1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 5

From his office at 55 Wall Street, Charles Mitchell walked three blocks in the frosty morning air of February 14 to the impressive new building that housed the Federal Reserve Bank of New York.

The structure occupied a full block bordered by Liberty, Nassau, and William Streets and Maiden Lane, a fortresslike Renaissance palazzo of limestone and sandstone. Though it had just opened in 1924, its massive stones and copious ironwork conveyed eternal strength, as if it were a pillar of civilization that had stood undaunted for centuries—and would continue to for centuries more.

Mitchell entered the double-arched entryway and strode into a long hall, his footsteps echoing off the marble floor and into the vaulted ceilings of stone and brick. Tellers stood behind cages, protected from the public by more ornamental ironwork. The lowest of the bank’s four basement floors contained its enormous vault, where gold was stored in 122 compartments, the designated holdings of many banks and entire nations. The eighteen stories above held offices and meeting rooms, as well as a cafeteria and gymnasium.

Six weeks earlier, Mitchell had been appointed to the board of the Federal Reserve Bank of New York. It was validation of his exalted place in American society, as one of the chosen, respected not only for his achievements and personal wealth but for his integrity and judgment. Though the Fed itself was barely fifteen years old, it already cast a large shadow over the markets. Wall Street was becoming worried that if the Fed made a misstep, it could snuff out the boom.

The way the Fed had been set up was the result of a political compromise between big-city industrialists and financiers—who believed that the country needed a strong national bank to set borrowing rates, direct the flows of capital, and steady the economy during panics and busts—and the representatives of small towns, farmers, and rural folk, who feared the centralization of power. On paper, the Fed neatly satisfied these competing concerns with a logical, egalitarian structure: twelve regional banks that each had their own boards and set their own policies, overseen by the Federal Reserve Board in Washington. But the reality that had emerged in the decade and a half since its founding was that the New York Fed, due to its proximity to Wall Street, practically ran the entire institution.

When the Fed was born, Mitchell had been in his mid-thirties, overseeing a small investment firm and still searching for his big opportunity. In a way, he and the Fed had grown up together, and it made perfect sense for him to join the board of the New York Fed and serve alongside the likes of General Electric president Owen Young and Thomas Lamont.

Mitchell owed his ascension to the late Benjamin Strong, who had served as governor of the New York Fed from 1914 until his death in 1928. Strong had been a formidable player in world affairs. He worked closely with central bankers from England, France, and Germany to rectify the disastrous financial aftermath of the Great War, while helping the U.S. economy quickly recover from near calamity in 1921 when unemployment jumped to 12 percent after government wartime spending plummeted. Strong helped stabilize the economy and begin the greatest period of growth it had ever seen. Despite all this, Strong had been the target of frequent political attacks from rural-state Democrats in Washington.

Mitchell himself had been a critic—sometimes publicly and sometimes privately—of interest rate decisions by the Fed, so it was a bit of a surprise when Strong expressed his wish to have Mitchell join the board. In August 1928, just two months before he died, Strong wrote Young that he had “a high regard” for Mitchell, judging him to be “truly one of our ablest bankers.”

Strong had not always thought so highly of Mitchell. In 1925, when the possibility of his joining the board was first floated, Strong called it “dangerous,” telling one of the board governors that Mitchell “will interpret” an invitation to serve on the board “as indicating we are unduly affected by his attacks and he has won a victory.” He added: “ Mitchell, as you realize, has an exceedingly active and well developed ego.”

But Strong had reasons for wanting Mitchell on the board—largely as a way to muzzle him. Strong was so concerned about the political status of the Fed, still a young institution and not yet fully trusted by the public, that he feared the repercussions of Mitchell airing grievances about the institution publicly.

“ Should he become a director before any hearings, it would…put him in a position where he would not be willing to appear,” Strong wrote, suggesting the possibility that keeping his enemy close was the best strategy. Strong said Mitchell should join the board if he was willing to “play the game” and mute his criticism of Fed actions.

