by Hugh Brogan
Such ebbs in commerce are wholly natural and indeed predictable. In other circumstances their impact and duration can be minimal. Unfortunately, in the late twenties, two other factors made the impact of this particular turndown catastrophic. The first has already been touched on. The Mellon-Coolidge-Hoover philosophy of government and economics forbade the federal government to take any preventive action, and indeed had largely deprived it of any instruments of action, even had it wanted to do something. A modern government can usually stimulate demand by reducing taxation; but Mellon had already reduced taxation so much that there was little further to be done in that line. He could have pressed Congress to lower the tariff, which might have stimulated demand by lowering prices, since cheap European goods could then have entered the American market and forced their American competitors to cut their rates (though that in turn would probably have entailed lower wages and dividends); with the dollars thus obtained the Europeans would have bought American goods, or paid their American debts, and so assisted the American economy. But it is in the highest degree unlikely that Congress, still dominated by protectionists, as events were soon to prove, would have agreed to such a policy, and anyway Mellon never dreamed of proposing it. Finally, the federal government could have acted as governments have done so often since, and by an extensive programme of public expenditure maintained employment and stimulated demand. Unfortunately such a policy was as yet unthinkable. The long Jeffersonian tradition forbade the American government to use its power in that way. Government revenues, it was believed, ought properly to be devoted to extinguishing the national debt, and Mellon was a very proper man. Under his management the debt shrank from $24 billion or thereabouts in 1920 to some $16 billion in 1930.
So if a damaging recession was to be avoided the private sector would have to act. Unfortunately it was wholly inadequate for such a role. It acted, indeed, but everything it did turned a minor fluctuation into a catastrophe. The worst crisis of American capitalism was at hand.
As we have seen, some of the great industrialists understood the importance of a comparatively high wage-level and a comparatively low price level to keep the economy healthy. Inconsistently, they also believed in the prohibitively high tariff; nor did they object to the golden tide of virtually untaxed dividends which Mellon’s policies poured into their coffers and those of their shareholders. Their profits were huge: they ploughed back the bulk of them into new factories, new production techniques, new jobs – which last did something to mitigate the effect of their bigoted anti-unionism. They would not see that the doubling of the average annual earnings of the workforce between 1914 and 1923, a gain of 19 per cent in real terms, and the gain of 13 per cent in real terms between 1923 and 1928, was the true source of their new wealth; they did all they could to prevent organized labour from pushing up wages still more. Membership of the AFL declined from just over four million in 1920 to less than three million in 1929. But the crisis cannot really be laid at the door of the manufacturers. Even a stronger union movement or a somewhat more enlightened wages policy could hardly have beaten back the storm. It is to the financial wing of the system that we must turn in order to understand what happened.
‘The business of America is business,’ said Calvin Coolidge in one of those aphorisms which ensured that the words of Silent Cal would be remembered far longer than those of more talkative politicians. Unfortunately Americans did not understand their business very well – certainly not in the 1920s. The generation of the first J. P. Morgan, as we have seen, knew enough of their weakness to set up the Federal Reserve System; but this measure was not in itself sufficient, it was no more than a first step; and so little did post-war American financiers understand this that they actually did all they could to weaken the FRS – rather like an otherwise unarmed soldier throwing away his rifle before a battle. This was characteristic. At every stage the story displays the devastating consequences of a bland unawareness of economic and political essentials. But perhaps nothing is more shocking than the complacent acceptance of a national financial structure which its manipulators should have known was fundamentally unsound. Thus, the banking system, in spite of the FRS, was still pretty much the ramshackle affair that Andrew Jackson’s depredations had made it. The vast wealth of cash and credit which the American industrial machine, the greatest in the world, generated so abundantly was dissipated into thousands upon thousands of small, amateurishly managed, largely unsupervised banks and brokerage houses, instead of being used to strengthen the central banks so that they could, in time of trouble, come to the rescue of their weaker partners. Every state had a separate family of banks, and the members of each family were essentially isolated, living from hand to mouth, unable to help each other or, too often, themselves. Even in the palmy days of Coolidge prosperity there were over 600 bank failures a year: in other words, every year an appreciable portion of America’s earnings and savings went down the drain. Nor were there effective means for ensuring that bankers or stockbrokers were honest. All too many of them were not; and all too many were idiots.
The high financiers were not much better. If a single moment may be selected as the beginning of the downward journey, it is that of the Dawes Agreement. In itself this was an admirable measure, and it rightly earned its architect nomination as Coolidge’s Vice-President in 1924. It rescued Germany from the abyss into which the reparations controversy, the great inflation of 1923 and the French occupation of the Rhineland had plunged her. It was an act of the highest statesmanship in the best American tradition. But it was not, it could not be, a signal that the German economy was now entirely re-established: at best the patient was beginning a slow and painful convalescence. The financiers of New York saw things differently. They were of the stock which had formerly looked for bonanzas in Eastern canals, in Western ranches, and from goldmines in the Rockies. Part of the Dawes Plan was an international loan to Germany. Wall Street subscribed heavily, and did not stop there. It invested some $3,900,000,000 in loans to Germany – to states, municipalities and private borrowers – in the next five years, with absurdly little consideration (in spite of warnings) of whether it would ever get a decent return on its money. For one thing, the money was in large part not its own, but that of Americans looking for somewhere to put their savings: Wall Street got its profit out of fees for services rendered. It brought borrowers and lenders together, and encouraged them. In this spirit it discovered a Bavarian village which needed $125,000 to build a swimming-pool. By the time the financiers had finished, it had borrowed three million. In the short run this sort of thing seemed justified. A hectic flush of prosperity spread over Germany; an entente was negotiated between France, Britain and their late enemy; reparations, and the war-debts payments which depended on them, flowed smoothly at last. Meanwhile American industry was largely left to look for its financing to its own resources; fortunately its profits were so huge that this was no problem.
