Lords of Finance_ The Bankers Who Broke the World Part 12

Finally, in early April, Young felt ready to allow the Allies to unveil their proposal. Germany would have to make annual payments of $525 million for the first thirty-seven years and, in order to match exactly the Allied war debts to the United States, $400 million a year for the subsequent twenty-one years. The Allies made it clear that the only reason they were saddling two generations of Germans with reparations was that they themselves were in debt to the Americans for the same length of time. On hearing the Allied proposal, Schacht turned pale and, in a voice trembling in anger, declared the session terminated.

By now he realized how totally he had miscalculated. The American bankers' power to pressure the Allies had foundered on the U.S. government's unwillingness to contemplate any further reduction in war debts. Without such an easing, the Allies would not reduce their claims on Germany. Schacht was now caught between letting the conference collapse thus very likely provoking a financial crisis in Germany for which he would be blamed, or settling for the terms on offer, for which he feared he would be equally vilified.

Schacht had always been a gambler. In a desperate effort to win more options, he decided to change the German offer radically. He had always believed that one of the greatest injustices of Versailles had been the seizure of Germany's colonies-an odd collection of territories that Germany, late to the scramble for empire, had acc.u.mulated, including most of Samoa, part of New Guinea, Togoland, German South-West Africa, the Cameroons, and Tanganyika-which Schacht implausibly claimed had been worth $20 billion to Germany, an amount that overshadowed even the bill for reparations. He now argued that Germany would be unable to meet the victors' demands unless its former colonies were restored. Even more provocatively, he demanded that the Danzig corridor, the most contentious strip of land in all Europe, taken from Germany to give Poland access to the sea, should also be returned.

In seeking to tack what amounted to a territorial revision of Versailles upon what was supposed to have been a purely financial negotiation, Schacht had gone out on a limb, and without the permission, or even the knowledge, of his own government. The detente between Germany and the Allies, so painstakingly achieved since the withdrawal from the Ruhr five years before, had rested on the principle that Germany would not seek to overturn the political or territorial clauses of the 1919 settlement. Here was Schacht in one stroke trying to undermine the whole fragile basis of European peace.

It has always been something of a mystery what Schacht was hoping to achieve. He did have a habit of shaking things up without quite knowing where it would all end. But he must have known that no one at the Young Conference had the authority to renegotiate crucial parts of the Treaty of Versailles, that the gambit was bound to end in failure. Some thought he was just grandstanding for domestic consumption to prepare for a political career on his return to Germany, others that he was just trying to provoke a crisis to give himself a smoke screen to avoid taking the blame for the poor deal for Germany.

Schacht's proposal was initially received in stunned silence. Once the other delegates had had time to absorb his demands-and he had made them sound like an ultimatum-the table dissolved into an uproar, with cries of astonishment and outrage. Moreau was so furious that he pounded the table and, in a rage, flung his ink blotter across the room.

With the conference now close to collapse, Pierre Quesnay of the Banque de France told one of the Americans that evening that French depositors would withdraw $200 million from German banks by noon the next day. It was unclear whether this was intended as a threat or a prediction. In any case, Germany suddenly began to lose gold at an accelerating pace-$100 million over the next ten days, forcing the Reichsbank to raise rates to 7.5 percent, despite Germany's being deep in recession, with two million unemployed.

Seeing this as the first salvo in an economic war, Schacht accused the Banque de France of having secretly orchestrated the withdrawals to force his hand and threatened that if Germany's reserves continued to fall, he would have no option but to invoke the transfer clause of the Dawes Plan to default on all further reparations. At that moment, such a move would have set off a global financial meltdown. German banks, munic.i.p.alities, and corporations owed money to everybody-$500 million to British banks, several hundred million to French banks, and some $1.5 billion to American lenders. Had it defaulted on reparations at that point, every financial inst.i.tution with exposure to Germany would have tried to pull what money it could out of the country. Germany would have had to suspend payments on all its commercial loans, creating a domino effect across the globe. Half the London banks would have gone under. Britain, its reserves already depleted, would have been flung off the gold standard. The financial chaos would have been catastrophic.

The Banque de France had in fact considered launching such a preemptive financial strike against Germany but rejected the idea as too risky. Moreau did not want to be blamed for a world economic collapse. Some French banks undoubtedly did pull some deposits home but this was mere commercial prudence in the light of the deteriorating turn of events. Meanwhile, in an effort to forestall a breakdown in world finances, Norman and George Harrison of the New York Fed had begun mobilizing money to support the Reichsbank.

