by Dan Hampton
The United States emerged from World War I like a teenage boy surprised by his newly discovered muscles. Though the industrial flexing of 1914 to 1918 was minuscule compared to what would come during the Second World War, it was enough to awaken the potential of the United States, and in loaning the Allies the money needed to purchase military matériel, America overtook Britain as the largest creditor nation on Earth. By the early 1920s U.S. foreign investments totaled nearly $16 billion, with $4 billion to postwar Germany alone.
Herein lay the problem.
The fragile and insecure Weimar Republic had to make good on 132 billion gold marks, or about $32 billion in U.S. dollars, in war reparations to Belgium, France, and Great Britain for Imperial Germany’s “Criminal Pride.”* In 1919 Georges Clemenceau, premier of France, said of the latent Teutonic threat, “The next time, remember, the Germans will make no mistake. They will break through into Northern France and seize the Channel ports as a base of operations against England.”
Unfortunately for the world, he was prophetically correct, and a large slice of blame lies with political decisions that fostered the bad economics. Subjectively, the Allied powers’ thirst for vengeance can be understood, but objectively it was a disaster and many diplomats disagreed with the terms, rightly fearing the future threat of a desperate Germany. The World War Foreign Debt Commission was established in February 1922, one month after Bob Hoover’s birth, to manage the repayment. Fifteen separate agreements were signed based on each nation’s ability to pay, with terms extending sixty-two years into the future.*
In 1924, when George Welch was six and Ken Chilstrom was a toddler, Washington loaned Berlin the funds needed to meets its postwar debt service. With Germany now fulfilling its obligation, then France, Belgium, and Great Britain could repay the $7 billion owed to the United States—with interest—and everyone would win. This would, it was hoped, permit Europe to recover and resume full trade, including significant imports from America and thereby bolstering both economies.
After a brief postwar recession, America recovered and had an unprecedented, though relatively short, burst of prosperity and growth. Parents such as George Lewis Schwartz or John and Emma Chilstrom would have been fascinated, as America was in general, with amazing new products flooding department stores. Toasters, vacuum cleaners, telephones, and refrigerators to name just a few; automobile production was surging and there were more cars in New York alone than in all of Germany. Dupont Chemicals, where George Welch’s father worked as a senior research chemist, had patented a new fast-drying, hard lacquer and suddenly there was a rainbow of color choices for cars other than Ford’s boring, utilitarian black.
By 1925 the radio craze had struck in full force and the WSM Barn Dance was on air in Bob Hoover’s home city of Nashville.* Over $60M was spent on sets and spare parts, while the number of broadcasting stations increased from 30 in 1922, to over 500 by 1923. Radio shows like Burns and Allen or Fibber McGee and Molly, both of which premiered in the 1930s, kept listeners across the country amused, while NBC and CBS news programs brought world events into living rooms across the country. During July 1921, three months after Ken Chilstrom was born, 1 in 500 American homes had radios and listened as the Demspey-Carpentier fight changed sporting events into mass entertainment.
Kids growing up in the 1920ss would have been enthralled with the House of Myths or Amos ’n’ Andy; Ken Chilstrom thrilled to Uncle Don’s Strange Adventures for Children as his parents relaxed with jazz, opera, or show tunes from commercially sponsored shows like The Fleischmann’s Yeast Hour, or even the Champion Spark Plug Hour. At least six million American radios were tuned to Graham McNamee as Charles Lindbergh arrived in Washington on June 11, 1927, and during the following summer came Plane Crazy, the film debut of Mickey and Minnie Mouse.
But there were problems, of course.
By 1920 approximately 30,909 national and state banks existed in the United States, and many were not the solid, secure institutions of the previous century. Created ad hoc to take advantage of the rapidly inflating economic bubble, many of these banks were run by less than qualified individuals who used them to play the decade’s great game: speculation. Real estate was a favorite, especially in Florida and California. But a 150 mph storm hit Miami and Fort Lauderdale head-on in 1926, and at that time was called “the most destructive hurricane ever to strike the United States.” Two years later, during the night of September 16, 1928, another one roared ashore, flooded Lake Okeechobee near Palm Beach, and the dikes dissolved. Several thousand were confirmed dead and property damage was significant.