Germany was not the only unsound foreign field for investment in these years, though it was the most important. Some $8,500,000,000 in all went abroad, not all of it unwisely. But eventually it dawned on Wall Street that there was more money to be made at home, and the bankers diverted their attention and their funds from Germany to the United States. This had a bad effect on Germany: it was like cutting off a patient’s blood transfusion. It was to be even more devastating for America.
In 1927 the economy seemed to be on a very solid footing. The boom was in some ways smaller than its predecessors. Percentages of profits, of numbers employed, had been higher in earlier times; money had been cheaper. But this is one of those cases where percentages are misleading. The fact is that the sheer quantity of wealth had never been so great, so tempting. The economy was expanding; there were vast sums to be earned by the middlemen who organized the expansion. Unhappily for themselves the New York financiers had let much of this business slip through their fingers. To recapture it they had to go into the stock market: to use their enormous capital reserve
s not to assist the launching of new enterprise, the refinancing of old, the development of successful undertakings – that could come later – but to regain control from the usurpers of Detroit, San Francisco and Chicago. New York began to buy; and the price of shares began to soar.
It had been rising ever since the end of the post-war depression, for indeed there was a great deal to be said for spending your more or less untaxed savings on stocks and shares which, in those sunny years, would yield every year a higher dividend (reflecting the boom in production), which would also be largely untaxed (good Mr Mellon). But the injection of Wall Street’s huge resources into the market set off an upward rush. The bankers wanted shares: they bought them, paid and looked for more. As the months went on, lesser mortals were drawn in. It looked so simple. To judge from recent performance, you only had to spend a hundred dollars today to become rich tomorrow as the high interest rolled in. Even the dullest, safest stocks were paying 12 per cent by the end of 1928: an excellent rate of return, better than you might get by putting your firm’s working capital into further production. Not only that, the price of shares themselves was going up. It was irresistible. No work, no skill were required; there was no chance (it seemed) of losing. The middle class took the plunge. By the late summer of 1929 there were approximately nine million individual investors in the market.10
It was a heaven-sent opportunity for swindlers. Some were merely incompetent bankers or stockbrokers who thought they understood economics: in good faith they advised their ignorant but greedy clients to buy – to buy almost anything; they did so themselves; the less scrupulous of them helped themselves surreptitiously to their clients’ money, or dipped into the funds of the institutions they headed, to further their schemes. Bigger men, often previously respectable men, launched new corporations with alluring tides (the American Founders Group, the Shenandoah Corporation, the Blue Ridge Corporation) and misleading prospectuses: they thus parted many a fool from his money. The biggest sharks of all – Ivar Kreuger, the Swedish match-king, Samuel Insull, the English-born electricity wizard (in his youth a protege of Thomas Edison) – raised colossal sums on the market to further their ever more colossal ambitions. They thus got a reputation for genius: by the end the very size of Insull’s operations (which he himself no longer understood) seemed to be proof that money was safe, if invested with him. In I932he was to flee the country to avoid embezzlement charges. Self-styled experts in the financial press (read more and more widely, with uncomprehending awe) advised as confidently and rashly as stockbrokers, and were as often self-deceived. Prices began to gallop. The silent, hidden battle for ownership of the goose which laid the golden eggs continued: almost unnoticed, she started to lay rather fewer.
This was how matters stood at the moment of Herbert Hoover’s inauguration in March 1929. The vast stock-market bubble was still swelling, and the few cool heads in America understood perfectly well that it would burst, as all previous bubbles had burst since the days of the South Sea Company. But they were afraid to incur the dreadful odium of pricking it. Indeed, the outgoing President had announced that in his opinion share-prices were low. A friend asked incredulously if he really thought this. Coolidge replied that in his Yankee opinion anyone who speculated on the stock market was a fool; but as President of the United States and head of the Republican party it was his duty to tell his followers what they wanted to hear. The Federal Reserve Board made a last timid attempt to discourage the gamblers by raising the rate charged for their bank loans by 1 per cent, and by suggesting that anyway FRS banks ought not to lend their clients money for stock-market operations. Unfortunately Charles E. Mitchell, head of the National City Bank and a director of the Federal Reserve bank in New York, the chief component of the system, was deeply involved in the speculation: he used every ounce of power and influence at his command, and forced the Board to eat its words. This was the last effective exercise of the control which for fifty years Wall Street had wielded over public financial policy – and it was utterly disastrous.
