Wall Street Prior to the 1929 Crash
We glance at Wall Street. It was only a few years ago— within the life times of middle-aged men—that Wall Street, a spicy blend of robust individuals, was a target for the nation's most virulent oratorical sharp-shooters.
Wall Street! Festering place of our national ailments, breeding place of dastardly, but legal skullduggery. There dwelt the Morgans, the Goulds, the Carnegies, huge, bloated figures with dollar signs on their waistcoats and widows' scalps on their belts.
By reason of the scorching, quasi-legendary prejudices accumulated by all respectable people north of Fulton Street and west to the Golden Gate, Wall Street stood for a good part of what was detestable upon the American financial scene; and the men who moved there were carnivores of the more loathsome sort.
But that was yesterday, as the horse car, the corset and the stocking bank were yesterday. Wall Street then was just Wall Street—a darksome alley at the foot of Trinity Church, in whose beneficent shadow millionaires scuttled railroads, the government, the public when they could, and occasionally other millionaires.
Today Wall Street is the nation and Main Street is more Wall Street than Wall Street ever was—or probably ever will be. Wall Street is a state of mind; 20,000,000 men and women—investors and speculators—are its corporeal being; and the chattering tape that runs under the glass domes of 12, 000 tickers, up hill and down dale, are its hyper-sensitive nervous system.
Tchkt, tchkt, tchkt,.. . the tape spurts endlessly and inexhaustibly into the tall waste basket; and in Harlem, Bangor, Denver, San Diego and Atlanta, men hang breathlessly over the story it tells, and lustfully or bitterly decode its personal meaning.
Here, surely, is something that none of the old buccaneers, who regarded the public as a necessary — but avoidable—evil, ever dared predict. Indeed, one may count on the fingers of his hand the few authoritative men who predicted it ten years ago. And there are still men in Wall Street—brokers and bankers— who must from time to time pinch themselves to restore the conviction.
But the transition is here, and has been for five years. The public is in Wall Street, and Wall Street is in the public. And this merging of personalities has produced the most spectacular thing that this nation—or the world—has ever witnessed.
PROSPERITY is the match-maker that inspired this mating which, twenty years ago, would have been damned as miscegenation. When the World War ended, you and I and our neighbor heard considerable talk about this singular quality. It seemed to be something intrinsically American. It stood for money in the pocket—in the bank. And we were determined to have some part of it.
So we put what eggs we had in our basket and went to Wall Street where we put them up as margin for exciting expectancies called stocks. Bonds seemed so dreadfully old-fashioned.
Bolder people followed. Industry waxed fat, dividends fell like over-ripe fruit from towering industries, and stocks boomed.
In the thrill of winning—and the envy of seeing friends winning—we were like the Scotchman who won his first bet at the race track. How long, indeed, has this been going on?
Powerful brokerage houses which for decades had confined themselves to the larger cities on the Atlantic seaboard opened branch offices in Pawtucket, Houston, Emporia, Kansas City, wherever there was money for the market. And brokerage houses grew in inland cities the population of which once distrusted even the savings banks. And if these brokerage houses were too poor to buy membership on the exchanges themselves, they tied up with firms privileged to deal there.
On December 15, 1866, the New York Stock Exchange had its first million-share day. For years after its volume fluctuated between four and five hundred thousand shares a day. In 1927 the Federal Reserve's low rediscount rate, 3 1/2 per cent, close to the lowest level reached since the War, lent impetus to the market. On August 16, 1928, for the first time in its history, the Stock Exchange had its long-awaited 5,000,000-share day.
Now even that record is ancient history. A few days ago the head of one of the most conservative brokerage houses in New York told me that a return to the old levels would have to be regarded as a national calamity.
As he talked, I became aware of a singular disquiet in the attitude of the bootblack shining his shoes. His eyes hungered after the tape rustling behind his shoulders. Finally he could control himself no longer. He grabbed the tape.
"Are you interested in the market?" I asked, amazed.
"Me and me brudda," he answered ecstatically, "we gotta da Steel."
In Paris a banker announces that America, because it controls the world's wealth, must become the center of world culture, its opulent patron. In Texas, an oil man, recouping $25,000,000 that Wall Street took away from him five years ago, serves notice he is through with the market forever. And one of my friends, a bond salesman with an income of $4,000 a year, buys a new straight eight with the profits he makes in common stocks.
