THE CRASH blighted the fortunes of many hundreds of thousands of Americans. But among people of prominence worse havoc was worked on reputations. In such circles credit for wisdom, foresight, and, unhappily also, for common honesty underwent a convulsive shrinkage.
On the whole, those who had proclaimed during the crash that business was "fundamentally sound" were not held accountable for their words. The ritualistic nature of their expression was recognized; then as now no one supposed that such spokesmen knew whether business was sound or unsound. One exception was Mr. Hoover. He undoubtedly suffered as the result of his repeated predictions of imminent prosperity. However, Hoover had converted the simple business ritual of reassurance into a major instrument of public policy. It was certain in consequence to be the subject of political comment.
The scholarly forecasters were not so fortunate. People on the whole cherished the discovery that they were not omniscient. Mr. Lawrence disappeared from Princeton. Among economists his voice was not heard again.
The Harvard Economic Society, it will be recalled, had come up to the summer of the crash with a valuable reputation for pessimism. This position it abandoned during the summer when the stock market kept on rising and business seemed strong. On November 2, after the crash, the Society concluded that "the present recession, both for stocks and business, is not the precursor of business depression." On November 10 it made its notable estimate that "a serious depression like that of 1920–21 is outside the range of probability." It repeated this judgment on November 23 and on December 21 gave its forecast for the new year: "A depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall." On January 18, 1930, the Society said, "There are indications that the severest phase of the recession is over"; on March 1, that "manufacturing activity is now—to judge from past periods of contraction—definitely on the road to recovery", on March 22, "The outlook continues favorable"; on March 29, that "the outlook is favorable"; on April 19, that "by May or June the spring recovery forecast in our letters of last December and November should be clearly apparent"; on May 17, that business "will turn for the better this month or next, recover vigorously in the third quarter and end the year at levels substantially above normal"; on May 24 it was suggested that conditions "continue to justify" the forecasts of May 17; on June 21, that "despite existing irregularities" there would soon be improvement; on June 28 it stated that "irregular and conflicting movements of business should soon give way to sustained recovery"; on July 19 it pointed out that "untoward elements have operated to delay recovery but the evidence nonetheless points to substantial improvement"; and on August 30, 1930, the Society stated that "the present depression has about spent its force." Thereafter the Society became less hopeful. On November 15, 1930, it said: "We are now near the end of the declining phase of the depression." A year later, on October 31, 1931, it said: "Stabilization at [present] depression levels is clearly possible." 1 Even these last forecasts were wildly optimistic. Somewhat later, its reputation for infallibility rather dimmed, the Society was dissolved. Harvard economics professors ceased forecasting the future and again donned their accustomed garb of humility.
Professor Irving Fisher tried hard to explain why he had been wrong. Early in November 1929 he suggested that the whole thing had been irrational and hence beyond prediction. In a statement that was not a model of coherence, he said: "It was the psychology of panic. It was mob psychology, and it was not, primarily, that the price level of the market was unsoundly high ... the fall in the market was very largely due to the psychology by which it went down because it went down."2 The explanation attracted little attention except from the editor of The Commercial and Financial Chronicle. The latter observed with succinct brutality: "The learned professor is wrong as he usually is when he talks about the stock market." The "mob," he added, didn't sell. It got sold out.
Before the year was over, Professor Fisher tried again in a book, The Stock Market Crash—and After.3 He argued, and rightly for the moment, that stocks were still on a plateau, albeit a somewhat lower one than before, that the crash was a great accident, that the market had gone up "principally because of sound, justified expectations of earnings." He also argued that prohibition was still a strong force for higher business productivity and profits, and concluded that for "the immediate future, at least, the outlook is bright." This book attracted little attention. One trouble with being wrong is that it robs the prophet of his audience when he most needs it to explain why.
Out in Ohio, Professor Dice—he of the parasangs—survived honorably to write and teach for a lifetime about finance.
This may be the place also to record another happy ending. Goldman, Sachs and Company rescued its firm name from its delinquent offspring and returned to an earlier role of strict rectitude and stern conservatism. It became known for its business in the most austere of securities.