For, thus encouraged, the boom roared on. Shares were now changing hands at prices which no dividends would ever be large enough to justify. You bought a share only in order to sell it at a profit; you bought it ‘on margin’ (with credit, that is, not cash); you assumed that there would always be another sucker. Yet by the late summer warehouses were choked with unsold goods, and factories were therefore beginning to diminish their output. It dawned on some of the shareholders in September that it might be prudent to sell their shares. At least one of the big professionals decided that the time had come to be a bear: to try for profit by selling short, thereby bringing the market down, and buying at the lower price thus produced. The Dow Jones average began to decline.
At first the suckers did not notice, or, if they did, assumed that the price rise would soon resume. It did not; and through September and October the snowball of sellers grew. There came a day – 23 October 1929 – when, suddenly, it seemed that everybody was selling: over six million shares changed hands, and prices slumped. The next day was remembered as ‘Black Thursday’: the wave of selling continued, a record-breaking 12.9 million shares changed hands, and only the intervention of a bankers’ consortium led by the House of Morgan stopped the price of shares collapsing completely. But already thousands of small investors were ruined, as were some stockbrokers (at least one of these tried to commit suicide at the end of the day’s trading). Things were calmer on Friday and Saturday; and President Hoover, like Coolidge before him, felt it his duty to issue a reassuring statement. ‘The fundamental business of the country,’ he said, ‘that is production and distribution of commodities, is on a sound and prosperous basis.’ Unfortunately this remark carried with it the connotation that perhaps, though the fundamental business was sound, the stock market was not. Sunday was the day of rest; on Monday the slide began again. Nine million shares were traded; by the end of the day the price of shares had gone down by $14,000,000,000 altogether since the middle of the previous week. The selling had been sharpest at the end of the trading day. Next day, ‘Black Tuesday’, collapse was total: 650,000 shares in US Steel, bluest of ‘blue chips’, the most respectable of ‘securities’, were dumped on the market in the first three minutes. The New York Stock Exchange reacted like a zoo where all the animals had gone mad. The superintendant later recalled how the brokers ‘roared like a lot of lions and tigers. They hollered and screamed, they clawed at one another’s collars.’ And they sold and sold and sold. Radio collapsed, General Electric collapsed, Tinker Roller Bearing and Anaconda Copper collapsed. It was as if the whole fabric of modern, business, industrial America was unravelling. Montgomery Ward, the great mail-order firm, collapsed. The bankers’ consortium of the week before was quite unable to stem the torrent. Woolworth collapsed. Men rushed screaming from the floor into the street: ‘I’m sold out! Sold out! Out!’ Trinity Church on Wall Street was packed with desperate men of all creeds in search of comfort. By the time the exchange closed at 3 p.m. 16,383,700 shares had been sold at a loss of 810,000,000,000 – ‘twice the amount of currency in circulation in the entire country at the time’.11 And, simultaneously, panic had been wrecking all the other stock exchanges – in San Francisco, Los Angeles, Chicago. A great part of a generation’s savings had been wiped out. The rest were to go in the long slow slide that went on until 1932, when US Steel, which had stood at $262 a share in 1929, stood at $22; General Motors at 18; Montgomery Ward at $4. Coolidge prosperity had come to a brutal end.
For if the market for industrial products had been slackening in the summer, when cash and credit seemed to be in limitless supply, it could only come almost to a halt when, suddenly, there was no money, or, at least, there was a great shortage of it. The consequences were devastating. Money is the lubricant of trade: that, indeed, is its only function. It comes in many forms, but basically in two, currency and credit. The stock-market crash destroyed credit: nobody trusted banks or brokerage houses any more; nobody would lend against th
e security of stocks and shares. Consequently there was a desperate scramble for currency on the part of all those who needed money to keep themselves and their businesses afloat, for wages still had to be paid, bank loans serviced, raw materials acquired, bills, of all kinds, settled – and no creditor was now willing, or indeed could long afford, to wait for payment. All plans for industrial expansion had to be abandoned. Middle-class consumers suddenly had to retrench, or worse: for all too many of them had bought shares on margin and were now called on for cash. Often they could only raise it by selling their possessions for what they could get – the wife’s fur-coat, the family car, the house itself -and the cumulative effect of such forced sales of course helped to reduce prices and therefore earnings and profits. Even worse off were people with mortgages: these were usually short-term affairs, but before the crash it had been easy enough to re-finance them. Now, suddenly, it was almost impossible, and there was an epidemic of foreclosures. The housing industry slumped. Even those who still had money in the bank, few debts and good salaries, were affected by the panic and paused in their outlays. It became difficult for firms and corporations, whose shares were sliding down, to borrow the money they needed just to keep their businesses going: bankers were now hesitant, all the more so as many of them were themselves in deep trouble, having thrown away vast sums in stock-market speculation. Soon, as a result of this contraction in trade, factories began to lay off their workers, who thus turned, in an instant, from contributors to the national income to charges upon it. Unemployment, which according to the federal bureau of labour statistics stood at 1.5 million in 1929, was up to at least 3.25 million by March 1930. And soon the factories began to close down altogether.