The invariably oblique-minded Bishop Cannon, in pleasing contrast to his prohibition peccadilloes, produces a masterful apologia in defense of buying on margin, as singular a document as has ever come from one of the cloth, one which, historically, must be to Wall Street what Newman's Apologia pro vita sua was to Catholicism.
And hard upon the Cannon tract, though hardly inspired by it, the Federal Reserve Board, after repeatedly yelling "wolf," lifted the rediscount rate from 5 per cent to 6. The move was to choke off speculation—to deflect credit's center of gravity from the red-hot crucible of speculation to Mr. Hoover's poor farmers. In the previous two years, brokers' borrowings had doubled, and boosted, by the end of July, to $7,473,000,000.
The punitive measure succeeded for a day. Stocks dumped in a hurry, in a frenzy were repurchased again two days later. Bears took flight. In the third week of August, brokers' loans advanced from $133,000,000 to $6,085, 000,000, well above old highs. And stocks rebounded to new altitudes.
Did the nation applaud this spank-ing of profligate Wall Street? Hardly. From one end of the country to the other roared the perhaps reasonable cry that the Federal Reserve was a silly reactionary playing politics; that the Stock Exchange had as much right to the nation's credit reserves as Peoria. There was a popular ring to the cry. The boosted rates hadn't hit the financiers alone. They had hit about one in six of us. Twenty million people, with Bishop Cannon with them, heart and soul, can't always be wrong.
IF ONE REALLY needed proof of the enormous participation of the public in the stock market, there is no end to the statistics that may be conjured up. Let us contemplate the physical membership of the Stock Exchange itself. In 1895, out of the 112 branch offices which its 1,100 members then maintained, only sixty-seven were outside New York City. By the end of 1928, these out-of-town branches liad increased to 966. At this writing they number well over a thousand.
Nor are they restricted to the supposedly more speculative East. Not at all. Go anywhere in the country, look east or west, and you will observe, wherever there is a city of respectable proportions, there is at least one brokerage house privileged to deal, by direct membership or affiliation, on the floors of the great exchanges of Chicago and New York.
Pennsylvania has 599 New York Stock Exchange bond and stock tickers, Illinois has 428, Virginia has 46, Ohio has 155, Oklahoma has 15, Texas has 38, California has 155, and Michigan, with 110, has only 59 less than Massachusetts, which has always been a next door neighbor of the Stock Market.
An enormous intricate system of communication binds up these scattered elements into a cohesive machine keyed to the tick of the instant. Thousands of direct wires link these brokerage houses to the floor of the Exchange in New York.
A few minutes after a man in San Francisco asks his broker to buy 100 shares of General Motors the order is executed at the post on the New York Stock Exchange. And a few seconds later—if the ticker is abreast of business—Bishop Cannon (I can't easily escape identifying him, for he is a handy symbol of the new attitude toward Wall Street) may be reading the sale in North Carolina.
On a 5,000,000 share day on the Big Board, nearly $200,000,000 worth of buying and selling pulses through these steel highways. This is not the total business. Merely the 30 per cent that the citizenry removed from Wall Street contributes to the day's volume as a rule.
By itself this fact impresses as to the extent of Wall Street's quiet penetration into the hinterland. The Wall Street brokerage house of fifteen years ago whose out-of-town business averaged 15 per cent was unusual. Today there are a number of great houses in Wall Street whose wire business—that is to say, their out-of-town business—makes up the bulk of its orders.
Improved communications have provided a high speed channel for the country's inspired speculative hopes.
The growth of the "odd lot" business is another remarkable phase of this flowering. Time was when the more elegant houses in the financial district contemplated with faint distaste such poor men's dabbling. But nowadays the nicest houses cultivate them. They comprise about 40 per cent of the Stock Exchange's daily business.
Speaking broadly, "odd lots" mean the public. It is a device of vicarious trade by means of which the rest of us, who can't afford to purchase the lowest unit of trade—100 shares—allowed on the Exchange, are enabled to buy and sell in fractions. Theoretically, there is no such thing as an "odd lot" transaction. The ticker tape never records one.
