-Caveat Lector- an excerpt from: Once In Golconda - A True Drama of Wall Street 1920-1938 John Brooks�1969 Truman Talley Book/ E. P. Dutton ISBN 0-525-48166-4 ----- A good book of social history. A sympathetic study. The cast includes many Bonesman and their family members. Om K ----- Chapter Five Things Fall Apart I The perfect public forum for the mighty of finance was the transatlantic shipboard interview. In those times an annual summer trip to Europe, combining business with pleasure, was considered all but de rigueur in the upper reaches of Wall Street, and in the absence of transatlantic air service an ocean liner was the way of getting there. The appearance of a powerful man's name on a passenger list was just about the only routine occasion for advance public disclosure of his whereabouts, and probable ready availabiiity to reporters, at any given time. Thus each June and July, as the advance of summer gradually converted the city into a caldron that would steam intermittently until Labor Day or after and the North River piers came to echo with the farewell hoots of departing leviathans, the newspaper reporters culled the lists for the names of Morgan partners, Stock Exchange officials, or famous pool operators, and, finding them, took pains to be on deck with pad and pencil shortly before departure time. As for the mighty men, they could refuse interviews or sequester themselves in their staterooms if they so desired. But often they did not so desire. On the contrary, they sometimes selected their departures and arrivals as the moments to make their public statements, invariably referred to in the press as "rare." The fact that their presence on the ship was public knowledge gave them the opportunity to present themselves as reluctant subjects, men trapped into interviews that they could not in democratic courlesy refuse; in fact, they often came on board with carefully prepared and memorized statements. The circumstances gave them a chance to say what they wished to say while, to outward appearances, maintaining the financial traditions of conservative reticence, unavailability, dignity, and mystery. So every early summer and early fall, the papers would be full of these "rare" public statements from the "usually unavailable" nabobs, and sometimes the market would be rocked by the wash from the statements. The great liners came to be the royal processions of American finance. The mighty men left for Europe, and the market, reacting to their buoyant words, bellowed "Bon Voyage"; they landed at Southampton or Le Havre, and the market cried "Bravo"; their stately conveyances again approached New York, and, as Winkelman wroter "great salvos of welcome arose from the floor of the Exchange." Around midnight on Saturday, July 31, 1926, the Morgan partner Thomas Cochran, having boarded the liner Olympic shortly before so as to get a night's sleep before her early morning departure, consented to an intetview with a ship news reporter. The following Monday at just past noon, the Dow- Jones financial news ticker carried the result into banks and brokerage houses in Wall Street around around the nation. Among other things, Cochran was reported as having said, "General Motors running at its present rate is cheap at the price, and it should and will sell at least one hundred points higher." Doubtless many of the Dow-Jones subscribers rubbed their eyes and looked at the broad tape again. The elder J. P. Morgan, once asked by a reporter what the market was going to do, had replied with magnificent evasiveness, "It will fluctuate." Evidently times had changed. Not only was a leading voice from the imperial Corner, 23 Wall Street itself, stooping to tout a specified stock with an explicit future-price prediaion, in the terms usually associated with the more importunate sort of brokerage-house telephone sales man. That in itself would have been enough to cause jaws to drop. In fact, as the New York Times said later, "there was no precedent on Wall Street for such an episode." But, in addition, Cochran was�and was publicly known to be�very much of a General Motors insider, in a quasi-fiduciary relationship to the company. J. P. Morgan & Company was General Motors' banker, the firm had huge holdings of the corporation's stock, and some of its partners were General Motors directors. Since the General Motors board had met recently and since it could be assumed that Morgan partners were in the habit of communicating with each other, there was reason to believe that Cochran knew what had taken place at the meeting, and his words appeared to be what was called�although not in Morgan circles�a feedbox tip. Within minutes, more than half of all the brokers and traders on the Stock Exchange floor were clustered around the post where General Motors was traded. Before the day was over, more than a quarter-million shares of the stock had been traded and its price had risen from 189.5 to 201. It was much the same the following day: other listed stocks, and the other trading posts on the floor, were