The Wizards of Wall Street

Business Adventures, Once in Golconda, and The Go-Go Years

John Brooks

CONTENTS

BUSINESS ADVENTURES

1 The Fluctuation

2 The Fate of the Edsel

3 The Federal Income Tax

4 A Reasonable Amount of Time

5 Xerox Xerox Xerox Xerox

6 Making the Customers Whole

7 The Impacted Philosophers

8 The Last Great Corner

9 A Second Sort of Life

10 Stockholder Season

11 One Free Bite

12 In Defense of Sterling

ONCE IN GOLCONDA

1. Overture: The Outrage

2. Ticker Tyranny

3. The Almost Aristocracy

4. So Near the Apes

5. Things Fall Apart

6. Enter the White Knight

7. Gold Standard on the Booze

8. Ordeal in Washington

9. The White Knight Unhorsed

10. Rising Action

11. Catastrophe

12. Denouement

THE GO-GO YEARS

Chapter I: Climax

Chapter II: Fair Exchange

Chapter III: The Last Gatsby

Chapter IV: Palmy Days and Low Rumblings

Chapter V: Northern Exposure

Chapter VI: The Birth of Go-Go

Chapter VII: The Conglomerateurs

Chapter VIII: The Enormous Back Room

Chapter IX: Go-Go at High Noon

Chapter X: Confrontation

Chapter XI: Revelry Before Waterloo

Chapter XII: The 1970 Crash

Chapter XIII: Saving Graces

Chapter XIV: The Go-Go Years

About the Author

Business Adventures

Twelve Classic Tales from the World of Wall Street

1

The Fluctuation

THE STOCK MARKET—the daytime adventure serial of the well-to-do—would not be the stock market if it did not have its ups and downs. Any board-room sitter with a taste for Wall Street lore has heard of the retort that J. P. Morgan the Elder is supposed to have made to a naïve acquaintance who had ventured to ask the great man what the market was going to do. “It will fluctuate,” replied Morgan dryly. And it has many other distinctive characteristics. Apart from the economic advantages and disadvantages of stock exchanges—the advantage that they provide a free flow of capital to finance industrial expansion, for instance, and the disadvantage that they provide an all too convenient way for the unlucky, the imprudent, and the gullible to lose their money—their development has created a whole pattern of social behavior, complete with customs, language, and predictable responses to given events. What is truly extraordinary is the speed with which this pattern emerged full blown following the establishment, in 1611, of the world’s first important stock exchange—a roofless courtyard in Amsterdam—and the degree to which it persists (with variations, it is true) on the New York Stock Exchange in the nineteen-sixties. Present-day stock trading in the United States—a bewilderingly vast enterprise, involving millions of miles of private telegraph wires, computers that can read and copy the Manhattan Telephone Directory in three minutes, and over twenty million stockholder participants—would seem to be a far cry from a handful of seventeenth-century Dutchmen haggling in the rain. But the field marks are much the same. The first stock exchange was, inadvertently, a laboratory in which new human reactions were revealed. By the same token, the New York Stock Exchange is also a sociological test tube, forever contributing to the human species’ self-understanding.

The behavior of the pioneering Dutch stock traders is ably documented in a book entitled “Confusion of Confusions,” written by a plunger on the Amsterdam market named Joseph de la Vega; originally published in 1688, it was reprinted in English translation a few years ago by the Harvard Business School. As for the behavior of present-day American investors and brokers—whose traits, like those of all stock traders, are exaggerated in times of crisis—it may be clearly revealed through a consideration of their activities during the last week of May, 1962, a time when the stock market fluctuated in a startling way. On Monday, May 28th, the Dow-Jones average of thirty leading industrial stocks, which has been computed every trading day since 1897, dropped 34.95 points, or more than it had dropped on any other day except October 28, 1929, when the loss was 38.33 points. The volume of trading on May 28th was 9,350,000 shares—the seventh-largest one-day turnover in Stock Exchange history. On Tuesday, May 29th, after an alarming morning when most stocks sank far below their Monday-afternoon closing prices, the market suddenly changed direction, charged upward with astonishing vigor, and finished the day with a large, though not record-breaking, Dow-Jones gain of 27.03 points. Tuesday’s record, or near record, was in trading volume; the 14,750,000 shares that changed hands added up to the greatest one-day total ever except for October 29, 1929, when trading ran just over sixteen million shares. (Later in the sixties, ten, twelve, and even fourteen-million share days became commonplace; the 1929 volume record was finally broken on April 1st, 1968, and fresh records were set again and again in the next few months.) Then, on Thursday, May 31st, after a Wednesday holiday in observance of Memorial Day, the cycle was completed; on a volume of 10,710,000 shares, the fifth-greatest in history, the Dow-Jones average gained 9.40 points, leaving it slightly above the level where it had been before all the excitement began.

The crisis ran its course in three days, but, needless to say, the post-mortems took longer. One of de la Vega’s observations about the Amsterdam traders was that they were “very clever in inventing reasons” for a sudden rise or fall in stock prices, and the Wall Street pundits certainly needed all the cleverness they could muster to explain why, in the middle of an excellent business year, the market had suddenly taken its second-worst nose dive ever up to that moment. Beyond these explanations—among which President Kennedy’s April crackdown on the steel industry’s planned price increase ranked high—it was inevitable that the postmortems should often compare May, 1962, with October, 1929. The figures for price movement and trading volume alone would have forced the parallel, even if the worst panic days of the two months—the twenty-eighth and the twenty-ninth—had not mysteriously and, to some people, ominously coincided. But it was generally conceded that the contrasts were more persuasive than the similarities. Between 1929 and 1962, regulation of trading practices and limitations on the amount of credit extended to customers for the purchase of stock had made it difficult, if not actually impossible, for a man to lose all his money on the Exchange. In short, de la Vega’s epithet for the Amsterdam stock exchange in the sixteen-eighties—he called it “this gambling hell,” although he obviously loved it—had become considerably less applicable to the New York exchange in the thirty-three years between the two crashes.

THE 1962 crash did not come without warning, even though few observers read the warnings correctly. Shortly after the beginning of the year, stocks had begun falling at a pretty consistent rate, and the pace had accelerated to the point where the previous business week—that of May 21st through May 25th—had been the worst on the Stock Exchange since June, 1950. On the morning of Monday, May 28th, then, brokers and dealers had reason to be in a thoughtful mood. Had the bottom been reached, or was it still ahead? Opinion appears, in retrospect, to have been divided. The Dow-Jones news service, which sends its subscribers spot financial news by teleprinter, reflected a certain apprehensiveness between the time it started its transmissions, at nine o’clock, and the opening of the Stock Exchange, at ten. During this hour, the broad tape (as the Dow-Jones service, which is printed on vertically running paper six and a quarter inches wide, is often called, to distinguish it from the Stock Exchange price tape, which is printed horizontally and is only three-quarters of an inch high) commented that many securities dealers had been busy over the weekend sending out demands for additional collateral to credit customers whose stock assets were shrinking in value; remarked that the type of precipitate liquidation seen during the previous week “has been a stranger to Wall Street for years;” and went on to give several items of encouraging business news, such as the fact that Westinghouse had just received a new Navy contract. In the stock market, however, as de la Vega points out, “the news [as such] is often of little value;” in the short run, the mood of the investors is what counts.

This mood became manifest within a matter of minutes after the Stock Exchange opened. At 10:11, the broad tape reported that “stocks at the opening were mixed and only moderately active.” This was reassuring information, because “mixed” meant that some were up and some were down, and also because a falling market is universally regarded as far less threatening when the amount of activity in it is moderate rather than great. But the comfort was short-lived, for by 10:30 the Stock Exchange tape, which records the price and the share volume of every transaction made on the floor, not only was consistently recording lower prices but, running at its maximum speed of five hundred characters per minute, was six minutes late. The lateness of the tape meant that the machine was simply unable to keep abreast of what was going on, so fast were trades being made. Normally, when a transaction is completed on the floor of the Exchange, at 11 Wall Street, an Exchange employee writes the details on a slip of paper and sends it by pneumatic tube to a room on the fifth floor of the building, where one of a staff of girls types it into the ticker machine for transmission. A lapse of two or three minutes between a floor transaction and its appearance on the tape is normal, therefore, and is not considered by the Stock Exchange to be “lateness;” that word, in the language of the Exchange, is used only to describe any additional lapse between the time a sales slip arrives on the fifth floor and the time the hard-pressed ticker is able to accommodate it. (“The terms used on the Exchange are not carefully chosen,” complained de la Vega.) Tape delays of a few minutes occur fairly often on busy trading days, but since 1930, when the type of ticker in use in 1962 was installed, big delays had been extremely rare. On October 24, 1929, when the tape fell two hundred and forty-six minutes behind, it was being printed at the rate of two hundred and eighty-five characters a minute; before May, 1962, the greatest delay that had ever occurred on the new machine was thirty-four minutes.

Unmistakably, prices were going down and activity was going up, but the situation was still not desperate. All that had been established by eleven o’clock was that the previous week’s decline was continuing at a moderately accelerated rate. But as the pace of trading increased, so did the tape delay. At 10:55, it was thirteen minutes late; at 11:14, twenty minutes; at 11:35, twenty-eight minutes; at 11:58, thirty-eight minutes; and at 12:14, forty-three minutes. (To inject at least a seasoning of up-to-date information into the tape when it is five minutes or more in arrears, the Exchange periodically interrupted its normal progress to insert “flashes,” or current prices of a few leading stocks. The time required to do this, of course, added to the lateness.) The noon computation of the Dow-Jones industrial average showed a loss for the day so far of 9.86 points.

Signs of public hysteria began to appear during the lunch hour. One sign was the fact that between twelve and two, when the market is traditionally in the doldrums, not only did prices continue to decline but volume continued to rise, with a corresponding effect on the tape; just before two o’clock, the tape delay stood at fifty-two minutes. Evidence that people are selling stocks at a time when they ought to be eating lunch is always regarded as a serious matter. Perhaps just as convincing a portent of approaching agitation was to be found in the Times Square office (at 1451 Broadway) of Merrill Lynch, Pierce, Fenner & Smith, the undisputed Gargantua of the brokerage trade. This office was plagued by a peculiar problem: because of its excessively central location, it was visited every day at lunchtime by an unusual number of what are known in brokerage circles as “walk-ins”—people who are securities customers only in a minuscule way, if at all, but who find the atmosphere of a brokerage office and the changing prices on its quotation board entertaining, especially in times of stock-market crisis. (“Those playing the game merely for the sake of entertainment and not because of greediness are easily to be distinguished.”—de la Vega.) From long experience, the office manager, a calm Georgian named Samuel Mothner, had learned to recognize a close correlation between the current degree of public concern about the market and the number of walk-ins in his office, and at midday on May 28th the mob of them was so dense as to have, for his trained sensibilities, positively albatross-like connotations of disaster ahead.

Mothner’s troubles, like those of brokers from San Diego to Bangor, were by no means confined to disturbing signs and portents. An unrestrained liquidation of stocks was already well under way; in Mothner’s office, orders from customers were running five or six times above average, and nearly all of them were orders to sell. By and large, brokers were urging their customers to keep cool and hold on to their stocks, at least for the present, but many of the customers could not be persuaded. In another midtown Merrill Lynch office, at 61 West Forty-eighth Street, a cable was received from a substantial client living in Rio de Janeiro that said simply, “Please sell out everything in my account.” Lacking the time to conduct a long-distance argument in favor of forbearance, Merrill Lynch had no choice but to carry out the order. Radio and television stations, which by early afternoon had caught the scent of news, were now interrupting their regular programs with spot broadcasts on the situation; as a Stock Exchange publication has since commented, with some asperity, “The degree of attention devoted to the stock market in these news broadcasts may have contributed to the uneasiness among some investors.” And the problem that brokers faced in executing the flood of selling orders was by this time vastly complicated by technical factors. The tape delay, which by 2:26 amounted to fifty-five minutes, meant that for the most part the ticker was reporting the prices of an hour before, which in many cases were anywhere from one to ten dollars a share higher than the current prices. It was almost impossible for a broker accepting a selling order to tell his customer what price he might expect to get. Some brokerage firms were trying to circumvent the tape delay by using makeshift reporting systems of their own; among these was Merrill Lynch, whose floor brokers, after completing a trade, would—if they remembered and had the time—simply shout the result into a floorside telephone connected to a “squawk box” in the firm’s head office, at 70 Pine Street. Obviously, haphazard methods like this were subject to error.

On the Stock Exchange floor itself, there was no question of any sort of rally; it was simply a case of all stocks’ declining rapidly and steadily, on enormous volume. As de la Vega might have described the scene—as, in fact, he did rather flamboyantly describe a similar scene—“The bears [that is, the sellers] are completely ruled by fear, trepidation, and nervousness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos.” Not the least worrisome aspect of the situation was the fact that the leading bluechip stocks, representing shares in the country’s largest companies, were right in the middle of the decline; indeed, American Telephone & Telegraph, the largest company of them all, and the one with the largest number of stockholders, was leading the entire market downward. On a share volume greater than that of any of the more than fifteen hundred other stocks traded on the Exchange (most of them at a tiny fraction of Telephone’s price), Telephone had been battered by wave after wave of urgent selling all day, until at two o’clock it stood at 104¾—down 6⅞ for the day—and was still in full retreat. Always something of a bellwether, Telephone was now being watched more closely than ever, and each loss of a fraction of a point in its price was the signal for further declines all across the board. Before three o’clock, I.B.M. was down 17½ points; Standard Oil of New Jersey, often exceptionally resistant to general declines, was off 3¼; and Telephone itself had tumbled again, to 101⅛. Nor did the bottom appear to be in sight.

Yet the atmosphere on the floor, as it has since been described by men who were there, was not hysterical—or, at least, any hysteria was well controlled. While many brokers were straining to the utmost the Exchange’s rule against running on the floor, and some faces wore expressions that have been characterized by a conservative Exchange official as “studious,” there was the usual amount of joshing, horseplay, and exchanging of mild insults. (“Jokes … form a main attraction to the business.”—de la Vega.) But things were not entirely the same. “What I particularly remember is feeling physically exhausted,” one floor broker has said. “On a crisis day, you’re likely to walk ten or eleven miles on the floor—that’s been measured with pedometers—but it isn’t just the distance that wears you down. It’s the physical contact. You have to push and get pushed. People climb all over you. Then, there were the sounds—the tense hum of voices that you always get in times of decline. As the rate of decline increases, so does the pitch of the hum. In a rising market, there’s an entirely different sound. After you get used to the difference, you can tell just about what the market is doing with your eyes shut. Of course, the usual heavy joking went on, and maybe the jokes got a little more forced than usual. Everybody has commented on the fact that when the closing bell rang, at three-thirty, a cheer went up from the floor. Well, we weren’t cheering because the market was down. We were cheering because it was over.”

BUT was it over? This question occupied Wall Street and the national investing community all the afternoon and evening. During the afternoon, the laggard Exchange ticker slogged along, solemnly recording prices that had long since become obsolete. (It was an hour and nine minutes late at closing time, and did not finish printing the day’s transactions until 5:58.) Many brokers stayed on the Exchange floor until after five o’clock, straightening out the details of trades, and then went to their offices to work on their accounts. What the price tape had to tell, when it finally got around to telling it, was a uniformly sad tale. American Telephone had closed at 100⅝, down 11 for the day. Philip Morris had closed at 71½, down 8¼ Campbell Soup had closed at 81, down 10¾. I.B.M. had closed at 361, down 37½. And so it went. In brokerage offices, employees were kept busy—many of them for most of the night—at various special chores, of which by far the most urgent was sending out margin calls. A margin call is a demand for additional collateral from a customer who has borrowed money from his broker to buy stocks and whose stocks are now worth barely enough to cover the loan. If a customer is unwilling or unable to meet a margin call with more collateral, his broker will sell the margined stock as soon as possible; such sales may depress other stocks further, leading to more margin calls, leading to more stock sales, and so on down into the pit. This pit had proved bottomless in 1929, when there were no federal restrictions on stock-market credit. Since then, a floor had been put in it, but the fact remains that credit requirements in May of 1962 were such that a customer could expect a call when stocks he had bought on margin had dropped to between fifty and sixty per cent of their value at the time he bought them. And at the close of trading on May 28th nearly one stock in four had dropped as far as that from its 1961 high. The Exchange has since estimated that 91,700 margin calls were sent out, mainly by telegram, between May 25th and May 31st; it seems a safe assumption that the lion’s share of these went out in the afternoon, in the evening, or during the night of May 28th—and not just the early part of the night, either. More than one customer first learned of the crisis—or first became aware of its almost spooky intensity—on being awakened by the arrival of a margin call in the pre-dawn hours of Tuesday.

If the danger to the market from the consequences of margin selling was much less in 1962 than it had been in 1929, the danger from another quarter—selling by mutual funds—was immeasurably greater. Indeed, many Wall Street professionals now say that at the height of the May excitement the mere thought of the mutual-fund situation was enough to make them shudder. As is well known to the millions of Americans who have bought shares in mutual funds over the past two decades or so, they provide a way for small investors to pool their resources under expert management; the small investor buys shares in a fund, and the fund uses the money to buy stocks and stands ready to redeem the investor’s shares at their current asset value whenever he chooses. In a serious stock-market decline, the reasoning went, small investors would want to get their money out of the stock market and would therefore ask for redemption of their shares; in order to raise the cash necessary to meet the redemption demands, the mutual funds would have to sell some of their stocks; these sales would lead to a further stock-market decline, causing more holders of fund shares to demand redemption—and so on down into a more up-to-date version of the bottomless pit. The investment community’s collective shudder at this possibility was intensified by the fact that the mutual funds’ power to magnify a market decline had never been seriously tested; practically nonexistent in 1929, the funds had built up the staggering total of twenty-three billion dollars in assets by the spring of 1962, and never in the interim had the market declined with anything like its present force. Clearly, if twenty-three billion dollars in assets, or any substantial fraction of that figure, were to be tossed onto the market now, it could generate a crash that would make 1929 seem like a stumble. A thoughtful broker named Charles J. Rolo, who was a book reviewer for the Atlantic until he joined Wall Street’s literary coterie in 1960, has recalled that the threat of a fund-induced downward spiral, combined with general ignorance as to whether or not one was already in progress, was “so terrifying that you didn’t even mention the subject.” As a man whose literary sensibilities had up to then survived the well-known crassness of economic life, Rolo was perhaps a good witness on other aspects of the downtown mood at dusk on May 28th. “There was an air of unreality,” he said later. “No one, as far as I knew, had the slightest idea where the bottom would be. The closing Dow-Jones average that day was down almost thirty-five points, to about five hundred and seventy-seven. It’s now considered elegant in Wall Street to deny it, but many leading people were talking about a bottom of four hundred—which would, of course, have been a disaster. One heard the words ‘four hundred’ uttered again and again, although if you ask people now, they tend to tell you they said ‘five hundred.’ And along with the apprehensions there was a profound feeling of depression of a very personal sort among brokers. We knew that our customers—by no means all of them rich—had suffered large losses as a result of our actions. Say what you will, it’s extremely disagreeable to lose other people’s money. Remember that this happened at the end of about twelve years of generally rising stock prices. After more than a decade of more or less constant profits to yourself and your customers, you get to think you’re pretty good. You’re on top of it. You can make money, and that’s that. This break exposed a weakness. It subjected one to a certain loss of self-confidence, from which one was not likely to recover quickly.” The whole thing was enough, apparently, to make a broker wish that he were in a position to adhere to de la Vega’s cardinal rule: “Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.”

IT was on Tuesday morning that the dimensions of Monday’s debacle became evident. It had by now been calculated that the paper loss in value of all stocks listed on the Exchange amounted to $20,800,000,000. This figure was an all-time record; even on October 28, 1929, the loss had been a mere $9,600,000,000, the key to the apparent inconsistency being the fact that the total value of the stocks listed on the Exchange was far smaller in 1929 than in 1962. The new record also represented a significant slice of our national income—specifically, almost four per cent. In effect, the United States had lost something like two weeks’ worth of products and pay in one day. And, of course, there were repercussions abroad. In Europe, where reactions to Wall Street are delayed a day by the time difference, Tuesday was the day of crisis; by nine o’clock that morning in New York, which was toward the end of the trading day in Europe, almost all the leading European exchanges were experiencing wild selling, with no apparent cause other than Wall Street’s crash. The loss in Milan was the worst in eighteen months. That in Brussels was the worst since 1946, when the Bourse there reopened after the war. That in London was the worst in at least twenty-seven years. In Zurich, there had been a sickening thirty-per-cent selloff earlier in the day, but some of the losses were now being cut as bargain hunters came into the market. And another sort of backlash—less direct, but undoubtedly more serious in human terms—was being felt in some of the poorer countries of the world. For example, the price of copper for July delivery dropped on the New York commodity market by forty-four one-hundredths of a cent per pound. Insignificant as such a loss may sound, it was a vital matter to a small country heavily dependent on its copper exports. In his recent book “The Great Ascent,” Robert L. Heilbroner had cited an estimate that for every cent by which copper prices drop on the New York market the Chilean treasury lost four million dollars; by that standard, Chile’s potential loss on copper alone was $1,760,000.

Yet perhaps worse than the knowledge of what had happened was the fear of what might happen now. The Times began a queasy lead editorial with the statement that “something resembling an earthquake hit the stock market yesterday,” and then took almost half a column to marshal its forces for the reasonably ringing affirmation “Irrespective of the ups and downs of the stock market, we are and will remain the masters of our economic fate.” The Dow-Jones news ticker, after opening up shop at nine o’clock with its customary cheery “Good morning,” lapsed almost immediately into disturbing reports of the market news from abroad, and by 9:45, with the Exchange’s opening still a quarter of an hour away, was asking itself the jittery question “When will the dumping of stocks let up?” Not just yet, it concluded; all the signs seemed to indicate that the selling pressure was “far from satisfied.” Throughout the financial world, ugly rumors were circulating about the imminent failure of various securities firms, increasing the aura of gloom. (“The expectation of an event creates a much deeper impression … than the event itself.”—de la Vega.) The fact that most of these rumors later proved false was no help at the time. Word of the crisis had spread overnight to every town in the land, and the stock market had become the national preoccupation. In brokerage offices, the switchboards were jammed with incoming calls, and the customers’ areas with walk-ins and, in many cases, television crews. As for the Stock Exchange itself, everyone who worked on the floor had got there early, to batten down against the expected storm, and additional hands had been recruited from desk jobs on the upper floors of 11 Wall to help sort out the mountains of orders. The visitors’ gallery was so crowded by opening time that the usual guided tours had to be suspended for the day. One group that squeezed its way onto the gallery that morning was the eighth-grade class of Corpus Christi Parochial School, of West 121st Street; the class’s teacher, Sister Aquin, explained to a reporter that the children had prepared for their visit over the previous two weeks by making hypothetical stock-market investments with an imaginary ten thousand dollars each. “They lost all their money,” said Sister Aquin.

The Exchange’s opening was followed by the blackest ninety minutes in the memory of many veteran dealers, including some survivors of 1929. In the first few minutes, comparatively few stocks were traded, but this inactivity did not reflect calm deliberation; on the contrary, it reflected selling pressure so great that it momentarily paralyzed action. In the interests of minimizing sudden jumps in stock prices, the Exchange requires that one of its floor officials must personally grant his permission before any stock can change hands at a price differing from that of the previous sale by one point or more for a stock priced under twenty dollars, or by two points or more for a stock priced above twenty dollars. Now sellers were so plentiful and buyers so scarce that hundreds of stocks would have to open at price changes as great as that or greater, and therefore no trading in them was possible until a floor official could be found in the shouting mob. In the case of some of the key issues, like I.B.M., the disparity between sellers and buyers was so wide that trading in them was impossible even with the permission of an official, and there was nothing to do but wait until the prospect of getting a bargain price lured enough buyers into the market. The Dow-Jones broad tape, stuttering out random prices and fragments of information as if it were in a state of shock, reported at 11:30 that “at least seven” Big Board stocks had still not opened; actually, when the dust had cleared it appeared that the true figure had been much larger than that. Meanwhile, the Dow-Jones average lost 11.09 more points in the first hour, Monday’s loss in stock values had been increased by several billion dollars, and the panic was in full cry.

And along with panic came near chaos. Whatever else may be said about Tuesday, May 29th, it will be long remembered as the day when there was something very close to a complete breakdown of the reticulated, automated, mind-boggling complex of technical facilities that made nationwide stock-trading possible in a huge country where nearly one out of six adults was a stockholder. Many orders were executed at prices far different from the ones agreed to by the customers placing the orders; many others were lost in transmission, or in the snow of scrap paper that covered the Exchange floor, and were never executed at all. Sometimes brokerage firms were prevented from executing orders by simple inability to get in touch with their floor men. As the day progressed, Monday’s heavy-traffic records were not only broken but made to seem paltry; as one index, Tuesday’s closing-time delay in the Exchange tape was two hours and twenty-three minutes, compared to Monday’s hour and nine minutes. By a heaven-sent stroke of prescience, Merrill Lynch, which handled over thirteen per cent of all public trading on the Exchange, had just installed a new 7074 computer—the device that can copy the Telephone Directory in three minutes—and, with its help, managed to keep its accounts fairly straight. Another new Merrill Lynch installation—an automatic teletype switching system that occupied almost half a city block and was intended to expedite communication between the firm’s various offices—also rose to the occasion, though it got so hot that it could not be touched. Other firms were less fortunate, and in a number of them confusion gained the upper hand so thoroughly that some brokers, tired of trying in vain to get the latest quotations on stocks or to reach their partners on the Exchange floor, are said to have simply thrown up their hands and gone out for a drink. Such unprofessional behavior may have saved their customers a great deal of money.

But the crowning irony of the day was surely supplied by the situation of the tape during the lunch hour. Just before noon, stocks reached their lowest levels—down twenty-three points on the Dow-Jones average. (At its nadir, the average reached 553.75—a safe distance above the 500 that the experts now claim was their estimate of the absolute bottom.) Then they abruptly began an extraordinarily vigorous recovery. At 12:45, by which time the recovery had become a mad scramble to buy, the tape was fifty-six minutes late; therefore, apart from fleeting intimations supplied by a few “flash” prices, the ticker was engaged in informing the stock-market community of a selling panic at a moment when what was actually in progress was a buying panic.

THE great turnaround late in the morning took place in a manner that would have appealed to de la Vega’s romantic nature—suddenly and rather melodramatically. The key stock involved was American Telephone & Telegraph, which, just as on the previous day, was being universally watched and was unmistakably influencing the whole market. The key man, by the nature of his job, was George M. L. La Branche, Jr., senior partner in La Branche and Wood & Co., the firm that was acting as floor specialist in Telephone. (Floor specialists are broker-dealers who are responsible for maintaining orderly markets in the particular stocks with which they are charged. In the course of meeting their responsibilities, they often have the curious duty of taking risks with their own money against their own better judgment. Various authorities, seeking to reduce the element of human fallibility in the market, have lately been trying to figure out a way to replace the specialists with machines, but so far without success. One big stumbling block seems to be the question: If the mechanical specialists should lose their shirts, who would pay their losses?) La Branche, at sixty-four, was a short, sharp-featured, dapper, peppery man who was fond of sporting one of the Exchange floor’s comparatively few Phi Beta Kappa keys; he had been a specialist since 1924, and his firm had been the specialist in Telephone since late in 1929. His characteristic habitat—indeed, the spot where he spent some five and a half hours almost every weekday of his life—was immediately in front of Post 15, in the part of the Exchange that is not readily visible from the visitors’ gallery and is commonly called the Garage; there, feet planted firmly apart to fend off any sudden surges of would-be buyers or sellers, he customarily stood with pencil poised in a thoughtful way over an unprepossessing loose-leaf ledger, in which he kept a record of all outstanding orders to buy and sell Telephone stock at various price levels. Not surprisingly, the ledger was known as the Telephone book. La Branche had, of course, been at the center of the excitement all day Monday, when Telephone was leading the market downward. As specialist, he had been rolling with the punch like a fighter—or to adopt his own more picturesque metaphor, bobbing like a cork on ocean combers. “Telephone is kind of like the sea,” La Branche said later. “Generally, it is calm and kindly. Then all of a sudden a great wind comes and whips up a giant wave. The wave sweeps over and deluges everybody; then it sucks back again. You have to give with it. You can’t fight it, any more than King Canute could.” On Tuesday morning, after Monday’s drenching eleven-point drop, the great wave was still rolling; the sheer clerical task of sorting and matching the orders that had come in overnight—not to mention finding a Stock Exchange official and obtaining his permission—took so long that the first trade in Telephone could not be made until almost an hour after the Exchange’s opening. When Telephone did enter the lists, at one minute before eleven, its price was 98½—down 2⅛ from Monday’s closing. Over the next three-quarters of an hour or so, while the financial world watched it the way a sea captain might watch the barometer in a hurricane, Telephone fluctuated between 99, which it reached on momentary minor rallies, and 98⅛, which proved to be its bottom. It touched the lower figure on three separate occasions, with rallies between—a fact that La Branche has spoken of as if it had a magical or mystical significance. And perhaps it had; at any rate, after the third dip buyers of Telephone began to turn up at Post 15, sparse and timid at first, then more numerous and aggressive. At 11:45, the stock sold at 98¾; a few minutes later, at 99; at 11:50, at 99⅜; and finally, at 11:55, it sold at 100.

Many commentators have expressed the opinion that that first sale of Telephone at 100 marked the exact point at which the whole market changed direction. Since Telephone is among the stocks on which the ticker gives flashes during periods of tape delay, the financial community learned of the transaction almost immediately, and at a time when everything else it was hearing was very bad news indeed; the theory goes that the hard fact of Telephone’s recovery of almost two points worked together with a purely fortuitous circumstance—the psychological impact of the good, round number 100—to tip the scales. La Branche, while agreeing that the rise of Telephone did a lot to bring about the general upturn, differs as to precisely which transaction was the crucial one. To him, the first sale at 100 was insufficient proof of lasting recovery, because it involved only a small number of shares (a hundred, as far as he remembers). He knew that in his book he had orders to sell almost twenty thousand shares of Telephone at 100. If the demand for shares at that price were to run out before this two-million-dollar supply was exhausted, then the price of Telephone would drop again, possibly going as low as 98⅛ for a fourth time. And a man like La Branche, given to thinking in nautical terms, may have associated a certain finality with the notion of going down for a fourth time.

It did not happen. Several small transactions at 100 were made in rapid succession, followed by several more, involving larger volume. Altogether, about half the supply of the stock at that price was gone when John J. Cranley, floor partner of Dreyfus & Co., moved unobtrusively into the crowd at Post 15 and bid 100 for ten thousand shares of Telephone—just enough to clear out the supply and thus pave the way for a further rise. Cranley did not say whether he was bidding on behalf of his firm, one of its customers, or the Dreyfus Fund, a mutual fund that Dreyfus & Co. managed through one of its subsidiaries; the size of the order suggests that the principal was the Dreyfus Fund. In any case, La Branche needed only to say “Sold,” and as soon as the two men had made notations of it, the transaction was completed. Where-upon Telephone could no longer be bought for 100.

There is historical precedent (though not from de la Vega’s day) for the single large Stock Exchange transaction that turns the market, or is intended to turn it. At half past one on October 24, 1929—the dreadful day that has gone down in financial history as Black Thursday—Richard Whitney, then acting president of the Exchange and probably the best-known figure on its floor, strode conspicuously (some say “jauntily”) up to the post where U.S. Steel was traded, and bid 205, the price of the last sale, for ten thousand shares. But there are two crucial differences between the 1929 trade and the 1962 one. In the first place, Whitney’s stagy bid was a calculated effort to create an effect, while Cranley’s, delivered without fanfare, was apparently just a move to get a bargain for the Dreyfus Fund. Secondly, only an evanescent rally followed the 1929 deal—the next week’s losses made Black Thursday look no worse than gray—while a genuinely solid recovery followed the one in 1962. The moral may be that psychological gestures on the Exchange are most effective when they are neither intended nor really needed. At all events, a general rally began almost immediately. Having broken through the 100 barrier, Telephone leaped wildly upward: at 12:18, it was traded at 101¼; at 12:41, at 103½; and at 1:05, at 106¼. General Motors went from 45½ at 11:46 to 50 at 1:38. Standard Oil of New Jersey went from 46¾ at 11:46 to 51 at 1:28. U.S. Steel went from 49½ at 11:40 to 52⅜ at 1:28. I.B.M. was, in its way, the most dramatic case of the lot. All morning, its stock had been kept out of trading by an overwhelming preponderance of selling orders, and the guesses as to its ultimate opening price varied from a loss of ten points to a loss of twenty or thirty; now such an avalanche of buying orders appeared that when it was at last technically possible for the stock to be traded, just before two o’clock, it opened up four points, on a huge block of thirty thousand shares. At 12:28, less than half an hour after the big Telephone trade, the Dow-Jones news service was sure enough of what was happening to state flatly, “The market has turned strong.”

And so it had, but the speed of the turnaround produced more irony. When the broad tape has occasion to transmit an extended news item, such as a report on a prominent man’s speech, it customarily breaks the item up into a series of short sections, which can then be transmitted at intervals, leaving time in the interstices for such spot news as the latest prices from the Exchange floor. This was what it did during the early afternoon of May 29th with a speech delivered to the National Press Club by H. Ladd Plumley, president of the United States Chamber of Commerce, which began to be reported on the Dow-Jones tape at 12:25, or at almost exactly the same time that the same news source declared the market to have turned strong. As the speech came out in sections on the broad tape, it created an odd effect indeed. The tape started off by saying that Plumley had called for “a thoughtful appreciation of the present lack of business confidence.” At this point, there was an interruption for a few minutes’ worth of stock prices, all of them sharply higher. Then the tape returned to Plumley, who was now warming to his task and blaming the stock-market plunge on “the coincidental impact of two confidence-upsetting factors—a dimming of profit expectations and President Kennedy’s quashing of the steel price increase.” Then came a longer interruption, chock-full of reassuring facts and figures. At its conclusion, Plumley was back on the tape, hammering away at his theme, which had now taken on overtones of “I told you so.” “We have had an awesome demonstration that the ‘right business climate’ cannot be brushed off as a Madison Avenue cliché but is a reality much to be desired,” the broad tape quoted him as saying. So it went through the early afternoon; it must have been a heady time for the Dow-Jones subscribers, who could alternately nibble at the caviar of higher stock prices and sip the champagne of Plumley’s jabs at the Kennedy administration.

IT was during the last hour and a half on Tuesday that the pace of trading on the Exchange reached its most frantic. The official count of trades recorded after three o’clock (that is, in the last half hour) came to just over seven million shares—in normal times as they were reckoned in 1962, an unheard-of figure even for a whole day’s trading. When the closing bell sounded, a cheer again arose from the floor—this one a good deal more full-throated than Monday’s, because the day’s gain of 27.03 points in the Dow-Jones average meant that almost three-quarters of Monday’s losses had been recouped; of the $20,800,000,000 that had summarily vanished on Monday, $13,500,000,000 had now reappeared. (These heart-warming figures weren’t available until hours after the close, but experienced securities men are vouchsafed visceral intuitions of surprising statistical accuracy; some of them claim that at Tuesday’s closing they could feel in their guts a Dow-Jones gain of over twenty-five points, and there is no reason to dispute their claim.) The mood was cheerful, then, but the hours were long. Because of the greater trading volume, tickers ticked and lights burned even farther into the night than they had on Monday; the Exchange tape did not print the day’s last transaction until 8:15—four and three-quarters hours after it had actually occurred. Nor did the next day, Memorial Day, turn out to be a day off for the securities business. Wise old Wall Streeters had expressed the opinion that the holiday, falling by happy chance in the middle of the crisis and thus providing an opportunity for the cooling of overheated emotions, may have been the biggest factor in preventing the crisis from becoming a disaster. What it indubitably did provide was a chance for the Stock Exchange and its member organizations—all of whom had been directed to remain at their battle stations over the holiday—to begin picking up the pieces.

The insidious effects of a late tape had to be explained to thousands of naïve customers who thought they had bought U.S. Steel at, say, 50, only to find later that they had paid 54 or 55. The complaints of thousands of other customers could not be so easily answered. One brokerage house discovered that two orders it had sent to the floor at precisely the same time—one to buy Telephone at the prevailing price, the other to sell the same quantity at the prevailing price—had resulted in the seller’s getting 102 per share for his stock and the buyer’s paying 108 for his. Badly shaken by a situation that seemed to cast doubt on the validity of the law of supply and demand, the brokerage house made inquiries and found that the buying order had got temporarily lost in the crush and had failed to reach Post 15 until the price had gone up six points. Since the mistake had not been the customer’s, the brokerage firm paid him the difference. As for the Stock Exchange itself, it had a variety of problems to deal with on Wednesday, among them that of keeping happy a team of television men from the Canadian Broadcasting Corporation who, having forgotten all about the United States custom of observing a holiday on May 30th, had flown down from Montreal to take pictures of Wednesday’s action on the Exchange. At the same time, Exchange officials were necessarily pondering the problem of Monday’s and Tuesday’s scandalously laggard ticker, which everyone agreed had been at the very heart of—if not, indeed, the cause of—the most nearly catastrophic technical snarl in history. The Exchange’s defense of itself, later set down in detail, amounts, in effect, to a complaint that the crisis came two years too soon. “It would be inaccurate to suggest that all investors were served with normal speed and efficiency by existing facilities,” the Exchange conceded, with characteristic conservatism, and went on to say that a ticker with almost twice the speed of the present one was expected to be ready for installation in 1964. (In fact, the new ticker and various other automation devices, duly installed more or less on time, proved to be so heroically effective that the fantastic trading pace of April, 1968 was handled with only negligible tape delays.) The fact that the 1962 hurricane hit while the shelter was under construction was characterized by the Exchange as “perhaps ironic.”

There was still plenty of cause for concern on Thursday morning. After a period of panic selling, the market has a habit of bouncing back dramatically and then resuming its slide. More than one broker recalled that on October 30, 1929—immediately after the all-time-record two-day decline, and immediately before the start of the truly disastrous slide that was to continue for years and precipitate the great depression—the Dow-Jones gain had been 28.40, representing a rebound ominously comparable to this one. In other words, the market still suffers at times from what de la Vega clinically called “antiperistasis”—the tendency to reverse itself, then reverse the reversal, and so on. A follower of the antiperistasis system of security analysis might have concluded that the market was now poised for another dive. As things turned out, of course, it wasn’t. Thursday was a day of steady, orderly rises in stock prices. Minutes after the ten-o’clock opening, the broad tape spread the news that brokers everywhere were being deluged with buying orders, many of them coming from South America, Asia, and the Western European countries that are normally active in the New York stock market. “Orders still pouring in from all directions,” the broad tape announced exultantly just before eleven. Lost money was magically reappearing, and more was on the way. Shortly before two o’clock, the Dow-Jones tape, having proceeded from euphoria to insouciance, took time off from market reports to include a note on plans for a boxing match between Floyd Patterson and Sonny Liston. Markets in Europe, reacting to New York on the upturn just as they had on the downturn, had risen sharply. New York copper futures had recovered over eighty per cent of their Monday and Tuesday-morning losses, so Chile’s treasury was mostly bailed out. As for the Dow-Jones industrial average at closing, it figured out to 613.36, meaning that the week’s losses had been wiped out in toto, with a little bit to spare. The crisis was over. In Morgan’s terms, the market had fluctuated; in de la Vega’s terms, antiperistasis had been demonstrated.

ALL that summer, and even into the following year, security analysts and other experts cranked out their explanations of what had happened, and so great were the logic, solemnity, and detail of these diagnoses that they lost only a little of their force through the fact that hardly any of the authors had had the slightest idea what was going to happen before the crisis occurred. Probably the most scholarly and detailed report on who did the selling that caused the crisis was furnished by the New York Stock Exchange itself, which began sending elaborate questionnaires to its individual and corporate members immediately after the commotion was over. The Exchange calculated that during the three days of the crisis rural areas of the country were more active in the market than they customarily are; that women investors had sold two and a half times as much stock as men investors; that foreign investors were far more active than usual, accounting for 5.5 per cent of the total volume, and, on balance, were substantial sellers; and, most striking of all, that what the Exchange calls “public individuals”—individual investors, as opposed to institutional ones, which is to say people who would be described anywhere but on Wall Street as private individuals—played an astonishingly large role in the whole affair, accounting for an unprecedented 56.8 per cent of the total volume. Breaking down the public individuals into income categories, the Exchange calculated that those with family incomes of over twenty-five thousand dollars a year were the heaviest and most insistent sellers, while those with incomes under ten thousand dollars, after selling on Monday and early on Tuesday, bought so many shares on Thursday that they actually became net buyers over the three-day period. Furthermore, according to the Exchange’s calculations, about a million shares—or 3.5 per cent of the total volume during the three days—were sold as a result of margin calls. In sum, if there was a villain, it appeared to have been the relatively rich investor not connected with the securities business—and, more often than might have been expected, the female, rural, or foreign one, in many cases playing the market partly on borrowed money.

The role of the hero was filled, surprisingly, by the most frightening of untested forces in the market—the mutual funds. The Exchange’s statistics showed that on Monday, when prices were plunging, the funds bought 530,000 more shares than they sold, while on Thursday, when investors in general were stumbling over each other trying to buy stock, the funds, on balance, sold 375,000 shares; in other words, far from increasing the market’s fluctuation, the funds actually served as a stabilizing force. Exactly how this unexpectedly benign effect came about remains a matter of debate. Since no one has been heard to suggest that the funds acted out of sheer public-spiritedness during the crisis, it seems safe to assume that they were buying on Monday because their managers had spotted bargains, and were selling on Thursday because of chances to cash in on profits. As for the problem of redemptions, there were, as had been feared, a large number of mutual-fund shareholders who demanded millions of dollars of their money in cash when the market crashed, but apparently the mutual funds had so much cash on hand that in most cases they could pay off their shareholders without selling substantial amounts of stock. Taken as a group, the funds proved to be so rich and so conservatively managed that they not only could weather the storm but, by happy inadvertence, could do something to decrease its violence. Whether the same conditions would exist in some future storm was and is another matter.

In the last analysis, the cause of the 1962 crisis remains unfathomable; what is known is that it occurred, and that something like it could occur again. As one of Wall Street’s aged, ever-anonymous seers put it recently, “I was concerned, but at no time did I think it would be another 1929. I never said the Dow-Jones would go down to four hundred. I said five hundred. The point is that now, in contrast to 1929, the government, Republican or Democratic, realizes that it must be attentive to the needs of business. There will never be apple-sellers on Wall Street again. As to whether what happened that May can happen again—of course it can. I think that people may be more careful for a year or two, and then we may see another speculative buildup followed by another crash, and so on until God makes people less greedy.”

Or, as de la Vega said, “It is foolish to think that you can withdraw from the Exchange after you have tasted the sweetness of the honey.”

2

The Fate of the Edsel

RISE AND FLOWERING

IN the calendar of American economic life, 1955 was the Year of the Automobile. That year, American automobile makers sold over seven million passenger cars, or over a million more than they had sold in any previous year. That year, General Motors easily sold the public $325 million worth of new common stock, and the stock market as a whole, led by the motors, gyrated upward so frantically that Congress investigated it. And that year, too, the Ford Motor Company decided to produce a new automobile in what was quaintly called the medium-price range—roughly, from $2,400 to $4,000—and went ahead and designed it more or less in conformity with the fashion of the day, which was for cars that were long, wide, low, lavishly decorated with chrome, liberally supplied with gadgets, and equipped with engines of a power just barely insufficient to send them into orbit. Two years later, in September, 1957, the Ford Company put its new car, the Edsel, on the market, to the accompaniment of more fanfare than had attended the arrival of any other new car since the same company’s Model A, brought out thirty years earlier. The total amount spent on the Edsel before the first specimen went on sale was announced as a quarter of a billion dollars; its launching—as Business Week declared and nobody cared to deny—was more costly than that of any other consumer product in history. As a starter toward getting its investment back, Ford counted on selling at least 200,000 Edsels the first year.

There may be an aborigine somewhere in a remote rain forest who hasn’t yet heard that things failed to turn out that way. To be precise, two years two months and fifteen days later Ford had sold only 109,466 Edsels, and, beyond a doubt, many hundreds, if not several thousands, of those were bought by Ford executives, dealers, salesmen, advertising men, assembly-line workers, and others who had a personal interest in seeing the car succeed. The 109,466 amounted to considerably less than one per cent of the passenger cars sold in the United States during that period, and on November 19, 1959, having lost, according to some outside estimates, around $350 million on the Edsel, the Ford Company permanently discontinued its production.

How could this have happened? How could a company so mightily endowed with money, experience, and, presumably, brains have been guilty of such a monumental mistake? Even before the Edsel was dropped, some of the more articulate members of the car-minded public had come forward with an answer—an answer so simple and so seemingly reasonable that, though it was not the only one advanced, it became widely accepted as the truth. The Edsel, these people argued, was designed, named, advertised, and promoted with a slavish adherence to the results of public-opinion polls and of their younger cousin, motivational research, and they concluded that when the public is wooed in an excessively calculated manner, it tends to turn away in favor of some gruffer but more spontaneously attentive suitor. Several years ago, in the face of an understandable reticence on the part of the Ford Motor Company, which enjoys documenting its boners no more than anyone else, I set out to learn what I could about the Edsel debacle, and my investigations have led me to believe that what we have here is less than the whole truth.

For, although the Edsel was supposed to be advertised, and otherwise promoted, strictly on the basis of preferences expressed in polls, some old-fashioned snake-oil-selling methods, intuitive rather than scientific, crept in. Although it was supposed to have been named in much the same way, science was curtly discarded at the last minute and the Edsel was named for the father of the company’s president, like a nineteenth-century brand of cough drops or saddle soap. As for the design, it was arrived at without even a pretense of consulting the polls, and by the method that has been standard for years in the designing of automobiles—that of simply pooling the hunches of sundry company committees. The common explanation of the Edsel’s downfall, then, under scrutiny, turns out to be largely a myth, in the colloquial sense of that term. But the facts of the case may live to become a myth of a symbolic sort—a modern American antisuccess story.

THE origins of the Edsel go back to the fall of 1948, seven years before the year of decision, when Henry Ford II, who had been president and undisputed boss of the company since the death of his grandfather, the original Henry, a year earlier, proposed to the company’s executive committee, which included Ernest R. Breech, the executive vice-president, that studies be undertaken concerning the wisdom of putting on the market a new and wholly different medium-priced car. The studies were undertaken. There appeared to be good reason for them. It was a well-known practice at the time for low-income owners of Fords, Plymouths, and Chevrolets to turn in their symbols of inferior caste as soon as their earnings rose above five thousand dollars a year, and “trade up” to a medium-priced car. From Ford’s point of view, this would have been all well and good except that, for some reason, Ford owners usually traded up not to Mercury, the company’s only medium-priced car, but to one or another of the medium-priced cars put out by its big rivals—Oldsmobile, Buick, and Pontiac, among the General Motors products, and, to a lesser extent, Dodge and De Soto, the Chrysler candidates. Lewis D. Crusoe, then a vice-president of the Ford Motor Company, was not overstating the case when he said, “We have been growing customers for General Motors.”

The outbreak of the Korean War, in 1950, meant that Ford had no choice but to go on growing customers for its competitors, since introducing a new car at such a time was out of the question. The company’s executive committee put aside the studies proposed by President Ford, and there matters rested for two years. Late in 1952, however, the end of the war appeared sufficiently imminent for the company to pick up where it had left off, and the studies were energetically resumed by a group called the Forward Product Planning Committee, which turned over much of the detailed work to the Lincoln-Mercury Division, under the direction of Richard Krafve (pronounced Kraffy), the division’s assistant general manager. Krafve, a forceful, rather saturnine man with a habitually puzzled look, was then in his middle forties. The son of a printer on a small farm journal in Minnesota, he had been a sales engineer and management consultant before joining Ford, in 1947, and although he could not have known it in 1952, he was to have reason to look puzzled. As the man directly responsible for the Edsel and its fortunes, enjoying its brief glory and attending it in its mortal agonies, he had a rendezvous with destiny.

IN December, 1954, after two years’ work, the Forward Product Planning Committee submitted to the executive committee a six-volume blockbuster of a report summarizing its findings. Supported by copious statistics, the report predicted the arrival of the American millennium, or something a lot like it, in 1965. By that time, the Forward Product Planning Committee estimated, the gross national product would be $535 billion a year—up more than $135 billion in a decade. (As a matter of fact, this part of the millennium arrived much sooner than the Forward Planners estimated. The G. N. P. passed $535 billion in 1962, and for 1965 was $681 billion.) The number of cars in operation would be seventy million—up twenty million. More than half the families in the nation would have incomes of over five thousand dollars a year, and more than 40 percent of all the cars sold would be in the medium-price range or better. The report’s picture of America in 1965, presented in crushing detail, was of a country after Detroit’s own heart—its banks oozing money, its streets and highways choked with huge, dazzling medium-priced cars, its newly rich, “upwardly mobile” citizens racked with longings for more of them. The moral was clear. If by that time Ford had not come out with a second medium-priced car—not just a new model, but a new make—and made it a favorite in its field, the company would miss out on its share of the national boodle.

On the other hand, the Ford bosses were well aware of the enormous risks connected with putting a new car on the market. They knew, for example, that of the 2,900 American makes that had been introduced since the beginning of the Automobile Age—the Black Crow (1905), the Averageman’s Car (1906), the Bug-mobile (1907), the Dan Patch (1911), and the Lone Star (1920) among them—only about twenty were still around. They knew all about the automotive casualties that had followed the Second World War—among them Crosley, which had given up altogether, and Kaiser Motors, which, though still alive in 1954, was breathing its last. (The members of the Forward Product Planning Committee must have glanced at each other uneasily when, a year later, Henry J. Kaiser wrote, in a valediction to his car business, “We expected to toss fifty million dollars into the automobile pond, but we didn’t expect it to disappear without a ripple.”) The Ford men also knew that neither of the other members of the industry’s powerful and well-heeled Big Three—General Motors and Chrysler—had ventured to bring out a new standard-size make since the former’s La Salle in 1927, and the latter’s Plymouth, in 1928, and that Ford itself had not attempted to turn the trick since 1938, when it launched the Mercury.

Nevertheless, the Ford men felt bullish—so remarkably bullish that they resolved to toss into the automobile pond five times the sum that Kaiser had. In April, 1955, Henry Ford II, Breech, and the other members of the executive committee officially approved the Forward Product Planning Committee’s findings, and, to implement them, set up another agency, called the Special Products Division, with the star-crossed Krafve as its head. Thus the company gave its formal sanction to the efforts of its designers, who, having divined the trend of events, had already been doodling for several months on plans for a new car. Since neither they nor the newly organized Krafve outfit, when it took over, had an inkling of what the thing on their drawing boards might be called, it became known to everybody at Ford, and even in the company’s press releases, as the E-Car—the “E,” it was explained, standing for “Experimental.”

The man directly in charge of the E-Car’s design—or, to use the gruesome trade word, “styling”—was a Canadian, then not yet forty, named Roy A. Brown, who, before taking on the E-Car (and after studying industrial design at the Detroit Art Academy), had had a hand in the designing of radios, motor cruisers, colored-glass products, Cadillacs, Oldsmobiles, and Lincolns.* Brown recently recalled his aspirations as he went to work on the new project. “Our goal was to create a vehicle which would be unique in the sense that it would be readily recognizable in styling theme from the nineteen other makes of cars on the road at that time,” he wrote from England, where at the time of his writing he was employed as chief stylist for the Ford Motor Company, Ltd., manufacturers of trucks, tractors, and small cars. “We went to the extent of making photographic studies from some distance of all nineteen of these cars, and it became obvious that at a distance of a few hundred feet the similarity was so great that it was practically impossible to distinguish one make from the others.… They were all ‘peas in a pod.’ We decided to select [a style that] would be ‘new’ in the sense that it was unique, and yet at the same time be familiar.”

While the E-Car was on the drawing boards in Ford’s styling studio—situated, like its administrative offices, in the company’s barony of Dearborn, just outside Detroit—work on it progressed under the conditions of melodramatic, if ineffectual, secrecy that invariably attend such operations in the automobile business: locks on the studio doors that could be changed in fifteen minutes if a key should fall into enemy hands; a security force standing round-the-clock guard over the establishment; and a telescope to be trained at intervals on nearby high points of the terrain where peekers might be roosting. (All such precautions, however inspired, are doomed to fail, because none of them provide a defense against Detroit’s version of the Trojan horse—the job-jumping stylist, whose cheerful treachery makes it relatively easy for the rival companies to keep tabs on what the competition is up to. No one, of course, is better aware of this than the rivals themselves, but the cloak-and-dagger stuff is thought to pay for itself in publicity value.) Twice a week or so, Krafve—head down, and sticking to low ground—made the journey to the styling studio, where he would confer with Brown, check up on the work as it proceeded, and offer advice and encouragement. Krafve was not the kind of man to envision his objective in a single revelatory flash; instead, he anatomized the styling of the E-Car into a series of laboriously minute decisions—how to shape the fenders, what pattern to use with the chrome, what kind of door handles to put on, and so on and on. If Michelangelo ever added the number of decisions that went into the execution of, say, his “David,” he kept it to himself, but Krafve, an orderly-minded man in an era of orderly-functioning computers, later calculated that in styling the E-Car he and his associates had to make up their minds on no fewer than four thousand occasions. He reasoned at the time that if they arrived at the right yes-or-no choice on every one of those occasions, they ought, in the end, to come up with a stylistically perfect car—or at least a car that would be unique and at the same time familiar. But Krafve concedes today that he found it difficult thus to bend the creative process to the yoke of system, principally because many of the four thousand decisions he made wouldn’t stay put. “Once you get a general theme, you begin narrowing down,” he says. “You keep modifying, and then modifying your modifications. Finally, you have to settle on something, because there isn’t any more time. If it weren’t for the deadline you’d probably go on modifying indefinitely.”

Except for later, minor modifications of the modified modifications, the E-Car had been fully styled by midsummer of 1955. As the world was to learn two years later, its most striking aspect was a novel, horse-collar-shaped radiator grille, set vertically in the center of a conventionally low, wide front end—a blend of the unique and the familiar that was there for all to see, though certainly not for all to admire. In two prominent respects, however, Brown or Krafve, or both, lost sight entirely of the familiar, specifying a unique rear end, marked by widespread horizontal wings that were in bold contrast to the huge longitudinal tail fins then captivating the market, and a unique cluster of automatic-transmission push buttons on the hub of the steering wheel. In a speech to the public delivered a while before the public had its first look at the car, Krafve let fall a hint or two about its styling, which, he said, made it so “distinctive” that, externally, it was “immediately recognizable from front, side, and rear,” and, internally, it was “the epitome of the push-button era without wild-blue-yonder Buck Rogers concepts.” At last came the day when the men in the highest stratum of the Ford Hierarchy were given their first glimpse of the car. It produced an effect that was little short of apocalyptic. On August 15, 1955, in the ceremonial secrecy of the styling center, while Krafve, Brown, and their aides stood by smiling nervously and washing their hands in air, the members of the Forward Product Planning Committee, including Henry Ford II and Breech, watched critically as a curtain was lifted to reveal the first full-size model of the E-Car—a clay one, with tinfoil simulating aluminum and chrome. According to eyewitnesses, the audience sat in utter silence for what seemed like a full minute, and then, as one man, burst into a round of applause. Nothing of the kind had ever happened at an intracompany first showing at Ford since 1896, when old Henry had bolted together his first horseless carriage.

ONE of the most persuasive and most frequently cited explanations of the Edsel’s failure is that it was a victim of the time lag between the decision to produce it and the act of putting it on the market. It was easy to see a few years later, when smaller and less powerful cars, euphemistically called “compacts,” had become so popular as to turn the old automobile status-ladder upside down, that the Edsel was a giant step in the wrong direction, but it was far from easy to see that in fat, tail-finny 1955. American ingenuity—which has produced the electric light, the flying machine, the tin Lizzie, the atomic bomb, and even a tax system that permits a man, under certain circumstances, to clear a profit by making a charitable donation *—has not yet found a way of getting an automobile on the market within a reasonable time after it comes off the drawing board; the making of steel dies, the alerting of retail dealers, the preparation of advertising and promotion campaigns, the gaining of executive approval for each successive move, and the various other gavotte-like routines that are considered as vital as breathing in Detroit and its environs usually consume about two years. Guessing future tastes is hard enough for those charged with planning the customary annual changes in models of established makes; it is far harder to bring out an altogether new creation, like the E-Car, for which several intricate new steps must be worked into the dance pattern, such as endowing the product with a personality and selecting a suitable name for it, to say nothing of consulting various oracles in an effort to determine whether, by the time of the unveiling, the state of the national economy will make bringing out any new car seem like a good idea.

Faithfully executing the prescribed routine, the Special Products Division called upon its director of planning for market research, David Wallace, to see what he could do about imparting a personality to the E-Car and giving it a name. Wallace, a lean, craggy-jawed pipe puffer with a soft, slow, thoughtful way of speaking, gave the impression of being the Platonic idea of the college professor—the very steel die from which the breed is cut—although, in point of fact, his background was not strongly academic. Before going to Ford, in 1955, he had worked his way through Westminster College, in Pennsylvania, ridden out the depression as a construction laborer in New York City, and then spent ten years in market research at Time. Still, impressions are what count, and Wallace has admitted that during his tenure with Ford he consciously stressed his professorial air for the sake of the advantage it gave him in dealing with the bluff, practical men of Dearborn. “Our department came to be regarded as a semi-Brain Trust,” he says, with a certain satisfaction. He insisted, typically, on living in Ann Arbor, where he could bask in the scholarly aura of the University of Michigan, rather than in Dearborn or Detroit, both of which he declared were intolerable after business hours. Whatever the degree of his success in projecting the image of the E-Car, he seems, by his small eccentricities, to have done splendidly at projecting the image of Wallace. “I don’t think Dave’s motivation for being at Ford was basically economic,” his old boss, Krafve, says. “Dave is the scholarly type, and I think he considered the job an interesting challenge.” One could scarcely ask for better evidence of image projection than that.

Wallace clearly recalls the reasoning—candid enough—that guided him and his assistants as they sought just the right personality for the E-Car. “We said to ourselves, ‘Let’s face it—there is no great difference in basic mechanism between a two-thousand-dollar Chevrolet and a six-thousand-dollar Cadillac,’” he says. “‘Forget about all the ballyhoo,’ we said, ‘and you’ll see that they are really pretty much the same thing. Nevertheless, there’s something—there’s got to be something—in the makeup of a certain number of people that gives them a yen for a Cadillac, in spite of its high price, or maybe because of it.’ We concluded that cars are the means to a sort of dream fulfillment. There’s some irrational factor in people that makes them want one kind of car rather than another—something that has nothing to do with the mechanism at all but with the car’s personality, as the customer imagines it. What we wanted to do, naturally, was to give the E-Car the personality that would make the greatest number of people want it. We figured we had a big advantage over the other manufacturers of medium-priced cars, because we didn’t have to worry about changing a pre-existent, perhaps somewhat obnoxious personality. All we had to do was create the exact one we wanted—from scratch.”

As the first step in determining what the E-Car’s exact personality should be, Wallace decided to assess the personalities of the medium-priced cars already on the market, and those of the so-called low-priced cars as well, since the cost of some of the cheap cars’ 1955 models had risen well up into the medium-price range. To this end, he engaged the Columbia University Bureau of Applied Social Research to interview eight hundred recent car buyers in Peoria, Illinois, and another eight hundred in San Bernardino, California, on the mental images they had of the various automobile makes concerned. (In undertaking this commercial enterprise, Columbia maintained its academic independence by reserving the right to publish its findings.) “Our idea was to get the reaction in cities, among clusters of people,” Wallace says. “We didn’t want a cross section. What we wanted was something that would show interpersonal factors. We picked Peoria as a place that is Midwestern, stereotyped, and not loaded with extraneous factors—like a General Motors glass plant, say. We picked San Bernardino because the West Coast is very important in the automobile business, and because the market there is quite different—people tend to buy flashier cars.”

The questions that the Columbia researchers fared forth to ask in Peoria and San Bernardino dealt exhaustively with practically everything having to do with automobiles except such matters as how much they cost, how safe they were, and whether they ran. In particular, Wallace wanted to know the respondents’ impressions of each of the existing makes. Who, in their opinion, would naturally own a Chevrolet or a Buick or whatever? People of what age? Of which sex? Of what social status? From the answers, Wallace found it easy to put together a personality portrait of each make. The image of the Ford came into focus as that of a very fast, strongly masculine car, of no particular social pretensions, that might characteristically be driven by a rancher or an automobile mechanic. In contrast, Chevrolet emerged as older, wiser, slower, a bit less rampantly masculine, and slightly more distingué—a clergyman’s car. Buick jelled into a middle-aged lady—or, at least, more of a lady than Ford, sex in cars having proved to be relative—with a bit of the devil still in her, whose most felicitous mate would be a lawyer, a doctor, or a dance-band leader. As for the Mercury, it came out as virtually a hot rod, best suited to a young-buck racing driver; thus, despite its higher price tag, it was associated with persons having incomes no higher than the average Ford owner’s, so no wonder Ford owners had not been trading up to it. This odd discrepancy between image and fact, coupled with the circumstance that, in sober truth all four makes looked very much alike and had almost the same horsepower under their hoods, only served to bear out Wallace’s premise that the automobile fancier, like a young man in love, is incapable of sizing up the object of his affections in anything resembling a rational manner.

By the time the researchers closed the books on Peoria and San Bernardino, they had elicited replies not only to these questions but to others, several of which, it would appear, only the most abstruse sociological thinker could relate to medium-priced cars. “Frankly, we dabbled,” Wallace says. “It was a dragnet operation.” Among the odds and ends that the dragnet dredged up were some that, when pieced together, led the researchers to report:

By looking at those respondents whose annual incomes range from $4,000 to $11,000, we can make an … observation. A considerable percentage of these respondents [to a question about their ability to mix cocktails] are in the “somewhat” category on ability to mix cocktails.… Evidently, they do not have much confidence in their cocktail-mixing ability. We may infer that these respondents are aware of the fact that they are in the learning process. They may be able to mix Martinis or Manhattans, but beyond these popular drinks they don’t have much of a repertoire.

Wallace, dreaming of an ideally lovable E-Car, was delighted as returns like these came pouring into his Dearborn office. But when the time for a final decision drew near, it became clear to him that he must put aside peripheral issues like cocktail-mixing prowess and address himself once more to the old problem of the image. And here, it seemed to him, the greatest pitfall was the temptation to aim, in accordance with what he took to be the trend of the times, for extremes of masculinity, youthfulness, and speed; indeed, the following passage from one of the Columbia reports, as he interpreted it, contained a specific warning against such folly.

Offhand we might conjecture that women who drive cars probably work, and are more mobile than non-owners, and get gratifications out of mastering a traditionally male role. But … there is no doubt that whatever gratifications women get out of their cars, and whatever social imagery they attach to their automobiles, they do want to appear as women. Perhaps more worldly women, but women.

Early in 1956, Wallace set about summing up all of his department’s findings in a report to his superiors in the Special Products Division. Entitled “The Market and Personality Objectives of the E-Car” and weighty with facts and statistics—though generously interspersed with terse sections in italics or capitals from which a hard-pressed executive could get the gist of the thing in a matter of seconds—the report first indulged in some airy, skippable philosophizing and then got down to conclusions:

What happens when an owner sees his make as a car which a woman might buy, but is himself a man? Does this apparent inconsistency of car image and the buyer’s own characteristics affect his trading plans? The answer quite definitely is Yes. When there is a conflict between owner characteristics and make image, there is greater planning to switch to another make. In other words, when the buyer is a different kind of person from the person he thinks would own his make, he wants to change to a make in which he, inwardly, will be more comfortable.

It should be noted that “conflict,” as used here, can be of two kinds. Should a make have a strong and well-defined image, it is obvious that an owner with strong opposing characteristics would be in conflict. But conflict also can occur when the make image is diffuse or weakly defined. In this case, the owner is in an equally frustrating position of not being able to get a satisfactory identification from his make.

The question, then, was how to steer between the Scylla of a too definite car personality and the Charybdis of a too weak personality. To this the report replied, “Capitalize on imagery weakness of competition,” and went on to urge that in the matter of age the E-Car should take an imagery position neither too young nor too old but right alongside that of the middling Olds-mobile; that in the matter of social class, not to mince matters, “the E-Car might well take a status position just below Buick and Oldsmobile”; and that in the delicate matter of sex it should try to straddle the fence, again along with the protean Olds. In sum (and in Wallace typography):

The most advantageous personality for the E-Car might well be THE SMART CAR FOR THE YOUNGER EXECUTIVE OR PROFESSIONAL FAMILY ON ITS WAY UP.

Smart car: recognition by others of the owner’s good style and taste.

Younger: appealing to spirited but responsible adventurers.

Executive or professional: millions pretend to this status, whether they can attain it or not.

Family: not exclusively masculine; a wholesome “good” role.