But actually these "odd lots" are the most vigorous single element in the great bull market. Their combined buying and selling power is Niagric; beside it, the resources of the colorful traders who once dominated the market stand dwarfed. "Odd lots" mean that Mr. and Mrs. Jones are in Wall Street.
Three great houses on Wall Street concentrate on filling these "odd lot" demands alone. These houses are dealers to the millions, they are their key to Wall Street.
When Tom, Dick and Harry go to their brokers to buy 10-25-50 shares of Prosperity, common, their brokers notify their men on the floor, who seek out the "odd lot" specialist in these shares. These 10-25-50 share units build into hundreds, then into thousands, then into hundreds of thousands of shares. At the end of 5,000,000-share day, these isolated "odd lots," blended in the turnover in multiples of 100, may mean 2, 000, 000 shares of that total.
That deeply is the public involved in the stock market. And the persons behind these staggering digits are laundrymen in San Francisco, mechanics in Detroit, push cart peddlers in New York, widows in Boston, and millions like them.
It is a most expensive kind of trading, this "odd lot" transaction. Since the "odd lot" houses are dealers, not brokers, being principals in the trade, they cannot charge a commission. But they levy a charge of a quarter or an eighth of a point above (when you buy) or below (when you sell) the market.
To that sum the broker tacks on a fixed charging, many of them now being committed to a minimum of from $2 to $5 a share. And if you buy on margin the bank from which the broker borrows money with which to finance the trade adds an extra one per cent of interest to the prevailing rate because of the inconvenience of handling these split lots.
With the high money rates that have been prevailing lately, these added costs have handicapped small traders at least a point before they actually started. The same deductions confront them when they sell. So they are, theoretically, spotting the market about 2 points from the very start.
Not long ago the head of one of the swankier brokerage houses, whose wealthy customers nor-mally traded in hundreds of shares, recently asked one of his clerks why he did not close out the account of Mr. X. For months X had been troubling them with ten-share orders. Such trifling orders, protested the broker, were an infernal nuisance. If X wanted to gamble, he said, let him use the penny-in-the-slot machine.
But he swiftly changed his mind when the clerk showed him that Mr. X owned twenty-five such lots, and that his total commissions during the month had cost him $1,250!
"Has he been able to survive those deductions?" I asked.
"He is a bit ahead of the game, as a matter of fact. You see, he and the rest of the public is inherently bullish. They are willing to accept these handicaps.
Not even the lifting of marginal deposits from ten points to thirty points per par value share has diminished the public's activity. The professionals are bearish. The public never.
"The higher the market goes, the deeper the public is in it." He reached for his customers' book. Just after the last debacle, the number of customers fell off to barely 140. Now, in the midst of August's great surge, the total had grown to nearly 500.
The extent of the public's participation has placed a terrific load on the over-worked ticker, which was never designed to shoulder such a burden. The ticker is fast. Not long ago it was the fastest news courier in the world. But marvelous mechanism that it is, it is not quite fast enough for its job.
The function of the Stock Exchange is two-fold: (1) to provide a trading place for stocks and bonds and (2) to announce the factors of these sales— quickly, at once. The one is as important as the other, for they are internally dependent. In its first function, the Exchange is more than holding its own. In the second, however, it is increasingly hard pressed.
Every minute, between the 3 o'clock, some forty or fifty trading hours of 10 o'clock and trades are made. In the bowels of the Exchange, a mass of machinery—cogs, belts, wheels and levers—as intricate as that of a Leviathan, is geared to drive the thousands of tickers below Fulton Street. And to drive the tickers beyond this frontier, a still greater assemblage of machinery is operated by the Western Union.
The ticker must be on time. Vancouver must get word of the trade as soon as Miami, Tulsa as soon as Boston. But the ticker is in a traffic jam. The most heroic entrenchments have failed to keep it abreast of trade. Characters have been shorn to cabalistic symbols. The sale of 100 shares of Steel, which used to read on the tape 100 US 112, now reads X 112; Anaconda has dwindled from Anc. to C., General Motors from GMO to GM, and others have been equally slaughtered. And during the great surges, volume was dropped from the tape altogether, until it caught up with trade.
