The Days Of Boom And Bust

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And since capital gains were what counted, one could vastly increase his opportunities by extending his holdings with borrowed funds—by buying on margin. Margin accounts expanded enormously, and from all over the country—indeed from all over the world—money poured into New York to finance these transactions. During the summer, brokers’ loans increased at the rate of $400,000,000 a month. By September they totaled more than $7,000,000,000. The rate of interest on these loans varied from 7 to 12 per cent and went as high as 15.

This boom was also inherently self-liquidating. It could last only so long as new people, or at least new money, were swarming into the market in pursuit of the capital gains. This new demand bid up the stocks and made the capital gains. Once the supply of new customers began to falter, the market would cease to rise. Once the market stopped rising, some, and perhaps a good many, would start to cash in. If you are concerned with capital gains, you must get them while the getting is good. But the getting may start the market down, and this will one day be the signal for much more selling—both by those who are trying to get out and those who are being forced to sell securities that are no longer safely margined. Thus it was certain that the market would one day go down, and far more rapidly than it went up. Down it went with a thunderous crash in October of 1929. In a series of terrible days, of which Thursday, October 24, and Tuesday, October 29, were the most terrifying, billions in values were lost, and thousands of speculators—they had been called investors—were utterly and totally ruined.

This too had far-reaching effects. Economists have always deprecated the tendency to attribute too much to the great stock market collapse of 1929: this was the drama; the causes of the subsequent depression really lay deeper. In fact, the stock market crash was very important. It exposed the other weakness of the economy. The overseas loans on which the payments balance depended came to an end. The jerry-built holding-company structures came tumbling down. The investment-trust stocks collapsed. The crash put a marked crimp on borrowing for investment and therewith on business spending. It also removed from the economy some billions of consumer spending that was either based on, sanctioned by, or encouraged by the fact that the spenders had stock market gains. The crash was an intensely damaging thing.

And this damage, too, was not only foreseeable but foreseen. For months the speculative frenzy had all but dominated American life. Many times before in history—the South Sea Bubble, John Law’s speculations, the recurrent real-estate booms of the last century, the great Florida land boom earlier in the same decade—there had been similar frenzy. And the end had always come, not with a whimper but a bang. Many men, including in 1929 the President of the United States, knew it would again be so.

The increasingly perilous trade balance, the corporate buccaneering, and the Wall Street boomalong with the less visible tendencies in income distribution—were all allowed to proceed to the ultimate disaster without effective hindrance. How much blame attaches to the men who occupied the presidency?

Warren G. Harding died on August 2, 1923. This, as only death can do, exonerates him. The disorders that led eventually to such trouble had only started when the fatal blood clot destroyed this now sad and deeply disillusioned man. Some would argue that his legacy was bad. Harding had but a vague perception of the economic processes over which he presided. He died owing his broker $180,000 in a blind account—he had been speculating disastrously while he was President, and no one so inclined would have been a good bet to curb the coming boom. Two of Harding’s Cabinet officers, his secretary of the interior and his attorney general, were to plead the Fifth Amendment when faced with questions concerning their official acts, and the first of these went to jail. Harding brought his fellow townsman Daniel R. Crissinger to be his comptroller of the currency, although he was qualified for this task, as Samuel Hopkins Adams has suggested, only by the fact that he and the young Harding had stolen watermelons together. When Crissinger had had an ample opportunity to demonstrate his incompetence in his first post, he was made head of the Federal Reserve System. Here he had the central responsibility for action on the ensuing boom. Jack Dempsey, Paul Whiteman, or F. Scott Fitzgerald would have been at least equally qualified.

Yet it remains that Harding was dead before the real trouble started. And while he left in office some very poor men, he also left some very competent ones. Charles Evans Hughes, his secretary of state; Herbert Hoover, his secretary of commerce; and Henry C. Wallace, his secretary of agriculture, were public servants of vigor and judgment.

The problem of Herbert Hoover’s responsibility is more complicated. He became President on March 4, 1929. At first glance this seems far too late for effective action. By then the damage had been done, and while the crash might come a little sooner or a little later, it was now inevitable. Yet Hoover’s involvement was deeper than this—and certainly much deeper than Harding’s. This he tacitly concedes in his memoirs, for he is at great pains to explain and, in some degree, to excuse himself.