John Brooks chronicles the 1920s bull market, its key players including Richard Whitney, the aftermath following the Great Crash of 1929, and how the events of that era transformed Wall Street.
The Notes
- “Bull markets create heroes and have a wonderful way of covering up mistakes, and worse.” — Richard Lambert (via the Forward)
- On September 16, 1920, a bomb went off at Wall and Broad, the financial center of the country. At the intersection sat the New York Stock Exchange, J.P. Morgan & Company, the Bankers Trust Company, and the U.S. Assay Office. Forty people would die from the explosion, with close to 300 more injured. Windows were blown out, the building’s facades were damaged, and a few scars still remain. And on the 17th of September, the Stock Exchange opened at its usual time, without panic.
- The recession in 1921 ended in the fall and began a boom in the economy.
- The Fed’s discount rate would fall from 7% in 1921 to 3% by 1924.
- Auto sales rose from 1.2 million to 3.6 million annually between 1921 and 1923. Total cars on the road would almost triple from 1921 to 1929. Auto companies were the innovation of the time, transformed the economy, and fueled the decade of great prosperity. General Motors, Fisher Body, Du Pont, and Yellow Cab became the Four Horseman of the stock market boom.
- Yet, from 1923 to 1929, an average of two banks failed per day and a third of Americans earned less than $2,000 per year.
- “Unrestrained euphoria and bland over-confidence, we tend to forget, have their inescapable opposite side. For every buyer of stock there is a seller; for every purchase that leads to a profit there is a sale that leads to the loss of a profit that might have been. Many people watch the prices of stocks they have recently sold more closely than the prices of those they still own; thus they show themselves to be more involved in fantasy than in reality, more concerned with justifying past actions than in planning future ones. In short, to be human. Think of those who got out of the market, say, in 1926 or 1928, and then all through 1929 (or almost all) cursed themselves every time they scanned the financial pages for letting a fortune slip through their fingers as a result of their foolish prudence.”
- On November 17, 1927, President Coolidge declared the country had entered “upon a new era of prosperity.” It would be the first hint of a belief at the end of cycles.
- Brokers encouraged the new stock buying public with cheap margin loans, set as low as ten to twenty percent of the value of the stock. Total margin loans rose faster than usual starting in 1927.
- In August of 1927 Ben Strong, head of the Fed, lowered the discount rate from 4% to 3.5%. He hoped to head off inflation and help Europe by slowing its outflow of gold to the U.S. It had the effect of adding fuel to a fire. The market took off. So did margin loans.
- Over the course of 1927, margin loans grew from $3.29 billion to $4.43 billion. President Coolidge didn’t think it was a big deal.
- March of 1928 saw more pool operations than ever before, Cadillac sales hit an all-time high for NYC, and the NYSE trading volume on the 27th of the month hit an all-time high. The next two months followed a similar pattern.
- On June 13, 1928, the stock market broke — “Wall Street’s bull market collapsed [yesterday] with a detonation heard round the world… Losses ranged from 23½ points in active Stock Exchange issues to as much as 150 in stocks dealt over the counter…” — New York Times
- It didn’t last. By August the Dow was 20% above the June low. By November, it was 50% above the low.
- The Fed reversed its course in 1928 because of a divided board. They were worried about excessive speculation. The discount rate was hiked from 3.5% to 5% (raised in three stages) and lowered bank reserves available for lending. The effects were felt by late 1928/early 1929. Small business and local government borrowing fell and construction declined.
- Yet, margin loans grew by $1.5 billion in the back half of 1928 and the stock market went on its merry way.
- The typical margin loan from a broker in 1928 cost 8% to 9%. In 1929, loans cost 12% or more. It didn’t curb the speculation.
- All New York banks had to do to make money was to lend it. Banks could borrow from the Fed at 5% and lend it to the brokerages at 10% to 12%.
- January 1929 saw the stock market rise another 20 or 30 points depending on the index of choice. Margin loans increased another $260 million.