New York's two greatest banks, the Chase and the National City, suffered severely in the aftermath. They, of course, shared the general obloquy of the New York bankers which resulted from the great hopes and great disappointments of organized support. But it was also the remarkable misfortune of each that it had as its head in those days a market operator in the grand manner.
Of the two, the Chase was the more fortunate. Albert H. Wiggin, variously President, Chairman of the board, and Chairman of the governing board of the Chase, was a speculator and operator, but not an articulate one. However, in 1929 and the years preceding he had been engaging in some astonishing enterprises. In 1929 he received $275,000 compensation as head of the Chase. He was also—or while head of the Chase had been—director of some fifty-nine utility, industrial, insurance, and other corporations and from some of these had also received a handsome salary. Armour and Company had paid him $40,000 to be a member of its finance committee; he got $20,000 a year from the Brooklyn-Manhattan Transit Corporation; at least seven other firms paid him from two to five thousand annually.4 Wisdom and esteem, or even affection, were not the only factors in this compensation. Those who paid were usually clients and prospective borrowers from the Chase. But the most remarkable of Mr. Wiggin's extracurricular interests was a bevy of private companies. Three were personal holding companies, two of which were named sentimentally for his daughters. Three others were incorporated in Canada for highly unsentimental reasons of taxation and corporate reticence.5
These companies were the instruments for an astonishing variety of stock market operations. In one operation in the spring of 1929 Shermar Corporation—one of the namesake companies—participated with Harry F. Sinclair and Arthur W. Cutten in a mammoth pool in the common stock of Sinclair Consolidated Oil Company. Even in those tolerant days Sinclair and Cutten were considered rather garish companions for a prominent banker. However, the operation netted Shermar $891,600.37 on no apparent investment.6
However, the most breathtaking of Mr. Wiggin's operations were in the stock of the Chase National Bank. These, in turn, were financed by the Chase bank itself. In one exceptionally well-timed coup Shermar Corporation, between September 23 and November 4, 1929, sold short 42,506 shares of Chase stock. (For those to whom short selling is an unrevealed mystery, this meant in effect that it negotiated a loan of 42,506 shares and then sold them at the exceedingly good prices then obtaining. It did this with the intention of buying the same number of shares later at a lower price in order to repay in kind the lender who had provided the original stock. The profit from repaying shares bought at a lower price—always assuming that the price went down—would obviously accrue to Shermar.) Prices did go down superbly; the short sale anticipated perfectly the crash. Then on December 11, 1929, Murlyn Corporation—this was for another daughter—bought 42,506 shares of stock from an affiliate of the Chase National Bank and financed this purchase with a loan of $6,588,430 from the Chase National Bank and from the Shermar Corporation. These shares were used to cover Shermar's short sale, i.e., to repay the loan of securities. The profits on the operation—at a time when many other people were doing much, much less well—was $4,008,538.7 People of carping tendencies might hold the profit was earned by the bank, whose stock it was, whose officer Wiggin was, and which had provided the money for the operation. In fact, the gain all went to Wiggin. Mr. Wiggin subsequently defended loans by banks to their own officers to allow them to speculate in their own stock on the grounds that it developed an interest in their institution. However, by this fine of reasoning, loans to finance short sales present a difficulty: presumably they develop an interest in having the institution, and hence its stock, behave as badly as possible. Pressed on this point, Mr. Wiggin expressed doubt as to whether officers should sell their own companies short.
At the end of 1932 Mr. Wiggin requested that he not be re-elected Chairman of the Governing Board of the bank. He was approaching sixty-five, and he noted with some slight overstatement that his "heart and energies [had] been concentrated for many years in promoting the growth, welfare, and usefulness of the Chase National Bank."8 It also seems probable that Winthrop W. Aldrich, who had come into the Chase as the result of a merger with the Equitable Trust Company and who represented a more austere tradition in commercial banking—the Equitable was controlled by the Rockefellers—had come to regard Mr. Wiggin as dispensable.9 The Executive Committee of the Chase, "in order to discharge in some measure the obligations of this bank to Mr. Wiggin,"10 by unanimous action voted him a life salary of $100,000. It was later brought out that this gesture of inspired generosity had been the impulse of Mr. Wiggin himself. In the months following Mr. Wiggin's retirement his activities became a matter of detailed study by a Senate committee. Mr. Aldrich, his successor, confessed his surprise at the extent and diversity of his predecessor's enterprises and said that the voting of the life salary was a terrible mistake. Mr. Wiggin later renounced the compensation.
