1929: Inside the Greatest Crash

 This document, "1929: Inside the Greatest Crash" by Andrew Ross Sorkin, offers a deeply detailed, character-driven narrative of the events leading up to, during, and after the 1929 Wall Street Crash and the early years of the Great Depression. The author, drawing on extensive research including previously unpublished documents, aims to illuminate the human drama behind this pivotal historical event and draw parallels to contemporary financial and political climates.

The book is structured into two main parts: the first focusing on the year 1929 and the crash itself, and the second covering the subsequent years of the deepening depression and the eventual push for financial reform.

Key Characters:

The narrative revolves around a cast of influential figures:

• Charles Mitchell ("Sunshine Charlie"): The ambitious and optimistic Chairman and CEO of National City Bank, a key player in expanding stock market participation and a vocal opponent of Federal Reserve attempts to curb speculation. He later faced tax evasion charges.
• Thomas Lamont: A senior partner at J.P. Morgan & Co., who balanced immense financial power with diplomatic roles, such as negotiating German war reparations. He initially projected confidence but later harbored private concerns about the market.
• Herbert Hoover: The U.S. President during the crash, portrayed as an engineer who believed in economic management but struggled to communicate effectively and was often perceived as out of touch with the public's suffering.
• Carter Glass: A powerful Senator from Virginia, a co-founder of the Federal Reserve, and a fervent critic of Wall Street speculation. He became Mitchell's nemesis and was instrumental in shaping the Glass-Steagall Act.
• Jesse Livermore ("Boy Plunger"): A legendary stock speculator renowned for his short-selling tactics, who profited immensely from the crash but eventually faced personal ruin.
• John Raskob: An executive at DuPont and General Motors, a Democrat who advocated for wider public participation in the stock market and spearheaded the construction of the Empire State Building. He later became a key political opponent of Hoover.
• Richard Whitney: Vice President, and later President, of the New York Stock Exchange, celebrated as a "White Knight" for his public efforts to stabilize the market during the crash, but later revealed to be deeply indebted and eventually convicted of larceny.
• William Durant: Co-founder of General Motors, a prominent speculator who publicly challenged the Federal Reserve's policies, experiencing significant financial losses himself.
• Bernard Baruch: A well-known speculator and statesman, who wisely exited the market before the worst of the crash.
• Owen D. Young: President of General Electric and co-founder of RCA, involved in international economic diplomacy.
• Ferdinand Pecora: A tenacious New York prosecutor who led the Senate Banking Committee hearings, exposing widespread unethical practices and corruption on Wall Street.

Summary of Events:

Part I: The Crash of 1929

The book begins in early 1929, characterized by an intoxicating sense of prosperity and unprecedented optimism. Fueled by readily available credit and the "buy now, pay later" mentality, millions of Americans, including the middle class, poured into the stock market, often buying on margin. Financial institutions like National City Bank, led by Charles Mitchell, actively encouraged this participation, viewing it as democratizing wealth.

The Federal Reserve expressed concerns about speculative excess and attempted to "moral suasion" to discourage lending for stock speculation. However, these warnings were largely ignored or actively resisted by Wall Street figures. In March 1929, after a sharp market dip, Mitchell dramatically stepped in, using National City's resources to lend money to brokers, effectively defying the Fed and stabilizing the market. This act cemented his hero status on Wall Street but made him a primary target for critics like Senator Carter Glass, who saw him as enabling dangerous "Mitchellism."

Throughout the summer of 1929, the market continued its ascent, defying gravity. John Raskob famously promoted the idea that "Everybody Ought to Be Rich." While economist Roger Babson issued stark warnings of an impending crash, influential figures like Yale's Irving Fisher maintained unwavering optimism, declaring a "permanently high plateau."

The turning point arrived in October 1929. Initial market jitters intensified, culminating in Black Thursday, October 24. A flood of sell orders overwhelmed the New York Stock Exchange. A consortium of prominent bankers, led by Thomas Lamont of J.P. Morgan and including Charles Mitchell and others, publicly intervened to buy up shares and stem the panic. This temporarily halted the freefall. However, the respite was short-lived.

Black Monday, October 28, saw a further catastrophic decline. Mitchell, worried about his bank's exposure due to a risky merger with Corn Exchange Bank, made a desperate personal loan from J.P. Morgan to buy his own bank's stock to prevent its collapse. Black Tuesday, October 29, marked the most devastating day, with massive trading volumes and billions in paper wealth vanishing. Jesse Livermore, known for short selling, made a fortune, while others like Winston Churchill lost heavily.

In the immediate aftermath of the crash, the financial world reeled. Mitchell faced internal crisis at National City. James Riordan, president of County Trust Company, committed suicide due to mounting financial pressures. President Hoover initially downplayed the severity, believing the crisis was "purely psychological" and confined to Wall Street. Carter Glass, however, continued to lambast Mitchell and the bankers, blaming them for the "orgy of speculation."

