by Prins, Nomi
It wasn’t until the spring of 1929, when the market suffered a sharp break, that Lamont turned more cautious. In May, after liquidating seven substantial holdings (including Chase National Bank, General Foods, and Humble Oil), he raised about $4 million in cash from the sale of securities—for himself. But then his own isolationism took hold; he didn’t make these sales public to the rest of the nation buying Morgan-backed securities. He didn’t have to legally, but still he chose to protect the information; it would do the market no good if word got out that bankers were cashing in their chips.
Besides, there was still money available in case something went wrong thanks to the safety net that the Morgan Bank and others had pushed for after the Panic of 1907: the Federal Reserve. The primary tool of the Federal Reserve to influence credit conditions was the discount rate that each regional Federal Reserve bank charged the other banks for loans. Because this rate was generally kept below market rates, banks had an incentive to borrow the reserves they needed to finance their rapidly expanding activities. Throughout much of the 1920s, discount window borrowings represented more than half of total Federal Reserve assets.75
In practice, that meant banks used their “membership” with the Fed to suck up money for speculative and risky lending purposes. They could lend that “easy” money at a profit to client companies or encourage investors to buy bonds of Latin American countries or stock of budding American companies that were packaged by National City Bank or Chase, while also lending to investors to buy into the pooled trusts they created from blocks of shares in those same companies. The more shares in the trusts bought with borrowed money, the more the prices of those shares and trusts rose, and the more new investors borrowed to invest in them.
The bigger the banks were, the more they were aware of looming problems with the shares of various trusts and companies because they had more information about them given their involvement in underlying loans and bond payments. It was always the case that banks knew more about the quality of loans and the bonds that financed them than investors. Missed payments to banks, whether on international or corporate bonds, meant an unhealthy situation was arising. To provide extra capital in the face of common disaster, the New York banks would increase loans and investments to their own accounts from October 2 to October 30 (mostly in the last week of October) by $1 billion and increased their reserves by nearly $250 million. Loans from smaller banks dropped by $800 million.76
The banks would attempt to keep ordinary investors from extracting their cash (often their life savings), even as values plummeted. The trusts might have been engineered and marketed “for the public” to buy securities alongside the big players, but when push came to shove, the masters were there to garner fees for their trusts and inflate stocks in their portfolios.
None of the starry-eyed free-market types, who promised that trusts were safe, ever mentioned the extent to which they were propped up by borrowed money and debt. That wouldn’t matter as long as the stock bubble remained inflated. But the trusts and stocks began trading up to 150 times earnings, puffed up by leverage debt and smarmy hype, not inherent value. That meant, as Bertie Charles Forbes would write in mid-November 1929, that “when things popped, they would pop badly.”77
As bankers and other citizens returned from their summer vacations on Labor Day 1929, New York City was a sweltering cauldron of putrid smells and record heat. The Dow’s temperature had also risen—to an all-time high of 381. The protracted bull market in stocks had enabled corporations to finance cheaply by issuing stocks rather than bonds or finding the cash with which to pay old debts or expand.
Merging to Power
Every chief financier had his preferred method of amassing influence and power during the 1920s. Mitchell chose to grow National City Bank’s “Everyman” deposits and disperse them in epic global speculation. Lamont’s position was more closely aligned with the US and other governments, as it had been during and after World War I. Chase’s chairman, Al Wiggin, executed his own buying spree—of other banks.