- The Fed tried to step in again on February 2nd — “…the Federal Reserve Act does not…contemplate the use of the resources of the Federal Reserve System for the creation or extension of speculative credit.” The banks ignored it.
- The market slumped in March, ending in a minor crash on the 26th. Margin rates spiked to 20%.
- Charles E. Mitchell, president of National City bank, finally stepped in. He made available $20 million, borrowed from the NY Fed no less, to fend off margin calls. The panic was over before it began, margin rates fell to 15% by day’s end, and the market recovered.
- Michell had a vested interest in the market’s speculative mania. He believed the National City bank’s main business was selling securities. National City wasn’t allowed to trade securities, but Mitchell set up a separate company, fully owned by National City, employing hundreds of salesmen to peddle securities. At first, it was foreign bonds, but by the late 1920s, common stocks were their main merchandise. By 1929, salesmen solicited National City depositors and pushed stocks that Mitchell ran pools in, as well as the stock of the bank.
- Albert H. Wiggin, president of Chase National bank, was a questionable sort. In July 1929, seeing an opportunity, he sold short over 42,000 shares in the bank he ran. In other words, he would profit off his bank’s collapse. And this was legal at the time. He made over $4 million on the trade and the bank’s board gave him a life’s pension of $100,000 per year after he retired in 1932.
- The summer of 1929 was unlike most summers for the stock market. It was filled with new record highs — 34% above the March low. August saw record volume for the month. Brokerage houses were packed. Ticker tapes were wired across the country, in resorts, hotels, and home offices. Over 500,000 people were trading on margin.
- Investment trusts were the fancy new securities pushed on the public. Wall Street supplied the demand for shares with Blue Ridge, Alleghany, Shenandoah, United Corporation, and more. Over $1.5 billion worth of stock in investment trusts issued since January of 1929. The sole purpose of investment trusts were to buy and sell stocks, with leverage of course. Though, in a few cases, it was to create new trusts, issue new shares — trusts within trusts.
- “The market did not all crash at once. Large segments of it had been depressed for a year or more. The 1929 boom was, in fact, quite a narrow and selective one. It was a boom of the handful of stocks that figured in the daily calculation of the Dow-Jones and New York Times indexes, and that was why those well-publicized indexes were at record highs. It was also a boom of the most actively traded stocks bearing the names of the most celebrated companies, the stocks mentioned daily by the newspapers and millions of times daily by the board-room habitués–and that was why it was constantly talked about. But it was emphatically not a boom of dozens of secondary stocks in which perhaps as many investors were interested. As a matter of fact, a good part of the stock market had been more or less depressed all through 1929.”
- The Babson Break. September 5th, Roger Babson made an often repeated remark, “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming.” This time he was quoted on the Dow-Jones financial ticker and the market broke. It would gradually decline through September.
- By October, margin loans were still growing but prices weren’t rising. Finally, the market recovered and by the 10th, the market was back its mid-September highs.
- October 15th, Charles Mitchell — from the deck of an ocean liner — announced, “The markets generally are now in a healthy condition.”
- Irving Fisher added his infamous words, “Stock prices have reached what looks like a permanently high plateau.”
- On October 19th, the market broke again. This time it was a Saturday session.
- On October 21st, a Monday, the chain reaction began. The first round of margin calls went out. It led to forced selling and a decline in stock prices. Rumors of “organized support” spread.
- On Wednesday, October 23rd, trading volume was the second-highest in history — 6,374,960 shares. After the close that day, another round of margin calls went out.
- October 24th, Black Thursday, was the first day of the crash. Volume was so high the ticker tape run until 7 pm, four hours after the market closed.
- A banking syndicate was formed that night to help support the market. The heads of the major banks — Mitchell of National City, Wiggin of Chase, Prosser of Bankers Trust, Potter of Guaranty Trust, Baker of First National, Richard Whitney acting president of the NYSE, and Thomas Lamont of J.P. Morgan — came to an agreement to stop the panic, similar to what Morgan did in 1907.