By comparison with the National City the troubles of the Chase were slight. Mr. Wiggin was a reserved, some described him as a rather scholarly, man. The head of the National City, Charles E. Mitchell, on the other hand, was a genial extrovert with a talent for headlines. He was known to one and all as a leading prophet of the New Era.
In the autumn of 1929 there were rumors in Wall Street that Mitchell would resign. He did not, and the rumors were described by Percy A. Rockefeller, an associate in numerous rather fervent stock market operations and a director of the bank, as "too absurd to be considered by any sensible person."11 For the next two or three years Mitchell was rather out of the news. Then at nine o'clock on the evening of March 21, 1933, he was arrested by Assistant U.S. District Attorney Thomas E. Dewey and charged with evasion of income taxes.
Many of the facts were never seriously in dispute. Like Wiggin, Mitchell had been operating extensively in the stock of his own bank, although possibly for more defensible reasons. Nineteen-twenty-nine was a year of bank mergers, and Charles E. Mitchell was no man to resist a trend. By early autumn of 1929 he had all but completed a merger with the Com Exchange Bank. The directors of the two institutions had approved; all that remained was the formality of ratification by the stockholders. Holders of Com Exchange stock were to receive, at their option, four-fifths of a share of National City stock or $360 in cash. The price of National City stock was then above 500, so it was certain that the Com Exchange stockholders would take the stock.
Then came the crash. The price of National City stock dropped to around 425, and at any price below 450—four-fifths of which equalled the $360 in cash—the stockholders of the Com Exchange would take money. To buy out all the Com Exchange stockholders for cash would cost the National City around $200 million. That was too much, so Mitchell undertook to save the deal. He began buying National City stock, and during the week of October 28 he arranged to borrow twelve million dollars from J. P. Morgan and Company with which to buy more. (Twelve million was a sizable sum both for Mitchell and for Morgan's, even at that time. Only ten million was actually used, and of this four million was repaid within a week or so. Possibly some of the Morgan partners had second thoughts on the wisdom of the loan.)
The coup failed. Like so many others, Mitchell learned how different it was to support a stock when everyone wanted to sell as compared with those days but a few weeks back when everyone wanted to buy. The price of National City stock sank lower and lower. Mitchell reached the end of his resources and gave up. This was no time for false pride, and with some mild prodding from the management, the National City stockholders repudiated that management and rejected the now disastrous deal. Mitchell, however, was left with a formidable debt to J. P. Morgan and Company. This debt was secured by the stock that had been purchased to support the market and by Mitchell's personal holdings, but its value was shrinking grievously. By the end of the year National City stock was near 200, down from more than 500, and close to the value at which Morgan's had accepted it as collateral.
Now Mitchell faced another misfortune, or, rather, an earlier piece of good fortune now became a disaster. As an executive of the National City Bank, Mitchell's pay was a modest $25,000. However, the bank had an incentive system which may still hold some sort of record for munificence. After a deduction of 8 per cent, 20 per cent of the profits of the bank and of its security affiliate, the National City Company, were paid into a management fund. This was divided twice a year between the principal officers by an arrangement which must have made for an interesting half hour. Each officer first dropped in a hat an unsigned ballot suggesting the share of the fund that Chairman Mitchell should have. Then each signed a ballot giving his estimate of the worth of each of the other eligible officers, himself excluded. The average of these estimates guided the Executive Committee of the bank in fixing the percentages of the fund each officer was to have.
