The Lords of Creation by Frederick Lewis Allen

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The Notes

• “This book is an attempt to tell the story of the immense financial and corporate expansion which took place in the United States between the depression of the eighteen-nineties and the crisis of the nineteen-thirties; to show how profoundly it altered the circumstances and quality of American life, why and how it ended in collapse, and what the collapse meant to all of us.”
• General History
  • U.S. in the 1870s and 1880s ran under the belief in free competition (laissez-faire).
  • Most business in the 1870s were small, localized, with limited competition.
  • Railroad expansion brought growth and competition. That competition led to business agreements to fix prices, share privileges, and cut out rivals.
  • Rockefeller’s Standard Oil Company was one trust of many that formed at the time to control the industry. A sugar trust, rubber trust, whisky trust, and cottonseed oil trust were others.
  • New Jersey passed a law in 1888 that allowed companies incorporated in New Jersey to own stock in other companies. Legal holding companies were born (it was previously illegal for a company to own stock in another company without legislative approval). Forming holding companies became an easy way to get rich quickly.
  • “The promoter made a business of bringing together the owners of competing concerns. He persuaded them to exchange their stock (on very generous terms) for the shares of a new holding company; he distributed the rest of the bonds and shares of the holding company to an eager investing public; and then he often so manipulated these shares on the stock exchanges as to reap fortunes for all those on the inside, including himself.”
  • “Watering” Stock – selling new stock issues at an inflated price relative to its value. It got its name from Daniel Drew who, as a young cattle driver, would give his cattle insufficient water as he drove them from Upper New York state down to New York City, only to let the cattle drink their fill, and put on weight, at the trough before they were weighed. Later, as railroad baron, Drew realized he could make more money by printing extra stock and selling it which he called “watering the stock.”
  • The Sherman Act was passed in 1890 as the outcry grew against monopolies. The Act did little to stop the trend of bigger, nationalized businesses. As transportation and communication linked the country, business grew with it.
  • Social discontent between farmers, workers, and business grew. Farmers fought against high cost of shipping and supplies. Workers fought against 12-hour days, low wages, poor conditions, and exploitation. Muckraker journalism began.
  • By 1890 railroad companies had overbuilt and overloaded themselves with debt.
  • By 1894, 61% of railroad shares paid dividends and 25% represented bankrupt companies.
  • The panic of 1893 led to a depression that ended with a boom in 1897.
  • The U.S. was becoming a financial power.
    • 1899 to 1902 the New York banks took on over $200 million in British loans to fund the Boer War.
    • U.S. businesses looked more at expanding into foreign markets than U.S. markets.
  • 185 holding companies existed in 1900 with a total market cap of $3 billion — represented one third of the capitalization of all manufacturing companies in the U.S.
  • “At certain rosy seasons hope can be sold for cash in the speculative markets…”
  • “I feel bound in all honor, when I reorganize a property and am morally responsible for its management, to protect it, and I generally do protect it.” — J.P. Morgan
  • President McKinley was shot on September 6, 1901 and died September 14. Teddy Roosevelt became President.
  • “I must frankly tell you that there is a feeling in financial circles here that in case you become President you may change matters so as to upset the confidence…of the business world, which would be an awful blow to everybody—the West as well as the East—as that means tight money.” — Teddy Roosevelt’s brother-in-law
  • “A curious phenomenon is the Wall Street mind, which can look with equanimity upon the building of over-capitalized financial structures like those of Morgan and Harriman, to say nothing of the manipulations of men like John W. Gates and the speculative excesses and raids which lead to panics, and then tremble at the least suggestion that the stability of these structures may be examined and their legality possibly put to the test!”
  • In 1901 few people in the U.S. were risking their money in the stock market — estimated less than one-tenth the number than in the late 1920s (which was also small compared to today). Only a handful of newspapers printed stock prices.
  • From 1902 to 1904 the market suffered from what Morgan called “undigested securities.” Too many new stocks and bonds (from new holding companies) had been pushed onto the public that it overwhelmed demand.
  • In 1903, the directors of the First National Bank of Chicago incorporated the First Trust and Savings Bank to skirt the laws limiting national banks. Both companies had the same directors and shareholders. It was one example of many to follow.
  • “I can put coffee down again just as easily as I put it down once before.” — Herman Sielcken, the “coffee king”
  • Teddy Roosevelt was elected President in 1904. Contributions from Wall Street elites — Morgan, Rogers, Archbold, Gould, Harriman, and Frick totaled $450,000.
  • The national trend in business was clearly toward consolidation by 1905.
    • Holding companies were the vehicle of choice in New York and Chicago to consolidate all industries — banking, insurance, manufacturing, commodities.
    • J.P Morgan held the largest influence at the time.
    • “Wherever Morgan sits on a board is the head of the table, even if he has but one share.” — Clarence Baron, 1905
    • Most people in the U.S. were ignorant of who the big Wall Street men were.
    • From 1900 to 1904, the Reader’s Guide mentioned Morgan, Baker, Stillman, John and William Rockefeller, Rogers, Harriman, Schiff, Vanderbilt, and Keene in a grand total of 88 lines of text. The 10 most popular politicians were mentioned in 799 lines.
    • From 1925 to 1928, the Reader’s Guide mentions changed slightly. Ten leading businessmen (Morgan, Lamont, Kahn, Young, Mitchell, Wiggin, Sweringens, Insull, Ford, and duPont) were mentioned in 226 lines of text (Henry Ford was mentioned in 150 of those lines). Ten politicians were mentioned in 1,503 lines.
  • Electric Bond and Share Company was the holding company created to control the interests of General Electric utilities in 1905.
  • “There are few things as dull as greed.”
  • “Religions tend to take on the color of the communities in which they are practiced; and in the American community other philosophies than that of Christ had absorbed and diluted the Christian teachings. There was the Benjamin Franklin philosophy of frugality. There was the Puritan philosophy of sobriety, continence, and Sabbath observance. There was the laissez-faire tradition of business competition as a hard-fought battle without fear or favor. So completely had such philosophies and traditions been taken into the American blood-stream, as it were, that if an aggressive business man worked hard, saved his pennies, refrained from alcohol and adultery, wore a somber suit to church every Sunday, and put money in the plate, he was well on his way to be a model of Christian conduct. (In the Episcopal Church there was somewhat less emphasis upon a bleak sobriety than in the evangelical churches, but the rest of the formula remained virtually intact.) These were the accepted virtues, and the Bible was an arsenal from which one might select rhetorical ammunition with which to defend them.”
  • “Bertrand Russell has said somewhere that any man of ordinary sensibility can sympathize with suffering that is visible to him, but only a man of exceptional imagination can be wrung by suffering at a great distance from him. It must be remembered that the damage done in the speculative campaigns of Wall Street, in the watering of stock, in outrageous reorganization plans, in the exploitation of labor, was usually remote from those who did it. When a man unloaded stock upon the public, for example, he did not see his victims face to face. The whole operation, performed in brokers’ offices and reported upon a mechanical ticker-tape, was anonymous and impersonal. Often the damage was remote in time as well as in space.”
  • “In competitive business, bad practices tend to drive out good.”
  • “The corporation lawyer was the efficient pathfinder of circumvention. (Mr. Dooley once said that the corporation lawyer could transform a law which had been designed as a stone wall into a triumphal arch.)”
  • On the laissez-faire business ideology:
    • “The earliest Americans had fled from Europe to escape governmental pressure; the pioneer had been perforce a rugged individualist; the belief had almost inevitably grown up that government interference with private business was the beginning of tyranny, and that to resist the intrusions of government into economic operations was to play the part of a conserver of American liberties. The law of supply and demand offered all the regulation which an American would tolerate. One’s business was one’s private affair, like one’s diet or one’s underclothes.”
    • “Add to this idea the financier’s scorn of politicians as purchasable commodities, as men ignorant of business who inflamed the envious and still more ignorant mob; add to it also a feeling that the man who had won out in the great game of competitive business had a right to the prize, and that those who wanted to change the rules were simply trying to win by cheating.”
  • “No further reminder is needed of the fact that in a democracy like the United States, in which there are no hereditary titles to provide a semblance of stability, the upper class is highly fluid.”
  • “The hordes waiting to be admitted to society, whether in New York, Newport, Long Island, Aiken, Tuxedo, or Lenox, were so numerous, so insistent, so rich, and, on the whole, so agreeable, that there was nothing to do but give up the struggle. And from that time on the men and women who were seen in general society multiplied like germs in a bouillon culture.” — Frank Crowninshield
  • By 1905 to 1906 the market exceeded its previous peak of 1901.
  • “Never did a year close with better record—never did a new year dawn with prospect brighter.… Good times go marching on!” — New York Tribune 1905
  • Life insurance scandals in New York broke in 1905. Officers of insurance companies used company funds to make money for themselves. Money or securities were deposited in banks controlled by the officers for their own ends.
  • By 1905 organized labor and socialist movements were growing. International Workers of the World was formed.
