Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (51 page)

Rumors of the turmoil spread quickly through the city, and by noon, a crowd of ten thousand sightseers, attracted by the reek of calamity, had gathered at the corner of Broad and Wall, just opposite the stock exchange. Police Commissioner Grover Whalen dispatched an extra six hundred policemen, including a mounted detail, to keep order and rope off the crowd from the entrance to the stock exchange. A gaggle of newspaper
photographers and film cameramen collected on the steps of the Subtreasury Building to document the scene.

A little after noon, the barons of Wall Street—Charles Mitchell of National City Bank, Albert Wiggin of Chase, William Potter of Guaranty Trust, Seward Prosser of Bankers Trust, and George Baker of First National—were seen pushing their way through the crowd into the front door of J. P. Morgan & Co. at 23 Wall Street. After a mere twenty minutes, they emerged grim faced and left without speaking to reporters. A few minutes later, Thomas Lamont appeared and held an impromptu press conference in Morgan’s marble lobby.

Looking “grave
⁵⁵⁹
” and “gesturing idly with his pince-nez as he spoke,” he began by announcing, “There has been a little distress selling on the Stock Exchange.” Though he was only trying to steady the market’s nerves, this was a remark that would go down in history as a classic, forever mocked as an embodiment of Wall Street’s capacity for self-delusion and obfuscation. “Air holes” caused by a “technical condition” had developed in the market, asserted Lamont. The situation, he assured his listeners, was “susceptible of betterment.”
⁵⁶⁰

What he did not announce was that the six bankers had agreed to contribute to a pool that would provide a “cushion” of buying power to support stock prices. At 1:30 p.m., Richard Whitney, president of the stock exchange—brother of Morgan partner George Whitney and himself stockbroker for the company—strode confidently onto the crowded floor of the exchange and placed an order for ten thousand shares of U.S. Steel at 205, 5 points above the price of its last sale. He then went from one post to the other, sprinkling similarly huge orders for blue chips—at a total cost of between $20 and $30 million. To the accompaniment of a chorus of cheers and whistles from the floor, the market rallied dramatically and by the end of the day was off a mere 6 points. Though stocks had taken comfort from the rescue operation, even as the market was rallying that afternoon, Lamont was closeted with the governors of the exchange to warn them that the bankers’ support was limited: “There is no man or group
⁵⁶¹
of men who can buy all the stocks that the American public can sell.”

While the private bankers were throwing the market this life buoy, the central bank, the Federal Reserve, was paralyzed by dissension. To try to ease conditions that morning, the directors of the New York Fed had voted to cut its lending rate from 6 percent to 5.5 percent, only to have the decision vetoed from Washington by the Federal Reserve Board. The latter spent the day closeted in meetings at its offices in the Treasury Building, next door to the White House. At 3:00 p.m., Secretary of the Treasury Andrew Mellon joined the conference, which broke up at 5:00 p.m. with no official announcement. A “senior” Treasury official did speak, however, to reporters off the record, expressing the view that the market had broken under the stress of “undue speculation
⁵⁶²
” and that the harm done, after all, only constituted “paper losses,” which would not prove “disastrous to business and the prosperity of the country.”

The newspapers reported next day that heroic action on the part of the bankers had successfully halted the panic. The
Wall Street Journal
carried the headline “Bankers Halt Stock Debacle
⁵⁶³
: 2 Hour Selling Deluge Stopped After Conference at Morgan’s Office: $1,000,000,000 For Support.”

Though the amount committed by the Morgan-led consortium was nowhere near that amount, the market was buoyed by the apparent success of the “organized support” and stabilized over the next two days, though trading remained heavy. Rumors circulated that the bankers felt sufficiently confident to begin disposing of the stocks they had acquired on Thursday at a small profit. But late on Saturday, the market began to fall again.