On Its Way Up: “The E-Car has faith in you, son; we’ll help you make it!”

Before spirited but responsible adventurers could have faith in the E-Car, however, it had to have a name. Very early in its history, Krafve had suggested to members of the Ford family that the new car be named for Edsel Ford, who was the only son of old Henry; the president of the Ford Motor Company from 1918 until his death, in 1943; and the father of the new generation of Fords—Henry II, Benson, and William Clay. The three brothers had let Krafve know that their father might not have cared to have his name spinning on a million hubcaps, and they had consequently suggested that the Special Products Division start looking around for a substitute. This it did, with a zeal no less emphatic than it displayed in the personality crusade. In the late summer and early fall of 1955, Wallace hired the services of several research outfits, which sent interviewers, armed with a list of two thousand possible names, to canvass sidewalk crowds in New York, Chicago, Willow Run, and Ann Arbor. The interviewers did not ask simply what the respondent thought of some such name as Mars, Jupiter, Rover, Ariel, Arrow, Dart, or Ovation. They asked what free associations each name brought to mind, and having got an answer to this one, they asked what word or words was considered the opposite of each name, on the theory that, subliminally speaking, the opposite is as much a part of a name as the tail is of a penny. The results of all this, the Special Products Division eventually decided, were inconclusive. Meanwhile, Krafve and his men held repeated sessions in a darkened room, staring, with the aid of a spotlight, at a series of cardboard signs, each bearing a name, as, one after another, they were flipped over for their consideration. One of the men thus engaged spoke up for the name Phoenix, because of its connotations of ascendancy, and another favored Altair, on the ground that it would lead practically all alphabetical lists of cars and thus enjoy an advantage analogous to that enjoyed in the animal kingdom by the aardvark. At a certain drowsy point in one session, somebody suddenly called a halt to the card-flipping and asked, in an incredulous tone, “Didn’t I see ‘Buick’ go by two or three cards back?” Everybody looked at Wallace, the impresario of the sessions. He puffed on his pipe, smiled an academic smile, and nodded.

THE card-flipping sessions proved to be as fruitless as the sidewalk interviews, and it was at this stage of the game that Wallace, resolving to try and wring from genius what the common mind had failed to yield, entered into the celebrated car-naming correspondence with the poet Marianne Moore, which was later published in The New Yorker and still later, in book form, by the Morgan Library. “We should like this name … to convey, through association or other conjuration, some visceral feeling of elegance, fleetness, advanced features and design,” Wallace wrote to Miss Moore, achieving a certain feeling of elegance himself. If it is asked who among the gods of Dearborn had the inspired and inspiriting idea of enlisting Miss Moore’s services in this cause, the answer, according to Wallace, is that it was no god but the wife of one of his junior assistants—a young lady who had recently graduated from Mount Holyoke, where she had heard Miss Moore lecture. Had her husband’s superiors gone a step further and actually adopted one of Miss Moore’s many suggestions—Intelligent Bullet, for instance, or Utopian Turtletop, or Bullet Cloisonné, or Pastelogram, or Mongoose Civique, or Andante con Moto (“Description of a good motor?” Miss Moore queried in regard to this last)—there is no telling to what heights the E-Car might have risen, but the fact is that they didn’t. Dissatisfied with both the poet’s ideas and their own, the executives in the Special Products Division next called in Foote, Cone & Belding, the advertising agency that had lately been signed up to handle the E-Car account. With characteristic Madison Avenue vigor, Foote, Cone & Belding organized a competition among the employees of its New York, London, and Chicago offices, offering nothing less than one of the brand-new cars as a prize to whoever thought up an acceptable name. In no time at all, Foote, Cone & Belding had eighteen thousand names in hand, including Zoom, Zip, Benson, Henry, and Drof (if in doubt, spell it backward). Suspecting that the bosses of the Special Products Division might regard this list as a trifle unwieldy, the agency got to work and cut it down to six thousand names, which it presented to them in executive session. “There you are,” a Foote, Cone man said triumphantly, flopping a sheaf of papers on the table. “Six thousand names, all alphabetized and cross-referenced.”

A gasp escaped Krafve. “But we don’t want six thousand names,” he said. “We only want one.”

The situation was critical, because the making of dies for the new car was about to begin and some of them would have to bear its name. On a Thursday, Foote, Cone & Belding canceled all leaves and instituted what is called a crash program, instructing its New York and Chicago offices to set about independently cutting down the list of six thousand names to ten and to have the job done by the end of the weekend. Before the weekend was over, the two Foote, Cone offices presented their separate lists of ten to the Special Products Division, and by an almost incredible coincidence, which all hands insist was a coincidence, four of the names on the two lists were the same; Corsair, Citation, Pacer, and Ranger had miraculously survived the dual scrutiny. “Corsair seemed to be head and shoulders above everything else,” Wallace says. “Along with other factors in its favor, it had done splendidly in the sidewalk interviews. The free associations with Corsair were rather romantic—‘pirate,’ ‘swashbuckler,’ things like that. For its opposite, we got ‘princess,’ or something else attractive on that order. Just what we wanted.”

Corsair or no Corsair, the E-Car was named the Edsel in the early spring of 1956, though the public was not informed until the following autumn. The epochal decision was reached at a meeting of the Ford executive committee held at a time when, as it happened, all three Ford brothers were away. In President Ford’s absence, the meeting was conducted by Breech, who had become chairman of the board in 1955, and his mood that day was brusque, and not one to linger long over swashbucklers and princesses. After hearing the final choices, he said, “I don’t like any of them. Let’s take another look at some of the others.” So they took another look at the favored rejects, among them the name Edsel, which, in spite of the three Ford brothers’ expressed interpretation of their father’s probable wishes, had been retained as a sort of anchor to windward. Breech led his associates in a patient scrutiny of the list until they came to “Edsel.” “Let’s call it that,” Breech said with calm finality. There were to be four main models of the E-Car, with variations on each one, and Breech soothed some of his colleagues by adding that the magic four—Corsair, Citation, Pacer, and Ranger—might be used, if anybody felt so inclined, as the subnames for the models. A telephone call was put through to Henry II, who was vacationing in Nassau. He said that if Edsel was the choice of the executive committee, he would abide by its decision, provided he could get the approval of the rest of his family. Within a few days, he got it.

As Wallace wrote to Miss Moore a while later: “We have chosen a name.… It fails somewhat of the resonance, gaiety, and zest we were seeking. But it has a personal dignity and meaning to many of us here. Our name, dear Miss Moore, is—Edsel. I hope you will understand.”

IT may be assumed that word of the naming of the E-Car spread a certain amount of despair among the Foote, Cone & Belding backers of more metaphorical names, none of whom won a free car—a despair heightened by the fact that the name “Edsel” had been ruled out of the competition from the first. But their sense of disappointment was as nothing compared to the gloom that enveloped many employees of the Special Products Division. Some felt that the name of a former president of the company, who had sired its current president, bore dynastic connotations that were alien to the American temper; others, who, with Wallace, had put their trust in the quirks of the mass unconscious, believed that “Edsel” was a disastrously unfortunate combination of syllables. What were its free associations? Pretzel, diesel, hard sell. What was its opposite? It didn’t seem to have any. Still, the matter was settled, and there was nothing to do but put the best possible face on it. Besides, the anguish in the Special Products Division was by no means unanimous, and Krafve himself, of course, was among those who had no objection to the name. He still has none, declining to go along with those who contend that the decline and fall of the Edsel may be dated from the moment of its christening.

Krafve, in fact, was so well pleased with the way matters had turned out that when, at eleven o’clock on the morning of November 19, 1956, after a long summer of thoughtful silence, the Ford Company released to the world the glad tidings that the E-Car had been named the Edsel, he accompanied the announcement with a few dramatic flourishes of his own. On the very stroke of that hour on that day, the telephone operators in Krafve’s domain began greeting callers with “Edsel Division” instead of “Special Products Division”; all stationery bearing the obsolete letterhead of the division vanished and was replaced by sheaves of paper headed “Edsel Division”; and outside the building a huge stainless-steel sign reading “EDSEL DIVISION” rose ceremoniously to the rooftop. Krafve himself managed to remain earthbound, though he had his own reasons for feeling buoyant; in recognition of his leadership of the E-Car project up to that point, he was given the august title of Vice-President of the Ford Motor Company and General Manager, Edsel Division.

From the administrative point of view, this off-with-the-old-on-with-the-new effect was merely harmless window dressing. In the strict secrecy of the Dearborn test track, vibrant, almost full-fledged Edsels, with their name graven on their superstructures, were already being road-tested; Brown and his fellow stylists were already well along with their designs for the next year’s Edsel; recruits were already being signed up for an entirely new organization of retail dealers to sell the Edsel to the public; and Foote, Cone & Belding, having been relieved of the burden of staging crash programs to collect names and crash programs to get rid of them again, was already deep in schemes for advertising the Edsel, under the personal direction of a no less substantial pillar of his trade than Fairfax M. Cone, the agency’s head man. In planning his campaign, Cone relied heavily on what had come to be called the “Wallace prescription”; that is, the formula for the Edsel’s personality as set forth by Wallace back in the days before the big naming bee—“The smart car for the younger executive or professional family on its way up.” So enthusiastic was Cone about the prescription that he accepted it with only one revision—the substitution of “middle-income” family for “younger executive,” his hunch being that there were more middle-income families around than young executives, or even people who thought they were young executives. In an expansive mood, possibly induced by his having landed an account that was expected to bring billings of well over ten million dollars a year, Cone described to reporters on several occasions the kind of campaign he was plotting for the Edsel—quiet, self-assured, and avoiding as much as possible the use of the adjective “new,” which, though it had an obvious application to the product, he considered rather lacking in cachet. Above all, the campaign was to be classic in its calmness. “We think it would be awful for the advertising to compete with the car,” Cone told the press. “We hope that no one will ever ask, ‘Say, did you see that Edsel ad?’ in any newspaper or magazine or on television, but, instead, that hundreds of thousands of people will say, and say again, ‘Man, did you read about that Edsel?’ or ‘Did you see that car?’ This is the difference between advertising and selling.” Evidently enough, Cone felt confident about the campaign and the Edsel. Like a chess master who has no doubt that he will win, he could afford to explicate the brilliance of his moves even as he made them.

Automobile men still talk, with admiration for the virtuosity displayed and a shudder at the ultimate outcome, of the Edsel Division’s drive to round up retail dealers. Ordinarily, an established manufacturer launches a new car through dealers who are already handling his other makes and who, to begin with, take on the upstart as a sort of sideline. Not so in the case of the Edsel; Krafve received authorization from on high to go all out and build up a retail-dealer organization by making raids on dealers who had contracts with other manufacturers, or even with the other Ford Company divisions—Ford and Lincoln-Mercury. (Although the Ford dealers thus corralled were not obliged to cancel their old contracts, all the emphasis was on signing up retail outlets exclusively dedicated to the selling of Edsels.) The goal set for Introduction Day—which, after a great deal of soul-searching, was finally established as September 4, 1957—was twelve hundred Edsel dealers from coast to coast. They were not to be just any dealers, either; Krafve made it clear that Edsel was interested in signing up only dealers whose records showed that they had a marked ability to sell cars without resorting to the high-pressure tricks of borderline legality that had lately been giving the automobile business a bad name. “We simply have to have quality dealers with quality service facilities,” Krafve said. “A customer who gets poor service on an established brand blames the dealer. On an Edsel, he will blame the car.” The goal of twelve hundred was a high one, for no dealer, quality or not, can afford to switch makes lightly. The average dealer has at least a hundred thousand dollars tied up in his agency, and in large cities the investment is much higher. He must hire salesmen, mechanics, and office help; buy his own tools, technical literature, and signs, the latter costing as much as five thousand dollars a set; and pay the factory spot cash for the cars he receives from it.

The man charged with mobilizing an Edsel sales force along these exacting lines was J. C. (Larry) Doyle, who, as general sales-and-marketing manager of the division, ranked second to Krafve himself. A veteran of forty years with the Ford Company, who had started with it as an office boy in Kansas City and had spent the intervening time mainly selling, Doyle was a maverick in his field. On the one hand, he had an air of kindness and consideration that made him the very antithesis of the glib, brash denizens of a thousand automobile rows across the continent, and, on the other, he did not trouble to conceal an old-time salesman’s skepticism about such things as analyzing the sex and status of automobiles, a pursuit he characterized by saying, “When I play pool, I like to keep one foot on the floor.” Still, he knew how to sell cars, and that was what the Edsel Division needed. Recalling how he and his sales staff brought off the unlikely trick of persuading substantial and reputable men who had already achieved success in one of the toughest of all businesses to tear up profitable franchises in favor of a risky new one, Doyle said not long ago, “As soon as the first few new Edsels came through, early in 1957, we put a couple of them in each of our five regional sales offices. Needless to say, we kept those offices locked and the blinds drawn. Dealers in every make for miles around wanted to see the car, if only out of curiosity, and that gave us the leverage we needed. We let it be known that we would show the car only to dealers who were really interested in coming with us, and then we sent our regional field managers out to surrounding towns to try to line up the No. 1 dealer in each to see the cars. If we couldn’t get No. 1, we’d try for No. 2. Anyway, we set things up so that no one got in to see the Edsel without listening to a complete one-hour pitch on the whole situation by a member of our sales force. It worked very well.” It worked so well that by midsummer, 1957, it was clear that Edsel was going to have a lot of quality dealers on Introduction Day. (In fact, it missed the goal of twelve hundred by a couple of dozen.) Indeed, some dealers in other makes were apparently so confident of the Edsel’s success, or so bemused by the Doyle staff’s pitch, that they were entirely willing to sign up after hardly more than a glance at the Edsel itself. Doyle’s people urged them to study the car closely, and kept reciting the litany of its virtues, but the prospective Edsel dealers would wave such protestations aside and demand a contract without further ado. In retrospect, it would seem that Doyle could have given lessons to the Pied Piper.

Now that the Edsel was no longer the exclusive concern of Dearborn, the Ford Company was irrevocably committed to going ahead. “Until Doyle went into action, the whole program could have been quietly dropped at any time at a word from top management, but once the dealers had been signed up, there was the matter of honoring your contract to put out a car,” Krafve has explained. The matter was attended to with dispatch. Early in June, 1957, the company announced that of the $250 million it had set aside to defray the advance costs of the Edsel, $150 million was being spent on basic facilities, including the conversion of various Ford and Mercury plants to the needs of producing the new cars; $50 million on special Edsel tooling; and $50 million on initial advertising and promotion. In June, too, an Edsel destined to be the star of a television commercial for future release was stealthily transported in a closed van to Hollywood, where, on a locked sound stage patrolled by security guards, it was exposed to the cameras in the admiring presence of a few carefully chosen actors who had sworn that their lips would be sealed from then until Introduction Day. For this delicate photographic operation the Edsel Division cannily enlisted the services of Cascade Pictures, which also worked for the Atomic Energy Commission, and, as far as is known, there were no unintentional leaks. “We took all the same precautions we take for our A.E.C. films,” a grim Cascade official has since said.

Within a few weeks, the Edsel Division had eighteen hundred salaried employees and was rapidly filling some fifteen thousand factory jobs in the newly converted plants. On July 15th, Edsels began rolling off assembly lines at Somerville, Massachusetts; Mahwah, New Jersey; Louisville, Kentucky; and San Jose, California. The same day, Doyle scored an important coup by signing up Charles Kreisler, a Manhattan dealer regarded as one of the country’s foremost practitioners in his field, who had represented Oldsmobile—one of Edsel’s self-designated rivals—before heeding the siren song from Dearborn. On July 22nd, the first advertisement for the Edsel appeared—in Life. A two-page spread in plain black-and-white, it was impeccably classic and calm, showing a car whooshing down a country highway at such high speed that it was an indistinguishable blur. “Lately, some mysterious automobiles have been seen on the roads,” the accompanying text was headed. It went on to say that the blur was an Edsel being road-tested, and concluded with the assurance “The Edsel is on its way.” Two weeks later, a second ad appeared in Life, this one showing a ghostly-looking car, covered with a white sheet, standing at the entrance to the Ford styling center. This time the headline read, “A man in your town recently made a decision that will change his life.” The decision, it was explained, was to become an Edsel dealer. Whoever wrote the ad cannot have known how truly he spoke.

DURING the tense summer of 1957, the man of the hour at Edsel was C. Gayle Warnock, director of public relations, whose duty was not so much to generate public interest in the forthcoming product, there being an abundance of that, as to keep the interest at white heat, and readily convertible into a desire to buy one of the new cars on or after Introduction Day—or, as the company came to call it, Edsel Day. Warnock, a dapper, affable man with a tiny mustache, is a native of Converse, Indiana, who, long before Krafve drafted him from the Ford office in Chicago, did a spot of publicity work for county fairs—a background that has enabled him to spice the honeyed smoothness of the modern public-relations man with a touch of the old carnival pitchman’s uninhibited spirit. Recalling his summons to Dearborn, Warnock says, “When Dick Krafve hired me, back in the fall of 1955, he told me, ‘I want you to program the E-Car publicity from now to Introduction Day.’ I said, ‘Frankly, Dick, what do you mean by “program”?’ He said he meant to sort of space it out, starting at the end and working backward. This was something new to me—I was used to taking what breaks I could get when I could get them—but I soon found out how right Dick was. It was almost too easy to get publicity for the Edsel. Early in 1956, when it was still called the E-Car, Krafve gave a little talk about it out in Portland, Oregon. We didn’t try for anything more than a play in the local press, but the wire services picked the story up and it went out all over the country. Clippings came in by the bushel. Right then I realized the trouble we might be headed for. The public was getting to be hysterical to see our car, figuring it was going to be some kind of dream car—like nothing they’d ever seen. I said to Krafve, ‘When they find out it’s got four wheels and one engine, just like the next car, they’re liable to be disappointed.’”

It was agreed that the safest way to tread the tightrope between overplaying and underplaying the Edsel would be to say nothing about the car as a whole but to reveal its individual charms a little at a time—a sort of automotive strip tease (a phrase that Warnock couldn’t with proper dignity use himself but was happy to see the New York Times use for him). The policy was later violated now and then, purposely or inadvertently. For one thing, as the pre-Edsel Day summer wore on, reporters prevailed upon Krafve to authorize Warnock to show the Edsel to them, one at a time, on what Warnock called a “peekaboo,” or “you’ve-seen-it-now-forget-it,” basis. And, for another, Edsels loaded on vans for delivery to dealers were appearing on the highways in ever-increasing numbers, covered fore and aft with canvas flaps that, as if to whet the desire of the motoring public, were forever blowing loose. That summer, too, was a time of speechmaking by an Edsel foursome consisting of Krafve, Doyle, J. Emmet Judge, who was Edsel’s director of merchandise and product planning, and Robert F. G. Copeland, its assistant general sales manager for advertising, sales promotion, and training. Ranging separately up and down and across the nation, the four orators moved around so fast and so tirelessly that Warnock, lest he lose track of them, took to indicating their whereabouts with colored pins on a map in his office. “Let’s see, Krafve goes from Atlanta to New Orleans, Doyle from Council Bluffs to Salt Lake City,” Warnock would muse of a morning in Dearborn, sipping his second cup of coffee and then getting up to yank the pins out and jab them in again.

Although most of Krafve’s audiences consisted of bankers and representatives of finance companies who it was hoped would lend money to Edsel dealers, his speeches that summer, far from echoing the general hoopla, were almost statesmanlike in their cautious—even somber—references to the new car’s prospects. And well they might have been, for developments in the general economic outlook of the nation were making more sanguine men than Krafve look puzzled. In July, 1957, the stock market went into a nose dive, marking the beginning of what is recalled as the recession of 1958. Then, early in August, a decline in the sales of medium-priced 1957 cars of all makes set in, and the general situation worsened so rapidly that, before the month was out, Automotive News reported that dealers in all makes were ending their season with the second-largest number of unsold new cars in history. If Krafve, on his lonely rounds, ever considered retreating to Dearborn for consolation, he was forced to put that notion out of his mind when, also in August, Mercury, Edsel’s own stablemate, served notice that it was going to make things as tough as possible for the newcomer by undertaking a million-dollar, thirty-day advertising drive aimed especially at “price-conscious buyers”—a clear reference to the fact that the 1957 Mercury, which was then being sold at a discount by most dealers, cost less than the new Edsel was expected to. Meanwhile, sales of the Rambler, which was the only American-made small car then in production, were beginning to rise ominously. In the face of all these evil portents, Krafve fell into the habit of ending his speeches with a rather downbeat anecdote about the board chairman of an unsuccessful dog-food company who said to his fellow directors, “Gentlemen, let’s face facts—dogs don’t like our product.” “As far as we’re concerned,” Krafve added on at least one occasion, driving home the moral with admirable clarity, “a lot will depend on whether people like our car or not.”

But most of the other Edsel men were unimpressed by Krafve’s misgivings. Perhaps the least impressed of all was Judge, who, while doing his bit as an itinerant speaker, specialized in community and civic groups. Undismayed by the limitations of the strip-tease policy, Judge brightened up his lectures by showing such a bewildering array of animated graphs, cartoons, charts, and pictures of parts of the car—all flashed on a CinemaScope screen—that his listeners usually got halfway home before they realized that he hadn’t shown them an Edsel. He wandered restlessly around the auditorium as he spoke, shifting the kaleidoscopic images on the screen at will with the aid of an automatic slide changer—a trick made possible by a crew of electricians who laced the place in advance with a maze of wires linking the device to dozens of floor switches, which, scattered about the hall, responded when he kicked them. Each of the “Judge spectaculars,” as these performances came to be known, cost the Edsel Division five thousand dollars—a sum that included the pay and expenses of the technical crew, who would arrive on the scene a day or so ahead of time to set up the electrical rig. At the last moment, Judge would descend melodramatically on the town by plane, hasten to the hall, and go into his act. “One of the greatest aspects of this whole Edsel program is the philosophy of product and merchandising behind it,” Judge might start off, with a desultory kick at a switch here, a switch there. “All of us who have been a part of it are real proud of this background and we are anxiously awaiting its success when the car is introduced this fall.… Never again will we be associated with anything as gigantic and full of meaning as this particular program.… Here is a glimpse of the car which will be before the American public on September 4, 1957 [at this point, Judge would show a provocative slide of a hubcap or section of fender].… It is a different car in every respect, yet it has an element of conservatism which will give it maximum appeal.… The distinctiveness of the frontal styling integrates with the sculptured patterns of the side treatment.…” And on and on Judge would rhapsodize, rolling out such awesome phrases as “sculptured sheet metal,” “highlight character,” and “graceful, flowing lines.” At last would come the ringing peroration. “We are proud of the Edsel!” he would cry, kicking switches right and left. “When it is introduced this fall, it will take its place on the streets and highways of America, bringing new greatness to the Ford Motor Company. This is the Edsel story.”

THE drum-roll climax of the strip tease was a three-day press preview of the Edsel, undraped from pinched-in snout to flaring rear, that was held in Detroit and Dearborn on August 26th, 27th, and 28th, with 250 reporters from all over the country in attendance. It differed from previous automotive jamborees of its kind in that the journalists were invited to bring their wives along—and many of them did. Before it was over, it had cost the Ford Company ninety thousand dollars. Grand as it was, the conventionality of its setting was a disappointment to Warnock, who had proposed, and seen rejected, three locales that he thought would provide a more offbeat ambiance—a steamer on the Detroit River (“wrong symbolism”); Edsel, Kentucky (“inaccessible by road”); and Haiti (“just turned down flat”). Thus hobbled, Warnock could do no better for the reporters and their wives when they converged on the Detroit scene on Sunday evening, August 25th, than to put them up at the discouragingly named Sheraton-Cadillac Hotel and to arrange for them to spend Monday afternoon hearing and reading about the long-awaited details of the entire crop of Edsels—eighteen varieties available, in four main lines (Corsair, Citation, Pacer, and Ranger), differing mainly in their size, power, and trim. The next morning, specimens of the models themselves were revealed to the reporters in the styling center’s rotunda, and Henry II offered a few words of tribute to his father. “The wives were not asked to the unveiling,” a Foote, Cone man who helped plan the affair recalls. “It was too solemn and businesslike an event for that. It went over fine. There was excitement even among the hardened newspapermen.” (The import of the stories that most of the excited newspapermen filed was that the Edsel seemed to be a good car, though not so radical as its billing had suggested.)

In the afternoon, the reporters were whisked out to the test track to see a team of stunt drivers put the Edsel through its paces. This event, calculated to be thrilling, turned out to be hair-raising, and even, for some, a little unstringing. Enjoined not to talk too much about speed and horsepower, since only a few months previously the whole automobile industry had nobly resolved to concentrate on making cars instead of delayed-action bombs, Warnock had decided to emphasize the Edsel’s liveliness through deeds rather than words, and to accomplish this he had hired a team of stunt drivers. Edsels ran over two-foot ramps on two wheels, bounced from higher ramps on all four wheels, were driven in crisscross patterns, grazing each other, at sixty or seventy miles per hour, and skidded into complete turns at fifty. For comic relief, there was a clown driver parodying the daredevil stuff. All the while, the voice of Neil L. Blume, Edsel’s engineering chief, could be heard on a loudspeaker, purring about “the capabilities, the safety, the ruggedness, the maneuverability and performance of these new cars,” and skirting the words “speed” and “horsepower” as delicately as a sandpiper skirts a wave. At one point, when an Edsel leaping a high ramp just missed turning over, Krafve’s face took on a ghastly pallor; he later reported that he had not known the daredevil stunts were going to be so extreme, and was concerned both for the good name of the Edsel and the lives of the drivers. Warnock, noticing his boss’s distress, went over and asked Krafve if he was enjoying the show. Krafve replied tersely that he would answer when it was over and all hands safe. But everyone else seemed to be having a grand time. The Foote, Cone man said, “You looked over this green Michigan hill, and there were those glorious Edsels, performing gloriously in unison. It was beautiful. It was like the Rockettes. It was exciting. Morale was high.”

Warnock’s high spirits had carried him to even wilder extremes of fancy. The stunt driving, like the unveiling, was considered too rich for the blood of the wives, but the resourceful Warnock was ready for them with a fashion show that he hoped they would find at least equally diverting. He need not have worried. The star of the show, who was introduced by Brown, the Edsel stylist, as a Paris couturière, both beautiful and talented, turned out at the final curtain to be a female impersonator—a fact of which Warnock, to heighten the verisimilitude of the act, had given Brown no advance warning. Things were never again quite the same since between Brown and Warnock, but the wives were able to give their husbands an extra paragraph or two for their stories.

That evening, there was a big gala for one and all at the styling center, which was itself styled as a night club for the occasion, complete with a fountain that danced in time with the music of Ray McKinley’s band, whose emblem, the letters “GM”—a holdover from the days of its founder, the late Glenn Miller—was emblazoned, as usual, on the music stand of each musician, very nearly ruining the evening for Warnock. The next morning, at a windup press conference held by Ford officials. Breech declared of the Edsel, “It’s a husky youngster, and, like most other new parents, we’re proud enough to pop our buttons.” Then seventy-one of the reporters took the wheels of as many Edsels and set out for home—not to drive the cars into their garages but to deliver them to the showrooms of their local Edsel dealers. Let Warnock describe the highlights of this final flourish: “There were several unfortunate occurrences. One guy simply miscalculated and cracked up his car running into something. No fault of the Edsel there. One car lost its oil pan, so naturally the motor froze. It can happen to the best of cars. Fortunately, at the time of this malfunction the driver was going through a beautiful-sounding town—Paradise, Kansas, I think it was—and that gave the news reports about it a nice little positive touch. The nearest dealer gave the reporter a new Edsel, and he drove on home, climbing Pikes Peak on the way. Then one car crashed through a tollgate when the brakes failed. That was bad. It’s funny, but the thing we were most worried about—other drivers being so eager to get a look at the Edsels that they’d crowd our cars off the road—happened only once. That was on the Pennsylvania Turnpike. One of our reporters was tooling along—no problems—when a Plymouth driver pulled up alongside to rubberneck, and edged so close that the Edsel got sideswiped. Minor damage.”

LATE in 1959, immediately after the demise of the Edsel, Business Week stated that at the big press preview a Ford executive had said to a reporter, “If the company weren’t in so deep, we never would have brought it out now.” However, since Business Week neglected to publish this patently sensational statement for over two years, and since to this day all the former ranking Edsel executives (Krafve included, notwithstanding his preoccupation with the luckless dog-food company) firmly maintained that right up to Edsel Day and even for a short time thereafter they expected the Edsel to succeed, it would seem that the quotation should be regarded as a highly suspect archaeological find. Indeed, during the period between the press preview and Edsel Day the spirit of everybody associated with the venture seems to have been one of wild optimism. “Oldsmobile, Goodbye!” ran the headline on an ad, in the Detroit Free Press, for an agency that was switching from Olds to Edsel. A dealer in Portland, Oregon, reported that he had already sold two Edsels, sight unseen. Warnock dug up a fireworks company in Japan willing to make him, at nine dollars apiece, five thousand rockets that, exploding in mid-air, would release nine-foot scale-model Edsels made of rice paper that would inflate and descend like parachutes; his head reeling with visions of filling America’s skies as well as its highways with Edsels on Edsel Day, Warnock was about to dash off an order when Krafve, looking something more than puzzled, shook his head.

On September 3rd—E Day-minus-one—the prices of the various Edsel models were announced; for cars delivered to New York they ran from just under $2,800 to just over $4,100. On E Day, the Edsel arrived. In Cambridge, a band led a gleaming motorcade of the new cars up Massachusetts Avenue; flying out of Richmond, California, a helicopter hired by one of the most jubilant of the dealers lassoed by Doyle spread a giant Edsel sign above San Francisco Bay; and all over the nation, from the Louisiana bayous to the peak of Mount Rainier to the Maine woods, one needed only a radio or a television set to know that the very air, despite Warnock’s setback on the rockets, was quivering with the presence of the Edsel. The tone for Edsel Day’s blizzard of publicity was set by an ad, published in newspapers all over the country, in which the Edsel shared the spotlight with the Ford Company’s President Ford and Chairman Breech. In the ad, Ford looked like a dignified young father, Breech like a dignified gentleman holding a full house against a possible straight, the Edsel just looked like an Edsel. The accompanying text declared that the decision to produce the car had been “based on what we knew, guessed, felt, believed, suspected—about you,” and added, “YOU are the reason behind the Edsel.” The tone was calm and confident. There did not seem to be much room for doubt about the reality of that full house.

Before sundown, it was estimated, 2,850,000 people had seen the new car in dealers’ showrooms. Three days later, in North Philadelphia, an Edsel was stolen. It can reasonably be argued that the crime marked the high-water mark of public acceptance of the Edsel; only a few months later, any but the least fastidious of car thieves might not have bothered.

DECLINE AND FALL

THE most striking physical characteristic of the Edsel was, of course, its radiator grille. This, in contrast to the wide and horizontal grilles of all nineteen other American makes of the time, was slender and vertical. Of chromium-plated steel, and shaped something like an egg, it sat in the middle of the car’s front end, and was embellished by the word “EDSEL” in aluminum letters running down its length. It was intended to suggest the front end of practically any car of twenty or thirty years ago and of most contemporary European cars, and thus to look at once seasoned and sophisticated. The trouble was that whereas the front ends of the antiques and the European cars were themselves high and narrow—consisting, indeed, of little more than the radiator grilles—the front end of the Edsel was broad and low, just like the front ends of all its American competitors. Consequently, there were wide areas on either side of the grille that had to be filled in with something, and filled in they were—with twin panels of entirely conventional horizontal chrome grillwork. The effect was that of an Oldsmobile with the prow of a Pierce-Arrow implanted in its front end, or, more metaphorically, of the charwoman trying on the duchess’ necklace. The attempt at sophistication was so transparent as to be endearing.

But if the grille of the Edsel appealed through guilelessness, the rear end was another matter. Here, too, there was a marked departure from the conventional design of the day. Instead of the notorious tail fin, the car had what looked to its fanciers like wings and to others, less ethereal-minded, like eyebrows. The lines of the trunk lid and the rear fenders, swooping upward and outward, did somewhat resemble the wings of a gull in flight, but the resemblance was marred by two long, narrow tail lights, set partly in the trunk lid and partly in the fenders, which followed those lines and created the startling illusion, especially at night, of a slant-eyed grin. From the front, the Edsel seemed, above all, anxious to please, even at the cost of being clownish; from the rear it looked crafty, Oriental, smug, one-up—maybe a little cynical and contemptuous, too. It was as if, somewhere between grille and rear fenders, a sinister personality change had taken place.

In other respects, the exterior styling of the Edsel was not far out of the ordinary. Its sides were festooned with a bit less than the average amount of chrome, and distinguished by a gouged-out bullet-shaped groove extending forward from the rear fender for about half the length of the car. Midway along this groove, the word “EDSEL” was displayed in chrome letters, and just below the rear window was a small grille-like decoration, on which was spelled out—of all things—“EDSEL.” (After all, hadn’t Stylist Brown declared his intention to create a vehicle that would be “readily recognizable”?) In its interior, the Edsel strove mightily to live up to the prediction of General Manager Krafve that the car would be “the epitome of the push-button era.” The push-button era in medium-priced cars being what it was, Krafve’s had been a rash prophecy indeed, but the Edsel rose to it with a devilish assemblage of gadgets such as had seldom, if ever, been seen before. On or near the Edsel’s dashboard were a push button that popped the trunk lid open; a lever that popped the hood open; a lever that released the parking brake; a speedometer that glowed red when the driver exceeded his chosen maximum speed; a single-dial control for both heating and cooling; a tachometer, in the best racing-car style; buttons to operate or regulate the lights, the height of the radio antenna, the heater-blower, the windshield wiper, and the cigarette lighter; and a row of eight red lights to wink warnings that the engine was too hot, that it wasn’t hot enough, that the generator was on the blink, that the parking brake was on, that a door was open, that the oil pressure was low, that the oil level was low, and that the gasoline level was low, the last of which the skeptical driver could confirm by consulting the gas gauge, mounted a few inches away. Epitomizing this epitome, the automatic-transmission control box—arrestingly situated on top of the steering post, in the center of the wheel—sprouted a galaxy of five push buttons so light to the touch that, as Edsel men could hardly be restrained from demonstrating, they could be depressed with a toothpick.

Of the four lines of Edsels, both of the two larger and more expensive ones—the Corsair and the Citation—were 219 inches long, or two inches longer than the biggest of the Oldsmobiles; both were eighty inches wide, or about as wide as passenger cars ever get; and the height of both was only fifty-seven inches, as low as any other medium-priced car. The Ranger and the Pacer, the smaller Edsels, were six inches shorter, an inch narrower, and an inch lower than the Corsair and the Citation. The Corsair and the Citation were equipped with 345-horsepower engines, making them more powerful than any other American car at the time of their debut, and the Ranger and the Pacer were good for 303 horsepower, near the top in their class. At the touch of a toothpick to the “Drive” button, an idling Corsair or Citation sedan (more than two tons of car, in either case) could, if properly skippered, take off with such abruptness that in ten and three-tenths seconds it would be doing a mile a minute, and in seventeen and a half seconds it would be a quarter of a mile down the road. If anything or anybody happened to be in the way when the toothpick touched the push button, so much the worse.

WHEN the wraps were taken off the Edsel, it received what is known in the theatrical business as a mixed press. The automotive editors of the daily newspapers stuck mostly to straight descriptions of the car, with only here and there a phrase or two of appraisal, some of it ambiguous (“The difference in style is spectacular,” noted Joseph C. Ingraham in the New York Times) and some of it openly favorable (“A handsome and hard-punching newcomer,” said Fred Olmstead, in the Detroit Free Press). Magazine criticism was generally more exhaustive and occasionally more severe. Motor Trend, the largest monthly devoted to ordinary automobiles, as distinct from hot rods, devoted eight pages of its October, 1957, issue to an analysis and critique of the Edsel by Joe H. Wherry, its Detroit editor. Wherry liked the car’s appearance, its interior comfort, and its gadgets, although he did not always make it clear just why; in paying his respects to the transmission buttons on the steering post, he wrote, “You need not take your eyes off the road for an instant.” He conceded that there were “untold opportunities for more … unique approaches,” but he summed up his opinion in a sentence that fairly peppered the Edsel with honorific adverbs: “The Edsel performs fine, rides well, and handles good.” Tom McCahill, of Mechanix Illustrated, generally admired the “bolt bag,” as he affectionately called the Edsel, but he had some reservations, which, incidentally, throw some interesting light on an automobile critic’s equivalent of an aisle seat. “On ribbed concrete,” he reported, “every time I shot the throttle to the floor quickly, the wheels spun like a gone-wild Waring Blendor.… At high speeds, especially through rough corners, I found the suspension a little too horsebacky.… I couldn’t help but wonder what this salami would really do if it had enough road adhesion.”

By far the most downright—and very likely the most damaging—panning that the Edsel got during its first months appeared in the January, 1958, issue of the Consumers Union monthly, Consumer Reports, whose 800,000 subscribers probably included more potential Edsel buyers than have ever turned the pages of Motor Trend or Mechanix Illustrated. After having put a Corsair through a series of road tests, Consumer Reports declared:

The Edsel has no important basic advantages over other brands. The car is almost entirely conventional in construction.… The amount of shake present in this Corsair body on rough roads—which wasn’t long in making itself heard as squeaks and rattles—went well beyond any acceptable limit.… The Corsair’s handling qualities—sluggish, over-slow steering, sway and lean on turns, and a general detached-from-the-road feel—are, to put it mildly, without distinction. As a matter of, simple fact, combined with the car’s tendency to shake like jelly, Edsel handling represents retrogression rather than progress.… Stepping on the gas in traffic, or in passing cars, or just to feel the pleasurable surge of power, will cause those big cylinders really to lap up fuel.… The center of the steering wheel is not, in CU’s opinion, a good pushbutton location.… To look at the Edsel buttons pulls the driver’s eyes clear down off the road. [Pace Mr. Wherry.] The “luxury-loaded” Edsel—as one magazine cover described it—will certainly please anyone who confuses gadgetry with true luxury.

Three months later, in a roundup of all the 1958-model cars, Consumer Reports went at the Edsel again, calling it “more uselessly overpowered … more gadget bedecked, more hung with expensive accessories than any car in its price class,” and giving the Corsair and the Citation the bottom position in its competitive ratings. Like Krafve, Consumer Reports considered the Edsel an epitome; unlike Krafve, the magazine concluded that the car seemed to “epitomize the many excesses” with which Detroit manufacturers were “repulsing more and more potential car buyers.”

AND yet, in a way, the Edsel wasn’t so bad. It embodied much of the spirit of its time—or at least of the time when it was designed, early in 1955. It was clumsy, powerful, dowdy, gauche, well-meaning—a de Kooning woman. Few people, apart from employees of Foote, Cone & Belding, who were paid to do so, have adequately hymned its ability, at its best, to coax and jolly the harried owner into a sense of well-being. Furthermore, the designers of several rival makes, including Chevrolet, Buick, and Ford, Edsel’s own stablemate, later flattered Brown’s styling by imitating at least one feature of the car’s much reviled lines—the rear-end wing theme. The Edsel was obviously jinxed, but to say that it was jinxed by its design alone would be an oversimplification, as it would be to say that it was jinxed by an excess of motivational research. The fact is that in the short, unhappy life of the Edsel a number of other factors contributed to its commercial downfall. One of these was the scarcely believable circumstance that many of the very first Edsels—those obviously destined for the most glaring public limelight—were dramatically imperfect. By its preliminary program of promotion and advertising, the Ford Company had built up an overwhelming head of public interest in the Edsel, causing its arrival to be anticipated and the car itself to be gawked at with more eagerness than had ever greeted any automobile before it. After all that, it seemed, the car didn’t quite work. Within a few weeks after the Edsel was introduced, its pratfalls were the talk of the land. Edsels were delivered with oil leaks, sticking hoods, trunks that wouldn’t open, and push buttons that, far from yielding to a toothpick, couldn’t be budged with a hammer. An obviously distraught man staggered into a bar up the Hudson River, demanding a double shot without delay and exclaiming that the dashboard of his new Edsel had just burst into flame. Automotive News reported that in general the earliest Edsels suffered from poor paint, inferior sheet metal, and faulty accessories, and quoted the lament of a dealer about one of the first Edsel convertibles he received: “The top was badly set, doors cockeyed, the header bar trimmed at the wrong angle, and the front springs sagged.” The Ford Company had the particular bad luck to sell to Consumers Union—which buys its test cars in the open market, as a precaution against being favored with specially doctored samples—an Edsel in which the axle ratio was wrong, an expansion plug in the cooling system blew out, the power-steering pump leaked, the rear-axle gears were noisy, and the heater emitted blasts of hot air when it was turned off. A former executive of the Edsel Division has estimated that only about half of the first Edsels really performed properly.

A layman cannot help wondering how the Ford Company, in all its power and glory, could have been guilty of such a Mack Sennett routine of buildup and anticlimax. The wan, hard-working Krafve explains gamely that when a company brings out a new model of any make—even an old and tested one—the first cars often have bugs in them. A more startling theory—though only a theory—is that there may have been sabotage in some of the four plants that assembled the Edsel, all but one of which had previously been, and currently also were, assembling Fords or Mercurys. In marketing the Edsel, the Ford Company took a leaf out of the book of General Motors, which for years had successfully been permitting, and even encouraging, the makers and sellers of its Oldsmobiles, Buicks, Pontiacs, and the higher-priced models of its Chevrolet to fight for customers with no quarter given; faced with the same sort of intramural competition, some members of the Ford and Lincoln-Mercury Divisions of the Ford Company openly hoped from the start for the Edsel’s downfall. (Krafve, realizing what might happen, had asked that the Edsel be assembled in plants of its own, but his superiors turned him down.) However, Doyle, speaking with the authority of a veteran of the automobile business as well as with that of Krafve’s second-in-command, pooh-poohs the notion that the Edsel was the victim of dirty work at the plants. “Of course the Ford and Lincoln-Mercury Divisions didn’t want to see another Ford Company car in the field,” he says, “but as far as I know, anything they did at the executive and plant levels was in competitive good taste. On the other hand, at the distribution and dealer level, you got some rough infighting in terms of whispering and propaganda. If I’d been in one of the other divisions, I’d have done the same thing.” No proud defeated general of the old school ever spoke more nobly.

It is a tribute of sorts to the men who gave the Edsel its big buildup that although cars tending to rattle, balk, and fall apart into shiny heaps of junk kept coming off the assembly lines, things didn’t go badly at first. Doyle says that on Edsel Day more than 6,500 Edsels were either ordered by or actually delivered to customers. That was a good showing, but there were isolated signs of resistance. For instance, a New England dealer selling Edsels in one showroom and Buicks in another reported that two prospects walked into the Edsel showroom, took a look at the Edsel, and placed orders for Buicks on the spot.

In the next few days, sales dropped sharply, but that was to be expected once the bloom was off. Automobile deliveries to dealers—one of the important indicators in the trade—are customarily measured in ten-day periods, and during the first ten days of September, on only six of which the Edsel was on sale, it racked up 4,095; this was lower than Doyle’s first-day figure because many of the initial purchases were of models and color combinations not in stock, which had to be factory-assembled to order. The delivery total for the second ten-day period was off slightly, and that for the third was down to just under 3,600. For the first ten days of October, nine of which were business days, there were only 2,751 deliveries—an average of just over three hundred cars a day. In order to sell the 200,000 cars per year that would make the Edsel operation profitable the Ford Company would have to move an average of between six and seven hundred each business day—a good many more than three hundred a day. On the night of Sunday, October 13th, Ford put on a mammoth television spectacular for Edsel, pre-empting the time ordinarily allotted to the Ed Sullivan show, but though the program cost $400,000 and starred Bing Crosby and Frank Sinatra, it failed to cause any sharp spurt in sales. Now it was obvious that things were not going at all well.

Among the former executives of the Edsel Division, opinions differ as to the exact moment when the portents of doom became unmistakable. Krafve feels that the moment did not arrive until sometime late in October. Wallace, in his capacity as Edsel’s pipe-smoking semi-Brain Truster, goes a step further by pinning the start of the disaster to a specific date—October 4th, the day the first Soviet sputnik went into orbit, shattering the myth of American technical pre-eminence and precipitating a public revulsion against Detroit’s fancier baubles. Public Relations Director Warnock maintains that his barometric sensitivity to the public temper enabled him to call the turn as early as mid-September; contrariwise, Doyle says he maintained his optimism until mid-November, by which time he was about the only man in the division who had not concluded it would take a miracle to save the Edsel. “In November,” says Wallace, sociologically, “there was panic, and its concomitant—mob action.” The mob action took the form of a concerted tendency to blame the design of the car for the whole debacle; Edsel men who had previously had nothing but lavish praise for the radiator grille and rear end now went around muttering that any fool could see they were ludicrous. The obvious sacrificial victim was Brown, whose stock had gone through the roof at the time of the regally accoladed debut of his design, in August, 1955. Now, without having done anything further, for either better or worse, the poor fellow became the company scapegoat. “Beginning in November, nobody talked to Roy,” Wallace says. On November 27th, as if things weren’t bad enough, Charles Kreisler, who as the only Edsel dealer in Manhattan provided its prize showcase, announced that he was turning in his franchise because of poor sales, and it was rumored that he added, “The Ford Motor Company has laid an egg.” He thereupon signed up with American Motors to sell its Rambler, which, as the only domestic small car then on the market, was already the possessor of a zooming sales curve. Doyle grimly commented that the Edsel Division was “not concerned” about Kreisler’s defection.

By December, the panic at Edsel had abated to the point where its sponsors could pull themselves together and begin casting about for ways to get sales moving again. Henry Ford II, manifesting himself to Edsel dealers on closed-circuit television, urged them to remain calm, promised that the company would back them to the limit, and said flatly, “The Edsel is here to stay.” A million and a half letters went out over Krafve’s signature to owners of medium-priced cars, asking them to drop around at their local dealers and test-ride the Edsel; everyone doing so, Krafve promised, would be given an eight-inch plastic scale model of the car, whether he bought a full-size one or not. The Edsel Division picked up the check for the scale models—a symptom of desperation indeed, for under normal circumstances no automobile manufacturer would make even a move to outfumble its dealers for such a tab. (Up to that time, the dealers had paid for everything, as is customary.) The division also began offering its dealers what it called “sales bonuses,” which meant that the dealers could knock anything from one hundred to three hundred dollars off the price of each car without reducing their profit margin. Krafve told a reporter that sales up to then were about what he had expected them to be, although not what he had hoped they would be; in his zeal not to seem unpleasantly surprised, he appeared to be saying that he had expected the Edsel to fail. The Edsel’s advertising campaign, which had started with studied dignity, began to sound a note of stridency. “Everyone who has seen it knows—with us—that the Edsel is a success,” a magazine ad declared, and in a later ad this phrase was twice repeated, like an incantation: “The Edsel is a success. It is a new idea—a YOU idea—on the American Road.… The Edsel is a success.” Soon the even less high-toned but more dependable advertising themes of price and social status began to intrude, in such sentences as “They’ll know you’ve arrived when you drive up in an Edsel” and “The one that’s really new is the lowest-priced, too!” In the more rarefied sectors of Madison Avenue, a resort to rhymed slogans is usually regarded as an indication of artistic depravity induced by commercial necessity.

From the frantic and costly measures the Edsel Division took in December, it garnered one tiny crumb: for the first ten-day period of 1958, it was able to report, sales were up 18.6 percent over those of the last ten days of 1957. The catch, as the Wall Street Journal alertly noted, was that the latter period embraced one more selling day than the earlier one, so, for practical purposes, there had scarcely been a gain at all. In any case, that early-January word of meretricious cheer turned out to be the Edsel Division’s last gesture. On January 14, 1958, the Ford Motor Company announced that it was consolidating the Edsel Division with the Lincoln-Mercury Division to form a Mercury-Edsel-Lincoln Division, under the management of James J. Nance, who had been running Lincoln-Mercury. It was the first time that one of the major automobile companies had lumped three divisions into one since General Motors’ merger of Buick, Oldsmobile, and Pontiac back in the depression, and to the people of the expunged Edsel Division the meaning of the administrative move was all too clear. “With that much competition in a division, the Edsel wasn’t going anywhere,” Doyle says. “It became a stepchild.”

FOR the last year and ten months of its existence, the Edsel was very much a stepchild—generally neglected, little advertised, and kept alive only to avoid publicizing a boner any more than necessary and in the forlorn hope that it might go somewhere after all. What advertising it did get strove quixotically to assure the automobile trade that everything was dandy; in mid-February an ad in Automotive News had Nance saying,

Since the formation of the new M-E-L Division at Ford Motor Company, we have analyzed with keen interest the sales progress of the Edsel. We think it is quite significant that during the five months since the Edsel was introduced, Edsel sales have been greater than the first five months’ sales for any other new make of car ever introduced on the American Road.… Edsel’s steady progress can be a source of satisfaction and a great incentive to all of us.

Nance’s comparison, however, was almost meaningless, no new make ever having been introduced anything like so grandiosely, and the note of confidence could not help ringing hollow.

It is quite possible that Nance’s attention was never called to an article by S. I. Hayakawa, the semanticist, that was published in the spring of 1958 in ETC: A Review of General Semantics, a quarterly magazine, under the title, “Why the Edsel Laid an Egg.” Hayakawa, who was both the founder and the editor of ETC, explained in an introductory note that he considered the subject within the purview of general semantics because automobiles, like words, are “important … symbols in American culture,” and went on to argue that the Edsel’s flop could be attributed to Ford Company executives who had been “listening too long to the motivation-research people” and who, in their efforts to turn out a car that would satisfy customers’ sexual fantasies and the like, had failed to supply reasonable and practical transportation, thereby neglecting “the reality principle.” “What the motivation researchers failed to tell their clients … is that only the psychotic and the gravely neurotic act out their irrationalities and their compensatory fantasies,” Hayakawa admonished Detroit briskly, and added, “The trouble with selling symbolic gratification via such expensive items as … the Edsel Hermaphrodite … is the competition offered by much cheaper forms of symbolic gratification, such as Playboy (fifty cents a copy), Astounding Science Fiction (thirty-five cents a copy), and television (free).”

Notwithstanding the competition from Playboy, or possibly because the symbol-motivated public included people who could afford both, the Edsel kept rolling—but just barely. The car moved, as salesmen say, though hardly at the touch of a toothpick. In fact, as a stepchild it sold about as well as it had sold as a favorite son, suggesting that all the hoopla, whether about symbolic gratification or mere horsepower, had had little effect one way or the other. The new Edsels that were registered with the motor-vehicle bureaus of the various states during 1958 numbered 34,481—considerably fewer than new cars of any competing make, and less than one-fifth of the 200,000 a year necessary if the Edsel was to show a profit, but still representing an investment by motorists of over a hundred million dollars. The picture actually brightened in November, 1958, with the advent of the Edsel’s second-year models. Shorter by up to eight inches, lighter by up to five hundred pounds, and with engines less potent by as much as 158 horsepower, they had a price range running from five hundred to eight hundred dollars less than that of their predecessors. The vertical grille and the slant-eyed rear end were still there, but the modest power and proportions persuaded Consumer Reports to relent and say, “The Ford Motor Company, after giving last year’s initial Edsel model a black eye, has made a respectable and even likable automobile of it.” Quite a number of motorists seemed to agree; about two thousand more Edsels were sold in the first half of 1959 than had been sold in the first half of 1958, and by the early summer of 1959 the car was moving at the rate of around four thousand a month. Here, at last, was progress; sales were at almost a quarter of the minimum profitable rate, instead of a mere fifth.

On July 1, 1959, there were 83,849 Edsels on the country’s roads. The largest number (8,344) were in California, which is perennially beset with far and away the largest number of cars of practically all makes, and the smallest number were in Alaska, Vermont, and Hawaii (122, 119, and 110, respectively). All in all, the Edsel seemed to have found a niche for itself as an amusingly eccentric curiosity. Although the Ford Company, with its stockholders’ money still disappearing week after week into the Edsel, and with small cars now clearly the order of the day, could scarcely affect a sentimental approach to the subject, it nonetheless took an outside chance and, in mid-October of 1959, brought out a third series of annual models. The 1960 Edsel appeared a little more than a month after the Falcon, Ford’s first—and instantly successful—venture into the small-car field, and was scarcely an Edsel at all; gone were both the vertical grille and the horizontal rear end, and what remained looked like a cross between a Ford Fairlane and a Pontiac. Its initial sales were abysmal; by the middle of November only one plant—in Louisville, Kentucky—was still turning out Edsels, and it was turning out only about twenty a day. On November 19th, the Ford Foundation, which was planning to sell a block of its vast holdings of stock in the Ford Motor Company, issued the prospectus that is required by law under such circumstances, and stated therein, in a footnote to a section describing the company’s products, that the Edsel had been “introduced in September 1957 and discontinued in November 1959.” The same day, this mumbled admission was confirmed and amplified by a Ford Company spokesman, who did some mumbling of his own. “If we knew the reason people aren’t buying the Edsel, we’d probably have done something about it,” he said.

The final quantitative box score shows that from the beginning right up to November 19th, 110,810 Edsels were produced and 109,466 were sold. (The remaining 1,344, almost all of them 1960 models, were disposed of in short order with the help of drastic price cuts.) All told, only 2,846 of the 1960 Edsels were ever produced, making models of that year a potential collector’s item. To be sure, it will be generations before 1960 Edsels are as scarce as the Type 41 Bugatti, of which no more than eleven specimens were made, back in the late twenties, to be sold only to bona-fide kings, and the 1960 Edsel’s reasons for being a rarity are not exactly as acceptable, socially or commercially, as the Type 41 Bugatti’s. Still, a 1960-Edsel Owners’ Club may yet appear.

The final fiscal box score on the Edsel fiasco will probably never be known, because the Ford Motor Company’s public reports do not include breakdowns of gains and losses within the individual divisions. Financial buffs estimate, however, that the company lost something like $200 million on the Edsel after it appeared; add to this the officially announced expenditure of $250 million before it appeared, subtract about a hundred million invested in plant and equipment that were salvageable for other uses, and the net loss is $350 million. If these estimates are right, every Edsel the company manufactured cost it in lost money about $3,200, or about the price of another one. In other, harsher words, the company would have saved itself money if, back in 1955, it had decided not to produce the Edsel at all but simply to give away 110,810 specimens of its comparably priced car, the Mercury.

THE end of the Edsel set off an orgy of hindsight in the press. Time declared, “The Edsel was a classic case of the wrong car for the wrong market at the wrong time. It was also a prime example of the limitations of market research, with its ‘depth interviews’ and ‘motivational’ mumbo-jumbo.” Business Week, which shortly before the Edsel made its bow had described it with patent solemnity and apparent approval, now pronounced it “a nightmare” and appended a few pointedly critical remarks about Wallace’s research, which was rapidly achieving a scapegoat status equal to that of Brown’s design. (Jumping up and down on motivational research was, and is, splendid sport, but, of course, the implication that it dictated, or even influenced, the Edsel’s design is entirely false, since the research, being intended only to provide a theme for advertising and promotion, was not undertaken until after Brown had completed his design.) The Wall Street Journal’s obituary of the Edsel made a point that was probably sounder, and certainly more original.

Large corporations are often accused of rigging markets, administering prices, and otherwise dictating to the consumer [it observed]. And yesterday Ford Motor Company announced its two-year experiment with the medium-priced Edsel has come to an end … for want of buyers. All this is quite a ways from auto makers being able to rig markets or force consumers to take what they want them to take.… And the reason, simply, is that there is no accounting for tastes.… When it comes to dictating, the consumer is the dictator without peer.

The tone of the piece was friendly and sympathetic; the Ford Company, it seemed, had endeared itself to the Journal by playing the great American situation-comedy role of Daddy the Bungler.

As for the post-mortem explanations of the debacle that have been offered by former Edsel executives, they are notable for their reflective tone—something like that of a knocked-out prize fighter opening his eyes to find an announcer’s microphone pushed into his face. In fact, Krafve, like many a flattened pugilist, blames his own bad timing; he contends that if he had been able to thwart the apparently immutable mechanics and economics of Detroit, and had somehow been able to bring out the Edsel in 1955, or even 1956, when the stock market and the medium-priced-car market were riding high, the car would have done well and would still be doing well. That is to say, if he had seen the punch coming, he would have ducked. Krafve refuses to go along with a sizable group of laymen who tend to attribute the collapse to the company’s decision to call the car the Edsel instead of giving it a brisker, more singable name, reducible to a nickname other than “Ed” or “Eddie,” and not freighted with dynastic connotations. As far as he can see, Krafve still says, the Edsel’s name did not affect its fortunes one way or the other.

Brown agrees with Krafve that bad timing was the chief mistake. “I frankly feel that the styling of the automobile had very little, if anything, to do with its failure,” he said later, and his frankness may pretty safely be left unchallenged. “The Edsel program, like any other project planned for future markets, was based on the best information available at the time in which decisions were made. The road to Hell is paved with good intentions!”

Doyle, with the born salesman’s intensely personal feeling about his customers, talks like a man betrayed by a friend—the American public. “It was a buyers’ strike,” he says. “People weren’t in the mood for the Edsel. Why not is a mystery to me. What they’d been buying for several years encouraged the industry to build exactly this kind of car. We gave it to them, and they wouldn’t take it. Well, they shouldn’t have acted like that. You can’t just wake up somebody one day and say, ‘That’s enough, you’ve been running in the wrong direction.’ Anyway, why did they do it? Golly, how the industry worked and worked over the years—getting rid of gear-shifting, providing interior comfort, providing plus performance for use in emergencies! And now the public wants these little beetles. I don’t get it!”

Wallace’s sputnik theory provides an answer to Doyle’s question about why people weren’t in the mood, and, furthermore, it is sufficiently cosmic to befit a semi-Brain Truster. It also leaves Wallace free to defend the validity of his motivational-research studies as of the time when they were conducted. “I don’t think we yet know the depths of the psychological effect that that first orbiting had on us all,” he says. “Somebody had beaten us to an important gain in technology, and immediately people started writing articles about how crummy Detroit products were, particularly the heavily ornamented and status-symbolic medium-priced cars. In 1958, when none of the small cars were out except the Rambler, Chevy almost ran away with the market, because it had the simplest car. The American people had put themselves on a self-imposed austerity program. Not buying Edsels was their hair shirt.”

TO any relics of the sink-or-swim nineteenth-century days of American industry, it must seem strange that Wallace can afford to puff on his pipe and analyze the holocaust so amiably. The obvious point of the Edsel’s story is the defeat of a giant motor company, but what is just as surprising is that the giant did not come apart, or even get seriously hurt in the fall, and neither did the majority of the people who went down with him. Owing largely to the success of four of its other cars—the Ford, the Thunderbird, and, later on the small Falcon and Comet and then the Mustang—the Ford Company, as an investment, survived gloriously. True, it had a bad time of it in 1958, when, partly because of the Edsel, net income per share of its stock fell from $5.40 to $2.12, dividends per share from $2.40 to $2.00, and the market price of its stock from a 1957 high of about $60 to a 1958 low of under $40. But all these losses were more than recouped in 1959, when net income per share was $8.24, dividends per share were $2.80, and the price of the stock reached a high of around $90. In 1960 and 1961, things went even better. So the 280,000 Ford stockholders listed on the books in 1957 had had little to complain about unless they had sold at the height of the panic. On the other hand, six thousand white-collar workers were squeezed out of their jobs as a result of the Mercury-Edsel-Lincoln consolidation, and the average number of Ford employees fell from 191,759 in 1957 to 142,076 the following year, climbing back to only 159,541 in 1959. And, of course, dealers who gave up profitable franchises in other makes and then went broke trying to sell Edsels weren’t likely to be very cheerful about the experience. Under the terms of the consolidation of the Lincoln-Mercury and Edsel Divisions, most of the agencies for the three makes were consolidated, too. In the consolidation, some Edsel dealers were squeezed out, and it can have been small comfort to those of them who went bankrupt to learn later that when the Ford Company finally discontinued making the car, it agreed to pay those of their former colleagues who had weathered the crisis one-half of the original cost of their Edsel signs, and was granting them substantial rebates on all Edsels in stock at the time of discontinuance. Still, automobile dealers, some of whom work on credit margins as slim as those of Miami hotel operators, occasionally go broke with even the most popular cars. And among those who earn their living in the rough-and-tumble world of automobile salesrooms, where Detroit is not always spoken of with affection, many will concede that the Ford Company, once it had found itself stuck with a lemon, did as much as it reasonably could to bolster dealers who had cast their lot with Edsel. A spokesman for the National Automobile Dealers Association has since stated, “So far as we know, the Edsel dealers were generally satisfied with the way they were treated.”

Foote, Cone & Belding also ended up losing money on the Edsel account, since its advertising commissions did not entirely compensate for the extraordinary expense it had gone to of hiring sixty new people and opening up a posh office in Detroit. But its losses were hardly irreparable; the minute there were no more Edsels to advertise, it was hired to advertise Lincolns, and although that arrangement did not last very long, the firm has happily survived to sing the praises of such clients as General Foods, Lever Brothers, and Trans World Airways. A rather touching symbol of the loyalty that the agency’s employees have for its former client is the fact that for several years after 1959, on every workday its private parking lot in Chicago was still dotted with Edsels. These faithful drivers, incidentally, are not unique. If Edsel owners have not found the means to a dream fulfillment, and if some of them for a while had to put up with harrowing mechanical disorders, many of them more than a decade later cherish their cars as if they were Confederate bills, and on Used Car Row the Edsel is a high-premium item, with few cars being offered.

By and large, the former Edsel executives did not just land on their feet, they landed in clover. Certainly no one can accuse the Ford Company of giving vent to its chagrin in the old-fashioned way, by vulgarly causing heads to roll. Krafve was assigned to assist Robert S. McNamara, at that time a Ford divisional vice-president (and later, of course, Secretary of Defense), for a couple of months, and then he moved to a staff job in company headquarters, stayed there for about a year, and left to become a vice-president of the Raytheon Company, of Waltham, Massachusetts, a leading electronics firm. In April, 1960, he was made its president. In the middle sixties he left to become a high-priced management consultant on the West Coast. Doyle, too, was offered a staff job with Ford, but after taking a trip abroad to think it over he decided to retire. “It was a question of my relationship to my dealers,” he explains. “I had assured them that the company was fully behind the Edsel for keeps, and I didn’t feel that I was the fellow to tell them now that it wasn’t.” After his retirement, Doyle remained about as busy as ever, keeping an eye on various businesses in which he has set up various friends and relatives, and conducting a consulting business of his own in Detroit. About a month before Edsel’s consolidation with Mercury and Lincoln, Warnock, the publicity man, left the division to become director of news services for the International Telephone & Telegraph Corp., in New York—a position he left in June, 1960, to become vice-president of Communications Counselors, the public-relations arm of McCann-Erickson. From there he went back to Ford, as Eastern promotion chief for Lincoln-Mercury—a case of a head that had not rolled but had instead been anointed. Brown, the embattled stylist, stayed on in Detroit for a while as chief stylist of Ford commercial vehicles and then went with the Ford Motor Company, Ltd., of England, where, again as chief stylist, he was assigned to direct the design of Consuls, Anglias, trucks, and tractors. He insisted that this post didn’t represent the Ford version of Siberia. “I have found it to be a most satisfying experience, and one of the best steps I have ever taken in my … career,” he stated firmly in a letter from England. “We are building a styling office and a styling team second to none in Europe.” Wallace, the semi-Brain Truster, was asked to continue semi-Brain Trusting for Ford, and, since he still didn’t like living in Detroit, or near it, was permitted to move to New York and to spend only two days a week at headquarters. (“They didn’t seem to care any more where I operated from,” he says modestly.) At the end of 1958, he left Ford, and he has since finally achieved his heart’s desire—to become a full-time scholar and teacher. He set about getting a doctorate in sociology at Columbia, writing his thesis on social change in Westport, Connecticut, which he investigated by busily quizzing its inhabitants; meanwhile, he taught a course on “The Dynamics of Social Behavior” at the New School for Social Research, in Greenwich Village. “I’m through with industry,” he was heard to declare one day, with evident satisfaction, as he boarded a train for Westport, a bundle of questionnaires under his arm. Early in 1962, he became Dr. Wallace.

The subsequent euphoria of these former Edsel men did not stem entirely from the fact of their economic survival; they appear to have been enriched spiritually. They are inclined to speak of their Edsel experience—except for those still with Ford, who are inclined to speak of it as little as possible—with the verve and garrulity of old comrades-in-arms hashing over their most thrilling campaign. Doyle is perhaps the most passionate reminiscer in the group. “It was more fun than I’ve ever had before or since,” he told a caller in 1960. “I suppose that’s because I worked the hardest ever. We all did. It was a good crew. The people who came with Edsel knew they were taking a chance, and I like people who’ll take chances. Yes, it was a wonderful experience, in spite of the unfortunate thing that happened. And we were on the right track, too! When I went to Europe just before retiring, I saw how it is there—nothing but compact cars, yet they’ve still got traffic jams over there, they’ve still got parking problems, they’ve still got accidents. Just try getting in and out of those low taxicabs without hitting your head, or try not to get clipped while you’re walking around the Arc de Triomphe. This small-car thing won’t last forever. I can’t see American drivers being satisfied for long with manual gear-shifting and limited performance. The pendulum will swing back.”

