Wall Street History: Individual Investors & The Crash of 1929
The break-up of Standard Oil and other monopolies during the Trust-busting Era, created somewhat greater competition, but did not significantly impact Wall Street, or its major players. For example, after the success of the Justice Department in the 1911 Supreme Court Case United States v. Standard Oil (in which the Court ruled that Standard Oil of New Jersey violated the Sherman Antitrust Act), the company was ordered broken into 34 ostensibly independent companies. *
The stock in each of these companies was distributed to Standard Oil Company shareholders (principally the Rockefeller family) and each company had separate boards of directors and separate management, but by and large they continued to operate on separate floors of the same building — 26 Broadway in Manhattan.
It was alleged that their management operated in concert. One immediate consequence of the break up was that the value of the stock in the aggregate rose significantly because the price of each separate company traded higher than the single company. It also provided opportunities for mid-level and senior executives of the overall company to have more responsibility in running the separate companies. As wealth poured into Lower Manhattan, the Unites States began to shift toward being a creditor to Europe as opposed to a debtor.
In 1912, Theodore Roosevelt formed the Progressive “Bull Moose” Party, breaking with his hand-picked successor William Howard Taft. As result of this split in the Republican Party, Woodrow Wilson who claimed to be a progressive Democrat and had the support of William Jennings Bryan, was elected President. Bryan would join Wilson’s cabinet as Secretary of State.
The First World War broke out in Europe Wilson and Bryan sought to keep the United States neutral, and firms on Wall Street would do business with both sides. The House of Morgan, with its close historical ties to Great Britain, strongly supported England and the allies, proudly later proclaiming it was “never neutral.” On the other hand, the Jewish firms, particularly Lehman Brothers, tended to support Germany (which also received significant support from Irish nationalists).
After the sinking of the Lusitania, Wilson was under pressure from American nationalists such as Theodore Roosevelt to enter the war on the side of the British and most Wall Street firms, like most Americans, swung their support to the Allies. In New York the upsurge of patriotism was led by New York City’s reform Mayor John Purroy Mitchell, joined by Theodore Roosevelt’s young cousin Assistant Secretary of the Navy Franklin D. Roosevelt, an ardent advocate of “preparedness.” Pro-British feelings and anti-German hostility both ran high, so much so that Evacuation Day, celebrating the British evacuation of the city of New York in 1783, was discontinued as anti-British.
One of the results of this upsurge in patriotic nationalism was the resurgence of war bond drives in which individual Americans were solicited to buy U.S. bonds to support the war effort, as they had been by Jay Cooke during the Civil War. In 1918 there were war bond rallies on Wall Street in which more than 20,000 people gathered in front of Federal Hall to hear speeches by famous entertainers such as Charlie Chaplain and Douglas Fairbanks extol the virtues of middle class Americans investing in the war effort through Wall Street.
The victory of the Allies in 1918 enhanced Wall Street and America’s position as the international center of capitalism. With the rise of Bolshevism and the Russian Revolution (which some alleged had been secretly financed by American firms hoping to gain access to Russian resources), the headquarters of J.P. Morgan & Company at 23 Wall Street (on the corner opposite the New York Stock Exchange and Federal Hall) was generally considered the center of worldwide finance.
On March 1920, a hay-wagon filled with dynamite was ignited on the street in front of the building and more than 20 people were killed in the explosion. Jack Morgan (J.P. Morgan’s son and the head of the firm at the time) was slightly injured in the blast. It’s said the marks on the building were never repaired so that those who undertook the attack would know that the firm, and Wall Street in general, remained triumphant. After the explosion of 1920, the U.S. Attorney General undertook a series of raids against “subversives” and many dissenters were imprisoned for sedition and other alleged crimes against the state.
Growth of Individual Investment in Wall Street firms.
Following the failure of Woodrow Wilson to obtain approval in the U.S. Senate for American participation in his proposed League of Nations, fellow Republican Warren G. Harding was elected President and many Americans shifted their primary financial concerns to the domestic economy. At this time Wall Street shifted from the big international banks to brokerage firms and the New York Stock Exchange, as the success of the bond drives of the First World War opened the possibility for broader individual investor participation in the market.
