Mr Lamont met the press with the disenchanting task
of denying that they had been liquidating securities -- or
participating in a bear raid. After explaining again, somewhat
redundantly in view of the day's events, that it was not the purpose
of the bankers to maintain a particular level of prices, he concluded:
'The group has continued and will continue in a cooperative way to
support the market and has not been a seller of stocks.' In fact, as
later intelligence revealed, Albert IL Wiggin of the Chase was
personally short at the time to the tune of some millions. His
cooperative support, which if successful would have cost him heavily,
must have had an interesting element of ambivalence.

So ended the organized support. The phrase recurred during the next
few days, but no one again saw in it any ground for hope. Few men ever
lost position so rapidly as did the New York bankers in the five days
from 24 October to 29 October. The crash on 20 October was the signal
for corporations and out-of-town banks, which had been luxuriating in
the ten per cent and more rate of interest, to recall their money from
Wall [*136] Street. Between 23 October and 30 October, as values fell
and margin accounts were liquidated, the volume of brokers' loans fell
by over a billion. But the corporations and the out-of-town banks
responded to the horrifying news from New York -- although, in fact,
their funds were never seriously endangered -- by calling home over
two billions. The New York banks stepped into the gaping hole that was
left by these summer financiers, and during that first week of crisis
they increased their loans by about a billion. This was a bold step.
Had the New York banks succumbed to the general fright, a money panic
would have been added to the other woes. Stocks would have been dumped
because their owners could not have borrowed money at any price to
carry them. To prevent this was a considerable achievement for which
all who owned stocks should have been thankful. But the banks received
no credit. People remembered only that they had bravely undertaken to
stem the price collapse and had failed.

Despite a flattering supposition to the contrary, people come readily
to terms with power. There is little reason to think that the power of
the great bankers, while they were assumed to have it, was much
resented. But as the ghosts of numerous tyrants, from Julius Caesar to
Benito Mussolini, will testify, people are very hard on those who,
having had power, lose it or are destroyed. Then anger at past
arrogance is joined with contempt for present weakness. The victim or
his corpse is made to suffer all available indignities.

Such was the fate of the bankers. For the next decade they were fair
game for congressional committees, courts, the press, and the
comedians. The great pretensions and the great failures of these days
were a cause. A banker need not be popular; indeed, a good banker in a
healthy capitalist society should probably be much disliked. People do
not wish to trust their money to a hail-fellow-well-met but to a
misanthrope who can say no. However, a banker must not seem futile,
ineffective, or [*137] vaguely foolish. In contrast with the stern
power of Morgan in 1907, that was precisely how his successors seemed,
or were made to seem, in 1929.

The failure of the bankers did not leave the community entirely
without constructive leadership. There was Mayor James J. Walker.
Appearing before a meeting of motion picture exhibitors on that
Tuesday, he appealed to them to 'show pictures which will reinstate
courage and hope in the hearts of the people'.

5

On the Exchange itself, there was a strong feeling that courage and
hope might best be restored by just closing up for a while. This
feeling had, in fact, been gaining force for several days. Now it
derived support from the simple circumstance that everyone was badly
in need of sleep. Employees of some Stock Exchange firms had not been
home for days. Hotel rooms in downtown New York were at a premium, and
restaurants in the financial area had gone on to a fifteen- and twenty-
hour day. Nerves were bad, and mistakes were becoming increasingly
common. After the close of trading on Tuesday, a broker found a large
waste basket of unexecuted orders which be had set aside for early
attention and had totally forgotten.FN1 One customer, whose margin
account was impaired, was sold out twice. A number of firms needed
some time to see if they were still solvent. There were, in fact, no
important failures by Stock Exchange firths during these days,
although one firm had reported itself bankrupt as the result of a
clerical error by an employee who was in the last stages of
fatigue.FN2

FN1. Allen, op. Cit., p. 334.
FN2 The Work of the Stock Exchange in the Panic of 1929, an address by
Richard Whitney before the Boston Association of Stock Exchange Fume.
Boston, 10 June 1930, pp. 16, 17. Whitney's account, below, of the
events of 29 October and thereafter is from the same source. [*138]

Yet to close the Exchange was a serious matter. It might somehow
signify that stocks had lost all their value, with con- sequences no
one could foresee. In any case, securities would immediately become a
badly frozen asset. This would be hard on wholly solvent investors who
might need to realize on them or use them as collateral. And sooner or
later a new 'gutter' market would develop in which individuals would
informally dispose of stocks to those increasingly exceptional
individuals who still wanted to buy them.

In 1929 the New York Stock Exchange was in principle a sovereignty of
its members. Apart from the general statutes relating to the conduct
of business and the prevention of fraud, it was subject to no
important state or federal regulation. This meant a considerable
exercise of self-government. Legislation governing the conduct of
trading had to be kept under review and enforced. Stocks had to be
approved for listing. The build- ing and other facilities of the
Exchange had to be managed. As with the United States Congress, most
of this work was done in committees. (These, in turn, were dominated
by a somewhat smaller group of members who were expected and
accustomed to run things.) A decision to close the Exchange had to be
taken by the Governing Committee, a body of about forty members. The
mere knowledge that this body was meeting would almost certainly have
an unfavourable effect on the market.

Nonetheless, at noon on Tuesday, the 29th, a meeting was held. The
members of the committee left the floor in twos and threes and went,
not to the regular meeting room, but to the office of the President of
the Stock Clearing Corporation directly below the trading floor. Some
months later, Acting President Whitney described the session with
considerable graphic talent. 'The office they met in was never
designed for large meetings of this sort, with the result that most of
the Governors were compelled to stand, or to sit on tables. As the
[*139] meeting proceeded, panic was raging overhead on the floor.
Every few minutes the latest prices were announced, with quotations
moving swiftly and irresistibly downwards. The feeling of those
present was revealed by their habit of continually lighting
cigarettes, taking a puff or two, putting them out and lighting new
ones -- a practice which soon made the narrow room blue with smoke and
extremely stuffy.'

The result of these nervous deliberations was a decision to meet again
in the evening. By evening the late rally had occurred, and it was
decided to stay open for another day. The next day a further formula
was hit upon. The Exchange would stay open. But it would have some
special holidays and then go on short hours, and this would be
announced just as soon as the market seemed strong enough to stand it.

Many still wanted to close. Whitney said later, although no doubt with
some exaggeration, that in the days to come 'the authorities of the
Exchange led the life of hunted things, until [eventually] the
desirability of holding the market open became apparent to all'.

6

The next day those forces were at work which on occasion bring
salvation precisely when salvation seems impossible. Stocks rose
wonderfully, miraculously, though still on enormous volume. The Times
industrials were up 31 points for the day, thus recouping a large part
of the terrible losses of the day before. Why this recovery occurred
no one will ever know. Organized support can have no credit. Organized
reassurance has a somewhat better claim. On the evening of the 29th,
Dr Julius Klein, Assistant Secretary of Commerce, friend of President
Hoover, and the senior apostle of the official economic view, took to
the radio to remind the country that President Hoover had said that
the 'fundamental business of the country' [*140] was sound. He added
firmly, 'The main point which I want to emphasize is the fundamental
soundness of (the] great mass of economic activities.' On Wednesday,
Waddill Catchinga, of Goldman, Sachs, announced on return from a
western trip that general business conditions were 'unquestionably
fundamentally sound'. (The same, by then, could not unquestionably be
said of all Goldman, Sachs.) Arthur Brisbane told Hearst readers: 'To
comfort yourself, if you lost, think of the people living near Mount
Pelee, ordered to abandon their homes.'

Most important, perhaps, from Pocantico Hills came the first public
statement by John D. Rockefeller in several decades. So far as the
record shows, it was spontaneous.

However, someone in Wall Street -- perhaps someone who knew that
another appeal to President Hoover to say some- thing specifically
encouraging about stocks would be useless -- may have realized that a
statement from Rockefeller would, if anything, be better. The
statement ran: Believing that fundamental conditions of the country
are sound ... my son and I have for some days been purchasing sound
common stocks.' The statement was widely applauded, although Eddie
Cantor, describing himself as Comedian, Author, Statistician, and
Victim, said later, 'Sure, who else had any money left?'FN1

The accepted Wall Street explanation of Wednesday's miracle was not
the reassurance but the dividend news of the day before. This also,
without much question, was somewhat organized. U.S. Steel had declared
an extra dividend; American Can had not only declared an extra but had
increased its regular dividend. These errant sunbeams were deeply
welcome in the dark canyons of lower Manhattan.

Just before the Rockefeller statement arrived, things looked good
enough on the Exchange so that Richard Whitney felt safe in announcing
that the market would not open until noon the

FN1 Caught Short! A Saga of Wailing Wall Street, New York (Simon and
Schuster), 1929 A.C. (After Crash), p. 31. [*141]

following day (Thursday) and that on Friday and Saturday it would stay
shut. The announcement was greeted by cheers. Nerves were clearly past
the breaking point. On La Salle Street in Chicago a boy exploded a
firecracker. Like wildfire the rumour spread that gangsters whose
margin accounts had been closed out were shooting up the street.
Several squads of police arrived to make them take their losses like
honest men. In New York the body of a commission merchant was fished
out of the Hudson. The pockets contained $9.40 in change and some
margin calls.

7

At the short session of three hours on Thursday, 31 October, well over
seven million shares were traded, and the market made another good
gain. The Times industrials were up 21 points. The weekly return of
the Federal Reserve Bank showed a drop in brokers' loans by more than
a billion, the largest weekly drop on record. Margin requirements had
already been cut to twenty-five per cent; now the Federal Reserve
Banks lowered the rediscount rate from six to five per cent. The
Reserve Banks also launched vigorous open-market purchases of bonds to
ease money rates and liberalize the supply of credit. The boom had
collapsed; the restraint that had previously been contemplated could
now give way to a policy of active encouragement to the market. On all
these happy portents the market closed down for Friday, Saturday, and
Sunday. They were not days of rest. Brokerage offices were fully
staffed, and the Exchange floor was open for completion of trades and
also for straightening out innumerable misunderstandings and mistakes.
It was noted that on Friday a visitor to the galleries could not have
told the market was suspended.

The weekend brought one piece of bad news. That was the announcement
on Saturday of the failure of the $20,000,000 Foshay enterprises of
Minneapolis. Foshay owned utilities in [*142] some twelve states,
Canada, Mexico, and Central America, and an assortment of hotels,
flour mills, banks, manufacturing and retail establishments wherever
he had happened to buy them. The 32-storey obelisk, commemorating the
enterprise, which still dominates the Minneapolis skyline, had been
opened with fitting ceremony by Secretary of War James W. Good, only
in August (Secretary Good had referred to it as the 'Washington
Monument of the North-west.'FN1) By all but the most technical of
considerations, Foshay was bankrupt at that festive time. His survival
depended on his ability to continue merchandising stock to the public.
The market crash eliminated this source of revenue and made him
dependent on the wholly inadequate earnings of his enterprises.

On all other fronts the news was all good. Alfred P. Sloan, Jr,
President of the General Motors Corporation, said: 'Business is
sound.' The Ford Motor Company emphasized a similar conviction by
announcing a general reduction in its prices: '...we feel that such a
step is the best contribution that could be made to assure a
continuation of good business'. The Roadster was cut from $450 to
$435; the phaeton from $460 to $440; the Tudor Sedan from $525 to
$500. For the three days that the market was closed the papers carried
stories of the accumulation of buying orders and, in some indefinable
way, the stories had a greater ring of conviction than the week
before. The market, after all, had closed after an excellent two-day
rally. As Barron's pointed out, it could now be believed that stocks
were selling 'ex-hopes and romance'. On Monday, the Commercial
National Bank and Trust Company took five columns in the Times to
advertise'... our belief and conviction that the general industrial
and business condition of the country is fundamentally sound and is
essentially unimpaired'.

That day the market started on another ghastly slump.

FN1 Investment News, 16 October, p. 538. [*143]

8

Over the weekend the financial community had almost certainly been
persuaded by its own organized and spontaneous efforts at cheer. The
paper described the reaction of professional Wall Street to Monday's
market as one of stunned surprise, disbelief, and shock. Volume was
smaller than the week before, but still well above six million. The
whole list was weak; individual issues made big losses; the Times
industrials were down 22 points for the day. Compared with anything
but the week before, this was very bad. When measured against the
bright hopes for that day, it was most distressing.

Explanations varied. The rumour recurred that the' organized support'
was selling stocks, and Mr Lamont, on meeting the press, added a minor
footnote to this now completed story. He said be didn't know -- the
organized support was really not that well organized. The most
plausible explanation is that everyone was feeling cheerful but the
public. As before and later, the weekend had been a time of thought,
and out of thought had come pessimism and a decision to sell. So, as
on other Mondays, no matter how cheerful the superficial portents, the
selling orders poured in in volume.

By now it was also evident that the investment trusts, once considered
a buttress of the high plateau and a built-in defence against
collapse, were really a profound source of weakness. The leverage, of
which people only a fortnight before had spoken so knowledgeably and
even affectionately, was now fully in reverse. With remarkable
celerity it removed all of the value from the common stock of a trust.
As before, the case of a typical trust, a small one, is worth
contemplating. Let it be supposed that it had securities in the hands
of the public which had a market value of $10,000,000 in early
October. Of this, half was in common stock, half in bonds and
preferred stock. The securities were fully covered by the current
market value [*144] of the securities owned. In other words, the
trust's portfolio contained securities with a market value also of
$10,000,000.

A representative portfolio of securities owned by such a trust would,
in the early days of November, have declined in value by perhaps half.
(Values of many of these securities by later standards would still be
handsome; on 4 November, the low for Tel and Tel was still 233, for
General Electric it was 234, and for Steel 183.) The new portfolio
value, $5,000000, would be only enough to cover the prior claim on
assets of the bonds and preferred stock. The common stock would have
nothing behind it Apart from expectations, which were by no means
bright, it was now worthless.

This geometrical ruthlessness was not exceptional. On the contrary, it
was everywhere at work on the stock of the leverage trusts. By early
November, the stock of most of them had become virtually unsaleable.
To make matters worse, many of them were traded on the Curb or the out-
of-town exchanges where buyers were few and the markets thin.