Warnock, like many a public-relations man before him, claims that his job gave him an ulcer—his second. “But I got over it,” he says. “That great Edsel team—I’d just like to see what it could have done if it had had the right product at the right time. It could have made millions, that’s what! The whole thing was two years out of my life that I’ll never forget. It was history in the making. Doesn’t it all tell you something about America in the fifties—high hopes, and less than complete fulfillment of them?”

Krafve, the boss of the great team manqué, is entirely prepared to testify that there is more to his former subordinates’ talk than just the romantic vaporings of old soldiers. “It was a wonderful group to work with,” he said not long ago. “They really put their hearts and guts into the job. I’m interested in a crew that’s strongly motivated, and that one was. When things went bad, the Edsel boys could have cried about how they’d given up wonderful opportunities to come with us, but if anybody did, I never heard about it. I’m not surprised that they’ve mostly come out all right. In industry, you take a bump now and then, but you bounce back as long as you don’t get defeated inside. I like to get together with somebody once in a while—Gayle Warnock or one of the others—and go over the humorous incidents, the tragic incidents.…”

Whether the nostalgia of the Edsel boys for the Edsel runs to the humorous or to the tragic, it is a thought-provoking phenomenon. Maybe it means merely that they miss the limelight they first basked in and later squirmed in, or maybe it means that a time has come when—as in Elizabethan drama but seldom before in American business—failure can have a certain grandeur that success never knows.

* The word “styling” is a weed deeply embedded in the garden of automobilia. In its preferred sense, the verb “to style” means to name; thus the Special Products Division’s epic efforts to choose a name for the E-Car, which will be chronicled presently, were really the styling program, and what Brown and his associates were up to was something else again. In its second sense, says Webster, “to style” means “to fashion in … the accepted style”; this was just what Brown, who hoped to achieve originality, was trying not to do, so Brown’s must have been the antistyling program.

* For details on this product of the national creativity, see Chapter 3.

3

The Federal Income Tax

I

BEYOND A DOUBT, many prosperous and ostensibly intelligent Americans have in recent years done things that to a naïve observer might appear outlandish, if not actually lunatic. Men of inherited wealth, some of them given to the denunciation of government in all its forms and manifestations, have shown themselves to be passionately interested in the financing of state and municipal governments, and have contributed huge sums to this end. Weddings between persons with very high incomes and persons with not so high incomes have tended to take place most often near the end of December and least often during January. Some exceptionally successful people, especially in the arts, have been abruptly and urgently instructed by their financial advisers to do no more gainful work under any circumstances for the rest of the current calendar year, and have followed this advice, even though it sometimes came as early as May or June. Actors and other people with high incomes from personal services have again and again become the proprietors of sand-and-gravel businesses, bowling alleys, and telephone-answering services, doubtless adding a certain élan to the conduct of those humdrum establishments. Motion-picture people, as if fulfilling a clockwork schedule of renunciation and reconciliation, have repeatedly abjured their native soil in favor of foreign countries for periods of eighteen months—only to embrace it again in the nineteenth. Petroleum investors have peppered the earth of Texas with speculative oil wells, taking risks far beyond what would be dictated by normal business judgment. Businessmen travelling on planes, riding in taxis, or dining in restaurants have again and again been seen compulsively making entries in little notebooks that, if they were questioned, they would describe as “diaries;” however, far from being spiritual descendants of Samuel Pepys or Philip Hone, they were writing down only what everything cost. And owners and part owners of businesses have arranged to share their ownership with minor children, no matter how young; indeed, in at least one case of partnership agreement has been delayed pending the birth of one partner.

As hardly anyone needs to be told, all these odd actions are directly traceable to various provisions of the federal income-tax law. Since they deal with birth, marriage, work, and styles and places of living, they give some idea of the scope of the law’s social effects, but since they are confined to the affairs of the well-to-do, they give no idea of the breadth of its economic impact. Inasmuch as almost sixty-three million individual returns were filed in a typical recent year—1964—it is not surprising that the income-tax law is often spoken of as the law of the land that most directly affects the most individuals, and inasmuch as income-tax collections account for almost three-quarters of our government’s gross receipts, it is understandable that it is considered our most important single fiscal measure. (Out of a gross from all sources of a hundred and twelve billion dollars for the fiscal year that ended June 30th, 1964, roughly fifty-four and a half billion came from individual income taxes and twenty-three and a third billion from corporation income taxes.) “In the popular mind, it is THE TAX,” the economics professors William J. Shultz and C. Lowell Harriss declare in their book “American Public Finance,” and the writer David T. Bazelon has suggested that the economic effect of the tax has been so sweeping as to create two quite separate kinds of United States currency—before-tax money and after-tax money. At any rate, no corporation is ever formed, nor are any corporation’s affairs conducted for as much as a single day, without the lavishing of earnest consideration upon the income tax, and hardly anyone in any income group can get by without thinking of it occasionally, while some people, of course, have had their fortunes or their reputations, or both, ruined as a result of their failure to comply with it. As far afield as Venice, an American visitor a few years ago was jolted to find on a brass plaque affixed to a coin box for contributions to the maintenance fund of the Basilica of San Marco the words “Deductible for U.S. Income-Tax Purposes.”

A good deal of the attention given to the income tax is based on the proposition that the tax is neither logical nor equitable. Probably the broadest and most serious charge is that the law has close to its heart something very much like a lie; that is, it provides for taxing incomes at steeply progressive rates, and then goes on to supply an array of escape hatches so convenient that hardly anyone, no matter how rich, need pay the top rates or anything like them. For 1960, taxpayers with reportable incomes of between two hundred thousand and five hundred thousand dollars paid, on the average, about 44 per cent, and even those few who reported incomes of over a million dollars paid well under 50 per cent—which happened to be just about the percentage that a single taxpayer was supposed to pay, and often did pay, if his income was forty-two thousand dollars. Another frequently heard charge is that the income tax is a serpent in the American Garden of Eden, offering such tempting opportunities for petty evasion that it induces a national fall from grace every April. Still another school of critics contends that because of its labyrinthine quality (the basic statute, the Internal Revenue Code of 1954, runs to more than a thousand pages, and the court rulings and Internal Revenue Service regulations that elaborate it come to seventeen thousand) the income tax not only results in such idiocies as gravel-producing actors and unborn partners but is in fact that anomaly, a law that a citizen may be unable to comply with by himself. This situation, the critics declare, leads to an undemocratic state of affairs, for only the rich can afford the expensive professional advice necessary to minimize their taxes legally.

The income-tax law in toto has virtually no defenders, even though most fair-minded students of the subject agree that its effect over the half century that it has been in force has been to bring about a huge and healthy redistribution of wealth. When it comes to the income tax, we almost all want reform. As reformers, however, we are largely powerless, the chief reasons being the staggering complexity of the whole subject, which causes many people’s minds to go blank at the very mention of it, and the specific, knowledgeable, and energetic advocacy by small groups of the particular provisions they benefit from. Like any tax law, ours had a kind of immunity to reform; the very riches that people accumulate through the use of tax-avoidance devices can be—and constantly are—applied to fighting the elimination of those devices. Such influences, combined with the fierce demands made on the Treasury by defense spending and other rising costs of government (even leaving aside hot wars like the one in Vietnam), have brought about two tendencies so marked that they have assumed the shape of a natural political law: In the United States it is comparatively easy to raise tax rates and to introduce tax-avoidance devices, and it is comparatively hard to lower tax rates and to eliminate tax-avoidance devices. Or so it seemed until 1964, when half of this natural law was spectacularly challenged by legislation, originally proposed by President Kennedy and pushed forward by President Johnson, that reduced the basic rates on individuals in two stages from a bottom of 20 per cent to a bottom of 14 per cent and from a top of 91 per cent to a top of 70 per cent, and reduced the top tax on corporations from 52 per cent to 48 per cent—all in all, by far the largest tax cut in our history. Meanwhile, however, the other half of the natural law remains immaculate. To be sure, the proposed tax changes advanced by President Kennedy included a program of substantial reforms to eliminate tax-avoidance devices, but so great was the outcry against the reforms that Kennedy himself soon abandoned most of them, and virtually none of them were enacted; on the contrary, the new law actually extended or enlarged one or two of the devices.

“Let’s face it, Clitus, we live in a tax era. Everything’s taxes,” one lawyer says to another in Louis Auchincloss’s book of short stories called “Powers of Attorney,” and the second lawyer, a traditionalist, can enter only a token demurrer. Considering the omnipresence of the income tax in American life, however, it is odd how rarely one encounters references to it in American fiction. This omission probably reflects the subject’s lack of literary elegance, but it may also reflect a national uneasiness about the income tax—a sense that we have willed into existence, and cannot will out of existence, a presence not wholly good or wholly bad but, rather, so immense, outrageous, and morally ambiguous that it cannot be encompassed by the imagination. How in the world, one may ask, did it all happen?

AN income tax can be truly effective only in an industrial country where there are many wage and salary earners, and the annals of income taxation up to the present century are comparatively short and simple. The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution. The rate of the ancien-régime tax, which was enacted by Louis XIV in 1710, was 10 per cent, a figure that was cut in half later, but not in time; the revolutionary regime eliminated the tax along with its perpetrators. In the face of this cautionary example, Britain enacted an income tax in 1798 to help finance her participation in the French revolutionary wars, and this was, in several respects, the first modern income tax; for one thing, it had graduated rates, progressing from zero, on annual incomes under sixty pounds, to 10 per cent, on incomes of two hundred pounds or more, and, for another, it was complicated, containing a hundred and twenty-four sections, which took up a hundred and fifty-two pages. Its unpopularity was general and instantaneous, and a spate of pamphlets denouncing it soon appeared; one pamphleteer, who purported to be looking back at ancient barbarities from the year 2000, spoke of the income-tax collectors of old as “merciless mercenaries” and “brutes … with all the rudeness that insolence and self-important ignorance could suggest.” After yielding only about six million pounds a year for three years—in large part because of widespread evasion—it was repealed in 1802, after the Treaty of Amiens, but the following year, when the British treasury again found itself in straitened circumstances, Parliament enacted a new income-tax law. This one was extraordinarily far ahead of its time, in that it included a provision for the withholding of income at the source, and, perhaps for that reason, it was hated even more than the earlier tax had been, even though its top rate was only half as high. At a protest meeting held in the City of London in July, 1803, several speakers made what, for Britons, must surely have been the ultimate commitment of enmity toward the income tax. If such a measure were necessary to save the country, they said, then they would reluctantly have to choose to let the country go.

Yet gradually, despite repeated setbacks, and even extended periods of total oblivion, the British income tax began to flourish. This may have been, as much as anything else, a matter of simple habituation, for a common thread runs through the history of income taxes everywhere: Opposition is always at its most reckless and strident at the very outset; with every year that passes, the tax tends to become stronger and the voices of its enemies more muted. Britain’s income tax was repealed the year after the victory at Waterloo, was revived in a halfhearted way in 1832, was sponsored with enthusiasm by Sir Robert Peel a decade later, and remained in effect thereafter. The basic rate during the second half of the nineteenth century varied between 5 per cent and less than 1 per cent, and it was only 2½ per cent, with a modest surtax on high incomes, as late as 1913. The American idea of very high rates on high incomes eventually caught on in Britain, though, and by the middle 1960’s the top British bracket was over 90 per cent.

Elsewhere in the world—or at least in the economically developed world—country after country took the cue from Britain and instituted an income tax at one time or another during the nineteenth century. Post-revolutionary France soon enacted an income tax, but then repealed it and managed to get along without one for a number of years in the second half of the century; eventually, though, the loss of revenue proved to be intolerable, and the tax returned, to become a fixture of the French economy. An income tax was one of the first, if not one of the sweetest, fruits of Italian unity, while several of the separate states that were to combine into the German nation had income taxes even before they were united. By 1911, income taxes also existed in Austria, Spain, Belgium, Sweden, Norway, Denmark, Switzerland, Holland, Greece, Luxembourg, Finland, Australia, New Zealand, Japan, and India.

As for the United States, the enormous size of whose income-tax collections and the apparent docility of whose taxpayers are now the envy of governments everywhere, it was a laggard in the matter of instituting an income tax and for years was an inveterate backslider in the matter of keeping one on its statute books. It is true that in Colonial times there were various revenue systems bearing some slight resemblance to income taxes—in Rhode Island at one point, for example, each citizen was supposed to guess the financial status of ten of his neighbors, in regard to both income and property, in order to provide a basis for tax assessments—but such schemes, being inefficient and subject to obvious opportunities for abuse, were short-lived. The first man to propose a federal income tax was President Madison’s Secretary of the Treasury, Alexander J. Dallas; he did so in 1814, but a few months later the War of 1812 ended, the demand for government revenue eased, and the Secretary was hooted down so decisively that the subject was not revived until the time of the Civil War, when both the Union and the Confederacy enacted income-tax bills. Before 1900, very few new income taxes appear to have been enacted anywhere without the stimulus of a war. National income taxes were—and until quite recently largely remained—war and defense measures. In June of 1862, prodded by public concern over a public debt that was increasing at the rate of two million dollars a day, Congress reluctantly passed a law providing for an income tax at progressive rates up to a maximum of 10 per cent, and on July 1st President Lincoln signed it into law, along with a bill to punish the practice of polygamy. (The next day, stocks on the New York Exchange took a dive, which was probably not attributable to the polygamy bill.)

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth. Annual revenue collections mounted from two million dollars in 1863 to seventy-three million in 1866, and then descended sharply. For two decades, beginning in the early eighteen-seventies, the very thought of an income tax did not enter the American mind, apart from rare occasions when some Populist or Socialist agitator would propose the establishment of such a tax designed specifically to soak the urban rich. Then, in 1893, when it had become clear that the country was relying on an obsolete revenue system that put too little burden on businessmen and members of the professions, President Cleveland proposed an income tax. The outcry that followed was shrill. Senator John Sherman, of Ohio, the father of the Sherman Antitrust Act, called the proposal “socialism, communism, and devilism,” and another senator spoke darkly of “the professors with their books, the socialists with their schemes … [and] the anarchists with their bombs,” while over in the House a congressman from Pennsylvania laid his cards on the table in the following terms:

An income tax! A tax so odious that no administration ever dared to impose it except in time of war.… It is unutterably distasteful both in its moral and material aspects. It does not belong to a free country. It is class legislation.… Do you desire to offer a reward to dishonesty and to encourage perjury? The imposition of the tax will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of officials with inquisitorial powers.… Mr. Chairman, pass this bill and the Democratic Party signs its death warrant.

The proposal that gave rise to these fulminations was for a tax at a uniform rate of 2 per cent on income in excess of four thousand dollars, and it was enacted into law in 1894. The Democratic Party survived, but the new law did not. Before it could be put into force, it was thrown out by the Supreme Court, on the ground that it violated the Constitutional provision forbidding “direct” taxes unless they were apportioned among the states according to population (curiously, this point had not been raised in connection with the Civil War income tax), and the income-tax issue was dead again, this time for a decade and a half. In 1909, by what a tax authority named Jerome Hellerstein has called “one of the most ironic twists of political events in American history,” the Constitutional amendment (the sixteenth) that eventually gave Congress the power to levy taxes without apportionment among the states was put forward by the implacable opponents of the income tax, the Republicans, who took the step as a political move, confidently believing that the amendment would never be ratified by the states. To their dismay, it was ratified in 1913, and later that year Congress enacted a graduated tax on individuals at rates ranging from 1 per cent to 7 per cent, and also a flat tax of 1 per cent on the net profits of corporations. The income tax has been with us ever since.

By and large, its history since 1913 has been one of rising rates and of the seasonable appearance of special provisions to save people in the upper brackets from the inconvenience of having to pay those rates. The first sharp rise took place during the First World War, and by 1918 the bottom rate was 6 per cent and the top one, applicable to taxable income in excess of a million dollars, was 77 per cent, or far more than any government had previously ventured to exact on income of any amount. But the end of the war and the “return to normalcy” brought a reversal of the trend, and there followed an era of low taxes for rich and poor alike. Rates were reduced by degrees until 1925, when the standard rate scale ran from 1½ per cent to an absolute top of 25 per cent, and, furthermore, a great majority of the country’s wage earners were relieved of paying any tax at all by being allowed personal exemptions of fifteen hundred dollars for a single person, thirty-five hundred dollars for a married couple, and four hundred dollars for each dependent. This was not the whole story, for it was during the twenties that special-interest provisions began to appear, stimulated into being by the complex of political forces that has accounted for their increase at intervals ever since. The first important one, adopted in 1922, established the principle of favored treatment for capital gains; this meant that money acquired through a rise in the value of investments was, for the first time, taxed at a lower rate than money earned in wages or for services—as, of course, it still is today. Then, in 1926, came the loophole that has undoubtedly caused more gnashing of teeth among those not in a position to profit by it than any other—the percentage depletion allowance on petroleum, which permits the owner of a producing oil well to deduct from his taxable income up to 27½ per cent of his gross annual income from the well and to keep deducting that much year after year, even though he has deducted the original cost of the well many times over. Whether or not the twenties were a golden age for the American people in general, they were assuredly a golden age for the American taxpayer.

The depression and the New Deal brought with them a trend toward higher tax rates and lower exemptions, which led up to a truly revolutionary era in federal income taxation—that of the Second World War. By 1936, largely because of greatly increased public spending, rates in the higher brackets were roughly double what they had been in the late twenties, and the very top bracket was 79 per cent, while, at the low end of the scale, personal exemptions had been reduced to the point where a single person was required to pay a small tax even if his income was only twelve hundred dollars. (As a matter of fact, at that time most industrial workers’ incomes did not exceed twelve hundred dollars.) In 1944 and 1945, the rate scale for individuals reached its historic peak—23 per cent at the low end and 94 per cent at the high one—while income taxes on corporations, which had been creeping up gradually from the original 1913 rate of 1 per cent, reached the point where some companies were liable for 80 per cent. But the revolutionary thing about wartime taxation was not the very high rates on high incomes; indeed, in 1942, when this upward surge was approaching full flood, a new means of escape for high-bracket taxpayers appeared, or an old one widened, for the period during which stocks or other assets must be held in order to benefit from the capital-gains provision was reduced from eighteen months to six. What was revolutionary was the rise of industrial wages and the extension of substantial tax rates to the wage earner, making him, for the first time, an important contributor to government revenue. Abruptly, the income tax became a mass tax.

And so it has remained. Although taxes on big and middle-sized businesses settled down to a flat rate of 52 per cent, rates on individual income did not change significantly between 1945 and 1964. (That is to say, the basic rates did not change significantly; there were temporary remissions, amounting to anywhere from 5 per cent to 17 per cent of the sums due under the basic rates, during the years 1946 through 1950.) The range was from 20 per cent to 91 per cent until 1950; there was a small rise during the Korean War, but it went right back there in 1954. In 1950, another important escape route, the so-called “restricted stock option,” opened up, enabling some corporate executives to be taxed on part of their compensation at low capital-gains rates. The significant change, invisible in the rate schedule, has been a continuation of the one begun in wartime; namely, the increase in the proportionate tax burden carried by the middle and lower income groups. Paradoxical as it may seem, the evolution of our income tax has been from a low-rate tax relying for revenue on the high income group to a high-rate tax relying on the middle and lower-middle income groups. The Civil War levy, which affected only one per cent of the population, was unmistakably a rich man’s tax, and the same was true of the 1913 levy. Even in 1918, at the height of the budget squeeze produced by the First World War, less than four and a half million Americans, of a total population of more than a hundred million, had to file income-tax returns at all. In 1933, in the depths of the depression, only three and three-quarters million returns were filed, and in 1939 an élite consisting of seven hundred thousand taxpayers, of a population of a hundred and thirty million, accounted for nine-tenths of all income-tax collections, while in 1960 it took some thirty-two million taxpayers—something over one-sixth of the population—to account for nine-tenths of all collections, and a whopping big nine-tenths it was, totalling some thirty-five and a half billion dollars, compared to less than a billion in 1939.

The historian Seligman wrote in 1911 that the history of income taxation the world over consisted essentially of “evolution toward basing it on ability to pay.” One wonders what qualifications he might add, on the basis of the American experience since then, if he were still alive. Of course, one reason people with middle incomes pay far more in taxes than they used to is that there are far more of them. Changes in the country’s social and economic structure have been as big a factor in the shift as the structure of the income tax has. It remains probable, though, that, in actual practice, the aboriginal income tax of 1913 extracted money from citizens with stricter regard to their ability to pay than the present income tax does.

WHATEVER the faults of our income-tax law, it is beyond question the best-obeyed income-tax law in the world, and income taxes are now ubiquitous, from the Orient to the Occident and from pole to pole. (Practically all of the dozens of new nations that have come into being over the past few years have adopted income-tax measures. Walter H. Diamond, the editor of a publication called Foreign Tax & Trade Briefs, has noted that as recently as 1955 he could rattle off the names of two dozen countries, large and small, that did not tax the individual, but that in 1965 the only names he could rattle off were those of a couple of British colonies, Bermuda and the Bahamas; a couple of tiny republics, San Marino and Andorra; three oil-rich Middle Eastern countries, the Sultanate of Muscat and Oman, Kuwait, and Qatar; and two rather inhospitable countries, Monaco and Saudi Arabia, which taxed the incomes of resident foreigners but not those of nationals. Even Communist countries have income taxes, though they count on them for only a small percentage of their total revenue; Russia applies different rates to different occupations, shopkeepers and ecclesiastics being in the high tax bracket, artists and writers near the middle, and laborers and artisans at the bottom.) Evidence of the superior efficiency of tax collecting in the United States is plentiful; for instance, our costs for administration and enforcement come to only about forty-four cents for every hundred dollars collected, as against a rate more than twice as high in Canada, more than three times as high in England, France, and Belgium, and many times as high in other places. This kind of American efficiency is the despair of foreign tax collectors. Toward the end of his term in office Mortimer M. Caplin, who was commissioner of Internal Revenue from January, 1961, until July, 1964, held consultations with the leading tax administrators of six Western European countries, and the question heard again and again was “How do you do it? Do they like to pay taxes over there?” Of course, they do not, but, as Caplin said at the time, “we have a lot going for us that the Europeans haven’t.” One thing we have going for us is tradition. American income taxes originated and developed not as a result of the efforts of monarchs to fill their coffers at the expense of their subjects but as a result of the efforts of an elected government to serve the general interest. A widely travelled tax lawyer observed not long ago, “In most countries, it’s impossible to engage in a serious discussion of income taxes, because they aren’t taken seriously.” They are taken seriously here, and part of the reason is the power and skill of our income-tax police force, the Internal Revenue Service.

Unquestionably, the “swarm of officials” feared by the Pennsylvania congressman in 1894 has come into being—and there are those who would add that the officials have the “inquisitorial powers” he also feared. As of the beginning of 1965, the Internal Revenue Service had approximately sixty thousand employees, including more than six thousand revenue officers and more than twelve thousand revenue agents, and these eighteen thousand men, possessing the right to inquire into every penny of everyone’s income and into matters like exactly what was discussed at an expense-account meal, and armed with the threat of heavy punishments, have powers that might reasonably be called inquisitorial. But the I.R.S. engages in many activities besides actual tax collecting, and some of these suggest that it exercises its despotic powers in an equitable way, if not actually in a benevolent one. Notable among the additional activities is a taxpayer-education program on a scale that occasionally inspires an official to boast that the I.R.S. runs the largest university in the world. As part of this program, it puts out dozens of publications explicating various aspects of the law, and it is proud of the fact that the most general of these—a blue-covered pamphlet entitled “Your Federal Income Tax,” which is issued annually and in 1965 could be bought for forty cents at any District Director’s office—is so popular that it is often reprinted by private publishers, who sell it to the unwary for a dollar or more, pointing out, with triumphant accuracy, that it is an official government publication. (Since government publications are not copyrighted, this is perfectly legal.) The I.R.S. also conducts “institutes” on technical questions every December for the enlightenment of the vast corps of “tax practitioners”—accountants and lawyers—who will shortly be preparing the returns of individuals and corporations. It puts out elementary tax manuals designed specially for free distribution to any high schools that ask for them—and, according to one I.R.S. official, some eighty-five per cent of American high schools did ask for them in one recent year. (The question of whether schoolchildren ought to be spending their time boning up on the tax laws is one that the I.R.S. considers to be outside its scope.) Furthermore, just before the tax deadline each year, the I.R.S. customarily goes on television with spot advertisements offering tax pointers and reminders. It is proud to say that, of the various spots, a clear majority have been in the interests of protecting taxpayers from overpaying.

In the fall of 1963, the I.R.S. took a big step toward increasing the efficiency of its collections still further, and, by a feat worthy of the wolf in “Little Red Riding Hood,” it managed to present the step to the public as a grandmotherly move to help everybody out. The step was the establishment of a so-called national-identity file, involving the assignment to every taxpayer of an account number (usually his Social Security number), and its intention was to practically eliminate the problem created by people who fail to declare their income from corporate dividends or from interest on bank accounts or bonds—a form of evasion that was thought to have been costing the Treasury hundreds of millions a year. But that is not all. When the number is entered in the proper place on a return, “this will make certain that you are given immediate credit for taxes reported and paid by you, and that any refund will be promptly recorded in your favor”—so Commissioner Caplin commented brightly on the front cover of the 1964 tax-return forms. The I.R.S. then began taking another giant step—the adoption of a system for automating a large part of the tax-checking process, in which seven regional computers would collect and collate data that would be fed into a master data-processing center at Martinsburg, West Virginia. This installation, designed to make a quarter of a million number comparisons per second, began to be called the Martinsburg Monster even before it was in full operation. In 1965, between four and five million returns a year were given a complete audit, and all returns were checked for mathematical errors. Some of this mathematical work was being done by computers and some by people, but by 1967, when the computer system was going full blast, all the mathematical work was done by machine, thus freeing many I.R.S. employees to subject even more returns to detailed audits. According to a publication authorized by the I.R.S. back in 1963, though, “the capacity and memory of the [computer] system will help taxpayers who forget prior year credits or who do not take full advantage of their rights under the laws.” In short, it was going to be a friendly monster.

IF the mask that the I.R.S. had presented to the country in recent years has worn a rather ghastly expression of benignity, part of the explanation is probably nothing more sinister than the fact that Caplin, the man who dominated it in those years, is a cheerful extrovert and a natural politician, and that his influence continued to be felt under the man who was appointed to succeed him as Commissioner in December 1964—a young Washington lawyer named Sheldon S. Cohen, who took over the job after a six-month interim during which an I.R.S. career man named Bertrand M. Harding served as Acting Commissioner. (When Caplin resigned as Commissioner, he stepped out of politics, at least temporarily, returning to his Washington law practice as a specialist in, among other things, the tax problems of businessmen.) Caplin is widely considered to have been one of the best Commissioners of Internal Revenue in history, and, at the very least, he was certainly an improvement on two fairly recent occupants of the post, one of whom, some time after leaving it, was convicted and sentenced to two years in prison for evading his own income taxes, and the other of whom subsequently ran for public office on a platform of opposition to any federal income tax—as a former umpire might stump the country against baseball. Among the accomplishments that Mortimer Caplin, a small, quick-spoken, dynamic man who grew up in New York City and used to be a University of Virginia law professor, is credited with as Commissioner is the abolition of the practice that had previously been alleged to exist of assigning collection quotas to I.R.S. agents. He gave the top echelons of I.R.S. an air of integrity beyond cavil, and, what was perhaps most striking, managed the strange feat of projecting to the nation a sort of enthusiasm for taxes, considered abstractly. Thus he managed to collect them with a certain style—a sort of subsidiary New Frontier, which he called the New Direction. The chief thrust of the New Direction was to put increased emphasis on education leading toward increased voluntary compliance with the tax law, instead of concentrating on the search for and prosecution of conscious offenders. In a manifesto that Caplin issued to his swarm of officials in the spring of 1961, he wrote, “We all should understand that the Service is not simply running a direct enforcement business aimed at making $2 billion in additional assessments, collecting another billion from delinquent accounts, and prosecuting a few hundred evaders. Rather, it is charged with administering an enormous self-assessment tax system which raises over $90 billion from what people themselves put down on their tax returns and voluntarily pay, with another $2 or $3 billion coming from direct enforcement activities. In short, we cannot forget that 97 per cent of our total revenue comes from self-assessment or voluntary compliance, with only three per cent coming directly from enforcement. Our chief mission is to encourage and achieve more effective voluntary compliance.… The New Direction is really a shift in emphasis. But it is a very important shift.” It may be, though, that the true spirit of the New Direction is better epitomized on the jacket of a book entitled “The American Way in Taxation,” edited by Lillian Doris, which was published in 1963 with the blessing of Caplin, who wrote the foreword. “Here is the exciting story of the largest and most efficient tax collecting organization the world has ever known—the United States Internal Revenue Service!” the jacket announced, in part. “Here are the stirring events, the bitterly-fought legislative battles, the dedicated civil servants that have marched through the past century and left an indelible imprint on our nation. You’ll thrill to the epic legal battle to kill the income tax … and you’ll be astonished at the future plans of the I.R.S. You’ll see how giant computers, now on the drawing boards, are going to affect the tax collection system and influence the lives of many American men and women in new and unusual ways!” It sounded a bit like a circus barker hawking a public execution.

It is debatable whether the New Direction watchword of “voluntary compliance” could properly be used to describe a system of tax collection under which some three-quarters of all collections from individuals are obtained through withholding at the source, under which the I.R.S. and its Martinsburg Monster lurk to catch the unwary evader, and under which the punishment for evasion runs up to five years in prison per offense in addition to extremely heavy financial penalties. Caplin, however, did not seem to feel a bit of concern over this point. With tireless good humor, he made the rounds of the nation’s organizations of businessmen, accountants, and lawyers, giving luncheon talks in which he praised them for their voluntary compliance in the past, exhorted them to greater efforts in the future, and assured them that it was all in a good cause. “We’re still striving for the human touch in our tax administration,” declared the essay on the cover of the 1964 tax-return forms, which Caplin signed, and which he says he composed in collaboration with his wife. “I see a lot of humor in this job,” he told a caller a few hours after remarking to a luncheon meeting of the Kiwanis Club of Washington at the Mayflower Hotel, “Last year was the fiftieth anniversary of the income-tax amendment to the Constitution, but the Internal Revenue Service somehow or other didn’t seem to get any birthday cakes.” This might perhaps be considered a form of gallows humor, except that the hangman is not supposed to be the one who makes the jokes.

Cohen, the Commissioner who succeeded Caplin and was still in office in mid-1968, is a born-and-bred Washingtonian who, in 1952, graduated from George Washington University Law School at the top of his class; served in a junior capacity with the I.R.S. for the next four years; practiced law in Washington for seven years after that, eventually becoming a partner in the celebrated firm of Arnold, Fortas & Porter; at the beginning of 1964 returned to the I.R.S., as its chief counsel; and a year later, at the age of thirty-seven, became the youngest Commissioner of Internal Revenue in history. A man with close-cropped brown hair, candid eyes, and a guileless manner that makes him seem even younger than he is, Cohen came from the chief counsel’s office with the reputation of having uplifted it both practically and philosophically; he was responsible for an administrative reorganization that has been widely praised as making faster decisions possible, and for a demand that the I.R.S. be consistent in its legal stand in cases against taxpayers (that it refrain from taking one position on a fine point of Code interpretation in Philadelphia, say, and the opposite position on the same point in Omaha), which is considered a triumph of high principle over governmental greed. In general, Cohen said upon assuming office, he intended to continue Caplin’s policies—to emphasize “voluntary compliance,” to strive for agreeable, or at least not disagreeable, relations with the taxpaying public, and so on. He is a less gregarious and a more reflective man than Caplin, however, and this difference has had its effect on the I.R.S. as a whole. He has stuck relatively close to his desk, leaving the luncheon-circuit pep talks to subordinates. “Mort was wonderful at that sort of thing,” Cohen said in 1965. “Public opinion of the Service is high now as a result of his big push in that direction. We want to keep it high without more pushing on my part. Anyhow, I couldn’t do it well—I’m not made that way.”

A charge that has often been made, and continues to be made, is that the office of Commissioner carries with it far too much power. The Commissioner has no authority to propose changes in rates or initiate other new tax legislation—the authority to propose rate changes belongs to the Secretary of the Treasury, who may or may not seek the Commissioner’s advice in the matter, and the enactment of new tax laws is, of course, the job of Congress and the President—but tax laws, since they must cover so many different situations, are necessarily written in rather general terms, and the Commissioner is solely responsible (subject to reversal in the courts) for writing the regulations that are supposed to explain the laws in detail. And sometimes the regulations are a bit cloudy themselves, and in such cases who is better qualified to explain them than their author, the Commissioner? Thus it comes about that almost every word that drops from the Commissioner’s mouth, whether at his desk or at luncheon meetings, is immediately distributed by the various tax publishing services to tax accountants and lawyers all over the country and is gobbled up by them with an avidity not always accorded the remarks of an appointed official. Because of this, some people see the Commissioner as a virtual tyrant. Others, including both theoretical and practical tax experts, disagree. Jerome Hellerstein, who is a law professor at New York University Law School as well as a tax adviser, says, “The latitude of action given the Commissioner is great, and it’s true that he can do things that may affect the economic development of the country as well as the fortunes of individuals and corporations. But if he had small freedom of action, it would result in rigidity and certainty of interpretation, and would make it much easier for tax practitioners like me to manipulate the law to their clients’ advantage. The Commissioner’s latitude gives him a healthy unpredictability.”

CERTAINLY Caplin did not knowingly abuse his power, nor has Cohen done so. Upon visiting first one man and then the other in the Commissioner’s office, I found that both conveyed the impression of being men of high intelligence who were living—as Arthur M. Schlesinger, Jr., has said that Thoreau lived—at a high degree of moral tension. And the cause of the moral tension is not hard to find; it almost surely stemmed from the difficulty of presiding over compliance, voluntary or involuntary, with a law of which one does not very heartily approve. In 1958, when Caplin appeared—as a witness versed in tax matters, rather than as Commissioner of Internal Revenue—before the House Ways and Means Committee, he proposed an across-the-board program of reforms, including, among other things, either the total elimination or a drastic curbing of favored treatment for capital gains; the lowering of percentage depletion rates on petroleum and other minerals; the withholding of taxes on dividends and interest; and the eventual drafting of an entirely new income-tax law to replace the 1954 Code, which he declared had led to “hardships, complexities, and opportunities for tax avoidance.” Shortly after Caplin left office, he explained in detail what his ideal tax law would be like. Compared to the present tax law, it would be heroically simple, with loopholes eliminated, and most personal deductions and exemptions eliminated, too, and with a rate scale ranging from 10 to 50 per cent.

In Caplin’s case, the resolution of moral tension, insofar as he achieved it, was not entirely the result of rational analysis. “Some critics take a completely cynical view of the income tax,” he mused one day during his stint as Commissioner. “They say, in effect, ‘It’s a mess, and nothing can be done about it.’ I can’t go along with that. True, many compromises are necessary, and will continue to be. But I refuse to accept a defeatist attitude. There’s a mystic quality about our tax system. No matter how bad it may be from the technical standpoint, it has a vitality because of the very high level of compliance.” He paused for quite a long time, perhaps finding a flaw in his own argument; in the past, after all, universal compliance with a law has not always been a sign that it was either intelligent or just. Then he went on, “Looking over the sweep of years, I think we’ll come out well. Probably a point of crisis of some kind will make us begin to see beyond selfish interests. I’m optimistic that fifty years from now we’ll have a pretty good tax.”

As for Cohen, he was working in the legislation-drafting section of the I.R.S. at the time the present Code was written, and he had a hand in its composition. One might suppose that this fact would cause him to have a certain proprietary feeling toward it, but apparently that is not so. “Remember that we had a Republican administration then, and I’m a Democrat,” he said one day in 1965. “When you are drafting a statute, you operate as a technician. Any pride you may feel afterward is pride in technical competence.” So Cohen can reread his old prose, now enshrined as law, with neither elation nor remorse, and he has not the slightest hesitation about endorsing Caplin’s opinion that the Code leads to “hardships, complexities, and opportunities for tax avoidance.” He is more pessimistic than Caplin about finding the answer in simplification. “Perhaps we can move the rates down and get rid of some deductions,” he says, “but then we may find we need new deductions, in the interests of fairness. I suspect that a complex society requires a complex tax law. If we put in a simpler code, it would probably be complex again in a few years.”

II

“EVERY nation has the government it deserves,” the French writer and diplomat Joseph de Maistre declared in 1811. Since the primary function of government is to make laws, the statement implies that every nation has the laws it deserves, and if the doctrine may be considered at best a half truth in the case of governments that exist by force, it does seem persuasive in the case of governments that exist by popular consent. If the single most important law now on the statute books of the United States is the income-tax law, it would follow that we must have the income-tax law we deserve. Much of the voluminous discussion of the income-tax law in recent years has centered on plain violations of it, among them the deliberate padding of tax-deductible business-expense accounts, the matter of taxable income that is left undeclared on tax returns, fraudulently or otherwise—a sum estimated at as high as twenty-five billion dollars a year—and the matter of corruption within the ranks of the Internal Revenue Service, which some authorities believe to be fairly common, at least in large cities. Such forms of outlawry, of course, reflect timeless and worldwide human frailties. The law itself, however, has certain characteristics that are more closely related to a particular time and place, and if de Maistre was right, these should reflect national characteristics; the income-tax law, that is, should be to some extent a national mirror. How does the reflection look?

TO repeat, then, the basic law under which income taxes are now imposed is the Internal Revenue Code of 1954, as amplified by innumerable regulations issued by the Internal Revenue Service, interpreted by innumerable judicial decisions, and amended by several Acts of Congress, including the Revenue Act of 1964, which embodied the biggest tax cut in our history. The Code, a document longer than “War and Peace,” is phrased—inevitably, perhaps—in the sort of jargon that stuns the mind and disheartens the spirit; a fairly typical sentence, dealing with the definition of the word “employment,” starts near the bottom of page 564, includes more than a thousand words, nineteen semicolons, forty-two simple parentheses, three parentheses within parentheses, and even one unaccountable interstitial period, and comes to a gasping end, with a definitive period, near the top of page 567. Not until one has penetrated to the part of the Code dealing with export-import taxes (which fall within its province, along with estate taxes and various other federal imposts) does one come upon a comprehensible and diverting sentence like “Every person who shall export oleomargarine shall brand upon every tub, firkin, or other package containing such article the word ‘Oleomargarine,’ in plain Roman letters not less than one-half inch square.” Yet a clause on page 2 of the Code, though it is not a sentence at all, is as clear and forthright as one could wish; it sets forth without ado the rates at which the incomes of single individuals are to be taxed: 20 per cent on taxable income of not over $2,000; 22 per cent on taxable income of over $2,000 but not over $4,000; and so on up to a top rate of 91 per cent on taxable income of over $200,000. (As we have seen, the rates were amended downward in 1964 to a top of 70 per cent.) Right at the start, then, the Code makes its declaration of principle, and, to judge by the rate table, it is implacably egalitarian, taxing the poor relatively lightly, the well-to-do moderately, and the very rich at levels that verge on the confiscatory.

But, to repeat a point that has become so well known that it scarcely needs repeating, the Code does not live up to its principles very well. For proof of this, one need look no further than some of the recent score sheets of the income tax—a set of volumes entitled Statistics of Income, which are published annually by the Internal Revenue Service. For 1960, individuals with gross incomes of between $4,000 and $5,000, after taking advantage of all their deductions and personal exemptions, and availing themselves of the provision that allows married couples and the heads of households to be taxed at rates generally lower than those for single persons, ended up paying an average tax bill of about one-tenth of their reportable receipts, while those in the $10,000–$15,000 range paid a bill of about one-seventh, those in the $25,000–$50,000 range paid a bill of not quite a quarter, and those in the $50,000–$100,000 range paid a bill of about a third. Up to this point, clearly, we find a progression according to ability to pay, much as the rate table prescribes. However, the progression stops abruptly when we reach the top income brackets—that is, at just the point where it is supposed to become most marked. For 1960, the $150,000–$200,000, $200,000–$500,000, $500,000$ 1,000,000 and million-plus groups each paid, on the average, less than 50 per cent of their reportable incomes, and when one takes into consideration the fact that the richer a man is, the likelier it is that a huge proportion of his money need not even be reported as gross taxable income—all income from certain bonds, for example, and half of all income from long-term capital gains—it becomes evident that at the very top of the income scale the percentage rate of actual taxation turns downward. The evidence is confirmed by the Statistics of Income for 1961, which breaks down figures on payments according to bracket, and which shows that although 7,487 taxpayers declared gross incomes of $200,000 or more, fewer than five hundred of them had net income that was taxed at the rate of 91 per cent. Throughout its life, the rate of 91 per cent was a public tranquilizer, making everyone in the lower bracket feel fortunate not to be rich, and not hurting the rich very much. And then, to top off the joke, if that is what it is, there are the people with more income than anyone else who pay less tax than anyone else—that is, those with annual incomes of a million dollars or more who manage to find perfectly legal ways of paying no income tax at all. According to Statistics of Income, there were eleven of them in 1960, out of a national total of three hundred and six million-a-year men, and seventeen in 1961, out of a total of three hundred and ninety-eight. In plain fact, the income tax is hardly progressive at all.

The explanation of this disparity between appearance and reality, so huge that it lays the Code open to a broad accusation of hypocrisy, is to be found in the detailed exceptions to the standard rates which lurk in its dim depths—exceptions that are usually called special-interest provisions or, more bluntly, loopholes. (“Loophole,” as all fair-minded users of the word are ready to admit, is a somewhat subjective designation, for one man’s loophole may be another man’s lifeline—or perhaps at some other time, the same man’s lifeline.) Loopholes were noticeably absent from the original 1913 income-tax law. How they came to be law and why they remain law are questions involving politics and possibly metaphysics, but their actual workings are relatively simple, and are illuminating to watch. By far the simplest method of avoiding income taxes—at least for someone who has a large amount of capital at his disposal—is to invest in the bonds of states, municipalities, port authorities, and toll roads; the interest paid on all such bonds is unequivocally tax-exempt. Since the interest on high-grade tax-exempt bonds in recent years has run from three to five per cent, a man who invests ten million dollars in them can collect $300,000 to $500,000 a year tax-free without putting himself or his tax lawyer to the slightest trouble; if he had been foolish enough to sink the money in ordinary investments yielding, say, five per cent, he would have had a taxable income of $500,000, and at the 1964 rate, assuming that he was single, had no other income, and did not avail himself of any dodges, he would have to pay taxes of almost $367,000. The exemption on state and municipal bonds has been part of our income-tax law since its beginnings; it was based originally on Constitutional grounds and is now defended on the ground that the states and towns need the money. Most Secretaries of the Treasury have looked on the exemption with disfavor, but not one has been able to accomplish its repeal.

Probably the most important special-interest provision in the Code is the one that concerns capital gains. The staff of the Joint Economic Committee of Congress wrote in a report issued in 1961, “Capital gains treatment has become one of the most impressive loopholes in the federal revenue structure.” What the provision says, in essence, is that a taxpayer who makes a capital investment (in real estate, a corporation, a block of stock, or whatever), holds on to it for at least six months, and then sells it at a profit is entitled to be taxed on the profit at a rate much lower than the rate on ordinary income; to be specific, the rate is half of that taxpayer’s ordinary top tax rate or twenty-five per cent whichever is less. What this means to anyone whose income would normally put him in a very high tax bracket is obvious: he must find a way of getting as much as possible of that income in the form of capital gains. Consequently, the game of finding ways of converting ordinary income into capital gains has become very popular in the past decade or two. The game is often won without much of a struggle. On television one evening in the middle 1960s, David Susskind asked six assembled multimillionaires whether any of them considered tax rates a stumbling block on the highroad to wealth in America. There was a long silence, almost as if the notion were new to the multimillionaires, and then one of them, in the tone of some one explaining something to a child, mentioned the capital-gains provision and said that he didn’t consider taxes much of a problem. There was no more discussion of high tax rates that night.

If the capital-gains provision resembles the exemption on certain bonds in that the advantages it affords are of benefit chiefly to the rich, it differs in other ways. It is by far the more accommodating of the two loopholes; indeed, it is a sort of mother loophole capable of spawning other loopholes. For example, one might think that a taxpayer would need to have capital before he could have a capital gain. Yet a way was discovered—and was passed into law in 1950—for him to get the gain before he has the capital. This is the stock-option provision. Under its terms, a corporation may give its executives the right to buy its shares at any time within a stipulated period—say, five years—at or near the open-market price at the time of the granting of the option; later on, if, as has happened so often, the market price of the stock goes sky-high, the executives may exercise their options to buy the stock at the old price, may sell it on the open market some time later at the new price, and may pay only capital-gains rates on the difference, provided that they go through these motions without unseemly haste. The beauty of it all from an executive’s point of view is that once the stock has gone up substantially in value, his option itself becomes a valuable commodity, against which he can borrow the cash he needs in order to exercise it; then, having bought the stock and sold it again, he can pay off his debt and have a capital gain that has arisen from the investment of no capital. The beauty of it all from the corporations’ point of view is that they can compensate their executives partly in money taxable at relatively low rates. Of course, the whole scheme comes to nothing if the company’s stock goes down, which does happen occasionally, or if it simply doesn’t go up, but even then the executive has had a free play on the roulette wheel of the stock market, with a chance of winning a great deal and practically no danger of losing anything—something that the tax law offers no other group.

By favoring capital gains over ordinary income, the Code seems to be putting forward two very dubious notions—that one form of unearned income is more deserving than any form of earned income, and that people with money to invest are more deserving than people without it. Hardly anyone contends that the favored treatment of capital gains can be justified on the ground of fairness; those who consider this aspect of the matter are apt to agree with Hellerstein, who has written, “From a sociological viewpoint, there is a good deal to be said for more severe taxation of profit from appreciation in the value of property than from personal-service income.” The defense, then, is based on other grounds. For one, there is a respectable economic theory that supports a complete exemption of capital gains from income tax, the argument being that whereas wages and dividends or interest from investments are fruits of the capital tree, and are therefore taxable income, capital gains represent the growth of the tree itself, and are therefore not income at all. This distinction is actually embedded in the tax laws of some countries—most notably in the tax law of Britain, which in principle did not tax capital gains until 1964. Another argument—this one purely pragmatic—has it that the capital-gains provision is necessary to encourage people to take risks with their capital. (Similarly, the advocates of stock options say that corporations need them to attract and hold executive talent.) Finally, nearly all tax authorities are agreed that taxing capital gains on exactly the same basis as other income, which is what most reformers say ought to be done, would involve formidable technical difficulties.

Particular subcategories of the rich and the well-paid can avail themselves of various other avenues of escape, including corporate pension plans, which, like stock options, contribute to the solution of the tax problems of executives; tax-free foundations set up ostensibly for charitable and educational purposes, of which over fifteen thousand help to ease the tax burdens of their benefactors, though the charitable and educational activities of some of them are more or less invisible; and personal holding companies, which, subject to rather strict regulations, enable persons with very high incomes from personal services like writing and acting to reduce their taxes by what amounts to incorporating themselves. Of the whole array of loopholes in the Code, however, probably the most widely loathed is the percentage depletion allowance on oil. As the word “depletion” is used in the Code, it refers to the progressive exhaustion of irreplaceable natural resources, but as used on oilmen’s tax returns, it proves to mean a miraculously glorified form of what is ordinarily called depreciation. Whereas a manufacturer may claim depreciation on a piece of machinery as a tax deduction only until he has deducted the original cost of the machine—until, that is, the machine is theoretically worthless from wear—an individual or corporate oil investor, for reasons that defy logical explanation, may go on claiming percentage depletion on a producing well indefinitely, even if this means that the original cost of the well has been recovered many times over. The oil-depletion allowance is 27.5 per cent a year up to a maximum of half of the oil investor’s net income (there are smaller allowances on other natural resources, such as 23 per cent on uranium, 10 per cent on coal, and 5 per cent on oyster and clam shells), and the effect it has on the taxable income of an oil investor, especially when it is combined with the effects of other tax-avoidance devices, is truly astonishing; for instance, over a recent five-year period one oilman had a net income of fourteen and a third million dollars, on which he paid taxes of $80,000, or six-tenths of one per cent. Unsurprisingly, the percentage-depletion allowance is always under attack, but, also unsurprisingly, it is defended with tigerish zeal—so tigerish that even President Kennedy’s 1961 and 1963 proposals for tax revision, which, taken together, are generally considered the broadest program of tax reform ever put forward by a chief executive, did not venture to suggest its repeal. The usual argument is that the percentage-depletion allowance is needed in order to compensate oilmen for the risks involved in speculative drilling, and thus insure an adequate supply of oil for national use, but many people feel that this argument amounts to saying, “The depletion allowance is a necessary and desirable federal subsidy to the oil industry,” and thereby scuttles itself, since granting subsidies to individual industries is hardly the proper task of the income tax.

THE 1964 Revenue Act does practically nothing to plug the loopholes, but it does make them somewhat less useful, in that the drastic reduction of the basic rates on high incomes has probably led some high-bracket taxpayers simply to quit bothering with the less convenient or effective of the dodges. Insofar as the new bill reduces the disparity between the Code’s promises and its performance, that is, it represents a kind of adventitious reform. (One way to cure all income-tax evasion would be to repeal the income tax.) However, quite apart from the sophistry—since 1964 happily somewhat lessened—that the Code embodies, it has certain discernible and disturbing characteristics that have not been changed and may be particularly hard to change in the future. Some of them have to do with its methods of allowing and disallowing deductions for travel and entertainment expenses by persons who are in business for themselves, or by persons who are employed but are not reimbursed for their business expenses—deductions that were estimated fairly recently at between five and ten billion dollars a year, with a resulting reduction in federal revenue of between one and two billion. The travel-and-entertainment problem—or the T & E problem, as it is customarily called—has been around a long time, and has stubbornly resisted various attempts to solve it. One of the crucial points in T & E history occurred in 1930, when the courts ruled that the actor and songwriter George M. Cohan—and therefore anyone else—was entitled to deduct his business expenses on the basis of a reasonable estimate even if he could not produce any proof of having paid that sum or even produce a detailed accounting. The Cohan rule, as it came to be called, remained in effect for more than three decades, during which it was invoked every spring by thousands of businessmen as ritually as Moslems turn toward Mecca. Over those decades, estimated business deductions grew like kudzu vines as the estimators became bolder, with the result that the Cohan rule and other flexible parts of the T & E regulations were subjected to a series of attacks by would-be reformers. Bills that would have virtually or entirely eliminated the Cohan rule were introduced in Congress in 1951 and again in 1959, only to be defeated—in one case, after an outcry that T & E reform would mean the end of the Kentucky Derby—and in 1961 President Kennedy proposed legislation that not only would have swept aside the Cohan rule but, by reducing to between four and seven dollars a day the amount that a man could deduct for food and beverages, would have all but put an end to the era of deductibility in American life. No such fundamental social change took place. Loud and long wails of anguish instantly arose, from businessmen and also from hotels, restaurants, and night clubs, and many of the Kennedy proposals were soon abandoned. Nevertheless, through a series of amendments to the Code passed by Congress in 1962 and put into effect by a set of regulations issued by the Internal Revenue Service in 1963, they did lead to the abrogation of the Cohan rule, and the stipulation that, generally speaking, all business deductions, no matter how small, would thenceforward have to be substantiated by records, if not by actual receipts.

Yet even a cursory look at the law as it has stood since then shows that the new, reformed T & E rules fall somewhat short of the ideal—that, in fact, they are shot through with absurdities and underlaid by a kind of philistinism. For travel to be deductible, it must be undertaken primarily for business rather than for pleasure and it must be “away from home”—that is to say, not merely commuting. The “away-from-home” stipulation raises the question of where home is, and leads to the concept of a “tax home,” the place one must be away from in order to qualify for travel deductions; a businessman’s tax home, no matter how many country houses, hunting lodges, and branch offices he may have, is the general area—not just the particular building, that is—of his principal place of employment. As a result, marriage partners who commute to work in two different cities have separate tax homes, but, fortunately, the Code continues to recognize their union to the extent of allowing them the tax advantages available to other married people; although there have been tax marriages, the tax divorce still belongs to the future.

As for entertainment, now that the writers of I.R.S. regulations have been deprived of the far-reaching Cohan rule, they are forced to make distinctions of almost theological nicety, and the upshot of the distinctions is to put a direct premium on the habit—which some people have considered all too prevalent for many years anyhow—of talking business at all hours of the day and night, and in all kinds of company. For example, deductions are granted for the entertainment of business associates at night clubs, theatres, or concerts only if a “substantial and bona fide business discussion” takes place before, during, or after the entertainment. (One is reluctant to picture the results if businessmen take to carrying on business discussions in great numbers during plays or concerts.) On the other hand, a businessman who entertains another in a “quiet business setting,” such as a restaurant with no floor show, may claim a deduction even if little or no business is actually discussed, as long as the meeting has a business purpose. Generally speaking, the noisier and more confusing or distracting the setting, the more business talk there must be; the regulations specifically include cocktail parties in the noisy-and-distracting category, and, accordingly, require conspicuous amounts of business discussion before, during, or after them, though a meal served to a business associate at the host’s home may be deductible with no such discussion at all. In the latter case, however, as the J. K. Lasser Tax Institute cautions in its popular guide “Your Income Tax,” you must “be ready to prove that your motive … was commercial rather than social.” In other words, to be on the safe side, talk business anyhow. Hellerstein has written, “Henceforth, tax men will doubtless urge their clients to talk business at every turn, and will ask them to admonish their wives not to object to shop talk if they want to continue their accustomed style of living.”

Entertainment on an elaborate scale is discouraged in the post-1963 rules, but, as the Lasser booklet notes, perhaps a little jubilantly, “Congress did not specifically put into law a provision barring lavish or extravagant entertainment.” Instead, it decreed that a businessman may deduct depreciation and operating expenses on an “entertainment facility”—a yacht, a hunting lodge, a swimming pool, a bowling alley, or an airplane, for instance—provided he uses it more than half the time for business. In a booklet entitled “Expense Accounts 1963,” which is one of many publications for the guidance of tax advisers that are issued periodically by Commerce Clearing House, Inc., the rule was explained by means of the following example:

A yacht is maintained … for the entertainment of customers. It is used 25% of the time for relaxation.… Since the yacht is used 75% of the time for business purposes, it is used primarily for the furtherance of the taxpayer’s business and 75% of the maintenance expenses … are deductible entertainment facility expenses. If the yacht had been used only 40% for business, no deduction would be allowed.

The method by which the yachtsman is to measure business time and pleasure time is not prescribed. Presumably, time when the yacht is in drydock or is in the water with only her crew aboard would count as neither, though it might be argued that the owner sometimes derives pleasure simply from watching her swing at anchor. The time to be apportioned, then, must be the time when he and some guests are aboard her, and perhaps his most efficient way of complying with the law would be to install two stopwatches, port and starboard, one to be kept running during business cruising and the other during pleasure cruising. Perhaps a favoring westerly might speed a social cruise home an hour early, or a September blow delay the last leg of a business cruise, and thus tip the season’s business time above the crucial fifty-percent figure. Well might the skipper pray for such timely winds, since the deductibility of his yacht could easily double his after-tax income for the year. In short, the law is nonsense.

Some experts feel that the change in T & E regulations represents a gain for our society because quite a few taxpayers who may have been inclined to fudge a bit under general provisions like the Cohan rule do not have the stomach or the heart to put down specific fraudulent items. But what has been gained in the way of compliance may have been lost in a certain debasement of our national life. Scarcely ever has any part of the tax law tended so energetically to compel the commercialization of social intercourse, or penalized so particularly the amateur spirit, which, Richard Hofstadter declares in his book “Anti-Intellectualism in American Life,” characterized the founders of the republic. Perhaps the greatest danger of all is that, by claiming deductions for activities that are technically business but actually social—that is, by complying with the letter of the law—a man may cheapen his life in his own eyes. One might argue that the founders, if they were alive today, would scornfully decline to mingle the social and the commercial, the amateur and the professional, and would disdain to claim any but the most unmistakable expenses. But, under the present tax laws, the question would be whether they could afford such a lordly overpayment of taxes, or should even be asked to make the choice.

IT has been maintained that the Code discriminates against intellectual work, the principal evidence being that while depreciation may be claimed on all kinds of exhaustible physical property and depletion may be claimed on natural resources, no such deductions are allowed in the case of exhaustion of the mental or imaginative capacities of creative artists and inventors—even though the effects of brain fag are sometimes all too apparent in the later work and incomes of such persons. (It has also been argued that professional athletes are discriminated against, in that the Code does not allow for depreciation of their bodies.) Organizations like the Authors League of America have contended, further, that the Code is unfair to authors and other creative people whose income, because of the nature of their work and the economics of its marketing, is apt to fluctuate wildly from year to year, so that they are taxed exorbitantly in good years and are left with too little to tide them over bad years. A provision of the 1964 bill intended to take care of this situation provided creative artists, inventors, and other receivers of sudden large income with a four-year averaging formula to ease the tax bite of a windfall year.

But if the Code is anti-intellectual, it is probably so only inadvertently—and is certainly so only inconsistently. By granting tax-exempt status to charitable foundations, it facilitates the award of millions of dollars a year—most of which would otherwise go into the government’s coffers—to scholars for travel and living expenses while they carry out research projects of all kinds. And by making special provisions in respect to gifts of property that has appreciated in value, it has—whether advertently or inadvertently—tended not only to force up the prices that painters and sculptors receive for their work but to channel thousands of works out of private collections and into public museums. The mechanics of this process are by now so well known that they need be merely outlined: a collector who donates a work of art to a museum may deduct on his income-tax return the fair value of the work at the time of the donation, and need pay no capital-gains tax on any increase in its value since the time he bought it. If the increase in value has been great and the collector’s tax bracket is very high, he may actually come out ahead on the deal. Besides burying some museums under such an avalanche of bounty that their staffs are kept busy digging themselves out, these provisions have tended to bring back into existence that lovable old figure from the pre-tax past, the rich dilettante. In recent years, some high-bracket people have fallen into the habit of making serial collections—Post-Impressionists for a few years, perhaps, followed by Chinese jade, and then by modern American painting. At the end of each period, the collector gives away his entire collection, and when the taxes he would otherwise have paid are calculated, the adventure is found to have cost him practically nothing.

The low cost of high-income people’s charitable contributions, whether in the form of works of art or simply in the form of money and other property, is one of the oddest fruits of the Code. Of approximately five billion dollars claimed annually as deductible contributions on personal income-tax returns, by far the greater part is in the form of assets of one sort or another that have appreciated in value, and comes from persons with very high incomes. The reasons can be made clear by a simple example: A man with a top bracket of 20 per cent who gives away $1,000 in cash incurs a net cost of $800. A man with a top bracket of 60 per cent who gives away the same sum in cash incurs a net cost of $400. If, instead, this same high-bracket man gives $1,000 in the form of stock that he originally bought for $200, he incurs a net cost of only $200. It is the Code’s enthusiastic encouragement of large-scale charity that has led to most of the cases of million-dollar-a-year men who pay no tax at all; under one of its most peculiar provisions, anyone whose income tax and contributions combined have amounted to nine-tenths or more of his taxable income for eight out of the ten preceding years is entitled by way of reward to disregard in the current year the usual restrictions on the amount of deductible contributions, and can escape the tax entirely.

Thus the Code’s provisions often enable mere fiscal manipulation to masquerade as charity, substantiating a frequent charge that the Code is morally muddleheaded, or worse. The provisions also give rise to muddleheadedness in others. The appeal made by large fund-raising drives in recent years, for example, has been uneasily divided between a call to good works and an explanation of the tax advantages to the donor. An instructive example is a commendably thorough booklet entitled “Greater Tax Savings … A Constructive Approach,” which was used by Princeton in a large capital-funds drive. (Similar, not to say nearly identical, booklets have been used by Harvard, Yale, and many other institutions.) “The responsibilities of leadership are great, particularly in an age when statesmen, scientists, and economists must make decisions which will almost certainly affect mankind for generations to come,” the pamphlet’s foreword starts out, loftily, and goes on to explain, “The chief purpose of this booklet is to urge all prospective donors to give more serious thought to the manner in which they make their gifts.… There are many different ways in which substantial gifts can be made at comparatively low cost to the donor. It is important that prospective donors acquaint themselves with these opportunities.” The opportunities expounded in the subsequent pages include ways of saving on taxes through gifts of appreciated securities, industrial property, leases, royalties, jewelry, antiques, stock options, residences, life insurance, and inventory items, and through the use of trusts (“The trust approach has great versatility”). At one point, the suggestion is put forward that, instead of actually giving anything away, the owner of appreciated securities may wish to sell them to Princeton, for cash, at the price he originally paid for them; this might appear to the simple-minded to be a commercial transaction, but the booklet points out, accurately, that in the eyes of the Code the difference between the securities’ current market value and the lower price at which they are sold to Princeton represents pure charity, and is fully deductible as such. “While we have laid heavy emphasis on the importance of careful tax planning,” the final paragraph goes, “we hope no inference will be drawn that the thought and spirit of giving should in any way be subordinated to tax considerations.” Indeed it should not, nor need it be; with the heavy substance of giving so deftly minimized, or actually removed, its spirit can surely fly unrestrained.

ONE of the most marked traits of the Code—to bring this ransacking of its character to a close—is its complexity, and this complexity is responsible for some of its most far-reaching social effects; it is a virtual necessity for many taxpayers to seek professional help if they want to minimize their taxes legally, and since first-rate advice is expensive and in short supply, the rich are thereby given still another advantage over the poor, and the Code becomes more undemocratic in its action than it is in its provisions. (And the fact that fees for tax advice are themselves deductible means that tax advice is one more item on the long list of things that cost less and less to those who have more and more.) All the free projects of taxpayer education and taxpayer assistance offered by the Internal Revenue Service—and they are extensive and well meant—cannot begin to compete with the paid services of a good independent tax expert, if only because the I.R.S., whose first duty is to collect revenue, is involved in an obvious conflict of interest when it sets about explaining to people how to avoid taxes. The fact that about half of all the revenue derived from individual returns for 1960 came from adjusted gross incomes of $9,000 or less is not attributable entirely to provisions of the Code; in part, it results from the fact that low-income taxpayers cannot afford to be shown how to pay less.

The huge army of people who give tax advice—“practitioners,” they are called in the trade—is a strange and disturbing side effect of the Code’s complexity. The exact size of this army is unknown, but there are a few guideposts. By a recent count some eighty thousand persons, most of them lawyers, accountants, and former I.R.S. employees, held cards, granted by the Treasury Department, that officially entitle them to practice the trade of tax adviser and to appear as such before the I.R.S.; in addition, there is an uncounted host of unlicensed, and often unqualified, persons who prepare tax returns for a fee—a service that anyone may legally perform. As for lawyers, the undisputed plutocrats, if not the undisputed aristocrats, of the tax-advice industry, there is scarcely a lawyer in the country who is not concerned with taxes at one time or another during a year’s practice, and every year there are more lawyers who are concerned with nothing else. The American Bar Association’s taxation section, composed mostly of nothing-but-tax lawyers, has some nine thousand members; in the typical large New York law firm one out of five lawyers devotes all of his time to tax matters; and the New York University Law School’s tax department, an enormous brood hen for the hatching of tax lawyers, is larger than the whole of an average law school. The brains that go into tax avoidance, which are generally recognized as including some of the best legal brains extant, constitute a wasted national resource, it is widely contended—and this contention is cheerfully upheld by some leading tax lawyers, who seem only too glad to affirm, first, that their mental capacities are indeed exceptional, and, second, that these capacities are indeed being squandered on trivia. “The law has its cycles,” one of them explained recently. “In the United States, the big thing until about 1890 was property law. Then came a period when it was corporation law, and now it’s various specialties, of which the most important is taxes. I’m perfectly willing to admit that I’m engaged in work that has a limited social value. After all, what are we talking about when we talk about tax law? At best, only the question of what an individual or a corporation should fairly pay in support of the government. All right, why do I do tax work? In the first place, it’s a fascinating intellectual game—along with litigation, probably the most intellectually challenging branch of the law as it is now practiced. In the second place, although it’s specialized in one sense, in another sense it isn’t. It cuts through every field of law. One day you may be working with a Hollywood producer, the next day with a big real-estate man, the next with a corporation executive. In the third place, it’s a highly lucrative field.”

HYPOCRITICALLY egalitarian on the surface and systematically oligarchic underneath, unconscionably complicated, whimsically discriminatory, specious in its reasoning, pettifogging in its language, demoralizing to charity, an enemy of discourse, a promoter of shop talk, a squanderer of talent, a rock of support to the property owner but a weighty onus to the underpaid, an inconstant friend to the artist and scholar—if the national mirror-image is all these things, it has its good points as well. Certainly no conceivable income-tax law could please everybody, and probably no equitable one could entirely please anybody; Louis Eisenstein notes in his book “The Ideologies of Taxation,” “Taxes are a changing product of the earnest effort to have others pay them.” With the exception of its more flagrant special-interest provisions, the Code seems to be a sincerely written document—at worst misguided—that is aimed at collecting unprecedented amounts of money from an unprecedentedly complex society in the fairest possible way, at encouraging the national economy, and at promoting worthy undertakings. When it is intelligently and conscientiously administered, as it has been of late, our national income-tax law is quite possibly as equitable as any in the world.

