Also it can hardly be denied that in certain of the established relationships between those inside the financial world and those outside it, the standard of decency had on the whole risen. For example, the attitude of men powerful in industrial management toward their employees was on the whole somewhat more civilized in the nineteen-twenties than a generation earlier. This, to be sure, is not to say much: the story of American industrial relations is one of the blackest chapters of American history. Nor had the advance, such as it was, come about without much pressure of outside opinion—without bitter labor warfare, long agitation, and the passage of humane laws opposed and defied by numerous employers. Yet there had developed, on the whole, a somewhat more decent regard for the safety and health of employees and for the provision of tolerable living conditions for their families. Enlightened men like William Cooper Procter, Henry S. Dennison, and Henry B. Endicott and George F. Johnson had done much to offset the disgraceful record of coal and steel companies which still regarded the laborer as a serf, to be fenced within his slatternly company town and terrorized into acquiescence by hired guards. There was even, during the nineteentwenties, considerable lip-service paid to the idea that the worker was after all a consumer and that the payment to him of adequate wages might be advantageous in the long run to industries dedicated to the principle of mass production and therefore dependent upon wide markets.
Again, there were certain distinct improvements in the relations between the insiders of the big corporations and their stockholders. The managers of concerns like the General Motors Corporation were publishing more adequate and comprehensible financial statements than had been offered to stockholders of the preceding generation, and their example was being more and more generally followed; the New York Stock Exchange itself was working to make the publication of quarterly reports the accepted practice among the larger companies, to the advantage of the proxy-signers.
Yet the new corporate devices which now flourished opened up whole new areas for irresponsibility and rascality on the part of insiders. Just as the corporation lawyer is usually two jumps ahead of the legislator, so is he often two jumps ahead of his own conscience and that of the banker or corporation executive whom he serves—to say nothing of the public conscience, which generally is not heard from at all until the dubious practices in question have been exhumed in the ruins of a disaster, at which moment the public flies into a brief and indiscriminate fury. These new areas for irresponsibility and rascality—some of which have been surveyed in previous chapters of this book—were very inviting; and as yet there were few exhibits of the possible dire results of invading them, to serve as warnings to men who stood at their borders. The visibility was not so good in 1928 and 1929 as in 1932 and 1933.
Furthermore, the long-sustained rise in the value of securities and the generally rising trend of profits were enough to dull any but the keenest conscience. For example, the insider who speculated in the shares of his own company—unloading stock upon men and women to whom, as a director or an officer of the company, he stood in a responsible position—could easily excuse such a performance to himself with the argument that before long the stock would look dirt cheap at the price. Or the insider who did a little juggling with the accounts of corporate subsidiaries could argue to himself that earnings would be bound to go up next year and that all he was doing was anticipating the future. Or the banker who lent his depositors’ money to the bank’s affiliated investment company and then speculated with it could argue that all he was doing was putting the depositors’ money to its most fruitful use. Specious arguments, all of them, yet they go far to explain the general relaxation of the financial conscience in the warm airs of prosperity. No Pied Piper of Hamelin ever made more tempting music than the stock tickers of 1929.
As for the effect of these temptations upon the conduct of even the better sort of men in the financial world, we need only to listen to the restrained words of Justice Harlan F. Stone of the United States Supreme Court, speaking at the dedication of the Law Quadrangle at the University of Michigan in June, 1934:
“I venture to assert that when the history of the financial era which has just drawn to a close comes to be written, most of its mistakes and its major faults will be ascribed to the failure to observe the fiduciary principle.… No thinking man can believe that an economy built upon a business foundation can permanently endure without some loyalty to that principle. The separation of ownership from management, the development of the corporate structure so as to vest in small groups control over the resources of a great number of small and uninformed investors, make imperative a fresh and active devotion to that principle if the modern world of business is to perform its proper function. Yet those who serve nominally as trustees, but relieved, by clever legal devices, from the obligation to protect those whose interests they purport to represent; corporate officers and directors who award themselves huge bonuses from corporate funds without the assent or even the knowledge of their stockholders; reorganization committees created to serve interests of others than those whose securities they control; financial institutions which, in the infinite variety of their operations, consider only last, if at all, the interests of those whose funds they command, suggest how far we have ignored the necessary implications of that principle. The loss and suffering inflicted on individuals, the harm done to a social order founded upon business and dependent upon its integrity, are incalculable.”
7
Another source of mischief in the financial world, and indeed the larger business world—even among men of probity—was the very prevalent reliance upon what might be called laissez-faire ethics, under circumstances which rendered such a code inadequate.