At this point, with a financial crisis looming, Lord Revelstoke saved the day by suddenly dropping dead. The consequent suspension of the proceedings forced the parties to catch their breath for a few days and step away from the brink. Schacht left with the German delegation for consultations in Berlin. There he found the cabinet up in arms. He had clearly overreached. The foreign minister, Stresemann, who had repeatedly tried to warn Schacht not to overstep his authority, feared that he might have jeopardized Germany's still very delicate political position. Other ministers were alarmed about the domestic economic ramifications. Not only had unemployment already reached two million, but a wave of strikes was now threatening to put another million men out of work. Schacht's gamble threatened to plunge Germany into even deeper recession.

Schacht fought back. He blamed Gilbert for having misled him. He even turned on his erstwhile patron Stresemann, whom he accused of having undercut him by caving in to the Allies behind his back even before the conference had started and of now making him the scapegoat for the political fallout at home.

While Schacht, even at this stage, would have been willing to go for broke and risk a global banking crisis, his government was not. Fearing that Germany would once again become a pariah nation, the cabinet disavowed his position, forced him to recant, and insisted that he return to Paris and resume negotiations on the basis of the last Allied proposal. He reluctantly agreed, provided the cabinet gave him political cover by publicly accepting final responsibility for any settlement. Schacht had no intention of ending up as the fall guy for what nationalists were bound to see as a sellout.

The German delegation returned to the table. In the middle of May, negotiations were again suspended for few days-though this time it was so that Moreau could return to fight the mayoral elections in his tiny hamlet of Saint Leomer. A few weeks later a compromise was reached. Germany would pay a little under $500 million for the next thirty-six years and $375 million a year for the twenty-two after that to cover the Allies debt to the United States. A new bank, the Bank of International Settlements (BIS), jointly owned by all the major central banks, would be set up to administer and where possible to "commercialize"-the modern term is securitize-these future payments, that is, to issue bonds against them. Any profits generated by the Bank were to accrue to Germany to help defray the burden. All foreign control over German economic policy was to be removed-Gilbert could pack his bags and join Morgans. The transfer protection clause was eliminated, although a small safety valve was retained whereby should Germany get into economic trouble, it could postpone two-thirds of its payments for two years.

In the circ.u.mstances, this was truly the best deal that Schacht could get. As the delegates gathered for the signing ceremony in the meeting room of the George V, the curtains suddenly burst into flame-the photographers lights had caused them to overheat. Schacht saw it as an omen. He had been humiliated in the negotiations and, on his return to Germany, was criticized from all sides-from the left, for having risked the future of Germany on a gamble that had gone badly wrong, and from the right, for having put his signature to a bill that would "shackle" the next two generations. Even his wife greeted him at the station with the words, "You ought never to have signed." And though he publicly supported the Young Plan, in private he painted a much darker picture of the future. "The crisis may have been postponed for another two years, but it will arrive with the same certainty and with even greater severity." In the ensuing financial chaos, he foresaw that "Germany will be cut off from all foreign capital for a long time, maybe two to three years. For all segments of the German people this will mean managing without, longer working hours, lower wages." An ominous prediction, accurate to the year.

THAT OTHER GREAT pessimist on reparations, Maynard Keynes, shared Schacht's view of the new arrangements. Believing that Germany would find it difficult to keep borrowing its way out of its hole, Keynes responded to the new plan by proclaiming, "My prophecy would be that the Young Plan will not prove practicable for even a short period . . . and I should not be surprised to see some sort of crisis in 1930."

Marriage had mellowed Keynes. Confounding all the clever predictions of his sophisticated friends, he and Lydia had settled into a blissfully happy union. He commuted between the London apartment in Gordon Square, where they lived during the week; his bachelor rooms in college at Kings on the weekends; and their country house at Tilton in Kent, during the holidays. Though less prolific with articles on current affairs, he had not completely retired from his position as the premier gadfly of economic orthodoxy.

