Lords of Creation

by Frederick Lewis Allen

  The story of the last two feverish years of the big bull market on the Exchange—the years when it got quite out of hand—I have already told in some detail in Only Yesterday. But there are certain aspects of that story which deserve a passing mention here, in order that the mania for speculation in common stocks may assume its proper place in the larger story of American finance.

  First let us attempt roughly to measure the astounding growth of this speculation. A reasonable measure is the number of shares of stock that changed hands year by year. Between 1910 and 1920 this number had never been higher than 312 million. Nor was this figure soon touched again, despite the fact that the Liberty Loan campaigns had provoked a new interest in investments and that the newspapers of the country were beginning to give more and more space to stock-market price-tables. During the next few years the annual trading fluctuated as follows:

  1920 ……………… 223 million

  1921 ……………… 171 million

  1922 ……………… 260 million

  1923 ……………… 237 million

  1924 ……………… 282 million

  But by 1925 Calvin Coolidge had been elected, the Florida boom was reaching its climax, stock prices were rising fast, and the momentum of trading in shares began to quicken. (In this year the Van Sweringens already had control of the Chesapeake and Ohio, the Erie, and the Pere Marquette, and were looking for more worlds to conquer; out in California, Giannini was battling with opposing California bankers for the right to expand his Bank of Italy all over the state; Insull’s empire was beginning to grow by leaps and bounds.) In 1925 the number of shares which changed hands on the New York Stock Exchange jumped from 282 million to 452 million.

  In 1926 it lapsed a little—to 449 million. But in 1927 it shot up once more to 576 million. And then came the years of the great madness.

  It was in March, 1928, that the daily doings in that great hall at the corner of Broad and Wall Streets began to be a front-page sensation: that the rise of Radio and General Motors became topics of furious discussion at thousands of dinner-tables; and that the record for daily trading which had been set during the Northern Pacific panic was at last broken. It was in November of this same year that Herbert Hoover defeated Al Smith for the Presidency, thus assuring the speculative community that the United States would enjoy “four years more of prosperity.” During 1928 the volume of trading climbed from 576 million to 920 million. And in 1929 it set an all-time record of 1,124 million—something like fifteen times the annual average for the war decade!

  Or suppose we watch the rise in prices, another measure of the speculative boom. Here are the Standard Statistics common stock averages for the years from 1924 to 1929, expressed in terms of an index in which 100 represents the average for the year 1926:

  June, 1924 ……………… 65.6

  June, 1925 ……………… 85.1

  June, 1926 ……………… 96.9

  June, 1927 ……………… 114.

  and then

  June, 1928 ……………… 148.2

  June, 1929 ……………… 191.

  and at last

  September, 1929 ……………… 216.1

  The significance of these figures is clear. A well-diversified investment in the more substantial common stocks would have more than tripled in value in the space of scarcely more than five years. The total value of all listed stocks increased by many billions of dollars. These dollars were in a very real sense new money manufactured by the processes of the Stock Exchange. Some of them were being spent by lucky speculators, and thus were stimulating business. They were available as collateral for bank loans. To a considerable extent they were being recorded as profits by corporations, as we have seen. The whole American economy was becoming geared to the price-level which they represented. This is one reason why we may speak of the speculation on the Stock Exchange as a great engine of inflation.

  But there was another reason. The bulk of these millions of purchases of stocks at rising prices was made on margin—that is to say, mostly with borrowed money. The loans to brokers to carry customers’ accounts also made a sensational rise. In the year 1922 these loans had not amounted to as much as two billion dollars. By the summer of 1926 they had risen to the very considerable total of almost three billion dollars. But that was nothing to what was to come. In 1927 they rose to nearly four and a half billion; in 1928, to nearly six and a half billions; and by September, 1929, to the incredible figure of over eight and a half billions.