Never was there a time when more people wanted more money more
urgently than in those days. The word that a man had 'got caught' by
the markets was the signal for his creditors to descend on him like
locusts. Many who were having trouble meeting their margin calls
wanted to sell some stocks so they could hold the rest and thus
salvage something from their misfortunes. But such people now found
that their investment trust securities could not be sold for any
appreciable sum and perhaps not at all. They were forced, as a result,
to realize on their good securities. Standard stocks like Steel,
General Motors, Tel and Tel were thus dumped on the market in abnormal
volume, with the effect on prices that had already been fully
revealed. The great investment trust boom had ended in a unique
manifestation of Gresham's Law in which the bad stocks were driving
out the good.

The stabilizing effects of the huge cash resources of the [*145]
investment trusts had also proved a mirage. In the early autumn the
cash and liquid resources of the investment trusts were large. Many
trusts had been attracted by the handsome returns in the call market.
(The speculative circle had been dosed. People who speculated in the
stock of investment trusts were in effect investing in companies which
provided the funds to finance their own speculation.) But now, as
reverse leverage did its work, investment trust managements were much
more concerned over the collapse in the value of their own stock than
over the adverse movements in the stock list as a whole. The
investment trusts had invested heavily in each other. As a result the
fall in Blue Ridge hit Shenandoah, and the resulting collapse in
Shenandoah was even more horrible for the Goldman Sachs Trading
Corporation.

Under these circumstances, many of the trusts used their available
cash in a desperate effort to support their own stock. However, there
was a vast difference between buying one's stock now when the public
wanted to sell and buying during the previous spring -- as Goldman
Sachs Trading Corporation had done -- when the public wanted to buy
and the resulting competition had sent prices higher and higher. Now
the cash went out and the stock came in, and prices were either not
perceptibly affected or not for long. What six months before had been
a brilliant financial manoeuvre was now a form of fiscal self-
immolation. In the last analysis, the purchase by a firm of its own
stock is the exact opposite of the sale of stocks. It is by the sale
of stock that firms ordinarily grow. [

However, none of this was immediately apparent If one has been a
financial genius, faith in one's genius does not dissolve at once. To
the battered but unbowed genius, support of the stock of one's own
company still seemed a bold, imaginative, and effective course.
Indeed, it seemed the only alternative to slow but certain death. So
to the extent that their cash resources allowed, the managements of
the trusts chose faster, [*146] though equally certain death. They
bought their own worthless stock. Men have been swindled by other men
on many occasions. The autumn of 1929 was, perhaps, the first occasion
when men succeeded on a large scale in swindling themselves.

The time has now come to complete the chronicle of the last days of
the crisis.

9

Tuesday, November, was election day, and the market was closed all
day. In the New York mayoralty race, the Democratic incumbent, James
J. Walker, scored a landslide victory over his Republican opponent, F.
H. La Guardia, who had been soundly denounced by the Democrats as a
socialist. Babson, in a statement, called for poise, discernment,
judicious courage, and old-fashioned common sense. On Wednesday the
market reopened for the first of a new series of short sessions of
three hours. These were the compromise on the question of closing
which had been reached the previous week. Nearly six million shares
were traded in this session or the equivalent often million shares on
a full day. There was another sickening slide. U.S. Steel opened at
i8x, and, by what one paper called a succession of 'feverish dips',
went to 165. Auburn Automobile lost 66 points; Otis Elevator lost 45.
The Times industrials were off 37 points for the day, or only 6 points
less than on the terrible Tuesday eight days earlier. Where would it
all end?

There was also disturbing news from beyond the market. Fundamentals
seemed to be turning sour. The week's figures on carloadings showed a
heavy drop as compared with the year before. The steel rate was
significantly down from the preceding week. More serious, the slump
had extended to the commodity markets. On previous days these had
reacted sympathetically with the stock market. On this Wednesday they
had troubles of their own. Cotton was sharply off in the [*147]
heaviest trading in weeks. References were made to 'panic' in the
wheat market when the price dropped vertically at noon.

On Thursday the stock market was steady to higher, but on Friday it
took a small drop. People had another weekend of contemplation. This
time there was no talk of an accumulation of buying orders; indeed,
there was little good news of any kind. On Monday, 11 November, came
another drastic slump. For the next two days trading was heavy -- the
Ex- change was still on short hours -- and prices went down still
more. In these three days, 11, 12, and 13 November, the Times
industrials lost another 50 points.

Of all the days of the crash, these without doubt were the dreariest.
Organized support had failed. For the moment even organized
reassurance had been abandoned. All that could be managed was some
sardonic humour. It was noted that the margin calls going out by
Western Union that week carried a small sticker: 'Remember them at
home with a cheery Thanksgiving telegram, the American way for this
American day.' Clerks in downtown hotels were said to be asking guests
whether they wished the room for sleeping or jumping. Two men jumped
hand-in-hand from a high window in the Ritz. They had a joint account.
The Wall Street Journal, becoming biblical, told its readers: 'Verily,
I say, let the fear of the market be the law of thy life, and abide by
the words of the bond salesman? The financial editor of the Times, who
by this time showed signs of being satisfied with the crash and
perhaps even of feeling that it had gone too far, said: 'Probably none
of the present generation will be able to speak again ... of a
"healthy reaction". There are many signs that the phrase is entirely
out of date.' [*148]

CHAPTER VIII

AFTERMATH I

In the week or so following Black Thursday, the London penny press
told delightedly of the scenes in downtown New York. Speculators were
hurling themselves from windows; pedestrians picked their way
delicately between the bodies of fallen financiers. The American
correspondent for the Economist wrote an indignant column for his
paper protesting against this picture of imaginary carnage.

In the United States the suicide wave that followed the stock market
crash is also part of the legend of 1929. In fact, there was none. For
several years before 1929, the suicide rate had been gradually rising.
It continued to increase in that year, with a further and much sharper
increase in 1930, 1931, and 1932- years when there were many things
besides the stock market to cause people to conclude that life was no
longer worth living. The statistics for New Yorkers, who might be
assumed to have had a special propensity for self-destruction, derived
from their propinquity to the market, show only a slight deviation
from those for the country as a whole. Since the suicide myth is so
well established, it may be useful to give the detailed figures, which
are shown on the following page.

Since the market crash took place late in the year, there could have
been a substantial increase in suicides in late October and thereafter
which still would not be great enough to affect the figures for the
year as a whole. However, figures on the causes of death by months are
also available for 1929.FN1

FN1 I am grateful to the custodians of vital statistics in the
Department of Health, Education and Welfare for tracking down these
figures for me. They are from Mortality Statistics, 1929 (Washington:
Department of Commerce, Bureau of the Census). [*149]

These show that the number of suicides in October and November was
comparatively low -- in October, 1,331 suicides in all the United
States, and in November, 1,344- In only three other months -- January,
February, and September -- did fewer people destroy themselves. During
the summer months, when the market was doing beautifully, the number
of suicides was substantially higher.

NUMBER OF SUICIDES PER 100,000 OF POPULATION
1925-34

Year For Registration Area* For New York City
1925 12.1 14.4
1926 12.8 13.7
1927 13.3 15.7
1928 13.6 15.7
1929 14.0 17.0
1930 15.7 18.7
1931 16.8 19.7
1932 17.4 21.3
1933 15.9 18.5
1934 14.9 17.0
*The Registration Area is the part of the country -- most of it --
wherein causes of death are duly reported. Data are from Vital
Statistics: Special Reports, 1-45, 1935, Washington (Department of
Commerce, Bureau of the Census), 1937.

One can only guess how the suicide myth became established. Like
alcoholics and gamblers, broken speculators are supposed to have a
propensity for self-destruction. At a time when broken speculators
were plentiful, the newspapers and the public may have simply supplied
the corollary. Alternatively, suicides that in other times would have
evoked the question, 'Why do you suppose he did it?' now had the
motive assigned automatically: 'The poor fellow was caught in the
[*150] crash.' Finally, it must be noted that, although suicides did
not increase sharply either in the months of the crash or in 1929 as a
whole, the rate did rise in the later depression years. In memory some
of these tragedies may have been moved back a year or two to the time
of the stock market crash.

The weight of the evidence suggests that the newspapers and the public
merely seized on such suicides as occurred to show that people were
reacting appropriately to their misfortune. Enough deaths could be
related in one way or another to the market to serve. Beginning soon
after Black Thursday, stories of violent self-destruction began to
appear in the papers with some regularity. Curiously, though another
myth runs strongly to the contrary, few people in these days followed
the classic method of jumping from a high window. One would-be suicide
jumped into the Schuylkill River, although he changed his mind when he
hit the water and was fished out. The head of the Rochester Gas and
Electric Company took gas. Another martyr dipped himself in gasoline
and touched himself off. He not only made good his escape from his
margin calls, but took his wife with him. There was also the suicide
of J. J. Riordan.

Riordan's death made large headlines in the newspapers on Sunday, 10
November. The papers obviously had sensed a story not only in his
death itself, but also in the manner of its announcement. Riordan was
a widely-known and popular figure among New York Democrats. He had
been treasurer of one of Mayor Walker's campaigns and also of one of
Al Smith's. He and Smith were close friends and business associates.
Al Smith was a member of the board of directors of the recently-
organized County Trust Company, of which Riordan was the president.

On Friday, 8 November, Riordan went to his bank, took a pistol from a
teller's cage, went home, and shot himself. Al Smith was notified, and
his sorrow over the death of his friend [*151] was not diminished by
the knowledge that the news might start a serious run on their bank. A
medical examiner was called but further notification was withheld
until the following day (Saturday) at noon, when the bank had closed
for the weekend. There had been a long wake through which the
distinguished mourners had kept one eye on the corpse and the other on
the clock.

The medical examiner first implied that he had postponed notification
out of a feeling of deep responsibility for depositors of the Country
Trust. This was a formidable exercise of discretion; carried to its
logical conclusion, it meant that all deaths would have to be weighed
by the attending doctor for their financial consequences. Later it was
tacitly conceded that the decision was Al Smith's. So great was
Smith's prestige -- and also the general nervousness -- that the
action was not questioned.

For some days Tumours had been circulating that Riordan had been wiped
out by the crash. Now his friends rallied to his defence, some with
vehement assertions that he never played the market. He had been
deeply involved, as subsequent Senate committee investigations of the
stock market revealed, but a hurried audit of the bank showed that all
of its funds were intact. This fact was well-publicized over the
weekend. The City Administration boldly announced that it was leaving
its deposits with the bank, which was a trifle like saying that it
would remain on speaking terms with Tammany Hall. Raskob temporarily
assumed the chairmanship. No run developed.

The Church concluded that Riordan, a Catholic, had been temporarily
deranged and thus was eligible for burial in consecrated ground. Among
the honorary pallbearers were Al Smith, Herbert Lehman, and John J.
Raskob, and among those attending the funeral were Mayor Frank Hague,
Vincent Astor, Grover Whalen, James A. Fancy, and M. J. Meehan, the
market operator. [*152]

Two and a half years later, on Saturday, 12 March, 1932, Ivar Kreuger
shot himself dead in his Paris apartment at eleven o'clock in the
morning local time. This was six hours before the New York Stock
Exchange closed. With the co- operation of the Paris police, the news
was withheld until the market closed. Later a congressional committee
was exceedingly critical of this delay, and Al Smith's action was
cited in the defence. In the case of Kreuger, it should be added, the
security system of the Paris police was less than perfect. It is
fairly certain that there was heavy selling that morning -- including
heavy short selling -- of Kreuger and Toll by continental
interests.FN1

2

In many ways the effect of the crash on embezzlement was more
significant than on suicide. To the economist embezzlement is the most
interesting of crimes. Alone among the various forms of larceny it has
a time parameter. Weeks, months, or years may elapse between the
commission of the crime and its discovery. (This is a period,
incidentally, when the embezzler has his gain and the man who has been
embezzled, oddly enough, feels no loss. There is a net increase in
psychic wealth.) At any given time there exists an inventory of
undiscovered embezzlement in -- or more precisely not in -- the
country's businesses and banks. This inventory -- it should

FN1 Stock Exchange Practices, January 1933, Pt 4, pp. 1214 ff. Such
sales were heavy for Friday and Saturday, but in the Exchange records
of the time the two days are not segregated. Mr Donald Durant, the
highly uninformed American director of Kreuger and Toll, was in Paris
at the time of Kreuger's death and cabled the news to the firm of Lee,
Higginson and Company, of which he was a partner. The latter company,
which was Kreuger's American investment banker, appears to have
refrained scrupulously from acting on the news (ibid., pp. tai-z6).
[*153]

perhaps be called the bezzle -- amounts at any moment to many millions
of dollars. It also varies in size with the business cycle. In good
times people are relaxed, trusting, and money is plentiful. But even
though money is plentiful, there are always many people who need more.
Under these circumstances the rate of embezzlement grows, the rate of
discovery, falls off, and the bezzle increases rapidly. In depression
all this is reversed. Money is watched with a narrow, suspicious eye.
The man who handles it is assumed to be dishonest until he proves
himself otherwise. Audits are penetrating and meticulous. Commercial
morality is enormously improved. The bezzle shrinks.

The stock market boom and the ensuing crash caused a traumatic
exaggeration of these normal relationships. To the normal needs for
money, for home, family, and dissipation, was added, during the boom,
the new and overwhelming requirements for funds to play the market or
to meet margin calls. Money was exceptionally plentiful. People were
also exceptionally trusting. A bank president who was himself trusting
Kreuger, Hopson, and Insull was obviously unlikely to suspect his
lifelong friend the cashier. In the late twenties the bezzle grew
apace.

Just as the boom accelerated the rate of growth, so the crash
enormously advanced the rate of discovery. Within a few days,
something close to universal trust turned into something akin to
universal suspicion. Audits were ordered. Strained or preoccupied
behaviour was noticed. Most important the collapse in stock values
made irredeemable the position of the employee who had embezzled to
play the market. He now confessed.

After the first week or so of the crash, reports of defaulting
employees were a daily occurrence. They were far more common than the
suicides. On some days comparatively brief accounts occupied a column
or more in the Times. The [*154] amounts were large and small, and
they were reported from far and wide.

The most spectacular embezzlement of the period -- the counterpart of
the Riordan suicide -- was the looting of the Union Industrial Bank of
Flint, Michigan. The gross take, estimates of which grew alarmingly as
the investigation proceeded, was stated in The Literary Digest later
in the year to be $3,592,000.FN1

In the beginning this embezzlement was a matter of individual
initiative. Unknown to each other, a number of the bank's officers
began making away with funds. Gradually they became aware of each
other's activities, and since they could scarcely expose each other,
they cooperated. The enterprise eventually embraced about a dozen
people, including virtually all of the principal officers of the bank.
Operations were so well organized that even the arrival of bank
examiners at the local hotels was made known promptly to members of
the syndicate.