Strong had many allies on Wall Street, who, he later confided to Young, worked “to educate [Mitchell] as to our policy and philosophy.” Strong added that “ so long as [Mitchell] is a member of the board of directors he should be willing to accept the decision of the directors…and not engage in outside criticism but be loyal to the majority of his associates.” He went on: “I am convinced that a nice talk with him on this subject would ensure that such would be the case, and it is not so much the need for having an understanding in advance as it is to avoid any possibility of a misunderstanding…and the distinction in Mitchell’s case is important.”

Strong had one other reservation about Mitchell: the “inevitable influence which his knowledge of what we are doing [at the Fed] may exert upon his policy in running the City Bank”—one of the oldest problems in the conflict-ridden industry of banking. As Strong put it, “How can a director…be disinterested and impartial in his attitude in the Reserve bank as well as in his own bank, and not take an unfair advantage of his confidential knowledge?” After Strong had a conversation with Mitchell “ to tell him very frankly the way we feel,” his directorship was arranged.

But Mitchell was still Mitchell. He trusted his own experience far more than any organization’s rules and customs. So as he entered the building that February morning, he was fully prepared to speak his mind.

In a speech he had delivered on New Year’s Eve, Mitchell had celebrated National City’s 1928 results as the best in the history of the institution and predicted that the stock market would continue to rise, due “to prevailing confidence that American business is destined to grow rapidly in volume and that the leading corporations will enjoy increasing prosperity,” he said. “No complaint regarding the level of stock prices, however, is justified except from the standpoint of credit strain…so long as the responsibility for credit distribution is held by the banks who obviously feel that responsibility, business should not suffer.”

Within a month, his optimism was put to the test. On February 2, the Federal Reserve Board in Washington, fearing that a speculative bubble was taking hold, issued an advisory to the Fed’s regional banks, discouraging them from making loans to support stock speculation, particularly stock bought on margin, that is, stock that was purchased by paying only a small percentage of the actual price and financing the rest with credit, like a down payment on a home loan.

Mitchell was shocked and upset by the new dictum. Buying on margin was not a new phenomenon—it had been an accepted practice since the earliest days of the stock exchange. What was different was that it had recently migrated beyond the professional class and into the mainstream, thanks in large part to Mitchell. Through National City Bank and its securities affiliate, National City Company, he aggressively extended credit—both to individual investors and to brokerage firms, making it far easier for them to offer margin accounts to their customers. Almost anyone could now put down as little as 10 percent of the purchase price of a stock and borrow the rest. Margin loans had grown from $1 billion at the beginning of the decade to nearly $6 billion, inflating the market into what many now feared was a dangerous bubble.

To Mitchell there was nothing wrong with American consumers using credit— they were already using credit to buy cars, refrigerators, and radios. So why not stock? Mitchell and National City Bank were making it possible for ordinary Americans to invest in the future. Who could say with any authority what the proper price of a stock should be? It was up to the market to decide. And if the Federal Reserve wouldn’t accept the common stock of America’s greatest corporations as collateral for loans—companies like RCA, GM, U.S. Steel, Standard Oil, Sears, and AT&T—what would they accept?

The Fed board’s anti-speculation announcement triggered a nosedive in the value of some stocks—the Dow had fallen 4 percent since the beginning of February—as well as a hike in borrowing rates on “call money” loans. These were short-term loans, also known as “overnight” loans, secured against stocks or bonds and that could be “called”—meaning that the borrower would have to repay the money at the moment of the call. New York banks made such loans to their own clients, to domestic banks outside New York, and to corporations, investment trusts, individuals, and foreign banks. Although the market quickly rebounded, the Fed had made its position clear: Speculation fueled by margin debt would not lead to sustainable economic growth and needed to be discouraged.

A few days after the announcement, George Harrison, the governor of the New York Fed, met with the Fed’s Washington board. He explained that his board members, representing Wall Street, felt that the Washington group’s course of action needlessly penalized stockholders. How could the board know what investors did with the funds they borrowed against their stock? His counterproposal was that Washington raise interest rates slightly to keep European speculators from playing the U.S. market. Harrison believed, in that moment, that it was better “ to have the stock market fall out of the tenth story, instead of the twentieth later on.”