But for the last four years, he had been hard at work on a new book. After After The Economic Consequences of the Peace The Economic Consequences of the Peace and and A Tract on Monetary Reform, A Tract on Monetary Reform, both monographs devoted to the immediate and practical concerns of the chaotic postwar world, he was now struggling with a more ambitious work, a theoretical treatise on the interactions between the monetary sphere-the world of banks and other financial inst.i.tutions-and the underlying real economy-the world of stores and factories and farms. He had begun this line of thought in the both monographs devoted to the immediate and practical concerns of the chaotic postwar world, he was now struggling with a more ambitious work, a theoretical treatise on the interactions between the monetary sphere-the world of banks and other financial inst.i.tutions-and the underlying real economy-the world of stores and factories and farms. He had begun this line of thought in the Tract, Tract, but that had been built on a very simple picture, almost a cartoon, of the economy. In this new book, he was trying to paint a richer portrait of the paths along which money flowed in order to understand better the fundamental source of the instability he believed to be inherent in the credit system of modern capitalism. but that had been built on a very simple picture, almost a cartoon, of the economy. In this new book, he was trying to paint a richer portrait of the paths along which money flowed in order to understand better the fundamental source of the instability he believed to be inherent in the credit system of modern capitalism.

He also remained an active speculator, an exhausting and dangerous pastime in that turbulent decade. As the bursar of Kings, he managed a pool of money for the college; he was chairman of the board of the National Mutual Insurance Company; and he had set up several investment companies with his friend, Oswald Falk, head of the London stockbroking firm of Buckmaster and Moore. In addition, he continued to manage his own money very actively, usually from the vantage point of his bed in the morning. Buying and selling on margin, he was able to leverage his positions substantially and his portfolio could be very volatile. He began 1923 with about $125,000, the profits of those first forays into the foreign exchange markets. During the next five years, he doubled his money, making most of it trading commodities and currencies, rather than stocks.

Despite his reputation as a Ca.s.sandra, by early 1928, his view of the future, as reflected in his investment portfolio, was uncharacteristically sanguine. He avoided the U.S. market, but made substantial investments in the shares of British motor companies, particularly Austin and Leyland. His largest bet, however, was a very substantial complex of long positions in commodities-especially rubber, but also corn, cotton, and tin-a strategy heavily influenced by his perception of Fed policy. He thought that the American central bank under Strong had done a remarkable job, a "triumph" he called it. The Fed, while hiding behind the smoke screen of adhering to the gold standard, had managed very successfully to stabilize U.S. prices, and Keynes believed that with Strong at the helm, it could and would continue to do so.

But as 1928 progressed, his portfolio began to unravel. He sustained substantial losses in April when rubber prices collapsed by 50 percent as the world cartel broke down, forcing him to liquidate large holdings at a loss to meet margin requirements. The Fed's tightening of early 1928 to cap the stock market took Keynes by surprise. After all, he argued, U.S. prices were stable and there was "nothing which can be called inflation yet in sight." In September 1928, with the Dow at 240, he circulated a short note among friends t.i.tled "Is there Inflation in the U.S.?" which predicted that "stocks would not slump severely [that is,] . . . unless the market was discounting a business depression," which the Fed "would do all in its power to avoid."

His big error was a failure to take into account the deflationary forces that had begun to sweep the world. After Strong's death in October and as the Fed initiated its campaign of words against the exuberance of the market, he began slowly to realize that the risk had now shifted "on the side of business depression and a deflation." But by his own admission, even in early 1929, he still did not comprehend the impact that the scarcity of gold would have on central banks. He had thought that over time they would liberate themselves from the hold of the "barbarous relic." He completely failed to foresee the sort of scramble for gold that emerged in 1929. "I was forgetting that gold is a fetish," he confessed.

The price for being a speculator was that all these miscalculations wrought havoc on his net worth. By the middle of 1929, he had lost almost three-quarters of his money. The only saving grace was that in order to meet his margin payments, he was forced to liquidate much of his stock portfolio and entered the turmoil of 1929 only modestly invested in the market.

The role of Ca.s.sandra was instead taken over by Montagu Norman. Of all the various flashpoints ready to detonate in the world economy that fateful spring and summer-Germany teetering on the brink of default, the shortage of gold, falling commodity prices, the madness on the U.S. exchanges, a chronically weak sterling held hostage by the Banque de France-he found it hard to tell which was the most combustible.

In April 1929, with the negotiations in Paris deadlocked, Norman wrote, "Picture to yourself that at one and the same time a committee is laboriously discussing the whole question of German reparations in Paris: that the rate of interest was yesterday 20% in New York, where the Reserve System is not functioning and where the stock market is playing ducks and drakes with their own and other people's money; that three of the central banks in Europe have raised their rates within the last month, perhaps only as a beginning." The world, it seemed to him, was sleepwalking toward a precipice.