  • 1906 found the world dealing with Russo-Japanese War, the great San Francisco earthquake and fire, the Bank of England warned against lending to New York, and a sagging stock market.
  • 1907 saw market panics around the globe – U.S., Egypt, Japan, and Chile experienced market collapses.
  • “It is a mistake to think of capitalism as a system, in the sense of something fixed: an ancient structure of laws and rules and technics and traditions. It is a living growth, watered by acquisitiveness and constantly putting out new branches as new devices for the accumulation of profits or of power are invented or as old devices are adapted to new uses.”
  • General Motors Company was created in 1908. It was holding company set up by William C. Durant that combined several auto manufacturers. He almost succeeded in including Ford in the combination. Henry Ford demand $8 million in cash and the bankers ruled his company was worth less than that.
  • “It was Morgan’s way to undertake vast projects, to pay round prices for the desirable properties without undue haggling, to finance these lavish purchases by loading down his parent company with debts or with quantities of stock, and to trust to a great expansion of business to provide profits with which to carry the debts and pay dividends on the stocks.”
  • In 1908, George Baker, who ran the First National Bank in New York, created the First Securities Company for the purpose of owning bank stocks and other securities not allowed by national banks.
  • 1911 – Stillman’s National City Bank created its affiliate National City Company for the purpose of owning stocks and other securities.
  • By 1913, 12 national banks around the U.S. had ties to affiliates to skirt the laws tied to national banks and hold stocks and other securities. The affiliates were separate companies from the national banks but with the same board, the same officers, the same shareholders, and the stock could not be sold without also selling the shares of the national bank. It could own stocks of other banks, it could speculate in securities, and it was completely legal.
  • March 4, 1913 – Woodrow Wilson becomes President of the U.S. He set out to lower tariffs, install a Federal income tax, establish a Federal Reserve System, and regulate big business via the Federal Trade Commission Act and Clayton Act.
  • By 1913 state legislatures took up the cause of workers reform first– workers compensation laws, laws regulating work hours for women and children, workplace safety laws, tenement housing laws, minimum-wage laws, public utility regulations.
  • 1914 – Ford announced he would pay workers $5/day. — “it was a spectacular answer—perhaps in its essence the best answer which capitalism could give—to one of the most vexatious questions which were to beset the American economy: how improvements in the technic of production could be made to bring benefit instead of hardship to the masses of the working population. The answer which Ford gave was of course familiar in economic theory and in the oratory of men like Schwab, but not in practice. It was that the benefits of increased efficiency must be deliberately passed on to the consumers—and that the employer’s own workmen are consumers.”
  • July 1914 – WWI broke out and lasted until 1918.
  • 1920 to 1921 saw the worst depression (until the Great Depression.)
  • 1922 – 1929
    • 1922 kicked off the seven-year period known as the Roaring Twenties.
    • “The overwhelming majority of the American people believed with increasing certainty that business men knew better than anybody else what was good for the country, and that the government had better keep its hands off their affairs and thus permit economic nature to take its course.”
    • Laissez-faire principles of business were not entirely back. Tariffs, subsidies, and favorable carve outs were lobbied for by businesses to strengthen their advantage and profits by restricting competition.
    • “Washington and the state capitals were thick with lobbies; to a greater extent than ever before in American history, the process of legislation became a tug-of-war of lobbies, each pulling for special advantages for its own group and special disadvantages for other groups; and even though a hundred lobbyists may agree in devotion to the principle of laissez-faire, if each of them proposes an exception to the principle—just one exception—their combined impact upon Congress or upon a state legislature is likely to result in more laws rather than in less.”
    • “One of the choicest ironies of this period was that many, if not most, of the new measures which interfered with business freedom were passed under the heavy pressure of groups of business men who professed to hate interference.”
    • The federal budget shrank over the period, but state and local budgets ballooned. The growing need for local public services (schools, roads, etc.) expended the total government expenditure from $3.3 billion in 1915 to $11.5 billion in 1929.
    • Enforcing government regulation on businesses became lax. Officials were selected for their party affiliation or pliability. Many knew nothing of the industry they regulated.
    • “There is no lonelier man than a government official who finds himself confronting, month in and month out, year in and year out, plausible arguments for easy interpretation or lax administration of a statute—to say nothing of temptations to close his eyes for a price—and who hears from a forgetful and indifferent public no word of admonition or support.”
    • Public relations teams pushed “good news” stories, ghost-written interviews, and articles to make businesses and businessmen look more favorably in the public eye.
    • Farmers suffered from a deep drop in demand following WWI and massive debts from buying higher priced land and machinery to meet the war demands. Farms were more efficient, more productive, and the oversupply tanked crop prices.
    • The economy boomed for several reasons:
      • New industries like automobiles and radio gave consumers new ways to spend money and created extensive growth.
      • A construction boom occurred from skyscrapers, suburban growth, and Florida land boom.
      • Credit ballooned — consumer credit through mortgages, installment plans and buying stocks on margin.
      • Manufacturing efficiency rose due to steam and electric power, research and consultants, scale and mass production. Output per worker increased by 3.5% each year or 19% total from 1922 to 1927 (factory worker earnings increased 2.4% each year). The number of factory workers stayed relatively flat.
      • Industrial company profits rose by as much as 9% per year from 1923 to 1927.
      • The number of service jobs increased: gas station attendant, teachers, brokers, insurance sales, shop sales.
    • “It was the innocent delusion of the American public during the seven fat years that inordinate profits can come out of thin air.”
  • 1929 Yearly Income Breakdown (via America’s Capacity to Consume)
    • 2.4% of U.S. population = Family income over $10,000 (singles income over $5000)
    • 19.6% = Family income of $3,000 to $10,000 (singles income of $1,500 to $5,000)
    • 78% Family income less than $3,000 (singles income less than $1,500).
    • Of the 78%, over half the families had incomes less than $1,500 or singles less than $750 per year.
  • “Legal institutions, legal interpretations, move slowly; ideas sometimes move very rapidly.”
  • Business in 1929
    • Over 300,000 non-finance companies in the U.S.
    • The largest 200 non-finance companies controlled about half the corporate wealth and did 40% of overall business.
    • The largest 200 non-finance companies grew from 2.5 to 3 times faster than smaller companies.
    • Banks
      • From 1922 to 1929 close to 50 small banks closed each month. The total number of banks declined by close to 5,000 from 1920 to 1929.
      • The number of bank branches grew from 1,280 in 1920 to 3,516 in 1930.
      • By the end of 1929, the 250 largest banks controlled 46% of total resources.
    • Insurance
      • The 3 largest insurance companies in 1930 — Metropolitan, Prudential, and New York Life — each had assets greater the all life-insurance companies combined in 1900.
    • Chain Stores
      • Boom in grocery, cigar, and drug store chains.
      • Accounted for 20% of retail sales in the U.S. in 1930.
    • Automobiles
      • 1923 – 6 companies did 85% of sales.
      • 1930 – 3 companies did 83.3% of sales (Ford, General Motors, and Chrysler).
      • 1934 – 3 companies did 90.8% of sales.
      • March 1935 – 3 companies did 93.4% of sales.
    • Size and scale held a massive advantage over competition when efficiently managed.
    • Over 1,200 mergers, involving over 4,000 companies occurred from 1919 to 1928.
    • Of the 574 companies trading on the NYSE
      • 92 were solely holding companies,
      • 395 operated as operating and holding company,
      • 86 were operating company.
    • 75% of public utilities were under the control of 9 holding companies in 1930.
    • 20% of railroad miles were controlled by holding companies in 1930.
    • Shareholder Changes
      • US Steel =28,000 shareholders in 1910, 95,000 in 1920, 145,000 in 1930, and 239,000 in 1934.
      • The 20 largest holders of US Steel only owned 5.1% in 1929.
      • Pennsylvania Railroad = 65,000 in 1910, 117,000 in 1920, and 207,000 in 1930.
      • The 20 largest holders of Penn Railroad owned 2.7% in 1929.
      • AT&T = 41,000 in 1910, 139,000 in 1920, 567,000 in 1930, 675,000 in 1934.
      • The 20 largest holders of AT&T owned 4.1% in 1929.
      • Similar trends were common across other companies.
      • Some companies sold stock to workers. Public utilities sold stock to customers.
    • Management Used Several Devices to Hold Control
      • Annual Meetings – held in small, out of the way towns that were inaccessible to most shareholders.
      • Voting Trusts – empowered a small group to elect directors for a term of years.
      • Non-Voting Stock – issued to the public while management controlled all voting stock.
      • Disproportionate Voting Power – issued stock held by management with 5x, 10x, or 20x the voting power of the common stock.
      • New Incorporation Laws – gave directors more power to do things.
      • Incorporate in Delaware – the state changed its laws in the late 1920s that gave directors extra privileges. By the end of the decade, some 10,000 companies were registered to reside on the 10th floor of the Industrial Trust Building in Wilmington, Delaware.
      • Banker-Controlled Reorganization – bank directors dictated the structure of a firm when it came out of receivership.