The Washington overseers would not be dissuaded, however, and on February 6 issued a formal statement that was a stern scolding aimed at the public itself:

The Federal Reserve Board neither assumes the right nor has it any disposition to set itself up as an arbiter of security speculation or values…When it finds that conditions are arising which obstruct Federal reserve banks in the effective discharge of their function…it is its duty to inquire into them and…to correct them; which, in the immediate situation, means to restrain the use, either directly or indirectly, of Federal reserve credit facilities in aid of the growth of speculative credit.

Its tactic here was “moral suasion,” an attempt to persuade investors to act rationally. Rationality, of course, is in the eye of the beholder, and though the market suffered a few bad days after this latest Fed salvo, buyers continued to keep prices aloft. The American stock market was so appealing that the Bank of England raised the bank rate from 4.5 to 5.5 percent, hoping that the higher interest rate would keep British money from gravitating to Wall Street.

Across the country, speculating in the stock market had become so widespread and profitable that it seemed almost as if everyone were leveraged, committed, and in on the action. On February 12, a Philadelphia banker, Edward C. Benedere, suggested that clerks, stenographers, and women be kept out of the market as a way of keeping in check the public enthusiasm for speculation. So many women had started investing that brokerages had installed specially designated lounges and galleries where they could watch the fluctuations of the market safe from the rowdiness of men buying and selling. Benedere believed women were temperamentally unsuited for trading. “ Twenty percent of the persons in the market in the last year have been women, and it is getting to be ridiculous. People are going crazy and mortgaging their homes.” This sexist critique was anathema to Mitchell, whose goal was to bring small customers—both men and women—into the wealth-producing machine of the American markets.

Mitchell entered the New York Fed’s conference room for the February 14 meeting prepared to make the case that the Washington board was steering the country into disaster by trying to dissuade banks from lending to speculators. Many of his fellow board members agreed with his position, but some believed the Fed should raise the discount rate, the interest that banks pay when they borrow money from the central reserve, which would effectively raise rates for everyone. A higher rate, they believed, would tamp down the buying frenzy.

The meeting was called for 2 p.m., just after lunch, and in the ensuing five-hour session, Mitchell argued against raising rates. He linked human progress directly to the invention of newer, smarter financial instruments. Weeks earlier his own bank had come up with an innovative scheme to finance building construction through the sale of stock instead of through traditional mortgages. For his peers on the board of the Fed, ideas like these were too radical.

Despite Mitchell’s efforts, the New York Fed board voted to call Washington for permission to raise the discount rate from 5 to 6 percent. At 3:40 p.m., Harrison in New York called Young in Washington with their proposal. At 6:40 p.m., “ Governor Young advised Governor Harrison by telephone that the Federal Reserve Board had disapproved of this action of the directors and had determined the rediscount rate of this bank to be five percent.” The board worried that raising rates by a point would be the worst of both worlds: It wouldn’t puncture the speculative frenzy but could slow the real economy.

The meeting in New York finally adjourned at 6:55 p.m. Harrison then emerged to make the public announcement of the board’s decision.

“ I’m sorry, gentlemen,” he told the waiting press, which was eager for any news affecting investors. With weariness evident on his face, Harrison said only, “There is nothing I can say.”

A frustrated Mitchell, knowing he had promised to remain silent, was the first to leave the boardroom, his face grim, a rarity for Sunshine Charlie, as he strode to the elevator.

To the top Ivy League graduates beating a path to Wall Street in the 1920s, Mitchell was an idol. Over the preceding decade he had transformed National City from a sleepy relic into the red-hot engine of the new Wall Street by shepherding a new era of investors into the stock market.

When his bond salesmen complained they had run out of buyers, Mitchell would take them for lunch at the Bankers Club on the top floor of the Equitable Building at 120 Broadway.

“ Look down there,” he’d say, pointing to the Manhattan streets below. “There are six million people with incomes that aggregate thousands of millions of dollars. They are just waiting for someone to come to tell them what to do with their savings. Take a good look, eat a good lunch, and then go down and tell them.”

Up until the 1920s, most Americans, even the very rich, had been scared off by Wall Street’s opacity and reputation for self-dealing. With good reason: For decades, a shadowy cabal of insiders preyed upon the “dumb money,” as they referred to newcomers to the market. But Mitchell made it his life’s work to put the uninitiated at ease. Stocks were no different than a vacuum cleaner or a dishwasher. They were all products that improved your life.