Most of the funds which were purloined had been deposited with the
bank to be loaned in the New York call market. The money was duly
dispatched to New York but promptly recalled while the records
continued to show that it was there. The money was then returned once
more to New York and put into stocks. In the spring of 1929 the group
was about $100,000 ahead. Then, unfortunately, it went short just as
the market soared into the blue yonder of the summer sky. This was so
costly that the group was induced to return to a long position, which
it did just before the crash. The crash, needless to say, was mortal.

Each week during the autumn more such unfortunates were revealed in
their misery. Most of them were small men who had taken a flier in the
market and then become more deeply involved. Later they had more
impressive companions. It was

FN1 December 1929. [*155]

the crash, and the subsequent ruthless contraction of values,
which, in the end, exposed the speculation by Kreuger, Hopson, and
Insull with the money of other people. Should the American economy
ever achieve permanent full employment and prosperity, firms should
look well to their auditors. One of the uses of depression is the
exposure of what auditors fail to find. Bagehot once observed: 'Every
great crisis reveals the excessive speculations of many houses which
no one before suspected.'FN1

3

In mid-November 1929, at long, lost last, the market stopped falling
-- at least, for a while. The low was on Wednesday, 13 November. On
that day the Times industrials closed at 224 down from 542, or by
almost exactly one-half since 3 September. They were also then down 82
points -- about one- quarter -- from the dose on that day barely two
weeks before when John D. Rockefeller had announced that he and his
son were buying common stocks. On November 13 there was another
Rockefeller story: it was said that the family had entered a million-
share buying order to peg Standard Oil of New Jersey at 50. During the
rest of November and December the course of the market was moderately
up.

The decline had run its course. However, the end coincided with one
last effort at reassurance. No one can say for sure that it did no
good. One part was the announcement by the New York Stock Exchange of
an investigation of short selling. Inevitably in the preceding weeks
there had been rumours of bear raids on the market and of fortunes
being made by the shorts. The benign people known as 4the who once had
put the market up, were now a malign influence putting it down and
making money out of the common disaster. In the early

FN1 Lombard Street, p. 150. [*156]

days of the crash it was widely believed that Jesse L. Livermore, a
Bostonian with a large and unquestionably exaggerated reputation for
bear operations, was heading a syndicate that was driving the market
down. So persistent did these rumours become that Livermore, whom few
had thought sensitive to public opinion, issued a formal denial that
he was involved in any deflationary plot. 'What little business- I
have done in the stock market', he said, 'has always been as an
individual and will continue to be done on such basis.' As early as z.
October, The Wall Street Journa4 then somewhat less reserved in its
view of the world than now, complained that 'there has been a lot of
short selling, a lot of forced selling, and a lot of selling to make
the market look bad'. Such suspicions the Exchange authorities now
sought to dispel. Nothing came of the study.

A more important effort at reassurance was made by President Hoover.
Presumably he was still indifferent to the fate of the stock market.
But he could not be indifferent to the much-publicized fundamentals,
which by now were behaving worse each week. Prices of commodities were
falling. Freight-car loadings, pig iron and steel production, coal
output, and automobile production were also all going down. So, as a
result, was the general index of industrial production. Indeed, it was
falling much more rapidly than in the sharp postwar depression of
1920-1. There were alarming stories of the drop in consumer buying,
especially of more expensive goods. It was said that sales of radio
sets in New York had fallen by half since the crash.

Mr Hoover's first step was out of the later works of John Maynard
Keynes. Precisely as Keynes and Keynesians would have advised, he
announced a cut in taxes. The rate on both individuals and
corporations was cut by one full percentage point. This reduced the
income tax of a head of a family with no dependants and an income of
$4,000 by two-thirds. The man with $5,000 got a similar reduction The
tax of a married [*157] man with no dependants and an income of
$10,000 was cut in half. These were dramatic reductions, but their
effect was sadly mitigated by the fact that for most people the taxes
being cut were already insignificant. The man with $4,000 had his
annual tax burden reduced from $5.63 to $1.88. The man with $5;000 got
a cut from $i6.88 to $5.63. For the man with $10,000 the reduction in
annual tax was from $120 to $65. The step, nonetheless, was well
received as a contribution to increased purchasing power, expanded
business investment, and a general revival of confidence.

Mr Hoover also called a series of meetings on the state of the
economy. The leading industrialists, the leading railway executives,
the heads of the large utilities, the heads of the important
construction companies, the union leaders, and the heads of the farm
organizations met in turn with the President during the latter part of
November. The procedure in the case of each of the meetings was the
same. There was a solemn session with the President, those attending
had their picture taken with the President, and there was a press
interview at which the conferees gave the press their opinion on the
business prospect. The latter, without exception, was highly
favourable. After the meeting of the industrial leaders on 21
November, which was attended by, among others, Henry Ford, Walter
Teagle, Owen D. Young, Alfred P. Sloan, Jr, Pierre du Pont, Walter
Gifford, and Andrew Mellon, the expressions of confidence were so
robust that Julius Rosenwald, who also attended, said he feared there
might soon be a bad labour shortage.

The utility, rail, and construction executives were equally hopeful.
Even the heads of the farm organizations were less misanthropic than
normal for that time. They said afterwards that they had told the
President that 'the morale of their industry was better than it had
been for years'.

FN1 Magazine of Wall Street, 1 December 1929, p. 264. The references
to Foch and the Manic following is from the same source. [*158]

This was organized reassurance on a really grand scale, and ft
attracted some of the most enthusiastic comment of the period. A Wall
Street financial writer began his story of the sessions: "Order up the
Moors I" was Marshal Foch's reply at the first battle of the Marne...
"Order up the business reserves," directed President Hoover as
pessimistic reports flowed in from all quarters following the stock
market crash.' The Philadelphia Record was led to describe the
President as 'easily the most commanding figure in the modern science
of "engineering statesmanship". The Boston Globe said that the nation
is now aware 'that it has at the White House a man who believes not in
the philosophy of drift, but in the dynamics of mastery'.FN1

4

Yet to suppose that President Hoover was engaged only in organizing
further reassurance is to do him a serious injustice. He was also
conducting one of the oldest, most important -- and, unhappily, one of
the least understood -- rites in American life. This is the rite of
the meeting which is called not to do business but to do no business.
It is a rite which is still much practised in our time. It is worth
examining for a moment.

Men meet together for many reasons in the course of business. They
need to instruct or persuade each other. They must agree on a course
of action. They find thinking in public more productive or less
painful than thinking in private. But there are at least as many
reasons for meetings to transact no business. Meetings are held
because men seek companionship or, at a minimum, wish to escape the
tedium of solitary duties. They yearn for the prestige which accrues
to the man who presides over meetings, and this leads them to convoke
assemblages over which they can preside. Finally, there is the meeting

FN1 Both comments are from The Literary Digest, 30 November 1929.
[*159]

which is called not because there is business to be done, but because
it is necessary to create the impression that business is being done.
Such meetings are more than a substitute for action. They are widely
regarded as action.

The fact that no business is transacted at a no-business meeting is
normally not a serious cause of embarrassment to those attending.
Numerous formulas have been devised to prevent discomfort. Thus
scholars, who are great devotees of the no-business meeting, rely
heavily on the exchange-of-ideas justification. To them the exchange
of ideas is an absolute good. Any meeting at which ideas are exchanged
is, therefore, useful. This justification is nearly ironclad. It is
very hard to have a meeting of which it can be said that no ideas were
exchanged.

Salesmen and sales executives, who also are important practitioners of
the no-business gathering, commonly have a different justification and
one that has strong spiritual over- tones. Out of the warmth of
comradeship, the interplay of personality, the stimulation of alcohol,
and the inspiration of oratory comes an impulsive rededication to the
daily task. The meeting pays for itself in a fuller and better life
and the sale of more goods in future weeks and months.

The no-business meetings of the great business executives depend for
their illusion of importance on something quite different. Not the
exchange of ideas or the spiritual rewards of comradeship, but a
solemn sense of assembled power gives significance to this assemblage.
Even though nothing of importance is said or done, men of importance
cannot meet without the occasion seeming important. Even the
commonplace observation of the head of a large corporation is still
the statement of the head of a large corporation. What it lacks in
content it gains in power from the assets behind it.

The no-business meeting was an almost perfect instrument for the
situation in which President Hoover found himself in [*160] the autumn
of 1929. The modest tax cut apart, the President was clearly averse to
any large-scale government action to counter the developing
depression. Nor was it very certain, at the time, what could be done.
Yet by 1929 popular faith in laissez-faire had been greatly weakened.
No responsible political leader could safely proclaim a policy of
keeping hands off. The no-business meetings at the White House were a
practical expression of laissez-faire. No positive action resulted. At
the same time they gave a sense of truly impressive action. The
conventions governing the no-business session ensured that there would
be no embarrassment arising from the absence of business. Those who
attended accepted as a measure of the importance of the meetings the
importance of the people attending. The newspapers also cooperated in
emphasizing the importance of the sessions. Had they done otherwise
they would, of course, have undermined the value of the sessions as
news.

In recent times the no-business meeting at the White House
-- attended by governors, industrialists, representatives of business,
labour, and agriculture -- has become an established institution of
government. Some device for simulating action, when action is
impossible, is indispensable in a sound and functioning democracy. Mr
Hoover in 1929 was a pioneer in this field of public administration.

As the depression deepened, it was said that Mr Hoover's meetings had
been a failure. This, obviously, reflects a very narrow view.

5

In January, February, and March of 1930 the stock market showed a
substantial recovery. Then in April the recovery lost momentum, and in
June there was another large drop. Thereafter, with few exceptions the
market dropped week by week, [*161] month by month, and year by year
through June of 1932. The position when it finally halted made the
worst level during the crash seem memorable by contrast. On 13
November 1929, it may be recalled, the Times industrials closed at
224. On 8 July 1932, they were 58. This value was not much more than
the net by which they dropped on the single day of 28 October 1929.
Standard Oil of New Jersey, which the Rockefellers were believed to
have pegged at 50 on 13 November 1929, dropped below 20 in April 1932.
On 8 July it was 4. U.S. Steel on 8 July reached a low of 22. On 3
September 1929, it had sold as high as 262. General Motors was a
bargain at 8 on 8 July, down from 73 n 3 September 1929. Montgomery
Ward was 4, down from 138. Tel and Tel was 72, and on 3 September 1929
it had sold at 304. Anaconda sold at 4 on 8 July. The Commercial and
Financial Chronicle observed that 'the copper shares are so low that
their fluctuations are of little consequence'.FN1

However, comparatively speaking, values in these staple stocks had
been well maintained. Things were far worse with the investment
trusts. Blue Ridge during the week ending 8 July 1932 was 63 cents,
and Shenandoah was 50 cents. United Founders and American Founders
were both around 50 cents as compared with 70 and 117 (dollars,
needless to say) on September The fears of November 1929 that the
investment trusts might go to nothing had been largely realized.

No one any longer suggested that business was sound, fundamentally or
otherwise. During the week of 8 July 1932, Iron Age announced that
steel operations had reached twelve per cent of capacity. This was
thought of its sort to be a record. Pig-iron output was the lowest
since 1896. A total of 720,278 shares were traded that day on the New
York Stock Exchange.

Before all this came to pass there had been more, many

FN1 9 July 1932. [*162]

more, efforts at reassurance. In the weeks of the crash President
Hoover had sagely observed: 'My own experience... has been that words
are not of any great importance in times of economic disturbance.'
This impregnable rule he thereafter forgot. In December he told the
Congress that the steps he had taken -- the White House no-business
conferences in particular -- had 're-established confidence'. In March
1930, following a flood of optimistic forecasts by his subordinates,
Mr Hoover said that the worst effect of the crash upon unemployment
would be ended in sixty days. In May Mr Hoover said he was convinced
we have now passed the worst and with continued unity of effort shall
rapidly recover'. Toward the end of the month he said that business
would be normal by fall.FN1

What was perhaps the last word on the policy of reassurance was said
by Simeon D. Few, the Chairman of the Republican National Committee:

Persons high in Republican circles are beginning to believe that there
is some concerted effort on foot to utilize the stock market as a
method of discrediting the Administration. Every time an
Administration official gives out an optimistic statement about
business conditions, the market immediately drops.FN2

FN1 Frederick Lewis Allen, Only Yesterday, pp. 340-1.
FN2 Quoted by Edward Angly, Oh Yeah!, p. 27, from the New York World,
15 October 1930. [*163]

CHAPTER IX

AFTERMATH II

I

The crash blighted the fortunes of many hundreds of thousands of
Americans. But among people of prominence worse havoc was worked on
reputations. In such circles credit for wisdom, foresight, and,
unhappily also, for common honesty underwent a convulsive shrinkage.

On the whole, those who had proclaimed during the crash that business
was 'fundamentally sound' were not held accountable for their words.
The ritualistic nature of their expression was recognized; then as now
no one supposed that such spokesmen knew whether business was sound or
unsound. One exception was Mr Hoover. He undoubtedly suffered as the
result of his repeated predictions of imminent prosperity. However,
Hoover had converted the simple business ritual of reassurance into a
major instrument of public policy. It was certain in consequence to be
the subject of political comment

The scholarly forecasters were not so fortunate. People on the whole
cherished the discovery that they were not omniscient. Mr Lawrence
disappeared from Princeton. Among economists his voice was not heard
again.