  Yes, but how many people were actually speculating? To Wall Street it seemed as if the whole American population were in the market, and this indeed has been the orthodox defense of the debauch of 1928 and 1929 submitted by some of the gentlemen of the Street. For example, when Richard Whitney, president of the Stock Exchange, was asked by counsel for the Senate Committee how it happened that stocks rose so high, he replied, “Ask the one hundred and twenty-three million people of the United States.” The best available evidence would seem to indicate, however, that in this statement the president of the Exchange indulged in hyperbole. During the year 1929 the member firms of the Exchange had on their books a collective total of a little over half a million margin accounts. They had altogether a total of 1,371,920 customers, including those who bought stocks outright for cash. If we adopt John T. Flynn’s method of arriving at an estimate, and double these figures to allow for those who did their business through non-member concerns and on other exchanges, we cannot be very far wrong. Let us say, then, that in 1929 there were probably well over a million people speculating on margin; that there were perhaps two or three million in all who were buying and selling stocks with an uneasy eye on the financial quotations, whether or not they gambled on margin; and that of course there were other investors—perhaps one or two millions of them—whose fortunes, large or small, were directly affected by what was going on in the Street, even if they had never learned to flip the evening paper open to the stock-market page. Unquestionably there were far more people speculating than ever before; unquestionably there were great numbers of clerks, stenographers, janitors, chauffeurs, and waiters in the market. Yet probably not much more than one person in a hundred in the American population was playing stocks on margin, and not much more than one person in twenty was directly affected through changes in the value of his or her possessions. The effect of the mania on the rest of the population was great, but it was indirect—brought about by the results of economic inflation and unbalance.

  In another respect the orthodox Wall Street apology fails to conform to the facts. It suggests a picture of the big men of the Street standing helplessly by while Tom, Dick, and Harry put the prices of stocks up. The actuality was quite different.

  Unfortunately no such exhaustive studies of the great speculation of 1928 and 1929 were ever made as it was possible for the Senate Committee’s investigators to make of the lesser speculative outburst of the spring and summer of 1933, during the first few months of the New Deal. But the figures for that latter outburst—when the money-changers were supposedly somewhat chastened—are illuminating in many ways.

  They show, for one thing, that during the month of July, 1933, the total trading on the New York Stock Exchange was about 120 million shares. The members of the Exchange and their partners bought or sold nearly 65 million shares for their own account. In short, they were on the buying or selling side of the market in over half the transactions; or, to put it another way, they did over a quarter of the total business for themselves.

  In some of the stocks which rose most sensationally in value during that brief boom in 1933, and attracted most inevitably the little shoestring speculators who throng the brokers’ board-rooms during a bull market, the part which the big speculators of the Street played in the trading was much greater. One of the wildest leaps of 1933 was made by the stock of the American Commercial Alcohol Corporation, the price of which rose in a little over two months from less than 25 to over 90—and th
en collapsed abruptly to less than 30. The Senate Committee’s study of that egregious operation shows that fifty men were on one side or the other of three-quarters of the transactions during this period; and that a mere five men were on one side or another of more than half of them. These five men did 27 per cent of the purchasing and 27 per cent of the selling. What is more, if one examines carefully the records of the trading, day by day, in this stock—they are set forth in detail in John T. Flynn’s Security Speculation—one will discover that the days when the volume of trading suddenly expanded, thus drawing the eyes of quantities of little speculators to American Commercial Alcohol as a promising speculative vehicle into which to put their meagre capital, were not days when these five big speculators stood by and idly watched. On these days they themselves were doing the bulk of the trading. And these five men were the specialist in the stock (the man who served as the Stock Exchange’s referee, so to speak, between buyers and sellers); a market operator named Thomas Bragg, who was the manager of the pool; and three officers of the American Commercial Alcohol Corporation itself!

  A glimpse of these five men in action—during a brief part of their sustained operation—may be instructive as showing how big operators could attract the public into the market and thus push prices up to their own profit. On June 26, 1933, the pool in American Commercial Alcohol had been at work for over six weeks. How it had obtained a supply of the stock to play with, by obtaining an option on shares which had fallen under the control of the insiders in the corporation, and how it had already pushed up the price considerably and then had sold a good deal of its stock while the price held steady, we need not recount in detail. Let us see what happened on June 26 and the succeeding days.