Certain leaders of Wall Street brokerage firms, such as Charles Merrill and Edmund Lynch (later Merrill Lynch) and Charles Mitchell of Citibank, began to promote aggressive individual investment by middle class Americans in common stocks. One benefit for Wall Street firms was that individual investment could be a significant source of capital for new enterprises. In the 1920s there were a number of new technological innovations such as the automobile, home appliances, radio, and telephones, all of which needed capital. This strategy would help change the New York Stock Exchange into the broad-based $26.4 trillion market that it is today.
Whereas in the 19th century most of the capital investment in U.S. enterprises (such as railroads and steamships) had come from foreign sources through investment banks such as J.P. Morgan or J.W. Seligman, now most of the investment capital for newer enterprises came from domestic sources, including individuals investing on the New York Stock Exchange through retail brokerage firms. It’s estimated that in the 1920s, as the number of automobiles owned by Americans rose from approximately 50,000 in 1918 to more than 8,000,000 by 1928, as many as one quarter of the stocks traded on the NYSE were related to the production of automobiles or automobile-related products.
Another important benefit of having broader-based individual investor participation in Wall Street was that it would blunt the historical political hostility toward Wall Street throughout the country, and make adverse regulation less likely. Now individuals in communities throughout the country could ostensibly participate, along with the Morgans and the Rockefellers, in equity investments in American companies and it was believed this would blunt criticism of Wall Street and regulatory efforts against individual companies. For example if AT&T (“Ma Bell”) had more than a million individual shareholders, they might not look as kindly on politicians who attacked the telephone monopoly.
This broader investment in Wall Street offered another benefit to the firms located there. Many upper class Americans took a greater and more sympathetic interest in the workings of Wall Street. They began following stocks more closely and by the late 1920s some set up offices in Lower Manhattan. One of these investors was an Irish born former banker from Boston named Joseph P. Kennedy who moved his family to New York so that he could “play” the market full time.
Kennedy became a highly successful full-time professional stock speculator and participated in a number of “pools” involving stock manipulation, which key players such as Ben Smith or Jesse Livermore organized. Without regulation the New York Stock Exchange, these pools, like those of Jay Gould and Cornelius Vanderbilt in former years, or arbitrageurs years later, were not unusual on Wall Street at the time and many smaller investors, after hearing rumors about them, would try to get in on them as well. All of this greatly increased in a sense the importance of Wall Street in the country and made it a much greater focus of the economy.
The greater flow of capital into the market in the 1920s caused a general increase in the value of most stocks on the Stock Exchange which resulted in increased profits and wealth to most investors. The Dow Jones Industrial Average, the benchmark of stock prices on the Stock Exchange, increased from about 61 in 1921 to almost 391 in 1929 (it reached 1,000 in 1982 and is more than 33,000 today). Needless to say, as more and more middle class Americans saw their neighbors succeeding in investment in the market, they were encouraged to join in too. By 1928 and early 1929 there were some who said the enthusiasm of the so-called “Roaring 20s” was getting out of hand. However the majority opinion on Wall Street was perhaps better reflected in Yale economics Professor Irving Fisher’s statement that the market had reached a “permanently high plateau.” Dupont Vice Chairman and Democratic National Committee Chairman John Raskob’s article “Do you sincerely want to be rich?” exhorted young men to participate.
Politically, the country elected Calvin Coolidge President in 1924, who said “let the business of America be business” and then a similarly minded Herbert Hoover in 1928. Hoover handily defeated New York Governor Alfred E. Smith, a Democrat whose progressive social welfare efforts in New York State had attracted attention throughout the country. The son of an Irish immigrant from the Lower East Side of Manhattan, Smith was the first Catholic to run for President and was viciously attacked for being Catholic, Irish, a member of Tammany Hall, and from New York City.