- Lamont held court with the press on October 25th, “There has been a little distress selling on the Stock Exchange, and we have held a meeting of the heads of several financial institutions to discuss the situation.”
- At 2:30 pm, Richard Whitney strolled onto the Exchange floor and made the most historic trade ever. At Post No. 2 where U.S. Steel traded, he placed a bid for 10,000 shares at 205 (the asking price was below 200 at the time). He did the same at several other posts, placing bids for other blue-chip stocks. His orders tallied up to $20 million over a few minutes. The market rallied to the close. It rallied again on the 26th.
- “The fundamental business of the country…is on a sound and prosperous basis.” — President Hoover, October 25, 1929
- On Monday, October 28th, the stock market decline resumed.
- Black Tuesday, October 29, 1929, was the worst of it. The selling got out of hand. The Exchange was mass confusion. Orders went unexecuted and forgotten.
- A group gathered in secret in the basement of the Exchange to make the decision to close the Exchange or remain open. A compromise was reached. Special holidays (Friday and Saturday) and shortened trading sessions were planned for the following week and eventually extended through November.
- October 30th, John D. Rockefeller Sr. weighed in to help stem the bleeding, “My son and I have for some days been purchasing sound common stocks.” It wasn’t enough.
- November 13, 1929, the stock market finally bottomed for the year. Jesse Livermore said that day, “To my mind this situation should go no further.” By this time, $30 billion dollars of value (out of $80 billion or 38%) had been wiped from stocks listed on the NYSE since September.
- From September to November of 1929, unemployment rose from 750,000 to nearly 3 million, but ironically Wall Street jobs were prospering. The amount of trading volume over those three months kept people employed and firms hiring to handle the paperwork.
- “Edwin Lefèvre quoted an intelligent traveling salesman as saying, “I firmly believe that there isn’t a town of ten thousand inhabitants or over in the United States that hasn’t at least one night club. In the past year and a half I have been in a hundred or more of them, and I’ll swear that nine-tenths of the people I saw were having the time of their lives spending their uncashed stock-market profits. It struck me that these people had acquired the worst habits of the idle rich, without the riches.””
- “Never before has American business been as firmly entrenched for prosperity as it is today… Stocks may go up and stocks may go down, but the nation will prosper.” — Charles Schwab, December 10, 1929
- By April 1930, the Dow would climb 50% above the November 1929 low. It wouldn’t reach that height again until 1954.
- “Normal business conditions should be restored in two or three months.” — Secretary of Commerce, May 1930
- “The worst is over without a doubt.” — Secretary of Labor, June 1930
- “You have come sixty days too late. The depression is over.” — President Hoover, June 1930 — his response to clergymen asking for a public works program.
- From April to September 1931, the stock market fell by 40%, industrial production fell 18%, factory payrolls fell 20%, and construction contracts fell 30%.
- “Early 1932: unemployment above ten million and heading for twelve million, or not quite a quarter of the civilian labor force; industrial production nationally down to half its 1929 rate; industrial stocks listed on the Stock Exchange worth about one-fifth of their value at their 1929 peak; foreign withdrawals of United States gold running at a rate of $100 million a week, and more than a billion dollars’ worth of currency and coin, much of it gold, being hoarded by terrified Americans — in sum, a nation in the throes of economic disaster.”
- With an election on the horizon, Wall Street and short selling become the political scapegoat. Roosevelt would win the election.
- The Senate Banking and Currency Committee began its investigation of Wall Street in March 1932. It continued throughout 1933 and 1934. It eventually brought to light the inner workings of stock manipulation pools, massive public losses, investment trusts, and other seedier aspects of Wall Street.
