Once in Golconda by John Brooks
Brooks covers the history of Wall Street from 1920 to 1938, although his Depression era history revolves around the travails of Richard Whitney, the chairman of the New York Stock Exchange, presumably because the downsizing of the exchange seemed less newsworthy than its expansion.
On Thursday, September 16, 1920, a few seconds after the Trinity Church bell had finished tolling noon, the pleasant air of downtown Manhattan (weather clear, temperature sixty-nine degrees, market up slightly) was rent by an enormous and devastating explosion....
the explosion darkened the area for several minutes with a huge cloud of greenish smoke, set fire to awnings twelve stories above the street, broke virtually every window in the immediate vicinity and some as much as a half-mile away, and spattered a wide area with hundreds of small shrapnel-like iron slugs that, on later examination, appeared to be fragnents of cut-up window sash weights.
The United States, having financed a year and a half of participation in the war largely by selling bonds internally, had changed from a three-billion-dollar international debtor to a three-billion-dollar creditor. The Treasury was sitting on something like one-third of the world's monetary gold supply. The predicted postwar national depression had arrived, but was mild compared to the time of bankruptcies and bread lines that had been predicted. Wall Street even had an inadvertent benefit of the war in a horde of new customers -- citizens whose purchases of Liberty Bonds seemed to have given them an enduring taste for investing.
In those times an annual summer trip to Europe, combining business with pleasure, was considered all but de rigueur in the upper reaches of Wall Street, and in the absence of transatlantic air service an ocean liner was the way of getting there. The appearance of a powerful man's name on a passenger list was just about the only routine occasion for advance public disclosure of his whereabouts, and probable ready availability to reporters, at any given time...
On the contrary, they sometimes selected their departures and arrivals as the moments to make their public statements, invariably referred to in the press as "rare". The fact that their presence on the ship was public knowledge gave them the opportunity to present themselves as reluctant subjects, men trapped into interviews that they could not in democratic courtesy refuse; in fact, tney often came on baord with carefully prepared and memorized statements.
In hindsight he (Benjamin Strong, Federal Reserve Chairman who Brooks believes sold out the US to help Britain) was to be accused by Hoover of "crimes far worse than murder" and by most financial historians of being the single chief cause of the coming crash; but he was a better man than most of his detractors, and was cursed by fate as well as by his own tragic flaw; if he had been given another year of life, his full attention would surely have been focused on the American situation and his firm hand might have done much to set things to rights in time. As it was, he left behind, as so many big men do, a power vacuum, a shattered institution, weak, divided, and lacking enterprising leadership.( ouch )
What did a New York banker have to do to make moneyin early 1929? Lend it in the call-money market at 10 or 12 percent, at a time when he could, if he chose, borrow it from the Federal Reserve at 5 percent. As simple as that; both transactions were cut and dried, requiring no business initiative and involving practically no risk (!), and although starting in early February the Federal Reserve Board officially disapproved of the practice, it continued to be done. Bankers, like royalty in a constitutional monarchy, were in the position of being handsomely paid simply for existing.
Beginning in July, 1929, Wiggin (President of Chase National Bank) -- as astute as ever -- began to see the prospects for the stock market in general and Chase stock in particular as dim. Accordingly, through one of his personal companies he sold over 42,000 shares of Chase stock short. He was then in the curious position of having a vested interest, and a huge one, in the deterioration of the institution he headed...( this was legal )
When the account was closed that November, the whole market had collapsed as Wiggin had foreseen, and the profit to his personal company came to just over four million dollars. And no one -- for several years -- was the wiser; when Wiggin retired in 1932, the Chase's executive committee thanked him fulsomely for his uncounted services to the bank and unanimously voted him a life pension of $100,000 per year.
Moreover, the very root purpose of making a short sale -- to profit by the misfortunes of others -- tends to make the practice, as the wise and thoughtful Otto H. Kahn once said, "inherently repellent to a right-thinking man". A prime political target, then; and the more so because the defense of short selling, to the eternal frustration of its defenders, has to be based on more sophisticated and less readily grasped concepts. In the first place, a short sale can be looked upon as nothing more than a sale for future delivery -- such a transaction as is commonplace and universally accepted in almost all forms of commerce, and the interdiction of which, in most forms, would be universally regarded as intolerable tampering with the free market...
And these theoretical arguments, which were all advanced by defenders of short selling in 1930 and 1931, seemed to be backed by practical experience; all recorded efforts to forbid or severely restrict short selling on stock exchanges over extended periods -- in Holland in the seventeenth century, in France in the eighteenth, in England in the nineteenth, in Germany at the opening of the twentieth -- had ended in failure. The short sale like the earthworm is an unprepossessing object that plays a useful role.