They did not realize how completely the whole structure of stock-market values had become honeycombed with brokers’ loans. Still less did they realize that the wave of stock-market prosperity was running upon a shoal. The construction industry had been weakening since 1928, for in the Florida boom and the various winter-resort and summer-resort and suburban booms which had followed it, more houses had been built than could be paid for, and even the craze for putting up higher and higher skyscrapers in the great cities could not maintain the industry at its former pace of operations. The automobile industry had begun to slow up in the early summer of 1929, and with it the steel industry. The furious drive for bigger and bigger profits, and the financial inflation which was predicated upon the continuance of such profits, had prevented the distribution of the fruits of prosperity in the form of higher wages or lower prices, and thus the general purchasing power had become overstrained. In fact, so topheavy had the American economy become that only the lavish expenditures of the fortunate and the extravagant resort of the somewhat less fortunate to installment buying and other forms of personal credit were maintaining business at its full volume. But the speculators were unaware of the full meaning of the slight downturn in the business indices. And still less, of course, did they or anybody else realize to what far-reaching destruction any serious collapse in the stock-market might ultimately lead.
It was the very next day—Thursday, October 24, 1929—at a little after ten o’clock in the morning, that the wave broke.
What happened that day is highly instructive as we view it in retrospect. In the first place, it seems well established that what brought down the avalanche was no attack of concerted short-selling; the amount of short-selling was small. What brought it down was the inexorable working of the very machinery of gambling which had facilitated the previous advance. When a margin speculator pays, let us say, only thirty dollars to buy a hundred-dollar share of stock, and his broker borrows the other seventy dollars to complete the purchase, the broker shares neither the speculator’s gains nor his losses. If the price of the stock goes up to one hundred and thirty, the speculator has a nice hundred-per-cent profit. If it goes down to seventy, he has a not-so-nice hundred-per-cent loss. And more than that—if the stock goes down to seventy and the speculator is unable to put up any more cash, the broker inevitably sells the stock to rescue his own seventy dollars. The process is virtually automatic. When in a crowded market the prices of speculative common stocks slide down simultaneously, the money put up by thousands of speculators is exhausted and their brokers rush to sell. Unless there are other thousands of people standing ready to buy—and these other men are not frightened by the torrent of selling—a panic (large or small) almost automatically develops.
That is what happened on a huge scale on the morning of that doomsday of Wall Street prosperity, October 24, 1929. There was a vast flood of simultaneous selling orders. There were not enough people standing ready to buy. Prices did not merely decline—they fell hard and fast. Anxious traders took fright and sold in sheer alarm. Whereupon prices plunged downward as if bound for a bottomless abyss.
America was beginning to pay the inevitable price for a long chain of events: the general acceptance of the theory that the way to prosperity was through having as many people as possible buy securities which could be converted into cash at short notice; the acceptance of the theory that the way to make such instant conversion possible was through encouraging margin speculation; the widespread craze for common stocks as the cream of investments—and of vehicles for margin speculation; and the consequent conversion of the market for common stocks into a great gambling casino.
Some of the losses on that morning of October 24 were staggering. Though United States Steel, which a few weeks before had been selling for more than $260 a share and had opened today at 205½, slid down only to 193½, there were other more abrupt nose-dives. Radio, for example, opened at 68¾ and within three frenzied hours was selling at 44½. Montgomery Ward, which had opened at 83, coasted to 50. The volume of trading was terrific. The ticker fell so far behind that its report became almost useless to board-room traders. The telephone system of the Exchange was hopelessly clogged with frantic inquiries. This was panic indeed, sudden, bewildering, appalling.
But another instructive thing happened that day. Shortly after noon a group of Wall Street bankers met at the House of Morgan to form a pool for the support of the market. Thomas W. Lamont was there, representing the Morgan firm; the others were William C. Potter of the Guaranty Trust Company, Seward Prosser of the Bankers Trust Company, and two other gentlemen whose exploits we have specifically noted in a previous chapter of this book—Albert H. Wiggin of the Chase National Bank and Charles E. Mitchell of the National City Bank. The moment that the word got about that these men were on their way to the rescue, the rout stopped and a quick rally took its place. Wall Street—and with it the great company of the prosperous—still believed in the omnipotence of its gods.
The illusion was brief. For the rest of that day and the two succeeding days the market almost held its own, but not quite; on the following Monday the avalanche began again with such fury that all the bankers’ pool could do was to try, by intervening now and then where there were no purchasers at all, to prevent utter demoralization. On Tuesday, October 29, the avalanche reached its maximum force; more than sixteen million shares were sold and the losses in value were enormous. Nor was that catastrophic day the last one of the panic. A rally was followed by further liquidation, and this liquidation continued until November 13.