- Bank runs were becoming common. People feared losing their savings. Bank holidays were being declared in different states. One of the first was Nevada in October 1932. In February 1933, the month before Roosevelt’s inauguration, Michigan, Indiana, Maryland, Arkansas, and Ohio would follow suit. That month, $900 million was withdrawn from banks — about 17% of the currency in circulation at the time. A day before the inauguration, banks remained open in only 10 states.
- Roosevelt’s first act as president was to declare a national bank holiday. He proceeded to push forward the New Deal — National Industrial Recovery Act, the Agricultural Adjustment Act, the Tennessee Valley Authority, the Federal Home Owners Act, the Farm Credit Act, the Banking Act, and the Securities Act — in his first 100 days.
- When the stock market opened on March 15, it ended the day up 15%! On April 20th, it had its biggest day by volume in three years. By July, the Dow had more than doubled since inauguration day.
- Roosevelt’s next target was deflation. He banned the export and hoarding of gold. Then he took the country off the gold standard. His experiment failed and returned to the gold standard in early 1934.
- On February 9, 1934, Roosevelt decided that the regulation of the Stock Exchange was needed. Richard Whitney, as president of the Exchange, was vehemently against it. On June 6, Roosevelt signed the Securities Exchange Act of 1934. It created the SEC and Joseph P. Kennedy, notorious for being a speculator and pool operator, was appointed chairman.
- Richard Whitney:
- Formed Richard Whitney & Company in 1916, which mainly traded for J.P. Morgan & Company through its seat on the Exchange.
- “He lived on a grand scale at his house in New York and on his five-hundred-acre estate near Far Hills, New Jersey, where he rode to hounds, raised champion Ayrshire cattle, and augmented a staff of household servants with a platoon of twelve “outside hands”–herdsmen, grooms, a jockey.”
- He was the vice-president of the New York Stock Exchange and acting-president throughout 1929.
- The news of his “205 for Steel” bid on Black Thursday made him an instant national celebrity.
- He became president of the Stock Exchange in 1930.
- Richard’s brother George Whitney was a Morgan partner.
- Richard regularly borrowed money from his brother and always repaid it.
- He was a sucker for highly speculative stocks.
- In 1923, he bought into Florida Humus Company, which was experimenting in fertilizer, along with Collodial Products Corporation of America. Both were lottery stocks. When both failed to pay off, rather than cut his losses, he doubled down. The money he threw into the stocks was borrowed from his brother.
- In 1928, he had outstanding personal loans of $590,000 ($340,000 from his brother) pumped into the two long-shot stocks.
- In February 1929, he borrowed another $175,000 from his brother to put into the Florida investment. In March, he came back for another $500,000 under the guise of buying an additional seat on the Exchange.
- By 1934, he was borrowing less from his brother and more from others. And he repeated his past mistakes.
- His new speculation was Distilled Liquors. The repeal of prohibition in December 1933 created a boom in liquor stocks. Whitney bought on the way up. At its peak price of $45/share, his position was worth $1 million. Had he sold then, he could have paid off all his debts, except those to his brother. Instead, he held out for a higher price. Two years later, the stock price was down to $11. Whitney stilled owned shares.
- He would “retire” as president of the Exchange in 1935.
- On December 26, 1935, he was named a trustee of the Stock Exchange Gratuity Fund. The fund set aside money specifically for deceased member’s families. It held millions.
- In 1935, he owed almost $2 million in debt — $1 million to his brother, another $500,000 to J.P. Morgan & Company, and the last $500,000 to close friends. He continued to borrow, this time from people who were less than friends.
- It started with a $100,000 loan from a floor specialist on the Exchange, another $100,000 from a Stock Exchange member, and then $150,000 from a prior member, George Bull. Most of it went into Distilled Liquors stock.
- Turns out, Whitney had bank loans against his Distilled Liquor stock. If the stock price dropped too low, the banks would ask for more collateral. So he was propping up the stock price to protect his loans.