The years 1928 and 1929 were a time of excellent profits. Mitchell's subordinates had also taken a favorable view of his work. For the full year 1928 his cut was $1,316,634.14. 1929 was even better. The division at the end of the first half of that year brought him no less than $1,108,000.12 Dividends and numerous other activities had further augmented his income, and all of this meant a serious tax liability. It would have been easy to sell some National City stock and establish a tax loss, but, as noted, the stock was pledged with J. P. Morgan and Company.
Nevertheless, Mitchell sold the stock—to his wife: 18,300 shares were disposed of to this possibly unsuspecting lady at 212, for the exceedingly satisfying loss of $2,872,305.50. This wiped out all tax liability for 1929. Morgan's was not, it appears, notified of the change of ownership of the stock they held. Somewhat later Mitchell reacquired the stock from his wife, also at a price of 212. Before then there had been a further sickening slide in the price, and had Chairman Mitchell bought the stock in the open market rather than from his wife, he could have got it for around 40. Asked about the transaction by Senator Brookhart of Iowa during a Senate hearing, Mitchell, in a burst of candor that must have devastated his lawyer, said: "I sold this stock, frankly, for tax purposes."13 This frankness led directly to his indictment a few weeks later.
Following his testimony, Mitchell had resigned from the National City Bank. His trial in New York during May and June of 1933 was something of a sensation, although the headlines were necessarily subordinate to the larger ones currently being made in Washington. In his inaugural address on March 4, Roosevelt had promised to drive the money-changers from the temple. Mitchell was widely regarded as the first.
On June 22, Mitchell was acquitted by the jury on all counts. The sales as required by the tax laws were held to be bona fide transactions made in good faith. The Times reporter covering the trial thought that both Mitchell and his lawyer received the verdict with surprise. Attorney General Cummings said that he still believed in the jury system. Mitchell later resumed his career in Wall Street as head of Blyth and Company. The government entered a civil claim for the taxes and won a judgment of $1,100,000 in taxes and penalties. Mitchell appealed the case through to the Supreme Court, lost, and made a final settlement with the government on December 27, 1938. On his behalf it must be stressed that the device by which he sought to reduce his tax liability was far more common then than now. The Senate investigations of 1933 and 1934 showed that tax avoidance had brought individuals of the highest respectability into extraordinary financial intercourse with their wives.14
Our political tradition sets great store by the generalized symbol of evil. This is the wrongdoer whose wrongdoing will be taken by the public to be the secret propensity of a whole community or class. We search avidly for such people, not so much because we wish to see them exposed and punished as individuals, but because we cherish the resulting political discomfort of their friends. To uncover an evil man among the friends of one's foes had long been a recognized method of advancing one's political fortunes. However, in recent times the technique has been greatly improved and refined by the added firmness with which the evil of the evildoer is now attributed to friends, acquaintances, and all who share his way of life.
In the nineteen-thirties Wall Street was exceptionally well endowed with enemies. There were some socialists and communists who believed that capitalism should be abolished and obviously did not seek to have its citadel preserved. There were some people who merely thought that Wall Street was bad. There were yet others who did not seek to have Wall Street abolished or who did not care much about its allegedly evil ways but who enjoyed as a matter of course the discomfiture of the rich and the powerful and the proud. There were those who had lost money in Wall Street. Most of all there was the New Deal. The administrations of Coolidge and Hoover had had an extremely overt alliance with the great financial interests which Wall Street symbolized. With the advent of the New Deal the sins of Wall Street became the sins of the political enemy. What was bad for Wall Street was bad for the Republican Party.
For anyone who was in search of symbolic evil in Wall Street—of individuals whose misbehavior would stigmatize the whole community—the discovery that the heads of the National City and Chase had been guilty of grave lapses would seem to be almost ideal. These were the two best-known and most influential banks; what could have been better than default here?
