Penguin History of the United States of America (96 page)

Germany was not the only unsound foreign field for investment in these years, though it was the most important. Some $8,500,000,000 in all went abroad, not all of it unwisely. But eventually it dawned on Wall Street that there was more money to be made at home, and the bankers diverted their attention and their funds from Germany to the United States. This had a bad effect on Germany: it was like cutting off a patient’s blood transfusion. It was to be even more devastating for America.

In 1927 the economy seemed to be on a very solid footing. The boom was in some ways smaller than its predecessors. Percentages of profits, of numbers employed, had been higher in earlier times; money had been cheaper. But this is one of those cases where percentages are misleading. The fact is that the sheer quantity of wealth had never been so great, so tempting. The economy was expanding; there were vast sums to be earned by the middlemen who organized the expansion. Unhappily for themselves the New York financiers had let much of this business slip through their fingers. To recapture it they had to go into the stock market: to use their enormous capital reserves not to assist the launching of new enterprise, the refinancing of old, the development of successful undertakings – that could come later – but to regain control from the usurpers of Detroit, San Francisco and Chicago. New York began to buy; and the price of shares began to soar.

It had been rising ever since the end of the post-war depression, for indeed there was a great deal to be said for spending your more or less untaxed savings on stocks and shares which, in those sunny years, would yield every year a higher dividend (reflecting the boom in production), which would also be largely untaxed (good Mr Mellon). But the injection of Wall Street’s huge resources into the market set off an upward rush. The bankers wanted shares: they bought them, paid and looked for more. As the months went on, lesser mortals were drawn in. It looked so simple. To judge from recent performance, you only had to spend a hundred dollars today to become rich tomorrow as the high interest rolled in. Even the dullest, safest stocks were paying 12 per cent by the end of 1928: an excellent rate of return, better than you might get by putting your firm’s working capital into further production. Not only that, the price of shares themselves was going up. It was irresistible. No work, no skill were required; there was no chance (it seemed) of losing. The middle class took the plunge. By the late summer of 1929 there were approximately nine million individual investors in the market.
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It was a heaven-sent opportunity for swindlers. Some were merely incompetent bankers or stockbrokers who thought they understood economics:
in good faith they advised their ignorant but greedy clients to buy – to buy almost anything; they did so themselves; the less scrupulous of them helped themselves surreptitiously to their clients’ money, or dipped into the funds of the institutions they headed, to further their schemes. Bigger men, often previously respectable men, launched new corporations with alluring tides (the American Founders Group, the Shenandoah Corporation, the Blue Ridge Corporation) and misleading prospectuses: they thus parted many a fool from his money. The biggest sharks of all – Ivar Kreuger, the Swedish match-king, Samuel Insull, the English-born electricity wizard (in his youth a protege of Thomas Edison) – raised colossal sums on the market to further their ever more colossal ambitions. They thus got a reputation for genius: by the end the very size of Insull’s operations (which he himself no longer understood) seemed to be proof that money was safe, if invested with him. In I932he was to flee the country to avoid embezzlement charges. Self-styled experts in the financial press (read more and more widely, with uncomprehending awe) advised as confidently and rashly as stockbrokers, and were as often self-deceived. Prices began to gallop. The silent, hidden battle for ownership of the goose which laid the golden eggs continued: almost unnoticed, she started to lay rather fewer.

This was how matters stood at the moment of Herbert Hoover’s inauguration in March 1929. The vast stock-market bubble was still swelling, and the few cool heads in America understood perfectly well that it would burst, as all previous bubbles had burst since the days of the South Sea Company. But they were afraid to incur the dreadful odium of pricking it. Indeed, the outgoing President had announced that in his opinion share-prices were low. A friend asked incredulously if he really thought this. Coolidge replied that in his Yankee opinion anyone who speculated on the stock market was a fool; but as President of the United States and head of the Republican party it was his duty to tell his followers what they wanted to hear. The Federal Reserve Board made a last timid attempt to discourage the gamblers by raising the rate charged for their bank loans by 1 per cent, and by suggesting that anyway FRS banks ought not to lend their clients money for stock-market operations. Unfortunately Charles E. Mitchell, head of the National City Bank and a director of the Federal Reserve bank in New York, the chief component of the system, was deeply involved in the speculation: he used every ounce of power and influence at his command, and forced the Board to eat its words. This was the last effective exercise of the control which for fifty years Wall Street had wielded over public financial policy – and it was utterly disastrous.