Wiggin’s pedigree was grittier than that of some of his upper-crust compatriots. He began his career in 1885 as a bank clerk in Boston.78 He joined Chase as a vice president in 1904 and rose to the post of president in January 1911; by 1917, he had become chairman of the board.79 Wall Street legend had it that Wiggin was the “only man who ever refused a Morgan partnership.”80 According to Time magazine, he was an intense poker player and was known around Wall Street as “the man with a million friends.”81 “Tall, heavy, slightly pop-eyed,” Wiggin created his own alliances in banking and business by joining all the clubs he could. An avid golfer like Lamont, he was known to be “never more dangerous to his opponent than when behind.”82
Relative to the Morgan clique, Wiggin was an outsider to Washington power-elite alliances. He focused on growing his power through acquisitions of banks and club memberships. He collected banks like he collected etchings. His reign at Chase was one big buying spree, capped by merging two of the oldest banks in the financial district; Chase National and the Mechanics and Metals National Bank. The marriage was announced on February 12, 1926.83 The newly combined Chase National possessed just over $1 billion in assets, ranking second only to National City Bank’s $1.25 billion. Wiggin maintained his position as chairman of the board of directors over the combined company.
The well-connected Gates McGarrah, chairman of the board of the Mechanics and Metals National Bank, became chairman of the executive committee of Chase. In addition to his many prominent local positions, McGarrah was also a member of the general board of the German Reichsbank, the American director under the Dawes plan, a post from which his international influence would blossom in the early 1930s. In February 1927, McGarrah was appointed chairman of the New York Fed.
Unlike Mitchell, Wiggin cautioned against excess in the mid-1920s, even while engaging in its spoils. Like Mellon and Coolidge, Wiggin was opposed to excessive debt, public or otherwise. In January 1927, he publicly praised the government’s policy of steadily reducing the public debt since 1920, calling it “one of the most wholesome financial developments of the period” in his annual report to stockholders, where he urged “the use of the present Government surpluses in further scaling down the debt.”84
He foresaw something potentially dangerous about the speculative boom and believed that while surpluses existed in banking and other businesses, they should be utilized to pay down federal debt. In early 1927, he had warned that the “revenues of 1926 are probably abnormally great, reflecting, as they do, the incomes of 1925. A great expansion of bank credit was being expended in capital uses and when business activity and speculative enthusiasm were very high. Bank expansion of this kind cannot safely continue and in its absence . . . it is well to use the present surplus . . . in reducing public debt.”85
By the fall of 1929 Chase had acquired six major New York banks, making it the second largest private bank in the world, next to Mitchell’s National City. The rivalry that would reverberate for decades—different men, same pursuit—characterized the relationship of Wiggin and Mitchell, the two outsiders who would fight for their spot in history, on Wall Street, and in the world—and for whom it would all turn out very wrong.
Charles Mitchell, Salesman and Mega-Banker
In 1921, when Mitchell became president of National City, the bank had four offices. Within three years it had fifty, and by 1929 it was the largest distributor of securities in the world, with one hundred branches in twenty-three countries. Its motto was: “When it comes to investing your money, solid facts outweigh whispered rumors.”86 In other words, bank with us—trust us.
Personifying the modern banker-titan, Mitchell aggressively pursued investors as if they were prey. Behind his desk at National City Bank’s headquarters hung a portrait of George Washington, reflecting one of his favorite maxims—that “the typical US system is the concentration of responsibility in the hands of one accountable individual.”87
As compe
titive in his private life as in business, he believed himself to be just such an individual—intoxicated with the game of banking and his prowess at it. Enjoying “exercise and combat,” he kept fit and alert by “frequently walk[ing] from his home at 933 Fifth Avenue to his office at 55 Wall Street,” according to Time.88 Navigating that five-and-a-half-mile walk, Mitchell revealed himself as a precursor to the Wall Street “masters of the universe” portrayed in the 1980s by Tom Wolfe in Bonfire of the Vanities. For a time, he believed himself to be, and was, invincible.
Mitchell sold corporate bonds to a growing investor class at far more than they turned out to be worth.89 In doing so, he made National City a financial supermarket. During the 1920s, its securities arm underwrote more than 150 bond issues, raising nearly $11 billion, or 21 percent of total US issuance.90
In 1928 and 1929, Mitchell (who became chairman in 1929) earned $1.2 million in total compensation, two hundred times the average American’s salary of $6,000.91 His family resided in a six-story townhouse in Manhattan with sixteen live-in servants, plus chauffeurs. He had another mansion in Southampton, Long Island. He earned about $1 million more than Wiggin did at Chase, or Lamont did at Morgan.
