Economics and The Public Welfare

Chapter 27

Mob Mind in 1928-1929

One able Jewish investment banker said in the summer of 1928 that he did not understand what was going on. He said, “When I do not understand, I do nothing.” He had withdrawn from the market. He had turned his holdings into cash, and he was waiting until he understood. After the crash in 1929, a speech was made before the Chamber of Commerce of the State of New York to explain what had happened, which discussed, among other things, the phenomena of mob mind which had been so manifest in the year and a half that had preceded the crash.1 The speaker made the generalization, familiar to social psychologists, that the more intense the craze, the higher the type of intellect that succumbs to it. The investment banker, seated near the speakers’ table, nodded his head emphatically as he heard this generalization. Later he was asked about it. He said that he had reluctantly gone back into the market under the pressure of repeated advice from his associates and others, and that as stocks went higher and his friends and associates were borrowing money to increase their holdings, he too had borrowed money, He said that he had gone to London in the spring of 1929, had learned some things there that made him much concerned, and had cabled orders to New York to his associates to sell everything that he had bought. But they protested and told him that the move was not nearly over, and he had reversed his instructions and had stayed with the market. He said that he had come into the crash carrying stocks bought at high prices with $4,000,000 of borrowed money. He was prepared to subscribe to the generalization that the wilder the craze, the higher the type of intellect that succumbs to it. He had a high I.Q., and he knew it.

When men of this type lost their heads, it was not strange that bootblacks did. It was not strange that charwomen bought one or two shares of National City Bank stock. It was not strange that widows sold mortgages in order to get money with which to buy stocks.

Mob Mind in Manhattan Real Estate. It must be said, by the way, that the widow’s mortgage itself was being undermined by the extravagances of the period from 1924 to 1929. Excessive money developed speculation in every field, and very specially in the field of real estate. The giant skyscrapers in midtown Manhattan Island which, viewed from Wall Street skyscrapers, look like a profile of the 1927-1929 stock market averages, were, in large measure, set going, even when not completed, in 1927-1929. Real estate mortgage bonds were issued at a tremendous pace. Real estate values soared and real estate mortgages of all kinds were so rapidly multiplied that in 1932-1933 the widow might well have wondered whether she would not have done better to sell her mortgage in 1929, buying stocks with the money. Many stocks were still paying dividends, but, in too many instances mortgages like hers had ceased to pay interest—including not a few mortgages guaranteed by mortgage guaranty companies which down to 1931 and 1932 had had high standing. Methods which they had found conservative and safe for forty years or more had not protected them or their clients when the whole fabric of real estate values had been undermined, and when they had given guaranties for a multiple of their capital.

• 1This point will be discussed at length in Chap. 34.