Germany, now locked out of the American market, grabbed at any and every source of credit on which it could lay its hands. In May 1929, the Swiss banker Felix Somary, nicknamed by his American colleagues the "Raven of Zurich" for his unremitting dark "croakings" of a crash to come, received a frantic call from the German finance minister, Rudolf Hilferding, desperate to borrow $20 million to pay public employees. Somary flew to Paris to finalize the necessary arrangements with Schacht, reporting back to the president of the Swiss National Bank, "Almost all the great powers have been negotiating for months about how many billions a year should be paid until 1966, and thereafter until 1988, by a country that is not even in a position to pay its own civil servants' salaries the next day."

Germany was so hard up that it even began loan negotiations with the mysterious Ivar Kreuger, one of that handful of shadowy figures, like Calouste Gulbenkian and Sir Basil Zaharoff, who hovered over the European financial scene in the interwar years, making fortunes in suspicious deals with governments. Kreuger himself was said to be worth several hundred million dollars, and maintained six or seven residences, including his three summer mansions in Sweden, his permanent suite at the Carlton in London, apartments in Berlin, on Park Avenue in Manhattan, and on the Avenue Victor Emmanuel III in Paris, where he had installed a string of mistresses-ex-chorus girls, students, shop a.s.sistants, even the occasional streetwalker-on whom he lavished presents.

Whereas Gulbenkian, nicknamed "Mr. Five Percent," dealt in Middle East oil rights and Zaharoff in arms, Kreuger manufactured nothing grander or more threatening than plain little matches. Given the scale of his empire, however-he then controlled three-quarters of the world's match manufacturing-he could borrow money in New York on finer terms than most European governments. Exploiting this financial muscle, he floated bonds on Wall Street and used the proceeds to sh.o.r.e up the finances of the less creditworthy governments across the globe, exacting in return match monopolies in the countries to which he lent. He had concluded such deals with Poland, Peru, Greece, Ecuador, Hungary, Estonia, Yugoslavia, Romania, and Latvia. He had even provided $75 million to the French government during the stabilization of the franc in return for a quasi monopoly in France. Now he offered the German government $145 million in return for a ban on all imports of cheap Russian matches.

As interest rates rose in the United States and New York functioned as a magnet, drawing money from all corners of the globe, every country in Europe, except France, struggled to prevent its gold from escaping across the Atlantic. Interest rates, as Keynes put it, "even in countries thousands of miles away from Wall Street," ratcheted upward, propelled by the scramble for gold. In February 1929, the Bank of England raised its rates a full percentage point to 5.5 percent, despite unemployment above 1.5 million. In March, Italy and the Netherlands followed suit. Germany was already deep in recession, but after the raid on its reserves during the Young Plan negotiations, had also been forced to hike its rates to 7.5 percent. Austria and Hungary more than matched the Reichsbank, taking their rates to over 8 percent. In July, Belgium joined the column.

With the steady erosion in commodity prices, the effect of the rate hikes was to raise the real cost of money in many places to over 10 percent, bringing with it the first signs of worldwide economic slowdown. This had begun in 1928 in the big commodity producers: Australia, Canada, and Argentina. By early 1929, Germany and Central Europe were also in recession.

The U.S. stock market meanwhile refused to pay attention to either the rising cost of money around the world or the first signs of slowdown abroad. In June, it broke out on the upside. As reports of outstanding corporate earnings poured in, the Dow kept going up. In June it rose 34 points and another 16 in July.

The character of the market had by now become almost completely speculative. As trading turned feverish, action increasingly concentrated in an ever narrower roster of companies and was no longer led by those that were making sustained large profits-the General Motors corporations of the world. Instead, it was frantically pursuing glamour stocks-Montgomery Ward, General Electric, and the most dazzling of them all, Radio Corporation of America. Thus, while the market averages continued to race up, reaching their peak in September, most individual stocks had hit their highs in late 1928 or at best in early 1929. Indeed, on September 3, 1929, the day the Dow topped out, only 19 of the 826 stocks on the New York Exchange attained all-time highs. Almost a third had fallen at least 20 percent from their highest points.

