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The Greatest Gamble

THE soldiers of World War I whored and gambled as soldiers always have but the official attitude, supported by civilian puritanism, was merely to put both sports out of bounds. Since abstinence was unenforceable, the venereal rate and the loss of wages at gaming were staggering. Despite this, realistic officers who suggested teaching their men to protect themselves with prophylaxis and to learn to defend themselves against cheats were accused of encouraging bawdiness and vice.

While 4,355,000 Americans were off at the wars, the Volstead Act was passed to dry up the country. They returned after the armistice in a frame of mind to break the law and live it up, restless, dislocated.

The economy, inevitably, was equally dislocated. The fat years of war orders gave way to six sickening months of unemployment. After that better than a year of boom set in, erased by a sharp decline in the summer of 1920, when the national income sagged from seventy-five to fifty-nine billions. Then the United States swung into the decade known as the Roaring Twenties.

When Warren Gamaliel Harding was nominated to break an all-night deadlock in the smoke-filled rooms he said happily, "We drew to a pair of deuces and filled," took office in 1921, and appointed his poker cabinet in the name of "back to normalcy." Seven million Americans were out of work that year but recovery began in 1922.

The national pastime of betting on games was immune to the economic ups and downs, and it took the 1919 World Series scandal to break the public faith that major team sports were incorruptible and you could at least bet on them with no danger of being cheated. The countrywide disbelief and shock were summed up in a small boy's "Say it ain't so, Joe."Even college football, reputedly amateur, was tainted with players betting sometimes on their own teams, sometimes against them. George Gipp, Notre Dame's first All-America star, lounged idly by while young Knute Rockne castigated his team one day after a catastrophic first half against Army."I don't suppose you have the slightest interest in this game," Rockne thundered at the Gipper.

"You're wrong there," the halfback replied mildly. "I've got five hundred set on this game, Rock, and I don't intend to blow it." Nor did he. Notre Dame won 27-17.

As prosperity increased in an era of dizzy easy credit, mah-jong became a prime woman's game, condoned by husbands bent on poker nights of their own, then faded. Hollywood, model of misbehavior, gambled on location, on the set, and in the bedecked homes of its astronomical-salaried stars. There were waves of reform in New York and New Orleans, and when Mayor Hylan claimed that New York was clean, a small-time bookie, Charles Howard, removed his operations from the city to the old Post Office - federal territory. Governor Huey Long, whose rise to power coincided with A1 Capone's, promised, when pressured, to stamp out gambling in Louisiana but proceeded with so little conviction that it simply went underground temporarily.

Americans who had bought Liberty Bonds in 1918 shifted to riskier securities. The stock market seemed the perfect way to pile up lucre so everybody could live in clover. In 1920 there were thirty thousand stock brokers in the U.S.; within nine years there were almost seventy-one thousand.

Herbert Hoover could say solemnly in 1928, "We in America are nearer to the final triumph over poverty than ever before in the history of this land." All signs bore him out: new construction, fourteen million automobiles, more than nineteen million telephones, almost nine million homes electrified. The twelvehour workday was dead and wages and purchasing power were up. Almost everybody had enough to take a risk for more. By 1929 national income was up to a fantastic eighty-four billions.

To "beat the rap" was a common phrase for common practice, covering a tolerance of the Harding administration rackets and a universal disregard of the prohibition amendment. To "beat the market" summed up the national mania for gambling in stocks, which were, to a steadily growing number of people, chips in a glorious game.

By 1927 prices of most securities already bore little relation to the earnings of corporations. Prices climbed to vertiginous and irrational heights. More than a million dollars a day was paid to brokers in commissions. No Securities Exchange Act existed to prevent speculators from gambling on the slimmest of margins (10 to 25 per cent with brokers covering the rest by borrowing from banks).

Plumbers, actors, grocers, milkmen artists, barbers, window cleaners, college professors, dishwashers, seamstresses - people of all sorts and incomes - blissfully ignorant of the workings of the market or the nature of the shares it listed, bought and bought and bought. They turned to the financial pages before they read the front pages of their papers. Even the daily scandal sheets gave investment advice. Tip sheets circulated widely, and over the radio the "Old Counselor" passed on the market savvy of such important magnates as Samuel Insull.

Stocks on margin cost a pittance, and if they went up, which they mostly did, the investor covered out of his profits. The atmosphere was so heady that few amateurs stopped to consider that if the trend were reversed, they would have to cough up more and more margin to keep their equity. Or lose their stocks.

