The character of the market had by now become almost completely speculative. As trading turned feverish, action increasingly concentrated in an ever narrower roster of companies and was no longer led by those that were making sustained large profits—the General Motors corporations of the world. Instead, it was frantically pursuing glamour stocks—Montgomery Ward, General Electric, and the most dazzling of them all, Radio Corporation of America. Thus, while the market averages continued to race up, reaching their peak in September, most individual stocks had hit their highs in late 1928 or at best in early 1929. Indeed, on September 3, 1929, the day the Dow topped out, only 19 of the 826 stocks on the New York Exchange attained all-time highs. Almost a third had fallen at least 20 percent from their highest points.
It was during these months that most of the large stock traders sold their positions. Claims by speculators about what they did in 1929 and when they did it need to be taken with some grains of salt. People rarely tell the complete truth either about their amorous exploits or their stock portfolios, the latter being especially true for professional investors whose reputations hinge on appearing to be prescient about the market.
In February, Owen Young, alarmed by the feverish level of stock prices and the Fed’s war of words, sold his entire portfolio of $2.2 million, some of it held on margin. David Sarnoff, Young’s vice president at RCA and a member of the U.S. delegation to the Paris conference, got out in June. John J. Raskob, the man who sincerely wanted everyone to be rich and was touting stocks as a long-term investment in the Ladies’ Home Journal, had apparently liquidated most of his portfolio before his article appeared. Joe Kennedy, catching the last rally, sold in July 1929. Bernard Baruch claims, in his autobiography, to have had an epiphany on the Scottish moors in September of 1929, rushed home and dumped everything by the end of the month. Even Thomas Lamont, the inveterate optimist, sold substantial amounts of his portfolio during the spring and summer.
Even the greatest cheerleader of them all, that most determined of bulls, Billy Durant, got rid of his positions. In April 1929, he had some friends arrange for him to meet secretly with the president. He slipped out of New York, careful not to inform even his secretary of his destination, took a train down to Washington, hopped anonymously into a taxi, and arrived at the White House at 9:30 in the evening, when he was ushered into the president’s study. He told Hoover that unless the Fed eased up its assault against the stock market, there would be a financial catastrophe. It is not clear whether Durant understood that he was wasting his breath, that Hoover was fully behind the Fed’s campaign. He does seem to have realized soon after the meeting that his warnings had gone nowhere. On April 17, he set sail for Europe aboard the Aquitania, and a few weeks later, he and most of his crowd began liquidating their positions.
But behind the scenes, the Board of the Federal Reserve was finally ready to concede that its attempts at “direct action” were a failure. On August 8, after the market had closed, the New York Fed announced that it was raising its discount rate from 5 percent to 6 percent. The next day the Dow plunged 15 points in frantic trading, the largest daily decline in the index’s history. The market suddenly realized, however, that speculators had been comfortably making large profits while paying much higher rates in the brokers’ loan market. Within a day, all the losses were recouped.
Over the next three weeks, the Dow went up another 30 points. Among investors there reigned, as one commentator described it, the sort of “panic which keeps people at roulette tables, the insidious propaganda against quitting a winner, the fear of being taunted by those who held on.” It was symptomatic of the market’s reach when on August 14, the New York Stock Exchange firm of Saint-Phalle and Co. announced that it had opened direct ship-to-shore service aboard the transatlantic liner Ile de France, to be followed a few days later by M. J. Meehan and Co, opening a similar service on the Berengaria and the Leviathan.
Even Europe was drawn into the frenzy. “Scores of thousands of American shares are bought everyday in London alone and Paris, Berlin, Brussels and Amsterdam are pouring money into New York as fast as the cable can carry it,” complained Viscount Rothermere in one of his newspapers, the Sunday Pictorial. “Wall Street has become a colossal suction pump, which is draining the world of capital and the suction is fast producing a vacuum over here. That is why bank rates are rising throughout Europe. That is the reason of the steady withdrawal of gold from the Bank of England. That is the explanation of the frequent visits which the governor of the bank, Mr. Montagu Norman, pays to New York and Washington.”
