America’s Money Machine

ON AUGUST 2, 1927, Calvin Coolidge, then vacationing in the Black Hills of South Dakota, issued a cryptic twelve word message: “I do not plan to be a candidate for re-election in 1928.” Its effect in the stock market was such as the assassination of Julius Caesar may have had in the trading precincts of the Roman forum: there followed, as the New York Times reported, “a pell-mell scramble to sell stocks and opening prices were from 2 to 15 1/4 points lower than the previous day’s close.”

The market flutter was short lived as banks, institutions, investors rushed in for bargains, and the Times took comfort in the “demonstration of the market’s inherent strength.”

Actually, the market was showing signs of instability that foreshadowed the later collapse. The market had behind it a long period of advances, which were mainly perpendicular during the preceding month. The short interest, which usually cushioned a fall, had been driven out. A week later the tenuous condition of the market became evident when a pool1 in Manhattan Supply Co. collapsed—presumably because their credit ran out, this in turn because they could no longer find buyers at still higher prices—and the quotations plummeted 60 points. This was to halve the value of the stock, and the loss of so much paper value ruined a good many investors.

The Manhattan Supply blowup had not been the first. The year before had seen similar bubbles pricked—Devoe & Raynolds, and the Foundation Company—but a few days later the announcement of the receivership of A. L. Fuller Company which was involved in Manhattan Supply touched off a mass of selling which carried with it market leaders like U. S. Steel and General Motors.

By September, the stock market was again wildly bullish. In one day Commercial Solvents rose 16 points, General Motors was being bid higher and higher; another stock shot up 19 points. On September 15 the Times reported, “Paying no attention to anything but a further fractional lowering of Stock Exchange money rates, yesterday’s stock market repeated many of the extravagancies which have distinguished recent trading. . . . With what even Wall Street for a moment described as a tinge of recklessness, several selected stocks were driven up 7, 8, and 10 points apiece, with advances of 30 to 50 points numerous elsewhere. . . .”

Serious questions were now beginning to trouble the press regarding the speculative nature of the market, but the consensus was that it was all justified by sound prosperity and basic values. The New York Times fairly reflected current sentiment when it argued:

The extravagant rise of the New York stock market, in the Civil War paper-inflation days, is too remote to be recalled; but many people will recall that in 1923, by the Frankfurther Zeitung’s compilations, the combined stock exchange prices of active German shares rose from 376,685 in January to 22,987,500 in October. That was a fairly respectable achievement in the way of inflation; but it had to be considered, even on the Berlin Bourse, in relation to other markets. The German index number of commodity prices, for instance, based on 100 for 1913, had risen from 43,223 in September, 1922, to 36,200,000 in September, 1923. This, like the rise on the stock exchange, was attributed, not to “credit inflation” but to the fact that the currency’s gold value had depreciated at such a rate that, whereas 4 1/2 German marks would once have bought a dollar, the price got to ten billion marks in the Autumn of 1923 and to eight trillion shortly afterward.

The market recovered, as it had done repeatedly, but a month later, on September 3, a new storm of selling “out of a clear sky” broke on the Exchange, which in one hour—described as “one of the most hectic hours in the history of the Exchange”—“wiped out thousands of small speculators who up to now had been riding along comfortably on their paper profits.”

Babson’s views were promptly challenged by Professor Irving Fisher, the Yale savant, who announced from New Haven the same day, “Stock prices are not too high and Wall Street will not experience anything in the nature of a crash.”

As so often when the experts disagree, the public took its own view, which was recklessly confident, and within a couple of days the market was again boiling, and prices soaring. On September 6 over five million shares traded on a rising market.

The Times found wry humor in the influence exerted by assertions of sober economists that “would have been described in the unregenerate past as ‘tips on the market.’ ”

Meantime, little noticed events abroad had been adding their burden to the overweighted, top-heavy credit structures. In April of 1928 a leading Wall Street house, overestimating the enthusiasm of the market, had offered an issue of Danish government bonds at an unprecedented rate of slightly less than 4 per cent. The market refused to absorb the offering and the issue went “sour,” with the underwriters compelled to take over the bonds themselves. That marked an end of the bull market in foreign lending, and the repercussions were to be felt a year later in the domestic securities market. Foreign enterprises, finding the fountain drying up, began to curtail their commitments, and Europe began to experience business recession.

At the same time the European banking and monetary structure had become as overstrained as in the United States. There was, to use a phrase, a shortage of liquidity. Despite new gold supplies from the mines at the rate of some $400 million a year, a gold famine prevailed. Gold represented a smaller and smaller percentage of central bank reserves. By the beginning of 1929 the four principal commercial countries—the United States, France, the United Kingdom, and Germany—had increased their gold holdings by 2.4 times over pre-war, but the credit structure had increased even faster, with a steady decline in the reserve ratio. In 1929 the ratio of gold to total reported bank deposits in these countries stood as follows: United Kingdom, 11.3 per cent; France, 7.4 per cent; United States, 6.9 per cent; Germany 3.1 per cent.