virtually neglected in the frenzy to buy GM, which rose 12.5 more points. On Wednesday Cochran, a thousand miles at sea but fully informed as to the brouhaha, sent a radiogram intended for publication in which he disclaimed the interview only partially. He had "authorized" no statement predicting the future price of the stock, he said; otherwise he stood by the interview. Wall Street had no trouble deducing what had happened�the shipboard reporter had violated the time-honored rule of Morgan partners, which they shared with kings and presidents, that they never be quoted directly except by specific permission. Cochran's message from mid-ocean had saved his face before his partners, but it had not really much mitigated the strangeness of his and his firm's action. Regardless of what he had authorized, the fact remained that he, apparently with his partners' approval, had blatantly plugged a stock in which they were interested. Next day, as GM continued to soar, the Wall Street Journal praised Cochran for his frankness, expressing the view that it was a sign of public spiritedness when corporate insiders shared their favorable inside information with the public rather than keeping it for their own use. But this was rank heresy; even assuming Cochran had disclosed any seclets, which he hadn't, the form of "disclosure" in which he had indulged was all too close to wanton and self serving manipulation; surely the proper means of corporate disclosure of favorable news was a corporate statement, not an interview with one insider. That the tip was no bum steer became clear soon enough�on August 12, when General Motors anncunced a 50 percent stock dividend, worth $600 million to its stockholders, which soon sent the stock on up to new heights. So those who had acted on Cochran's words had made money, pots of it, that might otherwise have gone to insiders like himself, and to this extent he might indeed be said to have worked in the public interest. But something more important had happened. J. P. Morgan & Company had descended from its pedestal. Perhaps just once�perhaps in part, yet not wholly, through a reporter's ignorance or bad faith�it had lent itself to the spreading puffery and free-wheeling morality of the growing speculative boom. Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world. II Things didn't visibly fall apart in 1927; instead, it was the year the big boom got going in earnest. A year after Cochran's interview the Dow-Jones industrial average stood half again as high as at the time of it. Charles Lindbergh's flight to Paris that May had helped by attracting attention to aviation stocks, but much more than that, it had helped psychologically, by bolstering national confidence in the unlimited possibilities of life�particularly life in America. What if there had never been such a stock malket before, in this or any country? There was going to be one now. Nor was the boom all hopes and fantasies; in spite of a mild recession toward the end of the year, business in almost all its aspects was good, giving the stock market a sound underpinning. Who better than President Coolidge, for whom the boom had already long since by common consent been named, to put the new spirit into words? On November 17, 1927, he said that America was �entering upon a new era of prosperity." So the New Era was born; the phrase meant permanent prosperity, an end to the old cycle of boorn and bust, steady growth in the wealth and savings of the American people, continuously rising stock prices.... There was only one recognized cause for concern. As more and more people sought to share in stock-market prosperity, more and more borrowed money in order to do so. They borrowed it from brokers, who permitted (or, rather, encouraged) them to buy stocks on a cash margin�sometimes a very thin margin, say 10 or 20 percent of the value of the stocks they bought, with the balance being borrowed; and the brokers in turn borrowed from banks, in what was called the call-money market. This had been standard practice for years, but now the total sum of banks' loans to brokers suddenly began to rise to alarming new heights, and the credit structure of Wall Street began to look top-heavy and insecure. Such a contingency, too, had long since been anticipated, and the machinery to control it existed. It was chiefly to permit the regulation of credit, through the establishment of a master interest rate on loans and the adjustment of bank reserves, that Congress in 1913 had established the nation's central bank, the Federal Reserve System, charged to act in the interest of monetary stability, and independent of political direction even from the President himself. In 1927 the Fed, as regulator of the economy, might have been expected to restrain wildly proliferating stock-market credit by raising its master interest rate, the so-called discount rate, and reducing bank reserves. It did the opposite. At a famous�or in famous�meeting on July 27, its officers decided on a course of making money easier to borrow rather