The Harvard Economic Society, it will be recalled, had come up to the
summer of the crash with a valuable reputation for pessimism. This
position it abandoned during the summer when the stock market kept on
rising and business seemed strong. On 2 November, after the crash, the
Society concluded that 'the present recession, both for stocks and
business is not the precursor of business depression'. On 10 November
it made its notable estimate that 'a serious depression like that
[*164] of izo-i is outside the range of probability'. It repeated this
judgement on 23 November and on zi December gave its forecast for the
next year: 'A depression seems improbable; (we expect] recovery of
business next spring, with further im- provement in the fall.' On i8
January 1930 the Society said, 'There are indications that the
severest phase of the recession is over'; on i March, that
'manufacturing activity is now -- to judge from past periods of
contraction -- definitely on the road to recovery'; on 22 March, 'The
outlook continues favourable'; On 29 March, that 'the outlook is
favourable'; on 19 April, that 'by May or June the spring recovery
forecast in our letters of last December and November should be
clearly apparent'; On 17 May, that business 'will turn for the better
this month or next, recover vigorously in the third quarter and end
the year at levels substantially above normal'; on 24 May it was
suggested that conditions 'continue to justify' the forecasts of 17
May; on 21 June, that 'despite existing irregularities' there would
soon be improvement; on 28 June it stated that' irregular and
conflicting movements of business should soon give way to sustained
recovery'; on 19 July it pointed out that 'untoward elements have
operated to delay recovery but the evidence nonetheless points to
substantial improvement'; and on 30 August 1930, the Society stated
that 'the present depression has about spent its force'. Thereafter
the Society became less hopeful. On i 5 November 1930 it said: 'We are
now near the end of the declining phase of the depression.' A year
later, on 31 October 193 1, it said: 'Stabilization at [present)
depression levels is clearly possible." Even these last forecasts were
wildly optimistic. 'Somewhat later, its reputation for infallibility
rather dimmed, the Society was dissolved. Harvard economics professors
ceased forecasting the future and again donned their accustomed garb
of humility.

Professor Irving Fisher tried hard to explain why he had

FN1 Quotation are from the Weekly Letter of the date gives. [*165]

been wrong. Early in November 1929 he suggested that the whole thing
had been irrational and hence beyond prediction. In a statement that
was not a model of coherence, he said: 'It was the psychology of
panic. It was mob psychology, and it was not, primarily, that the
price level of the market was unsoundly high ... the fail in the
market was very largely due to the psychology by which it went down
because it went down." The explanation attracted little attention
except from the editor of The Commercial and Financial Chronicle. The
latter observed with succinct brutality: 'The learned professor is
wrong as he usually is when he talks about the stock market.' The
'mob', he added, didn't sell. It got sold out.

Before the year was over, Professor Fisher tried again in a book, The
Stock Market Crash -- And After.' He argued, and rightly for the
moment, that stocks were still on a plateau, albeit a somewhat lower
one than before, that the crash was a great accident, that the market
had gone up 'principally because of sound, justified expectations of
earnings'. He also argued that prohibition was still a strong force
for higher business productivity and profits, and concluded that for
'the immediate future, at least, the outlook is bright'. This book
attracted little attention. One trouble with being wrong is that it
robs the prophet of his audience when he most needs it to explain why.

Out in Ohio, Professor Dice -- he of the parasangs -- survived
honourably to write and teach for a lifetime about finance.

This may be the place also to record another happy ending.
Goldman, Sachs and Company rescued its firm name from its delinquent
offspring and returned to an earlier role of strict

FN1 New York Herald Tribune, 3 November 1929. Quoted by The Commercial
and Financial Chronicle, 9 November 1929.
FN2 New York (Macmillan), 1930. The quotations following are on pp.
53, 269. [*166]

rectitude and stern conservatism. It became known for in business in
the most austere of securities.

2

New York's two greatest banks, the Chase and the National City,
suffered severely in the aftermath. They, of course, shared the
general obloquy of the New York bankers which resulted from the great
hopes and great disappointments of organized support. But it was also
the remarkable misfortune of each that it had as its head in those
days a market operator in the grand manner.

Of the two, the Chase was the more fortunate. Albert H. Wiggin,
variously President, Chairman of the board, and Chairman of the
governing board of the Chase, was a speculator and operator, but not
an articulate one. However, in 1929 and the years preceding he had
been engaging in some astonishing enterprises. In 1929 he received
$275,000 compensation ahead of the Chase. He was also -– or while head
of the Chase had been -- director of some fifty-nine utility,
industrial, insurance, and other corporations and from some of these
had also received a handsome salary. Armour and Company had paid him
$40,000 to be a member of its finance committee; he got $2o,ooo a year
from the Brooklyn-Manhattan, Transit Corporation; at least seven other
firms paid him from two to five thousand annually.' Wisdom and esteem,
or even affection, were not the only factors in his compensation.
Those who paid were usually clients and prospective borrowers from the
Chase. But the most remarkable of Mr Wiggin's extracurricular
interests was a bevy of private companies. There were personal holding
companies, two of which were named sentimentally for his daughters.
Three others were incorporated in Canada for

FN1 Stock Exchange Practices, Report, 1934, p. 201-2. [*167]

highly unsentimental reasons of taxation and corporate reticence?

These companies were the instruments for an astonishing variety of
stock market operations. In one operation in the spring of 1929
Shermar Corporation -- one of the namesake companies -- participated
with Harry F. Sinclair and Arthur W. Cutten in a mammoth pool in the
common stock of Sinclair Consolidated Oil Company. Even in those
tolerant days Sinclair and Cutten were considered rather garish
companions for a prominent banker. However, the operation netted
Shermar $89i,600.37 on no apparent investment.

However, the most breathtaking of Mr Wiggin's operations were in the
stock of the Chase National Bank. These, in turn, were financed by the
Chase bank itself. In one exceptionally well-timed coup Shermar
Corporation, between 23 September and 4 November 1929, sold short
2,506 shares of Chase stock. (For those to whom short selling is an
unrevealed mystery, this meant in effect that it negotiated a loan of
42,5o6 shares and then sold them at the exceedingly good prices then
obtaining. It did this with the intention of buying the same number of
shares later at a lower price in order to repay in kind the lender who
had provided the original stock. The profit from repaying shares
bought at a lower price -- always assuming that the price went down --
would obviously accrue to Shermar.) Prices did go down superbly; the
short sale anticipated perfectly the crash. Then on 11 December 1929
Murlyn Corporation -- this was for another daughter -- bought 42,506
shares of stock from an affiliate of the Chase National Bank and
financed this purchase with a loan of $6,588,430 from the Chase
National Bank and from Shermar Corporation. These shares were used to
cover Shermar's short sale, i.e. to repay the loan of securities.

FN1 Stock Exchange Practices, Hearings, October-November 1933, Pt 6,
pp. 2877 ff.
FN2 Stock Exchange Practices, Report, 1934, pp. 192-3. [*168]

The profits on the operation -- at a time when many other people were
doing much, much less well -- was $4,008,538.FN1 People of carping
tendencies might hold the profit was earned by the bank, whose stock
it was, whose officer Wiggin was, and which had provided the money for
the operation. In fact, the gain all went to Wiggin. Mr Wiggin
subsequently defended loans by banks to their own officers to allow
them to speculate in their own stock on the grounds that it developed
an interest in their institution. However, by this line of reasoning,
loans to finance short sales present a difficulty: presumably they
develop an interest in having the institution, and hence its stock,
behave as badly as possible. Pressed on this point, Mr Wiggin
expressed doubt as to whether officers should sell their own companies
short.

At the end of 1932 Mr 'Wiggin requested that he not be re-elected
Chairman of the Governing Board of the bank. He was approaching sixty-
five, and he noted with some slight over- statement that his 'heart
and energies [had] been concentrated for many years in promoting the
growth, welfare, and usefulness of the Chase National Bank'.FN2 It
also seems probable that Winthrop W. Aldrich, who had come into the
Chase as the result of a merger with the Equitable Trust Company and
who represented a more austere tradition in commercial banking -- the
Equitable was controlled by the Rockefellers -- had come to regard Mr
Wiggin as dispensable.' The Executive Committee of the Chase,' in
order to discharge in some measure the obligations of this bank to Mr
Wiggin', by unanimous action voted him a life salary of $100,000. It
was later brought out

FN1 Stock Exchange Practices, Report, 1934, pp. 188 ff.
FN2 Stock Exchange Practices, Hearings, October 1933, Pt. 5, p. 2304.
FN3 Mr Aldrich later told a Senate committee (ibid., p. 4ozo) that his
differences of opinion with friends of Mr Wiggin, and presumably also
with Mr Wiggin, were a matter of general knowledge.
FN4 ibid., p. 2302 Practices, Report, 1934, pp. 192-3. [*169]

that this gesture of inspired generosity had been the impulse of Mr
Wiggin himself. In the months following Mr Wiggin's retirement his
activities became a matter of detailed study by a Senate committee, Mr
Aldrich, his successor, confessed his surprise at the extent and
diversity of his predecessor's enter- prises and said that the voting
of the life salary was a terrible mistake. Mr Wiggin later renounced
the compensation.

3

By comparison with the National City the troubles of the Chase were
slight. Mr Wiggin was a reserved, some described him as a rather
scholarly, man. The head of the National City, Charles E. Mitchell, on
the other hand, was a genial extrovert with a talent for headlines. He
was known to one and all as a leading prophet of the New Era.

In the autumn of 1929 there were rumours in Wall Street that Mitchell
would resign. He did not, and the rumours were described by Percy A.
Rockefeller, an associate in numerous rather fervent stock market
operations and a director of the bank, as 'too absurd to be considered
by any sensible person'.FN1 For the next two or three years Mitchell
was rather out of the news. Then at nine o'clock on the evening of 2!
March 1933 he was arrested by Assistant U.S. District Attorney Thomas
E. Dewey and charged with evasion of income taxes.

Many of the facts were never seriously in dispute. Like Wiggin,
Mitchell had been operating extensively in the stock of his own bank,
although possibly for more defensible reasons. 1929 was a year of bank
mergers, and Charles B. Mitchell was no man to resist a trend. By
early autumn of 1929 he had all but completed a merger with the Corn
Exchange Bank. The directors of the two institutions had approved; all
that remained was the formality of ratification

FN1 Investment News, z6 November 1929, p. 546. [*170]

by the stockholders. Holders of Corn Exchange stock were to receive,
at their option, four-fifths of a share of National City stock or $360
in cash. The price of National City stock was then above 5oo, so it
was certain that the Corn Exchange stockholders would take the stock.

Then came the crash. The price of National City stock dropped to
around 425, and at any price below 450-four-fifths of which equalled
$360 in cash -- the stockholders of the Corn Exchange would take
money. To buy out all the Corn Exchange holders for cash would cost
the National City around $200 million. That was too much, so Mitchell
undertook to save the deal. He began buying National City stock, and
during the week of 28 October he arranged to borrow twelve million
dollars from J. P. Morgan and Company with which to buy more. (Twelve
million was a sizeable sum both for Mitchell and for Morgan's, even at
that time. Only ten million was actually used, and of this four
million was repaid within a week or so. Possibly some of the Morgan
partners had second thoughts on the wisdom of the loan.)

The coup failed. Like so many others, Mitchell learned how different
it was to support a stock when everyone wanted to sell as compared
with those days but a few weeks back when every- one wanted to buy.
The price of National City stock sank lower and lower. Mitchell
reached the end of his resources and gave up. This was no time for
false pride, and with some mild prodding from the management, the
National City stockholders repudiated that management and rejected the
now disastrous deal. Mitchell, however, was left with a formidable
debt to J. P. Morgan and Company. This debt was secured by the stock
that had been purchased to support the market and by Mitchell's
personal holdings, but its value was shrinking grievously. By the end
of the year National City stock was near 200, down from more than 500,
and close to the value at which Morgan's had accepted it as
collateral. [*171]

Now Mitchell faced another misfortune, or, rather, an earlier piece of
good fortune now became a disaster. As an executive of the National
City Bank, Mitchell's pay was a modest $25,000. However, the bank had
an incentive system which may still hold some sort of record for
munificence. After a deduction of eight per cent, twenty per cent of
the profits of the bank, and of its security affiliate, the National
City Company were paid into a management fund. This was divided twice
a year between the principal officers by an arrangement which must
have made for an interesting half-hour. Each officer first dropped in
a hat an unsigned ballot suggesting the share of the fund that
Chairman Mitchell should have. Then each signed a ballot giving his
estimate of the worth of each of the other eligible officers, himself
excluded. The average of these estimates guided the Executive
Committee of the bank in fixing the percentages of the fund each
officer was to have.

The years 1928 and 1929 were a time of excellent profits. Mitchell's
subordinates had also taken a favourable view of his work. For the
full year 1928 his cut was $1,316,634.14 1929 was even better. The
division at the end of the first half of that year brought him no less
than $1,108,000.FN1 Dividends and numerous other activities had
further augmented his income, and all of this meant a serious tax
liability. It would have been easy to sell some National City stock
and establish a tax loss, but, as noted, the stock was pledged with J.
P. Morgan and Company.

Nevertheless, Mitchell sold the stock -- to his wife: 18,300 shares
were disposed of to this possibly unsuspecting lady at 212, for the
exceedingly satisfying loss of $2,872,305.50. This wiped out all tax
liability for 1929. Morgan's were not, it appears, notified of the
change of ownership of the stock they held. Somewhat later Mitchell
reacquired the stock from his wife, also at a price of 212. Before
then there had been a

FN1 Stock Exchange Practices, Report, 1934, p. 206. [*172]

further sickening slide in the price, and had Chairman Mitchell bought
the stock in the open market rather than from his wife, he could have
got it for around 40. Asked about the transaction by Senator Brookhard
of Iowa during a Senate hearing, Mitchell, in a burst of candour that
must have devastated his lawyer, said: 'I sold this stock, frankly,
for tax purposes." This frankness led directly to his indictment a few
weeks later.

Following his testimony, Mitchell had resigned from the National City
Bank. His trial in New York during May and June of 1933 was something
of a sensation, although the head- lines were necessarily subordinate
to the larger ones currently being made in Washington. In his
inaugural address on 4 March, Roosevelt had promised to drive the
money-changers from the temple. Mitchell was widely regarded as the
first.

On 22 June, Mitchell was acquitted by the jury on all counts. The
sales as required by the tax laws were held to be bona fide
transactions made in good faith. The Times reporter covering the trial
thought that both Mitchell and his lawyer received the verdict with
surprise. Attorney General Cummings said that he still believed in the
jury system. Mitchell later resumed his career in Wail Street as head
of Blyth and Company. The government entered a civil claim for taxes
and won a judgement of $1,100,000 in taxes and penalties. Mitchell
appealed the case through to the Supreme Court, lost, and made a final
settlement with the government on 27 December 1938- On his behalf it
must be stressed that the device by which he sought to reduce his tax
liability was far more common then than now. The Senate investigations
of 1933 and 1934 showed that tax avoidance had brought individuals of
the highest respectability into extraordinary financial intercourse
with their wives.'