      • Pyramiding – used holding companies to buy control of operating companies or other holding companies.
      • Takeaways:
        • “Some of the devices which were now permitted and were used on a large scale made for general financial instability. This was conspicuously true of the holding-company pyramid, and to a lesser degree was true of holding-companies in general, of investment trusts, and of other financial superstructures of the new-era model.”
        • “The general process of concentration made for irresponsibility of management, because again and again the power which men wielded far outreached their personal stake in the enterprises which they controlled.”
        • “Finally, the concentration of so much power in a few hands had virtually the effect of setting apart a special economic class—a class of insiders, of economic rulers, almost as far removed, in opportunity and interest, from the ordinary stockholders—the proxy-signers—as the office executives were removed from the day laborers.”
  • Bank Failures 1923 to 1929
    • 1923 – 648 failures
    • 1924 – 776 failures
    • 1925 – 612 failures
    • 1926 – 956 failures
    • 1927 – 662 failures
    • 1928 – 491 failures
    • 1929 – 642 failures
    • A total of 4,787 banks failed. None were big metropolitan banks. Most were small banks due to mortgage/debt delinquency on farmland during the WWI land bloom and Florida real-estate boom. Lack of loan diversity.
    • Total commercial loans remained relatively flat during the 1920s boom because money could be easily raised through security sales.
    • Total Federal Reserve member bank loans and investments increased from $24 billion in 1922 to $35.5 billion in 1929. The increase was due to investments in securities ($3 billion) securities lending (margin loans of $5.5 billion), and city real estate loans ($2.75 billion).
  • 1934 – Upton Sinclair failed at a run for Governor of California pushing a socialist policy. It was close.
  • American people didn’t want to change the system, they wanted jobs, money, and hope.
  • “Life is seldom altogether intolerable for the financial and business community when it sees plus signs after the names of its favorite securities in the afternoon papers.”
  • National City Company & Other Investment Affiliates
    • Was the securities affiliate of National City Bank.
    • 1916 – Charles Mitchell took control.
    • 1921 – Mitchell named the president of National City Bank after James Stillman left and ran both companies.
    • Mitchell created a sales force to sell stocks and bonds to investors.
    • Had 350 salesmen across 58 cities by 1929.
    • “Instead of waiting for investors to come, he took young men and women, gave them a course of training in the sale of securities, and sent them out to find the investors. Such methods, pursued with such vigor and on such a scale, were revolutionary.” — Burce Barton on Mitchell’s sales method
    • Ran sales contests to boost results. One contest in September 1929 had $25,000 in prize money for salesmen who earned the most points. A point system was allotted for different stocks.
    • Mitchell’s success at National City Company led other banks to create investment affiliates to get on the sales revenue.
    • Security sales were so good in the 1920s, the affiliates approached companies about issuing more securities. That bled into foreign governments and markets.
    • 1927 – “From the point of view of the American investor it is obviously necessary to scan the situation with increasing circumspection and to avoid rash or excessive lending. I have in mind the reports that I have recently heard of American bankers and firms competing on almost a violent scale for the purpose of obtaining loans in various foreign money markets overseas.” — Thomas Lamont, J.P. Morgan & Company
    • 1927 – National City and other investment affiliates originated 1/6th of security issues.
    • 1928 – Investment affiliates originated 1/3rd of security issues.
    • 1929 – Investment affiliates originated 4/5ths of security issues.
    • National City Company sold over 1million shares of National City Bank through its salesforce.
    • 1934 – Over 1/3 of outstanding foreign securities issued and sold to “U.S. investors was in default.
  • 1920s Land Booms
    • “Someone has said that the history of the United States is the story of a gigantic land boom.”
    • Florida Land Boom peaked in 1925
    • “By the time the Florida boom collapsed—with the inevitable result of ruined speculators and dying banks—it had given impetus to a whole series of summer-resort, winter-resort, and suburban boomlets in other parts of the country, similar to it in frenzy, absurdity, and after-effects.”
    • Urban development in skyscrapers and city lots in major cities across the U.S. City real estate loans increased from $1 billion in 1922 to $2.75 billion in 1929.
    • 1930 – Bank of the United States failed. It was the largest bank failure in the U.S. to date. Directors ran separate pool operation, using borrowed money from the Bank, to keep the stock price elevated while they went on a bank buying spree. Most of the bank loans were against real estate ventures in New York. When real estate collapsed, the stock collapsed, and the bank collapsed.
    • “The men who examined the banks of the country after the grand smash of 1933: again and again they had to report that the greatest factor of weakness was the prevalence of real-estate paper in the portfolios of banks.”
  • Security Issuance
    • New security issues rose from 7 billion annually in 1926 to 11.5 billion in 1929.
    • Most companies raised capital by issuing bonds and preferred stocks.
    • Common stocks were mostly reserved for insiders, promoters, investment bankers, for little or no money, who sold it in the open market.
    • Common stock issuance in the 1920s changed as demand grew. Insiders, investment bankers, promoters etc., instead were given warrants. They could sell the warrants for a profit or exercise the warrants for a profit if the stock price rose.
    • “Insiders found themselves in a delightfully favorable position: a sort of heads-I-win-a-lot, tails-I-can’t-lose-much position.”
    • Investment Trusts grew in numbers from 1927 to 1929. The sole purpose of the trust was to own securities of other companies. It became a simple way for Wall Street to issue securities without having to build a new company.
    • Estimated that 60% of issuance in August 1929 was for investment trusts.
  • J.P. Morgan & Company and Kuhn, Loeb & Co. were largest investment banks in the U.S. by the late 1920s.
  • “One of the strange things about the capitalist system in America was that, although it had undergone a revolutionary change as more and more devices were discovered and widely utilized by which the men at the top could acquire power and wealth, it was not really a system at all; not a hierarchy, but a free-for-all-insiders; not an order, but a disorder of irresponsible forces.”
  • NYSE Trading Volume
    • 1910 to 1920 – never higher than 312 million.
    • 1920 to 1924 – ranged from 171 million (1921) to 282 million (1924)
    • 1925 – 452 million
    • 1926 – 449 million
    • 1927 – 576 million
    • 1928 – 920 million
    • 1929 – 1.124 billion
  • Standard Statistics Stock Index
    • June 1924 – 65.6
    • June 1925 – 85.1
    • June 1926 – 96.9
    • June 1927 – 114
    • June 1928 – 148.2
    • June 1929 – 191
    • September 1929 – 216.1
    • “The significance of these figures is clear. A well-diversified investment in the more substantial common stocks would have more than tripled in value in the space of scarcely more than five years.”
  • Margin Loans
    • 1922 – total margin loans less than $2 billion.
    • 1926 – total margin loans almost $3 billion.
    • 1927 – total margin loans nearly $4.5 billion.
    • 1928 – total margins loans $6.5 billion.
    • September 1929 — $8.5 billion.
    • The Federal Reserve Banks increased the rediscount rate three times in 1928 to slow the margin lending.
  • “During the year 1929 the member firms of the Exchange had on their books a collective total of a little over half a million margin accounts. They had altogether a total of 1,371,920 customers, including those who bought stocks outright for cash.”
  • The author estimates that no more than 1% of the U.S. population owned stocks on margin and a little more than 5% owned stocks.
  • Radio Corporation of America:
    • Its stock ran from $94/share (March 3, 1928) to 1929 peak of $549/share.
    • A stock syndicate — including Percy Rockefeller, Walter Chrysler, John Raskob, William Durant, Mrs. David Sarnoff (wife of RCA president), and more — made over $4.9 million in a week in March 1929 from manipulating the stock price.
  • 1929 Corporate Lending to Brokers
    • Standard Oil Company – $69 million
    • Electric Bond & Share Company – $100 million
    • Sinclair Consolidated Oil Corporation – $12.5 million
    • City Services Company – $49 million
    • Over half the margin loans from brokers was due to corporate lending.
    • Interest rates were high on margin loans and the risk, by 1929, appeared low.
  • 1920s Bull Market
    • “It was a gamble pure and simple—if not, indeed, something much less pure and simple: a gamble in which some of the players had the inside knowledge and the financial power to determine the immediate outcome.”
    • “The economic justification offered for it by some of the apostles of the new era was fantastic. The current argument was that as the shares of successful companies became more and more widely distributed, the country would approach a condition in which everybody would prosper by holding stock, receiving dividends from it, and enjoying its appreciation in value.”
    • “The boom was not by any means an isolated phenomenon, apart from the general financial tendencies of the day. It was merely the most spectacular manifestation of those tendencies; of the spirit of some-thing-for-nothing with which innumerable financiers and business men had become imbued.”
    • “This gamble drew into the stock market over eight and a half billion dollars of credit, introduced inflated values everywhere into bank portfolios and corporate financing, built up preposterous claims upon the profit-making powers of business concerns, invited unsound industrial expansion, and in these and other ways added to the increasing instability of the American economy.”
