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.
The City financial establishment kept a wary distance. “Mr. Hatry is very clever, and one or two of the people we know who have had business relations with him have always told us that they have nothing against him,” wrote Morgan Grenfell to its corresponding partners J. P. Morgan & Co. But the letter continued, “He is a Jew. His standing here [in London] is by no means good. We should ourselves not think of doing business with him.” Nevertheless, with his enormous apparent wealth, he was able to induce some of the grandest names in the country to join his boards—for example, the Marquess of Winchester, who could trace his title back to the time of Henry VIII and was holder of the oldest marquessate in the country, was chairman of one of his companies—and no one questioned his financial situation.
In 1929, with grand plans to rationalize the British steel industry, he acquired a major manufacturer, United Steel Limited, for $40 million in what would today be called a leveraged buyout. In June, his bankers withdrew their financing at the last moment. He spent the next few weeks scrambling for cash, even approaching Montagu Norman, for Bank of England help. Needless to say, Norman, who would have found a man like Hatry highly distasteful, refused, telling him that he had paid too much for United Steel. Having borrowed as much as he could against all of his companies, Hatry eventually resorted to petty fraud: forging a million dollars worth of municipal bonds to post as collateral against additional loans.
Early in September, as rumors circulated that he was massively overextended, his companies’ shares plunged, and his bankers called in their loans. Recognizing that the game was up, Hatry went under in true British fashion. On September 18, he called upon his accountant, Sir Gilbert Garney, and told him of the forgery. After hearing him out, Sir Gilbert telephoned his old friend Sir Archibald Bodkin, the director of public prosecutions, to say that he had a group of City men who wished to come in to confess to fraud of a “stupendous” magnitude. Sir Archibald, after hearing that the sum involved was as high as $120 million—equivalent as a percentage of the British economy to the Enron imbroglio of 2001 in the United States—arranged for them to turn themselves in at his office at ten o’clock the next morning. Hatry duly arrived the following day, confessed to his crimes, and was remanded in custody.
When New York opened on Friday, September 20, the market faltered, losing 8 points to close at 362. The following week the Bank of England, fearing that sterling might be imperiled by Hatry’s collapse, raised interest rates to 7.5 percent and the market tumbled a further 17 points.
Because the many British investors who had lost money with Hatry were forced to liquidate their U.S. stock positions and began pulling their money out of the New York brokers’ loan market, the Dow came under mounting pressure, falling another 20 points over the week of September 30 to 325. In the space of two weeks, it had given up the gains of the previous two months. However, so far the market crack, while vicious, was not out of the ordinary. Indeed in the week of October 7 it surprised everyone by rallying 27 points. The Dow thus began the week of October 14 at around 350, a little less than 10 percent below its all-time highs.
On Tuesday, October 15, economist and market pundit Irving Fisher, in a speech that would go down in history for its spectacularly bad timing, threw his normal caution to the winds, with the declaration, “Stocks have reached what looks like a permanently high plateau.” Among the reasons he would later cite for this optimistic forecast were the “increased prosperity from less unstable money, new mergers, new scientific management, new inventions” and finally, Fisher being Fisher, he could not resist adding, on account of the benefits of “prohibition.” The market began to sag once again—dropping 20 points the next week and another 18 points in the first three days of the week after. It was by now back to 305, having lost about 20 percent of its value since the September peak. So far, however, there had been no real reason to panic.
Another victim of bad timing was Thomas Lamont of J. P. Morgan & Co., who chose the weekend of October 19 to send Hoover an eighteen-page letter. “There is a great deal of exaggeration in current gossip about speculation,” he warned the president. Indeed, he suggested that a certain amount of speculation was a healthy way of engaging the American public in the benefits of owning stocks, in the same way that “a jaded appetite was sometimes stimulated by a cocktail to the enjoyment of a hearty meal.” “The future appears brilliant,” he wrote, and vigorously urged the president not to intervene. The letter is now in the presidential archives with the phrase “This document is fairly amazing” scribbled by Hoover across the top.
On Wednesday, October 23, quite out of the blue, a sudden avalanche of sell orders, the origin of which was a complete mystery, knocked the market down by 20 points in the last two hours of trading. The next day, soon to be known as Black Thursday, saw the first true panic. The market opened steady with little change in prices; but at about 11:00 a.m, it was blindsided by a flood of large sell orders from all around the country, rattling out of such diverse places as Boston, Bridgeport, Memphis, Tulsa, and Fresno. Prices of major stocks started gapping lower. During the next hour, the major indices fell 20 percent, while the bellwether of speculation, RCA, plunged more than 35 percent. Adding further to the panic, communications across the country were disrupted by storms, and telephone lines were so clogged that many thousands of investors could not get through to their brokers.
Rumors of the turmoil spread quickly through the city, and by noon, a crowd of ten thousand sightseers, attracted by the reek of calamity, had gathered at the corner of Broad and Wall, just opposite the stock exchange. Police Commissioner Grover Whalen dispatched an extra six hundred policemen, including a mounted detail, to keep order and rope off the crowd from the entrance to the stock exchange. A gaggle of newspaper photographers and film cameramen collected on the steps of the Subtreasury Building to document the scene.