“ It has always seemed to me that there is and always has been too much mystery connected with banking,” Mitchell liked to say. “We sell our goods over the counter just the same way a clerk sells a necktie.”

Just as consumers could make purchases using credit, the same was true in the stock market. Putting up as little as $10 of his or her own money, an investor could buy a $100 blue-chip stock by borrowing the rest. If within a year the price doubled, a regular occurrence in the late 1920s, the investor realized a profit of $82—an 820 percent return, even assuming an onerous interest rate of 20 percent. Who wouldn’t want to take a stake in the market with such potentially high returns for so little up-front investment?

This only worked, of course, if everyone kept the faith that the market would continue rising. That was what Sunshine Charlie was all about: boosting people’s spirits and spreading the gospel of economic opportunity. He radiated the confidence of a self-made man, wealthy beyond his wildest dreams, whose first job was at a manufacturer of telephone parts for $10 a week.

Born in 1877, Mitchell was raised outside of Boston and, after overcoming a stutter, taught public speaking to put himself through Amherst College. Preternaturally confident, bordering on arrogant, he made no show of humility when his friends voted him “the greatest” in college. His reply? “I am.”

Still, it was marriage, not talent, that showed him what real wealth looked like. His wife, Elizabeth Rend, was the daughter of Colonel William P. Rend, an Irish immigrant who fought on the Union side in the Civil War and later made a fortune in coal and oil. He became renowned for paying Black and white mine workers equal wages.

Colonel Rend offered to give his daughter and her new husband a small yearly allowance, but Mitchell refused. “Charles was fond of the old American way of paddling a canoe,” Elizabeth wrote. “He preferred not to be dependent on an extra oar of bounty.”

Mitchell worked at Western Electric in Chicago after graduating from Amherst and then found his way to New York, where he took a job at Trust Company of America. That was where he learned about the perilous nature of finance: His bank was saved by J.P. Morgan in 1907. He eventually decided to strike out on his own, starting his own firm in 1911 before being asked to join National City Company, the securities affiliate of National City Bank, in 1916. “ This was exactly in line with my ambitions,” Mitchell later said. “There was virtually no limit to what might be accomplished in the way of constructive financing.”

As vice president, then president, Mitchell began reshaping National City by broadening its base to bring in what he referred to as “the Everyman.” In September 1917, an article featuring Mitchell appeared on the cover of the premier issue of a new magazine called Forbes . “I had more nerve than capital,” Mitchell was quoted as saying about his early career as a banker. In his first deal he sold $300,000 worth of bonds to banking insiders before they hit the public market. “It was the big game that fascinated him,” Bertie Charles Forbes, the founder of the magazine, wrote, lauding Mitchell as a “financial human dynamo.”

When he was elevated to president of National City Bank in 1921, at the age of forty-three, the company had just four offices. “ I am fully mindful of the quasi-public position which The National City Bank must hold, and cognizant as I am of my own shortcomings, I can indeed approach the work with none other than a feeling of solemnity,” he said soberly upon taking the top role.

“ I know what I am up against. I’m like a chap that’s going to learn to play the piano. I’ve got to begin by picking out the simple tunes with one finger; then, after a while, I’ll be able to use one hand, and then both hands. And some day I’ll know enough to take it all apart, pull out the bad strings and put in good ones. But it’s a long course of study, and I know it.”

Now in control of both the bank and the stock-trading subsidiary where he had started his National City career, Mitchell launched into creating what he called the “Bank for All,” a modern, diversified financial services corporation, with an emphasis on adding average Americans rather than Wall Street insiders to its customer base. He extended loans to small depositors, allowing them to speculate in the stock market. His dream was to have National City become the first U.S. bank to reach $1 billion in deposits, with the greatest number of overseas branches.

As the head of the bank, his energy was legendary. A big, athletic man, he often covered the five miles between his home and office on foot at a blistering pace reported to be twelve-minute miles.