In July, Norman made his second trip of the year to the United States. He spent most of his weeks of holiday with his old friend Mrs. Markoe at Bar Harbor in Maine but did go to see Harrison in New York. He came back even more pessimistic than after his February trip. He was now convinced that some sort of stock market crash in the United States was inevitable. No one could be sure what might set it off or how bad it would be. The longer the bubble continued, the more unavoidable would be the breakdown. And though the Fed was finally beginning to act, it had left things very late and still remained a bitterly divided institution.
Throughout the summer of 1929, Britain’s reserves came under siege. By the end of July, the Bank of England had already lost $100 million of its $800 million of gold and in August and September, it lost a further $45 million, mainly into the United States. There were also signs that the Banque de France had resumed converting its pounds. Since 1927, the flow of money into France had continued unabated, although now most of it was in the form of gold rather than sterling. By the middle of 1929, the Banque de France had accumulated $1.2 billion in gold and another $1.2 billion in foreign exchange, giving it an extraordinary hold on the world financial situation.
During the two years since Norman and Moreau had first fallen out, the Banque de France, recognizing that it had the power to destabilize the world currency situation, had actually been very restrained in handling its sterling. But the Young Plan negotiations put a new strain on Anglo-French relations. Having made some concessions to Germany on reparations, the former Allies fell out on how to divide the burden.
In June 1929, Britain went to the polls. After four years of high unemployment under Conservative rule, the Tories were voted out of office and a minority Labor government took power. Churchill was replaced at the Exchequer by Philip Snowden, a long and bitter opponent of France and French policy on reparations. At a conference at The Hague in August 1929 to wrap up some of the details of the Young Plan, he entered into a particularly heated exchange with his French counterpart, Henri Chéron, in the course of which he described the French finance minister’s arguments as “ridiculous and grotesque.” The translation into French, “ridicule et grotesque” has a much harsher connotation, implying bad faith and utter stupidity. As the economic historian Charles Kindleberger put it, the English expression could be used in the House of Commons, the French expression would not be allowed in the Chambre des Députés. Chéron, a “fat excitable man” whose enormous girth had made him the constant victim of jokes and who was, consequently, unusually sensitive, took offense at Snowden’s remarks, and sent his seconds to demand an apology—the French were only just weaning themselves off the practice of dueling.
Though he was eventually induced to return to the negotiating table, relations between Britain and France were severely strained. At one meeting during the same negotiations, Pierre Quesnay of the Banque de France is said to have threatened to convert France’s holdings of sterling into gold unless the British conceded. Though the evidence is murky, this was not mere saber rattling and Britain’s gold continued to come under attack.
On August 19, Time magazine ran a cover story on Norman, the “Palladin of Gold,” as it called him. The article described how within Europe “invisibly the battle of gold was on.” In late August, as Britain’s reserves hit a postwar low, Norman warned his fellow directors that unless something were to change, large parts of Europe, including
Britain, would be driven off gold and that they should begin to prepare for the impending havoc. But first another cataclysm was to blindside the world economy.
Wall Street, Black Tuesday, October 29, 1929
17. PURGING THE ROTTENNESS
1929-30
If stupidity got us into this mess, then why can’t it get us out?
—Will Rogers
THERE is an old stock trader’s adage: “Nobody rings a bell at the top of the market.” As Wall Street returned to work after Labor Day on Tuesday, September 3, few people thought that this might be the end of the bull market. The weekend had been unusually hot, and the journey home from the beach was marred by terrible traffic jams and long delays at train stations. Congestion on the New Jersey highways was so bad that thousands of people had parked their cars and finished the journey home to Manhattan by subway.