But to enact an unsatisfactory law and then try to compensate for its shortcomings by good administration is, clearly, an absurd procedure. One solution that is more logical—to abolish the income tax—is proposed chiefly by some members of the radical right, who consider any income tax Socialistic or Communistic, and who would have the federal government simply stop spending money, though abolition is also advanced, as a theoretical ideal rather than as a practical possibility, by certain economists who are looking around for alternative ways of raising at least a significant fraction of the sums now produced by the income tax. One such alternative is a value-added tax, under which manufacturers, wholesalers, and retailers would be taxed on the difference between the value of the goods they bought and that of the goods they sold; among the advantages claimed for it are that it would spread the tax burden more evenly through the productive process than a business-income tax does, and that it would enable the government to get its money sooner. Several countries, including France and Germany, have value-added taxes, though as supplements rather than alternatives to income taxes, but no federal tax of the sort is more than remotely in prospect in this country. Other suggested means of lightening the burden of the income tax are to increase the number of items subject to excise taxes, and apply a uniform rate to them, so as to create what would amount to a federal sales tax; to increase user taxes, such as tolls on federally owned bridges and recreation facilities; and to enact a law permitting federal lotteries, like the lotteries that were permitted from colonial times up to 1895, which helped finance such projects as the building of Harvard, the fighting of the Revolutionary War, and the building of many schools, bridges, canals, and roads. One obvious disadvantage of all these schemes is that they would collect revenue with relatively little regard to ability to pay, and for this reason or others none of them stand a chance of being enacted in the foreseeable future.

A special favorite of theoreticians, but of hardly anyone else, is something called the expenditure tax—the taxing of individuals on the basis of their total annual expenditures rather than on their income. The proponents of this tax—diehard adherents of the economics of scarcity—argue that it would have the primary virtue of simplicity; that it would have the beneficial effect of encouraging savings; that it would be fairer than the income tax, because it would tax what people took out of the economy rather than what they put into it; and that it would give the government a particularly handy control instrument with which to keep the national economy on an even keel. Its opponents contend that it wouldn’t really be simple at all, and would be ridiculously easy to evade; that it would cause the rich to become richer, and doubtless stingier as well; and, finally, that by putting a penalty on spending it would promote depression. In any event, both sides concede that its enactment in the United States is not now politically practicable. An expenditure tax was seriously proposed for the United States by Secretary of the Treasury Henry Morgenthau, Jr., in 1942, and for Britain by a Cambridge economist (later a special adviser to the National Treasury) named Nicholas Kaldor, in 1951, though neither proponent asked for repeal of the income tax. Both proposals were all but unanimously hooted down. “The expenditure tax is a beautiful thing to contemplate,” one of its admirers said recently. “It would avoid almost all the pitfalls of the income tax. But it’s a dream.” And so it is, in the Western world; such a tax has been put in effect only in India and Ceylon.

With no feasible substitute in sight, then, the income tax seems to be here to stay, and any hope for better taxation seems to lie in its reform. Since one of the Code’s chief flaws is its complexity, reform might well start with that. Efforts at simplification have been made with regularity since 1943, when Secretary Morgenthau set up a committee to study the subject, and there have been occasional small successes; simplified instructions, for example, and a shortened form for taxpayers who wish to itemize deductions but whose affairs are relatively uncomplicated were both introduced during the Kennedy administration. Obviously, though, these were mere guerrilla-skirmish victories. One obstacle to any victory more sweeping is the fact that many of the Code’s complexities were introduced in no interest other than that of fairness to all, and apparently cannot be removed without sacrificing fairness. The evolution of the special family-support provisions provides a striking example of how the quest for equity sometimes leads straight to complexity. Up to 1948, the fact that some states had and some didn’t have community-property laws resulted in an advantage to married couples in the community-property states; those couples, and those couples only, were allowed to be taxed as if their total income were divided equally between them, even though one spouse might actually have a high income and the other none at all. To correct this clear-cut inequity, the federal Code was modified to extend the income-dividing privilege to all married persons. Even apart from the resulting discrimination against single persons without dependents—which remains enshrined and unchallenged in the Code today—this correction of one inequity led to the creation of another, the correction of which led to still another; before the Chinese-box sequence was played out, account had been taken of the legitimate special problems of persons who had family responsibilities although they were not married, then of working wives with expenses for child care during business hours, and then of widows and widowers. And each change made the Code more complex.

The loopholes are another matter. In their case, complexity serves not equity but its opposite, and their persistent survival constitutes a puzzling paradox; in a system under which the majority presumably makes the laws, tax provisions that blatantly favor tiny minorities over everybody else would seem to represent the civil-rights principle run wild—a kind of anti-discrimination program for the protection of millionaires. The process by which new tax legislation comes into being—an original proposal from the Treasury Department or some other source, passage in turn by the House Ways and Means Committee, the whole House, the Senate Finance Committee, and the whole Senate, followed by the working out of a House-Senate compromise by a conference committee, followed by repassage by the House and the Senate and, finally, followed by signing by the President—is indeed a tortuous one, at any stage of which a bill may be killed or shelved. However, though the public has plenty of opportunity to protest special-interest provisions, what public pressure there is is apt to be greater in favor of them than against them. In the book on tax loopholes called “The Great Treasury Raid,” Philip M. Stern points out several forces that seem to him to work against the enactment of tax-reform measures, among them the skill, power, and organization of the anti-reform lobbies; the diffuseness and political impotence of the pro-reform forces within the government; and the indifference of the general public, which expresses practically no enthusiasm for tax reform through letters to congressmen or by any other means, perhaps in large part because it is stunned into incomprehension and consequent silence by the mind-boggling technicality of the whole subject. In this sense, the Code’s complexity is its impenetrable elephant hide. Thus the Treasury Department, which, as the agency charged with collecting federal revenues, has a natural interest in tax reform, is often left, along with a handful of reform-minded legislators, like Senators Paul H. Douglas of Illinois, Albert Gore of Tennessee, and Eugene J. McCarthy of Minnesota, on a lonely and indefensible salient.

OPTIMISTS believe that some “point of crisis” will eventually cause specially favored groups to look beyond their selfish interests, and the rest of the country to overcome its passivity, to such an extent that the income tax will come to give back a more flattering picture of the country than it does now. When this will happen, if ever, they do not specify. But the general shape of the picture hoped for by some of those who care most about it is known. The ideal income tax envisioned for the far future by many reformers would be characterized by a short and simple Code with comparatively low rates and with a minimum of exceptions to them. In its main structural features, this ideal tax would bear a marked resemblance to the 1913 income tax—the first ever to be put in effect in the United States in peacetime. So if the unattainable visions of today should eventually materialize, the income tax would be just about back where it started.

4

A Reasonable Amount of Time

PRIVATE INFORMATION, whether of distant public events, impending business developments, or even the health of political figures, has always been a valuable commodity to traders in securities—so valuable that some commentators have suggested that stock exchanges are markets for such information just as much as for stocks. The money value that a market puts on information is often precisely measurable in terms of the change in stock prices that it brings about, and the information is almost as readily convertible into money as any other commodity; indeed, to the extent that it is used for barter between traders, it is a kind of money. Moreover, until quite recently, the propriety of the use of inside dope for their own enrichment by those fortunate enough to possess it went largely unquestioned. Nathan Rothschild’s judicious use of advance news of Wellington’s victory at Waterloo was the chief basis of the Rothschild fortune in England, and no Royal commission or enraged public rose to protest; similarly, and almost simultaneously, on this side of the Atlantic John Jacob Astor made an unchallenged bundle on advance news of the Ghent treaty ending the War of 1812. In the post-Civil War era in the United States the members of the investing public, such as it was, still docilely accepted the right of the insider to trade on his privileged knowledge, and were content to pick up any crumbs that he might drop along the way. (Daniel Drew, a vintage insider, cruelly denied them even this consolation by dropping poisoned crumbs in the form of misleading memoranda as to his investment plans, which he would elaborately strew in public places.) Most nineteenth-century American fortunes were enlarged by, if they were not actually founded on, the practice of insider trading, and just how different our present social and economic order would be if such trading had been effectively forbidden in those days provides a subject for fascinating, if bootless, speculation. Not until 1910 did anyone publicly question the morality of corporate officers, directors, and employees trading in the shares of their own companies, not until the nineteen twenties did it come to be widely thought of as outrageous that such persons should be permitted to play the market game with what amounts to a stacked deck, and not until 1934 did Congress pass legislation intended to restore equity. The legislation, the Securities Exchange Act, requires corporate insiders to forfeit to their corporations any profits they may realize on short-term trades in their own firms’ stock, and provides further, in a section that was implemented in 1942 by a rule designated as 10B-5, that no stock trader may use any scheme to defraud or “make any untrue statement of a material fact or … omit to state a material fact.”

Since omitting to state material facts is the essence of using inside information, the law—while it does not forbid insiders to buy their own stock, nor to keep the profits provided they hold onto the stock more than six months—would seem to outlaw the stacked deck. In practice, though, until very recently the 1942 rule was treated almost as if it didn’t exist; it was invoked by the Securities and Exchange Commission, the federal enforcement body set up under the Securities Exchange Act, only rarely and in cases so flagrant as to be probably prosecutable even without it, under common law. And there were apparent reasons for this laxity. For one thing, it has been widely argued that the privilege of cashing in on their corporate secrets is a necessary incentive to business executives to goad them to their best efforts, and it is coolly contended by a few authorities that the uninhibited presence of insiders in the market, however offensive to the spirit of fair play, is essential to a smooth, orderly flow of trading. Moreover, it is contended that the majority of all stock traders, whether or not they are technically insiders, possess and conceal inside information of one sort or another, or at least hope and believe that they do, and that therefore an even-handed application of Rule 10B-5 would result in nothing less than chaos on Wall Street. So in letting the rule rest largely untroubled in the rulebook for twenty years, the S.E.C. seemed to be consciously refraining from hitting Wall Street in one of its most vulnerable spots. But then, after a couple of preliminary jabs, it went for the spot with a vengeance. The lawsuit in which it did so was a civil complaint against the Texas Gulf Sulphur Company and thirteen men who were directors or employees of that company; it was tried without a jury in the United States District Court in Foley Square on May 9th through June 21st, 1966, and as the presiding judge, Dudley J. Bonsal, remarked mildly at one point during the trial, “I guess we all agree that we are plowing new ground here to some extent.” Plowing, and perhaps sowing too; Henry G. Manne, in a recent book entitled “Insider Trading and the Stock Market,” says that the case presents in almost classic terms the whole problem of insider trading, and expresses the opinion that its resolution “may determine the law in this field for many years to come.”

THE events that led to the S.E.C.’s action began in March, 1959, when Texas Gulf, a New York City-based company that was the world’s leading producer of sulphur, began conducting aerial geophysical surveys over the Canadian Shield, a vast, barren, forbidding area of eastern Canada that in the distant but not forgotten past had proved to be a fertile source of gold. What the Texas Gulf airmen were looking for was neither sulphur nor gold. Rather, it was sulphides—deposits of sulphur occurring in chemical combination with other useful minerals, such as zinc and copper. What they had in mind was discovering mineable veins of such minerals so that Texas Gulf could diversify its activities and be less dependent upon sulphur, the market price of which had been slipping. From time to time during the two years that the surveys went on intermittently, the geophysical instruments in the scanning planes would behave strangely, their needles jiggling in such a way as to indicate the presence of electrically conductive material in the earth. The areas where such things happened, called “anomalies” by geophysicists, were duly logged and mapped by the surveyors. All told, several thousand anomalies were found. It’s a long way from an anomaly to a workable mine, as must be evident to anyone who knows that while most sulphides are electrically conductive, so are many other things, including graphite, the worthless pyrites called fool’s gold, and even water; nevertheless, several hundred of the anomalies that the Texas Gulf men had found were considered to be worthy of ground investigation, and among the most promising-looking of all was one situated at a place designated on their maps as the Kidd-55 segment—one square mile of muskeg marsh, lightly wooded and almost devoid of outcropping rocks, about fifteen miles north of Timmins, Ontario, an old gold-mining town that is itself some three hundred and fifty miles northwest of Toronto. Since Kidd-55 was privately owned, the company’s first problem was to get title to it, or to enough of it to make possible exploratory ground operations; for a large company to acquire land in an area where it is known to be engaged in mining exploration obviously involves delicacy in the extreme, and it was not until June, 1963, that Texas Gulf was able to get an option permitting it to drill on the northeast quarter section of Kidd-55. On October 29th and 30th of that year a Texas Gulf engineer, Richard H. Clayton, conducted a ground electromagnetic survey of the northeast quarter, and was satisfied with what he found. A drill rig was moved to the site, and on November 8th, the first test drill hole was begun.

There followed a thrilling, if uncomfortable, several days at Kidd-55. The man in charge of the drilling crew was a young Texas Gulf geologist named Kenneth Darke, a cigar smoker with a rakish gleam in his eye, who looked a good deal more like the traditional notion of a mining prospector than that of the organization man he was. For three days the drilling went on, bringing out of the earth a cylindrical core of material an inch and a quarter in diameter, which served as the first actual sample of what the rock under Kidd-55 contained. As the core came up, Darke studied it critically, inch by inch and foot by foot, using no instruments but only his eyes and his knowledge of what various mineral deposits look like in their natural state. On the evening of Sunday, November 10th, by which time the drill was down one hundred and fifty feet, Darke telephoned his immediate superior, Walter Holyk, Texas Gulf’s chief geologist, at his home in Stamford, Conn. to report on his findings so far. (He made the call from Timmins, since there was no telephone at the Kidd-55 drill site.) Darke, Holyk has since said, was “excited.” And so, apparently, was Holyk after he had heard what Darke had to say, because he immediately set in motion quite a corporate flap for a Sunday night. That same evening, Holyk called his superior, Richard D. Mollison, a Texas Gulf vice president who lived near Holyk in Greenwich, and—still the same evening—Mollison called his boss, Charles F. Fogarty, executive vice president and the company’s No. 2 man, in nearby Rye, to pass Darke’s report on up the line. Further reports were made the next day through the same labyrinth of command—Darke to Holyk to Mollison to Fogarty. As a result of them, Holyk, Mollison, and Fogarty all decided to go to Kidd-55 to see for themselves.

Holyk got there first; he arrived at Timmins on November 12th, checked in at the Bon Air Motel, and got out to Kidd-55 by jeep and muskeg tractor in time to see the completion of the drill hole and to help Darke visually estimate and log the core. By this time the weather, which had hitherto been passable for Timmins in mid-November, had turned nasty. In fact, it was “quite inclement,” Holyk, a Canadian in his forties with a doctorate in geology from Massachusetts Institute of Technology, has since said. “It was cold, windy, threatening snow and rain, and … we were much more concerned with personal comfort than we were with the details of the core hole. Ken Darke was writing, and I was looking at the core, trying to make estimates of the mineral content.” To add to the difficulty of working outdoors under such conditions, some of the core had come out of the ground covered with dirt and grease, and had to be washed with gasoline before its contents could even be guessed at. Despite all difficulties, Holyk succeeded in making an appraisal of the core that was, to say the least, startling. Over the six hundred or so feet of its final length, he estimated, there appeared to be an average copper content of 1.15% and an average zinc content of 8.64%. A Canadian stockbroker with special knowledge of the mining industry was to say later that a drill core of such length and such mineral content “is just beyond your wildest imagination.”

TEXAS Gulf didn’t have a surefire mine yet; there was always the possibility that the mineral vein was a long, thin one, too limited to be commercially exploitable, and that by a fantastic chance the drill had happened to go “down dip”—that is, straight into the vein like a sword into a sheath. What was needed was a pattern of several drill holes, beginning at different spots on the surface and entering the earth at different angles, to establish the shape and limits of the deposit. And such a pattern could not be made until Texas Gulf had title to the other three quarter-segments of Kidd-55. Getting title would take time if it were possible at all, but meanwhile, there were several steps that the company could and did take. The drill rig was moved away from the site of the test hole. Cut saplings were stuck in the ground around the hole, to restore the appearance of the place to a semblance of its natural state. A second test hole was drilled, as ostentatiously as possible, some distance away, at a place where a barren core was expected—and found. All of these camouflage measures, which were in conformity with long-established practice among miners who suspect that they have made a strike, were supplemented by an order from Texas Gulf’s president, Claude O. Stephens, that no one outside the actual exploration group, even within the company, should be told what had been found. Late in November, the core was shipped off, in sections, to the Union Assay Office in Salt Lake City for scientific analysis of its contents. And meanwhile, of course, Texas Gulf began discreetly putting out feelers for the purchase of the rest of Kidd-55.

And meanwhile other measures, which may or may not have been related to the events north of Timmins, were being taken. On November 12th, Fogarty bought three hundred shares of Texas Gulf stock; on the 15th he added seven hundred more shares, on November 19th five hundred more, and on November 26th two hundred more. Clayton bought two hundred on the 15th, Mollison one hundred on the same day; and Mrs. Holyk bought fifty on the 29th and one hundred more on December 10th. But these purchases, as things turned out, were only the harbingers of a period of apparently intense affection for Texas Gulf stock among certain of its officers and employees, and even some of their friends. In mid-December, the report on the core came back from Salt Lake City, and it showed that Holyk’s rough-and-ready estimate had been amazingly accurate; the copper and zinc contents were found to be almost exactly what he had said, and there were 3.94 ounces of silver per ton thrown in as a sort of bonus. Late in December, Darke made a trip to Washington, D.C. and vicinity, where he recommended Texas Gulf stock to a girl he knew there and her mother; these two, who came to be designated in the trial as the “tippees,” subsequently passed along the recommendation to two other persons who, logically enough, thereby became the “sub-tippees.” Between December 30th and the following February 17th, Darke’s tippees and sub-tippees purchased all told 2,100 shares of Texas Gulf stock, and in addition they purchased what are known in the brokerage trade as “calls” on 1,500 additional shares. A call is an option to buy a stated amount of a certain stock at a fixed price—generally near the current market price—at any time during a stated period. Calls on most listed stocks are always on sale by dealers who specialize in them. The purchaser pays a generally rather moderate sum for his option; if the stock then goes up during the stated period, the rise can easily be converted into almost pure profit for him, while if the stock stays put or goes down, he simply tears up his call the way a horseplayer tears up a losing ticket, and loses nothing but the cost of the call. Therefore calls provide the cheapest possible way of gambling on the stock market, and the most convenient way of converting inside information into cash.

Back in Timmins, Darke, put temporarily out of business as a geologist by the winter freeze and the land-ownership problem at Kidd-55, seems to have managed to keep time from hanging heavy on his hands. In January, he entered into a private partnership with another Timmins man who wasn’t a Texas Gulf employee to stake and claim Crown lands around Timmins for their own benefit. In February, he told Holyk of a barroom conversation that had occurred in Timmins one gelid winter evening, in which an acquaintance of his had let fall that he’d heard rumors of a Texas Gulf strike nearby and was therefore going to stake a few claims of his own. Horrified, Holyk, as he recalled later, told Darke to reverse the previous policy of avoiding Kidd-55 like the plague, and to “go right into the … area and stake all the claims we need;” also to “steer away this acquaintance. Give him a helicopter ride or anything, just get him out of the way.” Darke presumably complied with this order. Moreover, during the first three months of 1964 he bought three hundred shares of Texas Gulf outright, bought calls on three thousand more shares, and added several more persons, one of them his brother, to his growing list of tippees. Holyk and Clayton were somewhat less financially active during the same period, but they did add substantially to their Texas Gulf holdings—in the case of Holyk and his wife, particularly through the use of calls, which they’d scarcely even heard of before, but which were getting to be quite the rage in Texas Gulf circles.

Signs of spring began to come at last, and with them came a triumphant conclusion to the company’s land acquisition program. By March 27th, Texas Gulf had pretty much what it needed; that is, it had either clear title or mineral rights to the three remaining segments of Kidd-55, except for ten-per-cent profit concessions on two of the segments, the stubborn owner of the concession in one case being the Curtis Publishing Company. After a final burst of purchases by Darke, his tippees, and his sub-tippees on March 30th and 31st (among them all, six hundred shares and calls on 5,100 more shares for the two days), drilling was resumed in the still-frozen muskeg at Kidd-55, with Holyk and Darke both on the site this time. The new hole—the third in all, but only the second operational one, since one of the two drilled in November had been the dummy intended to create a diversion—was begun at a point some distance from the first and at an oblique angle to it, to advance the bracketing process. Observing and logging the core as it came out of the ground, Holyk found that he could scarcely hold a pencil because of the cold; but he must have been warmed inwardly by the fact that promising mineralization began to appear after the first hundred feet. He made his first progress report to Fogarty by telephone on April 1st. Now a gruelling daily routine was adopted at Timmins and Kidd-55. The actual drilling crew stayed at the site continuously, while the geologists, in order to keep their superiors in New York posted, had to make frequent trips to telephones in Timmins, and what with the seven-foot snowdrifts along the way the fifteen-mile trek between the town and the drilling camp customarily took three and a half to four hours. One after another, new drill holes, begun at different places around the anomaly and pitched at different angles to it, were plunged into the earth. At first, only one drill rig could be used at a time because of a shortage of water, which was necessary to the operation; the ground was frozen solid and covered by deep snow, and water had to be laboriously pumped from under the ice on a pond about a half mile from Kidd-55. The third hole was finished on April 7th, and a fourth immediately begun with the same rig; the following day, the water shortage having eased somewhat, a fifth hole was inaugurated with a second drill rig, and two days after that—on the 10th—a third rig was pressed into service to drill still another hole. All in all, during the first days of April the principals in the affair were kept busy; in fact, during that period their buying of calls on Texas Gulf seems to have come to a standstill.

Bit by bit the drilling revealed the lineaments of a huge ore deposit; the third hole established that the original one had not gone “down dip” as had been feared, the fourth established that the mineral vein was a satisfactorily deep one, and so on. At some point—the exact point was to become a matter of dispute—Texas Gulf came to know that it had a workable mine of considerable proportions, and as this point approached, the focus of attention shifted from drillers and geologists to staff men and financiers, who were to be the principal object of the S.E.C.’s disapproval later on. At Timmins, snow fell so heavily on April 8th and most of the 9th that not even the geologists could get from the town to Kidd-55, but toward evening on the 9th, when they finally made it after a hair-raising journey of seven and a half hours, with them was no lesser light than Vice President Mollison, who had turned up in Timmins the previous day. Mollison spent the night at the drill site and left at about noon the next day—in order, he explained later, to avoid the outdoorsmen’s lunch they served at Kidd-55 which was too hearty for a deskbound man like him. But before going he issued instructions for the drilling of a mill test hole, which would produce a relatively large core that could be used to determine the amenability of the mineral material to routine mill processing. Normally, a mill test hole is not drilled until a workable mine is believed to exist. And so it may have been in this case; two S.E.C. mining experts were to insist later, against contrary opinions of experts for the defense, that by the time Mollison gave his order, Texas Gulf had information on the basis of which it could have calculated that the ore reserves at Kidd-55 had a gross assay value of at least two hundred million dollars.

THE famous Canadian mining grapevine was humming by now, and in retrospect the wonder is that it had been relatively quiet for so long. (A Toronto broker was to remark during the trial, “I have seen drillers drop the goddam drill and beat it for a brokerage office as fast as they can … [or else] they pick up the telephone and call Toronto.” After such a call, the broker went on, the status of every Bay Street penny-stock tout depends, for a time, on how close a personal acquaintance he can claim with the driller who made the strike, just as a racetrack tout’s status depends sometimes on the degree of intimacy he can claim with a jockey or a horse.) “The moccasin telegraph has Texas Gulf’s activity centered in Kidd Township. A battery of drills are reported to be at work,” said The Northern Miner, a Toronto weekly of immense influence in the mining-stock set, on the 9th, and the same day the Toronto Daily Star declared that Timmins was “bug-eyed with excitement” and that “the magic word on every street corner and in every barber shop is ‘Texas Gulf.’” The phones in Texas Gulf’s New York headquarters were buzzing with frenzied queries, which the officers coldly turned aside. On the 10th, President Stephens was concerned enough about the rumors to seek counsel from one of his most trusted associates—Thomas S. Lamont, senior member of the Texas Gulf board of directors, former second-generation Morgan partner, holder of various lofty offices, past and present, in the Morgan Guaranty Trust Company, and bearer of a name that had long been one to conjure with in Wall Street. Stephens told Lamont what had been going on north of Timmins (it was the first Lamont had heard of it), made it clear that he himself did not yet feel that the evidence justified bug eyes, and asked what Lamont thought ought to be done about the exaggerated reports. As long as they stayed in the Canadian press, Lamont replied, “I think you might be able to live with them.” However, he added, if they should get into the papers in the United States, it might be well to give the press an announcement that would set the record straight and avoid undue gyrations in the stock market.

The following day, Saturday the 11th, the reports reached the United States papers with a bang. The Times and Herald Tribune both ran accounts on the Texas Gulf discovery, and the latter, putting its story on the front page, spoke of “the biggest ore strike since gold was discovered more than sixty years ago in Canada.” After reading these stories, perhaps with eyes bugging slightly, Stephens notified Fogarty that a press release should be issued in time for Monday’s papers, and over the weekend Fogarty, with the help of several other company officials, worked one up. Meanwhile, things were not standing still at Kidd-55; on the contrary, later testimony held that on Saturday and Sunday, as more and more core came up from the drill holes full of copper and zinc ore, the calculable value of the mine was increasing almost hour by hour. However, Fogarty did not communicate with Timmins after Friday night, so the statement that he and his colleagues issued to the press on Sunday afternoon was not based on the most up-to-the-minute information. Whether because of that or for some other reason, the statement did not convey the idea that Texas Gulf thought it had a new Comstock Lode. Characterizing the published reports as exaggerated and unreliable, it admitted only that recent drilling on “one property near Timmins” had led to “preliminary indications that more drilling would be required for proper evaluation of the prospect;” went on to say that “the drilling done to date has not been conclusive;” and then, putting the same thought in what can hardly be called another way, added that “the work done to date has not been sufficient to reach definite conclusions.”

The idea thus couched, or perhaps one should say bedded down, evidently came across to the public when it appeared in Monday morning’s newspapers, because Texas Gulf stock was not nearly so buoyant early that week as it might have been expected to be if the enthusiastic Times and Herald Tribune stories had gone unchallenged. The stock, which had been selling at around 17 or 18 the previous November and had crept up over the intervening months to around 30, opened Monday on the New York Stock Exchange at 32—a rise of nearly two points over Friday’s closing—only to reverse direction and sink to 30⅞ before the day’s trading, was over, and to slip off still further on the following two days and at one point on Wednesday touch a low of 28⅞. Evidently, investors and traders had been considerably impressed by Texas Gulf’s Sunday mood of deprecation. But on those same three days, Texas Gulf people in both Canada and New York seem to have been in quite another mood. At Kidd-55 on Monday the 13th, the day the low-keyed press release was reported in newspapers, the mill test hole was completed, drills continued to grind away on three regular test holes, and a reporter for The Northern Miner was shown around and briefed on the findings by Mollison, Holyk, and Darke. The things they told the reporter make it clear, in retrospect, that whatever the drafters of the release may have believed on Sunday, the men at Kidd-55 knew on Monday that they had a mine and a big one. However, the world was not to know it, or at least not from that source, until Thursday morning, when the next issue of the Miner would appear in subscribers’ mail and on newsstands.

Tuesday evening, Mollison and Holyk flew to Montreal, where they were planning to attend the annual convention of the Canadian Institute of Mining and Metallurgy, a gathering of several hundred leading mining and investment people. Upon arriving at the Queen Elizabeth Hotel where the convention was in progress, Mollison and Holyk were startled to find themselves greeted like film stars. The place had evidently been humming all day with rumors of a Texas Gulf discovery and everyone wanted to be the first to get the firsthand lowdown on it; in fact, a battery of television cameras had been set up for the express purpose of covering such remarks as the emissaries from Timmins might want to make. Not being authorized to make any remarks, Mollison and Holyk turned abruptly on their heels and fled the Queen Elizabeth, holing up for the night in a Montreal airport motel. The following day, Wednesday the 15th, they flew from Montreal to Toronto in the company, by prearrangement, of the Minister of Mines of the Province of Ontario and his deputy; en route they briefed the minister on the Kidd-55 situation, whereupon the minister declared that he wanted to clear the air by making a public announcement on the matter as soon as possible, and then, with Mollison’s help, he drafted such an announcement. According to a copy that Mollison made and kept, the announcement stated, in part, that “the information now in hand … gives the company confidence to allow me to announce that Texas Gulf Sulphur has a mineable body of zinc, copper, and silver ore of substantial dimensions that will be developed and brought to production as soon as possible.” Mollison and Holyk were given to believe that the minister would make his statement in Toronto at eleven o’clock that evening, over radio and television, and that thus Texas Gulf’s good news would become public property a few hours before The Northern Miner appeared early the next day. But for reasons that have never been given, the minister didn’t make the announcement that evening.

At Texas Gulf headquarters, at 200 Park Avenue, there was a similar air of mounting crisis. The company happened to have a regular monthly board-of-directors meeting scheduled for Thursday morning, and on Monday Francis G. Coates, a director who lived in Houston, Texas, and who hadn’t heard of the Kidd-55 strike, telephoned Stephens to inquire whether he ought to bother to come. Stephens said he ought, but didn’t explain why. Better and better news kept filtering in from the drill site, and some time on Wednesday, the Texas Gulf officers decided that it was time to write a new press release, to be issued at a press conference that would follow the Thursday-morning directors’ meeting. Stephens, Fogarty, and David M. Crawford, the company’s secretary, composed the release that afternoon. This time around, the release was based on the very latest information, and moreover, its language was happily devoid of both repetition and equivocation. It read, in part, “Texas Gulf Sulphur Company has made a major strike of zinc, copper, and silver in the Timmins area … Seven drill holes are now essentially complete and indicate an ore body of at least 800 feet in length, 300 feet in width, and having a vertical depth of more than 800 feet. This is a major discovery. The preliminary data indicate a reserve of more than 25 million tons of ore.” As to the striking difference between this release and the one of three days earlier, the new one stated that “considerably more data has been accumulated” in the interim. And no one could deny this; a reserve of more than twenty-five million tons of ore meant that the value of the ore was not the two hundred million dollars that was alleged to have been calculable a week earlier, but many times that much.

In the course of the same hectic day in New York, the engineer Clayton and the company secretary Crawford found time to call their brokers and order themselves some Texas Gulf stock—two hundred shares in Clayton’s case, three hundred in Crawford’s. And Crawford soon decided that he hadn’t plunged deeply enough; shortly after eight o’clock the next morning, after an apparently preoccupied night at the Park Lane Hotel, he awakened his broker with a second call and doubled his order.

ON Thursday morning, the first hard news of the Timmins strike spread through the North American investment world, rapidly but erratically. Between seven and eight o’clock, mailmen and newsstands in Toronto began distributing copies of The Northern-Miner containing the piece by the reporter who had visited Kidd55, in which he described the strike with a good deal of mining jargon but did not omit to call it, in language comprehensible enough for anyone, “a brilliant exploration success” and “a major new zinc-copper-silver mine.” At about the same time, the Miner was on its way out to subscribers south of the border in Detroit and Buffalo, and a few hundred newsstand copies appear to have arrived in New York between nine and ten o’clock. The paper’s physical appearance here, however, was preceded by telephone reports on its contents from Toronto, and by about 9:15 the news that Texas Gulf had hit it big for sure was the talk of New York brokerage offices. A customer’s man in the Sixtieth Street office of E. F. Hutton & Company complained later that his broker cronies had been so eager to natter on the telephone about Texas Gulf early that morning as to substantially prevent him from communicating with his customers; however, he did manage to squeeze in a call to two of them, a husband and wife for whom he was able to turn a rather quick profit in Texas Gulf—to be exact, a profit of $10,500 in less than an hour. (“It is clear that we are all in the wrong business,” Judge Bonsal was to comment when he heard this. Or as the late Wieland Wagner once remarked in another context, “I shall be quite explicit. Valhalla is Wall Street.”) At the Stock Exchange itself early that day, the traders in the Luncheon Club, which before the ten-o’clock opening serves as a breakfast club, were all munching on the Texas Gulf situation along with their toast and eggs.

At the directors’ meeting at 200 Park, which began promptly at nine, the directors were shown the new statement that was shortly to be released to the press, and Stephens, Fogarty, Holyk, and Mollison, as representatives of the exploration group, commented in turn on the Timmins discovery. Stephens also stated that the Ontario Minister of Mines had announced it publicly in Toronto the previous evening (a misstatement, of course, although an unintentional one; actually, the minister was making his announcement to the Ontario Parliament press gallery in Toronto at almost the same moment Stephens was speaking). The directors’ meeting ended at about ten o’clock, whereupon a clutch of reporters—twenty-two of them, representing many of the major United States newspapers and magazines, general and financial—trooped into the board room for the press conference, the Texas Gulf directors all remaining in their places. Stephens distributed copies of the press release to the reporters and then, in fulfillment of a curious ritual that governs such affairs, read it aloud. While he was engaged in this redundant recital various reporters began to drift away (“they began sort of leaking out of the room” was the way Lamont put it later) to telephone the sensational news to their publications; still more of them slipped away during the events that subsequently rounded out the press conference—the showing of some innocuous colored slides of the countryside around Timmins, and an exhibition and explanation by Holyk of some drill cores—and by the time it ended, at around 10:15, only a handful of reporters were left. This certainly didn’t mean that the affair had been a flop. On the contrary, a press conference is perhaps the only kind of show whose success is in direct proportion to the number of people who leave before it is over.

The actions of two of the Texas Gulf directors, Coates and Lamont, during the next half hour or so were to give rise to the most controversial part of the S.E.C.’s complaint, and, since the controversy has now been inscribed in the law, those actions are likely to be studied for at least a generation by inside stock traders seeking guidance as to what they must do to be saved, or at least to avoid being damned. The essence of the controversy was timing, and in particular, the timing of Coates’ and Lamont’s maneuvers in relation to that of the dissemination of the Texas Gulf news by the Dow Jones News Service, the familiar spot-news facility for investors. Few investment offices in the United States are without the service, and its prestige is such that in some investment circles the moment a piece of news becomes public is considered to be determined by the moment it crosses the broad tape. As to the morning of April 16th, 1964, a Dow Jones reporter was not only among those at the Texas Gulf press conference but was among those who left early to telephone the news to his office. According to his recollection, the reporter made his call between 10:10 and 10:15, and normally an item of such importance as the one he sent would begin to be printed out by Dow Jones machines in offices from coast to coast within two or three minutes after being telephoned in. In fact, though, the Texas Gulf story did not begin to appear until 10:54, an entirely inexplicable forty-odd minutes later. The mystery of the broad tape message, like the mystery of the Minister of Mines’ announcement, was left unraveled in the trial on grounds of irrelevance; an engaging aspect of the rules of evidence is their tendency to leave a few things to the imagination.

Coates, the Texan, was the first director to embark upon what he can hardly have thought of at the time as a historically significant course. Either before or immediately after the end of the press conference he went into an office adjoining the board room, where he borrowed a telephone and called his son-in-law, H. Fred Haemisegger, who is a stockbroker in Houston. Coates, as he related later, told Haemisegger of the Texas Gulf discovery and added that he had waited to call until “after the public announcement” because he was “too old to get into trouble with the S.E.C.” He then placed an order for two thousand shares of Texas Gulf stock for four family trusts of which he was a trustee, though not personally a beneficiary. The stock, which had opened on the Stock Exchange some twenty minutes earlier at a fraction above 30 in very active but by no means decisively bullish trading, was now rapidly on its way up, but by acting quickly Haemisegger managed to buy the block for Coates at between 31 and 31⅝, getting his orders in to his firm’s floor broker well before the unaccountably delayed news began to come out on the broad tape.

Lamont, in the Wall Street tradition of plungers rather than the Texas one, made his move with decision but with an elegant, almost languorous lack of hurry. Instead of leaving the board room at the conclusion of the press conference, he stayed there for some twenty minutes, not doing much of anything. “I milled around … and listened to some of them chatter and talk with each other, and slapped people on the back,” he recounted later. Then, at 10:39 or 10:40, he went to a nearby office and telephoned a colleague and friend of his at the Morgan Guaranty Trust Company—Longstreet Hinton, the bank’s executive vice president and the head of its trust department. Earlier in the week Hinton had asked Lamont if he, as a Texas Gulf director, could shed any light on the rumors of an ore discovery that were appearing in the press, and Lamont had replied that he couldn’t. Now Lamont, as he recalled later, told Hinton “that there was news which had come out, or was shortly coming out, on the ticker, which would be of interest to him, regarding Texas Gulf Sulphur.” “Is it good?” Hinton asked, and Lamont replied that it was “pretty good” or “very good.” (Neither man is sure which he said, but it doesn’t matter, since in New York bankerese “pretty good” means “very good.”) In any case, Hinton did not follow the advice to look at the Dow Jones ticker, even though a machine was ticking twenty feet from his office; instead, he immediately called the bank’s trading department and asked for a market quotation on Texas Gulf. After getting it, he placed an order to buy 3,000 shares for the account of the Nassau Hospital, of which he was treasurer. All this occupied no more than two minutes from the time Lamont had left the press conference. The order had been transmitted from the bank to the Stock Exchange and executed, and Nassau Hospital had its stock, before Hinton would have seen anything about Texas Gulf on the broad tape if he had been looking at it. But he was not looking at it; he was otherwise occupied. After placing the Nassau Hospital order, he went to the office of the Morgan Guaranty officer in charge of pension trusts and suggested that he buy some Texas Gulf for the trusts. In a matter of less than a half an hour, the bank had ordered 7,000 shares for its pension fund and profit-sharing account—two thousand of them before the announcement had begun to appear on the broad tape, and the rest either while it was appearing or within a few minutes afterward. A bit more than an hour after that—at 12:33 p.m.—Lamont bought 3,000 shares for himself and members of his family, this time having to pay 34½ for them, since Texas Gulf by that time was on its way up for fair. As it was to continue to be for days, months, and years. It closed that afternoon at 36⅜, it reached a high of 58⅜ later that month, and by the end of 1966, when commercial production of ore was at last under way at Kidd-55 and the enormous new mine was expected to account for one-tenth of Canada’s total annual production of copper and one-quarter of its total annual production of zinc, the stock was selling at over 100. Anyone who had bought Texas Gulf between November 12th, 1963 and the morning (or even the lunch hour) of April 16th, 1964 had therefore at least tripled his money.

PERHAPS the most arresting aspect of the Texas Gulf trial—apart from the fact that a trial was taking place at all—was the vividness and variety of the defendants who came before Judge Bonsal, ranging as they did from a hot-eyed mining prospector like Clayton (a genuine Welchman with a degree in mining from the University of Cardiff) through vigorous and harried corporate nabobs like Fogarty and Stephens to a Texas wheeler-dealer like Coates and a polished Brahmin of finance like Lamont. (Darke, who had left Texas Gulf’s employ soon after April, 1964 to become a private investor—which may or may not indicate that he had become a man of independent means—declined to appear at the trial on the ground that his Canadian nationality put him beyond the reach of subpoena by a United States court, and the S.E.C. grieved loudly over this refusal; defense counsel, however, scornfully insisted that the S.E.C. was really delighted to have Darke absent, thus allowing plaintiff to paint him as Mephistopheles hiding in the wings.) The S.E.C, after its counsel, Frank E. Kennamer Jr., had announced his intention to “drag to light and pillory the misconduct of these defendants,” asked the court to issue a permanent injunction forbidding Fogarty, Mollison, Clayton, Holyk, Darke, Crawford, and several other corporate insiders who had bought stock or calls between November 8th, 1963 and April 15th, 1964, from ever again “engaging in any act … which operates or would operate as a fraud or deceit upon any person in connection with purchase or sale of securities”; further—and here it was breaking entirely new ground—it prayed that the Court order the defendants to make restitution to the persons they had allegedly defrauded by buying stock or calls from them on the basis of inside information. The S.E.C. also charged that the pessimistic April 12th press release was deliberately deceptive, and asked that because of it Texas Gulf be enjoined from “making any untrue statement of material fact or omitting to state a material fact.” Apart from any question of loss of corporate face, the nub of the matter here lay in the fact that such a judgment, if granted, might well open the way for legal action against the company by any stockholder who had sold his Texas Gulf stock to anybody in the interim between the first press release and the second one, and since the shares that had changed hands during that period had run into the millions, it was a nub indeed.

Apart from legal technicalities, counsel based its defense of the early insider stock purchases chiefly on the argument that the information yielded by the first drill hole in November had made the prospect of a workable mine not a sure thing but only a sporting proposition, and to buttress this argument, it paraded before the judge a platoon of mining experts who testified as to the notorious fickleness of first drill holes, some of the witnesses going so far as to say that the hole might very well have turned out to be not an asset but a liability to Texas Gulf. The people who had bought stock or calls during the winter insisted that the drill hole had had little or nothing to do with their decision—they had been motivated simply by the feeling that Texas Gulf was a good investment at that juncture on general principles; and Clayton attributed his abrupt appearance as a substantial investor to the fact that he had just married a well-to-do wife. The S.E.C. countered with its own parade of experts, maintaining that the nature of the first core had been such as to make the existence of a rich mine an overwhelming probability, and that therefore those privy to the facts about it had possessed a material fact. As the S.E.C. put it saltily in a post-trial brief, “the argument that the defendants were free to purchase the stock until the existence of a mine had been established beyond doubt is equivalent to saying that there is no unfairness in betting on a horse entered in a race, knowing that the animal has received an illegal stimulant, because in the homestretch the horse might drop dead.” Defense counsel declined to be drawn into argument on the equine analogy. As to the pessimistic April 12th release, the S.E.C. made much of the fact that Fogarty, its chief drafter, had based it on information that was almost forty-eight hours old when it was issued, despite the fact that communications between Kidd-55, Timmins, and New York were relatively good at the time, and expressed the view that “the most indulgent explanation for his strange conduct is that Dr. Fogarty simply did not care whether he gave the shareholders of Texas Gulf and the public a discouraging statement based on stale information.” Brushing aside the question of staleness, the defense asserted that the release “accurately stated the status of the drilling in the opinion of Stephens, Fogarty, Mollison, Holyk, and Clayton,” that “the problem presented was obviously one of judgment,” and that the company had been in a particularly difficult and sensitive position in that if it had, instead, issued an overly optimistic report that had later proved to have been based on false hopes, it could just as well have then been accused of fraud for that.

Weighing the crucial question of whether the information obtained from the first drill hole had been “material,” Judge Bonsal concluded that the definition of materiality in such instances must be a conservative one. There was, he pointed out, a question of public policy involved: “It is important under our free-enterprise system that insiders, including directors, officers, and employees, be encouraged to own securities of their company. The incentive that comes with stock ownership benefits both the company and the stockholders.” Keeping his definition conservative, he decided that up until the evening of April 9th, when three converging drill holes positively established the three-dimensionality of the ore deposit, material information had not been in hand, and the decisions of the insiders to buy Texas Gulf stock before that date, even if based on the drilling results, were no more than perfectly sporting, and legal, “educated guesses.” (A newspaper columnist who disagreed with the judge’s finding was to remark that the guesses had been so educated as to qualify for summa cum laude.) In the case of Darke, the judge found that the spate of stock purchases by his tippees and sub-tippees on the last days of March seemed highly likely to have been instigated by word from Darke that drilling at Kidd-55 was about to be resumed; but even here, according to Judge Bonsal’s logic, material information did not yet exist and therefore could neither be acted upon nor passed along to others.

Case was therefore dismissed against all educated guessers who had bought stock or calls, or made recommendations to tippees, before the evening of April 9th. With Clayton and Crawford, who had been so injudicious as to buy or order stock on April 15th, it was another matter. The judge found no evidence that they had intended to deceive or defraud anyone, but they had made their purchases with the full knowledge that a great mine had been found and that it would be announced the next day—in short, with material private information in hand. Therefore they were found to have violated Rule 10B-5, and in due time would presumably be enjoined from doing such a thing again and made to offer restitution to the persons they bought their April 15th shares from—assuming, of course, that such persons can be found, the complexities of stock-exchange trading being such that it isn’t always an easy matter to figure out exactly whom one has been dealing with on any particular transaction. The law in our time is, and probably ought to remain, almost unrealistically humanistic; in its eyes, corporations are people, stock exchanges are street-corner marketplaces where buyer and seller haggle face to face, and computers scarcely exist.

As for the April 12th press release, the judge found it in retrospect “gloomy” and “incomplete,” but he acknowledged that its purpose had been the worthy one of correcting the exaggerated rumors that had been appearing and decided that the S.E.C. had failed to prove that it was false, misleading, or deceptive. Thus he dismissed the complaint that Texas Gulf had deliberately tried to confuse its stockholders and the public.

UP to this point, it was two wins against a whole string of losses for the S.E.C., and the right of a miner to drop his drill and run for a brokerage office appeared to have retained most of its sanctity, provided at least that his drill hole is the first of a series. But there remained to be settled the matter that, of all those contested in the case, was of the most consequence to stockholders, stock traders, and the national economy, as opposed to the members of corporate mining exploration groups. It was the matter of the April 16th activities of Coates and Lamont, and its importance lay in the fact that it turned on the question of precisely when, in the eyes of the law, a piece of information ceases to be inside and becomes public. The question had never before been subjected to anything like so exacting a test, so what came out of the Texas Gulf case would instantly become the legal authority on the subject until superseded by some even more refined case.

The basic position of the S.E.C. was that the stock purchases of Coates, and the circumspect tip given by Lamont to Hinton by telephone, were illegal use of inside information because they were accomplished before the announcement of the ore strike on the Dow Jones broad tape—an announcement that the S.E.C.’s lawyers kept referring to as the “official” one, although the Dow Jones service, much as it might like to, derives no such status from any authority other than custom. But the S.E.C. went further than that. Even if the two directors’ telephone calls had been made after the “official” announcement, it contended, they would have been improper and illegal unless enough time had elapsed for the news to be thoroughly absorbed by members of the investing public not privileged to attend the press conference or even to be watching the broad tape at the right moment. Defense counsel saw things rather differently. In its view, far from being culpable regardless of whether or not they had acted before or after the broad tape announcement, its clients were innocent in either case. In the first place, the lawyers contended, Coates and Lamont had every reason to believe the news was out, since Stephens had said during the directors’ meeting that it had been released by the Ontario Minister of Mines the previous evening, and therefore Coates and Lamont acted in good faith; in the second place, counsel went on, what with the buzzing in brokerage offices and the early-morning excitement at the Stock Exchange, to all intents and purposes the news really was out, via osmosis and The Northern Miner, considerably before it appeared on the ticker or before the mooted telephone calls were made. Lamont’s lawyers argued that their client hadn’t advised Hinton to buy Texas Gulf stock, anyhow; he’d merely advised him to look at the broad tape, an act as innocent to recommend as to perform, and what Hinton had done then had been entirely on his own hook. In sum, the lawyers for the two sides could agree on neither whether the rules had been violated nor what the rules actually were; indeed, it was one of the defense’s contentions that the S.E.C. was asking the court to write new rules and then apply them retroactively, while the plaintiff insisted that he was merely asking that an old rule, 10B-5, be applied broadly, in the spirit of the Marquis of Queensberry. Near the end of the trial Lamont’s lawyers, bearing down hard, created a courtroom sensation by introducing a surprise exhibit, a large, elaborate map of the United States dotted with colored flags, some blue, some red, some green, some gold, some silver—each flag, the lawyers announced, denoting a place where the Texas Gulf news had been disseminated before Lamont had acted or it had reached the broad tape. On questioning, it came out that all but eight of the flags represented offices of the brokerage firm of Merrill Lynch, Pierce, Fenner & Smith, on whose interoffice wire the news had been carried at 10:29; but while this revelation of the highly limited scope of the dissemination may have mitigated the legal force of the map, it apparently did not mitigate the esthetic impression on the judge. “Isn’t that beautiful?” he exclaimed, while the S.E.C. men fumed in chagrin, and when one of the proud defense lawyers noticed a couple of locations on the map that had been overlooked and pointed out that there should really be even more flags, Judge Bonsal, still bemused, shook his head and said he was afraid that wouldn’t work, since all known colors seemed to have been used already.

Lamont’s fastidiousness in waiting until 12:33, almost two hours after his call to Hinton, before he bought stock for himself and his family left the S.E.C. unimpressed—and it was here that the Commission took its most avant-garde stand and asked the judge for a decision that would forge most fearlessly into the legal jungles of the future. As the stand was set forth in the S.E.C. briefs, “It is the Commission’s position that even after corporate information has been published in the news media, insiders, are still under a duty to refrain from securities transactions until there had elapsed a reasonable amount of time in which the securities industry, the shareholders, and the investing public can evaluate the development and make informed investment decisions … Insiders must wait at least until the information is likely to have reached the average investor who follows the market and he has had some opportunity to consider it.” In the Texas Gulf case, the S.E.C. argued, one hour and thirty-nine minutes after the start of the broad-tape transmission was not long enough for that evaluation, as evidenced by the fact that the enormous rise in the price of Texas Gulf stock had hardly more than started by that time, and therefore Lamont’s 12:33 purchases had violated the Securities Exchange Act. What, then, did the S.E.C. think would be “a reasonable amount of time”? That would “vary from case to case,” the S.E.C.’s counsel Kennamer said in his summation, according to the nature of the inside information; for example, word of a dividend cut would probably percolate through the dullest investor’s brain in a very short time, while a piece of news as unusual and abstruse as Texas Gulf’s might take days, or even longer. It would, Kennamer said, be “a nearly impossible task to formulate a rigid set of rules that would apply in all situations of this sort.” Therefore, in the S.E.C.’s canon, the only way an insider could find out whether he had waited long enough before buying his company’s stock was by being haled into court and seeing what the judge would decide.

Lamont’s counsel, led by S. Hazard Gillespie, went after this stand with the same zeal, if not actually glee, that had marked its foray into cartography. First, Gillespie said, the S.E.C. had contended that Coates’ call to Haemisegger and Lamont’s to Hinton had been wrong because they had been made before the broadtape announcement; then it had said that Lamont’s later stock purchase had been wrong because it had been made after the announcement, but not long enough after. If these apparently opposite courses of action were both fraud, what was right conduct? The S.E.C. seemed to want to have the rules made up as it went along—or, rather, to have the courts make them up. As Gillespie put the matter more formally, the S.E.C. was “asking the court to write … a rule judicially and to apply it retroactively to adjudicate Mr. Lamont guilty of fraud because of conduct which he reasonably believed to be entirely proper.”

It wouldn’t stand up, Judge Bonsal agreed—and for that matter, neither would the S.E.C.’s contention that the time of the broad-tape transmission had been the time when the news had become public. He took the narrower view that, based on legal precedent, the controlling moment had been the one when the press release had been read and handed to the reporters, even though hardly any outsider—that is, hardly anybody at all—had known of it for some time afterward. Clearly troubled by the implications of this finding, Judge Bonsal added that “it may be, as the Commission contends, that a more effective rule should be established to preclude insiders from acting on information after it has been announced but before it has been absorbed by the public.” But he didn’t think it was up to him to write such a rule. Nor did he think it was up to him to determine whether or not Lamont had waited long enough before placing his 12:33 order. If it were left to judges to make such determinations, he said, “this could only lead to uncertainty. A decision in one case would not control another case with different facts. No insider would know whether he had waited long enough … If a waiting period is to be fixed, this could be most appropriately done by the Commission.” No one would bell the cat, and the complaints against Coates and Lamont were dismissed.

THE S.E.C. appealed all the dismissals, and Clayton and Crawford, the only two defendants found to have violated the Securities Exchange Act, appealed the judgments against them. In its appeal brief the Commission painstakingly reviewed the evidence and suggested to the Circuit Court that Judge Bonsal had erred in his interpretation of it, while the defense brief for Clayton and Crawford concentrated on the possibly detrimental effects of the doctrine implied in the finding against them. Might not the doctrine mean, for example, that every security analyst who does his best to ferret out little-known facts about a particular company, and then recommends that company’s stock to his customers as he is paid to do, could be adjudged an insider improperly distributing tips precisely because of his diligence? Might it not tend to “stifle investment by corporate personnel and impede the flow of corporate information to investors”?

Perhaps so. At all events, in August, 1968, the U.S. Court of Appeals for the Second Circuit handed down a decision which flatly reversed Judge Bonsal’s findings on just about every score except the findings against Crawford and Clayton, which were affirmed. The Appeals Court found that the original November drill hole had provided material evidence of a valuable ore deposit, and that therefore Fogarty, Mollison, Darke, Holyk, and all other insiders who had bought Texas Gulf stock or calls on it during the winter were guilty of violations of the law; that the gloomy April 12th press release had been ambiguous and perhaps misleading; and that Coates had improperly and illegally jumped the gun in placing his orders right after the April 16th press conference. Only Lamont—the charges against whom had been dropped following his death shortly after the lower court decision—and a Texas Gulf office manager, John Murray, remained exonerated.

The decision was a famous victory for the S.E.C., and the first reaction of Wall Street was to cry out that it would make for utter confusion. Pending further appeals to the Supreme Court, it would, at least, result in an interesting experiment. For the first time in the history of the world, the effort would have to be made, in Wall Street, to conduct a stock market without the use of a stacked deck.

5

Xerox Xerox Xerox Xerox

WHEN THE ORIGINAL mimeograph machine—the first mechanical duplicator of written pages that was practical for office use—was put on the market by the A. B. Dick Company, of Chicago, in 1887, it did not take the country by storm. On the contrary, Mr. Dick—a former lumberman who had become bored with copying his price lists by hand, had tried to invent a duplicating machine himself, and had finally obtained rights to produce the mimeograph from its inventor, Thomas Alva Edison—found himself faced with a formidable marketing problem. “People didn’t want to make lots of copies of office documents,” says his grandson C. Matthews Dick, Jr., currently a vice-president of the A. B. Dick Company, which now manufactures a whole line of office copiers and duplicators, including mimeograph machines. “By and large, the first users of the thing were non-business organizations like churches, schools, and Boy Scout troops. To attract companies and professional men, Grandfather and his associates had to undertake an enormous missionary effort. Office duplicating by machine was a new and unsettling idea that upset long-established office patterns. In 1887, after all, the typewriter had been on the market only a little over a decade and wasn’t yet in widespread use, and neither was carbon paper. If a businessman or a lawyer wanted five copies of a document, he’d have a clerk make five copies—by hand. People would say to Grandfather, ‘Why should I want to have a lot of copies of this and that lying around? Nothing but clutter in the office, a temptation to prying eyes, and a waste of good paper.’”

On another level, the troubles that the elder Mr. Dick encountered were perhaps connected with the generally bad repute that the notion of making copies of graphic material had been held in for a number of centuries—a bad repute reflected in the various overtones of the English noun and verb “copy.” The Oxford English Dictionary makes it clear that during those centuries there was an aura of deceit associated with the word; indeed, from the late sixteenth century until Victorian times “copy” and “counterfeit” were nearly synonymous. (By the middle of the seventeenth century, the medieval use of the noun “copy” in the robust sense of “plenty” or “abundance” had faded out, leaving behind nothing but its adjective form, “copious.”) “The only good copies are those which exhibit the defects of bad originals,” La Rochefoucauld wrote in his “Maxims” in 1665. “Never buy a copy of a picture,” Ruskin pronounced dogmatically in 1857, warning not against chicanery but against debasement. And the copying of written documents was often suspect, too. “Though the attested Copy of a Record be good proof, yet the Copy of a Copy never so well attested … will not be admitted as proof in Judicature,” John Locke wrote in 1690. At about the same time, the printing trade contributed to the language the suggestive expression “foul copy,” and it was a favorite Victorian habit to call one object, or person, a pale copy of another.

Practical necessity arising out of increasing industrialization was doubtless chiefly responsible for a twentieth-century reversal of these attitudes. In any case, office reproduction began to grow very rapidly. (It may seem paradoxical that this growth coincided with the rise of the telephone, but perhaps it isn’t. All the evidence suggests that communication between people by whatever means, far from simply accomplishing its purpose, invariably breeds the need for more.) The typewriter and carbon paper came into common use after 1890, and mimeographing became a standard office procedure soon after 1900. “No office is complete without an Edison Mimeograph,” the Dick Company felt able to boast in 1903. By that time, there were already about a hundred and fifty thousand of the devices in use; by 1910 there were probably over two hundred thousand, and by 1940 almost half a million. The offset printing press—a mettlesome competitor capable of producing work much handsomer than mimeographed output—was successfully adapted for office use in the nineteen-thirties and forties, and is now standard equipment in most large offices. As with the mimeograph machine, though, a special master page must be prepared before reproduction can start—a relatively expensive and time-consuming process—so the offset press is economically useful only when a substantial number of copies are wanted. In office-equipment jargon, the offset press and the mimeograph are “duplicators” rather than “copiers,” the dividing line between duplicating and copying being generally drawn somewhere between ten and twenty copies. Where technology lagged longest was in the development of efficient and economical copiers. Various photographic devices that did not require the making of master pages—of which the most famous was (and still is) the Photostat—began appearing around 1910, but because of their high cost, slowness, and difficulty of operation, their usefulness was largely limited to the copying of architectural and engineering drawings and legal documents. Until after 1950, the only practical machine for making a copy of a business letter or a page of typescript was a typewriter with carbon paper in its platen.

The nineteen-fifties were the raw, pioneering years of mechanized office copying. Within a short time, there suddenly appeared on the market a whole batch of devices capable of reproducing most office papers without the use of a master page, at a cost of only a few cents per copy, and within a time span of a minute or less per copy. Their technology varied—Minnesota Mining & Manufacturing’s Thermo-Fax, introduced in 1950, used heat-sensitive copying paper; American Photocopy’s Dial-A-Matic Autostat (1952) was based on a refinement of ordinary photography; Eastman Kodak’s Verifax (1953) used a method called dye transfer; and so on—but almost all of them, unlike Mr. Dick’s mimeograph, immediately found a ready market, partly because they filled a genuine need and partly, it now seems clear, because they and their function exercised a powerful psychological fascination on their users. In a society that sociologists are forever characterizing as “mass,” the notion of making one-of-a-kind things into many-of-a-kind things showed signs of becoming a real compulsion. However, all these pioneer copying machines had serious and frustrating inherent defects; for example, Autostat and Verifax were hard to operate and turned out damp copies that had to be dried, while Thermo-Fax copies tended to darken when exposed to too much heat, and all three could make copies only on special treated paper supplied by the manufacturer. What was needed for the compulsion to flower into a mania was a technological breakthrough, and the breakthrough came at the turn of the decade with the advent of a machine that worked on a new principle, known as xerography, and was able to make dry, good-quality, permanent copies on ordinary paper with a minimum of trouble. The effect was immediate. Largely as a result of xerography, the estimated number of copies (as opposed to duplicates) made annually in the United States sprang from some twenty million in the mid-fifties to nine and a half billion in 1964, and to fourteen billion in 1966—not to mention billions more in Europe, Asia, and Latin America. More than that, the attitude of educators toward printed textbooks and of business people toward written communication underwent a discernible change; avant-garde philosophers took to hailing xerography as a revolution comparable in importance to the invention of the wheel; and coin-operated copying machines began turning up in candy stores and beauty parlors. The mania—not as immediately disrupting as the tulip mania in seventeenth-century Holland but probably destined to be considerably farther-reaching—was in full swing.

The company responsible for the great breakthrough and the one on whose machines the majority of these billions of copies were made was, of course, the Xerox Corporation, of Rochester, New York. As a result, it became the most spectacular big-business success of the nineteen-sixties. In 1959, the year the company—then called Haloid Xerox, Inc.—introduced its first automatic xerographic office copier, its sales were thirty-three million dollars. In 1961, they were sixty-six million, in 1963 a hundred and seventy-six million, and in 1966 over half a billion. As Joseph C. Wilson, the chief executive of the firm, pointed out, this growth rate was such that if maintained for a couple of decades (which, perhaps fortunately for everyone, couldn’t possibly happen), Xerox sales would be larger than the gross national product of the United States. Unplaced in Fortune’s ranking of the five hundred largest American industrial companies in 1961, Xerox by 1964 had attained two-hundred-and-twenty-seventh place, and by 1967 it had climbed to hundred-and-twenty-sixth. Fortune’s ranking is based on annual sales; according to certain other criteria, Xerox placed much higher than hundred-and-seventy-first. For example, early in 1966 it ranked about sixty-third in the country in net profits, probably ninth in ratio of profit to sales, and about fifteenth in terms of the market value of its stock—and in this last respect the young upstart was ahead of such long-established industrial giants as U.S. Steel, Chrysler, Procter & Gamble, and R.C.A. Indeed, the enthusiasm the investing public showed for Xerox made its shares the stock market Golconda of the sixties. Anyone who bought its stock toward the end of 1959 and held on to it until early 1967 would have found his holding worth about sixty-six times its original price, and anyone who was really fore-sighted and bought Haloid in 1955 would have seen his original investment grow—one might almost say miraculously—a hundred and eighty times. Not surprisingly, a covey of “Xerox millionaires” sprang up—several hundred of them all told, most of whom either lived in the Rochester area or had come from there.

The Haloid Company, started in Rochester in 1906, was the grandfather of Xerox, just as one of its founders—Joseph C. Wilson, a sometime pawnbroker and sometime mayor of Rochester—was the grandfather of his namesake, the 1946–1968 boss of Xerox. Haloid manufactured photographic papers, and, like all photographic companies—and especially those in Rochester—it lived in the giant shadow of its neighbor, Eastman Kodak. Even in this subdued light, though, it was effective enough to weather the Depression in modestly good shape. In the years immediately after the Second World War, however, both competition and labor costs increased, sending Haloid on a search for new products. One of the possibilities its scientists hit upon was a copying process that was being worked on at the Battelle Memorial Institute, a large non-profit industrial-research organization in Columbus, Ohio. At this point, the story flashes back to 1938 and a second-floor kitchen above a bar in Astoria, Queens, which was being used as a makeshift laboratory by an obscure thirty-two-year-old inventor named Chester F. Carlson. The son of a barber of Swedish extraction, and a graduate in physics of the California Institute of Technology, Carlson was employed in New York in the patent department of P. R. Mallory & Co., an Indianapolis manufacturer of electrical and electronic components; in quest of fame, fortune, and independence, he was devoting his spare time to trying to invent an office copying machine, and to help him in this endeavor he had hired Otto Kornei, a German refugee physicist. The fruit of the two men’s experiments was a process by which, on October 22, 1938, after using a good deal of clumsy equipment and producing considerable smoke and stench, they were able to transfer from one piece of paper to another the unheroic message “10–22–38 Astoria.” The process, which Carlson called electrophotography, had—and has—five basic steps: sensitizing a photoconductive surface to light by giving it an electrostatic charge (for example, by rubbing it with fur); exposing this surface to a written page to form an electrostatic image; developing the latent image by dusting the surface with a powder that will adhere only to the charged areas; transferring the image to some sort of paper; and fixing the image by the application of heat. The steps, each of them in itself familiar enough in connection with other technologies, were utterly new in combination—so new, in fact, that the kings and captains of commerce were markedly slow to recognize the potentialities of the process. Applying the knowledge he had picked up in his job downtown, Carlson immediately wove a complicated net of patents around the invention (Kornei shortly left to take a job elsewhere, and thus vanished permanently from the electrophotographic scene) and set about trying to peddle it. Over the next five years, while continuing to work for Mallory, he pursued his moonlighting in a new form, offering rights to the process to every important office-equipment company in the country, only to be turned down every time. Finally, in 1944, Carlson persuaded Battelle Memorial Institute to undertake further development work on his process in exchange for three-quarters of any royalties that might accrue from its sale or license.