And as hard as Mitchell worked, he drove his employees harder. When one of his associates was given the task of hiring a new chauffeur for Mitchell, the man asked, “I suppose you don’t want to pay more than the ordinary rate of wages?” “Yes,” Mitchell shot back, “I do,” explaining, “ I always want to pay more than the going rate because I want to be in the position to demand more than ordinary service. Get a good man and pay him more than he asks, but tell him that I’ll expect him to keep my hours and they’re long hours.”

In the office, Sunshine Charlie could be intimidating. When an employee took him aside to tell him his pants were unbuttoned, Mitchell fired him on the spot. Another employee regarded Mitchell’s browbeating of his sales force “ as if Attila the Hun had coupled with one of the Borgias to create their own Nero.”

But his methods worked. He had established himself as a leader of men, and National City was flourishing. As the bank flourished, so did Mitchell. In 1928, Mitchell was paid a base salary of $25,000, though his total compensation, including bonuses and stock, zoomed well above $1 million, making him one of the best-paid executives the world had ever seen.

As his personal wealth grew, Mitchell very consciously played the part of the modern gentleman. His suits were bespoke. The Mitchells bought a lavish apartment in Manhattan for their growing family—with space for the children’s nurses, maids, and other servants. They quickly outgrew it and moved again to 933 Fifth Avenue, the former mansion of Lamon V. Harkness, one of Standard Oil’s largest investors, which included a music room with sixteen-foot-high ceilings. Elizabeth, who moved through New York with the practiced grace of a banker’s wife but had a steely intelligence underneath her quiet veneer, threw herself into hosting home musicals, a new activity among the rich, often playing piano herself.

The Mitchells also built an impressive estate in the exclusive enclave of Tuxedo Park, northwest of the city, which they called Hilldale. Situated on seventy-two undulating acres, the grounds were designed by Olmsted Brothers, whose founder had designed Central Park. The Mitchells spared no expense on the three-story Tudor and Gothic Revival house, which had gorgeous views of the lake. The second floor had seven bedrooms with en suite bathrooms, four with marble or stone fireplaces.

While rich Manhattanites flocked to the luxurious new towers that had sprouted up all along Central Park in the 1920s, the Mitchells preferred the private splendor of their own building and doubled down, buying the piece of property next door and hiring architects Walker & Gillette, who had designed Hilldale, to create a breathtaking showplace at 934 Fifth Avenue.

The staff of sixteen included a housekeeper, a butler, a valet, a houseman, two footmen, two laundresses, a cook, an assistant cook, five maids, and a French governess.

The Mitchells entertained lavishly. Charles invited a revolving cast of business leaders, politicians, and foreign dignitaries, and among their well-known friends were trader-statesman Bernard Baruch and the publisher Condé Nast. Elizabeth, for her part, was the consummate Wall Street wife, the ideal match for a man who aspired to climb New York’s social ladder in true style. Her beauty, social connections, and philanthropic instincts gave Mitchell’s swaggering image a gloss of sophistication. While he gave her full leeway to indulge her interests, he did not necessarily share them. When they attended the opera, he was known to close the curtains of their private box and enjoy a snooze, even quipping to friends that “ maybe I’ll be able to catch up a couple of hours’ sleep there.”

Elizabeth, who had become an accomplished amateur pianist, counted many musicians among her friends and confidants. One night she danced with George Gershwin to a band called the Yacht Club Boys, then sat on the stairs and chatted with the composer.

“ I wish I knew what to do,” Gershwin confided in her. “I can stay in New York and accept a tempting offer to write a show, or toss that up and follow the strong urge I feel to work out a new idea of mine.” That would mean going to Paris for a year and studying theory and orchestration and forgoing his considerable income.

“My guess is that unless you follow your real desire, you stand a pretty good chance of writing a pretty bad show,” Elizabeth told him. Gershwin took her advice and went abroad, where he wrote An American in Paris .

Mitchell’s love of the good life was matched by his appetite for risk. The legacy investment banks focused on the tried-and-true industries of the time: railroads and industrial companies. They wouldn’t sell the bonds or stocks of businesses that relied on new technology, like utilities. Mitchell plowed ahead. And he advertised National City services in newspapers and magazines—heresy to traditional firms like J.P. Morgan—as a personal advisor to customers: “ National City judgment as to which bonds are best for you is based on both strict investigation of the security and analysis of your own requirements.”