That the shortcomings of Mr. Wiggin and Mr. Mitchell were much welcomed is, of course, clear. Yet in some indefinable sense they were not of that part of Wall Street that people suspected most. Wall Street's crime, in the eyes of its classical enemies, was less its power than its morals. And the center of immorality was not the banks but the stock market. It was on the stock market that men gambled not alone with their own money, but with the wealth of the country. The stock market, with its promise of easy riches, was what led good if not very wise men to perdition—like the cashier of the local bank who was also a vestryman. The senseless gyrations of the stock market affected farm prices and land values and the renewal of notes and mortgages. Though to the sophisticated radical the banks might be the real menace, sound populist attitudes pointed the finger of suspicion at the New York Stock Exchange. There, accordingly, was the place, if possible, to find the symbol of evil, for there was the institution about which people were ready to believe the worst.
The search for a really adequate miscreant in the Stock Exchange began in April of 1932. The task was undertaken by the Senate Committee on Banking and Currency (later by a subcommittee) and its instructions, graced by the usual split infinitive, were "to thoroughly investigate practices of stock exchanges..." Under the later guidance of Ferdinand Pecora, this committee became the scourge of commercial, investment, and private bankers. But this was not foreseen when it was organized. The original and more or less exclusive object of the inquiry was the market for securities.
On the whole, this part of the investigation was unproductive. The first witness, when the hearings opened on April 11, 1932, was Richard Whitney.15 On November 30, 1929, the Governing Committee of the New York Stock Exchange had passed a resolution of appreciation for the "efficient and conscientious" labors of their acting president during the recent storm. It is an "old saying," the Resolution had stated, "that great emergencies produce the men who are competent to deal with them..." This sense of indebtedness made it inevitable that when Edward H. H. Simmons retired as President of the Exchange in 1930 after six years in office, Whitney would be elected to succeed him. As President of the Exchange it thus fell to Whitney, in the spring of 1932, to assume the task of protecting the stock market from its critics.
Whitney was not in all respects an ingratiating witness. One of his successors in office not long ago compared his general manner and bearing with that of Secretary of Defense Charles E. Wilson at the hearings on his confirmation as Secretary of Defense in early 1953. Whitney admitted to no serious fault in the past operations of the Exchange or even to the possibility of error. He supplied the information that was requested, but he was not unduly helpful to senators who sought to penetrate the mysteries of short selling, sales against the box, options, pools, and syndicates. He seemed to feel that these things were beyond the senators' intelligence. Alternatively he implied that they were things that every intelligent schoolboy understood and it was painful for him to have to go over the obvious. He was so unwise as to get into a discussion of personal economic philosophy with Senator Smith W. Brookhart of Iowa, one of the committee members who believed, devoutly, that the Exchange was the particular invention of the devil. The government, not Wall Street, was responsible for the current bad times, Whitney averred, and the government, he believed, could make its greatest contribution to recovery by balancing the budget and thus restoring confidence. To balance the budget he recommended cutting the pensions and benefits of veterans who had no service-connected disability and also all government salaries. When asked about cutting his own pay he said no—it was "very little." Pressed for the amount, he said that currently it was only about $60,000. His attention was drawn by the committee members to the fact that this was six times what a senator received, but Whitney remained adamantly in favor of cutting the public pay, including that of senators.16
In spite of Whitney's manner, or possibly because of it, several days of questioning produced little evidence of wrongdoing and no identification of wrongdoers. Prior to the crash Whitney had heard generally of syndicates and pools, but he could give no details. He repeatedly assured the committee that the Exchange had these and other matters well under control. He took exception to Senator Brookhart's contention that the market was a gambling hell and should be padlocked. In the end Whitney was excused before he had quite completed his testimony.
When the interrogation of Whitney showed clear signs of being unproductive, the committee turned to the famous market operators. These, too, were disappointing. All that could be proved was what everyone knew, namely, that Bernard E. ("Sell 'em Ben") Smith, M. J. Meehan, Arthur W. Cutten, Harry F. Sinclair, Percy A. Rockefeller, and others had been engaged in large-scale efforts to rig the market. Harry F. Sinclair, for example, was shown to have engaged in especially extensive operations in Sinclair Consolidated Oil. This was much like identifying William Z. Foster with the Communist Party. It was impossible to imagine Harry Sinclair not being involved in some intricate maneuver in high finance. Moreover, reprehensible as these activities were, it remained that only three short years before they had been regarded with breathless admiration. The problem here was somewhat similar to that encountered in the great red-hunt of the latter forties. Then there was constant embarrassment over the short time that had elapsed since Red Russia had been our gallant Soviet ally.