FN1 Stock Exchange Practices, Report, 1934, p. 322.
FN2 ibid., pp. 321, 322. [*173]

4

Our political tradition sets great store by the generalized symbol of
evil. This is the wrongdoer whose wrongdoing will be taken by the
public to be the secret propensity of a whole community or class. We
search avidly for such people, not so much because we wish to see them
exposed and punished as individuals, but because we cherish the
resulting political discomfort of their friends. To uncover an evil
man among the friend of one's foes has long been a recognized method
of advancing one's political fortunes. However, in recent times the
technique has been greatly improved and refined by the added firmness
with which the evil of the evildoer is now attributed to friends,
acquaintances, and all who share his way of life.

In the nineteen-thirties Wall Street was exceptionally well endowed
with enemies. There were some socialists and communists who believed
that capitalism, should be abolished and obviously did not seek to
have its citadel preserved. There were some people who merely thought
that Wall Street was bad. There were yet others who did not seek to
have Wall Street abolished or who did not care much about its
allegedly evil ways but who enjoyed as a matter of course the
discomfiture of the rich and the powerful and the proud. There were
those who had lost money in Wall Street. Most of all there was the New
Deal. The administrations of Coolidge and Hoover had had an extremely
overt alliance with the great financial interests which Wall Street
symbolized. With the advent of the New Deal the sins of Wall Street
became the sins of the political enemy. What was bad for Wall Street
was bad for the Re- publican Party.

For anyone who was in search of symbolic evil in Wall Street -- of
individuals whose misbehaviour would stigmatize the whole community --
the discovery that the heads of the [*174]

National City and Chase had been guilty of grave lapses would
seem to be almost ideal. These were the two best known and most
influential banks; what could have been better than default here?

That the shortcomings of Mr Wiggin and Mr Mitchell were much welcomed
is, of course, clear. Yet in some indefinable sense they were not of
that part of Wall Street that people suspected most. Wall Street's
crime, in the eyes of its classic enemies, was less its power than its
morals. And the centre of immorality was not the banks but the stock
market. It was on the stock market that men gambled not alone with
their own money, but with the wealth of the country. The stock market,
with its promise of my riches, was what led good if not very wise men
to perdition -- like the cashier of the local bank who was also a
vestryman. The senseless gyrations of the stock market affected farm
prices and land values and the renewal of notes and mortgages. Though
to the sophisticated radical the banks might be the real menace, sound
populist attitudes pointed the finger of suspicion at the New York
Stock Ex- change. There, accordingly, was the place, if possible, to
find the symbol of evil, for there was the institution about which
people were ready to believe the worst.

The search for a really adequate miscreant in the Stock Exchange began
in April 1932- The task was undertaken by the Senate Committee on
Banking and Currency (later by a subcommittee) and its instructions,
graced by the usual split infinitive, were 'to thoroughly investigate
practices of stock exchanges...' Under the later guidance of Ferdinand
Pecora, this committee became the scourge of commercial, investment,
and private bankers. But this was not foreseen when it was organized.
The original and more or less exclusive object of the inquiry was the
market for securities.

On the whole, this part of the investigation was unproductive. The
first witness, when the hearings opened on 11 April [*175] 1932, was
Richard Whitney.' On 30 November 1929, the Governing Committee of the
New York Stock Exchange had passed a resolution of appreciation for
the 'efficient and conscientious' labours of their acting president
during the recent storm. It is an 'old saying', the Resolution had
stated, 'that great emergencies produce the men who are competent to
deal with them. . .' This sense of indebtedness made it inevitable
that when Edward H. H. Simmons retired as President of the Exchange in
1930 after six years in office, Whitney would be elected to succeed
him. As President of the Exchange it thus fell to Whitney, in the
spring of 1932, to assume the task of protecting the stock market from
its critics.

Whitney was not in all respects an ingratiating witness. One of his
successors in office not long ago compared his general manner and
beating with that of Secretary of Defence Charles E. Wilson at the
hearings on his confirmation as Secretary of Defence in early 1933.
Whitney admitted to no serious fault in the past operations of the
Exchange or even to the possibility of error. He supplied the
information that was requested, but he was not unduly helpful to
senators who sought to penetrate the mysteries of short selling, sales
against the box, options, pools, and syndicates. He seemed to feel
that these things were beyond the senators' intelligence.
Alternatively he implied that they were things that every intelligent
schoolboy understood and it was painful for him to have to go over the
obvious. He was so unwise as to get into a discussion of personal
economic philosophy with Senator Smith W. Brookhart of Iowa, one of
the committee members who believed, devoutly, that the Exchange was
the particular invention of the devil. The government, not Wall
Street, was responsible for the current times, Whitney averred, and
the government, he believed, could make its greatest contribution to
recovery by balancing the budget and thus restoring confidence. To
balance the

FN1 Stock Exchange Practices. Hearings, April 1932, Pt 1, pp. ff.
[*176]

budget he recommended cutting the pensions and benefits of veterans
who had no service-connected disability and also all government
salaries. When asked about cutting his own pay he said no -- it was
'very little'. Pressed for the amount, he said that currently it was
only about $6o,ooo. His attention was drawn by the committee members
to the fact that this was six times what a senator received, but
Whitney remained adamantly in favour of cutting the public pay,
including that of senators.FN1

In spite of Whitney's manner, or possibly because of it, several days
of questioning produced little evidence of wrong- doing and no
identification of wrongdoers. Prior to the crash Whitney had heard
generally of syndicates and pools, but he could give no details. He
repeatedly assured the committee that the Exchange had these and other
matters well under control He took exception to Senator Brookhart's
contention that the market was a gambling hell and should be
padlocked. In the end Whitney was excused before he had quite
completed his testimony.

When the interrogation of Whitney showed clear signs of being
unproductive, the committee turned to the famous market operators.
These, too, were disappointing. All that could be proved was what
everyone knew, namely, that Bernard E. ('Sell 'em Ben') Smith, M. J.
Meehan, Arthur W. Cutten, Harry F. Sinclair, Percy A. Rockefeller, and
others had been engaged in large-scale efforts to rig the market Harry
F. Sinclair, for example, was shown to have engaged in especially
extensive operations in Sinclair Consolidated Oil. This was much like
identifying William Z. Foster with the Communist Party. It was
impossible to imagine Harry Sinclair not being involved in some
intricate manoeuvre in high finance. Moreover, reprehensible as these
activities were, it remained that only three short years before they
had been

FN1 Stock Exchange Practices, Hearings, February-March 1933, Pt 6, pp.
2235 ff. [*177]

regarded with breathless admiration. The problem here was somewhat
similar to that encountered in the great red-bunt of the latter
forties. Then there was constant embarrassment over the short time
that had elapsed since Red Russia had been our gallant Soviet ally.

It is true that the big operators, as they appeared on the stand, were
not an especially prepossessing group. As noted earlier, Arthur
Cutten's memory was extremely defective. M. J. Meehan was in bad
health and mistakenly went abroad when he was supposed to go to
Washington. (He later apologized handsomely for the error.) Few of the
others could remember much about their operations, Napoleonic though
they had once seemed. But men cannot be brought to trial r being
unprepossessing. And the dubious demeanour and bad memories of the
market operators did not directly involve the reputation of the New
York Stock Exchange. It is possible have a poor view of touts,
tipsters, and bookies without thinking the worse of Churchill Downs.

In earlier times of trouble on the stock market, Stock Ex- change
firms had failed, on occasion by the score. In the fall of 1929 the
failures were unimportant In the first week of the crash no member
firm of the New York Stock Exchange bad to suspend; only one smallish
member firm went under -- during the period of panic. There were some
complaints by customers of mistreatment. But there were more customers
who, during the worst days, were carried by their brokers after their
margins had been impaired or depleted. The standards of commercial
morality of the members of the Ex- change would seem to have been well
up to the average of the late twenties. They may have been much more
rigorous. This would seem to be the most obvious explanation why the
Exchange and its members survived so well the investigations of the
thirties. They did not come through unscathed, but they suffered no
obloquy comparable, say, with that of the great [*178] bankers. In the
congressional investigations no flagrant miscreant of any kind was
uncovered on the Exchange to serve as the symbolic bad apple. Then, on
10 March 1938, District Attorney Thomas E. Dewey -- who had arrested
Charles E. Mitchell and who somehow has escaped a reputation as the
nemesis of Wall Street -- ordered the arraignment of Richard Whitney.
The charge was grand larceny.

5

The rush to get in on the act, to use the recent idiom, when Whitney
was arrested is a measure of the yearning for a male- factor in the
stock market. It can be compared only with the stampede which followed
the announcement by Attorney General Herbert Brownell in the autumn of
that former President Truman had shielded treason. On the day
following his first arrest, Whitney was arrested again by New York
State Attorney General John J. Bennett. Mr Bennett had been con-
ducting an investigation of Whitney's affairs, and he bitterly accused
Mr Dewey of legal claim-jumping. In the next few weeks virtually every
public body or tribunal with a plausible excuse for doing so, called
Whitney to enlarge on his wrongdoing.

The detailed story of Richard Whitney's misfortunes does not belong to
this chronicle. Many of them occurred after the period with which this
history is concerned. There is need here to cover only those
operations that were deemed to implicate the market.

Whitney's dishonesty was of a casual, rather juvenile sort. Associates
of the day have since explained it as the result of an unfortunate
failure to realize that the rules, which were meant for other people,
also applied to him. Much more striking than Whitney's dishonesty was
the dear fact that he was one of the most disastrous businessmen in
modern history. Theft was almost a minor incident pertaining to his
business misfortunes. [*179] In the twenties the Wall Street firm of
Richard Whitney and Company was an unspectacular bond house with a
modest business. Whitney apparently felt that it provided insufficient
scope for his imagination, and with the passing years he moved on to
other enterprises, including the mining of mineral ml- bids and the
marketing of peat humus in Florida. He had also become interested in
the distilling of alcoholic beverages, Mainly applejack, in New
Jersey. Nothing is so voracious as a losing business, and eventually
Whitney had three of them. To keep them going he borrowed from banks,
investment bankers, other Stock Exchange members, and heavily from his
brother, George Whitney, a partner of J. P. Morgan and Company. The
loans so negotiated, from the early twenties on, totalled in the
millions, many of them unsecured. As time passed Whitney was
increasingly pressed. When one loan became due he was forced to
replace it with another and to borrow still more for the interest on
those outstanding. Beginning in 1933 his Stock Exchange firm was
insolvent, although this did not become evident for some five
Years.FN1

Finally, like so many others, Richard Whitney learned the cost of
supporting a stock on a falling market. In 1933, Richard Whitney and
Company -- the affairs of Whitney and his company were almost
completely indistinguishable -- had invested in between ten and
fifteen thousand shares of Distilled Liquors Corporation, the New
Jersey manufacturer of applejack and tether intoxicants. The price was
$15 a share. In the spring of 1934 the stock reached 45 in over-the-
counter trading. In January 1935 it was listed on the New York Curb
Exchange. Inevitably Whitney posted the stock as collateral for
various of his loans.

Unhappily, popular enthusiasm for the products of the firm

FN1 These details are from Securities and Exchange Commission in the
Matters of Richard Whitney, Eli D. Morgan, Etc., Vol. 1, Report on
Investigation, Washington, 1938. [*180]

even in the undiscriminating days following repeal, was remarkably
slight The firm made no money and by June 1936 the price of the stock
was down to ii. This drop had a disastrous effect on its value as
collateral, and the unhappy Whitney tried to maintain the value by
buying more of it (He later made the claim that he wanted to provide
the other investors in the company with a market for their stock,1
which if true meant that he was engaging in one of the most selfless
acts since the death of Sydney Carton.) All the other investors
unloaded on Whitney. At the time of his failure, of the 148,750 shares
outstanding, Whitney or his firm owned 137,672. By then the value had
dropped to between three and four dollars a share. Mention has been
made of the tendency of people in this period to swindle themselves.
Whitney, in his effort to support the stock of Distilled Liquors
Corporation, unquestionably emerged as the Ponzi of financial self-
deception. As the result of his operation he had all his old debts,
many new ones incurred in supporting the stock, all the stock -- and
the stock was nearly worthless.

As his position became more complex, Richard Whitney resorted
increasingly to an expedient which he had been using for several years
-- that of posting securities belonging to other people which were in
his custody as collateral for his loans. By early 1938 he had reached
the end of a surprising capacity to borrow money. Late in the
preceding autumn he had had a large last loan from his brother to
release securities belonging to the gratuity fund of the Stock
Exchange -- a fund out of which payments were made on the death of
members -- which he had appropriated and pledged for a bank loan. He
was now desperately, almost pathetically, visiting the most casual of
acquaintances in search of funds. The rumour spread that he was in
poor condition. Still, on 8 March, there was a stunned silence on the
floor of the Exchange when President Charles R. Gay announced from the
rostrum the suspension of Richard Whitney

FN1 Securities and Exchange Commission, op. cit., Vol. II. p. 50.
[*181]

and Company for insolvency. Members were rather more aghast when they
learned that Whitney had been engaged in theft on a lap scale for a
long period.

With no small dignity Whitney made a full disclosure of his
operations, refused to enter any sort of plea in his own defence, and
passed permanently from sight.

6

The failure of the smallest country banker caused more personal
hardship, anguish, and privation than the insolvency of Richard
Whitney. His victims were almost uniquely able to and their loss. And
the sums which he stole, while substantial, did not place him in the
ranks of the great defaulters of the day F they would not have paid
the interest on Ivar Kreuger's larceny for a year. Yet, from the point
of view of the antagonists of Wall Street, his default was ideal.
Rarely has a crime been acre joyously received.