It was during these months that most of the large stock traders sold their positions. Claims by speculators about what they did in 1929 and when they did it need to be taken with some grains of salt. People rarely tell the complete truth either about their amorous exploits or their stock portfolios, the latter being especially true for professional investors whose reputations hinge on appearing to be prescient about the market.

In February, Owen Young, alarmed by the feverish level of stock prices and the Fed's war of words, sold his entire portfolio of $2.2 million, some of it held on margin. David Sarnoff, Young's vice president at RCA and a member of the U.S. delegation to the Paris conference, got out in June. John J. Raskob, the man who sincerely wanted everyone to be rich and was touting stocks as a long-term investment in the Ladies' Home Journal, Ladies' Home Journal, had apparently liquidated most of his portfolio before his article appeared. Joe Kennedy, catching the last rally, sold in July 1929. Bernard Baruch claims, in his autobiography, to have had an epiphany on the Scottish moors in September of 1929, rushed home and dumped everything by the end of the month. Even Thomas Lamont, the inveterate optimist, sold substantial amounts of his portfolio during the spring and summer. had apparently liquidated most of his portfolio before his article appeared. Joe Kennedy, catching the last rally, sold in July 1929. Bernard Baruch claims, in his autobiography, to have had an epiphany on the Scottish moors in September of 1929, rushed home and dumped everything by the end of the month. Even Thomas Lamont, the inveterate optimist, sold substantial amounts of his portfolio during the spring and summer.

Even the greatest cheerleader of them all, that most determined of bulls, Billy Durant, got rid of his positions. In April 1929, he had some friends arrange for him to meet secretly with the president. He slipped out of New York, careful not to inform even his secretary of his destination, took a train down to Washington, hopped anonymously into a taxi, and arrived at the White House at 9:30 in the evening, when he was ushered into the president's study. He told Hoover that unless the Fed eased up its a.s.sault against the stock market, there would be a financial catastrophe. It is not clear whether Durant understood that he was wasting his breath, that Hoover was fully behind the Fed's campaign. He does seem to have realized soon after the meeting that his warnings had gone nowhere. On April 17, he set sail for Europe aboard the Aquitania Aquitania, and a few weeks later, he and most of his crowd began liquidating their positions.

But behind the scenes, the Board of the Federal Reserve was finally ready to concede that its attempts at "direct action" were a failure. On August 8, after the market had closed, the New York Fed announced that it was raising its discount rate from 5 percent to 6 percent. The next day the Dow plunged 15 points in frantic trading, the largest daily decline in the index's history. The market suddenly realized, however, that speculators had been comfortably making large profits while paying much higher rates in the brokers' loan market. Within a day, all the losses were recouped.

Over the next three weeks, the Dow went up another 30 points. Among investors there reigned, as one commentator described it, the sort of "panic which keeps people at roulette tables, the insidious propaganda against quitting a winner, the fear of being taunted by those who held on." It was symptomatic of the market's reach when on August 14, the New York Stock Exchange firm of Saint-Phalle and Co. announced that it had opened direct ship-to-sh.o.r.e service aboard the transatlantic liner Ile de France, Ile de France, to be followed a few days later by M. J. Meehan and Co, opening a similar service on the to be followed a few days later by M. J. Meehan and Co, opening a similar service on the Berengaria Berengaria and the and the Leviathan. Leviathan.

Even Europe was drawn into the frenzy. "Scores of thousands of American shares are bought everyday in London alone and Paris, Berlin, Brussels and Amsterdam are pouring money into New York as fast as the cable can carry it," complained Viscount Rothermere in one of his newspapers, the Sunday Pictorial Sunday Pictorial. "Wall Street has become a colossal suction pump, which is draining the world of capital and the suction is fast producing a vacuum over here. That is why bank rates are rising throughout Europe. That is the reason of the steady withdrawal of gold from the Bank of England. That is the explanation of the frequent visits which the governor of the bank, Mr. Montagu Norman, pays to New York and Washington."

In July, Norman made his second trip of the year to the United States. He spent most of his weeks of holiday with his old friend Mrs. Markoe at Bar Harbor in Maine but did go to see Harrison in New York. He came back even more pessimistic than after his February trip. He was now convinced that some sort of stock market crash in the United States was inevitable. No one could be sure what might set it off or how bad it would be. The longer the bubble continued, the more unavoidable would be the breakdown. And though the Fed was finally beginning to act, it had left things very late and still remained a bitterly divided inst.i.tution.