Here the flashback ends and xerography, as such, comes into being. By 1946, Battelle’s work on the Carlson process had come to the attention of various people at Haloid, among them the younger Joseph C. Wilson, who was about to assume the presidency of the company. Wilson communicated his interest to a new friend of his—Sol M. Linowitz, a bright and vigorously public-spirited young lawyer, recently back from service in the Navy, who was then busy organizing a new Rochester radio station that would air liberal views as a counterbalance to the conservative views of the Gannett newspapers. Although Haloid had its own lawyers, Wilson, impressed with Linowitz, asked him to look into the Battelle thing as a “one-shot” job for the company. “We went to Columbus to see a piece of metal rubbed with cat’s fur,” Linowitz has since said. Out of that trip and others came an agreement giving Haloid rights to the Carlson process in exchange for royalties to Carlson and Battelle, and committing it to share with Battelle in the work and the costs of development. Everything else, it seemed, flowed from that agreement. In 1948, in search of a new name for the Carlson process, a Battelle man got together with a professor of classical languages at Ohio State University, and by combining two words from classical Greek they came up with “xerography,” or “dry writing.” Meanwhile, small teams of scientists at Battelle and Haloid, struggling to develop the process, were encountering baffling and unexpected technical problems one after another; at one point, indeed, the Haloid people became so discouraged that they considered selling most of their xerography rights to International Business Machines. But the deal was finally called off, and as the research went on and the bills for it mounted, Haloid’s commitment to the process gradually became a do-or-die affair. In 1955, a new agreement was drawn up, under which Haloid took over full title to the Carlson patents and the full cost of the development project, in payment for which it issued huge bundles of Haloid shares to Battelle, which, in turn, issued a bundle or two to Carlson. The cost was staggering. Between 1947 and 1960, Haloid spent about seventy-five million dollars on research in xerography, or about twice what it earned from its regular operations during that period; the balance was raised through borrowing and through the wholesale issuance of common stock to anyone who was kind, reckless, or prescient enough to take it. The University of Rochester, partly out of interest in a struggling local industry, bought an enormous quantity for its endowment fund at a price that subsequently, because of stock splits, amounted to fifty cents a share. “Please don’t be mad at us if we find we have to sell our Haloid stock in a couple of years to cut our losses on it,” a university official nervously warned Wilson. Wilson promised not to be mad. Meanwhile, he and other executives of the company took most of their pay in the form of stock, and some of them went as far as to put up their savings and the mortgages on their houses to help the cause along. (Prominent among the executives by this time was Linowitz, whose association with Haloid had turned out to be anything but a one-shot thing; instead, he became Wilson’s right-hand man, taking charge of the company’s crucial patent arrangements, organizing and guiding its international affiliations, and eventually serving for a time as chairman of its board of directors.) In 1958, after prayerful consideration, the company’s name was changed to Haloid Xerox, even though no xerographic product of major importance was yet on the market. The trademark “XeroX” had been adopted by Haloid several years earlier—a shameless imitation of Eastman’s “Kodak,” as Wilson has admitted. The terminal “X” soon had to be downgraded to lower case, because it was found that nobody would bother to capitalize it, but the near-palindrome, at least as irresistible as Eastman’s, remained. XeroX or Xerox, the trademark, Wilson has said, was adopted and retained against the vehement advice of many of the firm’s consultants, who feared that the public would find it unpronounceable, or would think it denoted an anti-freeze, or would be put in mind of a word highly discouraging to financial ears—“zero.”

Then, in 1960, the explosion came, and suddenly everything was reversed. Instead of worrying about whether its trade name would be successful, the company was worrying about its becoming too successful, for the new verb “to xerox” began to appear so frequently in conversation and in print that the company’s proprietary rights in the name were threatened, and it had to embark on an elaborate campaign against such usage. (In 1961, the company went the whole hog and changed its name to plain Xerox Corporation.) And instead of worrying about the future of themselves and their families, the Xerox executives were worrying about their reputation with the friends and relatives whom they had prudently advised not to invest in the stock at twenty cents a share. In a word, everybody who held Xerox stock in quantity had got rich or richer—the executives who had scrimped and sacrificed, the University of Rochester, Battelle Memorial Institute, and even, of all people, Chester F. Carlson, who had come out of the various agreements with Xerox stock that at 1968 prices was worth many million dollars, putting him (according to Fortune) among the sixty-six richest people in the country.

THUS baldly outlined, the story of Xerox has an old-fashioned, even a nineteenth-century, ring—the lonely inventor in his crude laboratory, the small, family-oriented company, the initial setbacks, the reliance on the patent system, the resort to classical Greek for a trade name, the eventual triumph gloriously vindicating the free-enterprise system. But there is another dimension to Xerox. In the matter of demonstrating a sense of responsibility to society as a whole, rather than just to its stockholders, employees, and customers, it has shown itself to be the reverse of most nineteenth-century companies—to be, indeed, in the advance guard of twentieth-century companies. “To set high goals, to have almost unattainable aspirations, to imbue people with the belief that they can be achieved—these are as important as the balance sheet, perhaps more so,” Wilson said once, and other Xerox executives have often gone out of their way to emphasize that “the Xerox spirit” is not so much a means to an end as a matter of emphasizing “human values” for their own sake. Such platform rhetoric is far from uncommon in big-business circles, of course, and when it comes from Xerox executives it is just as apt to arouse skepticism—or even, considering the company’s huge profits, irritation. But there is evidence that Xerox means what it says. In 1965, the company donated $1,632,548 to educational and charitable institutions, and $2,246,000 in 1966; both years the biggest recipients were the University of Rochester and the Rochester Community Chest, and in each case the sum represented around one and a half per cent of the company’s net income before taxes. This is markedly higher than the percentage that most large companies set aside for good works; to take a couple of examples from among those often cited for their liberality, R.C.A.’s contributions for 1965 amounted to about seven-tenths of one per cent of pre-tax income, and American Telephone & Telegraph’s to considerably less than one per cent. That Xerox intended to persist in its high-minded ways was indicated by its commitment of itself in 1966 to the “one-per-cent program,” often called the Cleveland Plan—a system inaugurated in that city under which local industries agree to give one per cent of pre-tax income annually to local educational institutions, apart from their other donations—so that if Xerox income continues to soar, the University of Rochester and its sister institutions in the area can face the future with a certain assurance.

In other matters, too, Xerox has taken risks for reasons that have nothing to do with profit. In a 1964 speech, Wilson said, “The corporation cannot refuse to take a stand on public issues of major concern”—a piece of business heresy if there ever was one, since taking a stand on a public issue is the obvious way of alienating customers and potential customers who take the opposite stand. The chief public stand that Xerox has taken is in favor of the United Nations—and, by implication, against its detractors. Early in 1964, the company decided to spend four million dollars—a year’s advertising budget—on underwriting a series of network-television programs dealing with the U.N., the programs to be unaccompanied by commercials or any other identification of Xerox apart from a statement at the beginning and end of each that Xerox had paid for it. That July and August—some three months after the decision had been announced—Xerox suddenly received an avalanche of letters opposing the project and urging the company to abandon it. Numbering almost fifteen thousand, the letters ranged in tone from sweet reasonableness to strident and emotional denunciation. Many of them asserted that the U.N. was an instrument for depriving Americans of their Constitutional rights, that its charter had been written in part by American Communists, and that it was constantly being used to further Communist objectives, and a few letters, from company presidents, bluntly threatened to remove the Xerox machines from their offices unless the series was cancelled. Only a handful of the letter writers mentioned the John Birch Society, and none identified themselves as members of it, but circumstantial evidence suggested that the avalanche represented a carefully planned Birch campaign. For one thing, a recent Birch Society publication had urged that members write to Xerox to protest the U.N. series, pointing out that a flood of letters had succeeded in persuading a major airline to remove the U.N. insigne from its airplanes. Further evidence of a systematic campaign turned up when an analysis, made at Xerox’s instigation, showed that the fifteen thousand letters had been written by only about four thousand persons. In any event, the Xerox offices and directors declined to be persuaded or intimidated; the U.N. series appeared on the American Broadcasting Company network in 1965, to plaudits all around. Wilson later maintained that the series—and the decision to ignore the protest against it—made Xerox many more friends than enemies. In all his public statements on the subject, he insisted on characterizing what many observers considered a rather rare stroke of business idealism, as simply sound business judgment.

In the fall of 1966, Xerox began encountering a measure of adversity for the first time since its introduction of xerography. By that time, there were more than forty companies in the office copier business, many of them producing xerographic devices under license from Xerox. (The only important part of its technology for which Xerox had refused to grant a license was a selenium drum that enables its own machines to make copies on ordinary paper. All competing products still required treated paper.) The great advantage that Xerox had been enjoying was the one that the first to enter a new field always enjoys—the advantage of charging high prices. Now, as Barron’s pointed out in August, it appeared that “this once-fabulous invention may—as all technological advances inevitably must—soon evolve into an accepted commonplace.” Cut-rate latecomers were swarming into copying; one company, in a letter sent to its stockholders in May, foresaw a time when a copier selling for ten or twenty dollars could be marketed “as a toy” (one was actually marketed for about thirty dollars in 1968) and there was even talk of the day when copiers would be given away to promote sales of paper, the way razors have long given away to promote razor blades. For some years, realizing that its cozy little monopoly would eventually pass into the public domain, Xerox had been widening its interests through mergers with companies in other fields, mainly publishing and education; for example, in 1962 it had bought University Microfilms, a library on microfilm of unpublished manuscripts, out-of-print books, doctoral dissertations, periodicals, and newspapers, and in 1965 it had tacked on two other companies—American Education Publications, the country’s largest publisher of educational periodicals for primary- and secondary-school students, and Basic Systems, a manufacturer of teaching machines. But these moves failed to reassure that dogmatic critic the marketplace, and Xerox stock ran into a spell of heavy weather. Between late June, 1966, when it stood at 267¾, and early October, when it dipped to 131⅝, the market value of the company was more than cut in half. In the single business week of October 3rd through October 7th, Xerox dropped 42½ points, and on one particularly alarming day—October 6th—trading in Xerox on the New York Stock Exchange had to be suspended for five hours because there were about twenty-five million dollars’ worth of shares on sale that no one wanted to buy.

I find that companies are inclined to be at their most interesting when they are undergoing a little misfortune, and therefore I chose the fall of 1966 as the time to have a look at Xerox and its people—something I’d had in mind to do for a year or so. I started out by getting acquainted with one of its products. The Xerox line of copiers and related items was by then a comprehensive one. There was, for instance, the 914, a desksize machine that makes black-and-white copies of almost any page—printed, handwritten, typed, or drawn, but not exceeding nine by fourteen inches in size—at a rate of about one copy every six seconds; the 813, a much smaller device, which can stand on top of a desk and is essentially a miniaturized version of the 914 (or, as Xerox technicians like to say, “a 914 with the air left out”); the 2400, a high-speed reproduction machine that looks like a modern kitchen stove and can cook up copies at a rate of forty a minute, or twenty-four hundred an hour; the Copyflo, which is capable of enlarging microfilmed pages into ordinary booksize pages and printing them; the LDX, by which documents can be transmitted over telephone wires, microwave radio, or coaxial cable; and the Telecopier, a non-xerographic device, designed and manufactured by Magnavox but sold by Xerox, which is a sort of junior version of the LDX and is especially interesting to a layman because it consists simply of a small box that, when attached to an ordinary telephone, permits the user to rapidly transmit a small picture (with a good deal of squeaking and clicking, to be sure) to anyone equipped with a telephone and a similar small box. Of all these, the 914, the first automatic xerographic product and the one that constituted the big breakthrough, was still much the most important both to Xerox and to its customers.

It has been suggested that the 914 is the most successful commercial product in history, but the statement cannot be authoritatively confirmed or denied, if only because Xerox does not publish precise revenue figures on its individual products; the company does say, though, that in 1965 the 914 accounted for about sixty-two per cent of its total operating revenues, which works out to something over $243,000,000. In 1966 it could be bought for $27,500, or it could be rented for twenty-five dollars monthly, plus at least forty-nine dollars’ worth of copies at four cents each. These charges were deliberately set up to make renting more attractive than buying, because Xerox ultimately makes more money that way. The 914, which is painted beige and weighs six hundred and fifty pounds, looks a good deal like a modern L-shaped metal desk; the thing to be copied—a flat page, two pages of an open book, or even a small three-dimensional object like a watch or a medal—is placed face down on a glass window in the flat top surface, a button is pushed, and nine seconds later the copy pops into a tray where an “out” basket might be if the 914 actually were a desk. Technologically, the 914 is so complex (more complex, some Xerox salesmen insist, than an automobile) that it has an annoying tendency to go wrong, and consequently Xerox maintains a field staff of thousands of repairmen who are presumably ready to answer a call on short notice. The most common malfunction is a jamming of the supply of copy paper, which is rather picturesquely called a “mispuff,” because each sheet of paper is raised into position to be inscribed by an interior puff of air, and the malfunction occurs when the puff goes wrong. A bad mispuff can occasionally put a piece of the paper in contact with hot parts, igniting it and causing an alarming cloud of white smoke to issue from the machine; in such a case the operator is urged to do nothing, or, at most, to use a small fire extinguisher that is attached to it, since the fire burns itself out comparatively harmlessly if left alone, whereas a bucket of water thrown over a 914 may convey potentially lethal voltages to its metal surface. Apart from malfunctions, the machine requires a good deal of regular attention from its operator, who is almost invariably a woman. (The girls who operated the earliest typewriters were themselves called “typewriters,” but fortunately nobody calls Xerox operators “xeroxes.”) Its supply of copying paper and black electrostatic powder, called “toner,” must be replenished regularly, while its most crucial part, the selenium drum, must be cleaned regularly with a special non-scratchy cotton, and waxed every so often. I spent a couple of afternoons with one 914 and its operator, and observed what seemed to be the closest relationship between a woman and a piece of office equipment that I had ever seen. A girl who uses a typewriter or switchboard has no interest in the equipment, because it holds no mystery, while one who operates a computer is bored with it, because it is utterly incomprehensible. But a 914 has distinct animal traits: it has to be fed and curried; it is intimidating but can be tamed; it is subject to unpredictable bursts of misbehavior; and, generally speaking, it responds in kind to its treatment. “I was frightened of it at first,” the operator I watched told me. “The Xerox men say, ‘If you’re frightened of it, it won’t work,’ and that’s pretty much right. It’s a good scout; I’m fond of it now.”

Xerox salesmen, I learned from talks with some of them, are forever trying to think of new uses for the company’s copiers, but they have found again and again that the public is well ahead of them. One rather odd use of xerography insures that brides get the wedding presents they want. The prospective bride submits her list of preferred presents to a department store; the store sends the list to its bridal-registry counter, which is equipped with a Xerox copier; each friend of the bride, having been tactfully briefed in advance, comes to this counter and is issued a copy of the list, whereupon he does his shopping and then returns the copy with the purchased items checked off, so that the master list may be revised and thus ready for the next donor. (“Hymen, iö Hymen, Hymen!”) Again, police departments in New Orleans and various other places, instead of laboriously typing up a receipt for the property removed from people who spend the night in the lockup, now place the property itself—wallet, watch, keys, and such—on the scanning glass of a 914, and in a few seconds have a sort of pictographic receipt. Hospitals use xerography to copy electrocardiograms and laboratory reports, and brokerage firms to get hot tips to customers more quickly. In fact, anybody with any sort of idea that might be advanced by copying can go to one of the many cigar or stationery stores that have a coin-operated copier and indulge himself. (It is interesting to note that Xerox took to producing coin-operated 914s in two configurations—one that works for a dime and one that works for a quarter; the buyer or leaser of the machine could decide which he wanted to charge.)

Copying has its abuses, too, and they are clearly serious. The most obvious one is overcopying. A tendency formerly identified with bureaucrats has been spreading—the urge to make two or more copies when one would do, and to make one when none would do; the phrase “in triplicate,” once used to denote bureaucratic waste, has become a gross understatement. The button waiting to be pushed, the whir of action, the neat reproduction dropping into the tray—all this adds up to a heady experience, and the neophyte operator of a copier feels an impulse to copy all the papers in his pockets. And once one has used a copier, one tends to be hooked. Perhaps the chief danger of this addiction is not so much the cluttering up of files and loss of important material through submersion as it is the insidious growth of a negative attitude toward originals—a feeling that nothing can be of importance unless it is copied, or is a copy itself.

A more immediate problem of xerography is the overwhelming temptation it offers to violate the copyright laws. Almost all large public and college libraries—and many high-school libraries as well—are now equipped with copying machines, and teachers and students in need of a few copies of a group of poems from a published book, a certain short story from an anthology, or a certain article from a scholarly journal have developed the habit of simply plucking it from the library’s shelves, taking it to the library’s reproduction department, and having the required number of Xerox copies made. The effect, of course, is to deprive the author and the publisher of income. There are no legal records of such infringements of copyright, since publishers and authors almost never sue educators, if only because they don’t know that the infringements have occurred; furthermore, the educators themselves often have no idea that they have done anything illegal. The likelihood that many copyrights have already been infringed unknowingly through xerography became indirectly apparent a few years ago when a committee of educators sent a circular to teachers from coast to coast informing them explicitly what rights to reproduce copyrighted material they did and did not have, and the almost instant sequel was a marked rise in the number of requests from educators to publishers for permissions. And there was more concrete evidence of the way things were going; for example, in 1965 a staff member of the library school of the University of New Mexico publicly advocated that libraries spend ninety per cent of their budgets on staff, telephones, copying, telefacsimiles, and the like, and only ten per cent—a sort of tithe—on books and journals.

To a certain extent, libraries attempt to police copying on their own. The photographic service of the New York Public Library’s main branch, which fills some fifteen hundred requests a week for copies of library matter, informs patrons that “copyrighted material will not be reproduced beyond ‘fair use’”—that is, the amount and kind of reproduction, generally confined to brief excerpts, that have been established by legal precedent as not constituting infringement. The library goes on, “The applicant assumes all responsibility for any question that may arise in the making of the copy and in the use made thereof.” In the first part of its statement the library seems to assume the responsibility and in the second part to renounce it, and this ambivalence may reflect an uneasiness widely felt among users of library copiers. Outside library walls, there often does not seem to be even this degree of scruple. Business people who are otherwise meticulous in their observance of the law seem to regard copyright infringement about as seriously as they regard jaywalking. A writer I’ve heard about was invited to a seminar of high-level and high-minded industrial leaders and was startled to find that a chapter from his most recent book had been copied and distributed to the participants, to serve as a basis for discussion. When the writer protested, the businessmen were taken aback, and even injured; they had thought the writer would be pleased by their attention to his work, but the flattery, after all, was of the sort shown by a thief who commends a lady’s jewelry by making off with it.

In the opinion of some commentators, what has happened so far is only the first phase of a kind of revolution in graphics. “Xerography is bringing a reign of terror into the world of publishing, because it means that every reader can become both author and publisher,” the Canadian sage Marshall McLuhan wrote in the spring, 1966, issue of the American Scholar. “Authorship and readership alike can become production-oriented under xerography.… Xerography is electricity invading the world of typography, and it means a total revolution in this old sphere.” Even allowing for McLuhan’s erratic ebullience (“I change my opinions daily,” he once confessed), he seems to have got his teeth into something here. Various magazine articles have predicted nothing less than the disappearance of the book as it now exists, and pictured the library of the future as a sort of monster computer capable of storing and retrieving the contents of books electronically and xerographically. The “books” in such a library would be tiny chips of computer film—“editions of one.” Everyone agrees that such a library is still some time away. (But not so far away as to preclude a wary reaction from forehanded publishers. Beginning late in 1966, the long-familiar “all rights reserved” rigmarole on the copyright page of all books published by Harcourt, Brace & World was altered to read, a bit spookily, “All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system …” Other publishers quickly followed the example.) One of the nearest approaches to it in the late sixties was the Xerox subsidiary University Microfilms, which could, and did, enlarge its microfilms of out-of-print books and print them as attractive and highly legible paperback volumes, at a cost to the customer of four cents a page; in cases where the book was covered by copyright, the firm paid a royalty to the author on each copy produced. But the time when almost anyone can make his own copy of a published book at lower than the market price is not some years away; it is now. All that the amateur publisher needs is access to a Xerox machine and a small offset printing press. One of the lesser but still important attributes of xerography is its ability to make master copies for use on offset presses, and make them much more cheaply and quickly than was previously possible. According to Irwin Karp, counsel to the Authors League of America, an edition of fifty copies of any printed book could in 1967 be handsomely “published” (minus the binding) by this combination of technologies in a matter of minutes at a cost of about eight-tenths of a cent per page, and less than that if the edition was larger. A teacher wishing to distribute to a class of fifty students the contents of a sixty-four-page book of poetry selling for three dollars and seventy-five cents could do so, if he were disposed to ignore the copyright laws, at a cost of slightly over fifty cents per copy.

The danger in the new technology, authors and publishers have contended, is that in doing away with the book it may do away with them, and thus with writing itself. Herbert S. Bailey, Jr., director of Princeton University Press, wrote in the Saturday Review of a scholar friend of his who has cancelled all his subscriptions to scholarly journals; instead, he now scans their tables of contents at his public library and makes copies of the articles that interest him. Bailey commented, “If all scholars followed [this] practice, there would be no scholarly journals.” Beginning in the middle sixties, Congress has been considering a revision of the copyright laws—the first since 1909. At the hearings, a committee representing the National Education Association and a clutch of other education groups argued firmly and persuasively that if education is to keep up with our national growth, the present copyright law and the fair-use doctrine should be liberalized for scholastic purposes. The authors and publishers, not surprisingly, opposed such liberalization, insisting that any extension of existing rights would tend to deprive them of their livelihoods to some degree now, and to a far greater degree in the uncharted xerographic future. A bill that was approved in 1967 by the House Judiciary Committee seemed to represent a victory for them, since it explicitly set forth the fair-use doctrine and contained no educational-copying exemption. But the final outcome of the struggle was still uncertain late in 1968. McLuhan, for one, was convinced that all efforts to preserve the old forms of author protection represent backward thinking and are doomed to failure (or, anyway, he was convinced the day he wrote his American Scholar article). “There is no possible protection from technology except by technology,” he wrote. “When you create a new environment with one phase of technology, you have to create an anti-environment with the next.” But authors are seldom good at technology, and probably do not flourish in anti-environments.

In dealing with this Pandora’s box that Xerox products have opened, the company seems to have measured up tolerably well to its lofty ideals as set forth by Wilson. Although it has a commercial interest in encouraging—or, at least, not discouraging—more and more copying of just about anything that can be read, it makes more than a token effort to inform the users of its machines of their legal responsibilities; for example, each new machine that is shipped out is accompanied by a cardboard poster giving a long list of things that may not be copied, among them paper money, government bonds, postage stamps, passports, and “copyrighted material of any manner or kind without permission of the copyright owner.” (How many of these posters end up in wastebaskets is another matter.) Moreover, caught in the middle between the contending factions in the fight over revision of copyright law, it resisted the temptation to stand piously aside while raking in the profits, and showed an exemplary sense of social responsibility—at least from the point of view of the authors and publishers. The copying industry in general, by contrast, tended either to remain neutral or to lean to the educators’ side. At a 1963 symposium on copyright revision, an industry spokesman went as far as to argue that machine copying by a scholar is merely a convenient extension of hand copying, which has traditionally been accepted as legitimate. But not Xerox. Instead, in September, 1965, Wilson wrote to the House Judiciary Committee flatly opposing any kind of special copying exemption in any new law. Of course, in evaluating this seemingly quixotic stand one ought to remember that Xerox is a publishing firm as well as a copying-machine firm; indeed, what with American Education Publications and University Microfilms, it is one of the largest publishing firms in the country. Conventional publishers, I gathered from my researches, sometimes find it a bit bewildering to be confronted by this futuristic giant not merely as an alien threat to their familiar world but as an energetic colleague and competitor within it.

HAVING had a look at some Xerox products and devoted some thought to the social implications of their use, I went to Rochester to scrape up a first-hand acquaintance with the company and to get an idea how its people were reacting to their problems, material and moral. At the time I went, the material problems certainly seemed to be to the fore, since the week of the forty-two-and-a-half-point stock drop was not long past. On the plane en route, I had before me a copy of Xerox’s most recent proxy statement, which listed the number of Xerox shares held by each director as of February, 1966, and I amused myself by calculating some of the directors’ paper losses in that one bad October week, assuming that they had held on to their stock. Chairman Wilson, for example, had held 154,026 common shares in February, so his loss would have been $6,546,105. Linowitz’s holding was 35,166 shares, for a loss of $1,494,555. Dr. John H. Dessauer, executive vice-president in charge of research, had held 73,845 shares and was therefore presumably out $3,138,412.50. Such sums could hardly be considered trivial even by Xerox executives. Would I, then, find their premises pervaded by gloom, or at least by signs of shock?

The Xerox executive offices were on the upper floors of Rochester’s Midtown Tower, the ground level of which is occupied by Midtown Plaza, an indoor shopping mall. (Later that year, the company moved its headquarters across the street to Xerox Square, a complex that includes a thirty-story office building, an auditorium for civic as well as company use, and a sunken ice rink.) Before going up to the Xerox offices, I took a turn or two around the mall, and found it to be equipped with all kinds of shops, a café, kiosks, pools, trees, and benches that—in spite of an oppressively bland and affluent atmosphere, created mainly, I suspect, by bland piped-in music—were occupied in part by bums, just like the benches in outdoor malls. The trees had a tendency to languish for lack of light and air, but the bums looked O.K. Having ascended by elevator, I met a Xerox public-relations man with whom I had an appointment, and immediately asked him how the company had reacted to the stock drop. “Oh, nobody takes it too seriously,” he replied. “You hear a lot of lighthearted talk about it at the golf clubs. One fellow will say to another, ‘You buy the drinks—I dropped another eighty thousand dollars on Xerox yesterday.’ Joe Wilson did find it a bit traumatic that day they had to suspend trading on the Stock Exchange, but otherwise he took it in stride. In fact, at a party the other day when the stock was way down and a lot of people were clustering around him asking him what it all meant, I heard him say, ‘Well, you know, it’s very rarely that opportunity knocks twice.’ As for the office, you scarcely hear the subject mentioned at all.” As a matter of fact, I scarcely did hear it mentioned again while I was at Xerox, and this sang-froid turned out to be justified, because within a little more than a month the stock had made up its entire loss, and within a few more months it had moved up to an all-time high.

I spent the rest of that morning calling on three scientific and technical Xerox men and listening to nostalgic tales of the early years of xerographic development. The first of these men was Dr. Dessauer, the previous week’s three-million-dollar loser, whom I nevertheless found looking tranquil—as I guess I should have expected, in view of the fact that his Xerox stock was still presumably worth more than nine and a half million dollars. (A few months later it was presumably worth not quite twenty million.) Dr. Dessauer, a German-born veteran of the company who had been in charge of its research and engineering ever since 1938 and was then also vice-chairman of its board, was the man who first brought Carlson’s invention to the attention of Joseph Wilson, after he had read an article about it in a technical journal in 1945. Stuck up on his office wall, I noticed, was a greeting card from members of his office staff in which he was hailed as the “Wizard,” and I found him to be a smiling, youthful-looking man with just enough of an accent to pass muster for wizardry.

“You want to hear about the old days, eh?” Dr. Dessauer said. “Well, it was exciting. It was wonderful. It was also terrible. Sometimes I was going out of my mind, more or less literally. Money was the main problem. The company was fortunate in being modestly in the black, but not far enough. The members of our team were all gambling on the project. I even mortgaged my house—all I had left was my life insurance. My neck was way out. My feeling was that if it didn’t work Wilson and I would be business failures but as far as I was concerned I’d also be a technical failure. Nobody would ever give me a job again. I’d have to give up science and sell insurance or something.” Dr. Dessauer threw a retrospectively distracted glance at the ceiling and went on, “Hardly anybody was very optimistic in the early years. Various members of our own group would come in and tell me that the damn thing would never work. The biggest risk was that electrostatics would prove to be not feasible in high humidity. Almost all the experts assumed that—they’d say, ‘You’ll never make copies in New Orleans.’ And even if it did work, the marketing people thought we were dealing with a potential market of no more than a few thousand machines. Some advisers told us that we were absolutely crazy to go ahead with the project. Well, as you know, everything worked out all right—the 914 worked, even in New Orleans, and there was a big market for it. Then came the desk-top version, the 813. I stuck my neck way out again on that, holding out for a design that some experts considered too fragile.”

I asked Dr. Dessauer whether his neck was now out on anything in the way of new research, and, if so, whether it is as exciting as xerography was. He replied, “Yes to both questions, but beyond that the subject is privileged knowledge.”

Dr. Harold E. Clark, the next man I saw, had been in direct charge of the xerography-development program under Dr. Dessauer’s supervision, and he gave me more details on how the Carlson invention had been coaxed and nursed into a commercial product. “Chet Carlson was morphological,” began Dr. Clark, a short man with a professorial manner who was, in fact, a professor of physics before he came to Haloid in 1949. I probably looked blank, because Dr. Clark gave a little laugh and went on, “I don’t really know whether ‘morphological’ means anything. I think it means putting one thing together with another thing to get a new thing. Anyway, that’s what Chet was. Xerography had practically no foundation in previous scientific work. Chet put together a rather odd lot of phenomena, each of which was obscure in itself and none of which had previously been related in anyone’s thinking. The result was the biggest thing in imaging since the coming of photography itself. Furthermore, he did it entirely without the help of a favorable scientific climate. As you know, there are dozens of instances of simultaneous discovery down through scientific history, but no one came anywhere near being simultaneous with Chet. I’m as amazed by his discovery now as I was when I first heard of it. As an invention, it was magnificent. The only trouble was that as a product it wasn’t any good.”

Dr. Clark gave another little laugh and went on to explain that the turning point was reached at the Battelle Memorial Institute, and in a manner fully consonant with the tradition of scientific advances’ occurring more or less by mistake. The main trouble was that Carlson’s photoconductive surface, which was coated with sulphur, lost its qualities after it had made a few copies and became useless. Acting on a hunch unsupported by scientific theory, the Battelle researchers tried adding to the sulphur a small quantity of selenium, a non-metallic element previously used chiefly in electrical resistors and as a coloring material to redden glass. The selenium-and-sulphur surface worked a little better than the all-sulphur one, so the Battelle men tried adding a little more selenium. More improvement. They gradually kept increasing the percentage until they had a surface consisting entirely of selenium—no sulphur. That one worked best of all, and thus it was found, backhandedly, that selenium and selenium alone could make xerography practical.

“Think of it,” Dr. Clark said, looking thoughtful himself. “A simple thing like selenium—one of the earth’s elements, of which there are hardly more than a hundred altogether, and a common one at that. It turned out to be the key. Once its effectiveness was discovered, we were around the corner, although we didn’t know it at the time. We still hold patents covering the use of selenium in xerography—almost a patent on one of the elements. Not bad, eh? Nor do we understand exactly how selenium works, even now. We’re mystified, for example, by the fact that it has no memory effects—no traces of previous copies are left on the selenium-coated drum—and that it seems to be theoretically capable of lasting indefinitely. In the lab, a selenium-coated drum will last through a million processes, and we don’t understand why it wears out even then. So, you see, the development of xerography was largely empirical. We were trained scientists, not Yankee tinkers, but we struck a balance between Yankee tinkering and scientific inquiry.”

Next, I talked with Horace W. Becker, the Xerox engineer who was principally responsible for bringing the 914 from the working-model stage to the production line. A Brooklynite with a talent, appropriate to his assignment, for eloquent anguish, he told me of the hair-raising obstacles and hazards that surrounded this progress. When he joined Haloid Xerox in 1958, his laboratory was a loft above a Rochester garden-seed–packaging establishment; something was wrong with the roof, and on hot days drops of molten tar would ooze through it and spatter the engineers and the machines. The 914 finally came of age in another lab, on Orchard Street, early in 1960. “It was a beat-up old loft building, too, with a creaky elevator and a view of a railroad siding where cars full of pigs kept going by,” Becker told me, “but we had the space we needed, and it didn’t drip tar. It was at Orchard Street that we finally caught fire. Don’t ask me how it happened. We decided it was time to set up an assembly line, and we did. Everybody was keyed up. The union people temporarily forgot their grievances, and the bosses forgot their performance ratings. You couldn’t tell an engineer from an assembler in that place. No one could stay away—you’d sneak in on a Sunday, when the assembly line was shut down, and there would be somebody adjusting something or just puttering around and admiring our work. In other words, the 914 was on its way at last.”

But once the machine was on its way out of the shop and on to showrooms and customers, Becker related, his troubles had only begun, because he was now held responsible for malfunctions and design deficiencies, and when it came to having a spectacular collapse just at the moment when the public spotlight was full on it, the 914 turned out to be a veritable Edsel. Intricate relays declined to work, springs broke, power supplies failed, inexperienced users dropped staples and paper clips into it and fouled the works (necessitating the installation in every machine of a staple-catcher), and the expected difficulties in humid climates developed, along with unanticipated ones at high altitudes. “All in all,” Becker said, “at that time the machines had a bad habit, when you pressed the button, of doing nothing.” Or if the machines did do something, it was something wrong. At the 914’s first big showing in London, for instance, Wilson himself was on hand to put a ceremonial forefinger to its button; he did so, and not only was no copy made but a giant generator serving the line was blown out. Thus was xerography introduced in Great Britain, and, considering the nature of its début, the fact that Britain later become far and away the biggest overseas user of the 914 appears to be a tribute to both Xerox resilience and British patience.

That afternoon, a Xerox guide drove me out to Webster, a farm town near the edge of Lake Ontario, a few miles from Rochester, to see the incongruous successor to Becker’s leaky and drafty lofts—a huge complex of modern industrial buildings, including one of roughly a million square feet where all Xerox copiers are assembled (except those made by the company’s affiliates in Britain and Japan), and another, somewhat smaller but more svelte, where research and development are carried out. As we walked down one of the humming production lines in the manufacturing building, my guide explained that the line operates sixteen hours a day on two shifts, that it and the other lines have been lagging behind demand continuously for several years, that there are now almost two thousand employees working in the building, and that their union is a local of the Amalgamated Clothing Workers of America, this anomaly being due chiefly to the fact that Rochester used to be a center of the clothing business and the Clothing Workers has long been the strongest union in the area.

After my guide had delivered me back to Rochester, I set out on my own to collect some opinions on the community’s attitude toward Xerox and its success. I found them to be ambivalent. “Xerox has been a good thing for Rochester,” said a local businessman. “Eastman Kodak, of course, was the city’s Great White Father for years, and it is still far and away the biggest local business, although Xerox is now second and coming up fast. Facing that kind of challenge doesn’t do Kodak any harm—in fact, it does it a lot of good. Besides, a successful new local company means new money and new jobs. On the other hand, some people around here resent Xerox. Most of the local industries go back to the nineteenth century, and their people aren’t always noted for receptiveness to newcomers. When Xerox was going through its meteoric rise, some thought the bubble would burst—no, they hoped it would burst. On top of that, there’s been a certain amount of feeling against the way Joe Wilson and Sol Linowitz are always talking about human values while making money hand over fist. But, you know—the price of success.”

I went out to the University of Rochester, high on the banks of the Genesee River, and had a talk with its president, W. Allen Wallis. A tall man with red hair, trained as a statistician, Wallis served on the boards of several Rochester companies, including Eastman Kodak, which had always been the university’s Santa Claus and remained its biggest annual benefactor. As for Xerox, the university had several sound reasons for feeling kindly toward it. In the first place, the university was a prize example of a Xerox multimillionaire, since its clear capital gain on the investment amounted to around a hundred million dollars and it had taken out more than ten million in profits. In the second place, Xerox annually comes through with annual cash gifts second only to Kodak’s, and had recently pledged nearly six million dollars to the university’s capital-funds drive. In the third place, Wilson, a University of Rochester graduate himself, had been on the university’s board of trustees since 1949 and its chairman since 1959. “Before I came here, in 1962, I’d never even heard of corporations’ giving universities such sums as Kodak and Xerox give us now,” President Wallis said. “And all they want in return is for us to provide top-quality education—not do their research for them, or anything like that. Oh, there’s a good deal of informal technical consulting between our scientific people and the Xerox people—same thing with Kodak, Bausch & Lomb, and others—but that’s not why they’re supporting the university. They want to make Rochester a place that will be attractive to the people they want here. The university has never invented anything for Xerox, and I guess it never will.”

The next morning, in the Xerox executive offices, I met the three nontechnical Xerox men of the highest magnitude, ending with Wilson himself. The first of these was Linowitz, the lawyer whom Wilson took on “temporarily” in 1946 and kept on permanently as his least dispensable aide. (Since Xerox became famous, the general public tended to think of Linowitz as more than that—as, in fact, the company’s chief executive. Xerox officials were aware of this popular misconception, and were mystified by it, since Wilson, whether he was called president, as he was until May of 1966, or chairman of the board, as he was after that, had been the boss right along.) I caught Linowitz almost literally on the run, since he had just been appointed United States Ambassador to the Organization of American States and was about to leave Rochester and Xerox for Washington and his new duties. A vigorous man in his fifties, he fairly exuded drive, intensity, and sincerity. After apologizing for the fact that he had only a few minutes to spend with me, he said, rapidly, that in his opinion the success of Xerox was proof that the old ideals of free enterprise still held true, and that the qualities that had made for the company’s success were idealism, tenacity, the courage to take risks, and enthusiasm. With that, he waved goodbye and was off. I was left feeling a little like a whistle-stop voter who has just been briefly addressed by a candidate from the rear platform of a campaign train, but, like many such voters, I was impressed. Linowitz had used those banal words not merely as if he meant them but as if he had invented them, and I had the feeling that Wilson and Xerox were going to miss him.

I found C. Peter McColough, who had been president of the company since Wilson had moved up to chairman, and who was apparently destined eventually to succeed him as boss (as he did in 1968), pacing his office like a caged animal, pausing from time to time at a standup desk, where he would scribble something or bark a few words into a dictating machine. A liberal Democratic lawyer, like Linowitz, but a Canadian by birth, he is a cheerful extrovert who, being in his early forties, was spoken of as representing a new Xerox generation, charged with determining the course that the company would take next. “I face the problems of growth,” he told me after he had abandoned his pacing for a restless perch on the edge of a chair. Future growth on a large scale simply isn’t possible in xerography, he went on—there isn’t room enough left—and the direction that Xerox is taking is toward educational techniques. He mentioned computers and teaching machines, and when he said he could “dream of a system whereby you’d write stuff in Connecticut and within hours reprint it in classrooms all over the country,” I got the feeling that some of Xerox’s educational dreams could easily become nightmares. But then he added, “The danger in ingenious hardware is that it distracts attention from education. What good is a wonderful machine if you don’t know what to put on it?”

McColough said that since he came to Haloid, in 1954, he felt he’d been part of three entirely different companies—until 1959 a small one engaged in a dangerous and exciting gamble; from 1959 to 1964 a growing one enjoying the fruits of victory; and now a huge one branching out in new directions. I asked him which one he liked best, and he thought a long time. “I don’t know,” he said finally. “I used to feel greater freedom, and I used to feel that everyone in the company shared attitudes on specific matters like labor relations. I don’t feel that way so much now. The pressures are greater, and the company is more impersonal. I wouldn’t say that life has become easier, or that it is likely to get easier in the future.”

Of all the surprising things about Joseph C. Wilson, not the least, I thought when I was ushered into his presence, was the fact that his office walls were decorated with old-fashioned flowered wallpaper. A sentimental streak in the man at the head of Xerox seemed the most unlikely of anomalies. But he had a homey, unthreatening bearing to go with the wallpaper; a smallish man in his late fifties, he looked serious—almost grave—during most of my visit, and spoke in a slow, rather hesitant way. I asked him how he had happened to go into his family’s business, and he replied that as a matter of fact he nearly hadn’t. English literature had been his second major at the university, and he had considered either taking up teaching or going into the financial and administrative end of university work. But after graduating he had gone on to the Harvard Business School, where he had been a top student, and somehow or other … In any case, he had joined Haloid the year he left Harvard, and there, he told me with a sudden smile, he was.

The subjects that Wilson seemed to be most keen on discussing were Xerox’s non-profit activities and his theories of corporate responsibility. “There are certain feelings of resentment toward us on this,” he said. “I don’t mean just from stockholders complaining that we’re giving their money away—that point of view is losing ground. I mean in the community. You don’t actually hear it, but you sometimes get a kind of intuitive feeling that people are saying, ‘Who do these young upstarts think they are, anyhow?’”

I asked whether the letter-writing campaign against the U.N. television series had caused any misgivings or downright faintheartedness within the company, and he said, “As an organization, we never wavered. Almost without exception, the people here felt that the attacks only served to call attention to the very point we were trying to make—that world coöperation is our business, because without it there might be no world and therefore no business. We believe we followed sound business policy in going ahead with the series. At the same time, I won’t maintain that it was only sound business policy. I doubt whether we would have done it if, let’s say, we had all been Birchers ourselves.”

Wilson went on slowly, “The whole matter of committing the company to taking stands on major public issues raises questions that make us examine ourselves all the time. It’s a matter of balance. You can’t just be bland, or you throw away your influence. But you can’t take a stand on every major issue, either. We don’t think it’s a corporation’s job to take stands on national elections, for example—fortunately, perhaps, since Sol Linowitz is a Democrat and I’m a Republican. Issues like university education, civil rights, and Negro employment clearly are our business. I’d hope that we would have the courage to stand up for a point of view that was unpopular if we thought it was appropriate to do so. So far, we haven’t faced that situation—we haven’t found a conflict between what we consider our civic responsibility and good business. But the time may come. We may have to stand on the firing line yet. For example, we’ve tried, without much fanfare, to equip some Negro youths to take jobs beyond sweeping the floor and so on. The program required complete coöperation from our union, and we got it. But I’ve learned that, in subtle ways, the honeymoon is over. There’s an undercurrent of opposition. Here’s something started, then, that if it grows could confront us with a real business problem. If it becomes a few hundred objectors instead of a few dozen, things might even come to a strike, and in such a case I hope we and the union leadership would stand up and fight. But I don’t really know. You can’t honestly predict what you’d do in a case like that. I think I know what we’d do.”

Getting up and walking to a window, Wilson said that, as he saw it, one of the company’s major efforts now, and even more in the future, must be to keep the personal and human quality for which it has come to be known. “Already we see signs of losing it,” he said. “We’re trying to indoctrinate new people, but twenty thousand employees around the Western Hemisphere isn’t like a thousand in Rochester.”

I joined Wilson at the window, preparatory to leaving. It was a dank, dark morning, such as I’m told the city is famous for much of the year, and I asked him whether, on a gloomy day like this, he was ever assailed by doubts that the old quality could be preserved. He nodded briefly and said, “It’s an everlasting battle, which we may or may not win.”

6

Making the Customers Whole

ON THE MORNING of Tuesday, November 19th, 1963, a well-dressed but haggard-looking man in his middle thirties presented himself at the executive offices of the New York Stock Exchange, at 11 Wall Street, with the announcement that he was Morton Kamerman, managing partner of the brokerage firm of Ira Haupt & Co., a member of the Stock Exchange, and that he wanted to see Frank J. Coyle, head of the Exchange’s member-firms department. After checking, a receptionist explained politely that Mr. Coyle was tied up in a meeting, whereupon the visitor said that his mission was an urgent one and asked to see Robert M. Bishop, the department’s second-in-command. Bishop, the receptionist found, was unavailable, too; he was tied up with an important phone call. At length, Kamerman, who seemed to be growing more and more distracted, was ushered into the presence of a less exalted Exchange official named George H. Newman. He then duly delivered his message—that, to the best of his belief, the capital reserve of the Haupt firm had fallen below the Exchange’s requirements for member firms, and that he was formally reporting the fact, in accordance with regulations. While this startling announcement was being made, Bishop, in a nearby office, was continuing his important telephone conversation, the second party to which was a knowledgeable Wall Streeter whom Bishop has since declined to identify. The caller was telling Bishop he had reason to believe that two Stock Exchange member firms—J. R. Williston & Beane, Inc., and Ira Haupt & Co.—were in financial trouble serious enough to warrant the Exchange’s attention. After hanging up, Bishop made an interoffice call to Newman to tell him what he had just heard. To Bishop’s surprise, Newman already had the news, or part of it. “As a matter of fact, Kamerman is right here with me now,” he said.

In this humdrum setting of office confusion there began one of the most trying—and in some ways one of the most serious—crises in the Stock Exchange’s long history. Before it was over, this crisis had been exacerbated by the greater crisis resulting from the assassination of President Kennedy, and out of it the Stock Exchange—which has not always been noted for acting in the public interest, and, indeed, had been accused only a few months before by the Securities and Exchange Commission of an anti-social tendency to conduct itself like a private club—emerged temporarily poorer by almost ten million dollars but incalculably richer in the esteem of at least some of its countrymen. The event that had brought Haupt and Williston & Beane into straitened circumstances is history—or, rather, future history. It was the sudden souring of a huge speculation that these two firms (along with various brokers not members of the Stock Exchange) had become involved in on behalf of a single customer—the Allied Crude Vegetable Oil & Refining Co., of Bayonne, New Jersey. The speculation was in contracts to buy vast quantities of cottonseed oil and soybean oil for future delivery. Such contracts are known as commodity futures, and the element of speculation in them lies in the possibility that by delivery date the commodity will be worth more (or less) than the contract price. Vegetable-oil futures are traded daily at the New York Produce Exchange, at 2 Broadway, and at the Board of Trade, in Chicago, and they are bought and sold on behalf of customers by about eighty of the four hundred-odd firms that belong to the Stock Exchange and conduct a public business. On the day that Kamerman came to the Exchange, the Haupt firm was holding for Allied—on credit—so many cottonseed-oil and soybean-oil contracts that the change of a single penny per pound in the prices of the commodities meant a twelve-million-dollar change in the value of the Allied account with Haupt. On the two previous business days—Friday the fifteenth and Monday the eighteenth—the prices had dropped an average of a little less than a cent and a half per pound, and as a result Haupt had demanded that Allied put up about fifteen million dollars in cash to keep the account seaworthy. Allied had declined to do this, so Haupt—like any broker when a customer operating on credit has defaulted—was faced with the necessity of selling out the Allied contracts to get back what it could of its advances. The suicidal extent of the risk that Haupt had undertaken is further indicated by the fact that while the firm’s capital in early November had amounted to only about eight million dollars, it had borrowed enough money to supply a single customer—Allied—with some thirty-seven million dollars to finance the oil speculations. Worse still, as things turned out it had accepted as collateral for some of these advances enormous amounts of actual cottonseed oil and soybean oil from Allied’s inventory, the presence of which in tanks at Bayonne was attested to by warehouse receipts stating the precise amount and kind of oil on hand. Haupt had borrowed the money it supplied Allied with from various banks, passing along most of the warehouse receipts to the banks as collateral. All this would have been well and good if it had not developed later that many of the warehouse receipts were forged, that much of the oil they attested to was not, and probably never had been, in Bayonne, and that Allied’s president, Anthony De Angelis (who was later sent to jail on a whole parcel of charges), had apparently pulled off the biggest commercial fraud since that of Ivar Kreuger, the match king.

Where was the missing oil? How could Allied’s direct and indirect creditors, including some of the most powerful and worldly-wise banks of the United States and Great Britain, have been so thoroughly gulled? Would aggregate losses on the whole debacle finally total a hundred and fifty million dollars, as some authorities had estimated, or would the bill be even bigger? How could a leading Stock Exchange firm like Haupt have been so foolish as to take on such an inconceivably risky commitment for a single customer? These questions had not even been raised, let alone answered, on November 19th; some of them have not been answered yet, and some of them may not be answered for years. What began to emerge on November 19th, and what became clear in the harrowing days that followed, was that in the case of Haupt, which had about twenty thousand individual stock-market customers on its books, and in the case of Williston & Beane, which had about nine thousand, the impending disaster directly involved the personal savings of many totally innocent persons who had never heard of Allied and had only the vaguest notion of what commodity trading is.

KAMERMAN’S report to the Stock Exchange did not mean that Haupt had gone broke, and at the time he made it Kamerman himself surely did not think that his firm had gone broke; there is a great difference between insolvency and a mere failure to meet the Exchange’s rather stringent capital requirements, which are intended to provide a margin of safety. Indeed, various Stock Exchange officials have said that on that Tuesday morning they did not consider the Haupt situation to be especially serious, while the Williston & Beane situation, it was clear from the first, was even less so. One of the first reactions in the member-firms department was chagrin that Kamerman had come to the Exchange with his problem before the Exchange, through its elaborate system of audits and examinations, had discovered the problem for itself. This, the Exchange insists stubbornly, if a bit lamely, was a matter of bad luck rather than bad management. As a matter of routine, the Exchange required each of its member firms to fill out detailed questionnaires on its financial condition several times a year, and as an additional check an expert accountant from the Exchange staff descended unexpectedly on each member firm at least once a year to subject its books to a surprise inspection. Ira Haupt & Co. had filled out its most recent questionnaire early in October, and since the huge buildup in Allied’s commodities position with Haupt took place after that, the questionnaire showed nothing amiss. As for the surprise inspection, the Exchange’s man was in the Haupt offices conducting it at the very time the trouble broke. The auditor had been there for a week, his nose buried in Haupt’s account books, but the task of conducting such an inspection is a tedious one, and by November 19th the auditor hadn’t got around to examining the Haupt commodities department. “They had set our man up with a desk in a department where nothing unusual was going on,” an Exchange official has since said. “It’s easy to say now that he should have smelled trouble, but he didn’t.”

At midmorning on Tuesday the nineteenth, Coyle and Bishop sat down with Kamerman to see what needed to be done about Haupt’s problem, and what could be done. Bishop remembers that the atmosphere of the meeting was by no means grim; according to Kamerman’s figures, the amount of capital that Haupt needed to bring it up to snuff was about a hundred and eighty thousand dollars—an almost paltry sum for a firm of Haupt’s size. Haupt could make up the deficiency either by obtaining new money from outside or by converting securities it owned into cash. Bishop urged the latter course as the quicker and surer, whereupon Kamerman telephoned his firm and instructed his partners to begin selling some of their securities at once. The difficulty apparently was going to be solved as simply as that.

But during the rest of the day, after Kamerman had left 11 Wall, the crisis showed a tendency to go through the process that in political circles had come to be called escalation. In the late afternoon, an ominous piece of news arrived. Allied had just filed a voluntary-bankruptcy petition in Newark. Theoretically, the bankruptcy did not affect the financial position of its former brokers, since they held security for the money they had supplied Allied with; nevertheless, the news was alarming in that it provided a hint of worse news to follow. Such news, indeed, was not long in coming; the same evening, word reached the Stock Exchange that the managers of the New York Produce Exchange, in an effort to forestall chaos in their market, had voted to suspend all trading in cottonseed-oil futures until further notice, and to require immediate settlement of all outstanding contracts at a price dictated by them. Since the dictated price would have to be a low one, this meant that any remaining chance that Haupt or Williston & Beane had of getting out from under the Allied speculations on favorable terms was gone.

In the member-firms department that evening, Bishop was frantically trying to get in touch with G. Keith Funston, the president of the Stock Exchange, who was first at a midtown dinner and then on a train bound for Washington, where he was scheduled to testify the next day before a congressional committee. What with one thing and another, Bishop was busy in his office all evening; toward midnight, he found himself the last man in the member-firms department, and, having decided it was too late to go home to Fanwood, New Jersey, for the night, he collapsed on a leather couch in Coyle’s office. He had a restless night there; the cleaning women were considerately quiet, he said afterward, but the phones kept ringing all night long.

Promptly at nine-thirty on Wednesday morning, the Stock Exchange’s board of governors met in the sixth-floor Governors’ Room—which, with its regal red carpet, fierce old portraits, and fluted gilt columns, carries rather uncomfortable connotations of Wall Street’s checkered past—and, in accordance with Exchange regulations, voted to suspend Haupt and Williston & Beane because of their capital difficulties. The suspension was made public a few minutes after trading opened, at ten o’clock, by Henry M. Watts, Jr., chairman of the board of governors, who ascended a rostrum that overlooks the trading floor, rang the bell that normally signals the beginning or ending of a day’s trading, and read an announcement of it. From the point of view of the public, the immediate effect of the action was that the accounts of the almost thirty thousand customers of the two suspended firms were now frozen—that is, the owners of the accounts could neither sell their stocks nor get their money out. Touched by the plight of these unfortunates, the Stock Exchange brass now set about trying to help the beleaguered firms raise enough capital to lift the suspensions and free the accounts. In the case of Williston & Beane, its efforts were triumphantly successful. It developed that this firm needed about half a million dollars to get back into business, and so many fellow-brokers came forward to help out with loans that the firm actually had to fight off unwanted offers. The half million was finally accepted partly from Walston & Co. and partly from Merrill Lynch, Pierce, Fenner & Smith. (Cozily, the Beane of Williston & Beane was the very man who had been the caboose when the firm’s name was Merrill Lynch, Pierce, Fenner & Beane.) Restored to financial health by this timely injection of capital, Williston & Beane was relieved of its suspension—and its nine thousand customers were relieved of their anxiety—just after noon on Friday, or slightly more than two days after the suspension had been imposed.

But in the case of Haupt things went differently. It was clear by Wednesday that the capital-shortage figure of a hundred and eighty thousand dollars had been the rosiest of dreams. Even so, it appeared that the firm might still be solvent despite its losses on the forced sale of the oil contracts—on one condition. The condition was that the oil in Bayonne tanks that Allied had pledged to Haupt as collateral—and that now, through Allied’s default, belonged to Haupt—could be sold to other oil processors at a fair price. Richard M. Crooks, an Exchange governor who, unlike nearly all his colleagues, was an expert on commodities trading, figured that if the Bayonne oil were thus unloaded, Haupt might still end up slightly in the black. He therefore telephoned a couple of the country’s leading vegetable-oil processors and urged them to bid on the oil. The replies he received were unanimous and startling. The leading processors declined to make any bid at all, and they left Crooks with the feeling that they were suspicious of the Bayonne warehouse receipts held by Haupt—that they suspected some or all of them to be forgeries. If these suspicions were well founded, it would follow that some or all of the oil attested to by the receipts was not in Bayonne. “The situation was very simple,” Crooks has said. “Warehouse receipts are accepted in the commodities business as practically as good as currency, and now the possibility had been raised that millions of dollars of Haupt’s assets consisted of counterfeit money.”

Still, all that Crooks knew definitely on Wednesday morning was that the processors would not bid on Allied oil, and throughout the rest of Wednesday and all day Thursday the Exchange furiously went on trying to help Haupt get back on its feet along with Williston & Beane. Needless to say, the fifteen partners of Haupt were busy at the same endeavor, and in aid of it Kamerman told the Times buoyantly on Wednesday evening, “Ira Haupt & Co. is solvent and is in an excellent financial position.” Also on Wednesday evening, Crooks had dinner in New York with a veteran commodities broker from Chicago. “Although I’m an optimist by temperament, my experience tells me that these things always turn out to be much worse than they look at first,” Crooks said recently. “I mentioned this to my broker friend, and he agreed. The next morning at about eleven-thirty, he called me and said, ‘Dick, this thing is a hundred per cent worse than even you think.’” A bit later, at midday on Thursday, the Exchange’s member-firms department learned that many of Allied’s warehouse receipts were indeed fake.

As nearly as can be determined, the Haupt partners were making the same unhappy discovery at about the same time. At any rate, a number of them did not go home Thursday evening but spent the night at their offices at 111 Broadway, trying to figure out what their position was. Bishop got home to Fanwood that night, but he found that he could sleep hardly any better there than on Coyle’s couch. Accordingly, he rose before dawn, took the Jersey Central’s five-eight to the city, and on a hunch went to the Haupt offices. There, in the partners’ area—recently redecorated with modern contour chairs, marble-topped filing cabinets, and refrigerators disguised as desks—he found several of the partners, unshaven and unkempt, drowsing in their chairs. “They were pretty shot by then,” Bishop said later. And no wonder. After being awakened, they told him that they had been up all night calculating, and that at about three o’clock they had come to the conclusion that their position was hopeless; in view of the worthlessness of the warehouse receipts, the Haupt firm was insolvent. Bishop took this disastrous intelligence with him to the Stock Exchange, where he waited for the sun to come up and for everyone else to come to work.

AT one-forty on Friday afternoon, when the stock market was already badly rattled by the rumors of Haupt’s impending failure, the first reports of the President’s assassination reached the Exchange floor, in garbled form. Crooks, who was there, says that the first thing he heard was that the President had been shot, the second was that the President’s brother, the Attorney General, had also been shot, and the third was that the Vice-President had had a heart attack. “The rumors came like machine-gun bullets,” Crooks says. And they struck with comparable impact. In the next twenty-seven minutes, during which no hard news arrived to relieve the atmosphere of apocalypse, the prices of stocks declined at a rate unparalleled in the Exchange’s history. In less than half an hour, the values of listed stocks decreased by thirteen billion dollars, and they would no doubt have dropped further if the board of governors had not closed the market for the day at seven minutes past two. The panic’s immediate effect on the Haupt situation was to make the status of the twenty thousand frozen accounts far worse, because now, in the event of Haupt’s bankruptcy and the consequent liquidation of many of the accounts, the cashing in would have to be done at panic prices, with heavy losses to the accounts’ owners. A larger and less calculable effect of the events in Dallas was paralyzing despair. However, Wall Street—or, rather, some Wall Streeters—had a psychological advantage over the rest of the country in that there was work at hand to be done. This convergence of disasters confronted them with a definable task.

Having testified in Washington on Wednesday afternoon, Funston had returned to New York that evening and had spent most of Thursday as well as Friday morning working on getting Williston & Beane back in business. Sometime during that period, as it was gradually made clear that Haupt was not merely short of capital but actually insolvent, Funston became convinced the Exchange and its member firms must consider doing something virtually unprecedented—that is, reimburse the innocent victims of Haupt’s imprudence with their own money. (The nearest thing to a precedent for such action was the case of DuPont, Homsey & Co., a small Stock Exchange firm that went bankrupt in 1960 as a result of fraud by one of its partners; the Exchange then repaid the firm’s customers the money they had been divested of—about eight hundred thousand dollars.) Now, having hurried back to his office from a lunch date shortly before the emergency closing of the market, Funston set about putting his plan into action, calling about thirty leading brokers whose offices happened to be nearby and asking them to trot over to the Exchange immediately as an unofficial delegation representing its membership. Shortly after three o’clock, the brokers were assembled in the South Committee Room—a somewhat smaller version of the Governors’ Room—and Funston set before them the facts of the Haupt case as he then knew them, along with an outline of his plan for a solution. The facts were these: Haupt owed about thirty-six million dollars to a group of United States and British banks; since over twenty million of its assets were represented by warehouse receipts that now appeared to be worthless, there was no hope that Haupt could pay its debts. In the normal course of events, therefore, Haupt would be sued by the creditor banks when the courts reopened next week, the cash and many of the securities held by Haupt for its customers would be tied up by the creditors, and, according to Funston’s liberal estimate, some of the customers might end up getting back—after an extended period caused by legal delays—no more than sixty-five cents on the dollar. And there was another side to the case. If Haupt were to go into bankruptcy, the psychological effect of this, combined with the palpable effect of Haupt’s considerable assets’ being thrown on the market, might well lead to further depression of a stock market already in wild retreat at a time of grave national crisis. Not only the welfare of the Haupt customers was at stake, then, but perhaps the national welfare, too. Funston’s plan, simple enough in outline, was that the Stock Exchange or its members put up enough money to enable all the Haupt customers to get back their cash and securities—to be once again “whole,” in the banking expression. (The banking expression is etymologically sound; “whole” derives from the Anglo-Saxon “hal,” which meant uninjured or recovered from injury, and from which “hale” is also derived.) Funston further proposed that Haupt’s creditors, the banks, be persuaded to defer any efforts to collect their money until the customers had been taken care of. Funston estimated that the amount needed to do the job might run to seven million dollars, or even more.

Almost to a man, the assembled brokers agreed to support this public-spirited, if not downright eleemosynary, plan. But before the meeting was over a difficulty arose. Now that the Stock Exchange and the member firms had decided on a deed of self-sacrifice, the problem confronting each side—to a certain extent, anyway—was how to arrange to have the other side do the sacrificing. Funston urged the member firms to take over the entire matter. The firms declined this suggestion with thanks and countered by urging the Stock Exchange to handle it. “If we do,” Funston said, “you’ll have to repay us the amount we pay out.” Out of this not very dignified dialogue emerged an agreement that initially the funds would come out of the Exchange’s treasury, with repayment to be apportioned among the member firms later. A three-man committee, headed by Funston, was empowered to conduct negotiations to bring the deal off.

The chief parties that needed negotiating with were Haupt’s creditor banks. Their unanimous consent to the plan was essential, because if even one of them insisted on immediate liquidation of its loans “the pot would fall in,” as the Exchange’s chairman, Henry Watts—a fatherly-looking graduate of Harvard and of Omaha Beach, 1944—pungently put it. Prominent among the creditors were four local banks of towering prestige—Chase Manhattan, Morgan Guaranty Trust, First National City, and Manufacturers Hanover Trust—which among them had lent Haupt about eighteen and a half million dollars. (Three of the banks have remained notably reticent about the exact amount of their ill-fated loans to Haupt, but blaming them for their silence would be like blaming a poker player who is less than garrulous about a losing night. The Chase, however, has said that Haupt owed it $5,700,000.) Earlier in the week, George Champion, chairman of the Chase, had telephoned Funston; not only did the Stock Exchange have a friend at Chase, Champion assured him, but the bank stood ready to give any help it could in the Haupt matter. Funston now called Champion and said he was ready to take him up on his offer. He and Bishop then began to try to assemble representatives of the Chase and the three other banks for an immediate conference. Bishop remembers that he felt highly bearish about the chances of rounding up a group of bankers at five o’clock on a Friday—even such an exceptional Friday as this one—but to his surprise he found practically all of them at their battle stations and willing to come straight to the Exchange.

Funston and his fellow-negotiators for the Exchange—Chairman Watts and Vice-Chairman Walter N. Frank—conferred with the bankers from shortly after five until well into the dinner hour. The meeting was constructive, if tense. “First, we all agreed that it was a devil of a situation all around,” Funston subsequently recalled. “Then we got down to business. The bankers, of course, were hoping that the Exchange would pick up the whole thing, but we quickly disabused them of that notion. Instead, I made them an offer. We would put up a certain sum in cash solely for the benefit of the Haupt customers; in exchange for every dollar that we put up, the banks would defer collection—that is, would temporarily refrain from foreclosing—on two dollars. If, as we then estimated, twenty-two and a half million was needed to make Haupt solvent, we would put up seven and a half, and the banks would defer collection of fifteen. They weren’t so sure about our figures—they thought we were too low—and they insisted that the Exchange’s claim to get back any of its contribution out of Haupt assets would have to come after the banks’ claims for their loans. We agreed to that. We all fought and negotiated, and when we finally went home there was general agreement on the broad outline of the thing. Of course, everyone recognized that this meeting was only preliminary—to begin with, by no means all the creditor banks were represented at it—and that both the detail work and much of the hard bargaining would have to be done over the weekend.”

Just how much detail work and hard bargaining lay ahead became manifest on Saturday. The Exchange’s board met at eleven, and more than two-thirds of its thirty-three members were present; because of the Haupt crisis, some governors had cancelled weekend plans, and others had flown in from their regular stands in such outposts as Georgia and Florida. The board’s first action—a decision to keep the Exchange closed on Monday, the day of the President’s funeral—was accomplished with deep relief, because the holiday would give the negotiators an additional twenty-four hours in which to hammer out a deal before the deadline represented by the reopening of the courts and the markets. Funston brought the governors up to date on what was known about Haupt’s financial position and on the status of the negotiations that had been begun with the banks; he also gave them a new estimate of the sum that might be required to make the Haupt customers whole—nine million dollars. After a fractional moment of silence, several governors rose to say, in essence, that they felt that more than money was at stake; it was a question of the relation of the Stock Exchange to the country’s many million investors. The meeting was then temporarily adjourned, and, with the authority of the governors’ lofty sentiments to back it up, the Exchange’s three-man committee got down to negotiations with the bankers.

Thus, the pattern for Saturday and Sunday was set. While the rest of the nation sat stupefied in front of its television sets, and while the downtown Manhattan streets were as deserted as they must have been during the yellow-fever epidemics of the early nineteenth century, the sixth floor of 11 Wall Street was a nexus of utterly absorbed activity. The Exchange’s committee would remain closeted with the bankers until a point was reached at which Funston and his colleagues needed further authorization; then the board of governors would go into session again and either grant the new authority or decline to do so. Between sessions, the governors congregated in the hallways or smoked and brooded in empty offices. An ordinarily obscure corner of the Exchange bureaucracy called the Conduct and Complaints Department was having a busy weekend, too; a staff of half a dozen there was continuously on the phone dealing with anxious inquiries from Haupt customers, who were feeling anything but hale. And, of course, there were lawyers everywhere—“I never saw so many lawyers in my life,” one veteran Stock Exchange man has said. Coyle estimates that there were more than a hundred people at 11 Wall Street during most of the weekend, and since practically all local restaurants as well as the Exchange’s own eating facilities were closed, the food problem was acute. On Saturday, the entire output of a downtown lunch counter that had shrewdly stayed open was bought up and consumed, after which a taxi was dispatched to Greenwich Village for more supplies; on Sunday, one of the Exchange secretaries thoughtfully brought in an electric coffee-maker and a huge bag of groceries and set up shop in the Chairman’s Dining Room.