In early 1929, Mitchell, a consummate salesman, pushed his employees to sell nearly 2 million shares of National City stock to the public for $650 million. According to Time, “National City through its security affiliate National City Co. had put on the most flamboyant high-pressure bank stock selling campaign in all history.”92
But when the market wobbled in early March 1929, the great bamboozler got scared. All of a sudden, he needed backup to keep his stock price up. But he failed to convince the New York Fed to dump funds into the market to save, among other things, his shares, so he took matters into his own hands. On March 26 he announced, over the Fed’s objections, that he would provide $25 million from his bank, and an additional $5 million if necessary, to keep the escalating call money rate that banks charge on loans to brokers—who, in turn, lend the money to their clients to help them purchase stock—stable at 15 percent, amid fears that it would reach 20 percent. His move suggested he had more information about the true condition of the capital markets than the public.
“So far as this institution is concerned,” Mitchell said, “we feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert, so far as lies within our power, and [sic] dangerous crisis in the money market.”93 Though not with personal money, Mitchell nearly single-handedly kept the party raging. Many leading bankers and industrialists were grateful that his move saved the market and possibly the country’s financial systems.94 A banker had trumped the Federal Reserve.
Mitchell’s tactics didn’t ingratiate him with certain congressmen belaboring under the illusion that the Fed didn’t normally act to the bankers’ benefit. George Norris, a Republican senator from Nebraska, pronounced the obvious: Mitchell was on the side of “the gamblers in Wall Street [and] has shown no sympathy with the Federal Reserve Act. . . . Such defiance of the principles of the act ought not to be countenanced by the board.”95
Senator Carter Glass of Virginia called for Mitchell’s resignation from the New York Fed Board.96 But Mitchell remained.97 The day after his heroics, Mitchell quixotically warned, “I feel that with the immediate pressure passed, the people will do well to bear the credit condition in mind, and in stock activities to see that their margins are maintained and that they lean less heavily upon the credit structure.”98 He knew he had propped up a system that was teetering, if not on the brink of toppling completely.
Mitchell’s solo maneuver worked, temporarily—like the collective efforts of Morgan in 1907. National City shares and the Dow Jones skyrocketed through the spring, summer, and early fall. Mitchell had other motives for his macho antics. He was trying to protect what would have been his coup d’état deal, a page right out of the Wiggin book of major acquisitions, and in pursuit of his rival. He sought to merge National City Bank with the Corn Exchange Bank Trust Company and establish the world’s largest bank. In the deal, National City shares would be used to buy Corn Exchange shares, for which Mitchell had to maintain a price of $450 per share.
This was no small deal. On September 29, 1929, the New York Times prematurely blared the headline “The Ruler of the World’s Largest Bank,” dramatizing the moment that Mitchell discovered he would be the leader of the world’s biggest bank, overseeing what would be $1.73 billion in deposits and 201 branches, 103 of them in New York City.
Mitchell’s proposed consolidation, the fifth major merger in three years, was the culmination of a three-year trend that spawned fifty bank mergers in New York City alone, from which seventeen corporate entities had emerged, cutting competition by 65 percent. Smaller banks would succumb to the big New York banks’ dominance, as would the nation.99 History was clear on this: the big banks won. With consolidation, there would come more deposits, influence, and control. Mitchell knew this. He counted on it.
But when the Corn Exchange price took a dive during the jitters that ultimately led to the main crash, the deal was off. Not even Mitchell’s furious buying through his securities affiliate could sustain it.100 As National City stock plunged and his dreams of becoming a global banking superpower crumbled, Mitchell had other headaches. He couldn’t sell enough shares in his company to meet his personal loan payment to the Morgan Bank. As a result, the House of Morgan temporarily became the second largest stockholder in National City.101 (Mitchell was not alone in owing money to Morgan; even Charles Dawes, the Nobel Peace Prize winner, did, but his ego was prepared to handle it.)