Part II: The Great Depression and Reforms

1930-1932 brought a deepening economic crisis. A brief market rally in early 1930 proved ephemeral, leading to the "Hoover market," where stocks steadily declined. Bank failures escalated across the country, unemployment soared, and "Hoovervilles" sprang up. Hoover's interventions, such as the Reconstruction Finance Corporation, were seen as too little, too late. Political attacks mounted, with John Raskob's Democratic National Committee orchestrating a smear campaign against Hoover. Calls for stricter financial regulation grew louder, with Senator Glass continuing his push for banking reform.

The crisis reached a peak in early 1933, as widespread bank runs forced states to declare "bank holidays." Ferdinand Pecora, as chief counsel for the Senate Banking Committee, launched explosive hearings into Wall Street practices. Mitchell's testimony was particularly damaging, revealing his personal tax avoidance tactics and the unethical conduct of National City Bank in selling its own stock and offering bonuses to executives while closing customer accounts. These revelations eroded public trust in bankers. Mitchell eventually resigned from National City and was arrested on tax evasion charges. President-elect Franklin D. Roosevelt, while initially reluctant to cooperate with Hoover on the banking crisis, prepared to take decisive action.

In mid-1933, Roosevelt took office and immediately declared a national bank holiday, a bold move that helped restore public confidence. He then signed the Glass-Steagall Act into law, a landmark piece of legislation that legally separated commercial banking from investment banking. This act was largely the culmination of Carter Glass's long crusade, though key elements (like deposit insurance) were pushed by others like Representative Henry Steagall and Winthrop Aldrich (CEO of Chase National Bank, a rival to J.P. Morgan) who saw an opportunity to reshape the financial landscape. Mitchell, despite widespread public condemnation, was surprisingly acquitted in his criminal tax evasion trial, though he later faced civil penalties. The Pecora hearings also exposed J.P. Morgan's partners for tax avoidance and influence peddling, further tarnishing Wall Street's image.

Epilogue and Lasting Lessons:

The epilogue traces the long-term fates of the central figures. Richard Whitney's spectacular fall from grace culminated in his imprisonment for larceny. Jesse Livermore's obsession with the market led to his eventual bankruptcy and suicide. William Durant also went bankrupt. Mitchell, despite his legal battles and public disgrace, eventually returned to finance and rebuilt his fortune. Raskob's Empire State Building, initially an "Empty State Building," eventually became a landmark. Hoover rehabilitated his reputation through later humanitarian work.

The author concludes by reflecting on the enduring lessons of 1929. The crash was not solely caused by a few "villains" but by a collective delusion fueled by optimism, easy credit, and human nature's tendency to disregard risk. The financial infrastructure of the time was ill-equipped for the scale of the speculation. While reforms like Glass-Steagall were crucial, the ultimate takeaway is the need for humility in understanding that no system is foolproof, and societies are prone to repeating cycles of "irrational exuberance."

Images Included:

The document includes numerous images, primarily black-and-white portraits of the key individuals mentioned in the text, providing visual context to the narrative:

• Charles Edwin Mitchell (1929)
• Senator Carter Glass (1932)
• Thomas William Lamont
• Albert H. Wiggin, Jack Morgan, and Walter E. Frew (1917, at Liberty Loan Parade)
• Representative Henry B. Steagall (1936)
• Senator Reed Owen Smoot
• Benjamin Strong Jr. (1917)
• Elizabeth Rita Rend Mitchell (1929)
• William Crapo Durant
• George Whitney (1939)
• Herbert Clark Hoover (with his Oval Office telephone)
• Franklin Delano Roosevelt with his wife Eleanor and son Franklin (on his inauguration day)
• Andrew William Mellon and Ogden Mills (1927)
• Jesse Livermore (circa 1936)
• John Jakob Raskob
• Bernard Baruch
• Evangeline Adams (circa 1912)
• Roger Babson (1918)
• Irving Fisher (1927)
• Winston Churchill visiting Herbert Hoover at the White House (1929)
• Al Smith meeting with Charles Francis Adams about the Empire State Building (1929)
• Russell Cornell Leffingwell (circa 1918)
• Richard Whitney shaking hands with Senator Burton Wheeler
• The New York Stock Exchange (1929)
• Meeting of the reparations committee (1929)
• Profile of Charles E. Mitchell in The New York Times (September 29, 1929)
• The New York Times reporting on Jesse Livermore
• Crowds outside the Bank of United States after its closure (1929)
• Crowd forming outside the Sub-Treasury Building (following the crash in 1929)
• Crowd forming outside the New York Stock Exchange (following the crash in 1929)
• Front page of The New York Times (October 28 - November 1, 1929)
• President Herbert Hoover meeting with leading businessmen (November 21, 1929)
• The Empire State Building (1930, under construction)
• President Franklin D. Roosevelt signing the Glass-Steagall Act into law, flanked by Senators and Representatives.
• Pierre du Pont and John Jakob Raskob at American Liberty League banquet.
• Senator Carter Glass and Ferdinand Pecora shaking hands (1933).
• Jack Morgan before testifying to the SEC.
• Charles E. Mitchell walking on Broadway after his acquittal (1933).
• Jesse Livermore's obituary in The New York Times (November 29, 1940).
  