Installment buying was a sign of the times and the way most people took on cars, radios, furniture, refrigerators, houses, pianos, and other necessities and luxuries indispensable to keeping up with the Joneses. Consumer goods poured off belt and assembly lines to feed the national buying jag, and corporation earnings were greater and the outlook brighter than ever before. Between 1924 and 1927 prices of twenty-five top industrial stocks rose from 106 to 245, and in the optimistic climate of the day the jump did not seem excessive. By 1929 the figure had run up to 331 and still the mass of speculators saw no cause for alarm. Everybody at the top in that prosperous Republican day assured the world that the framework of business and finance in the U.S.A. was positively sound.

In 1927 the Federal Reserve System lowered the rediscount rate from 4 per cent to 3 1/2 per cent and began buying government securities in the open market. The incentive was commendable, to halt the accumulation of gold in America and assist Europe, where many countries were having trouble keeping their currencies firm and trade with America was weak. The upward surge of American business was beginning to show signs of slowing down and lowering money rates might instill fresh life and vigor into it. This it did not do but it hyped up the market. Brokers' loans increased and stock prices climbed.

Conservative financiers were uneasy. During the last few months of 1927 the country was shaken by a recession. For the first time since the war unemployment was serious. In January 1928 the market reacted and turned uncertain. The danger of inflation made for hesitation in speculating.

The tide was stemmed by President Coolidge, who announced that he did not think brokers' loans excessive. It was tantamount to White House sponsorship of inflation and restored the bull market trend. Though responsible banking analysts cautioned on grounds of the downward drift of business, of current unemployment, inflation, and record stock prices, they were written off as Cassandras.

No one can assess to what extent bankers and brokers stimulated the eighteen-month buying madness that followed. The stock exchange is both an organization where business is transacted according to fixed rules and a market place where clients are counseled as to what securities it is prudent to buy and sell. The initiative to hold in check veteran raiders and manipulators somewhere, during the lush Coolidge years, slipped out of the hands of influential stock-exchange firms. Cupidity destroyed discernment and gullibility and greed conspired to create confusion.

Responsible firms might try not to exploit investors, but they could not even if they would, protect them from their own ignorance and folly. Matt Brush, onetime hotel clerk and railway machinist who, in eight years, made enough money in the market to acquire fifty corporations and invest $15,000,000 in Wall Street, would later tell the Senate Banking and Currency Committee: "The Wall Street racket during the twenties made A1 Capone look like a piker."

There were wolves aplenty. Big operators privately combined to "bull up" the price of particular stocks. The United States and International Securities Company unblushingly sold shares they had assembled at twenty cents for fifty-two dollars. Important citizens and public officials were put on select lists and given the chance to buy stocks in advance at extraordinary discounts below the market price before they were offered to the public and apparently felt not a twinge of conscience at taking the opportunities for handsome profits. In the case of Insull Investments a preferred handful paid $7.48 a share before it was listed on the Chicago Exchange at $30.

John J. Raskob, chairman of the Democratic National Committee, told the Senate Banking and Currency Committee that he had been one of a group who helped spur a bull movement in certain stocks in 1929 and had then sold out when the public was let in to buy them at exaggerated prices. The group made $5,000,000 in radio stocks in one week, Raskob's share being $291,710. Senator Carter Glass commented that it was like "playing in a card game with a card up your sleeve."

These were times before the SEC laid down regulations and gave government agencies teeth to enforce them, when the market was liked a rigged faro setup with shrewd manipulators hoodwinking the speculating public.

Radio Corporation of America and General Motors set the pace that began to accelerate in the spring of 1928. Bull speculators realized that the average American could not withstand the appeal of a booming market. When the market started to climb, they forgot their worries about business conditions and the warnings of market analysts. A war between 'bulls and bears lent speed to the new boom. The bulls had the situation sized up right - with the public buying again the bears took a licking.

From March well into May stock prices gained impressively and the ticker tape often ran six to thirty-three minutes late as the volume of trading broke all previous records. March 12 was a 3,875,910 share day. The record did not long stand. On March 27, 4,790,000 shares were traded. For the first time in history the exchange closed that spring on several Saturdays to let brokers' clerks catch up with their paperwork. Brokers' loans increased and American credit, already inflated, was aggravated and distended.

