1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 9

Charles Mitchell was back at his office in New York by the last week of March after attending a series of parties with his wife in Palm Beach. Between canapés and champagne, virtually every conversation found its way back to the stock market, as if Palm Beach had become the Wall Street of the South. Would the Federal Reserve put a stop to the speculation?

William Fox, the entertainment mogul, had announced that week that his Fox Film Corporation would stop producing silent movies and had invested as much as $15 million in new equipment to make “talkies.” He had managed to sign exclusive deals with Broadway stars like Will Rogers. While this announcement stirred fear among the New York acting community that the new films would spell an end to theater, the Palm Beach party circuit wondered whether this represented an investment opportunity.

But on Tuesday, March 26, as the Fed met again about whether to raise interest rates, which would serve as yet another attempt to put a damper on the stock market, an unease raced through the market. The Dow had already fallen 5 percent since Hoover had been inaugurated and the last couple of weeks had been choppy. That morning a record number of shares changed hands—it would eclipse 8 million by the end of the day, beating all previous records.

From his desk Mitchell watched the carnage with mounting apprehension. As the ticker, unable to keep up with the unusual volume, fell behind, investors frantically dumped stocks. (Ironically, the prior day the New York Stock Exchange decided to reappoint E. H. H. Simmons as its president with the task of overseeing the installation of a new ticker technology to alleviate exactly this problem. But that didn’t stop the day’s carnage.)

By 1:50 p.m. the market appeared to be headed toward a historic disaster. It felt like an earthquake. Banks began raising their rates on brokers’ loans. Brokers frantically sent telegrams to their customers threatening to close out their accounts if they couldn’t provide cash to cover more of their margin debt.

The rapidity of the sell-off was surprising. Just a day earlier Mitchell had taken part in a New York Fed board meeting, where there had been some anxiety about bank lending and volatility in the market. But for the most part, the meeting had been routine—so much so that the board spent time debating and voting to rent “the sixth floor of this building for five or six months at a rental of $8,333.33 per month” to American Telephone & Telegraph Company. Just weeks earlier it had turned down an offer from Goldman Sachs for the same space “during the construction of their new building.” Given the Fed’s policy of “not renting space in this building to financial institutions we had advised our real estate agent that we would not be interested in renting the said space to Goldman, Sachs & Company,” the minutes reflected.

Now, looking at the numbers from the floor, Mitchell was having flashes of 1907. Money was becoming inaccessible: The call rate had leaped from 15 percent to 17 percent, then to 20 percent. In turn, stocks fell like dominos: General Electric off 7, Anaconda Copper down 13.

“ A landslide of selling during the first four hours of trading drove most of the active issues to new low ground for the year,” the Associated Press reported, giving “the market a shock that sent it through the most violent contortion in its history.”

By now Mitchell had given up on Federal Reserve policy as a way to stabilize Wall Street. His efforts on that front had failed. He had played by their rules, remained silent despite his growing discontent, and their solutions hadn’t worked. The Federal Reserve Board in Washington wasn’t going to help—its dictates were only making things worse. There was no higher authority that he could depend on.

Mitchell, who had a buzzer on his desk so he could summon his secretary, an “office boy,” and his stenographer, had a bold new thought: To stop the market from eating itself alive, he would have to wield the power of his own institution. National City would have to step into the breach and aggressively lend money to stock investors, big and small.

George Harrison, the governor of the New York Fed, called Mitchell that afternoon to get his assessment of the situation. Mitchell explained his plan. Harrison made sure that Mitchell understood that the Fed wasn’t going to take any measures against him. Especially in a “panicky” moment, Harrison told him, the Fed “could not be in the position of arbitrarily refusing loans on eligible paper” from banks. He privately assured Mitchell that he could go ahead and make loans to customers; the Fed would continue to provide National City with funding if it needed it.

Rumors about Mitchell’s gambit started to spread. The market, which The Boston Globe described as having experienced “the most tragic and demoralizing stock market day in recent years,” all of a sudden started to reverse itself, moving higher.

“ From the nadir of despair the emotions of the financial district moved up to a level of hopefulness for the future, a change wrought by the puzzling development in the market in the afternoon,” wrote the New York Herald Tribune , calling March 26 a day to be long remembered on Wall Street. “Swiftly word passed around brokerage house circles that the hand of the most powerful and famous of banking houses was responsible for the buying support that was tendered to the demoralized market.”

