The City financial establishment kept a wary distance. “Mr. Hatry is very clever, and one or two of the people we know who have had business relations with him have always told us that they have nothing against him,” wrote Morgan Grenfell to its corresponding partners J. P. Morgan & Co. But the letter continued, “He is a Jew. His standing here [in London] is by no means good. We should ourselves not think of doing business with him.” Nevertheless, with his enormous apparent wealth, he was able to induce some of the grandest names in the country to join his boards—for example, the Marquess of Winchester, who could trace his title back to the time of Henry VIII and was holder of the oldest marquessate in the country, was chairman of one of his companies—and no one questioned his financial situation.
In 1929, with grand plans to rationalize the British steel industry, he acquired a major manufacturer, United Steel Limited, for $40 million in what would today be called a leveraged buyout. In June, his bankers withdrew their financing at the last moment. He spent the next few weeks scrambling for cash, even approaching Montagu Norman, for Bank of England help. Needless to say, Norman, who would have found a man like Hatry highly distasteful, refused, telling him that he had paid too much for United Steel. Having borrowed as much as he could against all of his companies, Hatry eventually resorted to petty fraud: forging a million dollars worth of municipal bonds to post as collateral against additional loans.
Early in September, as rumors circulated that he was massively overextended, his companies’ shares plunged, and his bankers called in their loans. Recognizing that the game was up, Hatry went under in true British fashion. On September 18, he called upon his accountant, Sir Gilbert Garney, and told him of the forgery. After hearing him out, Sir Gilbert telephoned his old friend Sir Archibald Bodkin, the director of public prosecutions, to say that he had a group of City men who wished to come in to confess to fraud of a “stupendous” magnitude. Sir Archibald, after hearing that the sum involved was as high as $120 million—equivalent as a percentage of the British economy to the Enron imbroglio of 2001 in the United States—arranged for them to turn themselves in at his office at ten o’clock the next morning. Hatry duly arrived the following day, confessed to his crimes, and was remanded in custody.
When New York opened on Friday, September 20, the market faltered, losing 8 points to close at 362. The following week the Bank of England, fearing that sterling might be imperiled by Hatry’s collapse, raised interest rates to 7.5 percent and the market tumbled a further 17 points.
Because the many British investors who had lost money with Hatry were forced to liquidate their U.S. stock positions and began pulling their money out of the New York brokers’ loan market, the Dow came under mounting pressure, falling another 20 points over the week of September 30 to 325. In the space of two weeks, it had given up the gains of the previous two months. However, so far the market crack, while vicious, was not out of the ordinary. Indeed in the week of October 7 it surprised everyone by rallying 27 points. The Dow thus began the week of October 14 at around 350, a little less than 10 percent below its all-time highs.
On Tuesday, October 15, economist and market pundit Irving Fisher, in a speech that would go down in history for its spectacularly bad timing, threw his normal caution to the winds, with the declaration, “Stocks have reached what looks like a permanently high plateau.” Among the reasons he would later cite for this optimistic forecast were the “increased prosperity from less unstable money, new mergers, new scientific management, new inventions” and finally, Fisher being Fisher, he could not resist adding, on account of the benefits of “prohibition.” The market began to sag once again—dropping 20 points the next week and another 18 points in the first three days of the week after. It was by now back to 305, having lost about 20 percent of its value since the September peak. So far, however, there had been no real reason to panic.
Another victim of bad timing was Thomas Lamont of J. P. Morgan & Co., who chose the weekend of October 19 to send Hoover an eighteen-page letter. “There is a great deal of exaggeration in current gossip about speculation,” he warned the president. Indeed, he suggested that a certain amount of speculation was a healthy way of engaging the American public in the benefits of owning stocks, in the same way that “a jaded appetite was sometimes stimulated by a cocktail to the enjoyment of a hearty meal.” “The future appears brilliant,” he wrote, and vigorously urged the president not to intervene. The letter is now in the presidential archives with the phrase “This document is fairly amazing” scribbled by Hoover across the top.
On Wednesday, October 23, quite out of the blue, a sudden avalanche of sell orders, the origin of which was a complete mystery, knocked the market down by 20 points in the last two hours of trading. The next day, soon to be known as Black Thursday, saw the first true panic. The market opened steady with little change in prices; but at about 11:00 a.m, it was blindsided by a flood of large sell orders from all around the country, rattling out of such diverse places as Boston, Bridgeport, Memphis, Tulsa, and Fresno. Prices of major stocks started gapping lower. During the next hour, the major indices fell 20 percent, while the bellwether of speculation, RCA, plunged more than 35 percent. Adding further to the panic, communications across the country were disrupted by storms, and telephone lines were so clogged that many thousands of investors could not get through to their brokers.
Rumors of the turmoil spread quickly through the city, and by noon, a crowd of ten thousand sightseers, attracted by the reek of calamity, had gathered at the corner of Broad and Wall, just opposite the stock exchange. Police Commissioner Grover Whalen dispatched an extra six hundred policemen, including a mounted detail, to keep order and rope off the crowd from the entrance to the stock exchange. A gaggle of newspaper photographers and film cameramen collected on the steps of the Subtreasury Building to document the scene.
