Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (44 page)

At particular times
⁴⁶⁷
a great deal of stupid people have a great deal of stupid money. . . . At intervals . . . . the money of these people—the blind capital, as we call it, of the country—is particularly large and craving; it seeks for someone to devour it, and there is a “plethora”; it finds someone, and there is “speculation”; it is devoured, and there is “panic.”

—W
ALTER
B
AGEHOT

THE GREAT BEAR
of Wall Street legend, Jesse Livermore, once observed that “stocks could be beat
⁴⁶⁸
, but that no one could beat the stock market.” By that he meant that while it was possible to predict the factors that caused any given stock to rise or fall, the overall market was driven by the ebb and flow of confidence, a force so intangible and elusive that it was not readily discernible to most people. There would be no better evidence of this than the stock market bubble of the late 1920s and the crash that followed it.
^fn1

The bubble began
⁴⁶⁹
, like all such bubbles, with a conventional bull market, firmly rooted in economic reality and led by the growth of profits. From 1922 to 1927, profits went up 75 percent and the market rose commensurately with them. Not every stock went up in the rise. From the very start, the 1920s market had been as bifurcated as the underlying economy—the “old economy” of textiles, coal, and railroads struggling, as coal lost out to oil and electricity, and the new business of trucking bypassing the railways while the “new economy” of automobiles and radio and consumer appliances grew exponentially. Of the thousand or so companies listed on the New York Stock Exchange, as many went down as went up.

The first signs that other, more psychological, factors might be at play emerged in the middle of 1927 with the Fed easing after the Long Island meeting. The dynamic between market prices and earnings seemed to change. During the second half of the year, despite a weakening in profits, the Dow leaped from 150 to around 200, a rise of about 30 percent. It was still not clear that this was a bubble, for it was possible to argue that the fall in earnings was temporary—a consequence of the modest recession associated with Ford’s shutdown to retool for the change from the Model T to the Model A—and that stocks were being unusually prescient in anticipating a rebound in earnings the following year. The market was still well behaved, rising steadily with only a few stumbles, and without the slightly crazed erratic moves and frenetic trading that were to come.

It was in the early summer of 1928, with the Dow at around 200, that the market truly seemed to break free of its anchor to economic reality and began its flight into the outer reaches of make-believe. During the next fifteen months, the Dow went from 200 to a peak of 380, almost doubling in value.

That it was so obviously a bubble was apparent not simply from the fact that stock prices were now rising out of all proportion to the rise in corporate earnings—for while stock values were doubling, profits maintained their steady advance of 10 percent per year. The market displayed every classic symptom of a mania: the progressive narrowing in the number of stocks going up, the nationwide fascination with the activities of Wall Street, the faddish invocations of a new era, the suspension of every conventional standard of financial rationality, and the rabble enlistment of an army of amateur and ill-informed speculators betting on the basis of rumors and tip sheets.

By 1929, anywhere from two to three million households, one out of every ten in the country, had money invested in and were engaged with the market. Trading stocks had become more than a national pastime—it had become a national obsession. These punters were derisively described by professionals like Jesse Livermore as “minnows.” But while the bubble lasted, it was the people who were the least informed who were the ones making the most money. As the
New York Times
described it, “The old-timers
⁴⁷⁰
, who usually play the market by note, are behind the times and
wrong,” while the “new crop of speculators who play entirely by ear are right.”

The city that was most obsessed was New York, although Detroit, home to so many newly enriched “motor millionaires,” came a close second, followed by two other new-money towns, Miami and Palm Beach. The infatuation with the market took over the life of New York City, sucking everything into its maw. As Claud Cockburn, a British journalist newly arrived in America, observed, “You could talk about Prohibition
⁴⁷¹
, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.” Anyone trying to throw doubt
⁴⁷²
on the reality of this Promised Land found himself being attacked as if he had blasphemed about a religious faith or love of country.

As the crowd piling into the market
⁴⁷³
grew, brokerage house offices more than doubled—from 700 in 1925 to over 1,600 in 1929—mushrooming across the country into such places as Steubenville, Ohio; Independence, Kansas; Amarillo, Texas; Gastonia, North Carolina; Storm Lake, Iowa; Chickasha, Oklahoma, and Shabbona, Illinois. These “board rooms” became substitutes for the bars shut down by Prohibition—the same swing doors, darkened windows, and smoke-filled rooms furnished with mahogany chairs and packed with all sorts of nondescript folk from every walk of life hanging around to follow the projected ticker tape flickering on the big screen at the front of the office. The grail was to discover the next General Motors, which had risen twentyfold during the decade, or the next RCA, which had gone up seventyfold. The newspapers were full of articles about amateur investors who had made fortunes overnight.

The old crowd on Wall Street had a rule that a bull market was not in full stampede until it was being played by “bootblacks, household servants
⁴⁷⁴
, and clerks.” By the spring of 1928, every type of person was opening a brokerage account—according to one contemporary account, “school teachers, seamstresses, barbers, machinists, necktie salesmen, gas fitters, motormen, family cooks, and lexicographers.” Bernard Baruch, the stock speculator who had settled down to a life of respectability as a presidential
adviser, reminisced, “Taxi drivers told you what to buy
⁴⁷⁵
. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar, who regularly patrolled the street in front of my office, now gave me tips—and I suppose spent the money, I and others gave him, in the market. My cook had a brokerage account.”