For, thus encouraged, the boom roared on. Shares were now changing hands at prices which no dividends would ever be large enough to justify. You bought a share only in order to sell it at a profit; you bought it ‘on margin’ (with credit, that is, not cash); you assumed that there would always be another sucker. Yet by the late summer warehouses were choked with unsold goods, and factories were therefore beginning to diminish their
output. It dawned on some of the shareholders in September that it might be prudent to sell their shares. At least one of the big professionals decided that the time had come to be a bear: to try for profit by selling short, thereby bringing the market down, and buying at the lower price thus produced. The Dow Jones average began to decline.

At first the suckers did not notice, or, if they did, assumed that the price rise would soon resume. It did not; and through September and October the snowball of sellers grew. There came a day – 23 October 1929 – when, suddenly, it seemed that everybody was selling: over six million shares changed hands, and prices slumped. The next day was remembered as ‘Black Thursday’: the wave of selling continued, a record-breaking 12.9 million shares changed hands, and only the intervention of a bankers’ consortium led by the House of Morgan stopped the price of shares collapsing completely. But already thousands of small investors were ruined, as were some stockbrokers (at least one of these tried to commit suicide at the end of the day’s trading). Things were calmer on Friday and Saturday; and President Hoover, like Coolidge before him, felt it his duty to issue a reassuring statement. ‘The fundamental business of the country,’ he said, ‘that is production and distribution of commodities, is on a sound and prosperous basis.’ Unfortunately this remark carried with it the connotation that perhaps, though the fundamental business was sound, the stock market was not. Sunday was the day of rest; on Monday the slide began again. Nine million shares were traded; by the end of the day the price of shares had gone down by $14,000,000,000 altogether since the middle of the previous week. The selling had been sharpest at the end of the trading day. Next day, ‘Black Tuesday’, collapse was total: 650,000 shares in US Steel, bluest of ‘blue chips’, the most respectable of ‘securities’, were dumped on the market in the first three minutes. The New York Stock Exchange reacted like a zoo where all the animals had gone mad. The superintendant later recalled how the brokers ‘roared like a lot of lions and tigers. They hollered and screamed, they clawed at one another’s collars.’ And they sold and sold and sold. Radio collapsed, General Electric collapsed, Tinker Roller Bearing and Anaconda Copper collapsed. It was as if the whole fabric of modern, business, industrial America was unravelling. Montgomery Ward, the great mail-order firm, collapsed. The bankers’ consortium of the week before was quite unable to stem the torrent. Woolworth collapsed. Men rushed screaming from the floor into the street: ‘I’m sold out! Sold out! Out!’ Trinity Church on Wall Street was packed with desperate men of all creeds in search of comfort. By the time the exchange closed at 3 p.m. 16,383,700 shares had been sold at a loss of 810,000,000,000 – ‘twice the amount of currency in circulation in the entire country at the time’.
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And, simultaneously,
panic had been wrecking all the other stock exchanges – in San Francisco, Los Angeles, Chicago. A great part of a generation’s savings had been wiped out. The rest were to go in the long slow slide that went on until 1932, when US Steel, which had stood at $262 a share in 1929, stood at $22; General Motors at 18; Montgomery Ward at $4. Coolidge prosperity had come to a brutal end.

