From the Times Literary Supplement, March 6:
When the bubble bursts
At the beginning of 1929, Charles Mitchell was president of the National City Bank of New York and a director of the Federal Reserve Bank of New York. He combined ordinary deposit-based banking with investment services and “aggressively extended credit”, as Andrew Ross Sorkin writes, for small investors to buy equities they could not otherwise afford. This drew ever more purchasers, and their savings, to Wall Street and drove stock prices ever higher. Many of Mitchell’s Fed colleagues disapproved of this practice. The Federal Reserve Board issued statements discouraging such loans as the source of irresponsible speculation, but to little effect.
In March 1929, a dip in the stock market threatened to turn into a plunge. Mitchell announced that he would lend $25 million to buyers to keep the bull run going, “whatever the attitude of the Federal Reserve Board”. The market rallied and Mitchell became synonymous with defiance of wet-blanket regulators. The truth was more complicated: he had privately secured not only permission but also back-up funding from the New York Fed, which wanted neither a collapse nor public association with speculative lending. As one Fed banker wrote, “none of the Board criticized what Mitchell did – it was merely what he said”. But what he said made him a hero – for a few months.
The boom continued and Mitchell sealed a deal merging his bank and another, premissed on the high value of National City’s shares. Then, in October, the high-flying market suddenly dropped. No bravura announcements or bullish buying could stop it. Mitchell purchased his own firm’s shares to prop up its value and save the merger. He failed. He ended 1929 by privately selling National City stock to his wife at a value so reduced that he was able to record a loss adequate to offset his entire income-tax liability for the year.
Sorkin’s 1929 does not stop there, but continues on to the effort in 1932 and 1933 to apportion blame for the collapse. For economic historians today, the crash constituted an outward and visible sign of an inward and spiritual rot in the broader economy. The market collapse probably inhibited lending, and thus slowed buying, but it did not cause the Great Depression. Nevertheless, the conviction that the bankers had somehow sinned grew as the economy shrank. A few months before the elections of 1932, President Herbert Hoover persuaded Republican senators to investigate financial misdeeds. Mitchell testified undramatically. As Sorkin notes, the effort to pin something on him might have ended then, had the Democrats not swept both houses of Congress and the presidency in November 1932.
The newly Democratic Senate Banking Committee hired as counsel Ferdinand Pecora. As Sorkin writes, the lawyer had a talent for making actions “look utterly guilty and disreputable, even if they turned out to be perfectly legal”. He got Mitchell to admit the share sale to his wife, incurring a loss of about $2.8 million and thus avoiding income tax. The sale “was no doubt unseemly”, as Sorkin says (though a jury would later decide it was not criminal). National City convened an emergency meeting and Mitchell resigned. A couple of weeks later, it announced that it would separate its investment firm from its bank. Not only was Mitchell gone – so was his signature service of selling stocks to ordinary savers. But by then, Franklin Roosevelt was president and the New Deal was under way; voluntary individual action could not satisfy demands for systemic reform.
The Banking Act of 1933, more usually known as the Glass-Steagall Act, came to the White House for Roosevelt’s signature in June, at the end of the flurry of laws enacted during the administration’s first 100 days. It mandated for all banks the separation National City had undertaken voluntarily, dividing investment from commercial banking. It also brought the Federal Reserve’s open-market operations – the chief lever by which the system sought to conduct monetary policy – under the Federal Open Market Committee, convened in Washington. An era of much stricter banking regulation had begun. Roosevelt’s treasury secretary, Henry Morgenthau Jr would say, “we moved the financial capital from London and Wall Street right to my desk at the Treasury”, hyperbole with a kernel of truth. For decades, US banking remained highly regulated, stable and profitable....
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