1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 10

The news had leaked.

On Friday, March 29, Thomas Lamont had just arrived at Villa Baroncino, a gorgeous hotel nestled in the hilly landscape outside of Florence, Italy, when he received an urgent telegram from his partners in New York.

The New York Herald Tribune had gotten wind of the secret deal he had begun negotiating in February on the Aquitania and that he had spent the past month trying to complete: the blockbuster merger of RCA, Western Union, and ITT. That morning, the Herald story had been picked up across the country; the New York Times front-page headline read: “Radio Subsidiary Sold for $100,000,000.”

After nearly two months holed up in Paris in negotiations over German reparations that remained far from resolved, Lamont had left Paris with his family the night before on the 5:20 p.m. train from Gare de Lyon for a weeklong break. But rather than enjoy his time off, he was suddenly up to his neck dealing with the merger business.

From the start, Lamont had known that if news of the massive deal became public, it could be upended entirely. But for a deal of this scale, stretching across three continents, such risks were unavoidable—and, in his view, totally worth it. Over the last several days, Lamont had worked “like a beaver,” as he put it, to get the deal done. If he succeeded, it would shape the future of business—and send a signal to the world about his preeminent place in it.

If there was one company—and one stock—that had captured the imagination of the American public, it was RCA.

Known as “Radio,” RCA was the glamour stock of the 1920s, its shares the most heavily traded on the Exchange. Investors were transfixed by RCA because it represented the future like few other companies—its potential seemed limitless, and so did its stock price. For Americans who owned radios, it was already opening their worlds.

After its invention in 1895 by Guglielmo Marconi, radio technology had grown from a few tinkerers building “radio music boxes” to millions of sales of household sets and some 564 U.S. radio stations, fueled by commercial advertising. By 1929 radio reached an American audience of nearly thirty-eight million listeners, who could tune in to music, comedy, news, and political commentary—and the inauguration of a president.

In a 1929 RCA company report, board chairman Owen Young said radio “ has helped to create a vast new audience of a magnitude which was never dreamed of…This audience, invisible but attentive, differs not only in size but in kind from any audience the world has ever known…a linking-up of millions of homes.”

RCA had effectively created a new market and held exclusive patents on innovations that had yet to be exploited—which included television. Stock speculators eager to get in on the ground floor of the future sent RCA’s stock soaring from $1½ in 1921 to $85½ by 1928. And when the news of a possible merger broke in the Herald , it sent the company’s stock price even higher.

To Lamont the deal wasn’t just a merger but the equivalent of forging a transatlantic trade agreement between nations to build a colossus, an empire. And he and Owen Young, chairman of both RCA and General Electric, would be the master negotiators, just as they had been in the international negotiations for German war reparations.

One major obstacle to the deal was the White Act of 1927, a modification of the Sherman Antitrust Act that prohibited monopolies involving communications companies. Young believed this law was wrongheaded. His view was that competition in communications was counterproductive because it led to expensive and unnecessary duplication of plants and equipment. Radio communications, he argued, ought to be run by a single corporation with government oversight, like a public utility, an opinion that made many roll their eyes, since he said more or less the same thing about every business he controlled.

Lamont agreed with Young, but his logic was loftier and intended to appeal to lawmakers: The merger was a matter of national security. At that very moment the great British wire-wireless combination of the Eastern Telegraph Company and the Marconi Wireless Telegraph Company was finalizing a massive merger to unify cable lines and would soon become a formidable global force. That was competition enough, Lamont argued.

Both Young and Lamont believed they had America’s interest at heart. They told themselves that their motives were not greed but patriotism. On those grounds, they were convinced, Congress would be compelled to repeal the White Act and allow their deal to go through.

All throughout March, Lamont had watched uneasily from Paris as RCA’s stock price soared for reasons he couldn’t fully explain. He suspected it had little to do with anything of substance—certainly not with the merger talks he was quietly pursuing—and everything to do with the speculative euphoria sweeping the market. If the price rose too high, ITT wouldn’t be able to afford the deal. But from three thousand miles away, he was powerless to stop it.

Back in New York, meanwhile, a man named Michael Meehan had his own designs on RCA. He understood better than most the public’s infatuation—not just with radio technology but with RCA itself, the crown jewel of the new economy. He saw an opportunity—not to invest but to manipulate. His aim was simple: Drive up the stock price and cash in.

Meehan, a high-strung, red-haired Irishman, was the official RCA “specialist” on the floor of the New York Stock Exchange responsible for managing the stock’s trading—matching buy and sell orders, ensuring liquidity, and maintaining an orderly market. In practice, it gave him a unique lever to move the stock as he pleased. He had made a fortune trading RCA and had become a sort of financial celebrity, the face of the most popular stock on Wall Street. Visitors to the Exchange gallery would always look for him, standing at post 12 on the floor, right in the middle of all the action.