Fractions of seconds were penuriously scrimped. Electrical impulses to relay points were accelerated; one one-thousandth of a second was saved there in the transmission of a character; 400 new characters were added to the ticker's daily capacity. By such devices was the ticker's output boosted from 235 characters a minute to 296. Still trade moves faster. It is a rare day, now, that the ticker is not four minutes behind the market; and on one grievous day it lagged 100 minutes. A corrective, however, is promised. The Exchange is now experimenting with a new ticker—a marvelously fast machine capable of producing 900 characters a minute. This means tearing out all the old machinery, costly stuff. Nevertheless, the change seems to be economically worth-while. Time is at a premium in the stock market, nowhere more so.
All this has had a most striking influence upon the country's press. From the doubtful prestige of being "too technical" for the average reader's mind, financial news has risen—or fallen—to the persuasive estate of being front page news, when, as and if issued. Ten years ago the financial department of even the greatest newspapers consisted of an editor, two or three assistants, and two or three pages of paper. Now it is one of the strongest departments on the editorial staff. Ten to fifteen pages of solid financial news is the ordinary thing for the New York Times. And the trucks of the afternoon newspapers, whose placarded sides once blazened the promise of the snappiest race track summaries, the best features, now clamor for attention for their "latest and most complete financial reports." The greatest appeal of the leading Hearst newspaper in New York City is the contended excellence of its financial pages, to whose columns contribute some of the highest-paid financial brains in the country. Even more bewildering is what has taken place within the wire services, which serve the country at large. Five years ago, the Associated Press gave the country's editors 500 words of a general lead on the stock market and a few dull briefs, and they were satisfied. The daily output has since reached 10, 000 words, and it still continues to grow.
Less than five years ago even the large cities in the interior printed only the low, high, and final quotations of leading stocks. Such summaries meant little, simply served as a sop to the inconspicuous percentage of readers who must know such things. Now even the suburban editors are demanding volume and net changes, and the larger editors have managed to get a special wire service, with the "latest leads" on conditions on the Curb and Exchange. One wire alone of the A.P.'s magnificently operated West Wire service chatters on things financial all day long.
Since the beginning of 1929, the United Press has thrice revamped its financial news system in quest of greater speed. Two years ago, a single Morse wire, with a capacity of thirty words a minute, provided member newspapers with all the financial news they wanted. Most of them wanted only Curb and bond reports. Local brokers provided them with what news they wanted of affairs at the Big Board.
These days, however, a high-speed automatic double-trunk channel, with an output of 125 words a minute, is hard put to fill demands and new vehicles will step up the volume. A San Francisco newspaper which never printed any financial news save a general half-column summary on the markets, now requires three wires to accommodate its need. And all over the country, even in the smaller cities, editors have increased the space devoted to financial news to columns and pages.
Editors have said—and it is credible —that the public's awakened interest in markets has changed the complexion of the entire daily news report. Since her affairs impinge directly upon our national prosperity, Europe has become a more vital element in the news. Stories of European politics, crops, budgets, and whatnot, which not long ago would have speedily found their way to the editor's commodious wastebasket, are welcomed now with palpitating headlines and inexhaustible space. And the most technical reports on credit mergers, stock distributions, soluble only to experts, plow into the public prints.
It does seem rather far-fetched, though, to believe that the public as a whole either cares or understands a great deal about these technical elements which in their inner harmony or discord affect the whole structure of world financial equilibrium. Most of it is too oblique. Where in it, we ask, lies the granule that may dislocate the scale plans balancing United Ironing Board common? No, most of us have neither the knowledge nor the patience to determine such things. We have an authority more personal, more comprehensive. It is, on the whole, instinct, "hunch," if you prefer it, and "red hot tips."
The desire to make money is not limited to minds trained in making it. The easier money can be made, and the more quickly, the better it attracts the public. Just now the most fabulous money-making machine in the country seems to be the stock market; so the public has enthusiastically gone shopping there.
Savings banks have been not a little alarmed by this migration. Money that once remained in their vaults, soberly gathering 3 1/2 and 4 per cent interest, has now gone adventuring among common stocks, where dividends may be just expectancy, but where the greatest lure is the chance of selling out at twenty points profit. More than a billion dollars of deposits flowed out of the country's national banks during the last fiscal year, and the authorities ascribed the withdrawals to investment and speculation by the middle class.