Brokers in a sellers' market were riding high as throngs of men and women packed their offices to watch the news on the tape. Speculation was completely out of hand and ran contrary to all economic sense. Even when the Federal Reserve, perplexed and disturbed, raised the discount rate back to 4 per cent, the market continued to seethe. In May the authorities raised the rate to 4V2 per cent. The market still did not slacken and the already overvalued stocks went on up.

The breaking point, which had been anticipated by the calamity howlers, came on June 11, 1928. In one day a number of leading stocks tumbled: Bank of America fell 120 points, Bank of Italy 100, United Security 80, all on the San Francisco Exchange. The next morning the New York Exchange was deluged with orders to sell. The ticker was an hour and fifty minutes late and a five-million-share day was finally a fact as the bull market caved in. The drop in prices was great, though nothing like San Francisco's. Radio, for instance, lost 23 1/2 points. On June 14 Herbert Hoover was nominated Republican candidate for President and the market recovered its balance.

Market prices in June were still far higher than they had been in February, but thousands of small speculators had been forced out and ruined. Yet the final bull movement was only in its early stages. It would fly high and wide again after Herbert Hoover, with his pledge of "four more years of prosperity," defeated Alfred Smith in November.

Business was better and even sober minds thought that perhaps Hoover could make prosperity stick "with the help of God." The stock market celebrated the new administration with renewed bullish intoxication. Five-million-share days began to seem almost humdrum and one day in November 1928 seven million shares were traded. A seat on the New York Stock Exchange sold for $580,000. Brokers' loans were greater than ever before, and call-money charges ranged from 8 to 8 1/2 to 9.

On Saturday, December 7, 1928, a light panic began to build up and spread. That afternoon many stocks slid down, losing from 29 to 72 points. After a few perturbed weeks of uneven prices, the market moved up a little and a less ragged level was restored.

The Federal Reserve was dismayed at how speculation ate up the surplus funds of the country and frightened by the spreading expansion of credit. Early in February 1929 it informed its member banks that they were to stop using Federal Reserve funds to carry loans on stocks, as far as possible. The Federal Reserve Act, the authorities believed, had never been designed to extend speculative credit.

As a result stock prices crumbled and call-money rates rose from 12 to 20 per cent during the latter half of March. March 26 saw a leaping record 8,150,000 shares traded on the New York Exchange and the mailboxes of the United States were jammed with hundreds of thousands of letters from brokers urgently demanding more margin coverage. Speculators by the thousands of thousands were frozen out. The big bull market seemed to be washed up and mounting fear attained the demoralized terror of a panic.

Some New York banking houses decided that it was more prudent to lend money on call and avert the panic than to honor the Federal Reserve policy. On March 17, Charles E. Mitchell, president of National City, proclaimed that his bank was prepared to lend $20,000,000 on call -$5,000,000 at 15 per cent and $15,000,000 from 16 to 20 per cent. This peremptory reversal of the Federal Reserve's stand held call money at 15 per cent and averted the imminent panic. Stocks that had fallen headlong were resuscitated, and so was the bull market.

Corporations went the banks one better by making their excess cash available for call money at 8 and 9 per cent. By June the American public had plenty of money to gamble with and the prices began to mount again.

During that unreal summer the market was wilder than ever it had been in the wild years before. Brokers' loans totaled almost six billion dollars, nearly twice what they had been at the end of 1927.

American ears were deaf to jeremiads that the end of inflation must be hard times. Was there not a Republican president in Washington? Were not factories working full force? Had not recovery followed every collapse of the market? And prices climbed higher each time? Besides, capitalists knew what they were talking about. John J. Raskob wrote in the Ladies' Home Journal (under the inviting title "Everybody Ought to Be Rich"): "If a man saves $15 a week, and invests in good common stocks, and allows the dividends and rights to accumulate, at the end of twenty years he will have at least $80,000 and an income from investments of around $400 a month. He will be rich. And because income can do that, I am firm in my belief that anyone not only can be rich, but ought to be rich."

The immense success of investments trusts, many with unconditional authority to buy stocks of their own choosing, seemed an almost conservative response to this duty to become rich. In actual fact the situation was not unlike the point in a gambling joint when a naive customer asks the houseman to bet for him. In the summer of 1929 four and a half million Americans had entrusted all or part of their life savings to five hundred investment trusts. They were to live to see a third of this capital go down the drain. Some of the trusts were honestly administered, many were reckless, and others were prostituted by men interested only in self-aggrandizement. Often the trusts owned stocks in holding companies that owned stocks in banks. The banks in turn had affiliates that controlled holding companies, and so on in an endless financial maze. As long as prices kept on going up nobody seemed to care.