As bankers assessed the market after the summer, they were assisted by a fresh new voice to add to the blithe new-era optimism of the Wall Street Journal and the dark mutterings about “portents” and “misgivings” from Alexander Dana Noyes, financial columnist of the New York Times. That week, the premiere issue of BusinessWeek hit the newsstands. It sought to bring the successful Time magazine formula of snappy and vivid writing to the corporate world. From the very first issue, the editors expressed their skepticism about the bull market. “For five years at least,” they wrote, “American business has been in the grips of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the ‘new era’ upon which we, or it, or somebody has entered.” It had carried the country “into a cloud-land of fantasy.” “As the fall begins,” they warned, “there is a tenseness in Wall Street . . . a general feeling that something is going to happen during the present season. . . . Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly ‘psychological.’”
The market had become inured to such prognostications on the way up and continued to ignore them on the first day of trading. On September 3, 1929, the Dow traded up a single point to close at a record high of 381. For the next day and a half, it clung to that peak.
At two o’clock on the afternoon of September 5, the newswires reported that the Massachusetts economist and statistician Roger Babson had announced at his annual National Business Conference in Wellesley, Massachusetts, “I repeat what I said at this time last year and the year before that sooner or later a crash is coming . . . and it may be terrific. . . . The Federal Reserve System has put banks in a strong position but it has not changed human nature.” Observing further that “a detailed study of the market shows that the group of advancing stocks is continually becoming narrower and smaller,” he predicted that the Dow would probably drop 60 to 80 points—15 to 20 percent—and that “factories will shut down . . . men will be thrown out of work . . . the vicious circle will get in full swing and the result will be a serious business depression.” That afternoon the Dow fell 10 points, roughly 3 percent.
Babson was a well-known market seer, the founder of the Babson Statistical Organization, the country’s largest purveyor of investment analysis and business forecasts. Every month the company mailed out reams of charts and tables, dissecting the behavior of individual stocks, the overall market, and the economy. Babson had built his forecasting method around two somewhat antithetical notions: that the “ups and downs” of the economy “operate according to definite laws” derivable from Newton’s third law of motion and that emotions were “the most important factor in causing the business cycle.”
Babson had some other quirkier ideas. Having suffered a bout of tuberculosis as a youth, he believed in the benefits of fresh air and insisted on keeping all the windows in his office wide open. In winter, his secretaries, wrapped in woolen overcoats, sheepskin boots, and thick mittens, had to type by striking the keys with a little rubber hammer that Babson had himself expressly invented. He was a strict Prohibitionist, believed that the gravity of Newtonian physics was a malevolent force, and had published a pamphlet entitled Gravity—Our Number One Enemy.44 He had been predicting a market crash for the past two years and until now had been completely ignored.
After Babson’s gloomy forecast, the New York Times sought a rejoinder from Irving Fisher, professor of economics at Yale, and the most prominent economist of the time. Originally a mathematician who had gone on to make major contributions to the theory of money and of interest rates, Fisher was quite as odd a bird as Babson. Having also suffered from tuberculosis—although in his case at the age of thirty-one—he had emerged from the sanatorium a committed vegetarian. He suffered from terrible insomnia and, to cope with it, had designed a bizarre electrical contraption that he hooked up to his bed and was convinced helped him to fall asleep. He was also a proponent of selective breeding and was secretary of the American Eugenics Society; he believed that mental illness originated from infections of the roots of the teeth and of the bowels and, like Babson, was a fervent advocate of Prohibition—by 1929, he had even written two books on the economic benefits of Prohibition. Again like Babson, he was a wealthy man, having invented a machine for storing index cards—a precursor of the Rolodex—the patent of which he sold to Remington Rand in 1925 for several million dollars. By 1929, he was worth some $10 million, all of it invested in the stock market.