  On June 26, 1933, the five speculators bought 14,200 shares and sold 12,800. (The total volume of trading in the stock that day was 31,900 shares.) This sudden burst of activity in American Commercial Alcohol, after a period of comparative quiet, brought the outside speculative public in with a rush. There always seem to be hundreds of traders at such times standing ready to buy a stock that is moving upward and appearing constantly on the ticker tape; speculative operators count upon such traders in their plans. And the fact that the five men on the inside bought more stock than they sold helped to put the price up: it went up two or three points. The next day these five men were a little less active, and they sold 800 more shares than they bought (purchases, 11,-100; sales, 11, 900), but with the public swarming in, the price nevertheless went up again, several points. (The total volume of trading was larger than on the preceding day: 49,200 shares.) So far, so good. The little outsiders were now eager; wild expectations inflamed them; a lot more of them, anxious to get aboard the bandwagon before it was too late, decided to buy—and the five men on the inside were ready to sell to them. On the 28th of June the volume of trading rose again to 52,300 shares, the biggest figure of this movement; the volume was so large, in fact, that it effectively masked the fact that although the five men bought 10,500 shares, they also sold many more, they sold 14,400 shares. And the price hardly sagged at all, so gladly did Tom, Dick, and Harry buy. During these three days the price of American Commercial Alcohol had risen several points, the outsiders had come in in large numbers to buy, and the five men at the center of things had actually succeeded in selling, at these rising prices, 3300 more shares than they had bought! That is how pools make money by coaxing in the general public.

  This American Commercial Alcohol pool offers in some respects, it is true, a somewhat extreme example of manipulation of prices by insiders, including insiders who are officers of the companies whose stock is being taken for a ride; but it is not unreasonable to suppose that there must have been dozens of such pools during the wild years of 1928 and 1929. And it is certainly safe to say that a large proportion of the pools were carried on with the aid of corporation officers, directors, or other large stockholders.

  A few scattered operations during these years have been investigated in detail sufficient to show us the corporate insiders at work. Let us look at one or two of them.

  In 1928 there was a pool operation in the stock of the Sinclair Consolidated Oil Corporation. The manager of this operation was Arthur W. Cutten, one of the wiliest of the professional speculators. The participants included among others the Chase Securities Corporation (the affiliate of the Chase National Bank); one of Albert H. Wiggin’s private corporations, the Shermar Corporation; Harry F. Sinclair of Teapot Dome fame, who was the head of the Sinclair Consolidated Oil Corporation itself; and several other officers and directors of this corporation. The total profits of the operation were nearly thirteen million dollars; in these profits, the share of the officers, directors, and large stockholders of the Sinclair concern amounted to more than two and a half millions. It is hardly necessary to remind the reader that these profits in large degree were made by buying stock from, and selling stock to, stockholders (old or new) of whom these insiders were ostensibly the servants.

  Perhaps the most spectacular of all the advances made by individual stocks during the big bull market was that of the stock of the Radio Corporation of America. At the time when this market entered upon its final eighteen-month period of frenzy the quotation for Radio was $94 a share (this was on March 3, 1928); at one time during 1929 it got as high as $549 a share. This amazing advance did not come about without the active intervention of insiders. Of one phase of this advance we have precise knowledge. A syndicate which operated in the stock during a period of scarcely more than a week in March, 1929, made a net profit of over four million, nine hundred thousand dollars. This syndicate bought and sold most of its stock through the brokerage firm of M. J. Meehan & Company. The specialist in Radio stock was a member of that firm. And among the participants in the syndicate—along with Percy A. Rockefeller, Walter P. Chrysler, John J. Raskob, William C. Durant, and other men potent in the Wall Street of the day—was Mrs. David Sarnoff, wife of the president of this very Radio Corporation.