With so much at stake, Mitchell had no choice but to remain the market’s public cheerleader, to try to turn things around by sheer will and showmanship. Despite substantial wobbling, even in early October 1929, Mitchell proclaimed to the New York Times, “The industrial condition of the United States is absolutely sound and our credit situation is in no way critical.”102 It was classic Mitchell salesmanship, the kind for which he earned the nickname Sunshine Charley. And yet the pending market crash was intrinsically connected to the public’s dumping of bonds, stocks, confidence, and trust in the shady securities that Mitchell and voracious bankers had created.
In an October 19, 1929, letter to Hoover on the situation, Lamont tried to both calm him and blame random forces for the market tremors, an excuse that would come up during the investigations and would continue to be used by many bankers and economists whenever meltdowns occurred. Lamont wrote that “every protracted market on either the up or down side of the stock market (or of commodity markets, for that matter) has its excesses.” As a postscript, he noted, “The developments of the last few days in the stock market would seem to indicate that nature is already operating pretty vigorously.”103 In fact, nature had nothing to do with it. This crisis was all about the exploits of man.
All hell broke loose anyway.
CHAPTER 5
1929: THE ROOM AT 23 WALL, CRASH, AND BIG-SIX TAKE
“There is a panic now—among stock gamblers.”
—Senator Carter Glass, October 1929
THE BELLS OF TRINITY CHURCH IN LOWER MANHATTAN CHIMED NOON ON THAT cool, overcast Thursday, October 24, 1929. Their clangs were reminiscent of those that had marked the decade’s start. At the same hour, on September 16, 1920, a wagonload of explosives erupted in front of the Morgan Bank, presumably destined to kill Jack Morgan. Jack survived. Less lucky were the thirty-three civilians killed and more than one hundred wounded.1
Now, as the decade approached its climactic close, Morgan was across the Atlantic in Britain, far from the chaos engulfing the population. It would be Thomas Lamont who would act on behalf of the firm and in shades of its former patriarch to try to save the markets.
Black Thursday, as it would be called, was a day of reckoning: for the stock market, as share prices of companies plummeted in a frenzy of trading; for former President Calvin Coolidge, who had presided over much of the 1920s boo
m; and for recently elected President Herbert Hoover, who had emphasized in campaign advertisements that “the slogan of progress is changing from the full dinner pail to the full garage.”2
More critically, it was a day of reckoning for the “Big Six” bankers, who represented the collision of old and new money, speculative versus productive capital use, and the preservation of power and influence at the epicenter of civilized society. Four of them strode from their nearby offices through teeming crowds toward a spartan yet stately three-story building at 23 Wall Street—the heart and soul of the House of Morgan. Charles Mitchell was the first man to enter the building, the sighting of which set Wall Street abuzz with conjecture. (He had the most to lose.) Just afterward, Al Wiggin walked over from the Chase bank, one block north. He was followed by William Potter, president of the Guaranty Trust Company, and Seward Prosser, chairman of the Bankers Trust Company.3
A day earlier, the stock market had experienced its largest single-day drop ever. Not only shares fell; so did the country’s spirits. The ideal of shared prosperity was shattered. As John Kenneth Galbraith later put it, “By the summer of 1929 the market not only dominated the news. It also dominated the culture.”4 Its subsequent plunge was thus a decline of greater than financial ramifications. Not everyone was in the market, but the mood of those speculating in stocks (fewer than 1 percent of the population) dictated the story of the economy’s endless possibility. The media did their part to stoke the enthusiasm, which in turn fueled their most active manipulators: the bankers, or “operators.” Plus, when stocks fell, so did bonds, and so did people’s ability to borrow money to hire, pay, or sustain businesses.