    • “The sublimest folly of those days was the often-expressed belief that the speculative gamble was after all an unimportant affair—that if it were to end in a shakeout, a few speculators would lose their shirts and this would be the sum of the damage. Never were words spoken which betrayed a more tragic incompetence to understand what such collective frenzy must precipitate.”
  • New York City population was 6 million in 1929, up from 4 million in 1905.
  • “When a business man is caught giving a bribe to a public official, the recipient may be condemned but the giver seldom is: the implicit verdict of public opinion is that he was only doing what other business men would do in his place.”
  • “The doctrine of anything for profit perverts the labor policies of companies large and small into an effort to get the utmost in production with the least in concessions. It perverts legislation into a compromise between the objectives of paid lobbyists working for the advantage of various business groups without the slightest concern for the general public interest.”
  • “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.” — Harlan F. Stone, U.S. Supreme Court Justice, June 1934
  • How Business Perverted Supply and Demand
    • Monopolies shifted prices from competitive prices to fixed prices.
    • Manufacturers were often the primary job source in towns — usually owned housing and general stores that workers were in debt to — making it impossible for workers to find better paying jobs without moving hundreds of miles.
    • Propaganda — learned from WWI — became regular use for advertising and educational campaigns. Businessmen owned newspapers and pushed their agenda or spent big money to do so.
    • Political influence granted big business favoritism.
    • Stock pools and market manipulation held a controlling influence on security and commodity prices. “Stocks don’t go up — they’re put up.”
  • “The sequence of cause and effect in our world of endlessly involved mutual relationships is exceedingly complex.”
  • Cause of Economic Decline 1930 to 1932
    • The author places part of the economic decline from 1930 to 1932 on the technological innovation. Machines replaced men. Economic growth had previously created enough new jobs to offset the decline in jobs due to innovation that increased productivity at the expense of workers. Once that growth slowed or reversed, unemployment rose fast. Innovation accelerated the process throughout the Great Depression.
    • Massive increase in debt. Public debt (68%) rose faster than income (29%) and wealth (20%). Government and corporate debt were higher too. Continued growth was needed to service it.
    • Massive stock issuance, both common and preferred, held claims on future earning power that needed to be paid. Dividends were still being paid in 1932 to the tune of $4 billion, even though companies were losing money.
    • Corporate bloat infested most companies. For companies to resume growth and be profitable, they needed to massively cut administrative overhead and pay down debt first. Job cuts at the lowest level came first.
    • Companies resisted lowering prices in order to maintain profits. Average capital goods prices fell 20% from 1929 to 1932, while production of those goods fell 76%. Again, job cuts came first.
    • Total value of liquid securities as a percent of national wealth, spiked in 1929 and 1930 to 40%, from 25% in 1922, and 20% in 1912. The panic had a bigger impact than past decades.
    • According to NBER, in 1932, total money paid in interest was 3.3% less than 1929, dividends were 56.6% less, salaries were 40% less, and hourly wages were 60% less. A drop in income led to a drop in purchasing power, which led to a drop in sales, cutting production and jobs, and cycle continued.
    • “The capital markets were demoralized, the demoralization of the capital markets demoralized the banks, and so on through another spiral of cause and effect.”
    • The U.S. was not alone. Europe faced similar financial panic, economic decline, and unbalanced trade deficit with the U.S.
    • American farmers had still not recovered from the excesses during WWI.
    • Weak banking system.
    • “The era of high finance had so swollen the mass of claims upon the future that only roaring prosperity could sustain it; and the effort to sustain it even at the cost of purchasing power undermined the foundations of that prosperity.”
  • “No presidential reputation can withstand an economic depression; even those people who are most insistent that the government should keep its hands off business will blame the government when business goes wrong.”
  • 1935 – “the vast majority of shareholders regarded their stock certificates as tokens of liquid wealth rather than as tokens of responsible ownership; and that the insiders were subject to very little effective check by the scattered majority owners.”
  • “The problem was nothing less than how to adjust our institutions, under the new circumstances created by the vast financial and economic changes of the past generation, so as to multiply effectively and distribute with some decent approach to fairness the products of the earth, the fruits of labor, and the unprecedented gifts of science—and to do this without destroying human liberty.”
• Creating the United States Steel Corporation
  • Carnegie Steel Company was the dominant steel company in the U.S. It controlled its own iron mines, coke company, and transportation. It was more efficient and because of the company’s structure it could forgo profits to undercut competition.
  • Carnegie set the par value of his company shares at $1,000 to prevent his partners from trading on an exchange, and so his partners wouldn’t see the daily rise and fall its stock price.
  • John W. Gates teamed with J.P. Morgan in 1898 to create to the American Steel & Wire Company and the Federal Steel Company. Morgan also backed the creation of the National Tube Company and American Bridge Company.
  • Carnegie took the new combinations as a threat. He ordered Charles M. Schwab (president of Carnegie Steel) to build a new steel plant in Conneaut on Lake Erie to directly compete with the new companies.
  • “First, all means to conciliate; failing that, all means to crush.” — Carnegie’s orders to Schwab.
  • December 12, 1900 – a dinner at the University Club in New York brought Schwab and Morgan together. Schwab spoke of the importance specialization, integration, and world dominance in steel. For U.S. steel companies to dominate globally, they needed to focus on mass production to lower price on a scale beyond what Carnegie Steel accomplished.
  • Morgan with Gates and Robert Bacon, met with Schwab to judge what it would take to create the company Schwab imagined including the buyout of Carnegie Steel.
  • Schwab approached Carnegie about the buyout over golf. The next day Carnegie wrote down his price, Schwab delivered it Morgan, and he accepted it.
  • Carnegie insisted on receiving bonds in the new company created by Morgan in exchange for his stocks and bonds in Carnegie Steel.
  • March 3, 1901 – the first ad for the formation of U.S. Steel appeared in the papers. it informed shareholders of Federal Steel, National Steel, National Tube, American Steel and Wire of New Jersey, American Tin Plate, American Steel Hoop, and American Sheet Steel that the United States Steel Corporation was “organized under the laws of the State of New Jersey, with power, among other things, to acquire the outstanding preferred stocks and common stocks of the companies above named, and the outstanding bonds and stocks of the Carnegie Company.”
  • The new holding company was a collection of hundreds of small companies with 168,000 workers and controlled over 50% of the steel production in the U.S.
  • “It issued 303 millions in corporate bonds, all of which went to the owners of the Carnegie properties and about two-thirds of which went to wily old Andrew himself; and it issued also no less than 510 millions in preferred stock and 508 millions in common stock, making its total capitalization some 1402 millions.”
  • U.S. Steel was the largest company in existence in 1901. Its formation brought immediate criticism.
  • James R. Keene was hired to “make a market” for the new U.S. Steel shares. He manipulated the preferred stock price in the range of $90/share to $100/share and the common from $40/share to $50/share.
  • The Morgan syndicate was paid in 1.3 million shares or a profit of $62.5 million.
  • Carnegie gave away 90% of his fortune by the time he died in 1919.
• Fight for the Northern Pacific
  • The Union Pacific, Northern Pacific and Sante Fe Railroads were in receivership in 1894.
  • Jacob Schiff form Kuhn, Loeb, & Co. tried to reorganize the Union Pacific.
  • E.H. Harriman had the same idea Schiff. They agreed that Schiff would bring the Union Pacific out of bankruptcy and Harriman would have a seat on the board.
  • Union Pacific emerged from reorganization in 1897. Harriman set to work upgrading and improving the road to handle heavier freight.
  • The Union Pacific ran from Omaha to Ogden, Utah. It was controlled by Harriman and Schiff and backed by Kuhn, Loeb, & Co.
  • The Northern Pacific ran from St. Paul and Duluth, Minnesota, through Montana to the Pacific coast.
  • The Great Northern ran along the Canadian border, covering a similar region as the Northern Pacific. It was controlled by James J. Hill.
  • J.P. Morgan had wanted to combine the Great Northern and Northern Pacific for years and connect both, but laws disallowed the merging of competing roads.
  • Instead, Morgan set his sights on the Burlington railroad that ran from Chicago through Illinois, Iowa, Missouri, and Nebraska. Hill, with Morgan’s blessing, made a deal to buy the Burlington in April 1901.
  • Harriman had tried and failed to buy the Burlington a year early. Undeterred, Harriman set out to buy the Northern Pacific to gain control of the Burlington.
  • The Northern Pacific had $80 million in common and $75 million in preferred. Both share classes held voting rights but the preferred could be retired anytime after January 1, 1902.
  • Morgan and Hill held $33 to $35 million of the $155 million in combined shares of common and preferred.
  • Harriman and Schiff began buying Northern Pacific shares in the open market in April 1901.
  • April 22 – Northern Pacific stock was $101.
  • April 30 – Northern Pacific stock was $117¼.
  • May 3 – Harriman and Schiff had acquired $42 of the $75 million in preferred and $37 of the $80 million in common. They held a majority of the two classes together. But Harriman wanted a majority in both share classes.