than harder. It was some thing like the police issuing guns to people on the streets in a time of threatened riot, and it was an action that has since been blamed for many unhappy events that followed. To explain it, we must know somthing of the extraordinary man who, as the Fed's dominant force, was the nearest thing Wall Street in the 1920s had to a philosopher-king. His name was Benjamin Strong, he was governor of the Federal Reserve Bank of New York, and he was quite probably the most dedicated central banker the country has ever had He was a tall, handsome man with a large nose and ruthless eyes�a Morgan partner type racked with secret sorrows and ill health, and relentlessly self-driven. Born in 1872 in a small up-Hudson town, he came from a long line of Yankee merchants and traders, but did not grow up wealthy; he wanted to go to Princeton but never got there, and started working in Wall Street at sixteen. In 1898, married and the father of four, he moved with his fami]y to suburban Englewood that era's dormitory of Morgan partners, and there met and became friends with the great ones�Henry Davison, Thomas Lamone, later Dwight Morrow. But for special circumstances he would surely in due course have become a Morgan partner himself. In 1900 he was appointed treasurer of the Eng]ewood Hospital, of which Davison, five years his senior, was president. ln 1904 Davison made him secretary, and in l909 vice president, of the Bankers Trust Company; the man he succeeded in each post was Thomas Lamont. Obviously he was riding a trolley leading straight to a desk at the Corner. But then in 1913 the Federal Reserve System came into being (largely in belated reaction to the Panic of 1907), and the two leading bankers among its founders, Davison and Paul M. Warburg of Kuhn, Loeb, decided on Davison's protegy Strong as the man to head the System's New York bank. (Interesting, though hardly surprising, that when it was decided that the economy needed a degree of regulation, Morgan and Kuhn, Loeb should choose the man for the job.) Strong at first refused. He�along with Davison and Warburg�had opposed the structure for the System as approved by Congress, consisting of a network of regional banks directed by a board sitting in Washington; Strong like most Wall Streeters felt such an arrangement would inevitably make the System subject to political influence regardless of any disclaimers, and wanted a single central bank in New York, on the model of the Bank of England. But now, at the insistence of Davison and Warburg, he relented; in 1914 he assumed the governorship of the new Federal Reserve Bank of New York. His life was unhappy and uncomfortable, and destined to become more so. In 1905 his first wife had killed herself (and Davison had taken the Slrong children into his household). In 1916 his second wife left him. The same year he was stricken with tubercuiosis, still, in the same era in which The Magic Mountain was written, known with dread as the White Plague; attacking first his lungs and later his larynx, the disease was to keep him away from his desk more than a third of the time over the twelve years, the years of his greatness, that remained to him. But his thoughts were seldorn away. Emotional and physical adversity goaded him to harder work, and even when in sanatoriums or on sunny vacations he restlessly bombarded his bank colleagues with memoranda that came to have the force of ukases. He lived for central banking because he had little else; and, in particular, the task to which he applied his iron will was that of making the Federal Reserve Bank of New York in practice what he thought it should be, and what Congress had refused to make it in theory�the ultimate and dominant force in the System. To a great extent he succeeded, partly because of his banlc's convenient physical presence in the country's money center (taken for-granted characteristic of all other leading central banks), partly by the force of his personality, partly because most of his Washington rivals, the early governors of the Federal Reserve Board, were undistinguished and unqualified political appointees; the incumbent governor in 1927, for example, was a former Marion, Ohio, crony of Warren G. Harding's with no banking background at all. Strong by that time was almost a figure of Greek or Shakespearean drama; so ill now that he could seldom be at his desk, but at the top of his powers as a banker and leader, he was from his sickbed the virtual tyrant of the Federal Reserve System. "The Fed" meant "Ben Strong"; it did nothing without him. His passion now was European recovery, the adaptation of United States monetary policy to that end, and perhaps behind that passion, more than anything else, was the deepest friendship of this lonely man�s life�with Montagu Norman, governor of the Bank of England. For whatever reasons, in the early postwar years Strong's fierce, restless attention turned more and more to international monetary cooperation�not the bureaucratic, official kind at which the League of Nations