California (unsurprisingly) simply overdid it. Real estate permit values increased tenfold in “value” over a few years, and by middecade a developer was quoted saying, “We have enough subdivisions and lots for sale and in process of development to accommodate the cities of New York, Philadelphia, and Detroit.” With East Coast real estate awash in storm water and a bloated West Coast market, the banks panicked and began pulling in their notes.
Stocks were the other speculative El Dorado. The Great Bull Market of 1927 to 1928 saw 577 million and 920 million shares traded, respectively. The chance to get rich quick was intoxicating, and broker loans ($8.5 billion by September 1929) allowed people to invest with only 10 percent down while the brokerage house carried the rest on margin. Everyone, it seemed, was jumping aboard the prosperity train, including farmers who mortgaged their land and amateurs gambling with money they did not have.
It could not last.
Like tremors before an earthquake, all the signs of an impending financial calamity were in place by the summer of 1928. Tens of thousands of farmers had mortgaged their properties to play the market, yet with agricultural prices falling they began defaulting on their overvalued, heavily indebted farms, and at least 40 percent of the rural banks in business in 1920 had by early 1929. With Herbert Hoover’s nomination in June 1929, optimism rebounded and the volatile situation stabilized—temporarily. In his June acceptance speech Herbert Hoover gave voice to the national optimism by stating, “We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse vanishing from among us . . . we shall soon, with the help of God, be in sight of the day when poverty will be banished from this nation.”
Little did he know. But others did, and savvy investors like trader Michael Meehan and GM executive John Jakob Raskob discreetly sold off large chunks of stock while the professional bankers and businessmen continued to worry. The average investor didn’t understand or care, as long as the brokerage houses continued to hold 300,000,000 shares on margin and the dividends kept rolling in. The market dipped in December, then, in February 1929, sharply collapsed. Margin calls forced sell orders and a record 8,246,740 shares changed hands that month. The Federal Reserve Board refused to act and publicly stated that it would not “contemplate the use of the resources of the Federal Reserve Banks for the creation or extension of speculative credit.”
It was an understandable position but, in this case, shortsighted and disastrous. Bankers like Charles Mitchell of the National City Bank in New York well understood the peril, and his institution alone advanced $20 million to cover the calls, keep the brokerage houses above water, and the market alive in hopes that it would stabilize. Economists moaned but the general public ignored it. It was, the uninformed or greedy said, just a correction, and they kept buying in a frenzy of optimistic denial. Investment trusts, much like modern hedge funds, proliferated, and speculative ventures of all types permeated the American economy.
And why not? Skirts were shorter than ever before, and Prohibition was a dead letter; skyscrapers continued to climb, roads were improved, and automobiles were everywhere. Hemingway’s Farewell to Arms was released along with William Faulkner’s The Sound and the Fury, and Erich Maria Remarque’s huge bestseller All Quiet on the Western Front hit the shelves. Even though Voltaire’s Candide was banned in Boston, one could sway to the rolling hoarsenes
s of Louis Armstrong’s “Basin Street Blues,” or drink illegal martinis to Ben Selvin crooning “My Sin.” That year also found Commander Richard Evelyn Byrd shivering in Antarctic darkness waiting to fly to the South Pole, with the New York Times headline in late May exuberantly proclaiming:
COLONEL LINDBERGH WEDS ANNE MORROW IN HER HOME; MAY FLY ON HONEYMOON
Aviation stocks remained among the highest, with Curtiss reaching nearly 150 points while Wright Aeronautical, now the premier manufacturer of engines and basking in the light of Lindbergh’s successful flight, approached 300.* The Federal Reserve Board bumped its discount rate to cool the fever, but it had little effect as investors simply borrowed from other sources. Five months after Ken Chilstrom’s ninth birthday the Dow Jones Industrial Average hit a record of 381.17 on September 3, but on Tuesday, October 24, the cracks widened and spread.