The “second hurricane of liquidation” roared in on Monday, October 28—Black Monday. It came from every direction: demoralized individual investors, pool operators liquidating, Europeans throwing in the towel, speculators forced to sell by margin calls, banks dumping collateral. Investors, who had originally bought stocks only because they saw prices rising, now sold them because they saw prices falling. By the end of the day, 9 million shares had changed hands and the Dow was down 40 points, roughly 14 percent, the largest percentage fall in a single day in the market’s history—$14 billion wiped off the value of U.S. stocks.

Reporters, remembering all the various times in history that the U.S.
banking system had been saved from the Morgan offices, were camped out in front of 23 Wall Street. At 1:10 p.m. Mitchell of the National City Bank was seen entering the building. The market immediately rallied. But there was no sign of the other bankers or any evidence of any further “organized support.” It would later turn out that Mitchell was personally overextended and, desperate for cash, had gone in to negotiate a private loan for himself.

The press was so fascinated by the very conspicuous comings and goings of bankers to and from “No. 23” that they failed to recognize that the true locus of power no longer lay with Morgan but had shifted three blocks north to the offices of the New York Federal Reserve at 33 Liberty Street. The real hero of the day was not one of those bankers shuttling in and out of Morgan’s offices but George Harrison of the New York Fed.

Stock market crashes during the nineteenth and early twentieth century had invariably been associated with banking crises. The market and the banking system were too interconnected. Because the big New York City banks held their reserves in the form of call loans to stockbrokers, a collapse in stocks inevitably raised concerns about the safety of one bank or the other, often leading to a run on the system, which in turn led to a withdrawal of liquidity from the market, which in turn drove the market down further. The Fed had been created in part to break that nexus and Harrison was determined to prevent the market turmoil from widening into a full-scale financial crisis. He spent the whole day in close contact with the heads of the city’s major banks.

The country’s money center banks were confronted with a potentially life-threatening hit. Many of the largest traders on Wall Street, especially the pool operators, held gigantic leveraged positions in the stock market that had been financed by brokers’ loans—in some cases as much as $50 million, some of which had come from banks. The danger was that as the market fell, brokers, frantic to recoup their loans, would be forced to dump the stocks they held as collateral, creating further declines in the market and intensifying the vicious cycle of selling.

Rebuffed the previous Thursday by the Federal Reserve Board,
Harrison now took matters into his own hands. That night, Wall Street bankers were invited to a dinner in honor of Winston Churchill at the Fifth Avenue home of Bernard Baruch. Despite the days’ events, the general consensus among the financiers was that stocks were now undervalued. Mitchell even managed to raise a laugh when in his toast to the British visitor he addressed the company as “friends and former millionaires
⁵⁶⁴
.”

Down on Wall Street the lights in the skyscrapers glowed far into the early hours as exhausted clerks and bookkeepers tried to tally their records after a day of unprecedented trading. Meanwhile, at the Fed’s offices on Liberty Street, Harrison and his staff were developing a plan to inject large amounts of cash into the banking system by buying government securities. Fortunately, there was no time to consult the Board in Washington. He barely managed to reach two of his own directors, and then only at 3:00 a.m., to secure their approval. Early the next morning, even before the market had opened, the New York Fed injected $50 million.

That day, which came somewhat unoriginally to be christened Black Tuesday, saw no letup in selling. The crowd of ten thousand that again gathered that morning stood in hushed awe, fully aware that they were “participating in the making of history
⁵⁶⁵
,” and that they were unlikely ever again to witness such scenes. The
New York Times
man on the spot described Wall Street that morning as a street of “vanished hopes, of curiously silent apprehension, and of a paralyzed hypnosis.” Churchill chose that day to visit the stock exchange and was invited inside to witness the scene. Though he was heavily invested in the market and lost over $50,000, most of his savings, in the collapse, he seems to have responded to his change in fortunes quite philosophically—“No one who has gazed
⁵⁶⁶
on such a scene could doubt that this financial disaster, huge as it is, cruel as it is to thousands, is only a passing episode. . . .” Commissioner Whalen himself kept a close eye on the market, and the minute he saw prices sagging, had dispatched an extra squad of policemen downtown. The financial district looked like a city under siege.