In 1928, Mitchell pushed National City to promote bonds to its customers for a state in Brazil, Minas Gerais, even though an internal company report warned about the “ inefficiency and ineptitude…[and] complete ignorance, carelessness and negligence of the former State officials.” With the imprimatur of National City on them, the bonds were snapped up by American investors.

Some tried to warn against the explosion in such risky financing. “American bankers and firms [are] competing on an almost violent scale for the purpose of obtaining loans in various foreign money markets overseas,” Thomas Lamont observed in 1927 during a meeting at the International Chamber of Commerce in Washington. “That sort of competition tends to insecurity and unsound practice.” The genteel House of Morgan was feeling the pressure from Mitchell.

In January 1928, when National City stock hit $785 a share, Mitchell made a stunning move. He delisted National City from the New York Stock Exchange, choosing instead to have it trade privately on the “curb market,” so named because sales used to be conducted outdoors, on the curb. National City’s stock would be sold only through its own branches and salesmen—and because the shares weren’t traded openly on an exchange, investors who wanted to sell had to go back through the bank or find a private buyer, often at a steep discount.

At the time, Mitchell suggested he made the switch because he feared the volatility of prices on the Exchange floor. Speculators, running amok, were threatening to damage the perception of the bank’s stability, he said. “Banks differ greatly from railroads, industrials and public utilities, whose stocks are traded in regularly on The Exchange,” he said. “As credit institutions, banks might be seriously affected by public quotations in times of financial disturbance.”

Without the Exchange, Mitchell relied on his aggressive sales force to convince the bank’s middle-class customers to become its stockholders as well. By January 1929, the stock had risen to $1,450 a share. By spring, the stock had climbed to nearly $3,000 a share before a five-to-one split; after the split, it was still trading at $585 a share.

Like many other stocks in many other eras, National City had become a phenomenon, exciting but mysterious—and a little scary, too. It only seemed to go up. Was it for real? Could it be trusted?

Two days after the Federal Reserve Board meeting, on February 16, a Saturday, Mitchell’s promise to remain quiet came to an abrupt end. He was irate.

On Saturdays, the New York Stock Exchange was open from 10 a.m. to noon. Volume tended to be light. This Saturday was different. After a week of market breaks, a flood of sell orders had come in overnight on Friday, causing a frenzy at the opening bell. Prices dropped precipitously. It took almost ninety minutes for the market to steady itself. In the meantime, fear—the likes of which traders had not experienced in years—spread across the floor.

Mitchell and all of Wall Street were thinking the same thing: Was this the big one everyone had been predicting?

Charles Merrill, the founder of Merrill Lynch, had been telling his clients to get out of the market since March 1928, worried it was already overheated. In February 1929, he wrote to his partner Eddie Lynch, “ Many fine reputations have been built up in this era of extraordinary prosperity, which will not stand the acid test when troublesome times are here.” But Mitchell was far from ready to concede such a thing.

There is usually no credible explanation for what makes the market soar or sink, but in this case, the cause of the rout was clear as the blue sky to Mitchell: It was all the fault of the Federal Reserve Board for taking a stand against Wall Street’s supposedly “wanton” use of borrowed funds. The headline writer at The New York Times , putting together the next day’s edition, stated the situation plainly: “Stocks Break Again as Wall St. Awaits Credit ‘Show-Down.’ ”

The Federal Reserve’s “moral suasion” strategy had clearly had an impact, effectively cutting off the flow of credit to stock buyers. Call money rates rose to a whopping 20 percent before settling back down again. On top of that, Senator Carter Glass of Virginia was practically declaring a war on Wall Street and speculators.

Stock trading “is gambling wit matched against gambling wit,” Glass argued on the Senate floor that week. “It does not contribute a thing to the happiness or the welfare of the country. They buy things they never expect to get, and they sell things they never have. There isn’t a constructive thing in it.”

To Mitchell, this had all the makings of a major crisis, and he had an idea for how to address it.