by Prins, Nomi
The legendary action that J. P. Morgan had undertaken to “save the markets” more than two decades earlier with a similar group of bankers was foremost in everyone’s mind. Expectations and hopes ran high for a repeat performance.
These 1920s bankers weren’t deer caught in the headlights of market mayhem. They knew much more about why the market was tumbling than the unsuspecting public. They were aware that the margins (or collateral backing loans) they had tried to collect from customers would put many out of business. They understood that inflated stock and bond prices were the result of their words and strategies and how flimsy that kind of support was. Lamont and Wiggin had taken profits on their personal trades. They also knew that international bonds were poorly constructed and backed by shaky collateral.
These men took comfort in knowing that the institutions they represented were deeply interlocked with board memberships and stock ownerships. They might as well have been one big bank, and a bank that contained so much potential for future American financial glory couldn’t—wouldn’t—fail. All they needed was a plan to convince the average American that this “panic” selling was temporary and unfounded. Or so the thinking went.
The Morgan Bank headquarters stood like a fortress, a monolith with nary a signpost to draw attention. The building’s demeanor reflected that of its forefathers: J. P. Morgan and his son, Jack, both of whom were notoriously private. Yet everyone knew the building. It was positioned catty-corner from the New York Stock Exchange, an architectural homage to the Greek Empire and its gods. On that day the exchange was a scene of hysteria; behind its marble pillars an avalanche of stocks was crashing faster than sweaty floor runners could repost prices on the big board.
The nervous financiers marched through Morgan’s entrance, beneath the lobby’s 1,900-piece crystal Louis Quinze chandelier. They rushed to the second floor, where the partners’ enclave was located. There, they assembled before the mahogany rolltop desk of Morgan senior partner Lamont. Usually they were competitors, but today Mitchell, Wiggin, Potter, and Prosser were collaborators. George Baker Jr., vice chairman of the First National Bank, joined the second meeting the group had later that day.
The men formed the core of a powerful Wall Street fraternity named the “Big Six” by Forbes Magazine founder B. C. Forbes.5 They had been schooled at the finest institutions (with the exception of Wiggin, who had entered banking straight from high school); they were members of the most elite clubs, possessors of the most exclusive relationships, and intermarried into the bluest lines of American aristocracy. They represented the heart of finance; their client companies, the arteries. If the heart ceased beating, the arteries would shrivel and die.
Lost in the immediate retelling of the chaos was the notion that the financial havoc, impacting everyone from welders to seamstresses, clerks to drivers, electricians to grocery store owners, was fueled, if not completely then in large part, by these men and the institutions they ran. Such was the glowing aura in which newspapers bathed their actions that day amid banners of “Bankers Halt Stock Debacle,”6 “Business Is Sound, Bankers Declare,”7 and “Banks Restore Stability to Raging Stocks.”8
These men personified the phrase “too big to fail.” Indeed, none of their banks would fail. Instead, they would retain their status and morph into the biggest banks of the twentieth and twenty-first centuries. Their hierarchy would slightly shift through mergers, deaths, and changes in leadership, but their overall influence would remain intact.
It didn’t take long for the Big Six to reach an agreement. This was simple, and it had precedent from the collaborations between the Morgan-led bankers and the Roosevelt government during the Panic of 1907. This time, the bankers tried it without presidential aid first. Money had to be poured into the market. A united front was crucial. Each man would use his customers’ deposit money to bolster the stocks the group was most concerned about. In such times of strife, the best solution was socialistic in nature.
At the end of the meeting, which lasted a mere twenty minutes, reporters crowded the doorway and rushed at the ashen-faced bankers.9 Lamont calmly assured reporters that the situation was under control.10 Though he denied outright stock purchasing, brokerage circles reported that “large orders emanating from these banking interests had been executed on the floor of the exchange shortly after the conference ended.”11
Sure enough, during the afternoon trading session, order appeared to be restored. Ticker machines across the land showed stocks like US Steel rally from 190.5 to 206.12 Disaster had been averted. It seemed that all would be okay. The manifestation of gushes of capital—in whatever form, and under whatever circumstance—was the grease that would keep the wheels of the market turning. Or so it seemed.
Following Lamont’s instructions, the team dispatched financier Richard Whitney, also known as the “Morgan broker” because his brother George was a Morgan partner who pushed business toward his brokerage firm (Whitney, who ran the New York Stock Exchange from 1930 to 1935, later spent three years in jail for embezzlement).13 In what would become one of the most infamous moments in stock market history, Whitney, his Harvard Porcellian Club gold pig’s head dangling from his watch chain,14 descended to the stock exchange floor on a mission to buy massively, beginning with the exchange’s Number Two post, where US Steel was traded.15 “I bid $205 for 25,000 shares of steel!” he yelled, as he started snatching up huge stock blocks to bolster the market. Word traversed Wall Street and the nation that the House of Morgan had come to the rescue.16 Again.