A young financial reporter for the Herald Tribune , Elliott V. Bell, spent the afternoon trying to get a meeting with Mitchell at his office, hoping to get his perspective on the market volatility. It was about 5 p.m. and Mitchell’s secretary tried again to shoo him away, telling him that Mitchell was busy and it was a “waste” of time to wait. But wait Bell did, and about an hour and a half later, “Mr. Mitchell sent out word that he was free” and would see Bell.

Inside Mitchell’s office, Bell asked why many bankers were blaming the Federal Reserve for causing the market gyrations. So many of them were describing the Fed as “conspiring to bring on a panic.” What exactly did they mean by that?

That was when Mitchell decided to make his plan public: National City Bank would try to end that panic by providing loans as necessary, no questions asked—exactly what the Fed board in Washington had publicly warned against.

“ So far as this institution is concerned,” Mitchell told Bell, “we feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert, so far as lies within our power, any dangerous crisis in the money market. While we are averse to resorting to rediscounting for the purpose of making a profit in the call market, we certainly would not stand by and see a situation arise where money becomes impossible to secure at any price.”

Bell wrote it all down the moment he got outside Mitchell’s door, knowing that it was “ dynamite in a sentence.”

And it was. The moment Mitchell’s quote found its way into the New York Herald Tribune , the panic subsided and the speculators returned. Single-handedly, Mitchell had turned the tide. In the view of the Street, Mitchell had become an overnight hero, on par with the legendary J. Pierpont Morgan rescues of yesteryear.

The Federal Reserve Board in Washington held a two-hour meeting but maintained its silence, thus seemingly conceding to Mitchell’s power. The fear dissipated. The price for call money dipped from 20 to 15 percent.

Mitchell claimed that the price for a loan had become so high that his actions were a necessity.

“ Such a situation, for instance, as 15 percent being bid for $30,000,000 of loans and no money available, simply cannot be allowed to exist,” Mitchell told the newspapers. “That is the sort of thing that would cause a real chill.”

In the bank’s newsletter a few days later, Mitchell wrote, “The National City Bank fully recognizes the dangers of over speculation and endorses the desire of the Federal Reserve authorities to restrain excessive credit expansion for this purpose. At the same time, the bank, business generally, and it may be assumed the Federal Reserve Banks…wish to avoid a general collapse of the securities markets such as would have a disastrous effect on business.”

While Mitchell basked in the glory of the moment, he failed to see what standing up to the powers that be would eventually cost him. He was about to become a target.

Despite its public silence, the Federal Reserve in Washington was apoplectic. Adolph C. Miller, a board member, “ telephoned from New York that the bankers are very angry because of Mitchell’s interview; that they did not object to his relieving the market to avoid panicky conditions but that his interview overthrew banking control of the situation and started up speculative activity anew,” according to the diary entry of a board member.

Mitchell’s interview was exactly what Benjamin Strong had hoped to avoid by putting him on the board and effectively muzzling him. But instead of staying silent, Mitchell had used the gravitas and authority of his position to undermine the entire enterprise. “Dr. Miller stated that the sentiment in New York was against Mr. Mitchell as having given his interview for the selfish prestige of his Bank at the expense of his banking competitors; that other New York banks had done as much as, or more than, Mr. Mitchell to relieve financial stress,” according to notes from the meeting.

George R. James, a director from St. Louis, declared that “the Board should remove Mr. Mitchell” from the New York Fed.

The Federal Reserve board members privately debated what to do, ultimately deciding that before taking any kind of drastic action they would send Mitchell a letter asking him to formally explain himself.

“Governor Young at first objected, saying that Mr. Mitchell might put the Board in a hole. Later, however, he dictated a letter couched more moderately, and all agreed to it.” That letter cited the interview Mitchell had given. “At the request of the Federal Reserve Board and for its information, I would appreciate it very much if you would let me know whether you were correctly quoted.”

There was one other person in Washington wondering the same thing: Carter Glass, the powerful senator on the Senate Banking and Currency Committee and the scourge of the banking industry. As Mitchell was about to learn, his decision to lend money into a speculative frenzy was something Glass would never forget—and never forgive.