By that time some thirty billion dollars in capital values had vanished into thin air. If you find such an immense sum almost meaningless, reflect that it was almost as great as the entire cost to the United States of the war against Germany; that it was about ten times as great as the cost to the Union of the Civil War; and that it was considerably greater than the national debt. An overwhelming loss—and the irony of it was that a good deal of it represented money which had already been spent as income by fortunate speculators as the market went up: spent on automobiles and radios, and part payments on houses, and innumerable other purchases which had helped to keep the wheels of industry rolling.
It must clearly be borne in mind that it was the prosperous upon whom fell the brunt of this body blow at the American economy. To be sure there were thousands of stenographers, clerks, janitors, and even day laborers whose painfully acquired savings had gone over the dam; but 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, not unemployed clerks and laborers. Indeed, there were millionaires in those days who looked through the windows of their Rolls Royces with a new envy at the crowds of wage-earners in the streets—the lucky poor who were losing nothing in this catastrophe! The fact that the rich were the immediate victims of the panic helps, perhaps, to explain some of the lavish dividend disbursements of American corporations in 1930. Directors who voted for higher dividends in a season when their companies were dismissing workmen were not simply adhering to the philosophy of prosperity through big profits, not simply trying to re-establish the prestige of their companies among investors; they also, one suspects, felt that they were recompensing the chief losers in the debacle of 1929.
Yet it must also be borne in mind that the indirect effects of the crash were far-reaching. Luxury businesses were hard hit. The fashionable dress-shops were suddenly almost empty. Chauffeurs, maids, gardeners were dismissed. The demand for automobiles and radios and furniture and other expensive goods fell off, and with it, the demand for materials which went into them. Frightened lest their goods pile up on their shelves and uncertain of the future, manufacturers cut down on their production. Thus unemployment rapidly increased; from Maine to California, factories began letting men go.
And of course the panic had a further effect: the whole precarious edifice of values which had been built into the financial system was shake
n. The ubiquitous investment trusts were shaken. The pyramided holding companies which had written up their holdings were shaken. Flimsily financed real-estate and building developments were shaken. Every bank which had an up-to-date investment affiliate or had lent money in quantity against stock collateral was shaken. Every other company which was dependent upon the business of such concerns felt the shock. People still talked as if a speculative stock market were something apart from the rest of the national economy; 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.
2
President Hoover now swung into action.
What he did, if we judge it by the prevailing economic philosophy of the time, was on the whole highly reasonable. He called to the White House a large group of insiders—bankers and industrialists—and labor leaders as well. He urged these men to continue business as usual. The industrialists were not to cut wages, not to abandon construction programs. The labor leaders were to refrain from rocking the boat. Wide publicity was given to the agreement of these men to go along as if nothing had happened. In order to encourage the rich to scatter prosperity about once more, Hoover asked Congress to cut the income tax. He also advocated a public-works campaign to take up any possible slack in employment, thus taking a leaf out of a different book of economics. And he continued, as did everybody else, to assert that conditions were fundamentally sound and becoming sounder. Under his baton, the chorus of insistence that everything was all right, that business was going ahead, that prosperity—in the well-worn phrase of the day—was “just around the corner,” became almost deafening. If loudly expressed wishes had been horses, the American people would have ridden to wealth at a full gallop.
And what happened? The pool managers in Wall Street scrambled to their feet and began to push stocks up again. During the late winter and the early spring of 1930 there was a bull market of considerable dimensions; the volume of trading actually became for a time as great as in the summer of 1929.
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. The prices of some of the favored securities mounted fast and far. By April, 1930, for example, Steel was once more nudging the 200 mark and American Telephone and General Electric had almost reached their preposterous pre-panic heights.
Though unemployment remained severe and the bread-lines in the streets were longer than at the worst of the post-war depression of 1921, stock-market-minded business men hoped and half believed that this was but a temporary trouble: did not the graphs of security prices on the financial pages show an encouraging up-trend? Many corporations, as we have already noted, increased their dividend rates; the total amount of money paid out in dividends was only three per cent less in 1930 than in 1929. New investment trusts were coming to birth, and the pattern which prevailed among them hardly suggested any widespread doubt in the resumption of old-style prosperity; for most of them were “fixed trusts,” the managers of which were to invest in the stocks of the leading corporations of the country (as of 1930) and were not to be permitted to change these investments unless the corporations in question passed their dividends. Tom, Dick, and Harry were cheerfully buying participations in these curiously rigid trusts. Why shouldn’t they? They knew enough economics to know that business ebbed and flowed in cycles; if you knew economics, you knew that the time to buy was after a panic, and that it was the leading corporations of the country that were likely to prosper most in the bull market of the nineteen-thirties.
Something was wrong, however. Business was not actually gaining; it was barely holding its own at a volume considerably less than that of 1929. Presently it began definitely to lose ground. The speculators who had learned the great lesson of the panic hastened to sell. In May, 1930, the stock market collapsed again. And presently the depression entered a new phase—the long, grinding, inexorable, almost uninterrupted disintegration of late 1930 and 1931 and early 1932.