According to the accepted rules of free competitive business in a laissez-faire economy, each man serves his own interest, and the law of supply and demand takes care of the results. Business is a game, and to let slip an opportunity to score a point in this game is as needless—indeed, as foolish—as for a tennis player soft-heartedly to let slip an opportunity for a smash at the net. I make the best bargain I can for myself; it’s up to the other fellow to do the same for himself. My corporation is out to clean up big profits, and the way to do this is to buy as cheap as possible—whether goods or services—and sell as dear as possible. If my margin of profit is large, that is something which the law of supply and demand will ultimately take care of in the public interest: competitors will come in and force prices down. Meanwhile I naturally take advantage of every opportunity that comes my way. Likewise the stock market is a game. Unless everybody takes every opportunity to buy low and sell high, speculation will not perform its traditional function of stabilizing prices. If I buy at a hundred and sell at a hundred and fifty, the fortunes of the man who buys from me at the higher price are no affair of mine. He may suffer, but that’s all a part of the game: the smartest man wins; he ought to win. After all, I do not force anybody to buy that stock from me at a hundred and fifty. The buyer takes it of his own free will. And if, as it happens, I have knowledge or power which gives me the edge over him—well, isn’t that the way life is?
This code was a very comfortable one to do business by. It made self-interest almost identical with the public interest.
The trouble with it was that there were considerable areas of the national economy in which it was no longer valid. It depended for its validity upon the free play of supply and demand, and in these areas the law of supply and demand had been at least partially nullified. Here are some of the things which had worked to nullify it:
1. The control of prices by big corporations, through monopolies, secret pools, or other arrangements, so that the going price was not a competitive price.
2. The fact that large-scale production not merely deprived the worker of ownership of the tools of his trade (the ancient lament of the unionist) but collected him and his fellows in huge groups, often isolated from other factories or businesses which might employ him, and powerless to reach them. The law
of supply and demand, as applied to labor, naturally presupposes that the laborer, if offered an inadequate wage or laid off, can go elsewhere to seek employment. But suppose he is a penniless miner in a West Virginia mining town, in debt to his company (which may not necessarily mean that he has been improvident) and with a family on his hands? Or suppose he is a steel worker in a town hundreds of miles from the nearest other mill? In such circumstances the law of supply and demand is a mockery, no matter how pretty it may sound in the mouths of academic lecturers.
3. The power of propaganda: a very great power which, as we noted in Chapter VIII, was available to those who had plenty of money to spend on advertising and on what were known as “educational campaigns.”
4. The power of political influence, going in some cases so far as to put the police under corporation control. (This, if we regard business competition as a game, was tantamount to bribing the umpire.)
5. The stimulation of speculative markets by groups of manipulators so strategically situated and so well equipped with funds that for a time, at least, they exercised a controlling influence. What becomes of the law of supply and demand in a market of which it is commonly said, “Stocks don’t go up—they’re put up”?
These and other forces—such as we have seen at work in earlier chapters of this book—were undermining the validity of laissez-faire economics, the economics of free competition. Naturally they undermined also the validity of laissez-faire ethics. Increase the size and power of a corporation sufficiently, or combine under one management a whole hierarchy of corporations—such, for example, as Insull’s—and you have a force at large which, if its managers live by the code of sauve qui peut and their urge for profits does not happen to coincide with the public interest, may be as dangerous to the citizenry as a ten-ton truck at large on a crowded city street. The law of supply and demand may not be able to stop it until the damage has long been done.
Though there was much sheer rascality in the Wall Street of the nineteen-twenties, much sheer greed roaming at large, and a widespread betrayal of the fiduciary principle, it may be that none of these things did as much damage to the country, in the sum total, as the sheer irresponsibility of men who, possessing vast powers, played the game of profit and loss without regard for the general public interest. To say that such men were not deliberate plunderers, that they were—as a jury has said of Samuel Insull—not guilty of fraud, is not to say the last word about them. They were living by a code no longer adequate for men whose decisions swung such collossal weight.
They were able men, nearly all of them; wise men, many of them. They were not quite wise enough to realize what they and their like had done to revolutionize American life, and what new responsibilities to their fellow countrymen now rested upon their shoulders.
8
The golden summer of 1929 drew toward its close. Stock-market prices roared higher and ever higher. Investment trusts were being born every minute: a Wall Street broker estimated that sixty per cent of the financing done in the month of August was for these trusts. Sober citizens were becoming persuaded that a panicless, depressionless era had begun. Never had the well-groomed men of Wall Street trod their narrow canyon among the skyscrapers with mightier assurance.
Labor Day, 1929, came on the second of September. It was a very hot day in the East. The congestion of holiday-makers returning to New York City that evening was unprecedented. Fifty thousand automobiles clogged the highways of New Jersey, inching their way toward the bottle-neck of the Holland Tunnel; at midnight, sweltering men and women by the scores were abandoning the attempt to drive home and were parking their cars in Jersey City and Newark and riding to Manhattan through the stifling Tube. The congestion had broken a record, announced the newspapers. This was prosperity.…
But the next day—an even hotter day, with the temperature edging up to 94.2—a rather more important record was broken. It was on that third of September that the Stock Exchange price averages reached their highest point of all time.
There were no big headlines to mark the event; what were new highs to the headline-writers then? It was only long afterwards that the significance of that torrid September day became clear. It was the moment when the wave of prosperity, Coolidge-Hoover prosperity, speculation-driven prosperity, insiders’ prosperity, reached its towering peak.