It is true that the big operators, as they appeared on the stand, were not an especially prepossessing group. As noted earlier, Arthur Cutten's memory was extremely defective. M. J. Meehan was in bad health and mistakenly went abroad when he was supposed to go to Washington. (He later apologized handsomely for the error.) Few of the others could remember much about their operations, Napoleonic though they had once seemed. But men cannot be brought to trial for being unprepossessing. And the dubious demeanor and bad memories of the market operators did not directly involve the reputation of the New York Stock Exchange. It is possible to have a poor view of touts, tipsters, and bookies without thinking the worse of Churchill Downs.
In earlier times of trouble on the stock market, stock exchange firms had failed, on occasion by the score. In the fall of 1929 the failures were unimportant. In the first week of the crash no member firm of the New York Stock Exchange had to suspend; only one smallish member firm went under during the period of the panic. There were some complaints by customers of mistreatment. But there were more customers who, during the worst days, were carried by their brokers after their margins had been impaired or depleted. The standards of commercial morality of the members of the Exchange would seem to have been well up to the average of the late twenties. They may have been much more rigorous. This would seem to be the most obvious explanation why the Exchange and its members survived so well the investigations of the thirties. They did not come through unscathed, but they suffered no obloquy comparable, say, with that of the great bankers. In the congressional investigations no flagrant miscreant of any kind was uncovered on the Exchange to serve as the symbolic bad apple. Then, on March 10, 1938, District Attorney Thomas E. Dewey—who had arrested Charles E. Mitchell and who somehow has escaped a reputation as the nemesis of Wall Street—ordered the arraignment of Richard Whitney. The charge was grand larceny.
The rush to get in on the act, to use the recent idiom, when Whitney was arrested is a measure of the yearning for a malefactor in the stock market. It can be compared only with the stampede which followed the announcement by Attorney General Herbert Brownell in the autumn of 1953 that former President Truman had shielded treason. On the day following his first arrest, Whitney was arrested again by New York State Attorney General John J. Bennett. Mr. Bennett had been conducting an investigation of Whitney's affairs, and he bitterly accused Mr. Dewey of legal claim-jumping. In the next few weeks virtually every public body or tribunal with a plausible excuse for doing so, called Whitney to enlarge on his wrongdoing.
The detailed story of Richard Whitney's misfortunes do not belong to this chronicle. Many of them occurred after the period with which this history is concerned. There is need here to cover only those operations that were deemed to implicate the market.
Whitney's dishonesty was of a casual, rather juvenile sort. Associates of the day have since explained it as the result of an unfortunate failure to realize that the rules, which were meant for other people, also applied to him. Much more striking than Whitney's dishonesty was the clear fact that he was one of the most disastrous businessmen in modern history. Theft was almost a minor incident pertaining to his business misfortunes.
In the twenties the Wall Street firm of Richard Whitney and Company was an unspectacular bond house with a modest business. Whitney apparently felt that it provided insufficient scope for his imagination, and with the passing years he moved on to other enterprises, including the mining of mineral colloids and the marketing of peat humus in Florida. He had also become interested in the distilling of alcoholic beverages, mainly applejack, in New Jersey. Nothing is so voracious as a losing business, and eventually Whitney had three of them. To keep them going he borrowed from banks, investment bankers, other stock exchange members, and heavily from his brother, George Whitney, a partner of J. P. Morgan and Company. The loans so negotiated, from the early twenties on, totaled in the millions, many of them unsecured. As time passed Whitney was increasingly pressed. When one loan became due he was forced to replace it with another and to borrow still more for the interest on those outstanding. Beginning in 1933 his stock exchange firm was insolvent, although this did not become evident for some five years.17
Finally, like so many others, Richard Whitney learned the cost of supporting a stock on a falling market. In 1933, Richard Whitney and Company—the affairs of Whitney and his company were almost completely indistinguishable—had invested in between ten and fifteen thousand shares of Distilled Liquors Corporation, the New Jersey manufacturer of applejack and other intoxicants. The price was $15 a share. In the spring of 1934 the stock reached 45 in over-the-counter trading. In January 1935 it was fisted on the New York Curb Exchange. Inevitably Whitney posted the stock as collateral for various of his loans.