Whitney's identification was wholly with the Stock Exchange, the
symbolic centre of sin. Moreover, he had been its president and its
uncompromising defender before the Congress and the public in its
period of trial. He was a Republican, an arch-conservative, and was
loosely associated in the financial community with J. P. Morgan and
Company. He had himself taken a strong position in favour of honesty.
Speaking in St Louis in 1932, at a time when his own larceny was
already well advanced, Whitney had said sternly that one of the prime
necessities 'of a great market is that brokers must be honest and
financially irresponsible'. He looked forward to the day when the
financial supervision by the Exchange of its members would be so
strict that failure 'will be next to impossible'.FN1

FN1 The New York Stock Exchange, an address by Richard Whitney before
the Industrial Club of St Louis and the Chamber of Commerce, St Louis
(St Louis, 27 September 1932). [*182]

Finally, even by his colleagues, Whitney was regarded as a trifle
upstage. In his last days he had been reduced to the ultimate
indignity of trying to borrow money from the market operator, Bernard
E. Smith. Smith, at best a lower middle- brow figure, later told a
Securities and Exchange Commission examiner: 'He came up to. see me
and said he would like to get this over quickly, and told me he would
like to borrow $25o,000 on his face. I remarked he was putting a
pretty high value on his face, so he mid ... his back was to the wall
and he had to have $250,000. I told him he had a lot of nerve to ask
me for $250,000 when he didn't even bid me the time of day. I told him
I frankly didn't like him -- that I wouldn't loan him a dime.'FN1 On
any free vote for the man best qualified to bring discredit to Wall
Street, Whitney would have won by a wide margin.

The parallel between Whitney and a more recent culprit is interesting.
During the thirties the New Dealers were exuberantly uncovering the
financial derelictions of their opposition. (It is interesting that
dishonesty and not the more orthodox offences of capitalism like abuse
of power or the exploitation of the people was in these days the
nemesis of conservatives.) In the nineteen-forties and fifties
Republicans, as avidly, were discovering that there were New Dealers
who had been communists. Thus it came about that a decade later the
counterpart of Richard Whitney was Alger Hiss.

Each served admirably the enemies of his class. Each in origin,
education, associations, and career pretensions epitomized that class.
In each case the first reaction of friends to the allegations of guilt
was disbelief. Whitney's past role in his community had been more
prominent, and hence from the viewpoint of his enemies he was a more
satisfactory figure than Alger Hiss. In the government hierarchy, Hiss
was a distinctly

FN1 Securities and Exchange Commission, op. cit., Transcript of
Hearings, Vol. 11, pp. 823. 823. [*183]

routine figure. His eminence as a global statesman was synthesized ex
post facto and he also gained much prominence during two long trials.
Whitney, with no fanfare, accepted his fate.

There is, perhaps, a moral worth drawing from the careers Whitney and
Hiss. Neither the fact that Whitney was convicted of purloining
securities nor that Hiss purloined documents is convincing proof that
their friends, associates, and contemporaries were doing the same. On
the contrary, the evidence would indicate that most brokers were
honest as a matter of absolute routine, and most New Dealers, so far
from in league with the Russians, wished only that they might invited
once to taste caviare at the Soviet embassy. Both liberals and
conservatives, left and right, have now had personal experience with
the use of the symbolic evil. The injustice of the device is evident.
What may be a more compelling point, so are its dangers. In accordance
with an old but not outworn tradition, it might now be wise for all to
conclude that crime, or even misbehaviour, is the act of an
individual, not the pre-disposition of a class.

7

The Whitney affair brought a marked change in the relations between
the Exchange and the federal government, and, in some measure, between
the Exchange and the general public. In the Securities Act of 1933,
and more comprehensively in the Securities Exchange Act of 1934, the
government had sought to prohibit some of the more spectacular
extravagances of 1928 and 1929. Full disclosure was required on new
security issues, although no way was found of making would-be
investors read what was disclosed. Inside operations and short selling
after the manner of Mr Wiggin were outlawed. Authority was given to
the Federal Reserve Board to fix margin requirements and [*184] these
could, if necessary, be made a hundred per cent and thus eliminate
margin trading entirely. Pool operations, wash sales, the
dissemination of tips or patently false information and other devices
for rigging or manipulating the market were prohibited. Commercial
banks were divorced from their securities affiliates. Most important,
the principle was enunciated that the New York Stock Exchange and the
other exchanges were subject to public regulation and the Securities
and Exchange Commission was established to apply and enforce such
regulation.

This was somewhat bitter medicine. Moreover, regulatory bodies, like
the people who comprise them, have a marked life cycle. In youth they
are vigorous, aggressive, evangelistic, and even intolerant. Later
they mellow, and in old age -- after a matter of ten or fifteen years
-- they become, with some exceptions, either an arm of the industry
they are regulating or senile. The S.E.C. was especially aggressive.
To any young regulatory body, after all, Wall Street was certain to
seem a challenging antagonist.

Until the Whitney affair Wall Street -- always with exceptions -- was
disposed to fight back. It insisted on the right of a financial
community in general, and of a securities market in particular, to
conduct its affairs in its own way, by its own light and to govern
itself. On the evening before the suspension of Whitney was announced
from the rostrum, Charles R. Gay, President of the Exchange, and
Howland S. Davis, Chairman of the Committee on Business Conduct --
Whitney had been a predecessor of both in the two offices -- made
their way to Washington. There they reported their unhappy news to
William 0. Douglas and John W. Hanes of the S.E.C. The trip, in far
more than a symbolic sense, represented the surrender of the Exchange.
The cold war over regulation came to an end and was not thereafter
resumed.

While the Whitney default confirmed the victory of the New Deal on the
issue of regulation and also served admirably to [*185] confirm the
more general suspicion of moral delinquency in downtown New York, it
was Wail Street's good fortune that it came late. By 1938 the New Deal
assault on big business was on the wane; some leaders of the original
shock troops were already polishing up speeches on the virtues of the
free enterprise system. By then, also, it was accepted New Deal
theology that all necessary economic reforms had been revealed and
those that had not been enacted were on request from Congress. No
further reforms of the securities markets of any importance were on
the agenda. Henceforth Wail Street looked ingratiatingly at Washington
and Washington merely looked blank. [*186]

CHAPTER X

CAUSE AND CONSEQUENCE

I

After the Great Crash came the Great Depression which lasted, with
varying severity, for ten years. In 1933, Gross National Product
(total production of the economy) was nearly a third less than in
1929. Not until 1937 did the physical volume of production recover to
the levels of 1929, and then it promptly slipped back again. Until ii
the dollar value of production remained below 1929. Between 1930 and
1940 only once, in 1937, did the average number unemployed during the
year drop below eight million. In 1933 nearly thirteen million were
out of work, or about one in every four in the labour force. In 1938
one person in five was still out of work.FN1

It was during this dreary time that 1929 became a year of myth. People
hoped that the country might get back to twenty-nine; in some
industries or towns when business was phenomenally good it was almost
as good as in twenty-nine; men of outstanding vision, on occasions of
exceptional solemnity, were heard to say that 1929 'was no better than
Americana deserve'.

On the whole, the great stock market crash can be much more readily
explained than the depression that followed it. And among the problems
involved in assessing the causes of depression none is more
intractable than the responsibility to be assigned to the stock market
crash. Economics still does not allow final answers on these matters.
But, as usual, something can be said.

FN1 Economic Indicators: Historical and Descriptive Supplement, Joint
Committee on the Economic Report, Washington, 1953. [*187]

As already so often emphasized, the collapse in the stock market in
the autumn of 1929 was implicit in the speculation that went before.
The only question concerning that speculation 1s how long it would
last. Sometime, sooner or later, confidence in the short-run reality
of increasing common stock values would weaken. When this happened,
some people would sell, and this would destroy the reality of
increasing values. Holding for an increase would now become
meaningless; the new reality would be falling prices. There would be a
rush, pellmell, to unload. This was the way past speculative orgies
had ended. It was the way the end came in 1929. It is the way
speculation will end in the future.

We do not know why a great speculative orgy occurred in 1928 and 1929.
The long-accepted explanation that credit was easy and so people were
impelled to borrow money to buy common stock on margin is obviously
nonsense. On numerous occasions before and since credit has been easy,
and there has been no speculation whatever. Furthermore, much of the
1928 and 1929 speculation occurred on money borrowed at interest rates
which for years before, and in any period since, would pave been
considered exceptionally astringent. Money, by the ordinary tests, was
tight in the late twenties.

Far more important than rate of interest and the supply of credit is
the mood. Speculation on a large scale requires a j4ervasive sense of
confidence and optimism and conviction that ordinary people were meant
to be rich. People must also faith in the good intentions and even in
the benevolence of others, for it is by the agency of others that they
will get rich. 1929 Professor Dice observed: 'The common folks believe
their leaders. We no longer look upon the captains of industry as
magnified crooks. Have we not heard their voices over the radio? Are
we not familiar with their thoughts, ambitions, and [*188] ideals as
they have expressed them to us almost as a man talks to his
friend?'FN1 Such a feeling of trust is essential for a boom. When
people are cautious, questioning, misanthropic, suspicious, or mean,
they are immune to speculative enthusiasms. Savings must also be
plentiful. Speculation, however it may rely on borrowed funds, must be
nourished in part by those who participate. If savings are growing
rapidly, people will place a lower marginal value on their
accumulation; they will be willing to risk some of it against the
prospect of a greatly enhanced return. Speculation, accordingly, is
most likely to break out after a substantial period of prosperity,
rather than in the early phases of recovery from a depression.
Macaulay noted that between the Restoration and the Glorious
Revolution Englishmen were at loss to know what to do with their
savings and that the natural effect of this state of things was that a
crowd of projectors, ingenious and absurd, honest and knavish,
employed themselves in devising new schemes for the employment of
redundant capital'. Bagehot and others have attributed the South Sea
Bubble to roughly the same causes.' In 1720 England had enjoyed a long
period of prosperity, enhanced in part by war expenditures, and during
this time private savings are believed to have grown at an
unprecedented rate. Investment outlets were also few and returns low.
Accordingly, Englishmen were anxious to place their savings at the
disposal of the new enterprises and were quick to believe that the
prospects were not fantastic. So it was in 1928 and 1929.

Finally, a speculative outbreak has a greater or less immunizing
effect. The ensuing collapse automatically destroys the very mood
speculation requires. It follows that an outbreak of speculation
provides a reasonable assurance that another out.

FN1 New Levels in the Stock Market, p. 257.
FN2 Walter Bagehot, Lombard Street, p. 130. The quotation from
Macaulay, above, is cited by Bagehot, p. 128. [*189]

break will not immediately occur. With time and the dimming of memory,
the immunity wears off. A recurrence becomes possible. Nothing would
have induced Americans to launch a speculative adventure in the stock
market in 1935. By 1955 the chances are very much better.

3

As noted, it is easier to account for the boom and crash in the market
than to explain their bearing on the depression which followed. The
causes of the Great Depression are still far from certain. A lack of
certainty, it may also be observed, is not evident in the contemporary
writing on the subject. Much of it tells what went wrong and why with
marked firmness. However, this paradoxically can itself be an
indication of uncertainty. When people are least sure they are often
most dogmatic. We do not know what the Russians intend, so we state
with great assurance what they will do. We compensate for our
inability to foretell the consequences of, say rearming Germany by
asserting positively just what the consequences will be. So it is in
economics. Yet in explaining what happened in x929 and after, one can
distinguish between explanations that might be right and those that
are clearly wrong.

A great many people have always felt that a depression was inevitable
in the thirties. There had been (at least) seven good years; now by
occult or biblical law of compensation there would have to be seven
bad ones. Perhaps, consciously or unconsciously, an argument that was
valid for the stock market was brought to bear on the economy in
general. Because the market took leave of reality in 1928 and 1929, it
had at some time to make a return to reality. The disenchantment was
bound to be as painful as the illusions were beguiling. Similarly, the
New Era prosperity would some day evaporate; in its wake would come
the compensating hardship. [*190]

There is also the slightly more subtle conviction that economic life
is governed by an inevitable rhythm. After a certain time prosperity
destroys itself and depression corrects itself. In 1929 prosperity, in
accordance with the dictates of the business cycle, had run its
course. This was the faith confessed by the members of the Harvard
Economic Society in the spring of i when they concluded that a
recession was somehow overdue.

Neither of these beliefs can be seriously supported. The twenties by
being comparatively prosperous established no imperative that the
thirties be depressed. In the past, good times have given way to less
good times and less good or bad to good. But change is normal in a
capitalist economy. The degree of regularity in such movements is not
great, though often thought to be.FN1 No inevitable rhythm required
the collapse and stagnation of 1930-40.

Nor was the economy of the United States in 1929 subject to such
physical pressure or strain as the result of its past level of
performance that a depression was bound to come. The notion that the
economy requires occasional rest and resuscitation has a measure of
plausibility and also a marked viability. During the summer of 1954 a
professional economist on President Eisenhower's. personal staff
explained the then current recession by saying that the economy was
enjoying a brief (and presumably well-merited) rest after the
exceptional exertions of preceding years. In 1929 the labour force was
not tired; it could have continued to produce indefinitely at the best
1929 rate. The capital plant of the country was not depleted. In the
preceding years of prosperity, plant had been renewed and improved. In
fact, depletion of the capital plant

FN1 'At present it in less likely that the existence of business
cycles will be denied than that their regularity will be exaggerated.'
Wesley Clair Mitchell, Business Cycles and Unemployment, New York
(McGraw-Hill), 1933, p. 6. [*191]

occurred during the ensuing years of idleness when new invest- ment
was sharply curtailed. Raw materials in were ample for the current
rate of production. Entrepreneurs were never more eupeptic. Obviously
if men, materials, plant, and management were all capable of continued
and even enlarged exertions a refreshing pause was not necessary.

Finally, the high production of the twenties did not, as some have
suggested, outrun the wants of the people. During these years people
were indeed being supplied with an increasing volume of goods. But
there is no evidence that their desire for automobiles, clothing,
travel, recreation, or even food was sated. On the contrary, all
subsequent evidence showed (given the income to spend) a capacity for
a large further increase in consumption. A depression was not needed
so that people's wants could catch up with their capacity to produce.

4

What, then, are the plausible causes of the depression? The task of
answering can be simplified somewhat by dividing the problem into two
parts. First there is the question of why economic activity turned
down in 1929. Second there is the vastly more important question of
why, having started down, on this unhappy occasion it went down and
down and down and remained low for a full decade.

As noted, the Federal Reserve indexes of industrial activity and of
factory production, the most comprehensive monthly measures of
economic activity then available, reached a peak in June. They then
turned down and continued to decline throughout the rest of the year.
The turning point in other indicators -- factory payrolls, freight-car
loadings, and department store sales -- came later, and it was October
or after before the trend in all of them was clearly down. Still, as
economists have generally insisted, and the matter has the high
authority of the [*192] National Bureau of Economic Research,' the
economy had weakened in the early summer well before the crash.