was making a few ineffectual stabs, but a more mysterious, secretive, highhanded sort achieved behind closed and guarded doors, over the best food and wine, among the esoteric little international band of central-bank governors. Anglophile by nature like the Morgan partners he so admiredr Strongs had a large, perhaps a decisive, part in the return of Britain to the gold standard in 1925 at the old $4.86 dollar parity�a gallant but blalant overvaluation reflecting not economic reality but nostalgia for Britaints glorious past; it could probably not have been accomplished without loans to Britain of $200 million from the Federal Reserve, arranged by Strong, and another $100 million from the House of Morgan, arranged with Strong's help. But in 1927 Strong found hirnself under pressure at home. A growing faction in Washington, privately championed by Secretary of Commerce Herbert Hoover, began urging a higher discount rate and a generally restrictive money policy designed to dampen stock speculation. Such a policy would be anathema to Strong's European central-bank friends�particularly Norman, who came to New York especially to plead for lower American interest rates to stop the continuing out flow of Europe's gold to theGolconda in the New World, and thus help defend the exposed position of the pound. Various other American officials, on one side of the question or the other, had other motives; indeed, the largely behind-the-scenes debate on the subject that raged through the summer of 1927 was a little classic of cross-purposes. Hoover, the careful engineer, counseled restraint; Coolidge, urged by Hoover to put psessure on the Fed, characteristically found a legal justification for taking no action at all, in the Fed's statutory independence of the Executive; Mellon, the business loving boss of the Treasury, was all for continuing cheap money to finance continuing expansion; while Carter,Glass and a handful of other Senators complained bitterly that Fed policies were channeling practically all available credit into Wall Street to the further detriment of the nation's struggling farmers. Strong cared little for any of them. He was no New Era man, no rubber stamp for Coolidge or Mellon; rather, he nursed his own fixed idea�that America must have low interest rates that would stop the gold inflow from Europe�partly to eliminate its inflation ary effect here, and partly to save Europe's own economy. And the latter idea seems to have begun to assume the proportions of an obsession in his mind. Like any central banker, Strong was an economic nationalist, committed to putting his own country first in a clash of interests. But in this time of confusion as to what America's interests were, his ties to England and Norman dominated his mind. Through the spring, while Strong was convalescent in North Carolina, the Fed's policy seemed to waver. In the summer he was better and back on the job, and the Fed acted. In August the discount rate suddenly went down from 4 to 3.5 percent at most of the Federal Reserve banks. The governor of the one in Kansas City, where solicitude for the woes of Europe was not ordinarily notable, was asked by an astonished questioner why he had done it. "I did it because Ben Strong wanted me to," he replied. One Reserve bank, that of Chicago, balked, exercising its prerogative to refuse to comply with the Board's wishes unless directly ordered to do so; early in September, at Strong's behest and in defiance of all precedent, the Board gave the order and Chicago was forced to submit. The cost of this victory for Strong was internal discord. The vote within the Board was only four to three, showing that his mastery was slipping away; but he was still master, and the deed was done. The sequel is well known; the market went roaring upward and credit expanded faster than ever. Early in January of 1928 it was announced that over the course of 1927 brokers' loans to speculators had shot up from $3.29 billion to $4.43 billion. There had never before been anything like such a rise in a year, and when Coolidge commented that he did not consider the rise enough to cause unfavorable comment, even Wall Street was dumfounded. That March was the high-water mark of pool operations; it was also the month when Cadillac sales in New York City hit an all-time high. On the twenty-seventh, an avalanche of trading broke all previous Stock Exchange records. April and May were more of the same. In mid-May the daily volume of Exchange trading was so high that lights burned in the Wall Street office windows far into the mild spring evenings, and the St. George in Brooklyn Heights, the hotel nearest Wall Street, reported scores of unexpected late arrivals each night�financial- district workers who had been forced to stay too late to go home. The Exchange doctor reported that in spite of constant overwork no members had recently suffered nervous break downs. "They're all making money," he explained dryly. As for Strong, he was in London now, sick again for what was to prove to be the last time, comforted