The bankers’ negotiating committee now included men from two Haupt creditors that had not been represented on Friday—the National State Bank of Newark and the Continental Illinois National Bank & Trust Co., of Chicago. (Still unrepresented were the four British creditors—Henry Ansbacher & Co.; William Brandt’s Sons & Co., Ltd.; S. Japhet & Co., Ltd.; and Kleinwort, Benson, Ltd. Moreover, with the weekend half gone, they seemed to be temporarily unrepresentable. It was decided to continue negotiating without the British banks and then, on Monday morning, present any agreement to them for approval.) A crucial point at issue, it now developed, was the amount of cash that would be needed from the Stock Exchange to fulfill its part of the bargain. The bankers accepted Funston’s formula under which they would defer collection of two dollars for every dollar that the Exchange contributed to the cause, and they did not doubt that Haupt was stuck with about twenty-two and a half million dollars’ worth of useless warehouse receipts; however, they were unwilling to take that figure as the maximum amount that might be necessary to liquidate Haupt. To be on the safe side, they argued, the amount ought to be based on Haupt’s over-all indebtedness to them—thirty-six million—and this meant that the Exchange’s cash contribution would have to be not seven and a half million but twelve. Another point at issue was the question of to whom the Exchange would pay whatever sum was agreed upon. Some of the bankers thought the money ought to go straight into the coffers of Ira Haupt & Co., to be dispensed by the firm itself to its customers; the trouble with this suggestion, as the Exchange’s representatives were not slow to point out, was that it would put the Exchange’s contribution entirely beyond its control. As a final complication, one bank—the Continental Illinois—was distinctly reluctant to enter into the deal at all. “The Continental’s people were thinking in terms of their bank’s exposure,” an Exchange man has explained sympathetically. “They thought our arrangement might ultimately be more damaging to them than a formal Haupt bankruptcy and receivership. They needed time to consider, to make sure they were taking the proper action, but I must say they were coöperative.” Indeed, since it was primarily the Stock Exchange’s good name that was at the center of the planned deal, it would appear that all the banks were marvels of coöperation. After all, a banker is legally and morally charged with doing the best he can for his depositors and stockholders, and is therefore hardly in a position to indulge in grand gestures for the public good; if his eyes are flinty, they may mask a kind, but stifled, heart. As for the Continental, it had reason to be particularly slow to act, because its “exposure” amounted to well over ten million dollars, or much more than that of any other bank. No one concerned has been willing to say exactly what the points were on which the Continental held out, but it seems safe to assume that no bank or person who had lent Haupt less than ten million dollars can know exactly how the Continental felt.

By the time the negotiations were recessed, at about six o’clock Saturday evening, a compromise had been reached on the main issues—on the amount-of-cash controversy by an agreement that the Exchange would put up an initial seven and a half million with a pledge to go up to twelve million if it became necessary, and on the controversy about how the money would be paid to the Haupt customers by agreement that the Exchange’s chief examiner would be appointed liquidator of Haupt. But the Continental was still recalcitrant, and, of course, the British banks had not yet even been approached. In any event, everybody shut up shop for the night, with pledges to return early the next afternoon, even though it was Sunday. Funston, who was coming down with a bad cold, went home to Greenwich. The bankers went home to places like Glen Cove and Basking Ridge. Watts, a diehard commuter from Philadelphia, went home to that tranquil city. Even Bishop went home to Fanwood.

At two o’clock Sunday afternoon, the Exchange governors, their ranks now augmented by arrivals from Los Angeles, Minneapolis, Pittsburgh, and Richmond, met in joint session with the thirty representatives of member firms, who were anxious to learn what they were being committed to. After the current status of the emerging agreement had been explained to them, they voted unanimously in favor of going ahead with it. As the afternoon progressed, even Continental Illinois softened its opposition, and at about six o’clock, after a series of frantic long-distance telephone calls and attempts to track down Continental officers on trains and in airports, the Chicago bank agreed to go along, explaining that it was doing so in the public interest rather than in pursuance of its officers’ best business judgment. At about the same time, the Times’ financial editor, Thomas E. Mullaney—who, like the rest of the press, had been rigidly excluded from the sixth floor throughout the negotiations—called Funston to say he had heard rumors of a plan on Haupt in the offing. Because the British banks would have reason to be miffed, at the very least, if they should read in the next morning’s air editions of a scheme to dispose of their credits without their agreement, or even their knowledge, Funston had to give a reply that could only depress still further the spirits of the waiting twenty thousand customers. “There is no plan,” he said.

THE question of who would undertake the delicate task of cajoling the British banks had come up early Sunday afternoon. Funston, despite his cold, was anxious to make the trip (for one thing, he has since admitted, the drama of it appealed to him), and had gone as far as getting his secretary to reserve space on a plane, but as the afternoon progressed and the local problems continued to appear intractable, it was decided that he couldn’t be spared. Several other governors quickly volunteered to go, and one of them, Gustave L. Levy, was eventually selected, on the ground that his firm, Goldman, Sachs & Co., had had a long and close association with Kleinwort, Benson, one of the British banks, and that Levy himself was on excellent terms with some of the Kleinwort, Benson partners. (Levy would later succeed Watts as chairman.) Accordingly, Levy, accompanied by an executive and a lawyer of the Chase—who were presumably included in the hope that they would set the British banks an inspiring example of coöperation—left 11 Wall Street shortly after five o’clock and caught a London-bound jet at seven. The trio sat up on the plane most of the night, carefully planning the approach they would make to the bankers in the morning. They were well advised to do so, because the British banks certainly had no cause to feel coöperative; their Stock Exchange wasn’t in trouble. And there was more to it than that. According to unimpeachable sources, the four British banks had lent Haupt a total of five and a half million dollars, and these loans, like many short-term loans made by foreign banks to American brokers, had not been secured by any collateral. Sources only fractionally more impeachable maintain that some of the loans had been extended very recently—that is, a week or less before the debacle. The money lent is known to have consisted of Eurodollars, a phantom but nonetheless serviceable currency consisting of dollar deposits in European banks; some four billion Eurodollars were actively traded among European financial institutions at that time, and the banks that lent the five and a half million to Haupt had first borrowed them from somebody else. According to a local expert in international banking, Eurodollars are customarily traded in huge blocks at a relatively tiny profit; for instance, a bank might borrow a block at four and a quarter per cent and lend it at four and a half per cent, at a net advantage of one fourth of one per cent per annum. Obviously, such transactions are looked upon as practically without risk. One-fourth of one per cent of five and a half million dollars over a period of one week amounts to $264.42, which gives some indication of the size of the profit on the Haupt deal that the four British banks would have been able to divide among themselves, less expenses, if everything had gone as planned. Instead, they now stood to lose the whole bundle.

Levy and the Chase men arrived red-eyed in London shortly after daybreak on a depressingly drizzly morning. They went to the Savoy to change their clothes and have breakfast and then headed straight for the City, London’s financial district. Their first meeting was at the Fenchurch Street establishment of William Brandt’s Sons, which had put up over half of the five and a half million. The Brandt partners courteously offered condolences on the death of the President, and the Americans agreed that it was a terrible thing, whereupon both sides came to the point. The Brandt men knew of Haupt’s impending failure but not of the plan now afoot to rescue the Haupt customers by avoiding a formal bankruptcy; Levy explained this, and an hour’s discussion followed, in the course of which the Britons showed a certain reluctance to go along—as well they might. Having just been taken in by one group of Yankees, they were not anxious to be immediately taken in by another. “They were very unhappy,” Levy says. “They raised hell with me as a representative of the New York Stock Exchange, one of whose members had got them into this jam. They wanted to make a trade with us—to get a priority in the collection of their claims in exchange for coming along with us and agreeing to defer collection. But their trading position wasn’t really good; in a bankruptcy proceeding, their claims, based on unsecured loans, would have been considered after the claims of creditors who held collateral, and in my opinion they would have never collected a nickel. On the other hand, under the terms of our offer they would be treated equally with all the other Haupt creditors except the customers. We had to explain to them that we weren’t trading.”

The Brandt men replied that before deciding they wanted to think the matter over, and also to hear what the other British banks said. The American delegates then repaired to the London office of the Chase, on Lombard Street, where, by prearrangement, they met with representatives of the three other British banks and Levy had a chance for a reunion with his Kleinwort, Benson friends. The circumstances of the reunion were obviously less than happy, but Levy says that his friends took a realistic view of their situation and, with heroic objectivity, actually helped their fellow-Britons to see the American side of the question. Nevertheless, this meeting, like the earlier one, broke up without commitment by anyone. Levy and his colleagues stayed at the Chase for lunch and then walked over to the Bank of England, which was interested in the Haupt loans to the extent that their default would affect Britain’s balance of payments. The Bank of England, through one of its deputies, assured the visitors of its distress over both America’s national tragedy and Wall Street’s parochial one, and advised them that while it lacked the power to tell the London banks what to do, in its judgment they would be wise to go along with the American scheme. Then, at about two o’clock, the trio returned to Lombard Street to wait nervously for word from the banks. As it happened, a parallel vigil was then beginning on Wall Street, where it was nine o’clock on Monday morning, and where Funston, just arrived in his office and very much aware that only one day remained in which to get the deal wrapped up, was pacing his rug as he waited for a call that would tell him whether London was going to cause the pot to fall in.

Kleinwort, Benson and S. Japhet & Co. were the first to agree to go along, Levy recalls. Then—after a silence of perhaps half an hour, during which Levy and his colleagues began to have an agonizing sense of the minutes ticking away in New York—an affirmative answer came from Brandt. That was the big one; with the chief creditor and two of the three others in line, it was all but certain that Ansbacher would join up. At around 4 P.M. London time, Ansbacher did, and Levy was finally able to place the call that Funston had been waiting for. Their mission accomplished, the Americans went straight to the London airport, and within three hours were on a plane headed home.

On getting the good news, Funston felt that the whole agreement was pretty well in the bag at last, since all that was needed to seal the bag was the signatures of the fifteen Haupt general partners, who seemed to have nothing to lose and everything to gain from the plan. Still, the task of getting those signatures was a vital one. Short of a bankruptcy suit, which everyone was trying to avoid, no liquidator could distribute the Haupt assets—not even the marble-topped cabinets and the refrigerators—without the partners’ permission. Accordingly, late on Monday afternoon the Haupt partners, each accompanied by his lawyer, trooped into Chairman Watts’s office at the Stock Exchange to learn exactly what fate the Wall Street powers had been arranging for them.

The Haupt partners could hardly have found the projected agreement pleasant reading, inasmuch as it prescribed, among other things, that they were to execute powers of attorney giving a liquidator full control over Haupt’s affairs. However, one of their own lawyers gave them a short, pungent talk pointing out that they were personally liable for the firm’s debts whether or not they signed the agreement, so they might as well be public-spirited and sign it. More briefly, they were over a barrel. (Many of them later filed personal bankruptcy papers.) One startling event broke the even tenor of this gloomy meeting. Shortly after the Haupt lawyer had wound up his disquisition on the facts of life, someone noticed an unfamiliar and strikingly youthful face in the crowd and asked its owner to identify himself. The unhesitating reply was “I’m Russell Watson, a reporter for the Wall Street Journal.” There was a short, stunned silence, in recognition of the fact that an untimely leak might still disturb the delicate balance of money and emotion that made up the agreement. Watson himself, who was twenty-four and had been on the Journal for a year, has since explained how he got into the meeting, and under what circumstances he left it. “I was new on the Stock Exchange beat then,” he said afterward. “Earlier in the day, there had been word that Funston would probably hold a press conference sometime that evening, so I went over to the Exchange. At the main entrance, I asked a guard where Mr. Funston’s conference was. The guard said it was on the sixth floor, and ushered me into an elevator. I suppose he thought I was a banker, a Haupt partner, or a lawyer. On the sixth floor, people were milling around everywhere. I just walked off the elevator and into the office where the meeting was—nobody stopped me. I didn’t understand much of what was going on. I got the feeling that whatever was at stake, there was general agreement but still a lot of haggling over details to be done. I didn’t recognize anybody there but Funston. I stood around quietly for about five minutes before anybody noticed me, and then everybody said, pretty much at once, ‘Good God, get out of here!’ They didn’t exactly kick me out, but I saw it was time to go.”

During the haggling phase that followed—a painfully protracted one, it developed—the Haupt partners and their lawyers made a command post of Watts’s office, while the bank representatives and their lawyers camped in the North Committee Room, just down the hall. Funston, who was determined that news of a settlement should be in the hands of investors before the opening of the market next morning, was going wild with irritation and frustration, and in an effort to speed things up he constituted himself a sort of combination messenger boy and envoy. “All Monday evening, I kept running back and forth saying, ‘Look, they won’t give in on this point, so you’ve got to,’” he recalls. “Or I’d say, ‘Look what time it is—only twelve hours until tomorrow’s market opening! Initial here.’”

At fifteen minutes past midnight, nine and three-quarters hours before the market’s reopening, the agreement was signed in the South Committee Room by the twenty-eight parties at interest, in an atmosphere that a participant has described as one of exhaustion and general relief. As soon as the banks opened on Tuesday morning, the Stock Exchange deposited seven and a half million dollars, a sum amounting to roughly one-third of its available reserve, in an account on which the Haupt liquidator could draw; the same morning, the liquidator himself—James P. Mahony, a veteran member of the Exchange’s staff—moved into the Haupt offices to take charge. The stock market, encouraged by confidence in the new President or by news of the Haupt settlement, or by a combination of the two, had its greatest one-day rise in history, more than eliminating Friday’s losses. A week later, on December 2nd, Mahony announced that $1,750,000, had already been paid out of the Stock Exchange account to bail out Haupt customers; by December 12th, the figure was up to $5,400,000, and by Christmas to $6,700,000. Finally, on March 11, 1964, the Exchange was able to report that it had dispensed nine and a half million dollars, and that the Haupt customers, with the exception of a handful who couldn’t be found, were whole again.

THE agreement, in which some people saw an unmistakable implication that Wall Street’s Establishment now felt accountable for public harm caused by the misdeeds, or even the misfortunes, of any of its members, gave rise to a variety of reactions. The rescued Haupt customers were predictably grateful, of course. The Times said that the agreement was evidence of “a sense of responsibility that served to inspire investor confidence” and “may have helped to avoid a potential panic.” In Washington, President Johnson interrupted his first business day in office to telephone Funston and congratulate him. The chairman of the S.E.C., William L. Cary, who was not ordinarily given to throwing bouquets at the Stock Exchange, said in December that it had furnished “a dramatic, impressive demonstration of its strength and concern for the public interest.” Other stock exchanges around the world were silent on the matter, but if one may judge by the unsentimental way that most of them do business, some of their officials must have been indulging in a certain amount of headshaking over the strange doings in New York. The Stock Exchange’s member firms, who were assessed for the nine and a half million dollars over a period of three years, appeared to be generally satisfied, although a few of them were heard to grumble that fine old firms with justified reputations for skill and probity should not be asked to pay the losses of greedy upstarts who overstep and get caught out. Oddly, almost no one seems to have expressed gratitude to the British and American banks, which recouped something like half of their losses. It may be that people simply don’t thank banks, except in television commercials.

The Stock Exchange itself, meanwhile, was torn between blushingly accepting congratulations and prudently, if perhaps gracelessly, insisting that what it had done wasn’t to be regarded as a precedent—that it wouldn’t necessarily do the same thing again. Nor were the Exchange’s officials at all sure that the same thing would have been done if the Haupt case had occurred earlier—even a very little earlier. Crooks, who was chairman of the Exchange in the early 1950s, felt that the chances of such action during his term would have been about fifty-fifty. Funston, who assumed his office in 1951, felt that the matter would have been “questionable” during the early years of his incumbency. “One’s idea of public responsibility is evolutionary,” he said. He was particularly annoyed by the idea, which he had heard repeatedly, that the Exchange had acted out of a sense of guilt. Psychoanalytic interpretations of the event, he felt, were gratuitous, not to say churlish. As for those older governors who glared, quite possibly balefully, at the negotiations from their gilt frames in the Governors’ Room and the North and South Committee Rooms, their reaction to the whole proceeding may be imagined but cannot be known.

7

The Impacted Philosophers

AMONG THE GREATEST problems facing American industry today, one may learn by talking with any of a large number of industrialists who are not known to be especially given to pontificating, is “the problem of communication.” This preoccupation with the difficulty of getting a thought out of one head and into another is something the industrialists share with a substantial number of intellectuals and creative writers, more and more of whom seem inclined to regard communication, or the lack of it, as one of the greatest problems not just of industry but of humanity. (A group of avant-garde writers and artists have given the importance of communication a backhanded boost by flatly and unequivocally proclaiming themselves to be against it.) As far as the industrialists are concerned, I admit that in the course of hearing them invoke the word “communication”—often in an almost mystical way—over a period of years I have had a lot of trouble figuring out exactly what they meant. The general thesis is clear enough; namely, that everything would be all right, first, if they could get through to each other within their own organizations, and, second, if they, or their organizations, could get through to everybody else. What has puzzled me is how and why, in this day when the foundations sponsor one study of communication after another, individuals and organizations fail so consistently to express themselves understandably, or how and why their listeners fail to grasp what they hear.

A few years ago, I acquired a two-volume publication of the United States Government Printing Office entitled Hearings Before the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, United States Senate, Eighty-seventh Congress, First Session, Pursuant to S. Res. 52, and after a fairly diligent perusal of its 1,459 pages I thought I could begin to see what the industrialists are talking about. The hearings, conducted in April, May, and June, 1961, under the chairmanship of Senator Estes Kefauver, of Tennessee, had to do with the now famous price-fixing and bid-rigging conspiracies in the electrical-manufacturing industry, which had already resulted, the previous February, in the imposition by a federal judge in Philadelphia of fines totaling $1,924,500 on twenty-nine firms and forty-five of their employees, and also of thirty-day prison sentences on seven of the employees. Since there had been no public presentation of evidence, all the defendants having pleaded either guilty or no defense, and since the records of the grand juries that indicted them were secret, the public had had little opportunity to hear about the details of the violations, and Senator Kefauver felt that the whole matter needed a good airing. The transcript shows that it got one, and what the airing revealed—at least within the biggest company involved—was a breakdown in intramural communication so drastic as to make the building of the Tower of Babel seem a triumph of organizational rapport.

In a series of indictments brought by the government in the United States District Court in Philadelphia between February and October, 1960, the twenty-nine companies and their executives were charged with having repeatedly violated Section 1 of the Sherman Act of 1890, which declares illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” (The Sherman Act was the instrument used in the celebrated trust-busting activities of Theodore Roosevelt, and along with the Clayton Act of 1914 it has served as the government’s weapon against cartels and monopolies ever since.) The violations, the government alleged, were committed in connection with the sale of large and expensive pieces of apparatus of a variety that is required chiefly by public and private electric-utility companies (power transformers, switchgear assemblies, and turbine-generator units, among many others), and were the outcome of a series of meetings attended by executives of the supposedly competing companies—beginning at least as early as 1956 and continuing into 1959—at which noncompetitive price levels were agreed upon, nominally sealed bids on individual contracts were rigged in advance, and each company was allocated a certain percentage of the available business. The government further alleged that, in an effort to preserve the secrecy of these meetings, the executives had resorted to such devices as referring to their companies by code numbers in their correspondence, making telephone calls from public booths or from their homes rather than from their offices, and doctoring the expense accounts covering their get-togethers to conceal the fact that they had all been in a certain city on a certain day. But their stratagems did not prevail. The federals, forcefully led by Robert A. Bicks, then head of the Antitrust Division of the Department of Justice, succeeded in exposing them, with considerable help from some of the conspirators themselves, who, after an employee of a small conspirator company saw fit to spill the story in the early fall of 1959, flocked to turn state’s evidence.

The economic and social significance of the whole affair may be demonstrated clearly enough by citing just a few figures. In an average year at the time of the conspiracies, a total of more than one and three-quarters billion dollars was spent to purchase machines of the sort in question, nearly a fourth of it by federal, state, and local governments (which, of course, means the taxpayers), and most of the rest by private utility companies (which are inclined to pass along any rise in the cost of their equipment to the public in the form of rate increases). To take a specific example of the kind of money involved in an individual transaction, the list price of a 500,000-kilowatt turbine-generator—a monstrous device for producing electric power from steam power—was often something like sixteen million dollars. Actually, manufacturers sometimes cut their prices by as much as 25 percent in order to make a sale, and therefore, if everything was above board, it might have been possible to buy the machine at a saving of four million dollars; if representatives of the companies making such generators held a single meeting and agreed to fix prices, they could, in effect, increase the cost to the customer by the four million. And in the end, the customer was almost sure to be the public.

IN presenting the indictments in Philadelphia, Bicks stated that, considered collectively, they revealed “a pattern of violations which can fairly be said to range among the most serious, the most flagrant, the most pervasive that have ever marked any basic American industry.” Just before imposing the sentences, Judge J. Cullen Ganey went even further; in his view, the violations constituted “a shocking indictment of a vast section of our economy, for what is really at stake here is the survival of … the free-enterprise system.” The prison sentences showed that he meant it; although there had been many successful prosecutions for violation of the Sherman Act during the seven decades since its passage, it was rare indeed for executives to be jailed. Not surprisingly, therefore, the case kicked up quite a ruckus in the press. The New Republic, to be sure, complained that the newspapers and magazines were intentionally playing down “the biggest business scandal in decades,” but the charge did not seem to have much foundation. Considering such things as the public’s apathy toward switchgear, the woeful bloodlessness of criminal cases involving antitrust laws, and the relatively few details of the conspiracies that had emerged, the press in general gave the story a good deal of space, and even the Wall Street Journal and Fortune ran uncompromising and highly informative accounts of the debacle; here and there, in fact, one could detect signs of a revival of the spirit of old-time antibusiness journalism as it existed back in the thirties. After all, what could be more exhilarating than to see several dignified, impeccably tailored, and highly paid executives of a few of the nation’s most respected corporations being trooped off to jail like common pickpockets? It was certainly the biggest moment for business-baiters since 1938, when Richard Whitney, the former president of the New York Stock Exchange, was put behind bars for speculating with his customers’ money. Some called it the biggest since Teapot Dome.

To top it all off, there was a prevalent suspicion of hypocrisy in the very highest places. Neither the chairman of the board nor the president of General Electric, the largest of the corporate defendants, had been caught in the government’s dragnet, and the same was true of Westinghouse Electric, the second-largest; these four ultimate bosses let it be known that they had been entirely ignorant of what had been going on within their commands right up to the time the first testimony on the subject was given to the Justice Department. Many people, however, were not satisfied by these disclaimers, and, instead, took the position that the defendant executives were men in the middle, who had broken the law only in response either to actual orders or to a corporate climate favoring price-fixing, and who were now being allowed to suffer for the sins of their superiors. Among the unsatisfied was Judge Ganey himself, who said at the time of the sentencing, “One would be most naïve indeed to believe that these violations of the law, so long persisted in, affecting so large a segment of the industry, and, finally, involving so many millions upon millions of dollars, were facts unknown to those responsible for the conduct of the corporation.… I am convinced that in the great number of these defendants’ cases, they were torn between conscience and approved corporate policy, with the rewarding objectives of promotion, comfortable security, and large salaries.”

The public naturally wanted a ringleader, an archconspirator, and it appeared to find what it wanted in General Electric, which—to the acute consternation of the men endeavoring to guide its destinies from company headquarters, at 570 Lexington Avenue, New York City—got the lion’s share of attention both in the press and in the Subcommittee hearings. With some 300,000 employees, and sales averaging some four billion dollars a year over the past ten years, it was not only far and away the biggest of the twenty-nine accused companies but, judged on the basis of sales in 1959, the fifth-biggest company in the country. It also drew a higher total of fines ($437,500) than any other company, and saw more of its executives sent to jail (three, with eight others receiving suspended sentences). Furthermore, as if to intensify in this hour of crisis the horror and shock of true believers—and the glee of scoffers—its highest-ranking executives had for years tried to represent it to the public as a paragon of successful virtue by issuing encomiums to the free competitive system, the very system that the price-fixing meetings were set up to mock. In 1959, shortly after the government’s investigation of the violations had been brought to the attention of G.E.’s policymakers, the company demoted and cut the pay of those of its executives who admitted that they had been involved; one vice-president, for example, was informed that instead of the $127,000 a year he had been getting he would now get $40,000. (He had scarcely adjusted himself to that blow when Judge Ganey fined him four thousand dollars and sent him to prison for thirty days, and shortly after he regained his freedom, General Electric eased him out entirely.) The G.E. policy of imposing penalties of its own on these employees, regardless of what punishment the court might prescribe, was not adopted by Westinghouse, which waited until the judge had disposed of the case and then decided that the fines and prison sentences he had handed out to its stable of offenders were chastisement enough, and did not itself penalize them at all. Some people saw this attitude as evidence that Westinghouse was condoning the conspiracies, but others regarded it as a commendable, if tacit, admission that management at the highest level in the conniving companies was responsible—morally, at least—for the whole mess and was therefore in no position to discipline its erring employees. In the view of these people, G.E.’s haste to penalize the acknowledged culprits on its payroll strongly suggested that the firm was trying to save its own skin by throwing a few luckless employees to the wolves, or—as Senator Philip A. Hart, of Michigan, put it, more pungently, during the hearings—“to do a Pontius Pilate operation.”

EMBATTLED days at 570 Lexington Avenue! After years of cloaking the company in the mantle of a wise and benevolent corporate institution, the public-relations people at G.E. headquarters were faced with the ugly choice of representing its role in the price-fixing affair as that of either a fool or a knave. They tended strongly toward “fool.” Judge Ganey, by his statement that he assumed the conspiracies to have been not only condoned but approved by the top brass and the company as a whole, clearly chose “knave.” But his analysis may or may not have been the right one, and after reading the Kefauver Subcommittee testimony I have come to the melancholy conclusion that the truth will very likely never be known. For, as the testimony shows, the clear waters of moral responsibility at G.E. became hopelessly muddied by a struggle to communicate—a struggle so confused that in some cases, it would appear, if one of the big bosses at G.E. had ordered a subordinate to break the law, the message would somehow have been garbled in its reception, and if the subordinate had informed the boss that he was holding conspiratorial meetings with competitors, the boss might well have been under the impression that the subordinate was gossiping idly about lawn parties or pinochle sessions. Specifically, it would appear that a subordinate who received a direct oral order from his boss had to figure out whether it meant what it seemed to or the exact opposite, while the boss, in conversing with a subordinate, had to figure out whether he should take what the man told him at face value or should attempt to translate it out of a secret code to which he was by no means sure he had the key. That was the problem in a nutshell, and I state it here thus baldly as a suggestion for any potential beneficiary of a foundation who may be casting about for a suitable project on which to draw up a prospectus.

For the past eight years or so, G.E. had had a company rule called Directive Policy 20.5, which read, in part, “No employee shall enter into any understanding, agreement, plan or scheme, expressed or implied, formal or informal, with any competitor, in regard to prices, terms or conditions of sale, production, distribution, territories, or customers; nor exchange or discuss with a competitor prices, terms or conditions of sale, or any other competitive information.” In effect, this rule was simply an injunction to G.E.’s personnel to obey the federal antitrust laws, except that it was somewhat more concrete and comprehensive in the matter of price than they are. It was almost impossible for executives with jurisdiction over pricing policies at G.E. to be unaware of 20.5, or even hazy about it, because to make sure that new executives were acquainted with it and to refresh the memories of old ones, the company formally reissued and distributed it at intervals, and all such executives were asked to sign their names to it as an earnest that they were currently complying with it and intended to keep on doing so. The trouble—at least during the period covered by the court action, and apparently for a long time before that as well—was that some people at G.E., including some of those who regularly signed 20.5, simply did not believe that it was to be taken seriously. They assumed that 20.5 was mere window dressing: that it was on the books solely to provide legal protection for the company and for the higher-ups; that meeting illegally with competitors was recognized and accepted as standard practice within the company; and that often when a ranking executive ordered a subordinate executive to comply with 20.5, he was actually ordering him to violate it. Illogical as it might seem, this last assumption becomes comprehensible in the light of the fact that, for a time, when some executives orally conveyed, or reconveyed, the order, they were apparently in the habit of accompanying it with an unmistakable wink. In May of 1948, for example, there was a meeting of G.E. sales managers during which the custom of winking was openly discussed. Robert Paxton, an upper-level G.E. executive who later became the company’s president, addressed the meeting and delivered the usual admonition about antitrust violations, whereupon William S. Ginn, then a sales executive in the transformer division, under Paxton’s authority, startled him by saying, “I didn’t see you wink.” Paxton replied firmly, “There was no wink. We mean it, and these are the orders.” Asked by Senator Kefauver how long he had been aware that orders issued at G.E. were sometimes accompanied by winks, Paxton replied that he had first observed the practice way back in 1935, when his boss had given him an instruction along with a wink or its equivalent, and that when, some time later, the significance of the gesture dawned on him, he had become so incensed that he had with difficulty restrained himself from jeopardizing his career by punching the boss in the nose. Paxton went on to say that his objections to the practice of winking had been so strong as to earn him a reputation in the company for being an antiwink man, and that he, for his part, had never winked.

Although Paxton would seem to have left little doubt as to how he intended his winkless order of 1948 to be interpreted, its meaning failed to get through to Ginn, for not long after it was issued, he went out and fixed prices to a fare-thee-well. (Obviously, it takes more than one company to make a price-fixing agreement, but all the testimony tends to indicate that it was G.E. that generally set the pattern for the rest of the industry in such matters.) Thirteen years later, Ginn—fresh from a few weeks in jail, and fresh out of a $135,000-a-year job—appeared before the Subcommittee to account for, among other things, his strange response to the winkless order. He had disregarded it, he said, because he had received a contrary order from two of his other superiors in the G.E. chain of command, Henry V. B. Erben and Francis Fairman, and in explaining why he had heeded their order rather than Paxton’s he introduced the fascinating concept of degrees of communication—another theme for a foundation grantee to get his teeth into. Erben and Fairman, Ginn said, had been more articulate, persuasive, and forceful in issuing their order than Paxton had been in issuing his; Fairman, especially, Ginn stressed, had proved to be “a great communicator, a great philosopher, and, frankly, a great believer in stability of prices.” Both Erben and Fairman had dismissed Paxton as naïve, Ginn testified, and, in further summary of how he had been led astray, he said that “the people who were advocating the Devil were able to sell me better than the philosophers that were selling the Lord.”

It would be helpful to have at hand a report from Erben and Fairman themselves on the communication technique that enabled them to prevail over Paxton, but unfortunately neither of these philosophers could testify before the Subcommittee, because by the time of the hearings both of them were dead. Paxton, who was available, was described in Ginn’s testimony as having been at all times one of the philosopher-salesmen on the side of the Lord. “I can clarify Mr. Paxton by saying Mr. Paxton came closer to being an Adam Smith advocate than any businessman I have met in America,” Ginn declared. Still, in 1950, when Ginn admitted to Paxton in casual conversation that he had “compromised himself” in respect to antitrust matters, Paxton merely told him that he was a damned fool, and did not report the confession to anyone else in the company. Testifying as to why he did not, Paxton said that when the conversation occurred he was no longer Ginn’s boss, and that, in the light of his personal ethics, repeating such an admission by a man not under his authority would be “gossip” and “talebearing.”

Meanwhile, Ginn, no longer answerable to Paxton, was meeting with competitors at frequent intervals and moving steadily up the corporate ladder. In November, 1954, he was made general manager of the transformer division, whose headquarters were in Pittsfield, Massachusetts—a job that put him in line for a vice-presidency. At the time of Ginn’s shift, Ralph J. Cordiner, who has been chairman of the board of General Electric since 1949, called him down to New York for the express purpose of enjoining him to comply strictly and undeviatingly with Directive Policy 20.5. Cordiner communicated this idea so successfully that it was clear enough to Ginn at the moment, but it remained so only as long as it took him, after leaving the chairman, to walk to Erben’s office. There his comprehension of what he had just heard became clouded. Erben, who was head of G.E.’s distribution group, ranked directly below Cordiner and directly above Ginn, and, according to Ginn’s testimony, no sooner were they alone in his office than he countermanded Cordiner’s injunction, saying, “Now, keep on doing the way that you have been doing, but just be sensible about it and use your head on the subject.” Erben’s extraordinary communicative prowess again carried the day, and Ginn continued to meet with competitors. “I knew Mr. Cordiner could fire me,” he told Senator Kefauver, “but also I knew I was working for Mr. Erben.”

At the end of 1954, Paxton took over Erben’s job and thereby became Ginn’s boss again. Ginn went right on meeting with competitors, but, since he was aware that Paxton disapproved of the practice, didn’t tell him about it. Moreover, he testified, within a month or two he had become convinced that he could not afford to discontinue attending the meetings under any circumstances, for in January, 1955, the entire electrical-equipment industry became embroiled in a drastic price war—known as the “white sale,” because of its timing and the bargains it afforded to buyers—in which the erstwhile amiable competitors began fiercely undercutting one another. Such a manifestation of free enterprise was, of course, exactly what the intercompany conspiracies were intended to prevent, but just at that time the supply of electrical apparatus so greatly exceeded the demand that first a few of the conspirators and then more and more began breaking the agreements they themselves had made. In dealing with the situation as best he could, Ginn said, he “used the philosophies that had been taught me previously”—by which he meant that he continued to conduct price-fixing meetings, in the hope that at least some of the agreements made at them would be honored. As for Paxton, in Ginn’s opinion that philosopher was not only ignorant of the meetings but so constant in his devotion to the concept of free and aggressive competition that he actually enjoyed the price war, disastrous though it was to everybody’s profits. (In his own testimony, Paxton vigorously denied that he had enjoyed it.)

Within a year or so, the electrical-equipment industry took an upturn, and in January, 1957, Ginn, having ridden out the storm relatively well, got his vice-presidency. At the same time, he was transferred to Schenectady, to become general manager of G.E.’s turbine-generator division, and Cordiner again called him into headquarters and gave him a lecture on 20.5. Such lectures were getting to be a routine with Cordiner; every time a new employee was assigned to a strategic managerial post, or an old employee was promoted to such a post, the lucky fellow could be reasonably certain that he would be summoned to the chairman’s office to hear a rendition of the austere creed. In his book The Heart of Japan, Alexander Campbell reports that a large Japanese electrical concern has drawn up a list of seven company commandments (for example, “Be courteous and sincere!”), and that each morning, in each of its thirty factories, the workers are required to stand at attention and recite these in unison, and then to sing the company song (“For ever-increasing production/Love your work, give your all!”). Cordiner did not require his subordinates to recite or sing 20.5—as far as is known, he never even had it set to music—but from the number of times men like Ginn had it read to them or otherwise recalled to their attention, they must have come to know it well enough to chant it, improvising a tune as they went along.

This time, Cordiner’s message not only made an impression on Ginn’s mind but stuck there in unadulterated form. Ginn, according to his testimony, became a reformed executive and dropped his price-fixing habits overnight. However, it appears that his sudden conversion cannot be attributed wholly to Cordiner’s powers of communication, or even to the drip-drip-drip effect of repetition, for it was to a considerable extent pragmatic in character, like the conversion of Henry VIII to Protestantism. He reformed, Ginn explained to the Subcommittee, because his “air cover was gone.”

“Your what was gone?” Senator Kefauver asked.

“My air cover was gone,” replied Ginn. “I mean I had lost my air cover. Mr. Erben wasn’t around any more, and all of my colleagues had gone, and I was now working directly for Mr. Paxton, knowing his feelings on the matter.… Any philosophy that I had grown up with before in the past was now out the window.”

If Erben, who had not been Ginn’s boss since late in 1954, had been the source of his air cover, Ginn must have been without its protection for over two years, but, presumably, in the excitement of the price war he had failed to notice its absence. However that may have been, here he now was, a man suddenly shorn not only of his air cover but of his philosophy. Swiftly filling the latter void with a whole new set of principles, he circulated copies of 20.5 among his department managers in the turbine-generator division and topped this off by energetically adopting what he called a “leprosy policy”; that is, he advised his subordinates to avoid even casual social contacts with their counterparts in competing companies, because “once the relationships are established, I have come to the conclusion after many years of hard experience that the relationships tend to spread and the hanky-panky begins to get going.” But now fate played a cruel trick on Ginn, and, all unknowing, he landed in the very position that Paxton and Cordiner had been in for years—that of a philosopher vainly endeavoring to sell the Lord to a flock that declined to buy his message and was, in fact, systematically engaging in the hanky-panky its leader had warned it against. Specifically, during the whole of 1957 and 1958 and the first part of 1959 two of Ginn’s subordinates were piously signing 20.5 with one hand and, with the other, briskly drawing up price-fixing agreements at a whole series of meetings—in New York; Philadelphia; Chicago; Hot Springs, Virginia; and Skytop, Pennsylvania, to name a few of their gathering places.

It appears that Ginn had not been able to impart much of his shining new philosophy to others, and that at the root of his difficulty lay that old jinx, the problem of communicating. Asked at the hearings how his subordinates could possibly have gone so far astray, he replied, “I have got to admit that I made a communication error. I didn’t sell this thing to the boys well enough.… The price is so important in the complete running of a business that, philosophically, we have got to sell people not only just the fact that it is against the law, but … that it shouldn’t be done for many, many reasons. But it has got to be a philosophical approach and a communication approach.… Even though … I had told my associates not to do this, some of the boys did get off the reservation.… I have to admit to myself here an area of a failure in communications … which I am perfectly willing to accept my part of the responsibility for.”

In earnestly striving to analyze the cause of the failure, Ginn said, he had reached the conclusion that merely issuing directives, no matter how frequently, was not enough; what was needed was “a complete philosophy, a complete understanding, a complete breakdown of barriers between people, if we are going to get some understanding and really live and manage these companies within the philosophies that they should be managed in.”

Senator Hart permitted himself to comment, “You can communicate until you are dead and gone, but if the point you are communicating about, even though it be a law of the land, strikes your audience as something that is just a folklore … you will never sell the package.”

Ginn ruefully conceded that that was true.

THE concept of degrees of communication was further developed, by implication, in the testimony of another defendant, Frank E. Stehlik, who had been general manager of the G.E. low-voltage-switchgear department from May, 1956, to February, 1960. (As all but a tiny minority of the users of electricity are contentedly unaware, switchgear serves to control and protect apparatus used in the generation, conversion, transmission, and distribution of electrical energy, and more than $100 million worth of it is sold annually in the United States.) Stehlik received some of his business guidance in the conventional form of orders, oral and written, and some—perhaps just as much, to judge by his testimony—through a less intellectual, more visceral medium of communication that he called “impacts.” Apparently, when something happened within the company that made an impression on him, he would consult a sort of internal metaphysical voltmeter to ascertain the force of the jolt that he had received, and, from the reading he got, would attempt to gauge the true drift of company policy. For example, he testified that during 1956, 1957, and most of 1958 he believed that G.E. was frankly and fully in favor of complying with 20.5. But then, in the autumn of 1958, George E. Burens, Stehlik’s immediate superior, told him that he, Burens, had been directed by Paxton, who by then was president of G.E., to have lunch with Max Scott, president of the I-T-E Circuit Breaker Company, an important competitor in the switchgear market. Paxton said in his own testimony that while he had indeed asked Burens to have lunch with Scott, he had instructed him categorically not to talk about prices, but apparently Burens did not mention this caveat to Stehlik; in any event, the disclosure that the high command had told Burens to lunch with an archrival, Stehlik testified, “had a heavy impact on me.” Asked to amplify this, he said, “There are a great many impacts that influence me in my thinking as to the true attitude of the company, and that was one of them.” As the impacts, great and small, piled up, their cumulative effect finally communicated to Stehlik that he had been wrong in supposing the company had any real respect for 20.5. Accordingly, when, late in 1958, Stehlik was ordered by Burens to begin holding price meetings with the competitors, he was not in the least surprised.

Stehlik’s compliance with Burens’ order ultimately brought on a whole new series of impacts, of a much more crudely communicative sort. In February, 1960, General Electric cut his annual pay from $70,000 to $26,000 for violating 20.5; a year later Judge Ganey gave him a three-thousand-dollar fine and a suspended thirty-day jail sentence for violating the Sherman Act; and about a month after that G.E. asked for, and got, his resignation. Indeed, during his last years with the firm Stehlik seems to have received almost as many lacerating impacts as a Raymond Chandler hero. But testimony given at the hearings by L. B. Gezon, manager of the marketing section of the low-voltage-switchgear department, indicated that Stehlik, again like a Chandler hero, was capable of dishing out blunt impacts as well as taking them. Gezon, who was directly under Stehlik in the line of command, told the Subcommittee that although he had taken part in price-fixing meetings prior to April, 1956, when Stehlik became his boss, he did not subsequently engage in any antitrust violations until late 1958, and that he did so then only as the result of an impact that bore none of the subtlety noted by Stehlik in his early experience with this phenomenon. The impact came directly from Stehlik, who, it seems, left nothing to chance in communicating with his subordinates. In Gezon’s words, Stehlik told him “to resume the meetings; that the company policy was unchanged; the risk was just as great as it ever had been; and that if our activities were discovered, I personally would be dismissed or disciplined [by the company], as well as punished by the government.” So Gezon was left with three choices: to quit, to disobey the direct order of his superior (in which case, he thought, “they might have found somebody else to do my job”), or to obey the order, and thereby violate the antitrust laws, with no immunity against the possible consequences. In short, his alternatives were comparable to those faced by an international spy.

Although Gezon did resume the meetings, he was not indicted, possibly because he had been a relatively minor price-fixer. General Electric, for its part, demoted him but did not require him to resign. Yet it would be a mistake to assume that Gezon was relatively untouched by his experience. Asked by Senator Kefauver if he did not think that Stehlik’s order had placed him in an intolerable position, he replied that it had not struck him that way at the time. Asked whether he thought it unjust that he had suffered demotion for carrying out the order of a superior, he replied, “I personally don’t consider it so.” To judge by his answers, the impact on Gezon’s heart and mind would seem to have been heavy indeed.

THE other side of the communication problem—the difficulty that a superior is likely to encounter in understanding what a subordinate tells him—is graphically illustrated by the testimony of Raymond W. Smith, who was general manager of G.E.’s transformer division from the beginning of 1957 until late in 1959, and of Arthur F. Vinson, who in October, 1957, was appointed vice-president in charge of G.E.’s apparatus group, and also a member of the company’s executive committee. Smith’s job was the one Ginn had held for the previous two years, and when Vinson got his job, he became Smith’s immediate boss. Smith’s highest pay during the period in question was roughly $100,000 a year, while Vinson reached a basic salary of $110,000 and also got a variable bonus, ranging from $45,000 to $100,000. Smith testified that on January 1, 1957, the very day he took charge of the transformer division—and a holiday, at that—he met with Chairman Cordiner and Executive Vice-President Paxton, and Cordiner gave him the familiar admonition about living up to 20.5. However, later that year, the competitive going got so rough that transformers were selling at discounts of as much as 35 percent, and Smith decided on his own hook that the time had come to begin negotiating with rival firms in the hope of stabilizing the market. He felt that he was justified in doing this, he said, because he was convinced that both in company circles and in the whole industry negotiations of this kind were “the order of the day.”

By the time Vinson became his superior, in October, Smith was regularly attending price-fixing meetings, and he felt that he ought to let his new boss know what he was doing. Accordingly, he told the Subcommittee, on two or three occasions when the two men found themselves alone together in the normal course of business, he said to Vinson, “I had a meeting with the clan this morning.” Counsel for the Subcommittee asked Smith whether he had ever put the matter more bluntly—whether, for example, he had ever said anything like “We’re meeting with competitors to fix prices. We’re going to have a little conspiracy here and I don’t want it to get out.” Smith replied that he had never said anything remotely like that—had done nothing more than make remarks on the order of “I had a meeting with the clan this morning.” He did not elaborate on why he did not speak with greater directness, but two logical possibilities present themselves. Perhaps he hoped that he could keep Vinson informed about the situation and at the same time protect him from the risk of becoming an accomplice. Or perhaps he had no such intention, and was simply expressing himself in the oblique, colloquial way that characterized much of his speaking. (Paxton, a close friend of Smith’s, had once complained to Smith that he was “given to being somewhat cryptic” in his remarks.) Anyhow, Vinson, according to his own testimony, had flatly misunderstood what Smith meant; indeed, he could not recall ever hearing Smith use the expression “meeting of the clan,” although he did recall his saying things like “Well, I am going to take this new plan on transformers and show it to the boys.” Vinson testified that he had thought the “boys” meant the G.E. district sales people and the company’s customers, and that the “new plan” was a new marketing plan; he said that it had come as a rude shock to him to learn—a couple of years later, after the case had broken—that in speaking of the “boys” and the “new plan,” Smith had been referring to competitors and a price-fixing scheme. “I think Mr. Smith is a sincere man,” Vinson testified. “I am sure Mr. Smith … thought he was telling me that he was going to one of these meetings. This meant nothing to me.”

Smith, on the other hand, was confident that his meaning had got through to Vinson. “I never got the impression that he misunderstood me,” he insisted to the Subcommittee. Questioning Vinson later, Kefauver asked whether an executive in his position, with thirty-odd years’ experience in the electrical industry, could possibly be so naive as to misunderstand a subordinate on such a substantive matter as grasping who the “boys” were. “I don’t think it is too naive,” replied Vinson. “We have a lot of boys.… I may be naïve, but I am certainly telling the truth, and in this kind of thing I am sure I am naïve.”

SENATOR KEFAUVER: Mr. Vinson, you wouldn’t be a vice-president at $200,000 a year if you were naïve.

MR. VINSON: I think I could well get there by being naïve in this area. It might help.

Here, in a different field altogether, the communication problem again comes to the fore. Was Vinson really saying to Kefauver what he seemed to be saying—that naïveté about antitrust violations might be a help to a man in getting and holding a $200,000-a-year job at General Electric? It seems unlikely. And yet what else could he have meant? Whatever the answer, neither the federal antitrust men nor the Senate investigators were able to prove that Smith succeeded in his attempts to communicate to Vinson the fact that he was engaging in price-fixing. And, lacking such proof, they were unable to establish what they gave every appearance of going all out to establish if they could: namely, that at least some one man at the pinnacle of G.E.’s management—some member of the sacred executive committee itself—was implicated. Actually, when the story of the conspiracies first became known, Vinson not only concurred in a company decision to punish Smith by drastically demoting him but personally informed him of the decision—two acts that, if he had grasped Smith’s meaning back in 1957, would have denoted a remarkable degree of cynicism and hypocrisy. (Smith, by the way, rather than accept the demotion, quit General Electric and, after being fined three thousand dollars and given a suspended thirty-day prison sentence by Judge Ganey, found a job elsewhere, at ten thousand dollars a year.)

This was not Vinson’s only brush with the case. He was also among those named in one of the grand jury indictments that precipitated the court action, this time in connection not with his comprehension of Smith’s jargon but with the conspiracy in the switchgear department. On this aspect of the case, four switchgear executives—Burens, Stehlik, Clarence E. Burke, and H. Frank Hentschel—testified before the grand jury (and later before the Subcommittee) that at some time in July, August, or September of 1958 (none of them could establish the precise date) Vinson had had lunch with them in Dining Room B of G.E.’s switchgear works in Philadelphia, and that during the meal he had instructed them to hold price meetings with competitors. As a result of this order, they said, a meeting attended by representatives of G.E., Westinghouse, the Allis-Chalmers Manufacturing Company, the Federal Pacific Electric Company, and the I-T-E Circuit Breaker Company was held at the Hotel Traymore in Atlantic City on November 9, 1958, at which sales of switchgear to federal, state, and municipal agencies were divvied up, with General Electric to get 39 percent of the business, Westinghouse 35 percent, I-T-E 11 percent, Allis-Chalmers 8 percent, and Federal Pacific Electric 7 percent. At subsequent meetings, agreement was reached on allocating sales of switchgear to private buyers as well, and an elaborate formula was worked out whereby the privilege of submitting the lowest bid to prospective customers was rotated among the conspiring companies at two-week intervals. Because of its periodic nature, this was called the phase-of-the-moon formula—a designation that in due time led to the following lyrical exchange between the Subcommittee and L. W. Long, an executive of Allis-Chalmers:

SENATOR KEFAUVER: Who were the phasers-of-the-mooners—phase-of-the-mooners?

MR. LONG: AS it developed, this so-called phase-of-the-moon operation was carried out at a level below me, I think referred to as a working group.…

MR. FERRALL [counsel for the Subcommittee]: Did they ever report to you about it?

MR. LONG: Phase of the moon? No.

Vinson told the Justice Department prosecutors, and repeated to the Subcommittee, that he had not known about the Traymore meeting, the phase-of-the-mooners, or the existence of the conspiracy itself until the case broke; as for the lunch in Dining Room B, he insisted that it had never taken place. On this point, Burens, Stehlik, Burke, and Hentschel submitted to lie-detector tests, administered by the F.B.I., and passed them. Vinson refused to take a lie-detector test, at first explaining that he was acting on advice of counsel and against his personal inclination, and later, after hearing how the four other men had fared, arguing that if the machine had not pronounced them liars, it couldn’t be any good. It was established that on only eight business days during July, August, and September had Burens, Burke, Stehlik, and Hentschel all been together in the Philadelphia plant at the lunch hour, and Vinson produced some of his expense accounts, which, he pointed out to the Justice Department, showed that he had been elsewhere on each of those days. Confronted with this evidence, the Justice Department dropped its case against Vinson, and he stayed on as a vice-president of General Electric. Nothing that the Subcommittee elicited from him cast any substantive doubt on the defense that had impressed the government prosecutors.

Thus, the uppermost echelon at G.E. came through unscathed; the record showed that participation in the conspiracy went fairly far down in the organization but not all the way to the top. Gezon, everybody agreed, had followed orders from Stehlik, and Stehlik had followed orders from Burens, but that was the end of the trail, because although Burens said he had followed orders from Vinson, Vinson denied it and made the denial stick. The government, at the end of its investigation, stated in court that it could not prove, and did not claim, that either Chairman Cordiner or President Paxton had authorized, or even known about, the conspiracies, and thereby officially ruled out the possibility that they had resorted to at least a figurative wink. Later, Paxton and Cordiner showed up in Washington to testify before the Subcommittee, and its interrogators were similarly unable to establish that they had ever indulged in any variety of winking.

AFTER being described by Ginn as General Electric’s stubbornest and most dedicated advocate of free competition, Paxton explained to the Subcommittee that his thinking on the subject had been influenced not directly by Adam Smith but, rather, by way of a former G.E. boss he had worked under—the late Gerard Swope. Swope, Paxton testified, had always believed firmly that the ultimate goal of business was to produce more goods for more people at lower cost. “I bought that then, I buy it now,” said Paxton. “I think it is the most marvelous statement of economic philosophy that any industrialist has ever expressed.” In the course of his testimony, Paxton had an explanation, philosophical or otherwise, of each of the several situations related to price-fixing in which his name had earlier been mentioned. For instance, it had been brought out that in 1956 or 1957 a young man named Jerry Page, a minor employee in G.E.’s switchgear division, had written directly to Cordiner alleging that the switchgear divisions of G.E. and of several competitor companies were involved in a conspiracy in which information about prices was exchanged by means of a secret code based on different colors of letter paper. Cordiner had turned the matter over to Paxton with orders that he get to the bottom of it, and Paxton had thereupon conducted an investigation that led him to conclude that the color-code conspiracy was “wholly a hallucination on the part of this boy.” In arriving at that conclusion, Paxton had apparently been right, although it later came out that there had been a conspiracy in the switchgear division during 1956 and 1957; this, however, was a rather conventional one, based simply on price-fixing meetings, rather than on anything so gaudy as a color code. Page could not be called to testify because of ill health.

Paxton conceded that there had been some occasions when he “must have been pretty damn dumb.” (Dumb or not, for his services as the company’s president he was, of course, remunerated on a considerably grander scale than Vinson—receiving a basic annual salary of $125,000, plus annual incentive compensation of about $175,000, plus stock options designed to enable him to collect much more at low tax rates.) As for Paxton’s attitude toward company communications, he emerges as a pessimist on this score. Upon being asked at the hearings to comment on the Smith-Vinson conversations of 1957, he said that, knowing Smith, he just could not “cast the man in the role of a liar,” and went on:

When I was younger, I used to play a good deal of bridge. We played about fifty rubbers of bridge, four of us, every winter, and I think we probably played some rather good bridge. If you gentlemen are bridge players, you know that there is a code of signals that is exchanged between partners as the game progresses. It is a stylized form of playing.… Now, as I think about this—and I was particularly impressed when I read Smith’s testimony when he talked about a “meeting of the clan” or “meeting of the boys”—I begin to think that there must have been a stylized method of communication between these people who were dealing with competition. Now, Smith could say, “I told Vinson what I was doing,” and Vinson wouldn’t have the foggiest idea what was being told to him, and both men could testify under oath, one saying yes and the other man saying no, and both be telling the truth.… [They] wouldn’t be on the same wavelength. [They] wouldn’t have the same meanings. I think, I believe now that these men did think that they were telling the truth, but they weren’t communicating between each other with understanding.

Here, certainly, is the gloomiest possible analysis of the communications problem.

CHAIRMAN Cordiner’s status, it appears from his testimony, was approximately that of the Boston Cabots in the celebrated jingle. His services to the company, for which he was recompensed in truly handsome style (with, for 1960, a salary of just over $280,000, plus contingent deferred income of about $120,000, plus stock options potentially worth hundreds of thousands more), were indubitably many and valuable, but they were performed on such an exalted level that, at least in antitrust matters, he does not seem to have been able to have any earthly communication at all. When he emphatically told the Subcommittee that at no time had he had so much as an inkling of the network of conspiracies, it could be deduced that his was a case not of faulty communication but of no communication. He did not speak to the Subcommittee of philosophy or philosophers, as Ginn and Paxton had done, but from his past record of ordering reissues of 20.5 and of peppering his speeches and public statements with praise of free enterprise, it seems clear that he was un philosophe sans le savoir—and one on the side of selling the Lord, since no evidence was adduced to suggest that he was given to winking in any form. Kefauver ran through a long list of antitrust violations of which General Electric had been accused over the past half-century, asking Cordiner, who joined the company in 1922, how much he knew about each of them; usually, he replied that he had known about them only after the fact. In commenting on Ginn’s testimony that Erben had countermanded Cordiner’s direct order in 1954, Cordiner said that he had read it with “great alarm” and “great wonderment,” since Erben had always indicated to him “an intense competitive spirit,” rather than any disposition to be friendly with rival companies.

Throughout his testimony, Cordiner used the curious expression “be responsive to.” If, for instance, Kefauver inadvertently asked the same question twice, Cordiner would say, “I was responsive to that a moment ago,” or if Kefauver interrupted him, as he often did, Cordiner would ask politely, “May I be responsive?” This, too, offers a small lead for a foundation grantee, who might want to look into the distinction between being responsive (a passive state) and answering (an act), and their relative effectiveness in the process of communication.

Summing up his position on the case as a whole, in reply to a question of Kefauver’s about whether he thought that G.E. had incurred “corporate disgrace,” Cordiner said, “No, I am not going to be responsive and say that General Electric had corporate disgrace. I am going to say that we are deeply grieved and concerned.… I am not proud of it.”

CHAIRMAN Cordiner, then, had been able to fairly deafen his subordinate officers with lectures on compliance with the rules of the company and the laws of the country, but he had not been able to get all those officers to comply with either, and President Paxton could muse thoughtfully on how it was that two of his subordinates who had given radically different accounts of a conversation between them could be not liars but merely poor communicators. Philosophy seems to have reached a high point at G.E., and communication a low one. If executives could just learn to understand one another, most of the witnesses said or implied, the problem of antitrust violations would be solved. But perhaps the problem is cultural as well as technical, and has something to do with a loss of personal identity that comes from working in a huge organization. The cartoonist Jules Feiffer, contemplating the communication problem in a nonindustrial context, has said, “Actually, the breakdown is between the person and himself. If you’re not able to communicate successfully between yourself and yourself, how are you supposed to make it with the strangers outside?” Suppose, purely as a hypothesis, that the owner of a company who orders his subordinates to obey the antitrust laws has such poor communication with himself that he does not really know whether he wants the order to be complied with or not. If his order is disobeyed, the resulting price-fixing may benefit his company’s coffers; if it is obeyed, then he has done the right thing. In the first instance, he is not personally implicated in any wrongdoing, while in the second he is positively involved in right doing. What, after all, can he lose? It is perhaps reasonable to suppose that such an executive might communicate his uncertainty more forcefully than his order. Possibly yet another foundation grantee should have a look at the reverse of communication failure, where he might discover that messages the sender does not even realize he is sending sometimes turn out to have got across only too effectively.

Meanwhile, in the first years after the Subcommittee concluded its investigation, the defendant companies were by no means allowed to forget their transgressions. The law permits customers who can prove that they have paid artificially high prices as a result of antitrust violations to sue for damages—in most cases, triple damages—and suits running into many millions of dollars piled up so high that Chief Justice Warren had to set up a special panel of federal judges to plan how they should all be handled. Needless to say, Cordiner was not allowed to forget about the matter, either; indeed, it would be surprising if he was allowed a chance to think about much else, for, in addition to the suits, he had to contend with active efforts—unsuccessful, as it turned out—by a minority group of stockholders to unseat him. Paxton retired as president in April, 1961, because of ill health dating back at least to the previous January, when he underwent a major operation. As for the executives who pleaded guilty and were fined or imprisoned, most of those who had been employed by companies other than G.E. remained with them, either in their old jobs or in similar ones. Of those who had been employed by G.E., none remained there. Some retired permanently from business, others settled for comparatively small jobs, and a few landed big ones—most spectacularly Ginn, who in June, 1961, became president of Baldwin-Lima-Hamilton, manufacturers of heavy machinery. And as for the future of price-fixing in the electrical industry, it seems safe to say that what with the Justice Department, Judge Ganey, Senator Kefauver, and the triple-damage suits, the impact on the philosophers who guide corporate policy was such that they, and even their subordinates, were likely to try to hew scrupulously to the line for quite some time. Quite a different question, however, is whether they had made any headway in their ability to communicate.

8

The Last Great Corner

BETWEEN SPRING and midsummer, 1958, the common stock of the E. L. Bruce Company, the nation’s leading maker of hardwood floors, moved from a low of just under $17 a share to a high of $190 a share. This startling, even alarming, rise was made in an ascending scale that was climaxed by a frantic crescendo in which the price went up a hundred dollars a share in a single day. Nothing of the sort had happened for a generation. Furthermore—and even more alarming—the rise did not seem to have the slightest bit of relation to any sudden hunger on the part of the American public for new hardwood floors. To the consternation of almost everyone concerned, conceivably including even some of the holders of Bruce stock, it seemed to be entirely the result of a technical stock-market situation called a corner. With the exception of a general panic such as occurred in 1929, a corner is the most drastic and spectacular of all developments that can occur in the stock market, and more than once in the nineteenth and early twentieth centuries, corners had threatened to wreck the national economy.

The Bruce situation never threatened to do that. For one thing, the Bruce Company was so small in relation to the economy as a whole that even the wildest gyrations in its stock could hardly have much national effect. For another, the Bruce “corner” was accidental—the by-product of a fight for corporate control—rather than the result of calculated manipulations, as most of the historic corners had been. Finally, this one eventually turned out to be not a true corner at all, but only a near thing; in September, Bruce stock quieted down and settled at a reasonable level. But the incident served to stir up memories, some of them perhaps tinged with nostalgia, among those flinty old Wall Streeters who had been around to see the classic corners—or at least the last of them.

In June of 1922, the New York Stock Exchange began listing the shares of a corporation called Piggly Wiggly Stores—a chain of retail self-service markets situated mostly in the South and West, with headquarters in Memphis—and the stage was set for one of the most dramatic financial battles of that gaudy decade when Wall Street, only negligently watched over by the federal government, was frequently sent reeling by the machinations of operators seeking to enrich themselves and destroy their enemies. Among the theatrical aspects of this particular battle—a battle so celebrated in its time that headline writers referred to it simply as the “Piggly Crisis”—was the personality of the hero (or, as some people saw it, the villain), who was a newcomer to Wall Street, a country boy setting out defiantly, amid the cheers of a good part of rural America, to lay the slick manipulators of New York by the heels. He was Clarence Saunders, of Memphis, a plump, neat, handsome man of forty-one who was already something of a legend in his home town, chiefly because of a house he was putting up there for himself. Called the Pink Palace, it was an enormous structure faced with pink Georgia marble and built around an awe-inspiring white-marble Roman atrium, and, according to Saunders, it would stand for a thousand years. Unfinished though it was, the Pink Palace was like nothing Memphis had ever seen before. Its grounds were to include a private golf course, since Saunders liked to do his golfing in seclusion. Even the makeshift estate where he and his wife and four children were camping out pending completion of the Palace had its own golf course. (Some people said that his preference for privacy was induced by the attitude of the local country club governors, who complained that he had corrupted their entire supply of caddies by the grandeur of his tips.) Saunders, who had founded the Piggly Wiggly Stores in 1919, had most of the standard traits of the flamboyant American promoters—suspect generosity, a knack for attracting publicity, love of ostentation, and so on—but he also had some much less common traits, notably a remarkably vivid style, both in speech and writing, and a gift, of which he may or may not have been aware, for comedy. But like so many great men before him, he had a weakness, a tragic flaw. It was that he insisted on thinking of himself as a hick, a boob, and a sucker, and, in doing so, he sometimes became all three.

This unlikely fellow was the man who engineered the last real corner in a nationally traded stock.

THE game of Corner—for in its heyday it was a game, a high-stakes gambling game, pure and simple, embodying a good many of the characteristics of poker—was one phase of the endless Wall Street contest between bulls, who want the price of a stock to go up, and bears, who want it to go down. When a game of Corner was under way, the bulls’ basic method of operation was, of course, to buy stock, and the bears’ was to sell it. Since the average bear didn’t own any of the stock issue in contest, he would resort to the common practice of selling short. When a short sale is made, the transaction is consummated with stock that the seller has borrowed (at a suitable rate of interest) from a broker. Since brokers are merely agents, and not outright owners, they, in turn, must borrow the stock themselves. This they do by tapping the “floating supply” of stock that is in constant circulation among investment houses—stock that private investors have left with one house or another for trading purposes, stock that is owned by estates and trusts and has been released for action under certain prescribed conditions, and so on. In essence, the floating supply consists of all the stock in a particular corporation that is available for trading and is not immured in a safe-deposit box or encased in a mattress. Though the supply floats, it is scrupulously kept track of; the short seller, borrowing, say, a thousand shares from his broker, knows that he has incurred an immutable debt. What he hopes—the hope that keeps him alive—is that the market price of the stock will go down, enabling him to buy the thousand shares he owes at a bargain rate, pay off his debt, and pocket the difference. What he risks is that the lender, for one reason or another, may demand that he deliver up his thousand borrowed shares at a moment when their market price is at a high. Then the grinding truth of the old Wall Street jingle is borne in upon him: “He who sells what isn’t his’n must buy it back or go to prison.” And in the days when corners were possible, the short seller’s sleep was further disturbed by the fact that he was operating behind blank walls; dealing only with agents, he never knew either the identity of the purchaser of his stock (a prospective cornerer?) or the identity of the owner of the stock he had borrowed (the same prospective cornerer, attacking from the rear?).

Although it is sometimes condemned as being the tool of the speculator, short selling is still sanctioned, in a severely restricted form, on all of the nation’s exchanges. In its unfettered state, it was the standard gambit in the game of Corner. The situation would be set up when a group of bears would go on a well-organized spree of short selling, and would often help their cause along by spreading rumors that the company back of the stock in question was on its last legs. This operation was called a bear raid. The bulls’ most formidable—but, of course, riskiest—counter-move was to try for a corner. Only a stock that many traders were selling short could be cornered; a stock that was in the throes of a real bear raid was ideal. In the latter situation, the would-be cornerer would attempt to buy up the investment houses’ floating supply of the stock and enough of the privately held shares to freeze out the bears; if the attempt succeeded, when he called for the short sellers to make good the stock they had borrowed, they could buy it from no one but him. And they would have to buy it at any price he chose to ask, their only alternatives—at least theoretically—being to go into bankruptcy or to jail for failure to meet their obligations.

In the old days of titanic financial death struggles, when Adam Smith’s ghost still smiled on Wall Street, corners were fairly common and were often extremely sanguinary, with hundreds of innocent bystanders, as well as the embattled principals, getting their financial heads lopped off. The most famous cornerer in history was that celebrated old pirate, Commodore Cornelius Vanderbilt, who engineered no less than three successful corners during the eighteen-sixties. Probably his classic job was in the stock of the Harlem Railway. By dint of secretly buying up all its available shares while simultaneously circulating a series of untruthful rumors of imminent bankruptcy to lure the short sellers in, he achieved an airtight trap. Finally, with the air of a man doing them a favor by saving them from jail, he offered the cornered shorts at $179 a share the stock he had bought up at a small fraction of that figure. The most generally disastrous corner was that of 1901 in the stock of Northern Pacific; to raise the huge quantities of cash they needed to cover themselves, the Northern Pacific shorts sold so many other stocks as to cause a national panic with world-wide repercussions. The next-to-last great corner occurred in 1920, when Allan A. Ryan, a son of the legendary Thomas Fortune Ryan, in order to harass his enemies in the New York Stock Exchange, sought to corner the stock of the Stutz Motor Company, makers of the renowned Stutz Bearcat. Ryan achieved his corner and the Stock Exchange short sellers were duly squeezed. But Ryan, it turned out, had a bearcat by the tail. The Stock Exchange suspended Stutz dealings, lengthy litigation followed, and Ryan came out of the affair financially ruined.