Lamont, Wall Street’s Spokesperson
Substantiating this tone of optimism, the New York Times continued to lionize the top bankers. It was all so 1907. As the paper put it, “Wall Street gave credit yesterday to its banking leaders for arresting the decline on the New York Stock Exchange at a time when the stock market was being overwhelmed by selling orders. . . . The five bankers who met at . . . noon yesterday and again at 4:30 PM following the meeting of the board of the Federal Reserve Bank of New York . . . represented more than $6 billion of banking resources [$80 billion in today’s dollars].”17
Separately, bond prices rose on the rumor that “the Federal Reserve Bank would be forced to purchase government securities instead of bankers’ acceptances.” With the Fed swooping in to buy Treasury bonds in high volume, the prices in the bond market “would turn upward sharply.”18
The next day, conditions appeared even better, as word got out that Baker had joined the five bankers at an afternoon meeting.
But as Forbes later wrote, the Big Six weren’t exactly serene about the situation (which was the only valid explanation for such a quick vote to dump so much money into a plummeting market). “Conditions actually were more precarious at times than the public realized.” Having been taken into the confidence by the Big Six, Forbes reported “there were moments when they were on tenterhooks, fearful that something would happen the next instance to precipitate a total deadlock.” Forbes also claimed that had no concerted action been taken, “the panic unquestionably would have been infinitely worse.”19 Lost in this analysis was the notion that the bankers were coordinating to save the markets they had overinflated to begin with. The Federal Reserve’s actions in buying securities to boost prices also helped promote the illusion of financial health.
If anything, the very public actions of the bankers and the more private (or less widely understood) actions of the Fed served to suck more people into an unstable market. True, if no concerted action had been taken, the loss would have been more immediately shocking; but the slow burn that devastated the population over the following decade was no better.
Black Tuesday
The market dove massively beginning the following week. Mitchell had frantically, and secretly, borrowed millions of dollars from his own bank to support its share price. But National City stock still lost 50 percent of its value on October 29, 1929, as the market crashed amidst frenzied selling, before stabilizing somewhat over the next six months.
Congress vowed to look into the Crash and the bankers’ role in it. Utah Democratic senator William Henry King declared that when Congress reconvened in December, “it will make a searching investigation into our financial system, including the question of credit, the operations of the Federal Reserve System, the field in which investment trusts are operating, the conduct of the New York Stock Exchange and generally those matters which so vitally affect the welfare and prosperity of the people.”22 It would take three years for that investigation to begin.
Meanwhile, Charles Mitchell—not a man to leave the “recovery” of the market to chance—sprang into action. In November 1929, at his urging, the New York Fed eased rates further by purchasing more US Treasury bonds. The action, the second instance of a maneuver later referred to as “quantitative easing,” had the effect of keeping all rates down without the Fed having to lower the discount rate explicitly—which it also did. On October 31, the Fed reduced the discount rate from 6 percent to 5 percent. (Federal Reserve chairman Ben Bernanke did the same thing after the 2008 financial crisis, but he lowered rates further and bought far more Treasury bonds and other securities to keep rates down. In his mind, the post-Crash Fed had not acted aggressively enough. And in the minds of Presidents George W. Bush and Barack Obama, along with many journalists and economists who supported him, Bernanke’s approach to so-called quantitative easing saved America from a second Great Depression—though one could reasonably argue that providing artificial support is not the same as stabilizing conditions.)
By keeping a lid on rates, the Fed rendered money cheap, particularly for the big banks, which had more collateral to pledge than smaller banks did, and thus more access to that money. But even though a pronounced credit crunch emerged, the banks didn’t lend what they borrowed cheaply to the public for productive uses. They held onto it in desperate self-preservation mode. (This action was also repeated during the 2007–2008 financial crisis, which precipitated five years—as of the writing of this book—of the Fed’s 0 percent interest rate policy for the big banks, which would restrict lending it forward to the population.)
By November 1929, the New York Fed had increased its discounts for member banks by $150 million and purchased $150 million of government securities in the open market to further reduce rates.23 It remained selective in deciding who to help more explicitly. Relationships and positioning mattered. The amount of money lent to member banks—like the Big Six—was increased, but nonmembers were left to fail. The Fed’s policies may not have been deliberately constructed to cause thousands of nonmember firms to fail, but they nonetheless had the consequence of benefiting the member banks the most—with the largest member banks gaining the most favor.
In the process, the larger banks ate up the smaller ones like crows at a kill: taking them over and using their deposits as additional survival fuel. The Fed commended their strategies of taking over the loans of their smaller brethren. During the week ending October 30, the loans and investments of New York City member banks had increased by $1.4 billion, largely because they had taken over a large part of the loans in the call loan market, which had previously been made by out-of-town banks and nonbanking lenders, who withdrew funds from the market.24
That small local and state (nonmember) banks were left to die while larger ones enjoyed the benefits of the Fed’s benevolence is a major overlooked reason for the length of the Great Depression. People saw their deposits shut off to them at the smaller banks that collapsed, which hurt rural communities disproportionately. Even during recovery times, their trust in the system remained shattered.