by the company of his friend Norman, and his grip on the reins of the Fed was loosening at last. He could take satisfaction in the fact that his policy of the previous year had achieved its purpose; the pound and Europe's economy looked stronger for the moment�but, he must have asked himself as he read the news from Wall Street, at what cost, and what more to come? III Wall Street's bull market collapsed [yesterday] with a detonation heard round the world.... Losses ranged from 23[.5] points in active Stock Exchange issues to as much as 150 in stocks dealt over the counter.... It was a day of tumultuous, excited market happenings, characterized by an evident effort on the part of the general public to get out of stocks at what they could get. Individual losses were staggering. Hundreds of small traders were wiped out.... The sales were countrywide. They flowed into the Stock Exchange not alone from New York brokerage houses but from every nook and corner of the country. . . . The newspaper was the sober New York Times; the date was June 13, 1928 (repeat: 1928). If the break was in reaction to any identifiable event, the event was the realization by the Republican National Convention that the boom's patron, Coolidge, meant what he said and could not be drafted for another term in the White House. But if it hadn't been that, it would probably have been something else; a moment had come when what the market needed to set off a collapse was not a reason but an excuse. The collapse was short-lived; the detonation did not reverberate. In a matter of a few days the June 12 losses had been recovered, whereupon the market moved on into new higher ground at a brisker rate than ever. By August the Dow-Jones industrials were 20 percent above their June low; by November, 50 percent. All that had happened was that the engine of the boom had coughed once, then resumed its former smooth purr. The question became. Had the cough meant anything? Could it be forgotten as some sort of chance occurrence of no significance, or was it time to stop and take the whole machine into the shop for a check-up? The country as a whole and Wall Street itself divided on the question, and now hindsight, with its graceless finger, points out to us which were the wise and prescient, or else lucky, men of the time on the one hand, and which the deluded�or unlucky�on the other. Back at the beginning of 1928 a group of Senators raised a hue and cry against rising brokers' loans and stock speculation. Their argument was agrarian, Populist, and long familiar in American life�that the sharks of Wall Street were absorbing the money supply of the country and thus depriving the real producers, the farmers. Not surprisingly, the protesting Senators came mostly from the farm states of the old frontier and Middle Border�Borah from Idaho, Brookhart from lowa, Capper from Kansas, La Follette from Wisconsin, Mayfield from Texas, Pine from Oklahoma�where the prevailing attitudes were so often those of an earlier America: states where for many the bounds of a day were sunrise and sunset, where Prohibition and the more dour forms of Protestantism reigned, where the Eastern seaboard, and especially New York City, was automatically suspect of lawless saloons and foreign ways and libertine gambling in stocks. The struggle, one commentator wroter was "founded upon a clash of interests and a moral and intellectual antipathy between the wealthy, cultured, and conservative settlements on the seacoast and the poverty-stricken, illiterate, and radical pioneer communities of the interior"; the same writer went on to say that "the Puritan instincts of the [farm] community are scandalized by the spectacle of men and women 'doing nothing' and enjoying the fat of the land which honest folk can get only by the sweat of their brows." This was oversimplification to the point of cartooning; for one thing, the eminently Puritan farmers of New England in an earlier time had been inveterate gamblers and had helped finance their very War of Independence through lotteries, and for another, we have seen how many of the stock-market speculators of the 1920s were neither cultured and conservative nor products of the Eastern seaboard. Still, the Senate Banking and Currency Committee's hearings on brokers' loans in February and March of 1928, during which one witness after another denounced the plutocratic manipulators and the harm they did to men of the soil, served to polarize the issue in the public mind. From then on, the East was broadly thought to approve and promote the stock boom, the West to fear, suspect, and resent it. Coolidge, Mellon, and company notwithstanding, beginning in 1928 the country was far from unanimous on the market. The venom against it that was to break out a few years later did not come from nowhere. Even the "wealthy, cultured, and conservative" East�Wall Street itself�came to be divided. Not at the Stock Exchange, to be sure; the authorities there spoke with one voice in defense of speculation, which, after all, was the