Throughout the summer of 1929, Britain's reserves came under siege. By the end of July, the Bank of England had already lost $100 million of its $800 million of gold and in August and September, it lost a further $45 million, mainly into the United States. There were also signs that the Banque de France had resumed converting its pounds. Since 1927, the flow of money into France had continued unabated, although now most of it was in the form of gold rather than sterling. By the middle of 1929, the Banque de France had acc.u.mulated $1.2 billion in gold and another $1.2 billion in foreign exchange, giving it an extraordinary hold on the world financial situation.

During the two years since Norman and Moreau had first fallen out, the Banque de France, recognizing that it had the power to destabilize the world currency situation, had actually been very restrained in handling its sterling. But the Young Plan negotiations put a new strain on Anglo-French relations. Having made some concessions to Germany on reparations, the former Allies fell out on how to divide the burden.

In June 1929, Britain went to the polls. After four years of high unemployment under Conservative rule, the Tories were voted out of office and a minority Labor government took power. Churchill was replaced at the Exchequer by Philip Snowden, a long and bitter opponent of France and French policy on reparations. At a conference at The Hague in August 1929 to wrap up some of the details of the Young Plan, he entered into a particularly heated exchange with his French counterpart, Henri Cheron, in the course of which he described the French finance minister's arguments as "ridiculous and grotesque." The translation into French, "ridicule et grotesque" "ridicule et grotesque" has a much harsher connotation, implying bad faith and utter stupidity. As the economic historian Charles Kindleberger put it, the English expression could be used in the House of Commons, the French expression would not be allowed in the Chambre des Deputes. Cheron, a "fat excitable man" whose enormous girth had made him the constant victim of jokes and who was, consequently, unusually sensitive, took offense at Snowden's remarks, and sent his seconds to demand an apology-the French were only just weaning themselves off the practice of dueling. has a much harsher connotation, implying bad faith and utter stupidity. As the economic historian Charles Kindleberger put it, the English expression could be used in the House of Commons, the French expression would not be allowed in the Chambre des Deputes. Cheron, a "fat excitable man" whose enormous girth had made him the constant victim of jokes and who was, consequently, unusually sensitive, took offense at Snowden's remarks, and sent his seconds to demand an apology-the French were only just weaning themselves off the practice of dueling.

Though he was eventually induced to return to the negotiating table, relations between Britain and France were severely strained. At one meeting during the same negotiations, Pierre Quesnay of the Banque de France is said to have threatened to convert France's holdings of sterling into gold unless the British conceded. Though the evidence is murky, this was not mere saber rattling and Britain's gold continued to come under attack.

On August 19, Time Time magazine ran a cover story on Norman, the "Palladin of Gold," as it called him. The article described how within Europe "invisibly the battle of gold was on." In late August, as Britain's reserves. .h.i.t a postwar low, Norman warned his fellow directors that unless something were to change, large parts of Europe, including Britain, would be driven off gold and that they should begin to prepare for the impending havoc. But first another cataclysm was to blindside the world economy. magazine ran a cover story on Norman, the "Palladin of Gold," as it called him. The article described how within Europe "invisibly the battle of gold was on." In late August, as Britain's reserves. .h.i.t a postwar low, Norman warned his fellow directors that unless something were to change, large parts of Europe, including Britain, would be driven off gold and that they should begin to prepare for the impending havoc. But first another cataclysm was to blindside the world economy.

Wall Street, Black Tuesday, October 29, 1929

17. PURGING THE ROTTENNESS.

1929-30.

If stupidity got us into this mess, then why can't it get us out?

-Will Rogers

THERE is an old stock trader's adage: "n.o.body rings a bell at the top of the market." As Wall Street returned to work after Labor Day on Tuesday, September 3, few people thought that this might be the end of the bull market. The weekend had been unusually hot, and the journey home from the beach was marred by terrible traffic jams and long delays at train stations. Congestion on the New Jersey highways was so bad that thousands of people had parked their cars and finished the journey home to Manhattan by subway.