A little after noon, the barons of Wall Street—Charles Mitchell of National City Bank, Albert Wiggin of Chase, William Potter of Guaranty Trust, Seward Prosser of Bankers Trust, and George Baker of First National—were seen pushing their way through the crowd into the front door of J. P. Morgan & Co. at 23 Wall Street. After a mere twenty minutes, they emerged grim faced and left without speaking to reporters. A few minutes later, Thomas Lamont appeared and held an impromptu press conference in Morgan’s marble lobby.
Looking “grave” and “gesturing idly with his pince-nez as he spoke,” he began by announcing, “There has been a little distress selling on the Stock Exchange.” Though he was only trying to steady the market’s nerves, this was a remark that would go down in history as a classic, forever mocked as an embodiment of Wall Street’s capacity for self-delusion and obfuscation. “Air holes” caused by a “technical condition” had developed in the market, asserted Lamont. The situation, he assured his listeners, was “susceptible of betterment.”
What he did not announce was that the six bankers had agreed to contribute to a pool that would provide a “cushion” of buying power to support stock prices. At 1:30 p.m., Richard Whitney, president of the stock exchange—brother of Morgan partner George Whitney and himself stockbroker for the company—strode confidently onto the crowded floor of the exchange and placed an order for ten thousand shares of U.S. Steel at 205, 5 points above the price of its last sale. He then went from one post to the other, sprinkling similarly huge orders for blue chips—at a total cost of between $20 and $30 million. To the accompaniment of a chorus of cheers and whistles from the floor, the market rallied dramatically and by the end of the day was off a mere 6 points. Though stocks had taken comfort from the rescue operation, even as the market was rallying that afternoon, Lamont was closeted with the governors of the exchange to warn them that the bankers’ support was limited: “There is no man or group of men who can buy all the stocks that the American public can sell.”
While the private bankers were throwing the market this life buoy, the central bank, the Federal Reserve, was paralyzed by dissension. To try to ease condi
tions that morning, the directors of the New York Fed had voted to cut its lending rate from 6 percent to 5.5 percent, only to have the decision vetoed from Washington by the Federal Reserve Board. The latter spent the day closeted in meetings at its offices in the Treasury Building, next door to the White House. At 3:00 p.m., Secretary of the Treasury Andrew Mellon joined the conference, which broke up at 5:00 p.m. with no official announcement. A “senior” Treasury official did speak, however, to reporters off the record, expressing the view that the market had broken under the stress of “undue speculation” and that the harm done, after all, only constituted “paper losses,” which would not prove “disastrous to business and the prosperity of the country.”
The newspapers reported next day that heroic action on the part of the bankers had successfully halted the panic. The Wall Street Journal carried the headline “Bankers Halt Stock Debacle: 2 Hour Selling Deluge Stopped After Conference at Morgan’s Office: $1,000,000,000 For Support.”
Though the amount committed by the Morgan-led consortium was nowhere near that amount, the market was buoyed by the apparent success of the “organized support” and stabilized over the next two days, though trading remained heavy. Rumors circulated that the bankers felt sufficiently confident to begin disposing of the stocks they had acquired on Thursday at a small profit. But late on Saturday, the market began to fall again.
The “second hurricane of liquidation” roared in on Monday, October 28—Black Monday. It came from every direction: demoralized individual investors, pool operators liquidating, Europeans throwing in the towel, speculators forced to sell by margin calls, banks dumping collateral. Investors, who had originally bought stocks only because they saw prices rising, now sold them because they saw prices falling. By the end of the day, 9 million shares had changed hands and the Dow was down 40 points, roughly 14 percent, the largest percentage fall in a single day in the market’s history—$14 billion wiped off the value of U.S. stocks.
Reporters, remembering all the various times in history that the U.S. banking system had been saved from the Morgan offices, were camped out in front of 23 Wall Street. At 1:10 p.m. Mitchell of the National City Bank was seen entering the building. The market immediately rallied. But there was no sign of the other bankers or any evidence of any further “organized support.” It would later turn out that Mitchell was personally overextended and, desperate for cash, had gone in to negotiate a private loan for himself.
The press was so fascinated by the very conspicuous comings and goings of bankers to and from “No. 23” that they failed to recognize that the true locus of power no longer lay with Morgan but had shifted three blocks north to the offices of the New York Federal Reserve at 33 Liberty Street. The real hero of the day was not one of those bankers shuttling in and out of Morgan’s offices but George Harrison of the New York Fed.
Stock market crashes during the nineteenth and early twentieth century had invariably been associated with banking crises. The market and the banking system were too interconnected. Because the big New York City banks held their reserves in the form of call loans to stockbrokers, a collapse in stocks inevitably raised concerns about the safety of one bank or the other, often leading to a run on the system, which in turn led to a withdrawal of liquidity from the market, which in turn drove the market down further. The Fed had been created in part to break that nexus and Harrison was determined to prevent the market turmoil from widening into a full-scale financial crisis. He spent the whole day in close contact with the heads of the city’s major banks.
