Financial History Issue 131 (Fall 2019) - Page 14

City of Detroit $20 scrip, 1933. in 1921 to 3% by 1924, making for easier credit. The automobile industry was surg- ing. Between 1921 and 1923, factory sales of passenger cars more than doubled, to 3.6 million. The popular new mass enter- tainments of radio and movies—talkies!— were intoxicating. A sexual revolution was underway. And, speaking of intoxicating, notwithstanding Prohibition, liquid hap- piness flowed from every flapper’s flask and speakeasy. But problems lurked beneath the surface. From 1920 to 1921, farm prices dropped by half. Through the 1920s, a third of wage earners earned less than $2,000 a year—or $27,000 in today’s money. That would qualify today for a family of three as poverty level. Today the national poverty rate is about 12%. So in the 1920s almost three times more Americans than today lived at or below the poverty line. Even before the crash, two banks a day were failing. And, of course, there was as yet almost no safety net, no federal deposit insurance, Social Security, unemployment insurance, food stamps or Medicare. But it was increasingly easy to invest. Brokers opened margin accounts with as little as 10% cash down—which was great as long as stocks kept rising. The Fed was no help; it actually made the borrowing easier. In August 1927 it lowered the dis- count rate from 4 to 3.5%, making credit even more available. The renowned financial writer John Brooks said it was like “the police issuing guns to people on the street in a time of threatened riot.” In 1927 alone, brokers’ loans to customers rose from what would be, in today’s dollars, $47 billion to $65 billion. But not everywhere. While the eastern seaboard surfed the giddy wave, farmers and other suffering rural folk in the heart- land looked on disapprovingly. In 1928, the Fed finally hit the brakes, raising the discount rate to 5%, but it was too little, too late. With spectacular stock fortunes to be made, who cared about a slight rise in the cost of borrowing? Bank- ers loved it, borrowing from the Fed at 5% and loaning to speculators at 12%! Brooks put it well: bankers made money by existing. The Fed pleaded with bankers not to lend funds for speculation “as far as possible.” But any attempt to have the government step in to halt the madness was denounced as interference. By the summer of 1929, Wall Street was mayhem. Vacations were on hold as bankers and customers stayed glued to the tickertape. Barbers and chauffeurs eavesdropped for stock tips and feverishly passed them on. And then, in early September 1929, a broker by the name of Roger Babson in Wellesley, Massachusetts, spooked the market on a slow news day by mentioning 12    FINANCIAL HISTORY  |  Fall 2019  | in a luncheon talk what he had said many times before: “Sooner or later a crash is coming and it may be terrific.” A few weeks later, a big British financier, Clar- ence Hatry, went bust. He later went to prison for fraud. And in October regula- tors blocked Boston Edison from splitting its stock four to one and put the utility under a cloud by announcing an investi- gation. None of these things by themselves seemed causative, but they cast a pall, shaking confidence in the market. Monday, October 21, 1929 was a very bad down day, with the third greatest sales in history. The ticker lagged way behind, but stocks finally rallied, recover- ing some ground. Wednesday, October 23, was another bad day. On Thursday, October 24, it turned into a rout. Amid the rising alarm, Wall Street titans convened an emergency meeting. Morgan’s senior partner, Thomas Lamont, conceded, “There has been a little distress selling on the Stock Exchange” which he attributed to “a technical condition of the market.” President Hoover said famously, “The fun- damental business of the country, that is production and distribution of commodi- ties, is on a sound and prosperous basis.” Financier Richard Whitney made a dra- matic gesture, appearing on the New York Stock Exchange floor with a high bid, over the asking price, for US Steel. Whitney was hailed as a savior, but he later went