By Thursday everything from U.S. Steel to Montgomery Ward crashed. People panicked and, as before, bankers acted quickly to minimize the disaster. Their motives were practical, of course, not altruistic. They knew if they could restore some sense of balance and prevent a total market collapse, then measures might be taken to repair the damage before it became a catastrophe. This time six men, heads of the most important U.S. banks, met in the Wall Street offices of J. P. Morgan and Company across from the Exchange. In a matter of minutes they each pledged $40 million from their respective institutions, $240 million in all, to prevent an economic meltdown. The market, they believed, would recover if certain key securities were stabilized and margins met.
It worked.
Panic subsided and by the end of the day, after some twelve million shares changed hands, stocks actually closed higher in several cases. Friday and Saturday was still a roller coaster but on Monday, after the fear had passed, jittery investors decided to cash out while they could rather than risk another Black Thursday. So, on October 29, a massive dumping of stocks occurred and the result was an even blacker Tuesday, with 16,410,030 shares traded by the closing bell. This time it set off a chain reaction among the other North American exchanges, including San Francisco, Chicago, and Toronto, then the major foreign exchanges in London and Paris. Like spilled paint spreading across a floor, the consequences spread and amplified, exacerbated by diverse causes but financially apocalyptic in effect. Fortunes were lost and made. Society was irrevocably altered as men and women adapted to their new reality. Though some men deserted their families in the face of fear and uncertainty, most did not. The Chilstroms, Welchs, and countless others like them took a deep breath, mastered the dry-mouthed fear that comes from fearing for a family, and persevered.
They held on.
Though their faith in government paternalism, banking security, and the wisdom of businessmen was forever damaged, they did not lose faith in themselves or the hope represented by their children. This mental agility, perseverance, and toughness to endure a disaster none had foreseen was passed on to their children. Teenagers like Ken Chilstrom and George Welch, who would go on to force the world back into a livable place and, in so doing, also force the demon out into the open.
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Part Two
Into the Fire
There are no great men, just great challenges which ordinary men, out of necessity, are forced by circumstances to meet.
FLEET ADMIRAL WILLIAM FREDERICK HALSEY
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Three
The Next Leap
By the mid-1930s America was recovering from what Lionel Robbins, a British economist, called the Great Depression. Though he was arguably the first to capitalize the phrase, president James Monroe used the same words in his 1820 Fourth Annual Message, and the 1928 Republican Party proudly stated, “Under this Administration [Coolidge] the country has been lifted from the depths of a great depression to a level of prosperity.”
Still, though the Big Bull Market died and took with it literally billions in profits, this did not, by itself, provoke the Great Depression. The president reacted relatively decisively with a public works program to stave off unemployment, and tax cuts to stimulate the deflated economy so, by the New Year, there was a tentative recovery in progress. A recovery that might have survived, lessened the financial impact here and abroad, and very possibly prevented, or at least delayed, the international malaise leading to the Second World War.
Most critical, and often the least discussed, was the failure of the U.S. Federal Reserve system to do exactly what it was created to do: prevent a financial catastrophe. Twelve member banks with their respective board of governors were backed by the government and responsible for several key functions. They would set the discount rate, the prime interest rate charged by Federal Reserve banks to loan money to commercial banks. By regulating this, the economy could, in theory, be manipulated to either slow or stimulate growth as conditions dictated. The Fed also issued paper banknotes and determined the reserve limits of cash each member bank kept on hand. It was from this reserve that monies could have been paid out to smaller institutions to prevent the 1,352 bank failures in 1930 alone. Finally, in late December 1930, the Bronx branch of the Bank of the United States was forced to close its doors after losing $2 million in panicked withdrawals. This caused a wider panic as word spread that banks were closing and by the end of the year over $550 million in deposits had been liquidated.