The country’s money center banks were confronted with a potentially life-threatening hit. Many of the largest traders on Wall Street, especially the pool operators, held gigantic leveraged positions in the stock market that had been financed by brokers’ loans—in some cases as much as $50 million, some of which had come from banks. The danger was that as the market fell, brokers, frantic to recoup their loans, would be forced to dump the stocks they held as collateral, creating further declines in the market and intensifying the vicious cycle of selling.
Rebuffed the previous Thursday by the Federal Reserve Board, Harrison now took matters into his own hands. That night, Wall Street bankers were invited to a dinner in honor of Winston Churchill at the Fifth Avenue home of Bernard Baruch. Despite the days’ events, the general consensus among the financiers was that stocks were now undervalued. Mitchell even managed to raise a laugh when in his toast to the British visitor he addressed the company as “friends and former millionaires.”
Down on Wall Street the lights in the skyscrapers glowed far into the early hours as exhausted clerks and bookkeepers tried to tally their records after a day of unprecedented trading. Meanwhile, at the Fed’s offices on Liberty Street, Harrison and his staff were developing a plan to inject large amounts of cash into the banking system by buying government securities. Fortunately, there was no time to consult the Board in Washington. He barely managed to reach two of his own directors, and then only at 3:00 a.m., to secure their approval. Early the next morning, even before the market had opened, the New York Fed injected $50 million.
That day, which came somewhat unoriginally to be christened Black Tuesday, saw no letup in selling. The crowd of ten thousand that again gathered that morning stood in hushed awe, fully aware that they were “participating in the making of history,” and that they were unlikely ever again to witness such scenes. The New York Times man on the spot described Wall Street that morning as a street of “vanished hopes, of curiously silent apprehension, and of a paralyzed hypnosis.” Churchill chose that day to visit the stock exchange and was invited inside to witness the scene. Though he was heavily invested in the market and lost over $50,000, most of his savings, in the collapse, he seems to have responded to his change in fortunes quite philosophically—“No one who has gazed on such a scene could doubt that this financial disaster, huge as it is, cruel as it is to thousands, is only a passing episode. . . .” Commissioner Whalen himself kept a close eye on the market, and the minute he saw prices sagging, had dispatched an extra squad of policemen downtown. The financial district looked like a city under siege.
The bankers’ consortium gathered twice that day. Lamont struck a noticeably less confident note at his next press conference. Their objective was not to support prices, he told the reporters, but to maintain an orderly market. Toward the end of the day, after over 16 million shares had changed hands and the Dow had fallen more than 80 points—it had now lost 180 points, or close to 50 percent of its value in less than six weeks—it seemed as if the selling had begun to burn itself out. In the last fifteen minutes of trading, the market made a vigorous rally of 40 points.
During the day, the New York Fed had injected a further $65 million. The Board, especially Roy Young, was greatly irritated when it found out later that day about Harrison’s show of independence and initiative; his failure to get Washington’s approval first was a clear defiance of established protocol. In response to Young’s rebuke, Harrison shot back that there had never been such an emergency, that the world was “on fire” and that his actions were “done and can’t be undone.” The Board tried to pass a regulation prohibiting the New York Fed from making any further independent transfusions of cash, but questions arose about whether it had the legal authority to do so. During the next few days, there was considerable legal wrangling over the precise jurisdictions of the Board and the New York Fed. Harrison eventually proposed that they postpone the bureaucratic argument over powers and procedures until the crisis was over, agreeing in the meantime not to act unilaterally provided the Board gave him the authority to buy as much as $200 million more in government securities—an arrangement which allowed him to draw on the whole Federal Reserve System rather than the resources of the New York Fed alone.
That evening a somewhat larger group of bankers once again gathered in the library of Jack Morgan’s house at Madison Avenue and Thirty-fifth Street, the scene of his father’s legendary rescue of the New York banking syste
m in 1907. Among them was George Harrison.
With stocks now in free fall, all those who had pumped money into the brokers’ loan market—the corporations with excess cash, foreigners drawn by high rates of interest, small banks around the country—were rushing for the exits. In the days since Black Thursday over $2 billion, about one-quarter of all brokers’ loans, had or was about to be pulled out. This was creating massive additional selling and a scramble for cash that risked toppling the entire financial structure of brokers and banks on Wall Street. In order to forestall this financial fire stampede, with everyone heading for the doors at the same time, some of the bankers proposed to close down the stock exchange as had been done at the outbreak of war in 1914.
The meeting went on till 2:00 a.m. Harrison was adamant. “The Stock Exchange should stay open at all costs,” he told the gathering. Closing the stock market would not solve the problem, only postpone it and, by preventing transactions, might possibly prolong it and force even more bankruptcies. He proposed instead that the New York banks take over a good portion of brokers’ loans from those trying to pull out of the market. By thus stepping into the breach, they would head off panic selling and a complete meltdown. “I am ready to provide all the reserve funds that may be needed,” he reassured the bankers.
Over the next few days, as the Fed did just that, New York City banks took over $1 billion in brokers’ loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a banking crisis. Though the crash of October 1929 was by one count the eleventh panic to grip the stock market since the Black Friday of 1869 and was by almost any measure the most severe, it was the first to occur without a major bank or business failure.
Lords of Finance Page 37