The stock pronouncements of shoeshine boys would become forever immortalized as the emblematic symbol of the excesses of that period. Most famously, Joseph Kennedy decided to sell completely out of the market when in July 1929, having already liquidated a large portion of his portfolio, he was accosted by a particularly enthusiastic shoeblack on a trip downtown to Wall Street, who insisted on feeding him some inside tips. “When the time comes that a shoeshine boy
⁴⁷⁶
knows as much as I do about what is going on in the stock market,” concluded Kennedy, “it’s time for me to get out.”

About a third of the new speculators were female. Articles on investing regularly appeared in women’s magazines. Indeed, the seminal manifesto of the time, “Everyone Ought to Be Rich” originally appeared in the August 1929
Ladies’ Home Journal.
Its author, John J. Raskob, recently treasurer of General Motors, now sponsor of the Empire State Building then in its planning stages, made the case that anyone who invested $15 a month and reinvested the dividends would have a fortune of $80,000 after twenty years.

Initially, Wall Street, always a bastion of misogyny, dismissed the new class of speculatrices as “hard losers and naggers
⁴⁷⁷
. . . stubborn as mules, suspicious as serpents and absolutely hell bent to have their own way.” Even the
New York Times
⁴⁷⁸
had to have its chuckle about some of the characteristics of these novices—their memory lapses, their superstitions, their gullibility. But women soon became so important to the market that brokerage houses opened up special offices on the Upper East Side on Fifth or Madison or on Broadway in the West Seventies to cater specifically to this ever more substantial clientele.

The new folk heroes of the market were the pool operators, a band of professional speculators analogous to the hedge fund managers of today.
They were typically outsiders, despised by the Wall Street establishment, who accumulated their fortunes—though they would soon enough lose them—by betting on stocks with their own and their friends’ money. The seven Fisher brothers who had sold their automobile body company to General Motors for $200 million ran such an enterprise, as did Arthur Cutten, an old hard-of-hearing commodity trader from the Chicago wheat pits; Jesse Livermore, the great bear trader; and Kennedy, who had made his first million investing in the stock of the Hertz Yellow Cab Company and was now making his profits as an investor in the movie industry.

Biggest of them all was Billy Durant
⁴⁷⁹
, who became the cheerleader for the bull market. Operating from a high-floor office at the corner of Broadway and Fifty-seventh, the exiled creator of General Motors now specialized in ramping stocks—acquiring large blocks in secret, eventually publicizing his positions to drive the price high, then off-loading them as a sadly unsuspecting public piled in. He traded so frequently and in such large amounts that he had to use twenty different brokers, his commissions just to one of whom amounted to $4 million a year. When he went to Europe, his transatlantic phone bills alone were said to be $25,000 a week.

On Wall Street, opinion about the markets was as always split. Charles E. Mitchell, head of the National City, the largest bank in the country, was nicknamed “Sunshine Charlie” for his infectious optimism. He was the carnival salesman of American banking, who had transformed his firm into a giant machine for selling stocks. Paul Warburg, one of the wise men of American banking, the intellectual father of the Federal Reserve System, kept predicting that it would all end in disaster, issuing his most powerful jeremiad on March 8, 1929: “History, which has a painful way
⁴⁸⁰
of repeating itself, has taught us that speculative overexpansion invariably ends in over-contraction and distress.” If the “debauch” on the stock market and the “orgies of unrestrained speculations” continued, he warned, the ultimate collapse in stocks would bring about “a general depression involving the entire country.” He was promptly accused of “sandbagging American prosperity
⁴⁸¹
.”

Even within the same firm opinions were divided. At Morgans, Thomas Lamont was a believer in the New Era. Russell Leffingwell, a former assistant secretary of the treasury, who had become a partner in 1923, blamed the bubble on Norman and Strong. In March 1929, on the very same day that Warburg issued his ominous pronouncement, Leffingwell predicted to Lamont, “Monty and Ben sowed the wind
⁴⁸²
. I expect we shall have to reap the whirlwind. . . . I think we are going to have a world credit crisis.”

The financial press was as much at odds as the men they covered. While the
Journal of Commerce
and the
Commercial and Financial Chronicle
hammered away at the “speculative orgy
⁴⁸³
,” the
Wall Street Journal
kept the faith, insisting that, “There are many underlying reasons why the size of the market should be many times what it was a decade ago.” There was much editorial head-shaking in the mainstream newspapers. Alexander Dana Noyes, the bespectacled, professorial financial editor of the
New York Times
, who had been watching the market for forty years, warned that “stock speculation has reached an exceedingly dangerous stage,” while the
Washington Post
editorialized that “thousands of buyers of stocks are in for serious losses.”

The
New York Daily Mirror
, by contrast, was so transported by its vision of the future that it was unable to restrain its soaring flight of rhetoric:

The prevailing bull market is just America’s bet that she won’t stop expanding, that big ideas aren’t petering out, that ambition isn’t tiring in the wings, that tomorrow is twitching with growth pains. Graph hounds, chart wavers and statistic quoters may shout their pens hoarse with contrary sentiment—financial Jeremiahs may rave of days of doom, but these minority reports are drowned by the hurrahing ticker tape and the swish of skyrocketing securities. We’re gambling on continued prosperity, full employment, and undiminished spending capacity—on freight loadings, automobile output, radio expansion—on aviation
development, crop yields, beef prices—on mail order sales and sound retailing.

It was from Washington
⁴⁸⁴
that the bull market faced its greatest hostility. Every senior financial official in the government thought that stocks were now in a speculative bubble—everyone, that is, except the president, Calvin Coolidge. For some reason unfathomable even to members of his own administration, Silent Cal seemed blithely unconcerned about developments on Wall Street. In February 1929, as he prepared to leave the White House, he declared that stocks were “cheap at current prices” and conditions absolutely sound, probably just to irritate his successor, Herbert Hoover.