As bankers a.s.sessed the market after the summer, they were a.s.sisted by a fresh new voice to add to the blithe new-era optimism of the Wall Street Journal Wall Street Journal and the dark mutterings about "portents" and "misgivings" from Alexander Dana Noyes, financial columnist of the and the dark mutterings about "portents" and "misgivings" from Alexander Dana Noyes, financial columnist of the New York Times. New York Times. That week, the premiere issue of That week, the premiere issue of BusinessWeek BusinessWeek hit the newsstands. It sought to bring the successful hit the newsstands. It sought to bring the successful Time Time magazine formula of snappy and vivid writing to the corporate world. From the very first issue, the editors expressed their skepticism about the bull market. "For five years at least," they wrote, "American business has been in the grips of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the 'new era' upon which we, or it, or somebody has entered." It had carried the country "into a cloud-land of fantasy." "As the fall begins," they warned, "there is a tenseness in Wall Street . . . a general feeling that something is going to happen during the present season. . . . Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly 'psychological.'" magazine formula of snappy and vivid writing to the corporate world. From the very first issue, the editors expressed their skepticism about the bull market. "For five years at least," they wrote, "American business has been in the grips of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the 'new era' upon which we, or it, or somebody has entered." It had carried the country "into a cloud-land of fantasy." "As the fall begins," they warned, "there is a tenseness in Wall Street . . . a general feeling that something is going to happen during the present season. . . . Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly 'psychological.'"

The market had become inured to such prognostications on the way up and continued to ignore them on the first day of trading. On September 3, 1929, the Dow traded up a single point to close at a record high of 381. For the next day and a half, it clung to that peak.

At two o'clock on the afternoon of September 5, the newswires reported that the Ma.s.sachusetts economist and statistician Roger Babson had announced at his annual National Business Conference in Wellesley, Ma.s.sachusetts, "I repeat what I said at this time last year and the year before that sooner or later a crash is coming . . . and it may be terrific. . . . The Federal Reserve System has put banks in a strong position but it has not changed human nature." Observing further that "a detailed study of the market shows that the group of advancing stocks is continually becoming narrower and smaller," he predicted that the Dow would probably drop 60 to 80 points-15 to 20 percent-and that "factories will shut down . . . men will be thrown out of work . . . the vicious circle will get in full swing and the result will be a serious business depression." That afternoon the Dow fell 10 points, roughly 3 percent.

Babson was a well-known market seer, the founder of the Babson Statistical Organization, the country's largest purveyor of investment a.n.a.lysis and business forecasts. Every month the company mailed out reams of charts and tables, dissecting the behavior of individual stocks, the overall market, and the economy. Babson had built his forecasting method around two somewhat ant.i.thetical notions: that the "ups and downs" of the economy "operate according to definite laws" derivable from Newton's third law of motion and that emotions were "the most important factor in causing the business cycle."

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 ent.i.tled Gravity-Our Number One Enemy. 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. 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 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. 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 a.s.sessment on the a.s.sumption 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 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 reb.u.t.tal from the other. 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 reb.u.t.tal 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 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. 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 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 acc.u.mulation of gold." Previous crashes had all been preceded by an extraneous shock of some sort, which broke the herd psychology. 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. 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 acc.u.mulation of gold." Previous crashes had all been preceded by an extraneous shock of some sort, which broke the herd psychology. 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 munic.i.p.al 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 a.s.sociated 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-s.e.x, 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 t.i.tle 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 munic.i.p.al bonds to post as collateral against additional loans.

Early in September, as rumors circulated that he was ma.s.sively 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 s.p.a.ce 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 appet.i.te was sometimes stimulated by a c.o.c.ktail 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 doc.u.ment 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 doc.u.ment the scene.

A little after noon, the barons of Wall Street-Charles Mitch.e.l.l 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 cla.s.sic, 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, a.s.serted Lamont. The situation, he a.s.sured 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 conditions 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 const.i.tuted "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 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." 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 Sat.u.r.day, 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. Mitch.e.l.l 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 Mitch.e.l.l 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 a.s.sociated 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.

The country's money center banks were confronted with a potentially life-threatening hit. Many of the largest traders on Wall Street, especially the pool operators, held gigantic leveraged positions in the stock market that had been financed by brokers' loans-in some cases as much as $50 million, some of which had come from banks. The danger was that as the market fell, brokers, frantic to recoup their loans, would be forced to dump the stocks they held as collateral, creating further declines in the market and intensifying the vicious cycle of selling.

Rebuffed the previous Thursday by the Federal Reserve Board, Harrison now took matters into his own hands. That night, Wall Street bankers were invited to a dinner in honor of Winston Churchill at the Fifth Avenue home of Bernard Baruch. Despite the days' events, the general consensus among the financiers was that stocks were now undervalued. Mitch.e.l.l even managed to raise a laugh when in his toast to the British visitor he addressed the company as "friends and former millionaires."