This weakening can be variously explained. Production of industrial
products, for the moment, had outrun consumer and investment demand
for them. The most likely reason is that business concerns, in the
characteristic enthusiasm of good times, misjudged the prospective
increase in demand and acquired larger inventories than they later
found they needed. As a result they curtailed their buying, and this
led to a cutback in production. In short, the summer of 1929 marked
the beginning of the familiar inventory recession. The proof is not
conclusive from the (by present standards) limited figures available.
Department store inventories, for which figures are available, seem
not to have been out of line early in the year. But a mild slump in
department store sales in April could have been a signal for
curtailment.

Also there is a chance -- one that students of the period have
generally favoured -- that more deep-seated factors were at work and
made themselves seriously evident for the first time during that
summer. Throughout the twenties production and productivity per worker
grew steadily: between 1919 and r, output per worker in manufacturing
industries increased by about forty-three per cent' Wages, salaries,
and prices all remained comparatively stable, or in any case underwent
no comparable increase. Accordingly, costs fell and with prices the
same, profits increased. These profits sustained the spending of the
well-to-do, and they also nourished at least some of the expectations
behind the stock market boom. Most of all they encouraged a very high
level of capital investment. During

FN1 Geoffrey H. Moore, Statistical Indications of Cyclical Revivals
and Recessions, Occasional Paper 31, National Bureau of Economic
Research, Inc., New York, 1950.
FN2 H. W. Arndt, The Economic Lessons of the Nineteen-Thirties, London
(Oxford), 1944, p. 15. [*193]

the twenties, the production of capital goods increased at an average
annual rate of 6.4 per cent a year; non-durable consumers' goods, a
category which includes such objects of mass consumption as food and
clothing, increased at a rate of only 2.8 per cent.FN1 (The rate of
increase for durable consumers' goods such as cars, dwellings, home
furnishings, and the like, much of it representing expenditures of the
well-off to well-to- do, was 5.9 per cent.) A large and increasing
investment in capital goods was, in other words, a principal device by
which the profits were being spent.FN2 It follows that anything that
interrupted the investment outlays -- anything, indeed, which kept
them from showing the necessary rate of increase -- could cause
trouble. When this occurred, compensation through an increase in
consumer spending could not automatically be expected. The effect,
therefore, of insufficient investment --investment that failed to keep
pace with the steady increase in profits -- could be falling total
demand reflected in turn in falling orders and output. Again there is
no final proof of this point, for unfortunately we do not know how
rapidly investment had to grow to keep abreast of the current increase
in profits.FN3 However, the explanation is broadly consistent with the
facts.

FN1 E. M. Hugh-Jones and E. A. Radice, An American Experiment, London
(Oxford), 1936, p. 49. Cited by Arndt, op. cit., p. 16.
FN2 'This has been widely noted. See Lionel Robbins, The Great
Depression, p. 4, and Thomas Wilson, Fluctuations in Income, pp. 154
ff., and J. M. Keynes, A Treatise on Money, New York (Harcourt,
Brace), 1930, 11, 190 ff.
FN3 Perhaps I may be permitted to enlarge on this in slightly more
technical terms. The interruption could as well have been caused by an
insufficient rate of increase in consumer spending as by a failure in
the greater rate of increase of capital goods spending. Under-
consumption and tinder-investment are the same side of the same coin.
And some force is added to this explanation by the fact that spending
for one important consumers' durable, namely houses, had been
declining for several years and suffered a further substantial drop in
1929. However, the investment function we still suppose to be less
[*194]

There are other possible explanations of the downturn. Behind the
insufficient advance in investment may have been the high interest
rates. Perhaps, although less probably, trouble was transmitted to the
economy as a whole from some weak sector like agriculture. Further
explanations could be offered. But one thing about this experience is
dear. Until well along in the autumn of 1929 the downturn was limited.
The recession in business activity was modest and under-employment
relatively slight. Up to November it was possible to argue that not
much of anything had happened. On other occasions, as noted -- in 1924
and 1927 and of late in -- the economy has undergone similar
recession. But, unlike these other occasions, in 1929 the recession
continued and continued and got violently worse. This is the unique
feature of the 1929 experience. This is what we need really to
understand.

5

There seems little question that in 1929, modifying a famous cliché,
the economy was fundamentally unsound. This is a circumstance of first-
rate importance. Many things were wrong, but five weaknesses seem to
have bad an especially intimate bearing on the ensuing disaster. They
are:

(i) The bad distribution of income. In 1929 the rich were indubitably
rich. The figures are not entirely satisfactory, but

cont'd FN1 stable than the consumption function, even though we are
less assured of the stability of the latter than we used to be. And in
the present case it seems wise to attach causal significance to the
part of the spending which had to maintain the largest rate of
increase if total spending were to be uninterrupted. The need to
maintain a specific rate of increase in Investment outlay 1
insufficiently emphasized by Mr "mm Wilson In his book which I have so
frequently cited and to which students of the period are Indebted.
[*195]

it seems certain that the five per cent of the population with the
highest incomes in that year received approximately one-third of all
personal income. The proportion of personal income received in the
form of interest, dividends, and rent -- the income, broadly speaking,
of the well-to-do -- was about twice as great as in the years
following the Second World War.

This highly unequal income distribution meant that the economy was
dependent on a high level of investment or a high level of luxury
consumer spending or both. The rich cannot buy great quantities of
bread. If they are to dispose of what they receive it must be on
luxuries or by way of investment in new plants and new projects. Both
investment and luxury spending are subject, inevitably, to more
erratic influences and to wider fluctuations than the bread and rent
outlays of the $25-Week workman. This high-bracket spending and
investment was especially susceptible, one may assume, to the crushing
news from the stock market in October 1929.

(2) The bad corporate structure. In November 1929, a few weeks after
the crash, the Harvard Economic Society gave as a principal reason why
a depression need not be feared its reasoned judgement that 'business
in most lines has been con- ducted with prudence and conservatism'.'
The fact was that American enterprise in the twenties had opened its
hospitable arms to an exceptional number of promoters, grafters,
swindlers, impostors, and frauds. This, in the long history of such
activities, was a kind of flood tide of corporate larceny.

The most important corporate weakness was inherent in the vast new
structure of holding companies and investment trusts. The holding
companies controlled large segments of the utility, railroad, and
entertainment business. Here, as with the investment

FN1 Selma Goldsmith, George Jaszi, Hyman Kaitz, and Maurice
Liebenberg, 'Size Distribution of Income since the Mid-Thirties', The
Review of Economics and Statistics, February x4, pp. 16, 18.
FN2 Weekly Letter, 23 November 1929. [*196]

trusts, was the constant danger of devastation by reverse leverage. In
particular, dividends from the operating companies paid the interest
on the bonds of upstream holding companies. The interruption of the
dividends meant default on the bonds, bankruptcy, and the collapse of
the structure. Under these circumstances, the temptation to curtail
investment in operating plant in order to continue dividends was
obviously strong. This added to deflationary pressures. The latter, in
turn, curtailed earnings and helped bring down the corporate pyramids.
When this happened, even more retrenchment was inevitable. Income was
earmarked for debt repayment. Borrowing for new investment became
impossible. It would be hard to imagine a corporate system better
designed to continue and accentuate a deflationary spiral.

(3) The bad banking structure. Since the early thirties, a generation
of Americans has been told, sometimes with amusement, sometimes with
indignation, often with outrage, of the banking practices of the late
twenties. In fact, many of these practices were made ludicrous only by
the depression. Loans which would have been perfectly good were made
perfectly foolish by the collapse of the borrower's prices or the
markets for his goods or the value of the collateral he had posted.
The most responsible bankers -- those who saw that their debtors were
victims of circumstances far beyond their control and sought to help
-- were often made to look the worst. The bankers yielded, as did
others, to the blithe, optimistic, and immoral mood of the times but
probably not more so. A depression such as that of 1929-32, were it to
begin as this is written, would also be damaging to many currently
impeccable banking reputations.

However, although the bankers were not unusually foolish in 1929, the
banking structure was inherently weak. The weakness was implicit in
the large numbers of independent units. When one bank failed, the
assets of others were frozen while depositors elsewhere had a pregnant
warning to go and ask for their [*197] money. Thus one failure led to
other failures, and these spread with a domino effect. Even in the
best of times local misfortune or isolated millm2nagement could start
such a chain reaction. (In the first six months of 1929, 346 banks
failed in various parts of the country with aggregate deposits of
nearly $ii5 million.FN1) When income, employment, and values fell as
the result of a depression bank failures could quickly become
epidemic. This happened after 1929. Again it would be hard to imagine
a better arrangement for magnifying the effects of fear. The weak
destroyed not only the other weak, but weakened the strong. People
everywhere, rich and poor, were made aware of the disaster by the
persuasive intelligence that their savings had been destroyed.

Needless to say, such a banking system, once in the convulsions of
failure, had a uniquely repressive effect on the spending of its
depositors and the investment of its clients.

(4) The dubious state of the foreign balance. This is a familiar
story. During the First World War, the United States became a creditor
on international account. In the decade following, the surplus of
exports over imports which once had paid the interest and principal on
loans from Europe continued. The high tariffs, which restricted
imports and helped to create this surplus of exports, remained.
However, history and traditional trading habits also accounted for the
persistence of the favourable balance, so called.

Before, payments on interest and principal had in effect been deducted
from the trade balance. Now that the United States was a creditor,
they were added to this balance. The latter, it should be said, was
not huge. In only one year (1928) did the excess of exports over
imports come to as much as a billion dollars; in 1923 and 1926 it was
only about $375,000,000.FN2

FN1 Compiled from Federal Reserve Bulletin monthly issues, 1929.
FN2 U.S. Department of Commerce, Bureau of Foreign and Domestic
Commerce, Statistical Abstract of the United States, 1942. [*198]

However, large or small, this difference had to be covered. Other
countries which were buying more than they sold, and had debt payments
to make in addition, had somehow to find the means for making up the
deficit in their transaction with the United States.

During most of the twenties the difference was covered by cash -- i.e.
gold payments to the United States -- and by new private loans by the
United States to other countries. Most of the loans were to
governments -- national, state, or municipal bodies -- and a large
proportion were to Germany and Central and South America. The
underwriters' margins in handling these loans were generous; the
public took them up with enthusiasm; competition for the business was
keen. If unfortunately corruption and bribery were required as
competitive instruments, these were used. In late 1927 Juan Leguia,
the son of the President of Peru, was paid $450,000 by J. and W.
Seligman and Company and the National City Company (the security
affiliate of the National City Bank) for his services in connexion
with a $50,000,000 loan which these houses marketed for Peru.FN1
Juan's services, according to later testimony, were of a rather
negative sort. He was paid for not blocking the deal. The Chase
extended President Machado of Cuba, a dictator with a marked
predisposition toward murder, a generous personal line of credit which
at one time reached $200,000.FN2 Machado's son-in-law was employed by
the Chase. The bank did a large business in Cuban bonds. In
contemplating these loans, there was a tendency to pass quickly over
anything that might appear to the disadvantage of the creditor. Mr
Victor Schoepperle, a vice-president of the National City Company with
the responsibility for Latin American loans, made the following
appraisal of Peru as a credit prospect:

Peru: Bad debt record, adverse moral and political risk, bad

FN1 Stock Exchange Practice, Report, 1934, pp. 220-1.
FN2 ibid., p. 215. [*199]

internal debt situation, trade situation about as satisfactory that of
Chile in the past three years. Natural resources more varied. On
economic showing Peru should go ahead rapidly in the next ten
years.FN1

On such showing the National City Company floated a $15,000,000 loan
for Peru, followed a few months later by a $50,000,000 loan, and some
ten months thereafter by a $25,000,000 issue. (Peru did prove a highly
adverse political risk. President Leguia, who negotiated the loans,
was thrown violently out of office, and the loans went into default.)

In all respects these operations were as much a part of the New Era as
Shenandoah and Blue Ridge. They were also just as fragile, and once
the illusions of the New Era were dissipated they mm as abruptly to an
end. This, in turn, forced a fundamental revision in the foreign
economic position of the United States. Countries could not cover
their adverse trade balance with the United States with increased
payments of gold, at least not for long. This meant that they had
either to increase their exports to the United States or reduce their
imports or default on their past loans. President Hoover and the
Congress moved promptly to eliminate the first possibility -- that the
accounts would be balanced by larger imports -- by sharply increasing
the tariff. Accordingly, debts, including war debts, went into default
and there was a precipitate fall in American exports. The reduction
was not vast in relation to total output of the American economy, but
it contributed to the general distress and was especially hard on
farmers.

(5) The poor state of economic intelligence. To regard the people of
any time as particularly obtuse mm vaguely improper, and it also
establishes a precedent which members of this generation might regret.
Yet it seems certain that the economists and those who offered
economic counsel in the late

FN1 Stock Exchange Practices, Hearings, February-March 1933, Pt 6, pp.
2091 ff. [*200]

twenties and early thirties were almost uniquely perverse. In the
months and years following the stock market crash, the burden of
reputable economic advice was invariably on the side of measures that
would make things worse. In November 1929, Mr Hoover announced a cut
in taxes; in the great no- business conferences that followed he asked
business firms to keep up their capital investment and to maintain
wages. Both of these measures were on the side of increasing spendable
income, though unfortunately they were largely without effect. The tax
reductions were negligible except in the higher income brackets;
businessmen who promised to maintain investment and wages, in
accordance with a well-understood convention, considered the promise
binding only for the period within which it was not financially
disadvantageous to do so. As a result investment outlays and wages
were not reduced until circumstances would in any case have brought
their reduction. Still, the effort was in the right direction.
Thereafter policy was almost entirely on the side of making things
worse. Asked how the government could best advance recovery, the sound
and responsible adviser urged that the budget be balanced. Both
parties agreed on this. For Republicans the balanced budget was, as
ever, high doctrine. But the Democratic Party platform of 1932, with
an explicitness which politicians rarely advise, also called for a
'federal budget annually balanced on the basis of accurate executive
estimates within revenues...'