Unhappily, popular enthusiasm for the products of the firm, even in the undiscriminating days following repeal, was remarkably slight. The firm made no money and by June 1936 the price of the stock was down to 11. This drop had a disastrous effect on its value as collateral, and the unhappy Whitney tried to maintain the value by buying more of it. (He later made the claim that he wanted to provide the other investors in the company with a market for their stock,18 which if true meant that he was engaging in one of the most selfless acts since the death of Sydney Carton.) All the other investors unloaded on Whitney. At the time of his failure, of the 148,750 shares outstanding, Whitney or his firm owned 137,672. By then the value had dropped to between three and four dollars a share. Mention has been made of the tendency of people in this period to swindle themselves. Whitney, in his effort to support the stock of Distilled Liquors Corporation, unquestionably emerged as the Ponzi of financial self-deception. As the result of his operation he had all his old debts, many new ones incurred in supporting the stock, all the stock—and the stock was nearly worthless.
As his position became more complex, Richard Whitney resorted increasingly to an expedient which he had been using for several years—that of posting securities belonging to other people which were in his custody as collateral for his loans. By early 1938 he had reached the end of a surprising capacity to borrow money. Late in the preceding autumn he had had a large last loan from his brother to release securities belonging to the gratuity fund of the Stock Exchange—a fund out of which payments were made on the death of members—which he had appropriated and pledged for a bank loan. He was now desperately, almost pathetically, visiting the most casual of acquaintances in search of funds. The rumor spread that he was in poor condition. Still, on March 8, there was a stunned silence on the floor of the Exchange when President Charles R. Gay announced from the rostrum the suspension of Richard Whitney and Company for insolvency. Members were rather more aghast when they learned that Whitney had been engaged in theft on a large scale for a long period.
With no small dignity Whitney made a full disclosure of his operations, refused to enter any sort of plea in his own defense, and passed permanently from sight.
The failure of the smallest country banker caused more personal hardship, anguish, and privation than the insolvency of Richard Whitney. His victims were almost uniquely able to afford their loss. And the sums which he stole, while substantial, did not place him in the ranks of the great defaulters of the day—they would not have paid the interest on Ivar Kreuger's larceny for a year. Yet, from the point of view of the antagonists of Wall Street, his default was ideal. Rarely has a crime been more joyously received.
Whitney's identification was wholly with the Stock Exchange, the symbolic center of sin. Moreover, he had been its president and its uncompromising defender before the Congress and the public in its period of trial. He was a Republican, an arch-conservative, and was loosely associated in the financial community with J. P. Morgan and Company. He had himself taken a strong position in favor of honesty. Speaking in St. Louis in 1932, at a time when his own larceny was already well advanced, Whitney had said sternly that one of the prime necessities "of a great market is that brokers must be honest and financially responsible." He looked forward to the day when the financial supervision by the Exchange of its members would be so strict that failure "will be next to impossible."19
Finally, even by his colleagues, Whitney was regarded as a trifle upstage. In his last days he had been reduced to the ultimate indignity of trying to borrow money from the market operator, Bernard E. Smith. Smith, at best a lower middle-brow figure, later told a Securities and Exchange Commission examiner: "He came up to see me and said he would like to get this over quickly, and told me he would like to borrow $250,000 on his face. I remarked he was putting a pretty high value on his face, so he said ... his back was to the wall and he had to have $250,000. I told him he had a lot of nerve to ask me for $250,000 when he didn't even bid me the time of day. I told him I frankly didn't like him—that I wouldn't loan him a dime."20 On any free vote for the man best qualified to bring discredit to Wall Street, Whitney would have won by a wide margin.