Down on Wall Street the lights in the skysc.r.a.pers glowed far into the early hours as exhausted clerks and bookkeepers tried to tally their records after a day of unprecedented trading. Meanwhile, at the Fed's offices on Liberty Street, Harrison and his staff were developing a plan to inject large amounts of cash into the banking system by buying government securities. Fortunately, there was no time to consult the Board in Washington. He barely managed to reach two of his own directors, and then only at 3:00 a.m., to secure their approval. Early the next morning, even before the market had opened, the New York Fed injected $50 million.

That day, which came somewhat unoriginally to be christened Black Tuesday, saw no letup in selling. The crowd of ten thousand that again gathered that morning stood in hushed awe, fully aware that they were "partic.i.p.ating in the making of history," and that they were unlikely ever again to witness such scenes. The New York Times New York Times man on the spot described Wall Street that morning as a street of "vanished hopes, of curiously silent apprehension, and of a paralyzed hypnosis." Churchill chose that day to visit the stock exchange and was invited inside to witness the scene. Though he was heavily invested in the market and lost over $50,000, most of his savings, in the collapse, he seems to have responded to his change in fortunes quite philosophically-"No one who has gazed on such a scene could doubt that this financial disaster, huge as it is, cruel as it is to thousands, is only a pa.s.sing episode. . . ." Commissioner Whalen himself kept a close eye on the market, and the minute he saw prices sagging, had dispatched an extra squad of policemen downtown. The financial district looked like a city under siege. man on the spot described Wall Street that morning as a street of "vanished hopes, of curiously silent apprehension, and of a paralyzed hypnosis." Churchill chose that day to visit the stock exchange and was invited inside to witness the scene. Though he was heavily invested in the market and lost over $50,000, most of his savings, in the collapse, he seems to have responded to his change in fortunes quite philosophically-"No one who has gazed on such a scene could doubt that this financial disaster, huge as it is, cruel as it is to thousands, is only a pa.s.sing episode. . . ." Commissioner Whalen himself kept a close eye on the market, and the minute he saw prices sagging, had dispatched an extra squad of policemen downtown. The financial district looked like a city under siege.

The bankers' consortium gathered twice that day. Lamont struck a noticeably less confident note at his next press conference. Their objective was not to support prices, he told the reporters, but to maintain an orderly market. Toward the end of the day, after over 16 million shares had changed hands and the Dow had fallen more than 80 points-it had now lost 180 points, or close to 50 percent of its value in less than six weeks-it seemed as if the selling had begun to burn itself out. In the last fifteen minutes of trading, the market made a vigorous rally of 40 points.

During the day, the New York Fed had injected a further $65 million. The Board, especially Roy Young, was greatly irritated when it found out later that day about Harrison's show of independence and initiative; his failure to get Washington's approval first was a clear defiance of established protocol. In response to Young's rebuke, Harrison shot back that there had never been such an emergency, that the world was "on fire" and that his actions were "done and can't be undone." The Board tried to pa.s.s a regulation prohibiting the New York Fed from making any further independent transfusions of cash, but questions arose about whether it had the legal authority to do so. During the next few days, there was considerable legal wrangling over the precise jurisdictions of the Board and the New York Fed. Harrison eventually proposed that they postpone the bureaucratic argument over powers and procedures until the crisis was over, agreeing in the meantime not to act unilaterally provided the Board gave him the authority to buy as much as $200 million more in government securities-an arrangement which allowed him to draw on the whole Federal Reserve System rather than the resources of the New York Fed alone.

That evening a somewhat larger group of bankers once again gathered in the library of Jack Morgan's house at Madison Avenue and Thirty-fifth Street, the scene of his father's legendary rescue of the New York banking system in 1907. Among them was George Harrison.

With stocks now in free fall, all those who had pumped money into the brokers' loan market-the corporations with excess cash, foreigners drawn by high rates of interest, small banks around the country-were rushing for the exits. In the days since Black Thursday over $2 billion, about one-quarter of all brokers' loans, had or was about to be pulled out. This was creating ma.s.sive additional selling and a scramble for cash that risked toppling the entire financial structure of brokers and banks on Wall Street. In order to forestall this financial fire stampede, with everyone heading for the doors at the same time, some of the bankers proposed to close down the stock exchange as had been done at the outbreak of war in