- On February 14, 1936, he hit bottom. He pledged bonds, held in his safe and belonging to the New York Yacht Club, as collateral against $200,000 in debt to Richard Whitney & Company. Embezzlement. It wasn’t enough. It also wasn’t the first time. He had done it twice before with funds in his father-in-law’s estate, which he repaid without anyone noticing.
- Rumors of Richard’s out of control borrowing got back to his brother by the back half of 1936. His brother asked for a complete balance sheet for himself and his firm. It was sent incomplete, suggesting he only owed $650,000. His brother cut him a check for that amount. The rumors of Richard’s borrowing continued.
- In February 1937, during a meeting for the Stock Exchange Gratuity Fund, the trustees directed Richard to sell $350,000 in bonds, in order to buy other bonds. He did what was asked but never brought the new bonds back to the Fund. The next month a similar thing happened. And the next month, and so on. By year’s end, over $1 million was missing from the Fund. Richard had pledged it all as collateral against his bank loans.
- By the fall of 1937, Distilled Liquors sat at $9/share. Over 80% of the transactions in the stock were Richard’s. It still wasn’t enough.
- In September 1937 he mortgaged his estate for $300,000.
- Everything came to a head on November 19, 1937. The trustees of the Fund learned about the missing securities and asked Richard to return them immediately. Of course, he didn’t have it. In desperation, he came clean to his brother.
- November 24, 1937, Thomas Lamont cut George Whitney a check for $1,082,000, a loan at 4% interest. George endorsed it Richard, who used it to release the Gratuity Fund’s bonds. Sadly, Richard wasn’t done.
- George Whitney felt it was best if Richard sold his firm. At the time he believed it was worth about $500,000, including the shares in Distilled Liquor. Except, nobody wanted the shares or the firm and Richard was still borrowing to prop up the stock price. The firm was actually insolvent.
- In 1935, the SEC pushed the Exchange to adopt reforms, including a randomly sent questionnaire to its member firms on their financial condition. Whitney & Company was moved to the top of the list in February 1938. Richard left out a few things, which set off an audit of his books.
- On March 3rd, 1938, the Exchange had proof of embezzlement. He admitted everything, tried to convince them to drop the charges, and let him walk away quietly. He went so far as to remind them of what a PR disaster it would be if the former president of the Exchange was caught embezzling client money.
- “Let us sum up in broad strokes, for the astonishing record, Whitney’s true financial condition as of the first week of March 1938. Over the preceding four months he had negotiated, all told, 111 loans aggregating $27,361,500; of this, more than $25 million had been in more or less soundly secured borrowings from commercial banks, constantly turned over as he made new loans to repay those that came due. Apart from this, he owed, entirely unsecured, $2,897,000 to George Whitney, $474,000 to J. P. Morgan & Company, and about an even million dollars to others. He owed borrowed stocks worth about $390,000. Quite apart, then, from the sums he “owed” to the customers from whom he had embezzled, he had managed to accumulate on the strength of nothing, or almost nothing, more than his character and good name net borrowings well in excess of five million dollars.”
- On March 7, 1938, the Stock Exchange’s Business Conduct Committee voted to present charges to the Governing Committee, which voted unanimously that Richard be served, set a hearing on the charges, and notified the SEC. The next day, the news was announced on the Exchange floor and became public. It made front-page news that day.
- He filed for bankruptcy on March 8. The filing showed, despite being well off, he lived way beyond his means.
- He was indicted by the New York Country District Attorney on March 10.
- He was indicted by the New York State Attorney General on March 11. At the bail hearing, Magistrate Thomas Aurelio offered, “My little experience in life has been that it’s a whole lot easier to make money than to hold on to it, even in hard times. I guess that applies to all of us.”
- He was found guilty and sentenced on April 11, 1938, to five to ten years in Sing Sing and ordered never to deal in securities again.
- George Whitney eventually paid back all of his brother’s debts and stolen money. Distilled Liquors went bankrupt.
- Richard was paroled in August 1941.