Tuesday, October 29 (Black Tuesday), was a disaster: 16.5 million shares traded in a collapsing market that wiped out all of the gains of the preceding year. The members of the bankers’ pool met again but did nothing. Thomas Lamont somewhat lamely claimed that it had never been the purpose of the pool to maintain a particular level of stock prices. Worse, he was forced to deny rumors that the bankers had actually been selling stocks (conducting a bear raid) rather than buying.

(It would later be revealed that Albert Wiggins, the chairman of Chase National Bank and a member of the pool, was personally short several million dollars’ worth of stock at the time the bankers sought to organize support for stock prices.)

The market in fact demonstrated, with awesome ferocity, that it was not to be controlled by a few bankers or big operators. But what of the Federal Reserve System, which had been created in part to deal with crises like the 1929 crash? When the market broke in late October, the Federal Reserve Open Market Committee had been operating under a rule that allowed the purchase of only $25 million in government securities per week. The Federal Reserve Bank of New York immediately discarded this rule and quickly bought $160 million in short-term government notes in the marketplace in an effort to inject funds into the banking system.

By the end of November, the New York bank had purchased a total of $370 million in government securities. The bank’s governor, George Harrison, responding to criticism that he had exceeded his powers, said, “It is not at all unlikely that had we not bought governments so freely, thus supplementing the reserves built up by large additional discounts, the stock exchange might have had to yield to the tremendous pressure brought to bear on it to close on some of those very bad days in the last part of October.”

During the next two weeks, tens of thousands of margin calls went out to investors whose stockholdings had declined in value to the point where they no longer provided sufficient collateral to cover the investors’ margin loans. Nonbank lenders cut their brokers’ loans by $1.4 billion in the last two weeks of October, and non-New York banks recalled $800 million during this same period.

The big New York commercial banks stepped into the breach, making $1 billion in additional loans available. The funds necessary to do this were raised partly from borrowings from the Federal Reserve and partly from selling government securities. This process was aided immeasurably by the liquidity provided by the Federal Reserve Bank of New York. Overall, in the two months of October and November 1929, $4.5 billion in broker’s loans were liquidated, in a remarkably orderly process that caused not a single major bank or brokerage failure.

The Federal Reserve Board in Washington acted on November 14, dropping its discount rate from 5% to 4.5%. But George Harrison’s timely actions in New York undoubtedly prevented an even worse crisis. Previous market crashes had invariably been accompanied by financial sector bankruptcies. That such a chain of collapse did not take place in 1929 can be attributed in large part to the actions of the Federal Reserve Bank of New York. Harrison may well be the unacknowledged hero of 1929.

To some observers, the crash, painful as it was, served the useful purpose of purging speculative excess from the markets. Treasury Secretary Andrew Mellon, commenting after the crash, said bluntly, “Let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

The press sought out those presumed to be responsible for the debacle. Not surprisingly, Jesse Livermore, the King of the Bears, received the most attention. Eclipsed by perennial bulls like Arthur Cutten during the rising market of the late 1920s, Livermore was rediscovered by the press when the market crashed. A clash between Livermore and his presumed nemesis Cutten was highlighted, with one newspaper declaring, “Livermore, formerly one of the country’s biggest speculators, is the leader of the bear clique against Arthur Cutten, leader of the bulls…”

The New York Times marveled that “the ascendancy of Livermore to the position he once held as a leading market operator on the bear-side after years of eclipse is one of the most intriguing developments of the market.” Other papers openly speculated that Livermore was leading a bear raid on the market. The Wall Street Journal, while not specifically identifying Livermore, complained that there had been “a lot of selling to make the market look bad.” Livermore exulted in the publicity, playing to the galleries with his customary elan.

The stories were untrue. None of the major market operators possessed the wherewithal to have caused the crash, even if they had desired to do so. While Livermore made about $6 million from his shorts during the crash, he apparently lost about the same amount on stocks he owned. Financially, he was no better off than before. In any case, the magnitude of his trading was nowhere near large enough to have had a significant impact on the overall market.

Bernard Baruch is another trader who emerged from the crash with an enhanced reputation unjustified by the facts. On June 29, 1929, he said that “the economic condition of the world seems on the verge of a great forward movement.” He went on to note that market bears did not have houses on Fifth Avenue. In his memoirs, Baruch claims that he then suddenly turned bearish while visiting Scotland in late August, and immediately returned to New York to position himself for a market decline. But his brokerage records and other evidence do not support this assertion.

Like most speculators caught up in the boom of the 1920s, Baruch was slow to recognize changed circumstances. It was his inherent conservatism (especially his reluctance to speculate with borrowed money), not his astute market judgment, that enabled him to weather the storm.

Others would not be so lucky. By November 15, 1929, Arthur Cutten had lost more than $50 million. He would spend many of the remaining years of his life battling with government tax and regulatory authorities. Charles Mitchell was arrested in 1933 on charges of income tax evasion and forced to resign his position at National City Bank. He won an acquittal on the criminal charges but later lost a judgment for $1.1 million in a civil procedure, finally settling with the government in 1938.

To be continued…

Credits: Much of this article is extracted from B. Mark Smith’s Toward Rational Exuberance, 2004.

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