The bankers’ consortium gathered twice that day. Lamont struck a noticeably less confident note at his next press conference. Their objective
was not to support prices, he told the reporters, but to maintain an orderly market. Toward the end of the day, after over 16 million shares had changed hands and the Dow had fallen more than 80 points—it had now lost 180 points, or close to 50 percent of its value in less than six weeks—it seemed as if the selling had begun to burn itself out. In the last fifteen minutes of trading, the market made a vigorous rally of 40 points.

During the day, the New York Fed had injected a further $65 million. The Board, especially Roy Young, was greatly irritated when it found out later that day about Harrison’s show of independence and initiative; his failure to get Washington’s approval first was a clear defiance of established protocol. In response to Young’s rebuke, Harrison shot back that there had never been such an emergency, that the world was “on fire
⁵⁶⁷
” and that his actions were “done and can’t be undone.” The Board tried to pass a regulation prohibiting the New York Fed from making any further independent transfusions of cash, but questions arose about whether it had the legal authority to do so. During the next few days, there was considerable legal wrangling over the precise jurisdictions of the Board and the New York Fed. Harrison eventually proposed that they postpone the bureaucratic argument over powers and procedures until the crisis was over, agreeing in the meantime not to act unilaterally provided the Board gave him the authority to buy as much as $200 million more in government securities—an arrangement which allowed him to draw on the whole Federal Reserve System rather than the resources of the New York Fed alone.

That evening
⁵⁶⁸
a somewhat larger group of bankers once again gathered in the library of Jack Morgan’s house at Madison Avenue and Thirty-fifth Street, the scene of his father’s legendary rescue of the New York banking system in 1907. Among them was George Harrison.

With stocks now in free fall, all those who had pumped money into the brokers’ loan market—the corporations with excess cash, foreigners drawn by high rates of interest, small banks around the country—were rushing for the exits. In the days since Black Thursday over $2 billion, about one-quarter of all brokers’ loans, had been or was about to be pulled out. This was creating massive additional selling and a scramble for cash that risked
toppling the entire financial structure of brokers and banks on Wall Street. In order to forestall this financial fire stampede, with everyone heading for the doors at the same time, some of the bankers proposed to close down the stock exchange as had been done at the outbreak of war in 1914.

The meeting went on till 2:00 a.m. Harrison was adamant. “The Stock Exchange should stay open at all costs,” he told the gathering. Closing the stock market would not solve the problem, only postpone it and, by preventing transactions, might possibly prolong it and force even more bankruptcies. He proposed instead that the New York banks take over a good portion of brokers’ loans from those trying to pull out of the market. By thus stepping into the breach, they would head off panic selling and a complete meltdown. “I am ready to provide all the reserve funds that may be needed,” he reassured the bankers.

Over the next few days, as the Fed did just that, New York City banks took over $1 billion in brokers’ loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a banking crisis. Though the crash of October 1929
⁵⁶⁹
was by one count the eleventh panic to grip the stock market since the Black Friday of 1869 and was by almost any measure the most severe, it was the first to occur without a major bank or business failure.

The market traded up for the last couple of days of October. It then fell back again, revisiting the lows of Black Tuesday on November 13. By the last weeks of November, the Dow had settled at around 240—a 40 percent retreat over the eight weeks since late September. The bubble that had begun in early 1928 had lasted little more than a year and a half. By all indications, the effect of the October crash had merely been to squeeze out all the froth and return the stock market closer to its fair value.

IN THE WEEKS
that followed the Great Crash, the dazed financial press struggled to make sense of what had happened. Despite the magnitude of
the losses—$50 billion wiped off the value of stocks, equivalent to about 50 percent of GNP—and the ferocity of the decline, many papers were surprisingly sanguine, calling it the “prosperity panic.” The
New York Evening World
even argued that the panic had only occurred because “underlying conditions
⁵⁷⁰
[had] been so good,” that speculators had “an excuse for going clean crazy,” creating a bubble and thus setting the stage for it to burst.