  Among the participants in a pool in General Asphalt stock in 1929 was Horatio G. Lloyd, chairman of the executive committee of the company (and also a Morgan partner). Among the participants in a pool in Underwood-Elliott-Fisher stock in 1929 was one of the private corporations of Albert H. Wiggin, then a director of the company. When we add to these scattered examples those of which we have already caught a glimpse—Insull selling shares of Insull Utility Investments at thirty dollars a share which he had been assigned at $7.52 a share, at a time when he was the sole owner of the stock of this concern; Wiggin’s private corporations making over ten million dollars in the shares of the bank of which he was the head; Mitchell joining with officers of the Anaconda Copper Company in a pool operation in copper stocks; and Dillon, Read & Co. arranging with a firm of brokers to distribute blocks of the shares of United States and Foreign Securities which men associated with the firm had so inexpensively acquired—we need be under no illusion that throughout this whole bull market there were not large numbers of insiders pumping up values, thereby adding to the speculative frenzy, and profiting hugely in the process. The public came in eagerly, it is true, but they came in at the urgent and adroitly contrived invitation of Wall Street. The Stock Exchange was a private association; during those years it might well have been called the Association for Improving the Condition of the Rich.

  Nor should we overlook the part which leading American corporations played in the orgy by lending money from their surpluses to brokers to carry speculative loans. To give but a few examples: during the year 1929 the average amount which the Standard Oil Company of New Jersey had outstanding in call loans was about sixty-nine million dollars; the Electric Bond & Share Company and its subsidiaries, one hundred million dollars; the Sinclair Consolidated Oil Corporation, twelve and a half million dollars. At one time the outstanding loans by the Cities Service Company reached more than forty-nine million dollars. More than half of the colossal increase in loans to brokers consisted of loans like these from corporate treasu
ries. The interest rates were high and so the corporations took advantage of them—that was all. What was done with the money was apparently not their affair. The episode was an interesting example of self-rule by business.

  If it is preposterous to regard a bull market so stimulated and so financed as the product of the spontaneous speculative madness of the entire American population, it is also, of course, almost equally preposterous to imagine, as some radical writers have done, that the big financiers and industrialists pocketed their profits and stood aside in the autumn of 1929, leaving the dear public to its doom. To suppose that this happened is to miss the crowning irony of the whole adventure. The truth is that for so many long months had pool operators unloaded their holdings and then shortly seen the stocks in which they had operated go roaring up again, either because new pools had stepped in or because the public had taken the bit in its teeth; so wild and unprecedented had the whole advance become, so persuasive was the doctrine that America was entering a new era in which none of the old rules for determining value were any longer applicable, and so thoroughly had the darlings of speculative fortune lost their heads, that when the month of October, 1929, arrived, most of them went over the edge of Niagara with their victims. They succumbed to the fate of propagandists who in the end come to believe all too fully their own propaganda.

  During the boom there were, to be sure, voices raised in protest and warning—voices like Paul Warburg’s, or that of Alexander Dana Noyes of the New York Times, or that of the staid Commercial and Financial Chronicle, which on January 5, 1929, said flatly that the huge increase in brokers’ loans constituted a “menace to the entire community” and added that it was “a public duty for anyone in authority, or having influence and weight, to speak in unsparing terms in denunciation of what was going on.” The Federal Reserve Banks tried to stem the flood in 1928 by making three successive increases in the rediscount rate; early in 1929 the Federal Reserve Board tried by direct pressure upon the member banks to prevent them from using Federal Reserve credit for loans for speculative purposes; and subsequently the Federal Reserve Bank of New York sought repeatedly to raise its rediscount rate still higher, though it was prevented from doing so by the Board in Washington, which preferred to rely upon the method of direct pressure and was moreover divided in opinion as to what to do. But these somewhat spasmodic efforts on the part of the various Reserve authorities were of little avail; the weapons at their disposal were ill-adapted for dealing with such a situation. As for those who had most “influence and weight” in the Street, the House of Morgan appeared to be otherwise occupied—in planning to launch the Alleghany Corporation and United Corporation. As for “those in authority” in the Administration at Washington (aside from the Reserve Board), President Coolidge and his multimillionaire Secretary of the Treasury had for some years past been giving intermittent aid and comfort to the bull party in the market by uttering soothing words when stocks showed signs of sagging; the President had once, in the early days of 1928, gone so far as to state publicly that he did not consider brokers’ loans too high; and the nearest that Andrew W. Mellon ever came to that “unsparing denunciation” which had been urged by the editor of the Commercial and Financial Chronicle was to say very mildly that it was an opportune time for the prudent investor to buy bonds.