The parallel between Whitney and a more recent culprit is interesting. During the thirties the New Dealers were exuberantly uncovering the financial derelictions of their opposition. (It is interesting that dishonesty and not the more orthodox offenses of capitalism like abuse of power or the exploitation of the people were in these days the nemesis of conservatives.) In the nineteen-forties and fifties Republicans, as avidly, were discovering that there were New Dealers who had been communists. Thus it came about that a decade later the counterpart of Richard Whitney was Alger Hiss.
Each served admirably the enemies of his class. Each in origin, education, associations, and career pretension epitomized that class. In each case the first reaction of friends to the allegations of guilt was disbelief. Whitney's past role in his community had been more prominent, and hence from the viewpoint of his enemies he was a more satisfactory figure than Alger Hiss. In the government hierarchy, Hiss was a distinctly routine figure. His eminence as a global statesman was synthesized ex post facto and he also gained much prominence during two long trials. Whitney, with no fanfare, accepted his fate.
There is, perhaps, a moral worth drawing from the careers of Whitney and Hiss. Neither the fact that Whitney was convicted of purloining securities nor that Hiss purloined documents is convincing proof that their friends, associates, and contemporaries were doing the same. On the contrary, the evidence would indicate that most brokers were honest as a matter of absolute routine, and most New Dealers, so far from being in league with the Russians, wished only that they might be invited once to taste caviar at the Soviet embassy. Both liberals and conservatives, left and right, have now had personal experience with the use of the symbolic evil. The injustice of the device is evident. What may be a more compelling point, so are its dangers. In accordance with an old but not outworn tradition, it might now be wise for all to conclude that crime, or even misbehavior, is the act of an individual, not the predisposition of a class.
The Whitney affair brought a marked change in the relations between the Exchange and the federal government, and, in some measure, between the Exchange and the general public. In the Securities Act of 1933, and more comprehensively in the Securities Exchange Act of 1934, the government had sought to prohibit some of the more spectacular extravagances of 1928 and 1929. Full disclosure was required on new security issues, although no way was found of making would-be investors read what was disclosed. Inside operations and short selling after the maimer of Mr. Wiggin were outlawed. Authority was given to the Federal Reserve Board to fix margin requirements and these could, if necessary, be made 100 per cent and thus eliminate margin trading entirely. Pool operations, wash sales, the dissemination of tips or patently false information and other devices for rigging or manipulating the market were prohibited. Commercial banks were divorced from their securities affiliates. Most important, the principle was enunciated that the New York Stock Exchange and the other exchanges were subject to public regulation and the Securities and Exchange Commission was established to apply and enforce such regulation.
This was somewhat bitter medicine. Moreover, regulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age—after a matter of ten or fifteen years—they become, with some exceptions, either an arm of the industry they are regulating or senile. The SEC was especially aggressive. To any young regulatory body, after all, Wall Street was certain to seem a challenging antagonist.
Until the Whitney affair Wall Street—always with exceptions—was disposed to fight back. It insisted on the right of a financial community in general, and of a securities market in particular, to conduct its affairs in its own way, by its own lights and to govern itself. On the evening before the suspension of Whitney was announced from the rostrum, Charles R. Gay, the President of the Exchange, and Howland S. Davis, Chairman of the Committee on Business Conduct—Whitney had been a predecessor of both in the two offices—made their way to Washington. There they reported their unhappy news to William O. Douglas and John W. Hanes of the SEC. The trip, in far more than a symbolic sense, represented the surrender of the Exchange. The cold war over regulation came to an end and was not thereafter resumed.
While the Whitney default confirmed the victory of the New Deal on the issue of regulation and also served admirably to confirm the more general suspicion of moral delinquency in downtown New York, it was Wall Street's good fortune that it came late. By 1938 the New Deal assault on big business was on the wane; some leaders of the original shock troops were already polishing up speeches on the virtues of the free enterprise system. By then, also, it was accepted New Deal theology that all necessary economic reforms had been revealed and those that had not been enacted were on request from Congress. No further reforms of the securities markets of any importance were on the agenda. Henceforth Wall Street looked ingratiatingly at Washington and Washington merely looked blank.