  • May 4 (Saturday) – Harriman ordered Schiff to buy $4 million more of Northern Pacific common. Schiff’s assistant took the call but failed to place the order without Schiff’s consent (Schiff was at the Synagogue). The market closed without the order ever being placed.
  • Hill realized something was up, cabled Morgan in Aix-les-Bains in the Alps, for permission to buy $15 million in common to secure its majority (Morgan and Hill already controlled $26 of the $80 million).
  • May 6 – Morgan’s group bought in force. Northern Pacific opened at $114, peaked at $133 and closed at $127½.
  • “The sessions of the Stock Exchange were being held in temporary quarters in the Produce Exchange building while its new home was under construction; visitors to the Produce Exchange gallery described a scene of the utmost confusion on the floor where stocks were changing hands: ‘a struggling mass of humanity…howling and shrieking as though a mob were let loose.’”
  • May 7 – Morgan’s group continued its buying. Northern Pacific hit $149¾ before closing at $143½. In two days the Morgan group secured their majority in the common. But the damage was done.
  • As Northern Pacific stock rose, short sellers — smelling an opportunity — borrowed 12.5 million worth of shares from E.L. Norton, Morgan’s broker. Except there were no shares to buy to close their short positions. Morgan and Harriman had the stock cornered and neither were willing to lend shares to ease the pain. But the shorts didn’t know.
  • May 8 – Shorts frantically sold other holdings to buy Northern at any price. Northern Pacific opened at $155, hit $180, and closed at $160. But everything else was dropping. “‘Where before the cry had been only ‘Buy, buy, buy,’ it became ‘Sell, sell, sell.’ Steel fell 7 points; Amalgamated Copper, 12; Union Pacific, 8½—and so on all along the line.”
  • May 9 – The panic hit. Northern Pacific opened at $170, paused around $200, then shot up — $320, $650, $700, and finally $1000. Other stocks crashed. U.S. Steel stock fell from $40 to $26. Call-loan rates jumped to 75%.
  • May 9 – At noon Morgan and Harriman agreed to not demand immediate delivery of stock they bought that had been sold short. Banks formed a pool to lend money at 6%. Northern Pacific dropped to $325.
  • Morgan and Harriman agreed to let the shorts settle at $150/share.
  • “The volume of trading on the Exchange had probably been the greatest in its history; though the official total of sales was 3,071,805, a little less than the record set a few days before, it was agreed that many sales had gone unrecorded in the excitement.”
  • “An exhibition of the use of vast power for private ends unrestrained by any sense of public responsibility…like cowboys on a spree…shooting wildly at each other in entire disregard of the safety of the bystanders.” — New York Times
  • “I do not think that the flurry in Wall Street today will be anything else but incidental. The prosperity of the country will not be affected.” — President Kimble, Seventh National Bank
  • May 11, 1901: “The most serious part of the recent situation lay in its indications that the fever of speculation was spreading to all ranks of society. It was coming to be believed that the conditions underlying this market’s movement were so novel and unprecedented that old rules could no longer hold. From such conviction it was but one step to the belief that nothing could stop or reverse the upward movement of prices… It is notorious that for weeks the smaller brokers’ offices and the ‘bucket shops’ have been crowded with people of moderate means who were speculating with all the money they could control for a rise in stocks.” — Commerical and Finacial Chronicle
  • Morgan and Harriman agreed to set up a holding company called Northern Securities Company that controlled Northern Pacific and Great Northern and Burlington. Morgan controlled the board but Harriman got a seat on Northern Pacific’s and Burlington’s board.
  • The panic had no impact on the economy or market. Stock prices had regained their ground by the end of May.
  • February 1902 – Teddy Roosevelt told his Attorney-General to bring suit against Northern Securities Company for violating the Sherman Act. The Supreme Court ruled to dissolve the Northern Securities Company in 1904.
• Panic of 1907 and the Battle for United Copper
  • F. Augustus Heinze controlled a small copper mining company. He challenged the Amalgamated Copper Company (controlled by H.H. Rogers) under the apex-law. He claimed that his copper veins ran under Amalgamated’s land and had a right to mine them. The two parties settled, Heinze sold out, and took his millions back to New York.
  • Heinze became president of Mercantile National Bank.
  • Heinze, with a stock promotor named Charles Monroe, ran a speculative pool in United Copper stock. They’re goal was to manipulate the stock price in such a way to corner the market, spike the price, and profit.
  • October 14, 1907 – saw a flurry of buying that kept United Copper’s stock price inflated while other copper companies fell.
  • October 15, 1907 – Short sellers covered short positions on United Copper. Its stock price rose from $37¼ to $60.
  • Heinze and his partners believed the rise was sign they had the stock cornered. They didn’t. They called for delivery of the shares they bought — and all of it was delivered.
  • Heinze and partners borrowed heavily to buy United Copper shares and found themselves frantically selling as the price dropped from $60 to $36 on October 15.
  • October 16, 1907 – United Copper fell to $10. The brokerage firm Otto Heinze & Co. failed. Depositors at National Mercantile Bank withdrew funds out of concern that the bank might be caught up in the failure. A bank run began that triggered a cascade effect that enveloped the entire system.
  • New York Banking System
    • No Federal Reserve System existed at the time.
    • Clearing House was an association of banks that handled check clearing between banks.
    • Clearing House had the power to dictate terms to lesser banks during times of crisis. A bank was doomed to failure in crisis without the Clearing House.
    • The number of banks operating as trust companies rose from 1898 to 1906. Trust companies had less restrictions as banks, held fewer reserves than banks, often invested deposits in stocks and real estate, to offer higher interest on deposits. Most trusts were not members of the Clearing House.
  • The National Mercantile Bank applied for help from the Clearing House. The Clearing House used the opportunity to sanitize the situation. It demanded the resignation of Heinze and partners from the bank hoping that quelled public concerns on the bank’s strength. Headlines of the event did the opposite.
  • October 21, 1907 – the Clearing House demanded the resignation of Charles Barney, president of the Knickerbocker Trust Company. The National Bank of Commerce announced it would no longer clear checks for the Knickerbocker Trust.
  • “In fighting panics, as in fighting forest fires, it is important to decide upon what line one shall make one’s battle.”
  • October 22, 1907 – Representatives from the Knickerbocker met with J.P. Morgan for help, but he refused. The run on the Knickerbocker Trust began. $8 million had been pulled out by noon. It suspended payments.
  • October 22, 1907 – that evening the Treasury Secretary met with Morgan at the Manhattan Hotel and promised funds to help end the run.
  • October 23, 1907 – “The chief sore point is the Trust Company of America.” — George Perkins quote published in the morning edition of the New York Times
  • Rumor was the Barney borrowed from the Trust Company of America, and it also was involved with Heinze and Morse.
  • October 23, 1907 – Depositors lined up at the Trust Company of America before it opened and withdrew their funds. At the last minute the House of Morgan, first National Bank, and National City Bank lent $1 million to keep the Trust Company of America from suspending payments. $13.5 million was withdrawn that day.
  • Morgan enlisted Benjamin Strong with the Clearing House to examine the books of the Trust Company of America, found it to be solvent, and worth saving.
  • The Treasury Secretary deposited $36 million in New York national banks, with $10 million dedicated for trust companies, to be used as Morgan wished.
  • October 24, 1907 – The Trust Company of American was hit with withdrawals again and the panic spilled onto the Stock Exchange. Stocks dropped. Lending rates spiked to 125%. Liquidity dried up. The president of the Exchange took the news to Morgan who lent him $25 million to calm the markets and lower the lending rate to 6%. The market rallied a bit.
  • October 25, 1907 – The Trust Company of America was hit again. Morgan got the Clearing House to give up $15 million to cover it.
  • “If twenty millions had been needed that day, the Stock Exchange and a hundred or more firms would have gone up, it was just that close. It was touch and go.” — George Perkins
  • October 26, 1907 – the Clearing House decided to issue certificates in lieu of cash to serve banks temporarily.
  • October 27, 1907 – New York City officials told Morgan they needed a $30 million loan to cover short-term obligations.
  • October 28, 1907 – Morgan’s syndicate agreed to float $30 million in 6% bonds for the city.
  • November 2, 1907 – Morgan met that evening with the financiers of the city to put an end to the run. The Trust Company of America needed an infusion of $25 million more to save it. Grant Schley needed a bailout to avoid a worsening of the crisis (Schley borrowed from his firm against shares in Tennessee Coal & Mining Company, his firm borrowed from other banks, and selling the shares at much lower prices put all of them at risk).
  • Morgan’s solution was U.S. Steel would bailout Schley, exchanging bonds for shares in Tennessee Coal & Mining but only if the trust company presidents raised the needed $25 million for Trust Company of America. The lawyers prepared the document, and Morgan got them all to sign.
  • November 4, 1907 – U.S. Steel was given assurance from President Roosevelt that he wouldn’t go after the company for buying Tennessee Coal & Mining.
  • The panic was followed by a short depression.