For if the market for industrial products had been slackening in the summer, when cash and credit seemed to be in limitless supply, it could only come almost to a halt when, suddenly, there was no money, or, at least, there was a great shortage of it. The consequences were devastating. Money is the lubricant of trade: that, indeed, is its only function. It comes in many forms, but basically in two, currency and credit. The stock-market crash destroyed credit: nobody trusted banks or brokerage houses any more; nobody would lend against the security of stocks and shares. Consequently there was a desperate scramble for currency on the part of all those who needed money to keep themselves and their businesses afloat, for wages still had to be paid, bank loans serviced, raw materials acquired, bills, of all kinds, settled – and no creditor was now willing, or indeed could long afford, to wait for payment. All plans for industrial expansion had to be abandoned. Middle-class consumers suddenly had to retrench, or worse: for all too many of them had bought shares on margin and were now called on for cash. Often they could only raise it by selling their possessions for what they could get – the wife’s fur-coat, the family car, the house itself -and the cumulative effect of such forced sales of course helped to reduce prices and therefore earnings and profits. Even worse off were people with mortgages: these were usually short-term affairs, but before the crash it had been easy enough to re-finance them. Now, suddenly, it was almost impossible, and there was an epidemic of foreclosures. The housing industry slumped. Even those who still had money in the bank, few debts and good salaries, were affected by the panic and paused in their outlays. It became difficult for firms and corporations, whose shares were sliding down, to borrow the money they needed just to keep their businesses going: bankers were now hesitant, all the more so as many of them were themselves in deep trouble, having thrown away vast sums in stock-market speculation. Soon, as a result of this contraction in trade, factories began to lay off their workers, who thus turned, in an instant, from contributors to the national income to charges upon it. Unemployment, which according to the federal bureau of labour statistics stood at 1.5 million in 1929, was up to at least 3.25 million by March 1930. And soon the factories began to close down altogether.

Hoover saw the peril and acted to avert it. During the rest of his Presidential term, in fact, he was to act incessantly, doing more than any previous President had done in any previous economic crisis. His bad luck was that what he did was never enough, so that he seemed to be doing nothing, and his personality prevented him from doing more. This devoted man in
the end trod the same Via Dolorosa as his great hero Woodrow Wilson.

Meantime he sent for the leaders of the business community and persuaded them to give undertakings not to lower wages or lay off workers. He was convinced that with a little time and patience the bad corner could be turned and renewed prosperity be found beyond it. He believed it and said so, very often, very publicly: for it was part of a President’s duty to restore confidence, since only confidence would persuade frightened capitalists, large and small, to start investing or producing again. He was joined by a reassuring chorus of Cabinet officers, businessmen (‘Just grin,’ said the head of US Steel, ‘keep working’) and patriotic citizens. For a moment in early 1930 it seemed as if the magic was succeeding. Then the second great blow fell on the American economy. Once more the chickens came home to roost, the bad effects of faulty statesmanship made themselves felt, Hoover’s prognostications were falsified and his reputation began to collapse.

For the rest of the world was feeling the effect of the American disaster. It is important to remember that, throughout the twenties, the United States had been the only one of all the industrial nations to seem solidly prosperous. All the others were walking wounded, victims of the dislocations brought about by the First World War, except Russia and Germany, which were stretcher cases. Above all, the United States had been the only important source of investment capital and the only source of the money needed to pay reparations and war-debts. The flood of dollars had been drying up before the crash, diverted as it was to the home market and the stock exchanges; now it was reduced to less than a trickle, and before very long the economies which it had floated were wrecked.

This development took more than a year to make itself fully felt, however; meantime Congress pushed the economic thought (if that is the word) of the twenties to its ultimate absurdity: during 1930 a new American tariff, the Smoot-Hawley, was promulgated. It carried protection to heights even beyond those of the Fordney-McCumber tariff. Presumably the rationale was that since American industry had (allegedly) needed protection in the days of its strength, it needed still more now that it was weak. But the schedule of duties was not compiled in any systematic or scientific way. Instead there was the usual brawl of logrollers in Congress as Republicans and Democrats, Senators and Congressmen, farm representatives and spokesmen for industrial states, competed and bargained and engineered to help the special interests they favoured; just as if the times were normal.