Then, as at other times, the game of Corner suffered from a difficulty that plagues other games—post-mortem disputes about the rules. The reform legislation of the nineteen-thirties, by outlawing any short selling that is specifically intended to demoralize a stock, as well as other manipulations leading toward corners, virtually ruled the game out of existence. Wall Streeters who speak of the Corner these days are referring to the intersection of Broad and Wall. In U.S. stock markets, only an accidental corner (or near-corner, like the Bruce one) is now possible; Clarence Saunders was the last intentional player of the game.

SAUNDERS has been variously characterized by people who knew him well as “a man of limitless imagination and energy,” “arrogant and conceited as all getout,” “essentially a four-year-old child, playing at things,” and “one of the most remarkable men of his generation.” But there is no doubt that even many of the people who lost money on his promotional schemes believed that he was the soul of honesty. He was born in 1881 to a poor family in Amherst County, Virginia, and in his teens was employed by the local grocer at the pittance that is orthodox for future tycoons taking on their first jobs—in his case, four dollars a week. Moving ahead fast, he went on to a wholesale grocery company in Clarksville, Tennessee, and then to one in Memphis, and, while still in his twenties, organized a small retail food chain called United Stores. He sold that after a few years, did a stint as a wholesale grocer on his own, and then, in 1919, began to build a chain of retail self-service markets, to which he gave the engaging name of Piggly Wiggly Stores. (When a Memphis business associate once asked him why he had chosen that name, he replied, “So people would ask me what you just did.”) The stores flourished so exuberantly that by the autumn of 1922 there were over twelve hundred of them. Of these, some six hundred and fifty were owned outright by Saunders’ Piggly Wiggly Stores, Inc.; the rest were independently owned, but their owners paid royalties to the parent company for the right to adopt its patented method of operations. In 1923, an era when a grocery store meant clerks in white aprons and often a thumb on the scale, this method was described by the New York Times with astonishment: “The customer in a Piggly Wiggly Store rambles down aisle after aisle, on both sides of which are shelves. The customer collects his purchases and pays as he goes out.” Although Saunders did not know it, he had invented the supermarket.

A natural concomitant of the rapid rise of Piggly Wiggly Stores, Inc., was the acceptance of its shares for listing on the New York Stock Exchange, and within six months of that event Piggly Wiggly stock had become known as a dependable, if unsensational, dividend-payer—the kind of widows’-and-orphans’ stock that speculators regard with the respectful indifference that crap-shooters feel about bridge. This reputation, however, was shortlived. In November, 1922, several small companies that had been operating grocery stores in New York, New Jersey, and Connecticut under the name Piggly Wiggly failed and went into receivership. These companies had scarcely any connection with Saunders’ concern; he had merely sold them the right to use his firm’s catchy trade name, leased them some patented equipment, and washed his hands of them. But when these independent Piggly Wigglys failed, a group of stock-market operators (whose identities never were revealed, because they dealt through tight-lipped brokers) saw in the situation a heaven-sent opportunity for a bear raid. If individual Piggly Wiggly stores were failing, they reasoned, then rumors could be spread that would lead the uninformed public to believe that the parent firm was failing, too. To further this belief, they began briskly selling Piggly Wiggly short, in order to force the price down. The stock yielded readily to their pressure, and within a few weeks its price, which earlier in the year had hovered around fifty dollars a share, dropped to below forty.

At this point, Saunders announced to the press that he was about to “beat the Wall Street professionals at their own game” with a buying campaign. He was by no means a professional himself; in fact, prior to the listing of Piggly Wiggly he had never owned a single share of any stock quoted on the New York Stock Exchange. There is little reason to believe that at the beginning of his buying campaign he had any intention of trying for a corner; it seems more likely that his announced motive—the unassailable one of supporting the price of the stock in order to protect his own investment and that of other Piggly Wiggly stockholders—was all he had in mind. In any case, he took on the bears with characteristic zest, supplementing his own funds with a loan of about ten million dollars from a group of bankers in Memphis, Nashville, New Orleans, Chattanooga, and St. Louis. Legend has it that he stuffed his ten million-plus, in bills of large denomination, into a suitcase, boarded a train for New York, and, his pockets bulging with currency that wouldn’t fit in the suitcase, marched on Wall Street, ready to do battle. He emphatically denied this in later years, insisting that he had remained in Memphis and masterminded his campaign by means of telegrams and long-distance telephone calls to various Wall Street brokers. Wherever he was at the time, he did round up a corps of some twenty brokers, among them Jesse L. Livermore, who served as his chief of staff. Livermore, one of the most celebrated American speculators of this century, was then forty-five years old but was still occasionally, and derisively, referred to by the nickname he had earned a couple of decades earlier—the Boy Plunger of Wall Street. Since Saunders regarded Wall Streeters in general and speculators in particular as parasitic scoundrels intent only on battering down his stock, it seemed likely that his decision to make an ally of Livermore was a reluctant one, arrived at simply with the idea of getting the enemy chieftain into his own camp.

On the first day of his duel with the bears, Saunders, operating behind his mask of brokers, bought 33,000 shares of Piggly Wiggly, mostly from the short sellers; within a week he had brought the total to 105,000—more than half of the 200,000 shares outstanding. Meanwhile, ventilating his emotions at the cost of tipping his hand, he began running a series of advertisements in which he vigorously and pungently told the readers of Southern and Western newspapers what he thought of Wall Street. “Shall the gambler rule?” he demanded in one of these effusions. “On a white horse he rides. Bluff is his coat of mail and thus shielded is a yellow heart. His helmet is deceit, his spurs clink with treachery, and the hoofbeats of his horse thunder destruction. Shall good business flee? Shall it tremble with fear? Shall it be the loot of the speculator?” On Wall Street, Livermore went on buying Piggly Wiggly.

The effectiveness of Saunders’ buying campaign was readily apparent; by late January of 1923 it had driven the price of the stock up over 60, or higher than ever before. Then, to intensify the bear raiders’ jitters, reports came in from Chicago, where the stock was also traded, that Piggly Wiggly was cornered—that the short sellers could not replace the stock they had borrowed without coming to Saunders for supplies. The reports were immediately denied by the New York Stock Exchange, which announced that the floating supply of Piggly Wiggly was ample, but they may have put an idea into Saunders’ head, and this, in turn, may have prompted a curious and—at first glance—mystifying move he made in mid-February, when, in another widely disseminated newspaper advertisement, he offered to sell fifty thousand shares of Piggly Wiggly stock to the public at fifty-five dollars a share. The ad pointed out, persuasively enough, that the stock was paying a dividend of a dollar four times a year—a return of more than 7 percent. “This is to be a quick proposition, subject to withdrawal without prior notice,” the ad went on, calmly but urgently. “To get in on the ground floor of any big proposition is the opportunity that comes to few, and then only once in a lifetime.”

Anyone who is even slightly familiar with modern economic life can scarcely help wondering what the Securities and Exchange Commission, which is charged with seeing to it that all financial advertising is kept factual, impersonal, and unemotional, would have had to say about the hard sell in those last two sentences. But if Saunders’ first stock-offering ad would have caused an S.E.C. examiner to turn pale, his second, published four days later, might well have induced an apoplectic seizure. A full-page affair, it cried out, in huge black type:

OPPORTUNITY! OPPORTUNITY!

It Knocks! It Knocks! It Knocks!

Do you hear? Do you listen? Do you understand?

Do you wait? Do you act now?…

Has a new Daniel appeared and the lions eat him not?

Has a new Joseph come that riddles may be made plain?

Has a new Moses been born to a new Promised Land?

Why, then, asks the skeptical, can CLARENCE SAUNDERS … be so generous to the public?

After finally making it clear that he was selling common stock and not snake oil, Saunders repeated his offer to sell at fifty-five dollars a share, and went on to explain that he was being so generous because, as a farsighted businessman, he was anxious to have Piggly Wiggly owned by its customers and other small investors, rather than by Wall Street sharks. To many people, though, it appeared that Saunders was being generous to the point of folly. The price of Piggly Wiggly on the New York Stock Exchange was just then pushing 70; it looked as if Saunders were handing anyone who had fifty-five dollars in his pocket a chance to make fifteen dollars with no risk. The arrival of a new Daniel, Joseph, or Moses might be debatable, but opportunity certainly did seem to be knocking, all right.

Actually, as the skeptical must have suspected, there was a catch. In making what sounded like such a costly and unbusinesslike offer, Saunders, a rank novice at Corner, had devised one of the craftiest dodges ever used in the game. One of the great hazards in Corner was always that even though a player might defeat his opponents, he would discover that he had won a Pyrrhic victory. Once the short sellers had been squeezed dry, that is, the cornerer might find that the reams of stock he had accumulated in the process were a dead weight around his neck; by pushing it all back into the market in one shove, he would drive its price down close to zero. And if, like Saunders, he had had to borrow heavily to get into the game in the first place, his creditors could be expected to close in on him and perhaps not only divest him of his gains but drive him into bankruptcy. Saunders apparently anticipated this hazard almost as soon as a corner was in sight, and accordingly made plans to unload some of his stock before winning instead of afterward. His problem was to keep the stock he sold from going right back into the floating supply, thus breaking his corner; and his solution was to sell his fifty-five-dollar shares on the installment plan. In his February advertisements, he stipulated that the public could buy shares only by paying twenty-five dollars down and the balance in three ten-dollar installments, due June 1st, September 1st, and December 1st. In addition—and vastly more important—he said he would not turn over the stock certificates to the buyers until the final installment had been paid. Since the buyers obviously couldn’t sell the certificates until they had them, the stock could not be used to replenish the floating supply. Thus Saunders had until December 1st to squeeze the short sellers dry.

Easy as it may be to see through Saunders’ plan by hindsight, his maneuver was then so unorthodox that for a while neither the governors of the Stock Exchange nor Livermore himself could be quite sure what the man in Memphis was up to. The Stock Exchange began making formal inquiries, and Livermore began getting skittish, but he went on buying for Saunders’ account, and succeeded in pushing Piggly Wiggly’s price up well above 70. In Memphis, Saunders sat back comfortably; he temporarily ceased singing the praises of Piggly Wiggly stock in his ads, and devoted them to eulogizing apples, grapefruit, onions, hams, and Lady Baltimore cakes. Early in March, though, he ran another financial ad, repeating his stock offer and inviting any readers who wanted to discuss it with him to drop in at his Memphis office. He also emphasized that quick action was necessary; time was running out.

By now, it was apparent that Saunders was trying for a corner, and on Wall Street it was not only the Piggly Wiggly bears who were becoming apprehensive. Finally, Livermore, possibly reflecting that in 1908 he had lost almost a million dollars trying to get a corner in cotton, could stand it no longer. He demanded that Saunders come to New York and talk things over. Saunders arrived on the morning of March 12th. As he later described the meeting to reporters, there was a difference of opinion; Livermore, he said—and his tone was that of a man rather set up over having made a piker out of the Boy Plunger—“gave me the impression that he was a little afraid of my financial situation and that he did not care to be involved in any market crash.” The upshot of the conference was that Livermore bowed out of the Piggly Wiggly operation, leaving Saunders to run it by himself. Saunders then boarded a train for Chicago to attend to some business there. At Albany, he was handed a telegram from a member of the Stock Exchange who was the nearest thing he had to a friend in the white-charger-and-coat-of-mail set. The telegram informed him that his antics had provoked a great deal of head-shaking in the councils of the Exchange, and urged him to stop creating a second market by advertising stock for sale at a price so far below the quotation on the Exchange. At the next station, Saunders telegraphed back a rather unresponsive reply. If it was a possible corner the Exchange was fretting about, he said, he could assure the governors that they could put their fears aside, since he himself was maintaining the floating supply by daily offering stock for loan in any amount desired. But he didn’t say how long he would continue to do so.

A week later, on Monday, March 19th, Saunders ran a newspaper ad stating that his stock offer was about to be withdrawn; this was the last call. At the time, or so he claimed afterward, he had acquired all but 1,128 of Piggly Wiggly’s 200,000 outstanding shares, for a total of 198,872, some of which he owned and the rest of which he “controlled”—a reference to the installment-plan shares whose certificates he still held. Actually, this figure was open to considerable argument (there was one private investor in Providence, for instance, who alone held eleven hundred shares), but there is no denying that Saunders had in his hands practically every single share of Piggly Wiggly then available for trading—and that he therefore had his corner. On that same Monday, it is believed, Saunders telephoned Livermore and asked if he would relent long enough to see the Piggly Wiggly project through by calling for delivery of all the shares that were owed Saunders; in other words, would Livermore please spring the trap? Nothing doing, Livermore is supposed to have replied, evidently considering himself well out of the whole affair. So the following morning, Tuesday, March 20th, Saunders sprang the trap himself.

IT turned out to be one of Wall Street’s wilder days. Piggly Wiggly opened at 75½, up 5½ from the previous days’ closing price. An hour after the opening, word arrived that Saunders had called for delivery of all his Piggly Wiggly stock. According to the rules of the Exchange, stock called for under such circumstances had to be produced by two-fifteen the following afternoon. But Piggly Wiggly, as Saunders well knew, simply wasn’t to be had—except, of course, from him. To be sure, there were a few shares around that were still held by private investors, and frantic short sellers trying to shake them loose bid their price up and up. But by and large there wasn’t much actual trading in Piggly Wiggly, because there was so little Piggly Wiggly to be traded. The Stock Exchange post where it was bought and sold became the center of a mob scene as two-thirds of the brokers on the floor clustered around it, a few of them to bid but most of them just to push, whoop, and otherwise get in on the excitement. Desperate short sellers bought Piggly Wiggly at 90, then at 100, then at 110. Reports of sensational profits made the rounds. The Providence investor, who had picked up his eleven hundred shares at 39 in the previous autumn, while the bear raid was in full cry, came to town to be in on the kill, unloaded his holdings at an average price of 105, and then caught an afternoon train back home, taking with him a profit of over seventy thousand dollars. As it happened, he could have done even better if he had bided his time; by noon, or a little after, the price of Piggly Wiggly had risen to 124, and it seemed destined to zoom straight through the lofty roof above the traders’ heads. But 124 was as high as it went, for that figure had barely been recorded when a rumor reached the floor that the governors of the Exchange were meeting to consider the suspension of further trading in the stock and the postponement of the short sellers’ deadline for delivery. The effect of such action would be to give the bears time to beat the bushes for stock, and thus to weaken, if not break, Saunders’ corner. On the basis of the rumor alone, Piggly Wiggly fell to 82 by the time the Exchange’s closing bell ended the chaotic session.

The rumor proved to be true. After the close of business, the Governing Committee of the Exchange announced both the suspension of trading in Piggly Wiggly and the extension of the short sellers’ delivery deadline “until further action by this committee.” There was no immediate official reason given for this decision, but some members of the committee unofficially let it be known that they had been afraid of a repetition of the Northern Pacific panic if the corner were not broken. On the other hand, irreverent side-liners were inclined to wonder whether the Governing Committee had not been moved by the pitiful plight of the cornered short sellers, many of whom—as in the Stutz Motor case two years earlier—were believed to be members of the Exchange.

Despite all this, Saunders, in Memphis, was in a jubilant, expansive mood that Tuesday evening. After all, his paper profits at that moment ran to several million dollars. The hitch, of course, was that he could not realize them, but he seems to have been slow to grasp that fact or to understand the extent to which his position had been undermined. The indications are that he went to bed convinced that, besides having personally brought about a first-class mess on the hated Stock Exchange, he had made himself a bundle and had demonstrated how a poor Southern boy could teach the city slickers a lesson. It all must have added up to a heady sensation. But, like most such sensations, it didn’t last long. By Wednesday evening, when Saunders issued his first public utterance on the Piggly Crisis, his mood had changed to an odd mixture of puzzlement, defiance, and a somewhat muted echo of the crowing triumph of the night before. “A razor to my throat, figuratively speaking, is why I suddenly and without warning kicked the pegs from under Wall Street and its gang of gamblers and market manipulators,” he declared in a press interview. “It was strictly a question of whether I should survive, and likewise my business and the fortunes of my friends, or whether I should be ‘licked’ and pointed to as a boob from Tennessee. And the consequence was that the boastful and supposedly invulnerable Wall Street powers found their methods controverted by well-laid plans and quick action.” Saunders wound up his statement by laying down his terms: the Stock Exchange’s deadline extension notwithstanding, he would expect settlement in full on all short stock by 3 P.M. the next day—Thursday—at $150 a share; thereafter his price would be $250.

On Thursday, to Saunders’ surprise, very few short sellers came forward to settle; presumably those who did couldn’t stand the uncertainty. But then the Governing Committee kicked the pegs from under Saunders by announcing that the stock of Piggly Wiggly was permanently stricken from its trading list and that the short sellers would be given a full five days from the original deadline—that is, until two-fifteen the following Monday—to meet their obligations. In Memphis, Saunders, far removed from the scene though he was, could not miss the import of these moves—he was now on the losing end of things. Nor could he any longer fail to see that the postponement of the short sellers’ deadline was the vital issue. “As I understand it,” he said in another statement, handed to reporters that evening, “the failure of a broker to meet his clearings through the Stock Exchange at the appointed time is the same as a bank that would be unable to meet its clearings, and all of us know what would happen to that kind of a bank.… The bank examiner would have a sign stuck up on the door with the word ‘Closed.’ It is unbelievable to me that the august and all-powerful New York Stock Exchange is a welcher. Therefore I continue to believe that the … shares of stock still due me on contracts … will be settled on the proper basis.” An editorial in the Memphis Commercial Appeal backed up Saunders’ cry of treachery, declaring, “This looks like what gamblers call welching. We hope the home boy beats them to a frazzle.”

That same Thursday, by a coincidence, the annual financial report of Piggly Wiggly Stores, Inc., was made public. It was a highly favorable one—sales, profits, current assets, and all other significant figures were up sharply over the year before—but nobody paid any attention to it. For the moment, the real worth of the company was irrelevant; the point was the game.

ON Friday morning, the Piggly Wiggly bubble burst. It burst because Saunders, who had said his price would rise to $250 a share after 3 P.M. Thursday, made the startling announcement that he would settle for a hundred. E. W. Bradford, Saunders’ New York lawyer, was asked why Saunders had suddenly granted this striking concession. Saunders had done it out of the generosity of his heart, Bradford replied gamely, but the truth was soon obvious: Saunders had made the concession because he’d had to. The postponement granted by the Stock Exchange had given the short sellers and their brokers a chance to scan lists of Piggly Wiggly stockholders, and from these they had been able to smoke out small blocks of shares that Saunders had not cornered. Widows and orphans in Albuquerque and Sioux City, who knew nothing about short sellers and corners, were only too happy, when pressed, to dig into their mattresses or safe-deposit boxes and sell—in the so-called over-the-counter market, since the stock could no longer be traded on the Exchange—their ten or twenty shares of Piggly Wiggly for at least double what they had paid for them. Consequently, instead of having to buy stock from Saunders at his price of $250 and then hand it back to him in settlement of their loans, many of the short sellers were able to buy it in over-the-counter trading at around a hundred dollars, and thus, with bitter pleasure, pay off their Memphis adversary not in cash but in shares of Piggly Wiggly—the very last thing he wanted just then. By nightfall Friday, virtually all the short sellers were in the clear, having redeemed their indebtedness either by these over-the-counter purchases or by paying Saunders cash at his own suddenly deflated rate of a hundred dollars a share.

That evening, Saunders released still another statement, and this one, while still defiant, was unmistakably a howl of anguish. “Wall Street got licked and then called for ‘mamma,’” it read. “Of all the institutions in America, the New York Stock Exchange is the worst menace of all in its power to ruin all who dare to oppose it. A law unto itself … an association of men who claim the right that no king or autocrat ever dared to take: to make a rule that applies one day on contracts and abrogate it the next day to let out a bunch of welchers.… My whole life from this day on will be aimed toward the end of having the public protected from a like occurrence.… I am not afraid. Let Wall Street get me if they can.” But it appeared that Wall Street had got him; his corner was broken, leaving him deeply in debt to the syndicate of Southern bankers and encumbered with a mountain of stock whose immediate future was, to say the least, precarious.

SAUNDEES’ fulminations did not go unheeded on Wall Street, and as a result the Exchange felt compelled to justify itself. On Monday, March 26th, shortly after the Piggly Wiggly short sellers’ deadline had passed and Saunders’ corner was, for all practical purposes, a dead issue, the Exchange offered its apologia, in the form of a lengthy review of the crisis from beginning to end. In presenting its case, the Exchange emphasized the public harm that might have been done if the corner had gone unbroken, explaining, “The enforcement simultaneously of all contracts for the return of the stock would have forced the stock to any price that might be fixed by Mr. Saunders, and competitive bidding for the insufficient supply might have brought about conditions illustrated by other corners, notably the Northern Pacific corner in 1901.” Then, its syntax yielding to its sincerity, the Exchange went on to say that “the demoralizing effects of such a situation are not limited to those directly affected by the contracts but extends to the whole market.” Getting down to the two specific actions it had taken—the suspension of trading in Piggly Wiggly and the extension of the short sellers’ deadline—the Exchange argued that both of them were within the bounds of its own constitution and rules, and therefore irreproachable. Arrogant as this may sound now, the Exchange had a point; in those days its rules were just about the only controls over stock trading.

The question of whether, even by their own rules, the slickers really played fair with the boob is still debated among fiscal antiquarians. There is strong presumptive evidence that the slickers themselves later came to have their doubts. Regarding the right of the Exchange to suspend trading in a stock there can be no argument, since the right was, as the Exchange claimed at the time, specifically granted in its constitution. But the right to postpone the deadline for short sellers to honor their contracts, though also claimed at the time, is another matter. In June, 1925, two years after Saunders’ corner, the Exchange felt constrained to amend its constitution with an article stating that “whenever in the opinion of the Governing Committee a corner has been created in a security listed on the Exchange … the Governing Committee may postpone the time for deliveries on Exchange contracts therein.” By adopting a statute authorizing it to do what it had done long before, the Exchange would seem, at the very least, to have exposed a guilty conscience.

THE immediate aftermath of the Piggly Crisis was a wave of sympathy for Saunders. Throughout the hinterland, the public image of him became that of a gallant champion of the underdog who had been ruthlessly crushed. Even in New York, the very lair of the Stock Exchange, the Times conceded in an editorial that in the minds of many people Saunders represented St. George and the Stock Exchange the dragon. That the dragon triumphed in the end, said the Times, was “bad news for a nation at least 66⅔ per cent ‘sucker,’ which had its moment of triumph when it read that a sucker had trimmed the interests and had his foot on Wall Street’s neck while the vicious manipulators gasped their lives away.”

Not a man to ignore such a host of friendly fellow suckers, Saunders went to work to turn them to account. And he needed them, for his position was perilous indeed. His biggest problem was what to do about the ten million dollars that he owed his banker backers—and didn’t have. The basic plan behind his corner—if he had had any plan at all—must have been to make such a killing that he could pay back a big slice of his debt out of the profits, pay back the rest out of the proceeds from his public stock sale, and then walk off with a still huge block of Piggly Wiggly stock free and clear. Even though the cut-rate hundred-dollar settlement had netted him a killing by most men’s standards (just how much of a killing is not known, but it has been reliably estimated at half a million or so), it was not a fraction of what he might have reasonably expected it to be, and because it wasn’t his whole structure became an arch without a keystone.

Having paid his bankers what he had received from the short sellers and from his public stock sale, Saunders found that he still owed them about five million dollars, half of it due September 1, 1923, and the balance on January 1, 1924. His best hope of raising the money lay in selling more of the vast bundle of Piggly Wiggly shares he still had on hand. Since he could no longer sell them on the Exchange, he resorted to his favorite form of self-expression—newspaper advertising, this time supplemented with a mail-order pitch offering Piggly Wiggly again at fifty-five dollars. It soon became evident, though, that public sympathy was one thing and public willingness to translate sympathy into cash was quite another. Everyone, whether in New York, Memphis, or Texarkana, knew about the recent speculative shenanigans in Piggly Wiggly and about the dubious state of the president’s finances. Not even Saunders’ fellow suckers would have any part of his deal now, and the campaign was a bleak failure.

Sadly accepting this fact, Saunders next appealed to the local and regional pride of his Memphis neighbors by turning his remarkable powers of persuasion to the job of convincing them that his financial dilemma was a civic issue. If he should go broke, he argued, it would reflect not only on the character and business acumen of Memphis but on Southern honor in general. “I do not ask for charity,” he wrote in one of the large ads he always seemed able to find the cash for, “and I do not request any flowers for my financial funeral, but I do ask … everybody in Memphis to recognize and know that this is a serious statement made for the purpose of acquainting those who wish to assist in this matter, that they may work with me, and with other friends and believers in my business, in a Memphis campaign to have every man and woman who possibly can in this city become one of the partners of the Piggly Wiggly business, because it is a good investment first, and, second, because it is the right thing to do.” Raising his sights in a second ad, he declared, “For Piggly Wiggly to be ruined would shame the whole South.”

Just which argument proved the clincher in persuading Memphis that it should try to pull Saunders’ chestnuts out of the fire is hard to say, but some part of his line of reasoning clicked, and soon the Memphis Commercial Appeal was urging the town to get behind the embattled local boy. The response of the city’s business leaders was truly inspiring to Saunders. A whirlwind three-day campaign was planned, with the object of selling fifty thousand shares of his stock to the citizens of Memphis at the old magic figure of fifty-five dollars a share; in order to give buyers some degree of assurance that they would not later find themselves alone out on a limb, it was stipulated that unless the whole block was sold within the three days, all sales would be called off. The Chamber of Commerce sponsored the drive; the American Legion, the Civitan Club, and the Exchange Club fell into line; and even the Bowers Stores and the Arrow Stores, both competitors of Piggly Wiggly in Memphis, agreed to plug the worthy cause. Hundreds of civic-minded volunteers signed up to ring doorbells. On May 3rd, five days before the scheduled start of the campaign, 250 Memphis businessmen assembled at the Gayoso Hotel for a kickoff dinner. There were cheers when Saunders, accompanied by his wife, entered the dining room; one of the many after-dinner speakers described him as “the man who has done more for Memphis than any in the last thousand years”—a rousing tribute that put God knew how many Chickasaw chiefs in their place. “Business rivalries and personal differences were swept away like mists before the sun,” a Commercial Appeal reporter wrote of the dinner.

The drive got off to a splendid start. On the opening day—May 8th—society women and Boy Scouts paraded the streets of Memphis wearing badges that read, “We’re One Hundred Per Cent for Clarence Saunders and Piggly Wiggly.” Merchants adorned their windows with placards bearing the slogan “A Share of Piggly Wiggly Stock in Every Home.” Telephones and doorbells rang incessantly. In short order, 23,698 of the 50,000 shares had been subscribed for. Yet at the very moment when most of Memphis had become miraculously convinced that the peddling of Piggly Wiggly stock was an activity fully as uplifting as soliciting for the Red Cross or the Community Chest, ugly doubts were brewing, and some vipers in the home nest suddenly demanded that Saunders consent to an immediate spot audit of his company’s books. Saunders, for whatever reasons, refused, but offered to placate the skeptics by stepping down as president of Piggly Wiggly if such a move “would facilitate the stock-selling campaign.” He was not asked to give up the presidency, but on May 9th, the second day of the campaign, a watchdog committee of four—three bankers and a businessman—was appointed by the Piggly Wiggly directors to help him run the company for an interim period, while the dust settled. That same day, Saunders was confronted with another embarrassing situation: why, the campaign leaders wanted to know, was he continuing to build his million-dollar Pink Palace at a time when the whole town was working for him for nothing? He replied hastily that he would have the place boarded up the very next day and that there would be no further construction until his financial future looked bright again.

The confusion attendant on these two issues brought the drive to a standstill. At the end of the third day, the total number of shares subscribed for was still under 25,000, and the sales that had been made were canceled. Saunders had to admit that the drive had been a failure. “Memphis has fizzled,” he reportedly added—although he was at great pains to deny this a few years later, when he needed more of Memphis’ money for a new venture. It would not be surprising, though, if he had made some such imprudent remark, for he was understandably suffering from a case of frazzled nerves, and was showing the strain. Just before the announcement of the campaign’s unhappy end, he went into a closed conference with several Memphis business leaders and came out of it with a bruised cheekbone and a torn collar. None of the other men at the meeting showed any marks of violence. It just wasn’t Saunders’ day.

Although it was never established that Saunders had had his hand improperly in the Piggly Wiggly corporate till during his cornering operation, his first business move after the collapse of his attempt to unload stock suggested that he had at least had good reason to refuse a spot audit of the company’s books. In spite of futile grunts of protest from the watchdog committee, he began selling not Piggly Wiggly stock but Piggly Wiggly stores—partly liquidating the company, that is—and no one knew where he would stop. The Chicago stores went first, and those in Denver and Kansas City soon followed. His announced intention was to build up the company’s treasury so that it could buy the stock that the public had spurned, but there was some suspicion that the treasury desperately needed a transfusion just then—and not of Piggly Wiggly stock, either. “I’ve got Wall Street and the whole gang licked,” Saunders reported cheerfully in June. But in mid-August, with the September 1st deadline for repayment of two and a half million dollars on his loan staring him in the face and with nothing like that amount of cash either on hand or in prospect, he resigned as president of Piggly Wiggly Stores, Inc., and turned over his assets—his stock in the company, his Pink Palace, and all the rest of his property—to his creditors.

It remained only for the formal stamp of failure to be put on Saunders personally and on Piggly Wiggly under his management. On August 22nd, the New York auction firm of Adrian H. Muller & Son, which dealt in so many next-to-worthless stocks that its salesroom was often called “the securities graveyard,” knocked down fifteen hundred shares of Piggly Wiggly at a dollar a share—the traditional price for securities that have been run into the ground—and the following spring Saunders went through formal bankruptcy proceedings. But these were anticlimaxes. The real low point of Saunders’ career was probably the day he was forced out of his company’s presidency, and it was then that, in the opinion of many of his admirers, he achieved his rhetorical peak. When he emerged, harassed but still defiant, from a directors’ conference and announced his resignation to reporters, a hush fell. Then Saunders added hoarsely, “They have the body of Piggly Wiggly, but they cannot have the soul.”

IF by the soul of Piggly Wiggly Saunders meant himself, then it did remain free—free to go marching on in its own erratic way. He never ventured to play another game of Corner, but his spirit was far from broken. Although officially bankrupt, he managed to find people of truly rocklike faith who were still willing to finance him, and they enabled him to live on a scale only slightly less grand than in the past; reduced to playing golf at the Memphis Country Club rather than on his own private course, he handed out caddy tips that the club governors considered as corrupting as ever. To be sure, he no longer owned the Pink Palace, but this was about the only evidence that served to remind his fellow townsmen of his misfortunes. Eventually, the unfinished pleasure dome came into the hands of the city of Memphis, which appropriated $150,000 to finish it and turn it into a museum of natural history and industrial arts. As such, it continues to sustain the Saunders legend in Memphis.

After his downfall, Saunders spent the better part of three years in seeking redress of the wrongs that he felt he had suffered in the Piggly Wiggly fight, and in foiling the efforts of his enemies and creditors to make things still more unpleasant for him. For a while, he kept threatening to sue the Stock Exchange for conspiracy and breach of contract, but a test suit, brought by some small Piggly Wiggly stockholders, failed, and he dropped the idea. Then, in January, 1926, he learned that a federal indictment was about to be brought against him for using the mails to defraud in his mail-order campaign to sell his Piggly Wiggly stock. He believed, incorrectly, that the government had been egged on to bring the indictment by an old associate of his—John C. Burch, of Memphis, who had become secretary-treasurer of Piggly Wiggly after the shakeup. His patience once more exhausted, Saunders went around to Piggly Wiggly headquarters and confronted Burch. This conference proved far more satisfactory to Saunders than his board-room scuffle on the day the Memphis civic stock-selling drive failed. Burch, according to Saunders, “undertook in a stammering way to deny” the accusation, whereupon Saunders delivered a right to the jaw, knocking off Burch’s glasses but not doing much other damage. Burch afterward belittled the blow as “glancing,” and added an alibi that sounded like that of any outpointed pugilist: “The assault upon me was made so suddenly that I did not have time or opportunity to strike Mr. Saunders.” Burch refused to press charges.

About a month later, the mail-fraud indictment was brought against Saunders, but by that time, satisfied that Burch was innocent of any dirty work, he was his amiable old self again. “I have only one thing to regret in this new affair,” he announced pleasantly, “and that is my fistic encounter with John C. Burch.” The new affair didn’t last long; in April the indictment was quashed by the Memphis District Court, and Saunders and Piggly Wiggly were finally quits. By then, the company was well on its way back up, and, with a greatly changed corporate structure, it flourished on into the nineteen sixties; housewives continued to ramble down the aisles of hundreds of Piggly Wiggly stores, now operated under a franchise agreement with the Piggly Wiggly Corporation, of Jacksonville, Florida.

Saunders, too, was well on his way back up. In 1928, he started a new grocery chain, which he—but hardly anyone else—called the Clarence Saunders, Sole Owner of My Name, Stores, Inc. Its outlets soon came to be known as Sole Owner stores, which was precisely what they weren’t, for without Saunders’ faithful backers they would have existed only in his mind. Saunders’ choice of a corporate title, however, was not designed to mislead the public; rather, it was his ironic way of reminding the world that, after the skinning Wall Street had given him, his name was about the only thing he still had a clear title to. How many Sole Owner customers—or governors of the Stock Exchange, for that matter—got the point is questionable. In any case, the new stores caught on so rapidly and did so well that Saunders leaped back up from bankruptcy to riches, and bought a million-dollar estate just outside Memphis. He also organized and underwrote a professional football team called the Sole Owner Tigers—an investment that paid off handsomely on the fall afternoons when he could hear cries of “Rah! Rah! Rah! Sole Owner! Sole Owner! Sole Owner!” ringing through the Memphis Stadium.

FOR the second time, Saunders’ glory was fleeting. The very first wave of the depression hit Sole Owner Stores such a crushing blow that in 1930 they went bankrupt, and he was broke again. But again he pulled himself together and survived the debacle. Finding backers, he planned a new chain of grocery stores, and thought up a name for it that was more outlandish, if possible, than either of its predecessors—Keedoozle. He never made another killing, however, or bought another million-dollar estate, though it was always clear that he expected to. His hopes were pinned on the Keedoozle, an electrically operated grocery store, and he spent the better part of the last twenty years of his life trying to perfect it. In a Keedoozle store, the merchandise was displayed behind glass panels, each with a slot beside it, like the food in an Automat. There the similarity ended, for, instead of inserting coins in the slot to open a panel and lift out a purchase, Keedoozle customers inserted a key that they were given on entering the store. Moreover, Saunders’ thinking had advanced far beyond the elementary stage of having the key open the panel; each time a Keedoozle key was inserted in a slot, the identity of the item selected was inscribed in code on a segment of recording tape embedded in the key itself, and simultaneously the item was automatically transferred to a conveyor belt that carried it to an exit gate at the front of the store. When a customer had finished his shopping, he would present his key to an attendant at the gate, who would decipher the tape and add up the bill. As soon as this was paid, the purchases would be catapulted into the customer’s arms, all bagged and wrapped, by a device at the end of the conveyor belt.

A couple of pilot Keedoozle stores were tried out—one in Memphis and the other in Chicago—but it was found that the machinery was too complex and expensive to compete with supermarket pushcarts. Undeterred, Saunders set to work on an even more intricate mechanism—the Foodelectric, which would do everything the Keedoozle could do and add up the bill as well. It will never corner the retail-store-equipment market, though, because it was still unfinished when Saunders died, in October, 1953, five years too soon for him to see the Bruce “corner”, which, in any case, he would have been fully entitled to scoff at as a mere squabble among ribbon clerks.

9

A Second Sort of Life

DURING Franklin D. Roosevelt’s Presidency, when Wall Street and Washington tended to be on cat-and-dog terms, perhaps no New Dealer other than That Man himself better typified the New Deal in the eyes of Wall Street than David Eli Lilienthal. The explanation of this estimate of him in southern Manhattan lay not in any specific anti-Wall Street acts of Lilienthal’s—indeed, the scattering of financiers, among them Wendell L. Willkie, who had personal dealings with him generally found him to be a reasonable sort of fellow—but in what he had come to symbolize through his association with the Tennessee Valley Authority, which, as a government-owned electric-power concern far larger than any private power corporation in the country, embodied Wall Street’s notion of galloping Socialism. Because Lilienthal was a conspicuous and vigorous member of the T.V.A.’s three-man board of directors from 1933 until 1941, and was its chairman from 1941 until 1946, the business community of that period, in his phrase, thought he “wore horns.” In 1946, he became the first chairman of the United States Atomic Energy Commission, and when he gave up that position, in February, 1950, at the age of fifty, the Times said in a news story that he had been “perhaps the most controversial figure in Washington since the end of the war.”

What has Lilienthal been up to in the years since he left the government? As a matter of public record, he has been up to a number of things, all of them, surprisingly, centered on Wall Street or on private business, or both. For one thing, Lilienthal is listed in any number of business compendiums as the co-founder and the chairman of the board of the Development & Resources Corporation. Several years ago, I phoned D. & R.’s offices, then at 50 Broadway, New York City, and discovered it to be a private firm—Wall Street-backed as well as, give or take a block, Wall Street-based—that provides managerial, technical, business, and planning services toward the development of natural resources abroad. That is to say, D. & R.—whose other co-founder, the late Gordon R. Clapp, was Lilienthal’s successor as T.V.A. chairman—is in the business of helping governments set up programs more or less similar to the T.V.A. Since its formation, in 1955, I learned, D. & R. had, at moderate but gratifying profit to itself, planned and managed the beginnings of a vast scheme for the reclamation of Khuzistan, an arid and poverty-stricken, though oil-rich, region of western Iran; advised the government of Italy on the development of its backward southern provinces; helped the Republic of Colombia set up a T.V.A.-like authority for its potentially fertile but flood-plagued Cauca Valley; and offered advice to Ghana on water supply, to the Ivory Coast on mineral development, and to Puerto Rico on electric power and atomic energy.

For another thing—and when I found out about this, it struck me as considerably more astonishing, on form, than D. & R.—Lilienthal has made an authentic fortune as a corporate officer and entrepreneur. In a proxy statement of the Minerals & Chemicals Corporation of America, dated June 24, 1960, that fell into my hands, I found Lilienthal listed as a director of the firm and the holder of 41,366 shares of its common stock. These shares at the time of my investigation were being traded on the New York Stock Exchange at something over twenty-five dollars each, and simple multiplication revealed that they represented a thumping sum by most men’s standards, certainly including those of a man who had spent most of his life on government wages, without the help of private resources.

And, for still another thing, in 1953 Harper & Brothers brought out Lilienthal’s third book, “Big Business: A New Era.” (His previous books were “T.V.A.: Democracy on the March” and “This I Do Believe,” which appeared in 1944 and 1949, respectively.) In “Big Business,” Lilienthal argues that not only the productive and distributive superiority of the United States but also its national security depends on industrial bigness; that we now have adequate public safeguards against abuses of big business, or know well enough how to fashion them as required; that big business does not tend to destroy small business, as is often supposed, but, rather, tends to promote it; and, finally, that a big-business society does not suppress individualism, as most intellectuals believe, but actually tends to encourage it by reducing poverty, disease, and physical insecurity and increasing the opportunities for leisure and travel. Fighting words, in short, from an old New Dealer.

Lilienthal is a man whose government career I, as a newspaper reader, had followed fairly closely. My interest in him as a government official had reached its peak in February, 1947, when, in answer to a fierce attack on him by his old enemy Senator Kenneth D. McKellar, of Tennessee, during Congressional hearings on his fitness for the A.E.C. job, he uttered a spontaneous statement of personal democratic faith that for many people still ranks as one of the most stirring attacks on what later came to be known as McCarthyism. (“One of the tenets of democracy that grow out of this central core of a belief that the individual comes first, that all men are the children of God and their personalities are therefore sacred,” Lilienthal said, among other things, “is a deep belief in civil liberties and their protection; and a repugnance to anyone who would steal from a human being that which is most precious to him, his good name, by imputing things to him, by innuendo, or by insinuation.”) The fragments of information I picked up about his new, private career left me confused. Wondering how Wall Street and business life had affected Lilienthal, and vice versa, in their belated rapprochement, I got in touch with him, and a day or so later, at his invitation, drove out to New Jersey to spend the afternoon with him.

LILIENTHAL and his wife, Helen Lamb Lilienthal, lived on Battle Road, in Princeton, where they had settled in 1957, after six years in New York City, at first in a house on Beekman Place and later in an apartment on Sutton Place. The Princeton house, which stands in a plot of less than an acre, is of Georgian brick with green shutters. Surrounded by other houses of its kind, the place is capacious yet anything but pretentious. Lilienthal, wearing gray slacks and a plaid sports shirt, met me at the front door. At just past sixty, he was a tall, trim man with a receding hairline, a slightly hawklike profile, and candid, piercing eyes. He led me into the living room, where he introduced Mrs. Lilienthal and then pointed out a couple of household treasures—a large Oriental rug in front of the fireplace, which he said was a gift from the Shah of Iran, and, hanging on the wall opposite the fireplace, a Chinese scroll of the late nineteenth century showing four rather roguish men, who, he told me, have a special meaning for him, since they are upper-middle-rank civil servants. Pointing to a particularly enigmatic-looking fellow, he added, with a smile, that he always thought of that one as his Oriental counterpart.

Mrs. Lilienthal went to get coffee, and while she was gone, I asked Lilienthal to tell me something of his post-government life, starting at the beginning. “All right,” he said. “The beginning: I left the A.E.C. for a number of reasons. In that kind of work, I feel, a fellow is highly expendable. If you stayed too long, you might find yourself placating industry or the military, or both—building up what would amount to an atomic pork barrel. Another thing—I wanted to be allowed to speak my mind more freely than I could as a government official. I felt I’d served my term. So I turned in my resignation in November, 1949, and it went into effect three months later. As for the timing, I resigned then because, for once, I wasn’t under fire. Originally, I’d planned to do it earlier in 1949, but then came the last Congressional attack on me—the time Hickenlooper, of Iowa, accused me of ‘incredible mismanagement.’” I noticed that Lilienthal did not smile in referring to the Hickenlooper affair. “I entered private life with both trepidation and relief,” he went on. “The trepidation was about my ability to make a living, and it was very real. Oh, I’d been a practicing lawyer as a young man, in Chicago, before going into government work, and made quite a lot of money at it, too. But now I didn’t want to practice law. And I was worried about what else I could do. I was so obsessed with the subject that I harped on it all the time, and my wife and my friends began to kid me. That Christmas of 1949, my wife gave me a beggar’s tin cup, and one of my friends gave me a guitar to go with it. The feeling of relief—well, that was a matter of personal privacy and freedom. As a private citizen, I wouldn’t have to be trailed around by hordes of security officers as I had been at the A.E.C. I wouldn’t have to answer the charges of Congressional committees. And, above all, I’d be able to talk freely to my wife again.”

Mrs. Lilienthal had returned with the coffee as her husband was talking, and now she sat down with us. She comes, I knew, from a family of pioneers who, over several generations, moved westward from New England to Ohio to Indiana to Oklahoma, where she was born. She seemed to me to look the part—that of a woman of dignity, patience, practicality, and gentle strength. “I can tell you that my husband’s resignation was a relief to me,” she said. “Before he went with the A.E.C., we’d always talked over all aspects of his work. When he took that job, we agreed between us that although we’d indulge in the discussion of personalities as freely as we pleased, he would never tell me anything about the work of the A.E.C. that I couldn’t read in the newspapers. It was a terrible constraint to be under.”

Lilienthal nodded. “I’d come home at night with some frightful experience in me,” he said. “No one who so much as touches the atom is ever quite the same again. Perhaps I’d have been in a series of conferences and listened to the kind of talk that many military and scientific men go in for—cities full of human beings referred to as ‘targets,’ and that sort of thing. I never got used to that impersonal jargon. I’d come home sick at heart. But I couldn’t talk about it to Helen. I wasn’t allowed to get it off my chest.”

“And now there wouldn’t be any more hearings,” Mrs. Lilienthal said. “Those terrible hearings! I’ll never forget one Washington cocktail party we went to, for our sins. My husband had been going through one of the endless series of Congressional hearings. A woman in a funny hat came gushing up to him and said something like ‘Oh, Mr. Lilienthal, I was so anxious to come to your hearings, but I just couldn’t make it. I’m so sorry. I just love hearings, don’t you?’”

Husband and wife looked at each other, and this time Lilienthal managed a grin.

LILIENTHAL seemed glad to get on to what happened next. At about the time his resignation became effective, he told me, he was approached by various men from Harvard representing the fields of history, public administration, and law, who asked him to accept an appointment to the faculty. But he decided he didn’t want to become a professor any more than he wanted to practice law. Within the next few weeks came offers from numerous law firms in New York and Washington, and from some industrial companies. Reassured by these that he was not going to need the tin cup and guitar after all, Lilienthal, after mulling over the offers, finally turned them all down and settled, in May, 1950, for a part-time job as a consultant to the celebrated banking firm of Lazard Frères & Co., whose senior partner, André Meyer, he had met through Albert Lasker, a mutual friend. Lazard gave him an office in its headquarters at 44 Wall, but before he could do much consulting, he was off on a lecture tour across the United States, followed by a trip to Europe that summer, with his wife, on behalf of the late Collier’s magazine. The trip did not result in any articles, though, and on returning home in the fall he found it necessary to get back on a full-time income-producing basis; this he did by becoming a consultant to various other companies, among them the Carrier Corporation and the Radio Corporation of America. To Carrier he offered advice on managerial problems. For R.C.A., he worked on the question of color television, ultimately advising his client to concentrate on technical research rather than on law-court squabbles over patents; he also helped persuade the company to press its computer program and to stay out of the construction of atomic reactors. Early in 1951, he took another trip abroad for Collier’s—to India, Pakistan, Thailand, and Japan. This trip produced an article—published in Collier’s that August—in which he proposed a solution to the dispute between India and Pakistan over Kashmir and the headwaters of the Indus River. Lilienthal’s idea was that the tension between the two countries could best be lessened by a coöperative program to improve living conditions in the whole disputed area through economic development of the Indus Basin. Nine years later, largely through the financial backing and moral support of Eugene R. Black and the World Bank, the Lilienthal plan was essentially adopted, and an Indus treaty signed between India and Pakistan. But the immediate reaction to his article was general indifference, and Lilienthal, temporarily stymied and considerably disillusioned, once more settled down to the humbler problems of private business.

At this point in Lilienthal’s narrative, the doorbell rang. Mrs. Lilienthal went to answer it, and I could hear her talking to someone—a gardener, evidently—about the pruning of some roses. After listening restlessly for a minute or two, Lilienthal called to his wife, “Helen, please tell Domenic to prune those roses farther back than he did last year!” Mrs. Lilienthal went outside with Domenic, and Lilienthal remarked, “Domenic always prunes too gently, to my way of thinking. It’s a case of our backgrounds—Italy versus the Middle West.” Then, resuming where he had left off, he said that his association with Lazard Frères, and more particularly with Meyer, had led him into an association, first as a consultant and later as an executive, with a small company called the Minerals Separation North American Corporation, in which Lazard Frères had a large interest. It was in this undertaking that, unexpectedly, he made his fortune. The company was in trouble, and Meyer’s notion was that Lilienthal might be the man to do something about it. Subsequently, in the course of a series of mergers, acquisitions, and other maneuvers, the company’s name was changed to, successively, the Attapulgus Minerals & Chemicals Corporation, the Minerals & Chemicals Corporation of America, and, in 1960, the Minerals & Chemicals Philipp Corporation; meanwhile, its annual receipts rose from about seven hundred and fifty thousand dollars, for 1952, to something over two hundred and seventy-four million, for 1960. For Lilienthal, the acceptance of Meyer’s commission to look into the company’s affairs was the beginning of a four-year immersion in the day-to-day problems of managing a business; the experience, he said decisively, turned out to be one of his life’s richest, and by no means only in the literal sense of that word.

I HAVE reconstructed the corporate facts behind Lilienthal’s experience partly from what he told me in Princeton, partly from a subsequent study of some of the company’s published documents, and partly from talks with other persons interested in the firm. Minerals Separation North American, which was founded in 1916 as an offshoot of a British firm, was a patent company, deriving its chief income from royalties on patents for processes used in refining copper ore and the ores of other nonferrous minerals. Its activities were twofold—attempting to develop new patents in its research laboratory, and offering technical services to the mining and manufacturing companies that leased its old ones. By 1950, although it was still netting a nice annual profit, it was in a bad way. Under the direction of its long-time president, Dr. Seth Gregory—who was then over ninety but still ruled the company with an iron hand, commuting daily between his midtown apartment hotel and his office, at 11 Broadway, in a regally purple Rolls-Royce—it had cut down its research activities to almost nothing and was living on half a dozen old patents, all of which were scheduled to go into the public domain in from five to eight years. In effect, it was a still healthy company living under a death sentence. Lazard Frères, as a large stockholder, was understandably concerned. Dr. Gregory was persuaded to retire on a handsome pension, and in February, 1952, after working with Minerals Separation for some time as a consultant, Lilienthal was installed as the company’s president and a member of its board of directors. His first task was to find a new source of income to replace the fast-expiring patents, and he and the other directors agreed that the way to accomplish this was through a merger; it fell to Lilienthal to participate in arranging one between Minerals Separation and another company in which Lazard Frères—along with the Wall Street firm of F. Eberstadt & Co.—had large holdings: the Attapulgus Clay Company, of Attapulgus, Georgia, which produced a very rare kind of clay that is useful in purifying petroleum products, and which manufactured various household products, among them a floor cleaner called Speedi-Dri.

As a marriage broker between Minerals Separation and Attapulgus, Lilienthal had the touchy job of persuading the executives of the Southern company that they were not being used as pawns by a bunch of rapacious Wall Street bankers. Being an agent of the bankers was an unaccustomed role for Lilienthal, but he evidently carried it off with aplomb, despite the fact that his presence complicated the emotional problems still further by introducing into the situation a whiff of galloping Socialism. “Dave was very effective in building up the Attapulgus people’s morale and confidence,” another Wall Streeter has told me. “He reconciled them to the merger, and showed them its advantages for them.” Lilienthal himself told me, “I felt at home in the administrative and technical parts of the job, but the financial part had to be done by the people from Lazard and Eberstadt. Every time they began talking about spinoffs and exchanges of shares, I was lost. I didn’t even know what a spinoff was.” (As Lilienthal knows now, it is, not to get too technical about it, a division of a company into two or more companies—the opposite of a merger.) The merger took place in December, 1952, and neither the Attapulgus people nor the Minerals Separation people had any reason to regret it, because both the profits and the stock price of the newly formed company—the Attapulgus Minerals & Chemicals Corporation—soon began to rise. At the time of the merger, Lilienthal was made chairman of the board of directors, at an annual salary of eighteen thousand dollars. Over the next three years, while serving first in this position and later as chairman of the executive committee, he had a large part not only in the conduct of the company’s routine affairs but also in its further growth through a series of new mergers—one in 1954, with Edgar Brothers, a leading producer of kaolin for paper coating, and two in 1955, with a pair of limestone concerns in Ohio and Virginia. The mergers and the increased efficiency that went with them were not long in paying off; between 1952 and 1955 the company’s net profit per share more than quintupled.

The mechanics of Lilienthal’s own rise from the comparative rags of a public servant to the riches of a successful entrepreneur are baldly outlined in the company’s proxy statements for its annual and special stockholders’ meetings. (There are few public documents more indiscreet than proxy statements, in which the precise private stockholdings of directors must be listed.) In November, 1952, Minerals Separation North American granted Lilienthal, as a supplement to his annual salary, a stock option.* His option entitled him to buy as many as fifty thousand shares of the firm’s stock from its treasury at $4.87½ per share, then the going rate, any time before the end of 1955, and in exchange he signed a contract agreeing to serve the company as an active executive throughout 1953, 1954, and 1955. The potential financial advantage to him, of course, as to all other recipients of stock options, lay in the fact that if the price of the stock rose substantially, he could buy shares at the option price and thus have a holding that would immediately be worth much more than he paid for it. Furthermore, and more important, if he should later decide to sell his shares, the proceeds would be a capital gain, taxable at a maximum rate of 25%. Of course, if the stock failed to go up, the option would be worthless. But, like so many stocks of the mid-fifties, Lilienthal’s did go up, fantastically. By the end of 1954, according to the proxy statements, Lilienthal had exercised his option to the extent of buying twelve thousand seven hundred and fifty shares, which were then worth not $4.87½ each but about $20. In February, 1955, he sold off four thousand shares at $22.75 each, bringing in ninety-one thousand dollars. This sum, less capital-gains tax, was then applied against further purchases under the option, and in August, 1955, the proxy statements show, Lilienthal raised his holdings to almost forty thousand shares, or close to the number he held at the time of my visit to him. By that time, the stock, which had at first been sold over the counter, not only had achieved a listing on the New York Stock Exchange but had become one of the Exchange’s highflying speculative favorites; its price had skyrocketed to about forty dollars a share, and Lilienthal, obviously, was solidly in the millionaire class. Moreover, the company was now on a sound long-term basis, paying an annual cash dividend of fifty cents a share, and the Lilienthal family’s financial worries were permanently over.

Fiscally speaking, Lilienthal told me, his symbolic moment of triumph was the day, in June of 1955, when the shares of Minerals & Chemicals graduated to a listing on the New York Stock Exchange. In accordance with custom, Lilienthal, as a top officer, was invited onto the floor to shake hands with the president of the Exchange and be shown around generally. “I went through it in a daze,” Lilienthal told me. “Until then, I’d never been inside any stock exchange in my life. It was all mysterious and fascinating. No zoo could have seemed more strange to me.” How the Stock Exchange felt at this stage about having the former wearer of horns on its floor is not recorded.

IN telling me about his experience with the company, Lilienthal had spoken with zest and had made the whole thing sound mysterious and fascinating. I asked him what, apart from the obvious financial inducement, had led him to devote himself to the affairs of a small firm, and how it had felt for the former boss of T.V.A. and A.E.C. to be, in effect, peddling Attapulgite, kaolin, limestone, and Speedi-Dri. Lilienthal leaned back in his chair and stared at the ceiling. “I wanted an entrepreneurial experience,” he said. “I found a great appeal in the idea of taking a small and quite crippled company and trying to make something of it. Building. That kind of building, I thought, is the central thing in American free enterprise, and something I’d missed in all my government work. I wanted to try my hand at it. Now, about how it felt. Well, it felt plenty exciting. It was full of intellectual stimulation, and a lot of my old ideas changed. I conceived a great new respect for financiers—men like André Meyer. There’s a correctness about them, a certain high sense of honor, that I’d never had any conception of. I found that business life is full of creative, original minds—along with the usual number of second-guessers, of course. Furthermore, I found it seductive. In fact, I was in danger of becoming a slave. Business has its man-eating side, and part of the man-eating side is that it’s so absorbing. I found that the things you read—for instance, that acquiring money for its own sake can become an addiction if you’re not careful—are literally true. Certain good friends helped keep me on the track—men like Ferdinand Eberstadt, who became my fellow-director after the Attapulgus merger, and Nathan Greene, special counsel to Lazard Frères, who was on the board for a while. Greene was a kind of business father confessor to me. I remember his saying, ‘You think you’ll make your pile and then be independent. My friend, in Wall Street you don’t just win your independence at one stroke. To paraphrase Thomas Jefferson, you have to win your independence over again every day.’ I found that he was right about that. Oh, I had my problems. I questioned myself at every step. It was exhausting. You see, for so long I’d been associated with two pretty far-reaching things—institutions. I had a feeling of identity with them; in that kind of work you are able to lose your sense of self. Now, with myself to worry about—my personal standards as well as my financial future—I found myself wondering all the time whether I was making the right move. But that part’s all in my journal, and you can read it there, if you like.” *

I said I certainly would like to read it, and Lilienthal led me to his study, in the basement. It proved to be a good-sized room whose windows opened on window wells into which strands of ivy were trailing; light came in from outside, and even a little slanting sunshine, but the tops of the window wells were too high to permit a view of the garden or the neighborhood. Lilienthal remarked, “My neighbor Robert Oppenheimer complained about the enclosed feeling when he first saw this room. I told him that was just the feeling I wanted!” Then he showed me a filing cabinet, standing in a corner; it contained the journal, in rows and rows of loose-leaf notebooks, the earliest of them dating back to its author’s high-school days. Having invited me to make myself at home, Lilienthal left me alone in his study and went back upstairs.

Taking him at his word, I went for a turn or two around the room, looking at the pictures on the walls and finding about what might have been expected: inscribed photographs from Franklin D. Roosevelt, Harry S. Truman, Senator George Norris, Louis Brandeis; pictures of Lilienthal with Roosevelt, with Willkie, with Fiorello LaGuardia, with Nelson Rockefeller, with Nehru in India; a night view of the Fontana Dam, in the Tennessee Valley, being built under a blaze of electricity supplied by T.V.A. power plants. A man’s study reflects himself as he wishes to be seen publicly, but his journal, if he is honest, reflects something else. I had not browsed long in Lilienthal’s journal before I realized that it was an extraordinary document—not merely a historical source of unusual interest but a searching record of a public man’s thoughts and emotions. I leafed through the years of his association with Minerals & Chemicals, and, scattered amid much about family, Democratic politics, friends, trips abroad, reflections on national policies, and hopes and fears for the republic, I came upon the following entries having to do with business and life in New York:

May 24, 1951: Looks as if I am in the minerals business. In a small way, that could become a big way. [He goes on to explain that he has just had his first interview with Dr. Gregory, and is apparently acceptable to the old man as the new president of the company.]

May 31, 1951: [Starting in business] is like learning to walk after a long illness.… At first you have to think: move the right foot, move the left foot, etc. Then you are walking without thinking, and then walking is something one does with unconsciousness and utter confidence. This latter state, as to business, has yet to come, but I had the first touch of it today.

July 22, 1951: I recall Wendell Willkie saying to me years ago, “Living in New York is a great experience. I wouldn’t live anywhere else. It is the most exciting, stimulating, satisfying spot in the world,” etc. I think this was apropos of some remark I had made on a business visit to New York—that I was certainly glad I didn’t have to live in that madhouse of noise and dirt. [Last] Thursday was a day in which I shared some of Willkie’s feeling.… There was a grandeur about the place, and adventure, a sense of being in the center of a great achievement, New York City in the fifties.

October 28, 1951: What I am reaching for, perhaps, is to have my cake and eat it, too, but in a way this is not wholly senseless nor futile. That is, I can have enough actual contact with the affairs of business to keep a sense of reality, or develop one. How otherwise can I explain the pleasure I get in visiting a copper mine or talking to operators of an electric furnace, or a coal-research project, or watching how André Meyer works.… But along with that I want to be free enough to think about what these things mean, free enough to read outside the immediate field of interest. This requires keeping out of status (the absence of which I know makes me vaguely unhappy).

December 8, 1952: What is it that investment bankers do for their money? Well, I have certainly had my eyes opened, as to the amount of toil, sweat, frustrations, problems—yes, and tears—that has to be gone through.… If everyone who has something to sell in the market had to be as meticulous and detailed in his statements about what he is selling as those who offer stock in the market are now, under the Truth in Securities law, darn little would be sold, in time to be useful, at least.

December 20, 1952: My purpose in this Attapulgus venture is to make a good deal of money in a short time, in a way (i.e., old man capital gains) that enables me to keep three-fourths of it, instead of paying 80% or more in income taxes.… But there is another purpose: to have had the experience of business.… The real reason, or the chief reason, is a feeling that my life wouldn’t be complete, living in a business period—that is, a time dominated by the business of business—unless I had been active in that area. What I wanted was to be an observer of this fascinating activity that so colors and affects the world’s life, not … an observer from without (as a writer, teacher) but from the arena itself. I still have this feeling, and when I get low and glad to chuck the whole thing (as I have from time to time), the sustaining part is that even the bumps and sore spots are experiences, actual experiences within the business world.…

Then, too, [I wanted to be able to make] a comparison of the managers of business, the spirit, the tensions, the motivations, etc., with those of government (something I keep doing anyway)—and that needs doing to understand either government or business. This requires actual valid experience in the business world somewhat comparable to my long hiring out in government matters.

I don’t kid myself that I will ever be accepted as a businessman, not after those long years when I wore horns, for all of them outside the Tennessee Valley at least. And I feel less defensive—usually shown by a belligerence—on this score than I did when I rarely saw a tycoon or a Wall Streeter, whereas now I live with them.…

January 18, 1953: I am now definitely committed [to Minerals & Chemicals] for not less than three more years … and morally committed to see the thing through. While I can’t conceive that this business will ever seem enough, an end of itself, to make up a satisfactory life, yet the busy-ness, the activity, the crises, the gambles, the management problems I must face, the judgment about people, all combine to make something far from dull. Add to this the good chance of making a good deal of money.… My decision to try business—that seemed to so many people a bit of romantic moonshine—makes more sense today than it did a year ago.

But there is something missing.…

December 2, 1953: Crawford Greenewalt [president of du Pont] … introduced me in a speech (in Philadelphia).… He noted that I had entered the chemical business; bearing in mind that I had previously headed the biggest things in America, bigger than [any] private corporations, he was naturally a little nervous about seeing me become a potential competitor. It was kidding, but it was good kidding. And it certainly gave little ole Attapulgus quite a notice.

June 30, 1954: I have found a new kind of satisfaction, and in a sense, fulfillment, in a business career. I really never felt that the “consultant” thing was being a businessman, or engaging in the realities of a life of business. Too remote from the actual thinking process, the exercise of judgment and decision.… In this company, as we are evolving it, there are so many of the elements of fun.… The starting with almost nothing … the company depending on patents alone … acquisition, mergers, stock issues, proxy statements, the methods of financing internally and by bank loans … also the way stock prices are made, the silly and almost childlike basis upon which grown men decide that a stock should be bought, and at what price … the merger with Edgar, the great [subsequent] rise in the price of their stock … the review of the price structure. The beginning of better costs. The catalyst idea. The drive and energy and imagination: the nights and days (in the lab until 2 A.M. night after night) and finally the beginning of a new business.… It is quite a story.

(Later I got a rather different perspective on Lilienthal’s reactions to the transition from government to business by talking to the man he had described as his “business father confessor,” Nathan Greene. “What happens to a man who leaves top-level government work and comes to Wall Street as a consultant?” Greene asked me rhetorically. “Well, usually it’s a big letdown. In the government, Dave was used to a sense of great authority and power—tremendous national and international responsibility. People wanted to be seen with him. Foreign dignitaries sought him out. He had all sorts of facilities—rows of buttons on his desk. He pushed them, and lawyers, technicians, accountants appeared to do his bidding. All right, now he comes to Wall Street. There’s a big welcoming reception, he meets all the partners of his new firm and their wives, he’s given a nice office with a carpet. But there’s nothing on his desk—only one button, and all it summons is a secretary. He doesn’t have perquisites like limousines. Furthermore, he really has no responsibility. He says to himself, ‘I’m an idea man, I’ve got to have some ideas.’ He has some, but they’re not given much attention by the partners. So the outward form of his new work is a letdown. The same with its content. In Washington, it had been development of natural resources, atomic energy, or the like—world-shaking things. Now it turns out to be some little business to make money. It all seems a bit petty.

“Then, there’s the matter of money itself. In the government, our hypothetical man didn’t need it so badly. He had all these services and the basic comforts supplied him at no personal cost, and besides he had a great sense of moral superiority. He was able to sneer at people who were out making money. He could think of somebody in his law-school class who was making a pile in the Street, and say, ‘He’s sold out.’ Then our man leaves government and goes to the Wall Street fleshpots himself, and he says, ‘Boy, am I going to make these guys pay for my services!’ They do pay, too. He gets big fees for consulting. Then he finds out about big income taxes, how he has to pay most of his income to the government now instead of getting his livelihood from it. The shoe is on the other foot. He may—sometimes he does—begin to scream ‘Confiscation!,’ just like any old Wall Streeter.

“How did Dave handle these problems? Well, he had his troubles—after all, he was starting a second sort of life—but he handled them just about as well as they can be handled. He was never bored, and he never screamed ‘Confiscation!’ He has a great capacity for sinking himself in something. The subject matter isn’t so important to him. It’s almost as if he were able to think that what he’s doing is important, whether it is or not, simply because he’s doing it. His ability was invaluable to Minerals & Chemicals, and not just as an administrator. Dave is a lawyer, after all; he knows more about corporate finances than he likes to admit. He enjoys playing the barefoot boy, but he’s hardly that. Dave is an almost perfect example of somebody who kept his independence while getting rich on Wall Street.”)