Down on the lower East Side, where the residents recognize no international problems save Grover Whalen's minor incursions with patrol, the stock market has opened a new door to El Dorado. There are push cart peddlers who appoint an agent, chip in $15 or $20 each, and buy two or three shares of General Motors or U. S. Steel. Dividends are rigidly split, and the profits of sale divided perhaps ten ways.
A New York publisher, who made millions by getting in on the ground floor of America's self-discovered concern with sex, seems to have tapped another latent reservoir of desire by bringing out a daily tabloid devoted exclusively to financial news. Its price is three times that of any other afternoon newspaper. But its circulation is booming.
For months, a morning tabloid, the New York Daily News, has been featuring a financial writer whose function is avowedly that of tipster. He. has made the stock market as colorful—more so—as the race track. He is its Walter Winchell.
"Dupont is a corker . . . there's at least 40 points in it if bought at the market.—Stick with the Standards of N. Y. and N. J. . . . For a high-flyer, Eastman Kodak can't be surpassed. . . . Natural Dairy Products are about ready to go ...
"Buy Montgomery Ward and reap a substantial profit by August 26. . . . The Market Goose hangs high as Brokers' Loans dip. . . . U; S. Freight is to have a swirl upward. . . . The rails never looked better. . . . Don't so to bed tonight without having some American and Foreign Power in your strong box. ..."
And so on, day after day. Not being concerned with such things, I have never attempted to calculate the success of this anonymous artist. Some experts who have followed him say his predictions have averaged 6 per cent correct. Others fix the percentage considerably lower. But all of them agree he has been immeasurably assisted by the great Bull Market. Within the past three months—May 27 to August 27—100 representative industrial and railroad stocks have risen on an average of $28 per share, according to the New York Herald Tribune's recapitulator.
When the market sagged in the face of his bullishness, the tipster saw in it a good portent—"a corrective reaction," which he likened to a dose of castor oil. His rival newspaper writers simply smiled. They are wondering how he will fare when he must try to pick winners in a falling market.
Another and fascinating phenomenon has arisen on the American scene. I refer to the investment trusts. People too timid to risk their own judgment and money in the stock market can now buy brains to invest and speculate for them. At this writing there are more than 450 investment trusts in the market, with a total capital of three billion dollars; nearly 300 of these gigantic groups have an average capital of $2,500,000.
Here, then, is our old friend, the public, in the market stalls in still newer dress. Seven years ago, there was only one such company in the market, and it took it three years to peddle its $250,000 worth of shares. A few weeks ago, an investment trust, capitalized at $100,000,000, had its total stocks over-subscribed many times. These companies, of course, invest in corporations, and the extent of their new influence and activity can be judged, perhaps, by the recent prediction that an investment trust for investment trusts will soon be formed.
It is impossible to calculate the precise boundaries of their manipulations, since many of these trusts do not disclose their holdings. But there presence in the market is always felt. The frequent appearance of big blocks on the tape, the relative number of inactive stocks and the small increase in brokers' loans after a broad advance in stocks, attest to their activity.
In one sense, these trusts are the public's own defense against itself. These trusts act as great cushions against the market's shocks. When matters started to go to pot a few weeks ago, it is said, many of these trusts pegged the crumpling leaders by throwing huge buying orders into the maelstrom. The weaklings then took heart. Such influence, such terrific resources in constant reserve, have given the market an internal buoyancy it never possessed in the old days.
Since everybody in Wall Street is intent upon making money, they all seem to have hit upon the happy solution of keeping Mr. Calvin Coolidge's Bull Market on the hustle. Verily, it is a weird business.
One wonders whether such things can continue indefinitely. But why bother. As I crossed Broadway the other day, at the foot of Wall, I observed, with a queer sense of heartening, the push cart peddler there. Surely, I thought, here is a man who produces himself, to whom vicariously earned wealth means nothing.
Moving closer, I saw that his nose was buried in the financial pages of a newspaper. His pears were piled golden in his cart. But he had no eyes for them.
He was dreaming of another fruit, probably, a melon which would soon be ripe for the cutting.
Source: The Outlook, 18 September 1929