3
Let us try to analyze what was happening in those dolorous years of 1930 and 1931 and 1932.
The analysis cannot be simple, clear cut, dogmatic; for the sequence of cause and effect in our world of endlessly involved mutual relationships is exceedingly complex.
We must remember, in the first place, the continued existence of various distortions in the American economy which had made the recovery and prosperity of the country during the nineteen-twenties an astonishing achievement against odds. We must remember how curiously our foreign trade was balanced—that the only way in which we had been able to permit Europe to buy our goods was by lending her huge amounts of capital, and that obviously this could not keep up indefinitely. We must remember that the farmers who grew our staple crops had never fully recovered from the distress into which the collapse of their overseas markets had plunged them shortly after the war; and that as soon as industry languished, the country as a whole was likely to feel the dragging weight of a comparatively impoverished farming population.
Nor must we overlook the fact that the economic breakdown of the early nineteen-thirties was not simply an American phenomenon, but was world-wide. Europe in particular, staggering under a terrific burden of debts incurred during the war, and hampered by trade barriers built up by bitter national rivalries, had never enjoyed any such boom in the nineteen-twenties as had the United States, and was now drifting into a fresh economic crisis. This was bound to prolong and intensify the American crisis.
But it is doubtful if any of these factors—or all of them together—quite explain a breakdown as cumulative and appalling as that which actually took place. Let us look for other clues.
One of these clues is the increase in efficiency which was being brought about by improved methods of manufacture and of business, and especially by the machine-above all by the power-driven machine. As we have already noted (in Chapter VIII) machines were constantly replacing men. A given number of people were becoming able to produce and distribute more and more goods. There is no need to present specific illustrations of this fact; the Technocrats of 1932 deluged the country with them. But it may not be amiss to remark that the tendency toward technological unemployment about which the Technocrats talked so furiously was not confined to industry; consider, for example, how the output of American farms had been increased by the use of huge reapers and combines and also by the spread of knowledge about better farming methods; or consider how machinery and improved organization had likewise speeded up work in business offices. That the machine was an instrument for the production of plenty is undeniable—but that its increasing use was attended by economic strain is also undeniable. During the seven fat years the men whom it had thrown out of work had been absorbed in other occupations: the man who had lost his job in a textile mill became an apartment-house janitor, the man who had been fired from the automobile factory ran a filling station, and so on. But the strain was there—and it was just barely met.
To meet it, the American economy had to expand. There had to be constant growth—new factories, new construction, new industries, new occupations, new expenditures. The moment this expansion stopped for any reason, the American economy would begin, so to speak, to die at the roots—to suffer from an increasing technological unemployment. Prosperity had to go ahead very fast to stay in the same place.
For years past, this expansion had been achieved with the aid of a huge inflation of credit, and in particular with the aid of the speculative boom in real estate and then of the boom in the stock market. It was as if a huge bellows were blowing upon the industrial system of the country, making the fires burn brightly. Meanwhile, however, this expansion had had
other effects—and they, too, are clues to what happened when the bellows ceased to blow.
For one thing, it had helped to bring about an immense increase in the internal debt of the country. One needs only to glance at the tabulations in Evans Clark’s study of The Internal Debts of the United States to realize what a change had been brought about by the “investment consciousness” of the American people, plus the urgent salesmanship of the dispensers of securities and of life-insurance policies, plus the new financial gadgets of the time, plus the reckless optimism of the boom years. During these years, to quote Mr. Clark’s book, we had “piled up our debts almost three times as fast as our wealth and income increased.” While our wealth was growing only by an estimated 20 per cent, and our income by an estimated 29 per cent, the total amount of our long-term debt had been growing by an estimated 68 per cent—from 76 billion dollars to 126 billion dollars. A large increase? Yes, and it had come on top of another large increase during the war years. If we compare the long-term debt of the United States in 1929 with that in 1913–14, we find the increase in fifteen or sixteen years to have been no less than 232 per cent!
Part of this huge accretion was due to the same factor which had placed such a heavy burden of indebtedness upon Europe—the war. The Federal Government’s debt was 1154 per cent larger in 1929 than in 1913–14. But the states and the smaller governmental units had also increased their obligations—by 248 per cent. And business, too, had succeeded in cumbering itself with fixed claims of unprecedented magnitude. The debt of the railroads had not increased very much, if only because they had been notoriously over-bonded in 1913–14; here the gain amounted to a mere 26 per cent. But meanwhile the total debt of the public utilities had grown by 181 per cent; the debt of industrial concerns, by 172 per cent; the debt of financial concerns (including especially investment trusts and insurance companies) by 389 per cent; and a series of real-estate booms had lifted the total amount of urban mortgages by no less than 436 per cent.
Lords of Creation Page 38