A little after noon, the barons of Wall Street—Charles Mitchell of National City Bank, Albert Wiggin of Chase, William Potter of Guaranty Trust, Seward Prosser of Bankers Trust, and George Baker of First National—were seen pushing their way through the crowd into the front door of J. P. Morgan & Co. at 23 Wall Street. After a mere twenty minutes, they emerged grim faced and left without speaking to reporters. A few minutes later, Thomas Lamont appeared and held an impromptu press conference in Morgan’s marble lobby.
Looking “grave” and “gesturing idly with his pince-nez as he spoke,” he began by announcing, “There has been a little distress selling on the Stock Exchange.” Though he was only trying to steady the market’s nerves, this was a remark that would go down in history as a classic, forever mocked as an embodiment of Wall Street’s capacity for self-delusion and obfuscation. “Air holes” caused by a “technical condition” had developed in the market, asserted Lamont. The situation, he assured his listeners, was “susceptible of betterment.”
What he did not announce was that the six bankers had agreed to contribute to a pool that would provide a “cushion” of buying power to support stock prices. At 1:30 p.m., Richard Whitney, president of the stock exchange—brother of Morgan partner George Whitney and himself stockbroker for the company—strode confidently onto the crowded floor of the exchange and placed an order for ten thousand shares of U.S. Steel at 205, 5 points above the price of its last sale. He then went from one post to the other, sprinkling similarly huge orders for blue chips—at a total cost of between $20 and $30 million. To the accompaniment of a chorus of cheers and whistles from the floor, the market rallied dramatically and by the end of the day was off a mere 6 points. Though stocks had taken comfort from the rescue operation, even as the market was rallying that afternoon, Lamont was closeted with the governors of the exchange to warn them that the bankers’ support was limited: “There is no man or group of men who can buy all the stocks that the American public can sell.”
While the private bankers were throwing the market this life buoy, the central bank, the Federal Reserve, was paralyzed by dissension. To try to ease condi
tions that morning, the directors of the New York Fed had voted to cut its lending rate from 6 percent to 5.5 percent, only to have the decision vetoed from Washington by the Federal Reserve Board. The latter spent the day closeted in meetings at its offices in the Treasury Building, next door to the White House. At 3:00 p.m., Secretary of the Treasury Andrew Mellon joined the conference, which broke up at 5:00 p.m. with no official announcement. A “senior” Treasury official did speak, however, to reporters off the record, expressing the view that the market had broken under the stress of “undue speculation” and that the harm done, after all, only constituted “paper losses,” which would not prove “disastrous to business and the prosperity of the country.”
The newspapers reported next day that heroic action on the part of the bankers had successfully halted the panic. The Wall Street Journal carried the headline “Bankers Halt Stock Debacle: 2 Hour Selling Deluge Stopped After Conference at Morgan’s Office: $1,000,000,000 For Support.”
Though the amount committed by the Morgan-led consortium was nowhere near that amount, the market was buoyed by the apparent success of the “organized support” and stabilized over the next two days, though trading remained heavy. Rumors circulated that the bankers felt sufficiently confident to begin disposing of the stocks they had acquired on Thursday at a small profit. But late on Saturday, the market began to fall again.
The “second hurricane of liquidation” roared in on Monday, October 28—Black Monday. It came from every direction: demoralized individual investors, pool operators liquidating, Europeans throwing in the towel, speculators forced to sell by margin calls, banks dumping collateral. Investors, who had originally bought stocks only because they saw prices rising, now sold them because they saw prices falling. By the end of the day, 9 million shares had changed hands and the Dow was down 40 points, roughly 14 percent, the largest percentage fall in a single day in the market’s history—$14 billion wiped off the value of U.S. stocks.
Reporters, remembering all the various times in history that the U.S. banking system had been saved from the Morgan offices, were camped out in front of 23 Wall Street. At 1:10 p.m. Mitchell of the National City Bank was seen entering the building. The market immediately rallied. But there was no sign of the other bankers or any evidence of any further “organized support.” It would later turn out that Mitchell was personally overextended and, desperate for cash, had gone in to negotiate a private loan for himself.
The press was so fascinated by the very conspicuous comings and goings of bankers to and from “No. 23” that they failed to recognize that the true locus of power no longer lay with Morgan but had shifted three blocks north to the offices of the New York Federal Reserve at 33 Liberty Street. The real hero of the day was not one of those bankers shuttling in and out of Morgan’s offices but George Harrison of the New York Fed.
Stock market crashes during the nineteenth and early twentieth century had invariably been associated with banking crises. The market and the banking system were too interconnected. Because the big New York City banks held their reserves in the form of call loans to stockbrokers, a collapse in stocks inevitably raised concerns about the safety of one bank or the other, often leading to a run on the system, which in turn led to a withdrawal of liquidity from the market, which in turn drove the market down further. The Fed had been created in part to break that nexus and Harrison was determined to prevent the market turmoil from widening into a full-scale financial crisis. He spent the whole day in close contact with the heads of the city’s major banks.