  • “The panic had taught at least one lesson. There ought to be some systematic method of mobilizing bank reserves, as Morgan had mobilized some of them by sheer force of will. The result, after long and obstinate delay, was the creation of the Federal Reserve System. Other lessons of the panic, however—such as that the banks were insufficiently safeguarded either by law or by tradition, and too easily fell a prey to stock-market-minded men, if not to predatory gamblers—were not destined to be fully learned for at least another twenty-six years.”
  • Morse went to prison for misusing bank funds. Heinze was indicted and dismissed. Barney committed suicide.
• Pujo Committee
  • The House of Representatives authorized the Commitee on Banking and Currency to investigate the existence of a “money trust” in 1912. Hearings took place from 1912 to 1913.
  • The belief was that a small group of Wall Street banks and trust companies held an outsized influence over corporate America. The group fell within the sphere of Morgan, Baker, and Stillman.
  • The Committee found that members or directors of the House of Morgan, First National Bank, National City Bank, Bankers Trust Company, and Guarantee Trust Company held:
    • 118 directorships in 34 banks and trust companies with assets of $2.5 billion
    • 30 directorships in 10 insurance companies with assets over $2 billion
    • 105 directorships in 32 transportation systems with total market cap over $11 billion
    • 63 directorships in 24 producing and trading companies with total market cap over $3 billion
    • 25 directorships in 12 utility companies with total market cap of over $2 billion
  • “If, therefore, by a ‘money trust’ is meant an established and well-defined community of interest between a few leaders of finance which has been created and is held together through stock holdings, interlocking directorates, and other forms of dominion over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men—your committee…has no hesitation in asserting as a result of its investigation up to this time that the condition thus described exists in this country today.”
  • The committee failed to point out that the dollar amounts were not liquid cash that a handful of men could do what they wished with but mostly property and investments.
  • It also failed to point out the directors were not united under a single purpose or even had a clue what was going on in the companies they directed.
  • “A man I do not trust could not get money from me on all the bonds in Christendom.” — J.P. Morgan
  • “I do not compete for any deposits. I do not care whether they ever come. They come.” — J.P. Morgan
  • The Committee recommended:
    • The elimination of bank affiliates created for the purpose of trading and holding securities.
    • The incorporation and regulation of stock exchanges.
    • Stiffer margin requirements.
    • The prevention of stock market manipulation.
    • Supervision of securities issued by the government.
  • The recommendations were mostly forgotten about for the next 19 years.
• WWI (1914 – 1918, plus the economic aftermath)
  • The NYSE closed immediately and stayed closed for months. The closer prevented Europeans from selling securities for cash en masse and triggering a widespread panic.
  • “Frightened hoarding began at once… The very real danger to American credit was averted only by the bold action of a group of New York bankers, headed by the Morgan forces, in forming a gold pool to meet the requisitions of the outside world.”
  • The Federal Reserve System began operations in November 1914 and played a critical role during the war boom by providing dollars and credit to member banks to fund the soon to be growing production needs of business.
  • The NYSE opened to unrestricted trading on April 1, 1915.
  • Business production dropped, commodity prices dropped, and unemployment rose at the start of the war.
  • “There is no more instructive example of the difficulty of business forecasting than the fact that for almost a year after the war broke out, few Americans had any notion of the vast prosperity which it would shortly bring to their country.”
  • Autumn 1915
    • The door opened for American production toward the war effort.
    • The Allies, specifically the British realized they wouldn’t win without supplies from abroad.
    • Nations at war need food supplies because they couldn’t produce enough at home.
    • British navy had cleared most supply routes of German ships, making shipping less risky.
    • Neutral markets, once dominated by businesses in warring nations, were freely available for American businesses.
    • American factories jumped at the demand.
    • Speculation in “war stocks” lifted the stock market.
  • J.P. Morgan & Co.
    • The British and French governments made J.P. Morgan & Co. their purchasing agent and fiscal agent in the U.S.
    • It coordinated all government bond issues to fund the war and the mass purchase of war materials.
    • J.P Morgan & Co. floated $500 million in Anglo-French bonds, the single largest security issue in U.S at the time.
    • Coordinated the sale of $1.5 billion in foreign-owned American securities.
    • Floated an additional borrowing of over $1 billion by France and England.
    • All the money raised by France and Britain never left the U.S. It went to straight to U.S. manufacturers for war supplies.
    • “The final record as to the British contracts showed that, of the hundreds of different concerns dealt with, there were only eleven in which the Morgan partners held any interest; and the largest interest they held in any one of those eleven did not exceed three per cent of the shares. In the case of the French, the percentage was even more trifling.” — Thomas Lamont
  • 1917 – U.S. enters the war.
  • “In the first place, industrial production was still further expanded. It had to be expanded because Washington was calling insistently not only for men but for guns, shells, uniforms, cantonments, airplanes, trucks, rolling stock, ships, and other supplies in endless variety, to be delivered in quantity and at the earliest conceivable moment. This huge demand was superimposed upon a continuing demand for munitions and supplies for the Allies.”
  • The War Industrials Board
    • was created to manage the industrial production of the country for the war effort.
    • Railroad Administration, Food Administration, and Fuel Administration gave priority to troops and supplies.
    • Regulated prices and production to help win the war.
  • Profits exploded for companies:
    • DuPont – net income of $5.5 million in 1914 to $57million in 1915 to $82 million in 1916.
    • U.S. Steel – EPS of $11.02 in 1913, $0 in 1914, $9.96 in 1915, $48.46 in 1916, $39.15 in 1917, $22.09 in 1918.
    • Bethlehem Steel – $5.5 million in 1914, $17 million in 1915, $43 million in 1916.
  • Dividend payments exploded for companies too.
    • U.S. Steel paid $16.75/share in 1917 and $16/share in 1918.
    • Bethlehem Steel paid $22.50/share in 1917 and issued 200% stock dividend, $10/share in 1918.
    • DuPont issued total dividends from 1915 to 1918 equivalent of 458% of the original par value of its stock.
  • Cost of living rose 61.5% from 1914 to 1918.
  • Wages climbed, partially due to labor shortages and worker demands for better pay.
  • U.S. farm production and fortunes spiked with the rising food demand — despite fixed prices on staple crops. The demand drove a boom in farmland and planted acres that collapsed a few years later.
  • The U.S.’s total cost of the war was $32 billion.
    • 1/3 was raised through taxation via income tax and excess profit tax.
    • 2/3 was borrowed. Companies purchased U.S. bonds with excess earnings. Liberty Loan campaigns were a massive marketing success that drove the public to help fund the war.
  • “There is no surer engine of inflation than war.”
  • November 11, 1918 – Armistice Day.
  • 1919 Boom
    • “The events of 1919 and 1920, however, took a strange and unexpected turn. For a few months there was an anxious pause as business tried to adjust itself to altered and confusing circumstances; then there began, not a decline, but a furious boom.”
    • Europe continued to borrow from the U.S. after the war to cover reconstruction costs.
    • People yearned for normalcy and splurged on normal necessities they went without during the war.
    • Commodity prices spiked, stock speculation rose, exports rose.
    • “Meanwhile the crazy purchasing of goods against a supposed world shortage continued apace—until the spring of 1920, when the inevitable and long-postponed collapse began.”
  • 1920-1921 Depression ended it.
  • The war’s impact on business and economy:
    • Developed new industries and forced more efficiency into industrial production.
    • Paused the trend of business mergers and consolidation.
    • Expanded government functions and national debt.
    • Lopsided trade balance between U.S. and Europe. U.S. held outstanding Allied debts and the high tariffs on European goods made it harder for Europe to pay its debts.
    • Inflation pushed the prices of everything up to a new level.
    • The farm boom during the war collapsed as foreign demand dried up. Farmland prices dropped, mortgages went unpaid and led to rural poverty.
    • New York became the financial capital of the word.
    • Overconfidence in the Federal Reserve Systems ability to deal with a financial crisis.
      • “This confidence in the System, coupled with a confidence born of America’s new financial pre-eminence in the world, was tending to relax that eternal financial vigilance which is the price of security: to make men think that a good System of reserves could atone for loose and inadequate banking standards.”
    • Liberty Loan campaigns, for the first time, introduced the habit of investing to millions of Americans. The number of stockholders in the 31 largest companies more than doubled from 1913 to 1923.
    • Liberty Loan campaigns showed business leaders the power of marketing and public relations.
• Insull Utility Investments
  • Samuel Insull was born in England.
  • He applied and earned a job as stenographer to the London manager of Edison Electric.
  • Thomas Edison saw his potential and brought him to be his secretary in the US and worked his up the company ladder from there.
  • Samuel Insull became the president of Edison’s electric light company in Chicago his 30s.
  • By age 40, he bought enough rival utilities to have a monopoly control on the electric utility business in Chicago.
  • Insull believed that benefit consumers the most, utilities needed scale and mass production for more efficient electrical production and lower prices. He also believed in a regulated industry.
  • “If there is anything wrong with my business, I want to know it. And the best way for me to know it is to have a public official who has the right to look into my affairs, in a position so he can employ the highest class of talent to help him.” — Insull
  • 1905 – He began expanding outside Chicago purchasing two small companies on the Ohio River.