In August, 1929, the English promoter Clarence Hatry found himself unable to get further credit, and his empire suddenly collapsed. The disclosure of his defalcations and his arrest on September 20 sent a shudder through the market; investors with suspicions aroused began to sell to realize cash, and American securities held in England began to be offered on the New York Stock Exchange.

Public apprehension mounted. The Times commented that, in the words of one customer’s man, the brokers are “run ragged” for quotations, and “many of the downtown firms had been obliged to double or triple their switchboard facilities in recent months.”

On September 21, Charles E. Mitchell, the exuberant chairman of the National City Bank—which had been the bellwether in leading the commercial banks into the securities flotation business—issued a statement on the eve of sailing for Europe that “there is nothing to worry about in the credit situation.”

Meantime, call money went to 10 per cent, and on the twenty-sixth the Times reported that “more gullible than usual, Wall Street reveled yesterday in alarmist rumors, whispered stories that this or that firm was ‘in trouble,’ that pools had collapsed; that banking interests were going to the rescue of or abandoning large operators.” It added that “careful enquiry established that all of the stories were baseless.”

On the same day the Bank of England raised its discount rate from 5 1/2 per cent to 6 1/2 per cent.

The collapse came as with a dynamited office building or a struck vessel, or a bull in the arena that has received the blade, with a slow settling, with a hurt surprise, and disbelief. This phase, we can now observe in retrospect, began early in October, as day after day reported more declines than rises in the market. October 5 was marked by some “hysterical selling,” followed by a week-end recovery, but the following days were of increasing weakness.

On Saturday in the short session of October 19, stocks were driven down in heavy selling which registered losses of from 5 to 20 points, and the rumor spread that the noted speculator, Jesse Livermore, was heading a powerful short interest that was hammering stocks down. The following week was one of combined breaks and declines, marked by a recovery on Wednesday and on Thursday the twenty-fourth a climax with an unprecedented 12,894,650 shares traded and the papers reported the event in four column headlines. Again the House of Morgan became the donjon where the leading bankers gathered and from which communiques issued that basic conditions were “sound” and that the break was “technical.”

But Morgan the Elder was no longer on the scene, and the word from J. P. Morgan, Jr. lacked some of the authority of the old man. While Wall Street gave the banking leaders credit for arresting the decline—which was indeed stemmed by banking support—the public had lost hope of ever rising prices and brokers were busy shoring up impaired margins by issue notices for more collateral.

President Hoover—the “engineer in the White House,” who had come to office as an oracle of business after eight years as Secretary of Commerce—now issued a reassuring statement that failed to reassure.

On Monday, October 28, the Exchange was overwhelmed with a week-end pileup of orders to sell. Trading volume reached 9,212,800, but this was not the end. Tuesday, October 29, was to go down as the blackest in Wall Street history, with a crash the memory of which has faded; nevertheless, the effects of which after over fifty years still mark the face of business and color the temper of politics and government. On that day the market disintegrated under a volume of 16,410,030 shares, with leading stocks down 25 to 45 points, and with the collateral tragedy of bankruptcies and suicides.

Frantic efforts were made by the business community to restore confidence. U. S. Steel promptly announced a $1 extra dividend and American Can raised its dividend rate from $3 to $4; banks reduced margin requirements to 25 per cent; John D. Rockefeller announced that he was buying stocks; the Bank of England reduced its rediscount rate from 6 1/2 per cent to 6 per cent, followed by a reduction of the New York rate from 6 to 5 per cent; and the press reported that sentiment in Wall Street was more cheerful. But despair did not evaporate, stocks continued to weaken with another big break on November 12, with 6 1/2 million shares traded in a 3 hour session and a still more disastrous break on the thirteenth when 7,761,450 shares were traded. By the end of the year $40 billion had been shorn from paper values of securities; and the effects were beginning to spread throughout the business world and abroad.

_______________

2Meaning a more or less loosely organized group of traders, speculators, or investors.

• 1*Meaning a more or less loosely organized group of traders, speculators, or investors.
• 2Actually, the market was showing signs of instability that foreshadowed the later collapse. The market had behind it a long period of advances, which were mainly perpendicular during the preceding month. The short interest, which usually cushioned a fall, had been driven out. A week later the tenuous condition of the market became evident when a pool* in Manhattan Supply Co. collapsed—presumably because their credit ran out, this in turn because they could no longer find buyers at still higher prices—and the quotations plummeted 60 points. This was to halve the value of the stock, and the loss of so much paper value ruined a good many investors.