* J. P. Morgan, Charles Steele, Thomas W. Lamont, Thomas Cochran, Junius S. Morgan, George Whitney, Russell C. Leffingwell, Francis D. Bartow, Arthur M. Anderson, William Ewing; Otto Kahn, Frederick Strauss, Clarence Dillon, Charles Hayden, Arthur Lehman, Mortimer L. Schiff; George F. Baker (senior), George F. Baker, Jr., Albert H. Wiggin, Charles E. Mitchell, Paul M. Warburg, Seward Prosser, William C. Potter, George W. Davison, William Woodward, Harvey D. Gibson, Jackson E. Reynolds; John D. Rockefeller, Jr., Vincent Astor, Frederick H. Ecker, Darwin P. Kingsley, David F. Houston, E. H. H. Simmons, Bernard M. Baruch, John J. Raskob, Percy A. Rockefeller, Matthew C. Brush, Owen D. Young, Alfred P. Sloan, Jr., Pierre S. duPont, Myron C. Taylor, Walter C. Teagle, Jesse I. Straus, Walter S. Gifford, Sidney Z. Mitchell, Floyd L. Carlisle, George H. Howard, Matthew S. Sloan, Arthur Curtiss James, Leonor F. Loree.
(Here, for comparison, is the Gerard list, with asterisks marking the names of men included also in the other: Finance—Andrew W. Mellon, J. P. Morgan, * William H. Crocker, George F. Baker, * Charles Hayden, * John J. Raskob, * Thomas W. Lamont, * Albert H. Wiggin, * Charles E. Mitchell, * Walter Edwin Frew, Amadeo P. Giannini. Mining and finance—Daniel Guggenheim, William Loeb. Oil-John D. Rockefeller, Jr., * Walter C. Teagle, * R. C. Holmes. Automobiles-Henry Ford, Fred J. Fisher, Charles T. Fisher, Lawrence P. Fisher, William A. Fisher, Edward F. Fisher, Albert J. Fisher, Howard Fisher. Steel—Myron C. Taylor, * James A. Farrell, Charles M. Schwab, Eugene G. Grace. Explosives and Manufacturing—Pierre S. duPont, * Irénée duPont, Lammot duPont, H. F. duPont, Eugene duPont, A. Felix duPont, Eugene E. duPont. Railroads—O. P. Van Sweringen, M. J. Van Sweringen, W. W. Atterbury, Arthur Curtiss James, * Daniel Willard. Utilities—P. G. Gossler, Sosthenes Behn, Walter S. Gifford, * Samuel Insull, Sidney Z. Mitchell.* Electrical equipment—Owen D. Young, * Gerard Swope. Copper—John D. Ryan, Daniel C. Jackling. Aluminum—Arthur V. Davis. Coal—Edward J. Berwind. Lumber—Frederick K. Weyerhaeuser. Motion Pictures-H. M. Warner, Adolph Zukor. Tobacco—George W. Hill. Mail-Order Retailing—Julius Rosenwald. Publishing—Adolph S. Ochs, W. R. Hearst, Robert R. McCormick, Joseph Medill Patterson, Cyrus H. K. Curtis, Roy W. Howard. Labor—William Green, Matthew Woll.)
Chapter Thirteen
DOWNFALL AND CONFUSION
WHEN a wave breaks, it is the top that crashes first. Watch a great roller surging in upon a shelving shoal. It may seem to be about to break several times before it really does; several times its crest may gleam with white, and yet the wall of water will maintain its balance and sweep on undiminished. But at last the wall becomes precariously narrow. The shoal trips it. The crest, crumbling over once more, topples down, and what was a serenely moving mass of water becomes a thundering welter of foam.
When the American economic system broke, it was likewise the top that broke first: the crazily inflated structure of common-stock values which had been built up in the speculative madness of the Bull Market. Several times this structure had toppled—just as the crest of a roller curls over—in the successive stock-market breaks of June, 1928, of December, 1928, and of March, 1929; prices had cascaded down and thousands of speculators had been caught in the spate; yet each time the structure had recovered its balance and had lifted itself higher and yet higher. When, in the early autumn of 1929, another cascade of prices began, most observers supposed that, at the worst, these earlier episodes would once more be repeated. There would be a brief storm of selling, prices would drop thirty or forty or fifty points, a few thousand insecurely margined traders would lose everything, but the wave of values and of stock-market credit would catch its balance again and move forward. That the whole wave would go crashing down seemed al
most inconceivable.
For a brief interval these observers seemed to be right. Prices broke early in September—very soon after that sweltering day when the pinnacle of prices had been reached—and recovered. They broke again, later in the month. The cascade continued in October, with added volume because the collapse of Hatry’s speculative schemes in England had prompted European selling. It grew more and more torrential. And at last on Wednesday, October 23, the volume of liquidation became genuinely disturbing. Over six million shares changed hands, the ticker fell 104 minutes behind in its attempt to record immediately all the transactions on the floor of the Exchange, and the decline in prices was very severe.
Even then, however, there were few observers who anticipated what was to follow. The brokers’ offices all over the country were crowded with worried traders, but among them there were many who were saying to themselves that this would be the very moment to buy—if one had the money; that this was the culmination of the worst break since the Bull Market had begun, and that presently the march of speculative prosperity would begin once more.
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