  • 1912 – Formed the Middle West Utilities Company to raise funds for further acquisitions.
    • He sold assets to Middle West for $330,000.
    • He issued to himself 40,000 preferred shares and 60,000 common shares in exchange for $3.6 million.
    • He sold all the preferred shares and 10,000 common on public markets for $3.6 million.
    • “It was perhaps too instructive a lesson in how to make money in the utility business. The big money was made in selling stock to the public for more than you had had to pay for it (or, to put it another way, in selling the stock of your own company to yourself for less than its potential market value.) To do this, you had of course to put a high—if not actually extravagant—valuation upon the property which the stock represented, and to paint a rosy picture of possible earnings. And to make good on this picture, you had to provide the earnings. Ordinarily, the operation was one which could not soon be repeated without disastrous results: even in a rapidly growing industry, it usually took time for earnings to catch up with expectations. But possibly ways of finding them—or seeming to find them—could be discovered.”
  • “A Cunning Minister will engage his Master to begin with a small wrong step, which will insensibly engage him in a great one. A man that hath the Patience to go by steps, may deceive one much wiser than himself.” — George Savile, Marguis of Halifax
  • WWI – was named chairman of the State Council of Defense for Illinois.
  • Merger mania struck utility companies in the 1920s. Holding companies were the primary financial device used to accomplish it. Pyramiding holding companies on top of holding companies became the norm.
    • Electric Bond and Share was the largest, Byllesby system, Cities Services, Associated Gas and Electric, American Waterworks and Electric, and more.
  • Holding Company Advantages
    • Consolidated a single management, engineering expertise, mass purchasing (cost savings), taxes, and fund raising on better terms across multiple companies.
    • Larger scale allowed for growing revenue and profits while reducing rates.
    • Could be used to skim the profits off the underlying holdings to benefit the shareholders via dividends at the top of the pyramid. Holding companies typically held common stock, while bonds and preferred stock were issued to the public.
    • Holding company could charge the underlying holding and operating companies for the cost of management, engineers, etc. (sometimes excessively) to siphon more money out of the operating companies. Many underlying holding companies had no employees.
    • Holding company was outside the regulatory commissions reach.
    • Holding company could mark up the value of an operating company’s assets by selling it to another operating company in its control, and have it show up on the books as profit. Do it often enough, and the fraud, looks like rising asset values and profits.
    • Manufactured profits made it easier to raise money to finance M&A and expansion.
    • Used numerous security types and share classes to maintain control: prior preference stock, preferred stock, cumulative preferred stock, common stock, Class B stock, common stock with warrants.
  • 1926 – Insull expanded outside utilities and bought paper mills, textile mills, tire-fabric company, shoe factory, and a real-estate development company at well-above the value of the companies.
  • “What in hell would you do if some one came along and offered you three times as much as your company was ever worth?” — N.R. Danielian, president of an electric light company.
  • January 1928 – Middle West Utilities sold securities to National Electric Power (an Insull company) for over $3 million more than it paid for them. National Electric Power sold securities to Middle West Utilities for over $3 million more than it paid for them. Both companies listed the sales as $3 million in profit each.
  • 1929 – Middle West Utilities stock hit $570/share.
  • December 1928 – Insull Utilities Investments and transferred holdings in Middle West Utilities and other holdings companies in exchange for a block of preferred stock, about 750,000 common shares valued at $7.54/share, and warrants to 500,000 common shares at $12 and $15 in the next two years.
  • January 1929 – Insull Utility Investments began trading on the Chicago Stock Exchange at $30/share.
  • February 1929 – Insull Utility Investments at $46/share.
  • July 1929 – Insull Utility Investments at $126/share.
  • August 1929 – Insull Utility Investments at $149¼/share.
  • Insull Utility Investments Inc Controlled in 1929
    • The Public Service Company of Northern Illinois
    • Commonwealth Edison Company
    • Peoples Gas Light and Coke
    • Middle West Utilities
    • Each company controlled other holdings companies and operating companies.
    • “The system was not symmetrical, neither did it retain its shape for any long space of time; there was a constant shifting of investments going on, a constant passing of properties from hand to hand (often at rising prices)… The lines of investment and control did not simply run from the top of the system to the bottom, as one might expect. They ran every which way. Sometimes they ran upward.”
  • Late 1929 – Insull creates the Corporation Securities Company of Chicago to seal control over Insull Utility Investments.
  • Corporation Securities owned 28.9% of Insull Utility.
  • Insull Utility owned 12.5% of Corporation Securities.
  • Corporation Securities owned just over 10% of Middle West Utilities.
  • Middle West Utilities owned 1.2% of Corporation Securities.
  • “I say it is impossible for any man to grasp the situation of that vast structure … it was so set up that you could not possibly get an accounting system which would not mislead even the officers themselves.” — Owen D. Young
  • October 1929 – Market crashes. Insull tried to hold up stock for two years before the weight of selling caught up with him.
  • April 8, 1932 – Samuel Insull steps down and the company goes into receivership.
  • “Investigation, flight, indictment, refuge in Greece, capture, and trial in Chicago were still to come—grimly underscoring the tragic conclusion of a financial adventure in which a brilliant career had been wrecked, and American investors had lost nearly three-quarters of a billion dollars, and the economic system of the whole country had been gravely shaken.”
  • 1934 – Samuel Insull tried for fraud and found not guilty.
  • Samuel Insull built the Civic Opera House in Chicago. It was completed in 1929. He had an apartment on the top floor.
• Van Sweringens
  • Oris Paxton and Mantis James Van Sweringen were from Cleveland.
  • Got into real estate. Developed Shaker Heights, outside Cleveland right as suburban expansion took off in Cleveland.
  • 1916 – Bought controlling interest in the Nickel Plate railroad for $8.5 million using $1 million of their own money and the rest from funds raised in the creation of a holding company. Nickel Plate ran from Buffalo to Chicago.
  • Success of Nickel Plate allowed them to raise more funds to buy three more small railroads.
  • 1925 – sold bonds and took on debt in Nickel Plate to buy a15% interest in the Chesapeake and Ohio railroad.
  • 1926-1927 – Repeated the process to buy Pere Marguette railroad and an interest in the Erie railroad.
  • 1929 – their acquisition spree, involving numerous holdings companies, controlled thousands of miles of tracks east of the Mississippi River, over 100,000 employees, and assets of $2 billion.
  • 1929 – Formed the Alleghany Corporation to expand west and buy interest in the Missouri Pacific railroad.
  • Holding Company Structure on April 30, 1930
    • Vaness Company
      • General Securities Corporation (Van Sweringen’s owned 51.8%)
        • Alleghany Corporation (Van Sweringen’s owned 8.6%)
          • Chesapeake Corporation (Van Sweringen’s owned 4.1%)
            • Chesapeake and Ohio (Van Sweringen’s owned less than 1%)
              • Hocking Valley (Van Sweringen’s owned 0.25%)
              • Pere Marquette
              • Erie
          • Nickel Plate
            • Wheeling and Lake Erie railroad
          • Missouri Pacific
  • 1930 – Forced to turn to J.P. Morgan & Company for $40 million (in exchange for collateral) because the Cleveland banks refused to lend them more money.
  • 1933 – Missouri Pacific went into bankruptcy.
  • Alleghany Corporation remained solvent until 1935.
• Creating Bank of America
  • Amadeo Peter Giannini lived in San Francisco.
  • He opened a bank in 1904 called Bank of Italy at age 34.
  • He had 25 bank branches before age 50.
  • He expanded further in the 1920s. He used holding companies to buy stock in smaller banks that were converted to into bank branches.
  • Bankitaly Corporation was the primary holding company.
  • By 1929:
    • Had 453 branches in California.
    • Changed the name of the principal bank in San Francisco to Bank of America National Trust and Savings Association. It was the 4th largest bank in the country behind New York’s National City Bank, Chase National Bank, and Guaranty Trust Company.
    • Had bought the old Bank of America in New York and expanded its footprint to 32 branches by 1930.
    • Controlled a fire insurance company, life insurance company, mortgage company, and public utilities.
    • The entire holding company structure was controlled by The Transamerica Corporation.
  • After the 1929 crash, Giannini lost control of the New York bank.
  • Transamerica stock dropped from a high of $67⅜ in 1929 to $2½ in 1932.
  • Giannini kept control of the rest of what he built by not following the speculative practices of other bankers.
• 1929 Crash and Aftermath
  • Big market breaks, followed by recoveries in June 1928, December 1928, and March 1929.
  • The construction industry showed signs of weakening in 1928. The auto and steel industry slowed in the summer of 1929.
  • Summer 1929 – “Sober citizens were becoming persuaded that a panicless, depressionless era had begun.”
  • September 3, 1929 – Stock market peaked.
  • Most thought the September to October decline would lead to recovery and higher highs. They saw it as buying opportunity.
  • October 23 – 6 million shares traded. The ticker fell behind by 104 minutes.