Exchange's main activity and the source of its East prosperity. But at the great investment-banking houses, even the mighty and monolithic Morgan and Kuhn, Loeb, there was a certain discreet choosing up of sides. At Morgan's, Thomas Lamont was a staunch New Era man, scoffing at the notion that the market was unsound, while Russell Leffingwell was openly skeptical. At Kuhn, Loeb, Otto Kahn was a hearty backer of the boom and a heavy investor in it himself, while his close associate Paul Warburg during 1928 and 1929 was gaining a reputation as a Cassandra by repeatedly predicting a collapse unless speculation were brought under control. That the Federal Reserve Board was seriously divided wilhin its own counsels was first shown in the close vote on the matter of cracking down on wayward Chicago In 1928, under political pressure, and deprived of its indigenous driving force by the decline of Strong, it progressively reversed its easy-money policy. In three steps it raised the discount rate from 3.5 to 5 percent; at the same time bank reserves available for lending were reduced by Federal Re serve sales of government securities on an unprecedented scale. At the beginning of the year the Fed held $616 million in such securities, most of them bought under Strong's expansionary policy during 1927; a little more than a year later, in the early part of 1929, constant and vigorous selling had reduced the portfolio to below $150 million. Strong in London took no part in the decisions leading to this startling turnabout, but he apparently favored or at least condoned them; he is on record as having recommended a 5 percent discount rate in one of his famous communications, sent that May. Had he decided, then, that he had been wrong the previous year, and wished to make amends? Or that conditions had reversed themselves�that the pound and the franc and the mark were safe, and that at last the primary concern was stock speculation at home? Or was he too ill and tired now to keep up the fight? We do not know; he was not destined to explain. The effects of the new Fed policy began to be felt in the second half of 1928 and were to be felt in full force early in 1929. Nation wide, interest rates rose and the classic concomitants of dear money followed: building construction fell off, the borrowings of state and local governments were postponed, small businesses starved for the want of new funds. And meanwhile stock speculation�the chief target of the policy�went its merry way as if harassed by nothing more than a persistent mosquito. We have seen how the market shot up during the second haIf of 1928; over the same period brokers' loans increased by another $1.5 billion, or more than they had increased during the whole of 1927�the year of Strong's easy money. In short, the new Fed policy was an instant and spectacular failure. Loans from his broker now cost the speculator 8 or 9 per cent; early in 1929 they were to cost him 12 percent and more. But how could an interest rate of 8 or 12 percent a year deter a man, or woman, who fully expected to use the money to make a profit of 100 percent in a month or even a week? Traditional monetary restraints were useless because they had come too late. The speculative virus was past being checked by that medicine. And the physician, the Federal Reserve, which might have obtained from Congress the power to use such drastic and untraditional remedies as arbitrarily setting minimum margin requirements on stock purchases, was powerless because it was, relatively speaking, headless. Strong was dying. Back from Europe in August, he was informed by his doctors that he must give up all work at once. He ordered his resignation to the Federal Reserve Board and to the New York bank; it was tabled. In September he wrote Montagu Norman of his situation, and got a moving reply: "Dear old friend, how hard and cruel life is.... But what a stage ours has been over these ten or twelve years! . . . Whatever is to happen to us�wherever you and I are to live�we cannot now separate or ignore these years.... God bless you and my love now and ever." After a last-hope operation, Strong died in New York in October. God bless Ben Strong! In hindsight he was to be accused by Hoover of "crimes far worse than murder" and by most financial historians of being the single chief cause of the coming crash; but he was a better man than most of his detractors, and was cursed by fate as well as by his own tragic flaw; if he had been given another year of life, his full atuntion would surely have focused on the American situation and his firm hand might have done much to set things to rights in time. As it was, he left behind, as so many big men do, a power vacuum, a shattered institution, weak, divided, and lacking enterprising leadership. Things had indeed fallen apart when disintegration could least be afforded. pp. 86-98 --[cont]-- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance�not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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