But the Federal Reserve did nothing.
Then, the month following George Welch’s twelfth birthday, the U.S. Congress enacted the Smoot-Hawley Tariff Act. A protectionist piece of legislation, this was theoretically authored to protect American agriculture from foreign imports and pushed through by President Hoover in fulfillment of a campaign promise, a promise made before the crash of 1929 and signed into reality without consideration of its effects on the weakened economy. More than this, the act triggered retribution from European markets that decimated foreign trade on both sides of the Atlantic, pouring fuel on simmering nationalistic fires in Germany, Italy, and Japan. During the September Reichstag elections, the National Socialists, or “Nazis” for short, won over 18 percent of the vote, becoming the second-largest party in Germany.
Then came the drought in North America.
It began in the dry summer of 1930 and became a full-blown disaster in 1934, 1936, and 1939. Sparse rainfall turned over 100 million acres of the Oklahoma and Texas panhandles into a barren wasteland, which later expanded into Kansas, Nebraska, Colorado, and New Mexico. Winds from within the “Dust Bowl,” as it was subsequently named, stirred up huge clouds called “black rollers” that blew as far as the East Coast. Farms disappeared and a mass migration of homeless, destitute Americans trudged out of the Bowl looking for a fresh start and exacerbating the overcrowding, unemployment, and desperation in large urban centers.
It was into this world then, that the adolescent demon hunters were growing to maturity. Ken Chilstrom’s father had lost his job at J. C. Penney’s, and like thousands of others had to migrate to the nearest big city in hopes of finding work. In this case it was Chicago, and the little suburb of Elmhurst. Though not inundated by mass communication or instant news, Ken was certainly aware of some issues facing the country, at least as it affected him. He did realize that all was not right in his parents’ world, and, though too young to recall much of the Roaring Twenties Ken, like most children, were affected in varying degrees, mentally and psychologically, by the Great Depression.
“Money was scarce,” Chilstrom recalls. “We didn’t even have a radio anymore. I worked five jobs, including paper routes for the Chicago Tribune and Liberty Magazine.”
Chuck Yeager, growing up in Myra, West Virginia, might have been the least affected, as he later wrote, “it had no real impact when you were already so low on the income scale.” For him, shooting squirrels and rabbits for his mother to cook was just part of life. Through it all the children, many now teenagers like George Welch and Ken Chilstrom, absorbed their parents’ resiliency to become self-sufficient, adaptable, and tough.
Yet in this chaotic, unsettling, and often desperate time, aviation provided, as it always had, inspiration and hope. On April 20, 1930—Ken Chilstrom’s ninth birthday—Charles Lindbergh and his new wife flew from Los Angeles to New York in fourteen hours and forty-five minutes; a new coast-to-coast record. “I told my father I was enthralled with the idea of flying from hearing about Lucky Lindy. I think it was the first time I realized that this was what I wanted to do.”
He was not alone. Thousands of little boys, and girls, felt the same way. Two weeks before Smoot-Hawley was signed, America was further awed when Lieutenant Apollo Soucek took off from Naval Air Station Anacostia and set a world altitude record of 43,166 feet in an open-cockpit Wright Apache.* By the end of the year Glenn Curtiss had died in Buffalo, New York, and Clarence Birdseye patented his quick freezing process. The spring of 1931 saw “The Star-Spangled Banner” officially adopted as the national anthem and shortly before George Welch turned thirteen, the Empire State Building opened to the public. Most dramatic, on June 23 Wiley Post and Harold Gatty lifted off their Lockheed Vega, Winnie Mae, from Roosevelt Field to circumnavigate the world in eight days.* This was the same Long Island airfield where Charles Lindbergh left for Paris four years earlier, and the famous pilot was tragically back in the news himself in March 1932 when his baby, Charles Augustus Lindbergh Jr., was kidnapped. The toddler’s little body was later found within miles of his Hopewell, New Jersey, home.