Smith’s hand-picked successor as New York Democratic gubernatorial candidate in 1928 was Franklin D. Roosevelt, a patrician former Wall Street lawyer from Dutchess County. Roosevelt was narrowly elected Governor and named Frances Perkins as his state Labor Secretary and key social welfare policy adviser. Their “New Deal” for working people would have considerable importance following the Crash of 1929 and the Great Depression that followed.
Although most people in 1929 expected the boom on Wall Street to continue indefinitely, there were a few skeptics. In the summer of 1929 Joseph P. Kennedy largely left the market. It’s said this occurred when a shoe shiner at 120 Broadway (reportedly the actor Pat Bologna’s uncle) asked him for tips on the market and he decided that if shoe shine men were playing the market it was time to get out.
In September 1929 , there was a slight dip in the market when Roger Babson, a business consultant and a Massachusetts prognosticator, said in a speech that “sooner or later a crash is coming and it will be terrific.” Although Babson had been saying this for some time, it was apparently a slow news day and his prediction was run in the national media. The market then fell around 30 points, but recovered within a few weeks from the so-called “Babson Break.” By early to mid-October it began to fall again.
This fall became somewhat more precipitous by the third week in October, and some on Wall Street became concerned. Then on October 21 there was a significant drop, which continued until October 23. The next day a number of the heads of the leading Wall Street institutions met at the J.P. Morgan Headquarters at 23 Wall Street opposite the Stock Exchange to discuss the situation. Present at the meeting were Thomas J. Lamont of J.P. Morgan, Charles Mitchell of Citibank, Seward Prosser of Bankers Trust, Albert Wiggin of Chase Manhattan, Richard Whitney, the Vice-President of the Stock Exchange, along with the leaders of one or two other institutions. A crowd, having heard about the supposedly secret meeting, gathered on the steps of Federal Hall in front of 23 Wall Street and the Stock Exchange hoping for “organized support” for the market of the type Morgan had provided in 1907 to stem a crash.
Around 1 pm Lamont, the presiding partner of J.P. Morgan & Co. held a brief impromptu press conference in which he stated that there was a little technical problem in the market but the bankers were handling it. A half an hour later Richard Whitney, the Vice President of the Exchange and known to be J.P. Morgan’s broker, strode across Broad Street to the New York Stock Exchange floor where he went to the post trading U.S. Steel and bid 205 for 10,000 shares, when it was trading at 190, and he similarly went to the trading posts for other stocks making significant bids for higher than market prices for the stock of AT&T and other major companies. A cheer went up throughout the exchange floor as it seemed clear the wealthiest firms were willing to prop-up the market. The next day the New York Times ran a headline that said “Richard Whitney Halts Stock Panic.”
Unfortunately this optimism was short lived. Although prices held steady over the next two days, on Monday October 28, and even more so on Tuesday, October 29th (now known as Black Tuesday) the market fell precipitously after the bankers decided they had no more money to put up. (There was some speculation, probably apocryphal, that the word of the organized support had not reached heavily margined investors in the Midwest because telegraph lines happened to be down from a snowstorm.)
In any event, the avalanche of sell orders (many because investors who had bought on margin were forced to sell) overwhelmed the efforts of the so-called “bankers clique” and the prices of stocks on the Exchange continued to fall, so that by the time the low point was reached almost three years later approximately 83% of the value of the stocks traded on the New York Stock Exchange in 1929 was gone.
The hopes and dreams of the millions of Americans, many of whom had trusted the leaders of Wall Street with their life savings in the market, was shattered. The country would slip into the deepest economic depression in its history. It would not be until 1952 that stock prices on the New York Stock Exchange would reach the level they had at their height in 1929.
It was said that the once vibrant Wall Street would become a ghost town.
* Notably, Standard Oil of New Jersey became Esso, which eventually became Exxon; Standard Oil of New York became Socony, eventually Mobil (these two have since merged into ExxonMobil); Standard Oil of California (Socal), became Chevron; Standard Oil of Ohio (Sohio), was later acquired by BP; Standard Oil of Indiana (Amoco), was later acquired by BP; Standard’s Atlantic later merged with Richfield to form ARCO; Continental Oil, later merged with Phillips and is now ConocoPhillips (Philips 66).