The biggest bull market in our history reached its shining summit on September 3, 1929.

It broke the next day. For two weeks it slipped down and down, but the majority of the speculating public, sustained by the dream of a continuous bull market, saw in the decline no more than a chance to buy in at better prices. The market recuperated for a few days, then broke drastically again on October 4. Leading stocks plummeted 20 to 50 points from their high of a month before.

Still the public saw in the darkening skies only temporary misfortune. The logic of the time was as irresistible as ever: when stocks were low it was shrewd to buy. Brokers' loans soared to almost seven billion dollars, a sure indication that more and more margin buyers were undaunted.

When the decline set in again during the second week of October, the public and market analysts believed that the market was easing itself into a safer, less vulnerable position. Now it had hit bottom, they reasoned, and must turn upward.

Margin calls mounted alarmingly, and on October 23 a barrage of selling orders smashed prices lower than they had been in any of the slide-offs and sags of the previous two years. Over six million shares were traded and the ticker tape was an hour and fortyfour minutes late on the New York Stock Exchange.

October 24 was the beginning of the end. Inability to meet margin forced the sale of millions of shares and the market seemed to be collapsing. Panic-stricken speculators added to the widespread demoralization by making a concerted effort to liquidate at the going prices.

At noon that day the heads of six great banking houses met in J. P. Morgan & Company's office and agreed to put up forty million dollars apiece to prop up the stock market. This fund was to be used to support the prices of the stocks that acted as barometer for the whole list.

Ralph V. Whitney, vice-president of the exchange and representative of the bankers, went onto the floor at 1:30 and began buying steel and other issues in ten-thousand-share lots. Within a few minutes he had thrown thirty million dollars into the whirlpool and restored some show of confidence. Prices stood firm for almost all the rest of the day.

A complete cave-in had been averted on that alarming, thirteen-million-share day. Prices held through Friday and Saturday though the volume of trading greatly exceeded the norm. The bankers' pool discreetly started to dispose of as many as possible of the shares it had bought on Thursday, and numbers of speculators who had sold out at the top bought in again. Prices, however, began tobogganing a few minutes before Saturday's trading ended.

Over the weekend brokers sent out calls for more margin collateral, so the market opened Monday morning, October 18, with another flood of forced selling. Again the bankers' pool bought loudly and gamely from the floor. But nothing could check the gush of selling. Leading stocks dropped 17 1/2 to 50 per cent, and the ticker tape lagged. Men in brokers' offices and banks worked through Monday night telephoning and telegraphing their customers for more security to back up their loans at the banks.

On Tuesday, October 29, chaos inundated the floor of the exchange. Orders to sell in five-thousand and ten-thousand-share lots swamped the brokers and the tape while average prices of fifty top stocks tumbled almost forty points. When the exchange closed, 16,410,000 shares had been traded -down.

The announcement on Wednesday by directors of some major corporations of extra dividends and a deluge of optimistic statements in the press and over the radio stemmed the tide temporarily. John D. Rockefeller said, "Believing that fundamental conditions of the country are sound and that there is nothing in the business situation to warrant the destruction of values that has taken place on the exchange during the past week, my son and I have for some days been purchasing sound common stocks."

The public, avid for word of hope in high places, swallowed it hook, line, and sinker. In the afternoon Richard Whitney announced that the brokerage houses needed a breather to take stock of their accounts and that the exchange would not open till Thursday afternoon and would close again Friday and Saturday. Everyone on the floor applauded.

The most agonizing hours of the panic were over, though prices fell even lower with continued compulsory selling. On November 13 they hit bottom for the year of 1929. American Tel & Tel had slid from 304 to 197 1/4, General Electric from 396 1/4 to 168 1/8, Montgomery Ward from 137 1/8 to 49 1/4, and Radio from 101 to 28.

With the death of the big bull market, a ghastly tolLwas taken in suicides and billions lost. At the end of October, fifteen billion dollars had gone by the board and by the year's end the figure had risen to forty billions. Several million American families - one out of every twenty was in the market - who had lived on easy street found themselves with plenty of nothing.

Prosperity was finished and stock-market gambling would be suspect in the public mind for a quarter of a century. And never again would they play for big pots with penny antes.

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