By mid-November 1929, Lamont and other financial leaders had declared the crisis fully behind them. After they met on November 15 at the Morgan Bank for a follow-up conference, the New York Times claimed, “The bankers disclosed no reports of any serious difficulties or of any weak situations.” The paper went on to say that Lamont, acting as spokesman for the financiers, “gave the impression that the efforts to stabilize the market were industry-wide, not limited to the banks represented by the group of six,” and that “the other banking institutions of the city have rendered most effective cooperation throughout the emergency and have been in constant touch with the group.”25
President Hoover was personally uncomfortable with the power that the bankers had displayed and been praised for. But he was hard-pressed to determine the best course of action. He decided to assemble his own group of industry and financial leaders to discuss strategies for stabilizing the economy. Though hesitant at first, Hoover soon decided that he needed a stronger alliance with the bankers to secure future calm. Four bankers were selected to participate in a conference held in Washington on December 5: Al Wiggin; Arthur Reynolds, chairman of Continental Illinois Bank and Trust of Chicago; John Scott, president of the National Bank of Houston; and Herbert Fleishhacker, president of Anglo & London Paris National Bank of San Francisco.26
Hoover’s meeting with the bankers was later described by Galbraith as a “no-business business meeting.” Galbraith wrote that President Hoover “was also conducting one of the oldest, most important and unhappily, one of the least understood rights in American life. This is the right of the meeting which is called not to do business, but to do no business . . . to create the impression that business is being done . . . to provide . . . the illusion of importance.”27
Wiggin, Acquirer and Deceiver
The top bankers found ways to make their personal losses work for them. One strategy was tax evasion (even in the Mellon era of lax tax policy, evasion was a useful ploy). Wiggin made the most money from this maneuver. His secret was the creation of shell companies; he established six private corporations, three in the United States and three in Canada (which would be discovered during the Pecora hearings) to hide his wealth before the Crash.28 During the bull market, he had organized investment pools that bet on shares of Chase Securities and Chase National Bank to inflate their values. He also cut some of his friends in on the action, and made sure that everyone borrowed from Chase to pay for their holdings. His family extracted $8 million of loans from Chase, even though they could have afforded to buy stock without the loans.29 They used those loans to purchase more stock to inflate its values further.
Wiggin knew he was covered no matter what happened. Shortly before the Crash, he shorted shares in his own bank by borrowing shares from various brokers at prices he anticipated would fall, at which time he would buy the shares in the market at lower prices and return them to the brokers, making money on the difference. When the Dow stood at 359 on September 23, 1929 (the market had topped out twenty days earlier at 381), he placed what would be a hugely profitable bet that Chase’s stock would fall.30 He might have united with the rest of the Big Six to save the markets after the meeting with Lamont, but his short would net him a tidy fortune.
Before shorting those shares, Wiggin executed another profitable and shady strategy, using his bank’s funds to plump the shares up. He placed $200 million of his depositors’ money into trusts that speculated in Chase stock, thus participating in the very pool operations that artificially boosted its price during the run-up to the Crash. He pocketed $10.4 million from these trades, including $4 million from shorting the shares he drove up (after he drove them up) during the two-week period preceding the Crash.31 His justification for selling his own shares while Chase Securities was pushing customers to buy them was that the price was “ridiculously high.”32 He had, in effect, bet against all the other Chase shareholders who had trusted in his hype about the firm.
As the decade counted down its final minutes, the New Year’s Eve parties held in the midst of the glittering business and banker community flowed with
prohibited elixirs, lavish gaiety, and sumptuous feasts. In the Grill Room at the Roosevelt Hotel in New York City, known as “the Grand Dame of Madison Avenue,” the wealthy clanked their champagne flutes at midnight to the strains of Guy Lombardo’s first live rendition of “Auld Lang Syne” (which became an annual tradition).33
The ditty blared on radios across the land. Relief mixed with exhaustion and a tepid, manufactured optimism punctuated the close of the 1920s. On December 5, 1929, speaking at a Chamber of Commerce conference, President Hoover had said, “The cure for such storms is action; the cure for unemployment is to find jobs.”34 A defiant President Hoover, a nonintrospective Treasury Secretary Mellon, and the Big Six allowed themselves to imagine they had dodged a bullet.
But the worst was yet to come. The country would plunge into a Great Depression, a third of the nation’s banks would close, and unemployment would rise to capture one of every four employable citizens.
CHAPTER 6
THE EARLY 1930S: TENUOUS TIMES, TAX-EVADING TITANS
“We are thoroughly justified in saying, ‘Business as usual.’”
—Albert Wiggin, chairman of Chase National Bank, January 13, 1930
THE 1930S BEGAN ON THE FALSE NOTE OF ECONOMIC SECURITY WITH WHICH the political-financial alliance had capped off the 1920s. After the hysteria around the Crash subsided, President Hoover caught his breath. He could briefly push away doubts about his ability to extend his party’s leadership into his second term. Most of the Big Six were equally relieved that their collaboration to save the markets, buoyed by the staunch support of the White House and Treasury Department and abetted by the Federal Reserve, had turned the tide back to one of unbridled opportunity.