A commitment to a balanced budget is always comprehensive. It then
meant there could be no increase in government outlays to expand
purchasing power and relieve distress. It meant there could be no
further tax reduction. But taken literally it meant much more. From
1930 on the budget was far out of balance, and balance, therefore,
meant an increase in taxes, a reduction in spending, or both. The
Democratic platform in 1932 called for an 'immediate and drastic
reduction of govern-[*201]- mental expenditures' to accomplish at
least a twenty-five per cent decrease in the cost of government

The balanced budget was not a subject of thought. Nor was it, as often
asserted, a precise matter of faith. Rather it was a formula. For
centuries avoidance of borrowing had protected people from slovenly or
reckless public housekeeping. Slovenly or reckless keepers of the
public purse had often composed complicated arguments to show why
balance of income and outlay was not a mark of virtue. Experience had
shown that however convenient this belief might seem in the short run,
discomfort or disaster followed in the long run. Those simple precepts
of a simple world did not hold amid the growing complexities of the
early thirties. Mass unemployment in particular had altered the rules.
Events had played a very bad trick on people, but almost no one tried
to think out the problem anew.

The balanced budget was not the only strait-jacket on policy. There
was also the bogy of 'going off' the gold standard and, surprisingly,
of risking inflation. Until 1932 the United States added formidably to
its gold reserves, and instead of inflation the country was
experiencing the most violent deflation in the nation's history. Yet
every sober adviser saw dangers here, including the danger of runaway
price increases. Americans, though in years now well in the past, had
shown a penchant for tinkering with the money supply and enjoying the
brief but heady joys of a boom in prices. In 1931 or 1932, the danger
or even the feasibility of such a boom was nil. The advisers and
counsellors were not, however, analysing the danger or even the
possibility. They were serving only as the custodians of bad memories.

The fear of inflation reinforced the demand for the balanced budget.
It also limited efforts to make interest rates low, credit plentiful
(or at least redundant), and borrowing as easy as possible under the
circumstances. Devaluation of the dollar was, of course, flatly ruled
out. This directly violated the gold [*202] standard rules. At best,
in such depression times, monetary policy is a feeble reed on which to
lean. The current economic clichés did not allow even the use of that
frail weapon. And again, these attitudes were above party. Though
himself singularly open-minded, Roosevelt was careful not to offend or
disturb his followers. In a speech in Brooklyn toward the close of the
1932 campaign, he said:

The Democratic platform specifically declares, 'We advocate a sound
currency to be preserved at all hazards.' That is plain English. In
discussing this platform on 30 July, I said, 'Sound money is an
international necessity, not a domestic consideration for one nation
alone.' Far up in the Northwest, at Butte, I repeated the pledge ...
In Seattle I reaffirmed my attitude ...FN1

The following February, Mr Hoover set forth his view, as often before,
in a famous letter to the President-elect:

It would steady the country greatly if there could be prompt assurance
that there will be no tampering or inflation of the currency; that the
budget will be unquestionably balanced even if further taxation is
necessary; that the Government credit will be maintained by refusal to
exhaust it in the issue of securities.'

The rejection of both fiscal (tax and expenditure) and monetary policy
amounted precisely to a rejection of all affirmative government
economic policy. The economic advisers of the day had both the
unanimity and the authority to force the leaders of both parties to
disavow all the available steps to check deflation and depression. In
its own way this was a marked achievement -- a triumph of dogma over
thought. The consequences were profound.

FN1 Lawrence Sullivan, Prelude to Panic, Washington (Statesman Press),
1936, p. 20.
FN2 William Sum Myers and Walter H. Newton, The Hoover Administration:
A Documented Narrative, New York (Scribners), 1936, pp. 334O. [*203]

6

It is in light of the above weaknesses of the economy that the role of
the stock market crash in the great tragedy of the thirties must be
seen. The years of self-depreciation by Wall Street to the contrary,
the role is one of respectable importance. The collapse in securities
values affected in the first instance the wealthy and the well-to-do.
But we see that in the world of 1929 this was a vital group. The
members disposed of a large proportion of the consumer income; they
were the source of a lion's share of personal saving and investment.
Anything that struck at the spending or investment by this group would
of necessity have broad effects on expenditure and income in the
economy at large. Precisely such a blow was struck by the stock market
crash. In addition, the crash promptly removed from the economy the
support that it had been deriving from the spending of stock market
gains.

The stock market crash was also an exceptionally effective way of
exploiting the weaknesses of the corporate structure. Operating
companies at the end of the holding-company chain were forced by the
crash to retrench. The subsequent collapse of these systems and also
of the investment trusts effectively destroyed both the ability to
borrow and the willingness to lend for investment. What have long
looked like purely fiduciary effects were, in fact, quickly translated
into declining orders and increasing unemployment.

The crash was also effective in bringing to an end the foreign lending
by which international accounts had been balanced. Now the accounts
had, in the main, to be balanced by reduced exports. This put prompt
and heavy pressure on export markets for wheat, cotton, and tobacco.
Perhaps the foreign loans had only delayed an adjustment in the
balance which had one day to come. The stock market crash served
nonetheless to precipitate the adjustment with great suddenness at a
most [*204] unpropitious time. The instinct of farmers who traced
their troubles to the stock market was not totally misguided.

Finally, when the misfortune had struck, the attitudes of the time
kept anything from being done about it. This, perhaps, was the most
disconcerting feature of all. Some people were hungry in 1930 and 1931
and 1932. Others were tortured by the fear that they might go hungry.
Yet others suffered the agony of the descent from the honour and
respectability that go with income into poverty. And still others
feared that they would be next. Meanwhile everyone suffered from a
sense of utter hopelessness. Nothing, it seemed, could be done. And
given the ideas which controlled policy, nothing could be done.

Had the economy been fundamentally sound in 1929 the effect of the
great stock market crash might have been small. Alternatively, the
shock to confidence and the loss of spending by those who were caught
in the market might soon have worn off. But business in 1929 was not
sound; on the contrary it was exceedingly fragile. It was vulnerable
to the kind of blow it received from Wall Street. Those who have
emphasized this vulnerability are obviously on strong ground. Yet when
a greenhouse succumbs to a hailstorm something more than a purely
passive role is normally attributed to the storm. One must accord
similar significance to the typhoon which blew out of lower Manhattan
in October 1929.

7

The military historian when he has finished his chronicle is excused.
He is not required to consider the chance for a renewal of war with
the Indians, the Mexicans, or the Confederacy. Nor will anyone press
him to say how such acrimony can be prevented. But economics is taken
more seriously. The economic historian, as a result, is invariably
asked whether the [*205] misfortunes he describes will afflict us
again and how they may be prevented.

The task of this book, as suggested on an early page, is only to tell
what happened in 1929. It is not to tell whether or when the
misfortunes of 1929 will recur. One of the pregnant lessons of that
year will by now be plain: it is that very specific and personal
misfortune awaits those who presume to believe that the future is
revealed to them. Yet, without undue risk, it may be possible to gain
from our view of this useful year some insights into the future. We
can distinguish, in particular, between misfortunes that could happen
again and others which events, many of them in the aftermath of 1929,
have at least made improbable. And we can perhaps see a little of the
form and magnitude of the remaining peril.

At first glance the least probable of the misadventures of the late
twenties would seem to be another wild boom in the stock market with
its inevitable collapse. The memory of that autumn, although now much
dimmed, is not yet gone. As those days of disenchantment drew to a
close, tens of thousands of Americans shook, their beads and muttered,
again'. In every considerable community there are yet a few survivors,
aged but still chastened, who are still muttering and still shaking
their beads. The New Era had no such guardians of sound pessimism.

Also, there are the new government measures and controls. The powers
of the Federal Reserve Board -- now styled the Board of Governors, the
Federal Reserve System -- have been strengthened both in relation to
the individual Reserve banks and the member banks. Mitchell's defiance
of March 1929 is now unthinkable. What was then an act of arrogant but
not abnormal individualism would now be regarded as idiotic. The New
York Federal Reserve Bank retains a measure of moral authority and
autonomy, but not enough to resist a strong Washington policy. Now
also there is power to set margin [*206] requirements. If necessary,
the speculator can be made to post the full price of the stock he
buys. While this may not completely discourage him, it does mean that
when the market falls there can be no outsurge of margin calls to
force further sales and insure that the liquidation will go through
continuing spasms. Finally, the Securities and Exchange Commission is,
one hopes, effective to large-scale market manipulation, and it also
keeps rein on the devices and the salesmanship by which new
speculators are recruited.

Yet, in some respects, the chances for a recurrence of a speculative
orgy are rather good. No one can doubt that the American people remain
susceptible to the speculative mood -- to the conviction that
enterprise can be attended by unlimited rewards in which they,
individually, were meant to share. A rising market can still bring the
reality of riches. This, in turn, can draw more and more people to
participate. The government preventatives and controls are ready. In
the hands of a determined government their efficacy cannot be doubted.
There are, however, a hundred reasons why a government will determine
not to use them. In our democracy an election is in the offing even on
the day after an election. The avoidance of depression and prevention
of unemployment have become for the politician the most critical of
all questions of public policy. Action to break up a boom must always
be weighed against the chance that it will cause unemployment at a
politically inopportune moment. Booms, it must be noted, are not
stopped until after they have started. And after they have started the
action will always look, as it did to the frightened men in the
Federal Reserve Board in February x, like a decision in favour of
immediate as against ultimate death. As we have seen, the immediate
death not only had the disadvantage of being immediate but of
identifying the executioner.

The market will not go on a speculative rampage without some
rationalization. But during the next boom some newly [*207]
rediscovered virtuosity of the free enterprise system will be cited.
It will be pointed out that people are justified in paying the present
prices -- indeed, almost any price -- to have an equity position in
the system. Among the first to accept these rationalizations will be
some of those responsible for invoking the controls. They will say
firmly that controls are not needed. The newspapers, some of them,
will agree and speak harshly of those who think action might be in
order. They will be called men of little faith.FN1

8

A new adventure in stock market speculation sometime in the future
followed by another collapse would not have the same effect on the
economy as in 1929. Whether it would show the economy to be
fundamentally sound or unsound is something, unfortunately, that will
not be wholly evident until after the event. There can be no question,
however, that many of the points of extreme weakness exposed in 1929
or soon thereafter have since been substantially strengthened. The
distribution of income is no longer quite so lopsided. Between 1929
and 1948 the share of total personal income going to the five per cent
of the population with the highest income dropped from nearly a third
to less than a fifth of the total. Between 1929 and 1950 the share of
all family income which was received as wages, salaries, pensions, and
unemployment compensation Increased from approximately sixty-one per
cent to approximately seventy-one per cent. This is the income of
everyday people. Although dividends, interest, and rent, the income
characteristically of the well-to-do, increased in total amount, the
share dropped from just over twenty-two to just over twelve per cent
of total family personal income.FN2

FN1 In warning in 1960 of the current speculation, I managed to
attract, in a modest way, this epithet.
FN2 These data are from Goldsmith et al, 'Size of Distribution of
Income', pp. 16, 18. [*208]

Similarly, in the years since the great investment trust promotions
have been folded up and put away, or they have become cautious and
respectable. The S.E.C., aided by the bankruptcy laws, has flattened
out the great utility holding company pyramids. Federal insurance of
bank deposits, even to this day, has not been given full credit for
the revolution that it has worked in the nation's banking structure.
With this one piece of legislation the fear which operated so
efficiently to transmit weakness was dissolved. As a result the
grievous defect of the old system by which failure begot failure, was
cured. Rarely has so much been accomplished by a single law.

The problem of the foreign balance is much changed from what it was
twenty-five years ago. Now the United States finds itself with the
propensity to buy or spend as much and more than it sells and
receives. And now any disequilibrium is filled or more than filled by
military aid, Export-Import and Inter- national Bank loans and
economic aid. In contrast with the loans to Latin American republics
and the German municipalities, these payments are relatively
invulnerable to shock. A crash in the stock market would affect them
but little if at all.

Finally, there has been a modest accretion of economic knowledge. A
developing depression would not now be met with a fixed determination
to make it worse. Without question no-business conferences would be
assembled at the White House. We would see an explosion of reassurance
and incantation. Many would urge waiting and hoping as the best
policy. Not again, however, would people suppose that the best policy
would be -- as Secretary Mellon so infelicitously phrased it -- to
'liquidate labour, liquidate stocks, liquidate the farmers, liquidate
real estate'.FN1 Our determination to deal firmly and adequately with
a serious depression is still to be tested. But there is still a
considerable difference between a failure to do

FN1 Quoted by Herbert Hoover, Memoirs, p. 30. [*209]

enough that is right and a determination to do much that is wrong.

Other weaknesses in the economy have been corrected. The much maligned
farm programme provides a measure of security for farm income and
therewith for spending by farmers. Unemployment compensation
accomplishes the same result, if still inadequately, for labour. The
remainder of the social security system -- pensions and public
assistance -- helps protect the income and consequently the
expenditure of yet other segments of the population. The tax system is
a far better servant of stability than it was in 1929. An angry god
may have endowed capitalism with inherent contradictions. But at least
as an afterthought he was kind enough to make social reform
surprisingly consistent with improved operation of the system.

9

Yet all this reinforcement notwithstanding, it would probably be
unwise to expose the economy to the shock of another major speculative
collapse. Some of the new reinforcements might buckle. Instead of the
investment trusts we have the mutual funds and the contraction here
would be sharp. Fissures might open at other new and perhaps
unexpected places. Even the quick withdrawal from the economy of the
spending that comes from stock market gains might be damaging. Any
collapse, even though the further consequences were small, would not
be good for the public reputation of Wall Street.

Wall Street, in recent times, has become, as a learned phrase has it,
very 'public relations conscious'. Since a speculative collapse can
only follow a speculative boom, one might expect that Wall Street
would lay a heavy hand on any resurgence of speculation. The Federal
Reserve would be asked by bankers and brokers to lift margins to the
limit; it would be warned to enforce the requirement sternly against
those who might try to borrow on their own stocks and bonds in order
to buy more of [*210] them. The public would be warned sharply and
often of the risks inherent in buying stocks for the rise. Those who
persisted, nonetheless, would have no one to blame but themselves. The
position of the Stock Exchange, its members, the banks, and the
financial community in general would be perfectly clear and as well
protected in the event of a further collapse as sound public relations
allow.

As noted, all this might logically be expected. It will not come to
pass. This is not because the instinct for self-preservation in Wall
Street is poorly developed. On the contrary, it is probably normal and
may be above. But now, as throughout history, financial capacity and
political perspicacity are inversely correlated. Long-run salvation by
men of business has never been highly regarded if it means disturbance
of orderly life and convenience in the present. So inaction will be
advocated in the present even though it means deep trouble in the
future. Here, at least equally with communism, lies the threat to
capitalism. It is what causes men who know that things are going quite
wrong to say that things are fundamentally sound.