RCA’s recent run-up had started on March 8 when it jumped from 74 to 81¾. That day, Meehan had circulated a three-page document marked “Private and Confidential” to favored customers, including clients of his own firm, as well as several other brokerages. His plan was brazen: The document explained that with enough money in hand, Meehan could move the stock up at will. His partners in the scheme, which included two veteran pool manipulators, Ben Smith and Tom Bragg, would take 10 percent of the profits off the top.

Within days, Meehan had signed up sixty-eight participants, including William Durant for $400,000 and automobile magnate Walter Chrysler for $500,000. Two prominent brokers ponied up money in the names of their wives. Meehan also put his share of $1 million in the name of his wife, Elizabeth.

In the end, Meehan and his crew had amassed $12,683,000. “ RCA to extend activity abroad,” reported The Wall Street Journal the next day, Saturday, March 9. “Radio Corp. is financially better off than ever.” The stock bumped to 92 by noon, the Exchange’s closing time on Saturday.

On Monday, March 11, The Trader, a financial column at the New York Daily News (which accepted “contributions” from financial touts) predicted that RCA would rise to 100 “very soon” because “its original sponsors are behind it…Tuesday it should be a real buy.”

Then the crew began to “paint the tape,” making the stock look hot by trading among themselves. On Tuesday, Meehan took his place at post 12 on the floor of the Exchange. His crew found their spots, taking care not to be seen together. At the sounding of the bell at 10 a.m., the team went into action, buying and selling RCA stock according to a careful plan.

By Wednesday, The Wall Street Journal reported that RCA had soared to “fresh record levels on the activities of big operators who have sponsored RCA’s market for the last several weeks.”

RCA reached a peak on Saturday, March 16, at 109¼, at which point the pool managers “pulled the plug,” unloading shares that were then eagerly purchased by the gullible public that had read stories suggesting RCA would continue rising. Needless to say, it didn’t. By March 23, it would drop to 87¼.

Meehan’s crew made a net profit of $4,924,078.68. For a little more than one week’s effort, Durant’s $400,000 investment paid $145,855.39. Smith and Bragg—and their wives—profited $634,631.40. Meehan and his wife made $652,783.94, and the Meehan firm another $580,000.

Apart from the investor pool’s windfall, nothing substantial resulted from the short-term frenzy, which was fueled by lies, innuendo, and clever tactics by insiders. And it was all done “in accordance with and subject to the rules and regulations of the New York Stock Exchange.”

With the news about the merger now public, there was little Lamont could do from Italy to reach investors or policymakers in the United States, who were likely looking for answers about what the agreement entailed. His entire team was scattered. “As Owen D. Young is in London, Lamont in Florence, and as J.P. Morgan leaves for Venice tomorrow, I believe nothing can be done at this end until next Thursday when they will be back in Paris,” the J.P. Morgan office cabled everyone involved.

Still, Lamont was restless. “Not very good night. Slept rather late,” he wrote in his diary. Lamont spent the day at the Villa Baroncino reading “Saturday Reviews,” a detective story by R. Austin Freeman, to clear his mind, napping in between.

But he couldn’t take his mind off the deal. Lamont was kept abreast of developments in the United States by way of regular telegrams from his office. Aside from the RCA deal making the front page of The New York Times , there were two other stories on the front page that morning that managed to connect virtually all the major actors of Wall Street who were involved, including himself.

The first headline was: “Glass Assails Mitchell for Bank’s Aid to Market; Stocks Up in Buying Rush.” The efforts of Mitchell and Durant to push back against raising interest rates had the senator from Old Dominion on a rampage. The reporter quoted Glass: “Country has been aghast for months at stock gambling.”

Lamont and the House of Morgan were hardly aghast at the news—the partners assumed that banks would manage their business wisely and preferred that the Federal Reserve stay out of it. Lamont in particular did not believe that higher interest rates would end speculation.

“ The stock market will not have a very material decline unless and until there is an adverse turn in business,” Lamont wrote to his colleague back in New York, Russell Cornell Leffingwell. “Of course Jack doesn’t agree with me,” he added, referring to Jack Morgan.

The second story, just to the right of it, was headlined “Young Asks Schacht to Make Debt Offer Without More Ado” and reported on the now-deadlocked war reparations conference in Paris. Lamont, Owen Young, and their colleagues had grown discouraged and exasperated at the Germans’ intransigence, led by Dr. Hjalmar Schacht, president of the Reichsbank, and were ready to return home. Billions of dollars in reparations and the health of Europe were at stake.

“ During our vacation,” Young told Schacht right before he and Lamont left Paris for a break, “you will have time to reflect both on the reasonable sum which you must offer as a base of discussion and also on the enormous inconvenience which would result for your country.”