Prefacing his remarks with the concession that “none of us are infallible,” Professor Fisher declared, “Stock prices are not too high, and Wall Street will not experience anything in the nature of a crash.” A noted “student” of the market, he based his assessment on the assumption that the future would be much like the recent past, that profits would continue to grow at over 10 percent as they had done over the previous five years. It was an early example of the pitfalls of placing too much faith in the abilities of mathematicians, with their flawed models, to beat the market. Simple commonsense techniques for valuing equities such as those Babson relied on—for example, positing that prices should move in tandem with dividends—indicated that stocks were some 30 to 40 percent overvalued.
Though the market initially fell sharply on the day of Babson’s prediction, the next day, deciding that it preferred Fisher’s sweet elixir to Babson’s harsh medicine, it rebounded. Babson, the “prophet of loss,” as he was now nicknamed, was derided up and down Wall Street, mocked even by BusinessWeek for his “Babsonmindedness.” During the month of September, these two New England cranks—Babson and Fisher—battled for the soul of the market. Every time one was quoted, the newspapers obtained a rebuttal from the other.
The official chronicler of business cycles in the United States, the National Bureau of Economic Research, a not-for-profit group founded in 1920, would declare, though many months later, that a recession had set in that August. But in September, no one was aware of it. There were the odd signs of economic slowdown, especially in some of the more interest-rate-sensitive sectors—automobile sales had peaked and construction had been down all year, but most short-term indicators, for example, steel production or railroad freight car loadings, remained exceptionally strong.
By the middle of the month, the market was back at its highs and Babson’s forecast of a crash had been thoroughly discredited. The broader indices even set new records—for example, the most widely used measure of the market, the New York Times index of common stocks, reached its all time peak on September 19—though the Dow never did get quite back to 381.
Even the usually bearish Alexander Dana Noyes of the New York Times was skeptical of the forecast of a market collapse. It is “not perhaps surprising that the idea of an utterly disastrous and paralyzing crash . . . should have found few believers,” he wrote; after all, in contrast to previous episodes, the country now has “the power and protective resources of the Federal Reserve,” while the market was “guarded against the convulsions of old-time panics . . . by the country’s accumulation of gold.” Previous crashes had all been preceded by an extraneous shock of some sort, which broke the herd ps
ychology. The crash of 1873 had been foreshadowed by the bankruptcy of Jay Cooke and Company. In 1893, it had been the failure of the National Cordage Company, while in 1907, it was the collapse of the Knickerbocker Trust Company. Noyes took comfort in the fact that no such event seemed remotely on hand.
He spoke too soon. On Friday, September 19, the empire of the British financier Clarence Hatry suddenly collapsed, leaving investors with close to $70 million in losses. Hatry, the son of a prosperous Jewish silk merchant, had attended St. Paul’s School in London, immediately thereafter had taken over his father’s business and, by the age of twenty-five, was bankrupt. By thirty-five, however, he was a rich man again, having recouped his fortune by speculating in oil stocks and promoting industrial conglomerates in the heady postwar merger boom. Throughout the 1920s, he had led a roller-coaster career as an entrepreneur, with some spectacular successes and equally dramatic failures. By the latter part of the decade, he had a finger in almost every corner of the British economy. He made a fortune by building a retail conglomerate, the Drapery Trust, and then selling it to Debenhams, the department store; he engineered the merger of the London bus corporations into the London General Omnibus Company, ran a stockbroking firm specializing in municipal bonds, and was the head of an interlocking series of investment trusts that played the stock market. His latest ventures were the Photomaton Parent Company, which operated a countrywide chain of photographic booths, and the Associated Automatic Machine Corporation, which owned vending machines on railway platforms.
A small, sallow, birdlike man with a close-cropped mustache, Hatry was so flamboyant it was said that he even had the bottoms of his shoes polished. He lived in a garishly ornate mansion in Stanhope Gate, off Park Lane, around whose rooftop swimming pool he held lavish parties. He ran the requisite string of racehorses, entertained at his country house in Sus-sex, and owned the largest yacht in British waters, with a crew of forty. Needless to say, he did not endear himself to traditional British society by this vulgarly extravagant Hollywood lifestyle.
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