  • October 24
    • Margin calls led to widespread forced selling.
    • U.S. Steel dropped from $205½ to $193½.
    • Radio fell from $68¾ to $44½.
    • Montgomery Ward fell from $83 to $50.
    • A group of Wall Street bankers — Charles Mitchell, Alfred Wiggin, William Potter, Sward Prosser, Thomas Lamont — met at J.P. Morgan & Company to form a pool to stop the panic and support the market.
    • News of the pool led to a late market rally.
  • October 28 – selling was swift. It was the first of a two-day crash.
  • October 29 – 16 million shares traded as the market collapsed further.
  • The crash evaporated $30 billion in market values. That sum total was more than the cost to the U.S. in WWI, and 10x more than cost to the Union in the Civil War.
  • The selling continued until November 13.
  • “Broadly speaking it was the rich who were soaked—directly. It was stock-brokers and promoters who were committing suicide in October and November of 1929.”
  • The indirect effects of the crash hit the rich and trickled down from there. Luxury companies suffered most. Expensive goods (cars, radios, furniture) sales fell off. Chauffeurs, maids, and gardeners were let go. Manufacturers cut production. Unemployment rose.
  • “A loud and wishful chorus of financiers and public men, led by the president of the United States, chanted in unison that no matter what happened in Wall Street, business conditions were ‘fundamentally sound;’”‘ yet when an earthquake took place in Wall Street its tremors inevitably ran far and wide.”
  • Hoover asked Congress to the cut income tax and pushed for a public-works campaign to lower unemployment. His message was prosperity was just around the corner.
  • The market rallied from late 1929 to spring of 1930.
  • April 1930 – U.S. Steel and AT&T almost reached their pre-crash highs.
  • “It was piously believed in those days that the American public had ‘learned a great lesson’ in the disaster of the preceding autumn, yet apparently to hundreds of thousands of people the lesson of the disaster was that the bright thing to do was to buy early and sell at the top.”
  • Fixed Investment Trusts were created for the first time. The holdings of the trust were “fixed,” meaning the holdings could not be changed unless the companies stopped paying dividends.
  • May 1930 – the market dropped again and fell almost uninterrupted to early 1932.
  • “The campaign of synthetic optimism, by the autumn of 1930 it was already becoming a sour jest, and by the end of 1931 a compilation of the cheerful prophecies made by Hoover and his aides and by the leaders of business and finance, published under the scornful title of Oh Yeah? was greeted everywhere with derisive laughter.”
  • Summer 1931 – The largest bank in Austria, Credit Anstalt, collapsed and the government tried to borrow enough money to shore it up.
  • Hoover proposed a 1-year moratorium on war debts and reparations in an effort to prevent further panic in Europe. It was accepted. It was not enough to slow the panic. A German crisis followed.
  • September 1931 – England left the gold standard.
  • A panic in foreign bonds hit the NYSE.
  • Autumn 1931 – Federal Reserve estimated that $1 billion in currency was being hoarded. Unemployment hit 8 to 10 million men.
  • September 1931 – 305 U.S. bank failures.
  • October 1931 – 552 U.S. bank failures.
  • 1931 – total bank failures in the first 8 months of the year wiped out $10 billion in savings.
  • Autumn 1931 – Hoover created the Reconstruction Finance Corporation to lend to distressed banks and businesses. He also fought to balance the federal budget hoping it would instill confidence in the government.
  • End of 1931 to early 1932 – Europe pulled gold out the U.S.
  • July 1932 – NY Times Index of Business Activity was 50% of its 1929 high. Unemployment estimates ranged from 13 to 15 million. Franklin Delano Roosevelt was nominated for the Democratic ticket for president.
  • Stocks in 1929 to 1932
    • American Can – 1929 high $181 7/8, 1929 low $86, 1932 low $29 5/8.
    • AT&T – 1929 high $304, 1929 low $197 1/4, 1932 low $70 1/4.
    • General Electric – 1929 high $396 1/4, 1929 low $168 1/2, 1932 low $34.
    • General Motors – 1929 high $72 3/4, 1929 low $36, 1932 low $7 5/8.
    • NY Central – 1929 high $256 3/8, 1929 low $160, 1932 low $8 3/4.
    • Radio Corp – 1929 high $101, 1929 low $26, 1932 low $2 1/2.
    • US Steel – 1929 high $261 3/4, 1929 low $150, 1932 low $21 1/4.
    • Leading bond prices were down 41.4% from 1929 highs.
    • Alleghany Corp – 1932 low $0.375/share.
    • Transamerica Corp – 1932 low $2⅛.
  • April 1932 – “I’m afraid, every man is afraid. I don’t know, we don’t know, whether values we have are going to be real next month or not.” — Charles M. Schwab
  • “The pet economic theories of the Street had been annihilated. The theory of the business cycle (as most financiers had interpreted it)—the theory that business ebbed and flowed in such a way that the business man who watched the statistical indices carefully could buy at the bottom and prosper—had betrayed its faithful adherents again and again; indeed, one of the things which had helped to defeat this theory was perhaps the very fact that it was so widely believed in. The theory that forecasters could forecast was a wreck. The theory that common stocks were a satisfactory medium for long-term investment was a wreck.”
  • Summer 1932 – War veterans marched on Washington D.C. demanding funds. There were farmer strikes in Iowa.
  • 1932 – FDR was elected president.
  • February 1933 –
    • Union Guardian Trust Company wanted more money from the Reconstruction Finance Corp. to keep from collapsing. It controlled 19 banks, 7 securities companies, and other financial businesses.
    • Negotiations for more money failed.
    • The Governor of Michigan announced a bank holiday for 8 days to prevent a panic run on the banks.
    • The announcement triggered panic in other states. Small banks withdrew money from New York and triggered a selloff in bonds. The public and corporation pulled money out of banks.
  • February 24, 1933 – Governor of Maryland announced a 3-day bank holiday.
  • March 4, 1933 – Governors of New York and Illinois announced a bank holiday and, in turn, paralyzed the financial system of the country.
  • March 6, 1933 – FDR announced a national bank holiday and pushed through the Emergency Banking Act. It began the restoration of trust in the bank system.
  • Summer 1933
    • Concerns of inflation rose.
    • Crop prices rose.
    • Index of Industrial Production rose by half of what it lost since 1929. Employment and payrolls rose.
    • A speculative market boom ensued. Trading volume on NYSE hit 120 million for July. 65 million shares were bought by NYSE members for their own accounts.
    • Rumors of repealing prohibition hit alcohol stocks.
    • American Commerical Alcohol Corporation saw its stock jump from $25/share to $90/share in two months. A stock pool of 50 people accounted for 75% the stocks volume and 5 people did 27% of the volume. Then in four days it collapsed to $29⅛.
    • The speculative boom was over by the end of the July.
  • Autumn 1933
    • FDR wanted controlled inflation to 1) inflate away the weight of debt, and 2) higher prices would push businesses back into production.
    • FDR instituted a gold buying program to reduce the dollar in terms of gold in hopes prices would rise. It failed.
    • Agriculture Adjustment Act subsidized farmers to grow fewer crops in the hopes of higher crop prices.
    • Created a public works program in the hopes of stimulating business demand. It carried a risk of graft, unbalancing the budget, and a limited number of large projects available.
    • National Recovery Administration was created in the hopes of convincing businesses to 1) raise wages, 2) shorten the work week (spread more people across fewer work hours), and 3) stabilize prices. Supreme Court later ruled it unconstitutional.
  • Financial Reforms
    • Glass-Steagall Act of 1933 – separated commercial banks and investment banks.
    • Securities Act of 1933 – required the registration of securities and disclosure of information.
    • National Securities and Exchange Act of 1934 – established the SEC and required companies to disclose wages, salaries, bonuses, profit-sharing, etc. of directors, officers, and large shareholders. Let the SEC make rules to prevent stock market manipulation.
  • Economic statement ensued from 1933 to 1935 as government programs rolled out and businesses got back to work.
  • Annalist’s Index of Business Activity
    • 1929 high – 116.7
    • 1932 low – 59.7
    • March 1933 – 58.4 (FDR takes office)
    • July 1933 – 89.3
    • Autumn 1933 – 68.4
    • Winter/Spring 1934 – 80.2
    • Summer 1934 – 66.5
    • Winter/Spring 1935 – 83.3
    • “The economic machine did not slide into the ditch, it did not roar away to prosperity; it limped along uncertainly at half-speed.”
  • “Enthusiasm for the New Deal waned. Millions of Americans, unable to understand the economic situation and almost unaware of it except as some small part of it disturbed their daily lives, lapsed into indifference again; it is hard to remain excited about a semi-permanent emergency.”
  • “Generally speaking, the people at the upper end of the economic scale were better off than they had been at the beginning of the New Deal.”
  • 1935
    • 210 largest companies had Q1 profits 21.8% higher than Q1 1934.
    • Income tax returns showed they were higher for 1934.
    • Small business was lagging.
    • Estimated 10 million unemployed.

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