  

The key causes of the Crash

The key causes of the 1929 Wall Street Crash were a complex interplay of several factors, deeply rooted in the economic and social climate of the 1920s:

1. Excessive Speculation and Over-optimism (Human Nature):

   • Collective Delusion: The era was characterized by "collective delusion" where "optimism becomes a drug, or a religion." People lost their ability to calculate risk, convinced by "hot tips, one-of-a-kind deals, killer sales pitches, and irresistible slogans."
   • Public Participation: The stock market expanded beyond professionals, with middle-class Americans, including "clerks, stenographers, and women," eagerly participating. Figures like John Raskob actively promoted the idea that "Everybody Ought to Be Rich," further enticing small investors.
   • Blind Faith: There was an "unshakeable faith in a golden future," and a belief that even if wiped out, opportunities to regain wealth would re-emerge.

2. Easy and Widespread Credit (Debt):

   • Margin Trading: A crucial factor was "Wall Street went one step further and started offering stock on credit—‘on margin,’ it was called." Investors could put down as little as 10% or 20% of a stock purchase and borrow the rest, amplifying potential gains but also potential losses. Margin loans grew dramatically.
   • Bank Lending: Banks like National City, under Charles Mitchell, aggressively extended credit to individual investors and brokerage firms, making margin accounts more accessible.
   • Corporate and Foreign Funds: A "staggering $8.5 billion in bank funds had flowed to brokers linked to the New York Stock Exchange for the year so far," much of it from American corporations and foreign companies pouring their profits into the call money market to chase high short-term yields (up to 20%).

3. Federal Reserve's Ineffective Policy and Internal Conflicts:

   • Moral Suasion: The Federal Reserve Board, fearing a speculative bubble, issued advisories and formal statements discouraging loans for stock speculation ("moral suasion") rather than taking direct, forceful action.
   • Reluctance to Raise Rates: The New York Fed board initially voted to raise the discount rate to curb speculation, but the Washington board overruled them, fearing it would slow the "real economy" without puncturing the speculative frenzy.
   • Defiance by Bankers: Charles Mitchell of National City Bank openly defied the Fed's warnings, dramatically stepping in to provide liquidity to the market in March 1929, believing his obligation to "avert any dangerous crisis in the money market" was paramount. This undermined the Fed's authority.
   • Lack of Understanding/Control: The Fed was a "new and untested" institution, and even its creators "did not fully understand its power." It had "no control" over the "avalanche of ‘bootlegging’ credit consisting of loans ‘for others.’"

4. Underlying Economic Imbalances and Lack of Regulation:

   • Bifurcation of Society: The "heady times of the 1920s disguised a set of underlying imbalances, a massive bifurcation of American society," with a widening gulf between urban "haves" and rural "have-nots" due to agricultural distress and technological displacement of farmworkers.
   • Laissez-faire Government: The Coolidge administration was "proudly committed to slashing taxes and restoring the federal government to its pre–World War I size and capacity," with "an extreme form of laissez-faire" that largely left "American business alone." This meant little government oversight or intervention to prevent speculative excesses.
   • Opaque Practices: Practices like "stock pools" (where groups of investors covertly manipulated stock prices by trading among themselves) and the lack of transparency in "investment trusts" (which used layers of leverage) were widespread and legal, allowing insiders to profit at the expense of "gullible investors."
   • Weak Banking System: The national banking system was "weak and fragmented," composed of "many fragile, undercapitalized institutions" in rural areas that were "technically insolvent" even before the crash.

5. Influx of "New Era" Thinking:

   • Disregard for Old Precedents: A popular theory was that "this is a new economic era to which old economic precedent no longer applied," leading people to believe traditional risks were no longer relevant.
   • Celebrity Financiers: Wealthy businessmen became "cover stars," their pronouncements "quoted like scripture," casting them as "visionaries" and symbols of success, which further fueled public belief in unending prosperity.

In essence, the crash was "a slow boil—until everything spills over," driven by optimistic human nature, amplified by easy credit, and unchecked by a hesitant and internally divided Federal Reserve or a hands-off government, all against a backdrop of growing economic disparities.

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