One way and another, then—reading through these ambivalent protestations in the journal, and later hearing Greene—I seemed to detect under the exuberance and the absorption a nagging sense of dissatisfaction, almost of compromise. For Lilienthal, the obviously genuine thrill of having a new kind of experience, and an almost unimaginably profitable one, had been, I sensed, a rose with a worm in it. I went back up to the living room. There I found Lilienthal fiat on his back on the Shah’s rug underneath a pile of pre-school-age children. At least, it looked at first glance like a pile; on closer inspection I found that it consisted of just two boys. Mrs. Lilienthal, who had returned from the garden, introduced them as Allen and Daniel Bromberger, sons of the Lilienthals’ daughter, Nancy, and Sylvain Bromberger, adding that the Brombergers were living nearby, since Sylvain was teaching philosophy at the university. (A few weeks later, Bromberger moved on to the University of Chicago.) The Lilienthals’ only other offspring, David, Jr., lived in Edgartown, Massachusetts, where he had settled down to become a writer, as he subsequently did. In response to the urging of the senior Lilienthals, the grandchildren climbed off their grandfather and disappeared from the room. When things were normal again, I told Lilienthal my reaction to the entries I had read in the journal, and he hesitated for a while before speaking. “Yes,” he said, finally. “Well, one thing—it wasn’t making all that money that worried me. That didn’t make me feel either good or bad, by itself. In the government years, we’d always paid our bills, and by scrimping we’d been able to save enough to send the kids to college. We’d never thought much about money. And then making a lot of it, making a million—I was surprised, of course. I’d never especially aimed at that or thought it might happen to me. It’s like when you’re a boy and you try to jump six feet. Then you find you can jump six feet, and you say, ‘Well, so what?’ It’s sort of irrelevant. Over the past few years, a lot of people have said to me, ‘How does it feel to be rich?’ At first, I was kind of offended—there seemed to be an implied criticism in the question—but I’m over that. I tell them it doesn’t feel any special way. The way I feel is—But this is going to sound stuffy.”

“No, I don’t think it’s stuffy,” said Mrs. Lilienthal, anticipating what was coming.

“Yes, it is, but I’m going to say it anyway,” said Lilienthal. “I don’t think money makes much difference, as long as you have enough.”

“I don’t quite agree,” said Mrs. Lilienthal. “It doesn’t make much difference when you’re young. You don’t mind then, as long as you can struggle along. But as you get older, it is helpful.”

Lilienthal nodded in deference to that. Then he said that he thought the undertone of dissatisfaction I had noticed in the journal probably stemmed, at least in part, from the fact that his career in private business, absorbing though it was, did not bring with it the gratifications of public-service work. True, he had not been deprived of them entirely, because it was at the height of his Minerals & Chemicals operations, in 1954, that he first went to Colombia, at the request of that country’s government, and, serving as a peso-a-year consultant, started the Cauca Valley project that was later continued by the Development & Resources Corporation. But for the most part being a top officer of Minerals & Chemicals had kept him pretty well tied down, and he’d had to regard the Colombia work as a sideline, if not merely a hobby. I found it impossible to avoid seeing symbolic significance in the fact that the principal material with which Lilienthal the businessman had been engaged was—clay.

I thought of something else in Lilienthal’s life at that time that might have taken some of the kick out of the process of becoming a successful businessman. His “Big Business” book had come out when he was in the thick of the Minerals & Chemicals work. I wondered whether, since it is such an uncritical paean to free enterprise, it had been construed by some people as a rationalization of his new career, and I asked about this.

“Well, the ideas in the book were rather a shock to some of my husband’s New Deal friends, all right,” Mrs. Lilienthal said, a bit dryly.

“They needed shocking, damn it!” Lilienthal burst out. He spoke with some heat, and I thought of the phrase in his journal—used there in an entirely different context but still in reference to himself—about defensiveness shown by belligerence. After a moment, he went on, in a normal tone, “My wife and daughter thought I didn’t spend enough time working on the book, and they were right. I wrote it in too much of a hurry. My conclusions aren’t supported by enough argument. For one thing, I should have spelled out in more detail my opposition to the way the antitrust laws are administered. But the anti-trust part wasn’t the real trouble. The thing that really shook up some of my old friends was what I said about big industry in relation to individualism, and about the machine in relation to aesthetics. Morris Cooke, who used to be administrator of the Rural Electrification Administration—he was one who was shaken up. He took me apart over the book, and I took him apart back. The anti-bigness dogmatists stopped having anything to do with me. They simply wrote me off. I wasn’t hurt or disappointed. Those people are living on nostalgia; they look backward, and I try to look forward. Then, of course, there were the trust busters. They really went after me. But isn’t trust busting, in the sense of breaking up big companies simply because they’re big, pretty much a relic of a past era? Yes, I still think I was right in the main things I said—perhaps ahead of my time, but right.”

“The trouble was the timing,” Mrs. Lilienthal said. “The book came so close to coinciding with my husband’s leaving public service and going into private business. Some people thought it represented a change in point of view induced by expediency. Which it didn’t!”

“No,” Lilienthal said. “The book was written mostly in 1952, but all the ideas in it were hatched while I was still in public service. For example, my idea that bigness is essential for national security came in large part out of my experiences in the A.E.C. The company that had the research and manufacturing facilities to make the atomic bomb an operational weapon, so engineered that it wouldn’t require Ph.D.s to use it in the field—Bell Telephone, to be specific—was a big company. Because it was so big, the Anti-Trust Division of the Department of Justice was seeking to break the Bell System into several parts—unsuccessfully, as it turned out—at the very time we in the A.E.C. were calling on it to do a vital defense job that required unity. That seemed wrong. More generally, the whole point of view I expressed in the book goes way back to my quarrel with Arthur Morgan, the first T.V.A. chairman, in the early thirties. He had great faith in a handicraft economy, I was for large-scale industry. T.V.A., after all, was, and is, the biggest power system in the free world. In T.V.A. I always believed in bigness—along with decentralization. But, you know, the chapter I hoped would produce the most discussion was the one on bigness as a promoter of individualism. It did produce discussion, of a sort. I remember people—academic people, mostly—coming up to me with incredulous expressions and saying something that started with ‘Do you really believe …’ Well, my answer would start with ‘Yes, I really do believe …’”

One other touchy matter that Lilienthal may have questioned himself about in the process of making his Wall Street fortune was the fact that in making it he had not really needed to scream “Confiscation,” since he had made it through a tax loophole, the stock option. Possibly there have been liberal, reformist businessmen who have refused to accept stock options on principle, although I have never heard of one doing so, and I am not convinced that such a renunciation would be a sensible or useful form of protest. In any event, I didn’t ask Lilienthal about the matter; in the absence of any accepted code of journalism every journalist writes his own, and in mine, such a question would have come close to invasion of moral privacy. In retrospect, though, I almost wish I had violated my code that one time. Lilienthal, being Lilienthal, might have objected to the question strenuously, but I think he would have answered it equally strenuously, and without hedging. As things were, after discoursing on the critical reactions to his book, “Big Business,” he got up and walked to a window. “I see Domenic has been pretty cautious about his rose-pruning,” he said to his wife. “Maybe I’ll go out later and cut them back some more.” His jaw was set in a way that made me feel pretty sure I knew how the rose-pruning controversy was going to be resolved.

THE triumphant solution to Lilienthal’s problem—the way that he eventually found to have his cake and eat it—was the Development & Resources Corporation. The corporation arose out of a series of conversations between Lilienthal and Meyer during the spring of 1955, in the course of which Lilienthal pointed out that he was well acquainted with dozens of foreign dignitaries and technical personnel who had come to visit the T.V.A., and said that their intense interest in that project seemed to indicate that at least some of their countries would be receptive to the idea of starting similar programs. “Our aim in forming D. & R. was not to try to remold the world, or any large part of it, but only to try to help accomplish some rather specific things, and, incidentally, make a profit,” Lilienthal told me. “André was not so sure about the profit—we both knew there would be a deficit at first—but he liked the idea of doing constructive things, and Lazard Frères decided to back us, in return for a half interest in the corporation.” Clapp, who was serving at the time as deputy New York City administrator, came in as co-founder of the venture, and the subsequent executive appointments made D. & R. virtually a T.V.A. alumni association: John Oliver, who became executive vice-president, had been with T.V.A. from 1942 to 1954, ending up as its general manager; W. L. Voorduin, who became director of engineering, had been with T.V.A. for a decade and had planned its whole system of dams; Walton Seymour, who became vice-president for industrial development, had been a T.V.A. consultant on electric-power marketing for thirteen years; and a dozen other former T.V.A. men were scattered on down through the ranks.

In July, 1955, D. & R. set up shop at 44 Wall, and set to work finding clients. What was to prove its most important one came to light during a World Bank meeting in Istanbul that Lilienthal and his wife attended in September of that year. At the meeting, Lilienthal fell in with Abolhassan Ebtehaj, then head of a seven-year development plan in Iran; as it happened, Iran was just about the ideal D. & R. client, since, for one thing, the royalties on its nationalized oil industry gave it considerable capital with which to pay for the development of its resources, and, for another, what it desperately needed was technical and professional guidance. The encounter with Ebtehaj led to an invitation to Lilienthal and Clapp to visit Iran as the guests of the Shah, and see what they thought could be done about Khuzistan. Lilienthal’s employment contract with Minerals & Chemicals ended that December; although he stayed on as a director, he was now free to devote all his time, or nearly all of it, to D. & R. In February, 1956, he and Clapp went to Iran. “Before then, I blush to say, I had never heard of Khuzistan,” Lilienthal told me. “I’ve learned a lot about it since then. It was the heart of the Old Testament Elamite kingdom and later of the Persian Empire. The ruins of Persepolis are not far away, and those of Susa, where King Darius had his winter palace, are in the very center of Khuzistan. In ancient times, the whole region had an extensive water-conservation system—you can still find the remains of canals that were probably built by Darius twenty-five hundred years ago—but after the decline of the Persian Empire the water system was ruined by invasion and neglect. Lord Curzon described what the Khuzistan uplands looked like a century ago—‘a desert over which the eye may roam unarrested for miles.’ It was that way when we got there. Nowadays, Khuzistan is one of the world’s richest oil fields—the famous Abadan refinery is at its southern tip—but the inhabitants, two and a half million of them, haven’t benefited from that. The rivers have flowed unused, the fabulously rich soil has lain fallow, and all but a tiny fraction of the people have continued to live in desperate poverty. When Clapp and I first saw the place, we were appalled. Still, for two old T.V.A. hands like us, it was a dream; it was simply crying out for development. We looked for sites for dams, likely spots to hunt for minerals and make soil-fertility studies, and so on. We saw flares of natural gas rising from oil fields. That was waste, and it suggested petrochemical plants, to use the gas for making fertilizer and plastics. In eight days we’d roughed out a plan, and in about two weeks D. & R. had signed a five-year contract with the Iranian government.

“That was only the beginning. Bill Voorduin, our chief engineer, flew out there and spotted a wonderful dam site at a place just a few miles from the ruins of Susa—a narrow canyon with walls that rise almost vertically from the bed of the Dez River. We found we were going to have to manage the project as well as advise on it, and so our next job was lining up our managerial group. To give you some idea of the size of the project, right now there are about seven hundred people working on it at the professional level—a hundred Americans, three hundred Iranians, and three hundred others, mostly Europeans, who work directly for firms under subcontracts. Besides that, there are about forty-seven hundred Iranian laborers. Over five thousand people, all told. The entire plan includes fourteen dams, on five different rivers, and will take many years to finish. D. & R. has just completed its first contract, for five years, and signed a new one, for a year and a half, with option to renew for another five years. Quite a bit has been accomplished already. Take the first dam—the Dez one. It’s to be six hundred and twenty feet high, or more than half again as high as the Aswan, in Egypt, and it will eventually irrigate three hundred and sixty thousand acres and generate five hundred and twenty thousand kilowatts of electricity. It should be finished early in 1963. Meanwhile, a sugar plantation—the first in Khuzistan in twenty-five centuries—has been started, with irrigation by pumped water; it should yield its first crop this summer, and a sugar refinery will be ready by the time the sugar is. Another thing: eventually the region will supply its own electric power from the dams, but for the interim period a high-tension line, the first anywhere in Iran, has been put in over the seventy-two miles from Abadan to Ahwaz—a city of a hundred and twenty thousand that previously had no power source except half a dozen little diesels, which seldom worked.”

While the Iranian project was proceeding, D. & R. was also busy lining up and carrying out its programs for Italy, Colombia, Ghana, the Ivory Coast, and Puerto Rico, as well as programs for private business groups in Chile and the Philippines. A job that D. & R. had just taken on for the United States Army Corps of Engineers excited Lilienthal enormously—an investigation of the economic impact of power from a proposed dam on the Alaskan sector of the Yukon, which he described as “the river with the greatest hydroelectric potential remaining on this continent.” Meanwhile, Lazard Frères retained its financial interest in the firm and now very happily collected its share of a substantial annual profit, and Lilienthal happily took to teasing Meyer about his former skepticism as to D. & R. financial prospects.

Lilienthal’s new career had meant a highly peripatetic life both for him and for Mrs. Lilienthal. He showed me his foreign-travel log for 1960, which he said was a fairly typical year, and it read as follows:

January 23-March 26: Honolulu, Tokyo, Manila; Iligan, Mindanao;

Manila, Bangkok, Siemreap, Bangkok; Tehran, Ahwaz, Andimeshk, Ahwaz, Tehran; Geneva, Brussels, Madrid; home.

October 11–17: Buenos Aires; Patagonia; home.

November 18–December 5: London, Tehran, Rome, Milan, Paris, home.

Then he went and got the volume of his journal that relates to those trips. Turning to the pages on his stay in Iran early last spring, I was particularly struck by a few excerpts:

Ahwaz, March 5: The cry of the Arab women as the Shah’s big black Chrysler passed them, a solid row along the road from the airport, made me think of the rebel yell; then I recognized it: it was the Indian yelp, the kind we used to make as kids, moving our hand over our mouths to give that undulating wail.

Ahwaz, March 11: Our experience in the villagers’ huts on Wednesday threw me into a deep pit. I hovered between despair—which is an emotion I consider a sin—and anger, which doesn’t do much good, I suppose.

Andimeshk, March 9: … We have travelled many miles, through dust, mudholes where we got stuck fast, and some of the roughest “roads” I have ever known—and we also travelled back to the ninth century, and earlier, visiting villages and going into mud “homes” quite unbelievable—and unforgettable forever and ever. As the Biblical oath has it: Let my right hand wither if I ever forget how some of the most attractive of my fellow human beings live—are living tonight, only a few kilometres from here, where we visited them this afternoon.…

And yet I am as sure as I am writing these notes that the Ghebli area, of only 45,000 acres, swallowed in the vastness of the Khuzistan, will become as well known as, say, the community of Tupelo … became, or New Harmony or Salt Lake City when it was founded by a handful of dedicated men in a pass of the great Rockies.

The afternoon shadows were getting long on Battle Road, and it was time for me to be going. Lilienthal walked out to my car with me, and on the way I asked him whether he ever missed the rough-and-tumble, and the limelight, of being perhaps the most controversial man in Washington. He grinned, and said, “Sure.” When we reached the car, he went on, “I never intended to be especially combative, in Washington or in the Tennessee Valley. It was just that people kept disagreeing with me. But, all right, I wouldn’t have put myself in controversial situations so much if I hadn’t wanted to. I guess I was combative. When I was a kid, I was interested in boxing. At high school—in Michigan City, Indiana—I boxed a lot with a cousin of mine, and while I was in college, at DePauw, in central Indiana, I took to boxing during the summers with a man who had been a professional light-heavyweight. The Tacoma Tiger, he’d been called. Working out with him was a challenge. If I made a mistake, I’d be on the floor. I wanted just once to land on him good. It was my ambition. I never did, of course, but I got to be a fairly good boxer. I became boxing coach at DePauw while I was an undergraduate. Later on, at Harvard Law, I didn’t have time to keep it up, and I never boxed seriously again. But I don’t think that for me boxing was an expression of combativeness for its own sake. I think I considered competence at defending yourself a means of preserving your personal independence. I learned that from my father. ‘Be your own man,’ he used to say. He’d come from Austria-Hungary, the part that’s now eastern Czechoslovakia, in the eighteen-eighties, when he was about twenty, and he spent his adult life as a storekeeper in various Middle Western towns: Morton, Illinois, where I was born; Valparaiso, Indiana; Springfield, Missouri; Michigan City and, later, Winamac, Indiana. He had very pale-blue eyes that reflected the insides of him. You could tell by looking at him that he wouldn’t trade independence for security. He didn’t know how to dissemble, and wouldn’t have wanted to if he had known how. Well, to get back to my being controversial, or combative, or whatever you call it, in Washington—yes, there’s something missing when you don’t have a McKellar laying it on the line any more. The moral equivalent of that for me now is taking on challenges, different kinds of McKellars or Tacoma Tigers, maybe—the Minerals & Chemicals thing, the D. & R. thing—and trying to meet them.”

I revisited Lilienthal in early summer, 1968, this time at D. & R.’s third home office, a suite with a splendid harbor view at I Whitehall Street. Both D. & R. and he had moved along in the interim. In Khuzistan, the Dez Dam had been completed on schedule; water impounding had begun in November, 1962, the first power had been delivered in May, 1963, and the region was now not only supplying its own power but producing enough surplus to attract foreign industry. Meanwhile, agriculture in the once-barren region was flourishing as a result of irrigation made possible by the dam, and, as Lilienthal—sixty-eight now, and as combative as ever—put it, “The gloomy economists have to be gloomy about some other underdeveloped country.” D. & R. had just signed a new five-year contract with Iran to carry on the work. Otherwise, the firm had expanded its clientele to include fourteen countries; its most controversial undertaking was in Vietnam, where, under contract with the United States government, it was cooperating with a similar group of South Vietnamese in working up plans for the postwar development of the Mekong Valley. (This assignment had led to criticism of Lilienthal by those who took it to imply that he supported the war; in fact, he told me, he regarded the war as the disastrous outcome of a series of “horrible miscalculations,” and the planning of postwar resources development as a separate matter. It was clear enough, nevertheless, that the criticism hurt. At the same time, D. & R. was widening its horizons by beginning to move, unexpectedly, into domestic urban development, having been engaged by private foundation-sponsored groups in Queens County, New York and Oakland County, Michigan to see whether the T.V.A. approach might have some value in dealing with those modern deserts, the slums. “Just pretend this is Zambia and tell us what you would do,” these groups had said, in effect, to D. & R.—a wildly imaginative idea, surely, the usefulness of which remained to be proved.

As for D. & R. itself and its place in American business, Lilienthal recounted that since I had seen him it had expanded to the extent of opening a second permanent office on the West Coast, had considerably increased its profits, and become essentially employee-owned, with Lazard retaining only a token interest. Most encouraging of all, at a time when old-line business was having serious recruitment problems because its obsession with profit was repelling high-minded youth, D. & R. found that its idealistic objectives made it a magnet for the most promising new graduates. And as a result of all these things, Lillienthal could at last say what he had not been able to say on the earlier occasion—that private enterprise was now affording him more satisfaction than he had ever derived from public service.

Is D. & R., then, a prototype of the free enterprise of the future, accountable half to its stockholders and half to the rest of humanity? If so, then the irony is complete, and Lilienthal, of all people, ends up as the prototypical businessman.

* For a detailed discussion of stock options, see p. 101.

* This part of Lilienthal’s journal was eventually published, in 1966.

10

Stockholder Season

A FEW YEARS AGO, a European diplomat was quoted in the Times as saying, “The American economy has become so big that it is beyond the imagination to comprehend. But now on top of size you are getting rapid growth as well. It is a situation of fundamental power unequalled in the history of the world.” At about the same time, A. A. Berle wrote, in a study of corporate power, that the five hundred or so corporations that dominate that economy “represent a concentration of power over economics which makes the medieval feudal system look like a Sunday-school party.” As for the power within those corporations, it clearly rests, for all practical purposes, with their directors and their professional managers (often not substantial owners), who, Berle goes on to suggest in the same essay, sometimes constitute a self-perpetuating oligarchy. Most fair-minded observers these days seem to feel that the stewardship of the oligarchs, from a social point of view, isn’t anything like as bad as it might be, and in many cases is pretty good, yet, however that may be, the ultimate power theoretically does not reside in them at all. According to the corporate form of organization, it resides in the stockholders, of whom, in United States business enterprises of all sizes and descriptions, there are more than twenty million. Even though the courts have repeatedly ruled that a director does not have to follow stockholder instructions, any more than a congressman has to follow the instructions of his constituents, stockholders nevertheless do elect directors, on the logical, if not exactly democratic, basis of one share, one vote. The stockholders are deprived of their real power by a number of factors, among which are their indifference to it in times of rising profits and dividends, their ignorance of corporate affairs, and their sheer numbers. One way or another, they vote the management slate, and the results of most director elections have a certain Russian ring—ninety-nine per cent or more of the votes cast in favor. The chief, and in many cases the only, occasion when stockholders make their presence felt by management is at the annual meeting. Company annual meetings are customarily held in the spring, and one spring—it was that of 1966—I made the rounds of a few of them to get a line on what the theoretical holders of all that feudal power had to say for themselves, and also on the state of their relations with their elected directors.

What particularly commended the 1966 season to me was that it promised to be a particularly lively one. Various reports of a new “hard-line approach” by company managements to stockholders had appeared in the press. (I was charmed by the notion of a candidate for office announcing his new hard-line approach to voters right before an election.) The new approach, it was reported, was the upshot of events at the previous year’s meetings, where a new high in stockholder unruliness was reached. The chairman of the Communications Satellite Corporation was forced to call on guards to eject bodily two badgering stockholders at his company’s meeting, in Washington. Harland C. Forbes, who was then the chairman of Consolidated Edison, ordered one heckler off the premises in New York, and, in Philadelphia, American Telephone & Telegraph Chairman Frederick R. Kappel was goaded into announcing abruptly, “This meeting is not being run by Robert’s [Rules of Order]. It’s being run by me.” (The executive director of the American Society of Corporate Secretaries later explained that precise application of Robert’s rules would have had the effect not of increasing the stockholders’ freedom of speech but, rather, of restricting it. Mr. Kappel, the secretary implied, had merely been protecting stockholders from parliamentary tyranny.) In Schenectady, Gerald L. Phillippe, chairman of General Electric, after several hours of fencing with stockholders, summed up his new hard line by saying, “I should like it to be clear that next year, and in the years to come, the chair may well adopt a more rigorous attitude.” According to Business Week, the General Electric management then assigned a special task force to the job of seeing what could be done about cracking down on hecklers by changing the annual-meeting pattern, and early in 1966 the bible of management, the Harvard Business Review, entered the lists with an article by O. Glenn Saxon, Jr., the head of a company specializing in investor services to management, in which he recommended crisply that the chairmen of annual meetings “recognize the authority inherent in the role of the chair, and resolve to use it appropriately.” Apparently, the theoretical holders of fundamental power unequalled in the history of the world were about to be put in their place.

ONE thing I couldn’t help noticing as I went over the schedule of the year’s leading meetings was a trend away from holding them in or near New York. Invariably, the official reason given was that the move would accommodate stockholders from other areas who had seldom, if ever, been able to attend in the past; however, most of the noisiest dissident stockholders seem to be based in the New York area, and the moves were taking place in the year of the new hard line, so I found the likelihood of a relationship between these two facts by no means remote. United States Steel holders, for example, were to meet in Cleveland, making their second foray outside their company’s nominal home state of New Jersey since its formation, in 1901. General Electric was going outside New York State for the third time in recent years—and going all the way to Georgia, a state in which management appeared to have suddenly discovered fifty-six hundred stockholders (or a bit more than one per cent of the firm’s total roll) who were badly in need of a chance to attend an annual meeting. The biggest company of them all, American Telephone & Telegraph, had chosen Detroit, which was its third site outside New York City in its eighty-one-year history, the second having been Philadelphia, where the 1965 session was held.

To open my own meeting-going season, I tracked A.T.& T. to Detroit. Leafing through some papers on the plane going out there, I learned that the number of A.T. & T. stockholders had increased to an all-time record of almost three million, and I fell to wondering what would happen in the unlikely event that all of them, or even half of them, appeared in Detroit and demanded seats at the meeting. At any rate, each one of them had received by mail, a few weeks earlier, a notice of the meeting along with a formal invitation to attend, and it seemed to me almost certain that American industry had achieved another “first”—the first time almost three million individual invitations had ever been mailed out to any event of any kind anywhere. My fears on the first score were put to rest when I got to Cobo Hall, a huge riverfront auditorium, where the meeting was to take place. The hall was far from filled; the Yankees in their better days would have been disgusted with such a turnout on any weekday afternoon. (The papers next day said the attendance was four thousand and sixteen.) Looking around, I noticed in the crowd several families with small children, one woman in a wheelchair, one man with a beard, and just two Negro stockholders—the last observation suggesting that the trumpeters of “people’s capitalism” might well do some coordinating with the civil-rights movement. The announced time of the meeting was one-thirty, and Chairman Kappel entered on the dot and marched to a reading stand on the platform; the eighteen other A.T. & T. directors trooped to a row of seats just behind him, and Mr. Kappel gavelled the meeting to order.

From my reading and from annual meetings that I’d attended in past years, I knew that the meetings of the biggest companies are usually marked by the presence of so-called professional stockholders—persons who make a full-time occupation of buying stock in companies or obtaining the proxies of other stockholders, then informing themselves more or less intimately about the corporations’ affairs and attending annual meetings to raise questions or propose resolutions—and that the most celebrated members of this breed were Mrs. Wilma Soss, of New York, who heads an organization of women stockholders and votes the proxies of its members as well as her own shares, and Lewis D. Gilbert, also of New York, who represents his own holdings and those of his family—a considerable total. Something I did not know, and learned at the A.T. & T. meeting (and at others I attended subsequently), was that, apart from the prepared speeches of management, a good many big-company meetings really consist of a dialogue—in some cases it’s more of a duel—between the chairman and the few professional stockholders. The contributions of non-professionals run strongly to ill-informed or tame questions and windy encomiums of management, and thus the task of making cogent criticisms or asking embarrassing questions falls to the professionals. Though largely self-appointed, they become, by default, the sole representatives of a huge constituency that may badly need representing. Some of them are not very good representatives, and a few are so bad that their conduct raises a problem in American manners; these few repeatedly say things at annual meetings—boorish, silly, insulting, or abusive things—that are apparently permissible by corporate rules but are certainly impermissible by drawing-room rules, and sometimes succeed in giving the annual meetings of mighty companies the general air of barnyard squabbles. Mrs. Soss, a former public-relations woman who has been a tireless professional stockholder since 1947, is usually a good many cuts above this level. True, she is not beyond playing to the gallery by wearing bizarre costumes to meetings; she tries, with occasional success, to taunt recalcitrant chairmen into throwing her out; she is often scolding and occasionally abusive; and nobody could accuse her of being unduly concise. I confess that her customary tone and manner set my teeth on edge, but I can’t help recognizing that, because she does her homework, she usually has a point. Mr. Gilbert, who has been at it since 1933 and is the dean of them all, almost invariably has a point, and by comparison with his colleagues he is the soul of brevity and punctilio as well as of dedication and diligence. Despised as professional stockholders are by most company managements, Mrs. Soss and Mr. Gilbert are widely enough recognized to be listed in Who’s Who in America; furthermore, for what satisfaction it may bring them, they are the nameless Agamemnons and Ajaxes, invariably called “individuals,” in some of the prose epics produced by the business Establishment itself. (“The greater portion of the discussion period was taken up by questions and statements of a few individuals on matters that can scarcely be deemed relevant.… Two individuals interrupted the opening statement of the chairman.… The chairman advised the individuals who had interrupted to choose between ceasing their interruption or leaving the meeting.…” So reads, in part, the official report of the 1965 A.T. & T. annual meeting.) And although Mr. Saxon’s piece in the Harvard Business Review was entirely about professional stockholders and how to deal with them, the author’s corporate dignity did not permit him to mention the name of even one of them. Avoiding this was quite a trick, but Mr. Saxon pulled it off.

Both Mrs. Soss and Mr. Gilbert were present at Cobo Hall. Indeed, the meeting had barely got under way before Mr. Gilbert was on his feet complaining that several resolutions he had asked the company to include in the proxy statement and the meeting agenda had been omitted from both. Mr. Kappel—a stern-looking man with steel-rimmed spectacles, who was unmistakably cast in the old-fashioned, aloof corporate mold, rather than the new, more permissive one—replied shortly that the Gilbert proposals had referred to matters that were not proper for stockholder consideration, and had been submitted too late, anyhow. Mr. Kappel then announced that he was about to report on company operations, whereupon the eighteen other directors filed off the platform. Evidently, they had been there only to be introduced, not to field questions from stockholders. Exactly where they went I don’t know; they vanished from my field of vision, and I wasn’t enlightened when, later on in the meeting, Mr. Kappel responded to a stockholder’s question as to their whereabouts with the laconic statement “They’re here.” Going it alone, Mr. Kappel said in his report that “business is booming, earnings are good, and the prospect ahead is for more of the same,” declared that A.T. & T. was eager for the Federal Communications Commission to get on with its investigation of telephone rates, since the company had “no skeletons in the closet,” and then painted a picture of a bright telephonic future in which “picture phones” will be commonplace and light beams will carry messages.

When Mr. Kappel’s address was over and the management-sponsored slate of directors for the coming year had been duly nominated, Mrs. Soss rose to make a nomination of her own—Dr. Frances Arkin, a psychoanalyst. In explanation, Mrs. Soss said that she felt A.T. & T. ought to have a woman on its board, and that, furthermore, she sometimes felt some of the company’s executives would be benefited by occasional psychiatric examinations. (This remark seemed to me gratuitous, but the balance of manners between bosses and stockholders was subsequently redressed, at least to my mind, at another meeting, when the chairman suggested that some of his firm’s stockholders ought to see a psychiatrist.) The nomination of Dr. Arkin was seconded by Mr. Gilbert, although not until Mrs. Soss, who was sitting a couple of seats from him, had reached over and nudged him vigorously in the ribs. Presently, a professional stockholder named Evelyn Y. Davis protested the venue of the meeting, complaining that she had been forced to come all the way from New York by bus. Mrs. Davis, a brunette, was the youngest and perhaps the best-looking of the professional stockholders but, on the basis of what I saw at the A.T. & T. meeting and others, not the best informed or the most temperate, serious-minded, or worldly-wise. On this occasion, she was greeted by thunderous boos, and when Mr. Kappel answered her by saying, “You’re out of order. You’re just talking to the wind,” he was loudly cheered. It was only then that I understood the nature of the advantage that the company had gained by moving its meeting away from New York: it had not succeeded in shaking off the gadflies, but it had succeeded in putting them in a climate where they were subject to the rigors of that great American emotion, regional pride. A lady in a flowered hat who said she was from Des Plaines, Illinois, emphasized the point by rising to say, “I wish some of the people here would behave like intelligent adults, rather than two-year-olds.” (Prolonged applause.)

Even so, the sniping from the East went on, and by three-thirty, when the meeting had been in session for two hours, Mr. Kappel was clearly getting testy; he began pacing impatiently around the platform, and his answers got shorter and shorter. “O.K., O.K.” was all he replied to one complaint that he was dictatorial. The climax came in a wrangle between him and Mrs. Soss about the fact that A.T. & T., although it had listed the business affiliations of its nominees for director in a pamphlet that was handed out at the meeting, had failed to list them in the material mailed out to the stockholders, the overwhelming majority of whom were not at the meeting and had done their voting by proxy. Most other big companies make such disclosures in their mailed proxy statements, so the stockholders were apparently entitled to a reasonable explanation of why A.T. & T. had failed to do so, but somewhere along the way reason was left behind. As the exchange progressed, Mrs. Soss adopted a scolding tone and Mr. Kappel an icy one; as for the crowd, it was having a fine time booing the Christian, if that is what Mrs. Soss represented, and cheering the lion, if that is what Mr. Kappel represented. “I can’t hear you, sir,” Mrs. Soss said at one point. “Well, if you’d just listen instead of talking—” Mr. Kappel returned. Then Mrs. Soss said something I didn’t catch, and it must have been a telling bit of chairman-baiting, because Mr. Kappel’s manner changed completely, from ice to fire; he began shaking his finger and saying he wouldn’t stand for any more abuse, and the floor microphone that Mrs. Soss had been using was abruptly turned off. Followed at a distance of ten or fifteen feet by a uniformed security guard, and to the accompaniment of deafening booing and stamping, Mrs. Soss marched up the aisle and took a stand in front of the platform, facing Mr. Kappel, who informed her that he knew she wanted him to have her thrown out and that he declined to comply.

Eventually, Mrs. Soss went back to her seat and everybody calmed down. The rest of the meeting, given over largely to questions and comments from amateur stockholders, rather than professional ones, was certainly less lively than what had gone before, and not noticeably higher in intellectual content. Stockholders from Grand Rapids, Detroit, and Ann Arbor all expressed the view that it would be best to let the directors run the company, although the Grand Rapids man objected mildly that the “Bell Telephone Hour” couldn’t be received on television in his locality anymore. A man from Pleasant Ridge, Michigan, spoke up for retired stockholders who would like A.T. & T. to plow less of its earnings back into expansion, so that it could pay higher dividends. A stockholder from rural Louisiana stated that when he picked up his telephone lately, the operator didn’t answer for five or ten minutes. “Ah brang it to your attention,” the Louisiana man said, and Mr. Kappel promised to have somebody look into the matter. Mrs. Davis raised a complaint about A.T. & T.’s contributions to charity, giving Mr. Kappel the opportunity to reply that he was glad the world contained people more charitable than she. (Tax-exempt applause.) A Detroit man said, “I hope you won’t let the abuse you’ve been subjected to by a few malcontents keep you from bringing the meeting back to the great Midwest again.” It was announced that Dr. Arkin had been defeated for a seat on the board, since she had received a vote of only 19,106 shares against some four hundred million, proxy votes included, for each candidate on the management slate. (By approving the management slate, a proxy voter can, in effect, oppose a floor nomination, even though he knows nothing about it.) And that was how the 1966 annual meeting of the world’s largest company went—or how it went until five-thirty, when all but a few hundred stockholders had left, and when I headed for the airport to catch a plane back to New York.

THE A.T. & T. meeting left me in a thoughtful mood. Annual meetings, I reflected, can be times to try the soul of an admirer of representative democratic government, especially when he finds himself guiltily sympathizing with the chairman who is being badgered from the floor. The professional stockholders, in their wilder moments, are management’s secret weapon; a Mrs. Soss and a Mrs. Davis at their most strident could have made Commodore Vanderbilt and Pierpont Morgan seem like affable old gentlemen, and they can make a latter-day magnate like Mr. Kappel seem like a henpecked husband, if not actually a champion of stockholders’ rights. At such moments, the professional stockholders become, from a practical standpoint, enemies of intelligent dissent. On the other hand, I thought, they deserve sympathy, too, whether or not one believes they have right on their side, because they are in the position of representing a constituency that doesn’t want to be represented. It’s hard to imagine anyone more reluctant to claim his democratic rights, or more suspicious of anyone who tries to claim them for him, than a dividend-fattened stockholder—and, of course, most stockholders are thoroughly dividend-fattened these days. Berle speaks of the estate of stockholding as being by its nature “passive-receptive,” rather than “managing and creating;” most of the A.T. & T. stockholders in Detroit, it seemed to me, were so deeply devoted to the notion of the company as Santa Claus that they went beyond passive receptivity to active cupboard love. And the professional stockholders, I felt, had taken on an assignment almost as thankless as that of recruiting for the Young Communist League among the junior executives of the Chase Manhattan Bank.

In view of Chairman Phillippe’s warning to General Electric stockholders at Schenectady in 1965, and of the report about the company’s hard-line task force, it was with a sense of being engaged in hot pursuit that I boarded a southbound Pullman for the General Electric annual meeting. This one was held in Atlanta’s Municipal Auditorium, a snappy hall, the rear of which was brightened by an interior garden complete with trees and a lawn, and in spite of the fact that it was held on a languorous, rainy Southern spring morning, more than a thousand G.E. stockholders turned out. As far as I could see, three of them were Negroes, and it was not long before I saw that another of them was Mrs. Soss.

However exasperated he may have become the previous year in Schenectady, Mr. Phillippe, who also conducted the 1966 meeting, was in perfect control of himself and of the situation this time around. Whether he was expatiating on the wonders of G.E.’s balance sheet and its laboratory discoveries or sparring with the professional stockholders, he spoke in the same singsong way, delicately treading the thin line between patient, careful exposition and irony. Mr. Saxon, in his Harvard Business Review article, had written, “Top executives are finding it necessary to learn how to lessen the adverse impact of the few disrupters on the majority of shareowners, while simultaneously enhancing the positive effects of the good things which do take place in the annual meeting,” and, having learned sometime earlier that the same Mr. Saxon had been engaged by G.E. as an adviser on stockholder relations, I couldn’t help suspecting that Mr. Philippe’s performance was a demonstration of Saxonism in action. The professional stockholders, for their part, responded by adopting precisely the same ambiguous style, and the resulting dialogue had the general air of a conversation between two people who have quarrelled and then decided, not quite wholeheartedly, to make it up. (The professional stockholders might have demanded to know how much money G.E. had spent in the interest of keeping them under control, but they missed the chance.) One of the exchanges in this vein achieved a touch of wit. Mrs. Soss, speaking in her sweetest tone, called attention to the fact that one of the board-of-directors candidates—Frederick L. Hovde, President of Purdue University and former chairman of the Army Scientific Advisory Panel—owned only ten shares of G.E. stock, and said she felt that the board should be made up of more substantial holders, whereupon Mr. Philippe pointed out, just as sweetly, that the company had many thousands of holders of ten or fewer shares, Mrs. Soss among them, and suggested that perhaps these small holders were deserving of representation on the board by one of their number. Mrs. Soss had to concede a fine stroke of chairmanship, and she did. On another matter, although decorum was stringently maintained by both sides, outward accord was less complete. Several stockholders, Mrs. Soss among them, had formally proposed that the company adopt for its director elections the system called cumulative voting, under which a stockholder may concentrate all the votes he is entitled to on a single candidate rather than spread them over the whole slate, and which therefore gives a minority group of stockholders a much better chance of electing one representative to the board. Cumulative voting, though a subject of controversy in big-business circles, for obvious reasons, is nevertheless a perfectly respectable idea; indeed, it is mandatory for companies incorporated in more than twenty states, and it is used by some four hundred companies listed on the New York Stock Exchange. Nevertheless, Mr. Phillippe did not find it necessary to answer Mrs. Soss’s argument for cumulative voting; he chose instead to stand on a brief company statement on this subject that had been previously mailed out to stockholders, the main point of which was that the presence on the G.E. board, as a result of cumulative voting, of representatives of special-interest groups might have a “divisive and disruptive effect.” Of course, Mr. Phillippe did not say he knew, as he doubtless did know, that the company had in hand more than enough proxies to defeat the proposal.

Some companies, like some animals, have their private, highly specialized gadflies, who harass them and nobody else, and General Electric is one. In this instance, the gadfly was Louis A. Brusati, of Chicago, who at the company’s meetings over the past thirteen years had advanced thirty-one proposals, all of which had been defeated by a vote of at least ninety-seven per cent to three per cent. In Atlanta, Mr. Brusati, a gray-haired man built like a football player, was at it again—not with proposals this time but with questions. For one thing, he wanted to know why Mr. Phillippe’s personal holdings of G.E. stock, listed in the proxy statement, now were four hundred and twenty-three shares fewer than they had been a year ago. Mr. Phillippe replied that the difference represented shares that he had contributed to family trust funds, and added, mildly but with emphasis, “I could say it’s none of your business. I believe I have a right to the privacy of my affairs.” There was more reason for the mildness than for the emphasis, as Mr. Brusati did not fail to point out, in an impeccably unemotional monotone; many of Mr. Phillippe’s shares had been acquired under options at preferential prices not available to others, and, moreover, the fact that Mr. Phillippe’s precise holdings had been included in the proxy statement clearly showed that in the opinion of the Securities and Exchange Commission his holdings were Mr. Brusati’s business. Going on to the matter of the fees paid directors, Mr. Brusati elicited from Mr. Phillippe the information that over the past seven years these had been raised from twenty-five hundred dollars per annum first to five thousand dollars and then to seventy-five hundred. The ensuing dialogue between the two men went like this:

“By the way, who establishes those fees?”

“Those fees are established by the board of directors.”

“The board of directors establish their own fees?”

“Yes.”

“Thank you.”

“Thank you, Mr. Brusati.”

Later on in the morning, there were several lengthy and eloquent orations by stockholders on the virtues of General Electric and of the South, but this rather elegantly elliptical exchange between Mr. Brusati and Mr. Phillippe stuck in my mind, for it seemed to sum up the spirit of the meeting. Only after adjournment—which came at twelve-thirty, following Mr. Phillippe’s announcement that the unopposed slate of directors had been elected and that cumulative voting had lost by 97.51 per cent to 2.49 per cent—did I realize that not only had there been no stamping, booing, or shouting, as there had been in Detroit, but regional pride had not had to be invoked against the professional stockholders. It had been General Electric’s hole card, I felt, but General Electric had won on the board, without needing to turn it up.

EACH meeting I attended had its easily discernible characteristic tone, and that of Chas. Pfizer & Co., the diversified pharmaceutical and chemical firm, was amicability. Pfizer, which in previous years had customarily held its annual meeting at its headquarters in Brooklyn, reversed the trend by moving this year’s meeting right into the lair of the most vocal dissenters, midtown Manhattan, but everything that I saw and heard convinced me that the motivation behind this move had been not a brash resolve on the company’s part to beard the lions in their den but a highly unfashionable desire to get the maximum possible turnout. Pfizer seemed to feel self-confident enough to meet its stockholders with its guard down. For instance, in contrast with the other meetings I attended, no stockholder tickets were collected or credentials checked at the entrance to the Grand Ballroom of the Commodore Hotel, where the Pfizer meeting was held; Fidel Castro himself, whose oratorical style I have occasionally felt that the professional stockholders were using as a model, could presumably have walked in and said whatever he chose. Some seventeen hundred persons, or nearly enough to fill the ballroom, showed up, and all the members of the Pfizer board of directors sat on the platform from start to finish and answered any questions addressed to them individually.

Speaking, appropriately, with a faint trace of a Brooklyn accent, Chairman John E. McKeen welcomed the stockholders as “my dear and cherished friends” (I tried to imagine Mr. Kappel and Mr. Phillippe addressing their stockholders that way, and couldn’t, but then their companies are bigger), and said that on the way out everyone present would be given a big free-sample kit of Pfizer consumer products, such as Barbasol, Desitin, and Imprévu. Wooed thus by endearments and the promise of gifts, and further softened up by the report of President John J. Powers, Jr., on current operations (records all around) and immediate prospects (more records expected), the most intransigent professional stockholder would have been hard put to it to mount much of a rebellion at this particular meeting, and, as it happened, the only professional present seemed to be John Gilbert, brother of Lewis. (I learned later that Lewis Gilbert and Mrs. Davis were in Cleveland that day, attending the U.S. Steel meeting.) John Gilbert is the sort of professional stockholder the Pfizer management deserves, or would like to think it does. With an easygoing manner and a habit of punctuating his words with self-deprecating little laughs, he is the most ingratiating gadfly imaginable (or was on this occasion; I’m told he isn’t always), and as he ran through what seemed to be the standard Gilbert-family repertoire of questions—on the reliability of the firm’s auditors, the salaries of its officers, the fees of its directors—he seemed almost apologetic that duty called on him to commit the indelicacy of asking such things. As for the amateur stockholders present, their questions and comments were about like those at the other meetings I’d attended, but this time their attitude toward the role of the professional stockholder was noticeably different. Instead of being overwhelmingly opposed, they appeared to be split; to judge from the volume of clapping and of discreet groaning, about half of those present considered Gilbert a nuisance and half considered him a help. Powers left no doubt about how he felt; before adjourning the meeting he said, without irony, that he had welcomed Gilbert’s questions, and made a point of inviting him to come again next year. And, indeed, during the later stages of the Pfizer meeting, when Gilbert, in a conversational way, was praising the company for some things and criticizing it for others, and the various members of the board were replying to his comments just as informally, I got for the first time a fleeting sense of genuine communication between stockholders and managers.

THE Radio Corporation of America, which had held its last two meetings far from its New York headquarters—in Los Angeles in 1964, in Chicago in 1965—reserved the current trend even more decisively than Pfizer by convening this time in Carnegie Hall. The entire orchestra and the two tiers of boxes were completely filled with stockholders—about twenty-three hundred of them, of whom a strikingly larger proportion than at any of my other meetings was male. Mrs. Soss and Mrs. Davis were on hand, though, along with Lewis Gilbert and some professional stockholders I hadn’t seen before, and, as with Pfizer, the company’s whole board of directors sat on the platform, where the chief centers of attraction in R.C.A.’s case were David Sarnoff, the company’s seventy-five-year-old chairman, and his forty-eight-year-old son, Robert W. Sarnoff, who had been its president since the beginning of the year. For me, two aspects of the R.C.A. meeting stood out: the evident respect, amounting almost to veneration, of the stockholders for their celebrated chairman, and an unaccustomed disposition of the amateur stockholders to speak up for themselves. The elder Mr. Sarnoff, looking hale and ready for anything, conducted the meeting, and he and several other R.C.A. executives gave reports on company operations and prospects, in the course of which the words “record” and “growth” recurred so monotonously that I, not being an R.C.A. stockholder, began to nod. I was brought wide awake with a jolt on one occasion, though, when I heard Walter D. Scott, chairman of R.C.A.’s subsidiary the National Broadcasting Company, say in connection with his network’s television programming that “creative resources are always running ahead of demand.”

No one objected to that statement or to anything else in the glowing reports, but when they were over the stockholders had their say on other matters. Mr. Gilbert raised some favorite questions of his about accounting procedures, and a representative of R.C.A.’s accountants, Arthur Young & Co., made replies that seemed to satisfy Mr. Gilbert. A Dickensian elderly lady, who identified herself as Mrs. Martha Brand and said she held “many thousands” of shares of R.C.A. stock, expressed the view that the accounting procedures of the company should not even be questioned. I have since learned that Mrs. Brand is a professional stockholder who is an anomaly within the profession, in that she leans strongly toward the management view of things. Mr. Gilbert then advanced a proposal for the adoption of cumulative voting, supporting it with about the same arguments that Mrs. Soss had used at the G.E. meeting. Mr. Sarnoff opposed the motion, and so did Mrs. Brand, who explained that she was sure the present directors always worked tirelessly for the welfare of the corporation, and added this time that she was the holder of “many, many thousands” of shares. Two or three other stockholders spoke up in favor of cumulative voting—the only occasion at any meeting on which I saw stockholders not easily identifiable as professionals speak in dissent on a matter of substance. (Cumulative voting was defeated, 95.3 per cent to 4.7 per cent.) Mrs. Soss, still in as mild a mood as in Atlanta, said she was delighted to see a woman, Mrs. Josephine Young Case, sitting on the stage as a member of the R.C.A. board, but deplored the fact that Mrs. Case’s principal occupation was given on the proxy statement as “housewife.” Couldn’t a woman who was chairman of the board of Skidmore College at least be called a “home executive”? Another lady stockholder set off a round of applause by delivering a paean to Chairman Sarnoff, whom she called “the marvellous Cinderella man of the twentieth century.”

Mrs. Davis—who had earlier objected to the site of the meeting on the ground, which I found dumfounding, that Carnegie Hall was “too unsophisticated” for R.C.A.—advanced a resolution calling for company action “to insure that hereafter no person shall serve as a director after he shall have attained the age of seventy-two.” Even though similar rulings are in effect in many companies, and even though the proposal, not being retroactive, would have no effect upon Mr. Sarnoff’s status, it seemed to be aimed at him, and thus Mrs. Davis demonstrated again her uncanny knack of playing into management’s hands. Nor did she appear to help her cause by putting on a Batman mask (the symbolism of which I didn’t grasp) when she made it. At all events, the proposal gave rise to several impassioned defenses of Mr. Sarnoff, and one of the speakers went on to complain bitterly that Mrs. Davis was insulting the intelligence of everyone present. At this, the serious-minded Mr. Gilbert leaped up to say, “I quite agree about the silliness of her costume, but there is a valid principle in her proposal.” In making this Voltairian distinction, Mr. Gilbert, to judge from his evident state of agitation, was achieving a triumph of reason over inclination that was costing him plenty. Mrs. Davis’s resolution was defeated overwhelmingly; the margin against it served to end the meeting with what amounted to a rousing vote of confidence in the Cinderella man.

CLASSIC farce, with elements of slapstick, was the dominant mood of the meeting of the Communications Satellite Corporation, with which I wound up my meeting-going season. Comsat is, of course, the glamorous space-age communications company that was set up by the government in 1963 and turned over to public ownership in a celebrated stock sale in 1964. Upon arriving at the meeting site—the Shoreham Hotel, in Washington—I was scarcely startled to discover Mrs. Davis, Mrs. Soss, and Lewis Gilbert among the thousand or so stockholders present. Mrs. Davis, decked out in stage makeup, an orange pith helmet, a short red skirt, white boots, and a black sweater bearing in white letters the legend “I Was Born to Raise Hell,” had planted herself squarely in front of a battery of television cameras. Mrs. Soss, as I had learned by now was her custom, had taken a place at the opposite side of the room from Mrs. Davis, and this meant that she was now as far as possible from the television cameras. Considering that Mrs. Soss does not ordinarily seem to be averse to being photographed, I could write down this choice of seat only as a hard-won triumph of conscience akin to Mr. Gilbert’s at Carnegie Hall. As for Mr. Gilbert, he took a place not far from Mrs. Soss, and thus, of course, a long way from Mrs. Davis.

Since the previous year, Leo D. Welch, the man who had conducted the 1965 Comsat meeting with such a firm hand, has been replaced as chairman of the company by James McCormack, a West Point graduate, former Rhodes Scholar, and retired Air Force general with an impeccably polished manner, who bears a certain resemblance to the Duke of Windsor, and Mr. McCormack was conducting this year’s session. He warmed up with some preliminary remarks in the course of which he noted—-smoothly, but not without emphasis—that as for the subject of any intervention that a stockholder might choose to make, “the field of relevance is quite narrow.” When Mr. McCormack had finished his warmup, Mrs. Soss made a brief speech that may or may not have come within the field of relevance; I missed most of it, because the floor microphone supplied to her wasn’t working right. Mrs. Davis then claimed the floor, and her mike was working all too well; as the cameras ground, she launched into an earsplitting tirade against the company and its directors because there had been a special door to the meeting room reserved for the entrance of “distinguished guests.” Mrs. Davis, in a good many words, said she considered this procedure undemocratic. “We apologize, and when you go out, please go by any door you want,” Mr. McCormack said, but Mrs. Davis, clearly unappeased, went on speaking. And now the mood of farce was heightened when it became clear that the Soss-Gilbert faction had decided to abandon all efforts to keep ranks closed with Mrs. Davis. Near the height of her oration, Mr. Gilbert, looking as outraged as a boy whose ball game is being spoiled by a player who doesn’t know the rules or care about the game, got up and began shouting, “Point of order! Point of order!” But Mr. McCormack spurned this offer of parliamentary help; he ruled Mr. Gilbert’s point of order out of order, and bade Mrs. Davis proceed. I had no trouble deducing why he did this. There were unmistakable signs that he, unlike any other corporate chairman I had seen in action, was enjoying every minute of the goings on. Through most of the meeting, and especially when the professional stockholders had the floor, Mr. McCormack wore the dreamy smile of a wholly bemused spectator.

Eventually, Mrs. Davis’s speech built up to a peak of both volume and content at which she began making specific allegations against individual Comsat directors, and at this point three security guards—two beefy men and a determined-looking woman, all dressed in gaudy bottle-green uniforms that might have been costumes for “The Pirates of Penzance”—appeared at the rear, marched with brisk yet stately tread up the center aisle, and assumed the position of parade rest in the aisle within handy reach of Mrs. Davis, whereupon she abruptly concluded her speech and sat down. “All right,” Mr. McCormack said, still grinning. “Everything’s cool now.”

The guards retired, and the meeting proceeded. Mr. McCormack and the Comsat president, Joseph V. Charyk, gave the sort of glowing report on the company that I had grown accustomed to, Mr. McCormack going so far as to say that Comsat might start showing its first profit the following year rather than in 1969, as originally forecast. (It did.) Mr. Gilbert asked what fee, apart from his regular salary, Mr. McCormack received for attending directors’ meetings. Mr. McCormack replied that he got no fee, and when Mr. Gilbert said, “I’m glad you get nothing, I approve of that,” everybody laughed and Mr. McCormack grinned more broadly than ever. (Mr. Gilbert was clearly trying to make what he considered to be a serious point, but this didn’t seem to be the day for that sort of thing.) Mrs. Soss took a dig at Mrs. Davis by saying pointedly that anyone who opposed Mr. McCormack as company chairman was “lacking in perspicacity;” she did note, however, that she couldn’t quite bring herself to vote for Mr. Welch, the former chairman, who was now a candidate for the board, inasmuch as he had ordered her thrown out last year. A peppy old gentleman said that he thought the company was doing fine and everyone should have faith in it. Once, when Mr. Gilbert said something that Mrs. Davis didn’t like and Mrs. Davis, without waiting to be recognized, began shouting her objection across the room, Mr. McCormack gave a short irrepressible giggle. That single falsetto syllable, magnificently amplified by the chairman’s microphone, was the motif of the Comsat meeting.

On the plane returning from Washington, as I was musing on the meetings I had attended, it occurred to me that if there had been no professional stockholders at them I would probably have learned almost as much as I did about the companies’ affairs but that I would have learned a good deal less about their chief executives’ personalities. It had, after all, been the questions, interruptions, and speeches of the professional stockholders that brought the companies to life, in a sense, by forcing each chairman to shed his official portrait-by-Bachrach mask and engage in a human relationship. More often than not, this had been the hardly satisfactory human relationship of nagger and nagged, but anyone looking for humanity in high corporate affairs can’t afford to pick and choose. Still, some doubts remained. Being thirty thousand feet up in the air is conducive to taking the broader view, and, doing so as we winged over Philadelphia, I concluded that, on the basis of what I had seen and heard, both company managements and stockholders might well consider a lesson King Lear learned—that when the role of dissenter is left to the Fool, there may be trouble ahead for everybody.

11

One Free Bite

AMONG THE THOUSANDS of young scientists who were doing very well in the research-and-development programs of American companies in the fall of 1962 was one named Donald W. Wohlgemuth, who was working for the B. F. Goodrich Company, in Akron, Ohio. A 1954 graduate of the University of Michigan, where he had taken the degree of Bachelor of Science in chemical engineering, he had gone directly from the university to a job in the chemical laboratories of Goodrich, at a starting salary of three hundred and sixty-five dollars a month. Since then, except for two years spent in the Army, he had worked continuously for Goodrich, in various engineering and research capacities, and had received a total of fifteen salary increases over the six and a half years. In November, 1962, as he approached his thirty-first birthday, he was earning $10,644 a year. A tall, self-contained, serious-looking man of German ancestry, whose horn-rimmed glasses gave him an owlish expression, Wohlgemuth lived in a ranch house in Wadsworth, a suburb of Akron, with his wife and their fifteen-month-old daughter. All in all, he seemed to be the young American homme moyen réussi to the point of boredom. What was decidedly not routine about him, though, was the nature of his job; he was the manager of Goodrich’s department of space-suit engineering, and over the past years, in the process of working his way up to that position, he had had a considerable part in the designing and construction of the suits worn by our Mercury astronauts on their orbital and suborbital flights.

Then, in the first week of November, Wohlgemuth got a phone call from an employment agent in New York, who informed him that the executives of a large company in Dover, Delaware, were most anxious to talk to him about the possibility of his taking a job with them. Despite the caller’s reticence—a trait common among employment agents making first approaches to prospective employees—Wohlgemuth instantly knew the identity of the large company. The International Latex Corporation, which is best known to the public as a maker of girdles and brassiéres, but which Wohlgemuth knew to be also one of Goodrich’s three major competitors in the space-suit field, is situated in Dover. He knew, further, that Latex had recently been awarded a subcontract, amounting to some three-quarters of a million dollars, to do research and development on space suits for the Apollo, or man-on-the-moon, project. As a matter of fact, Latex had won this contract in competition with Goodrich, among others, and was thus for the moment much the hottest company in the space-suit field. On top of that, Wohlgemuth was somewhat discontented with his situation at Goodrich; for one thing, his salary, however bountiful it might seem to many thirty-year-olds, was considerably below the average for Goodrich employees of his rank, and, for another, he had been turned down not long before by the company authorities when he asked for air-conditioning or filtering to keep dust out of the plant area allocated to space-suit work. Accordingly, after making arrangements by phone with the executives mentioned by the employment agent—and they did indeed prove to be Latex men—Wohlgemuth went to Dover the following Sunday.

He stayed there a day and a half, borrowing Monday from vacation time that was due him from Goodrich, and getting what he subsequently described as “a real red-carpet treatment.” He was taken on a tour of the Latex space-suit-development facilities by Leonard Shepard, director of the company’s Industrial Products Division. He was entertained at the home of Max Feller, a Latex vice-president. He was shown the Dover housing situation by another company executive. Finally, before lunch on Monday, he had a talk with all three of the Latex executives, following which—as Wohlgemuth later described the scene in court—the three “removed themselves to another room for approximately ten minutes.” When they reappeared, one of them offered Wohlgemuth the position of manager of engineering for the Industrial Products Division, which included responsibility for space-suit development, at an annual salary of $13,700, effective at the beginning of December. After getting his wife’s approval by telephone—and it was not hard to get, since she was originally from Baltimore and was delighted at the prospect of moving back to her own part of the world—Wohlgemuth accepted. He flew back to Akron that night. First thing Tuesday morning, Wohlgemuth confronted Carl Effler, his immediate boss at Goodrich, with the news that he was quitting at the end of the month to take another job.

“Are you kidding?” Effler asked.

“No, I am not,” Wohlgemuth replied.

Following this crisp exchange, which Wohlgemuth later reported in court, Effler, in the time-honored tradition of bereaved bosses, grumbled a bit about the difficulty of finding a qualified replacement before the end of the month. Wohlgemuth spent the rest of the day putting his department’s papers in order and clearing his desk of unfinished business, and the next morning he went to see Wayne Galloway, a Goodrich space-suit executive with whom he had worked closely and had been on the friendliest of terms for a long time; he said later that he felt he owed it to Galloway “to explain to him my side of the picture” in person, even though at the moment he was not under Galloway’s supervision in the company chain of command. Wohlgemuth began this interview by rather melodramatically handing Galloway a lapel pin in the form of a Mercury capsule, which had been awarded to him for his work on the Mercury space suits; now, he said, he felt he was no longer entitled to wear it. Why, then, Galloway asked, was he leaving? Simple enough, Wohlgemuth said—he considered the Latex offer a step up both in salary and in responsibility. Galloway replied that in making the move Wohlgemuth would be taking to Latex certain things that did not belong to him—specifically, knowledge of the processes that Goodrich used in making space suits. In the course of the conversation, Wohlgemuth asked Galloway what he would do if he were to receive a similar offer. Galloway replied that he didn’t know; for that matter, he added, he didn’t know what he would do if he were approached by a group who had a foolproof plan for robbing a bank. Wohlgemuth had to base his decision on loyalty and ethics, Galloway said—a remark that Wohlgemuth took as an accusation of bad faith. He lost his temper, he later explained, and gave Galloway a rash answer. “Loyalty and ethics have their price, and International Latex has paid it,” he said.

After that, the fat was in the fire. Later in the morning, Effler called Wohlgemuth into his office and told him it had been decided that he should leave the Goodrich premises as soon as possible, staying around only long enough to make a list of projects that were pending and to go through certain other formalities. In mid-afternoon, while Wohlgemuth was occupied with these tasks, Galloway called him and told him that the Goodrich legal department wanted to see him. In the legal department, he was asked whether he intended to use confidential information belonging to Goodrich on behalf of Latex. According to the subsequent affidavit of a Goodrich lawyer, he replied—again rashly—“How are you going to prove it?” He was then advised that he was not legally free to make the move to Latex. While he was not bound to Goodrich by the kind of contract, common in American industry, in which an employee agrees not to do similar work for any competing company for a stated period of time, he had, on his return from the Army, signed a routine paper agreeing “to keep confidential all information, records, and documents of the company of which I may have knowledge because of my employment”—something Wohlgemuth had entirely forgotten until the Goodrich lawyer reminded him. Even if he had not made that agreement, the lawyer told him now, he would be prevented from going to work on space suits for Latex by established principles of trade-secrets law. Moreover, if he persisted in his plan, Goodrich might sue him.

Wohlgemuth returned to his office and put in a call to Feller, the Latex vice-president he had met in Dover. While he was waiting for the call to be completed, he talked with Effler, who had come in to see him, and whose attitude toward his defection seemed to have stiffened considerably. Wohlgemuth complained that he felt at the mercy of Goodrich, which, it seemed to him, was unreasonably blocking his freedom of action, and Effler upset him further by saying that what had happened during the past forty-eight hours could not be forgotten and might well affect his future with Goodrich. Wohlgemuth, it appeared, might be sued if he left and scorned if he didn’t leave. When the Dover call came through, Wohlgemuth told Feller that in view of the new situation he would be unable to go to work for Latex.

That evening, however, Wohlgemuth’s prospects seemed to take a turn for the better. Home in Wadsworth, he called the family dentist, and the dentist recommended a local lawyer. Wohlgemuth told his story to the lawyer, who thereupon consulted another lawyer by phone. The two counsellors agreed that Goodrich was probably bluffing and would not really sue Wohlgemuth if he went to Latex. The next morning—Thursday—officials of Latex called him back to assure him that their firm would bear his legal expenses in the event of a lawsuit, and, furthermore, would indemnify him against any salary losses. Thus emboldened, Wohlgemuth delivered two messages within the next couple of hours—one in person and one by phone. He told Effler what the two lawyers had told him, and he called the legal department to report that he had now changed his mind and was going to work at International Latex after all. Later that day, after completing the cleanup job in his office, he left the Goodrich premises for good, taking with him no documents.

The following day—Friday—R. G. Jeter, general counsel of Goodrich, telephoned Emerson P. Barrett, director of industrial relations for Latex, and spoke of Goodrich’s concern for its trade secrets if Wohlgemuth went to work there. Barrett replied that although “the work for which Wohlgemuth was hired was design and construction of space suits,” Latex was not interested in learning any Goodrich trade secrets but was “only interested in securing the general professional abilities of Mr. Wohlgemuth.” That this answer did not satisfy Jeter, or Goodrich, became manifest the following Monday. That evening, while Wohlgemuth was in an Akron restaurant called the Brown Derby, attending a farewell dinner in his honor given by forty or fifty of his friends, a waitress told him that there was a man outside who wanted to see him. The man was a deputy sheriff of Summit County, of which Akron is the seat, and when Wohlgemuth came out, the man handed him two papers. One was a summons to appear in the Court of Common Pleas on a date a week or so off. The other was a copy of a petition that had been filed in the same court that day by Goodrich, praying that Wohlgemuth be permanently enjoined from, among other things, disclosing to any unauthorized person any trade secrets belonging to Goodrich, and “performing any work for any corporation … other than plaintiff, relating to the design, manufacture and/or sale of high-altitude pressure suits, space suits and/or similar protective garments.”

THE need for the protection of trade secrets was fully recognized in the Middle Ages, when they were so jealously guarded by the craft guilds that the guilds’ employees were rigorously prevented from changing jobs. Laissez-faire industrial society, since it emphasizes the principle that the individual is entitled to rise in the world by taking the best opportunity he is offered, has been far more lenient about job-jumping, but the right of an organization to keep its secrets has survived. In American law, the basic commandment on the subject was laid down by Justice Oliver Wendell Holmes in connection with a 1905 Chicago case. Holmes wrote, “The plaintiff has the right to keep the work which it has done, or paid for doing, to itself. The fact that others might do similar work, if they wished, does not authorize them to steal plaintiff’s.” This admirably downright, if not highly sophisticated, ukase has been cited in almost every trade-secrets case that has come up since, but over the years, as both scientific research and industrial organization have become infinitely more complex, so have the questions of what, exactly, constitutes a trade secret, and what constitutes stealing it. The American Law Institute’s “Restatement of the Law of Torts,” an authoritative text issued in 1939, grapples manfully with the first question by stating, or restating, that “a trade secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” But in a case heard in 1952 an Ohio court decided that the Arthur Murray method of teaching dancing, though it was unique and was presumably helpful in luring customers away from competitors, was not a trade secret. “All of us have ‘our method’ of doing a million things—our method of combing our hair, shining our shoes, mowing our lawn,” the court mused, and concluded that a trade secret must not only be unique and commercially helpful but also have inherent value. As for what constitutes thievery of trade secrets, in a proceeding heard in Michigan in 1939, in which the Dutch Cookie Machine Company complained that one of its former employees was threatening to use its highly classified methods to make cookie machines on his own, the trial court decided that there were no fewer than three secret processes by which Dutch Cookie machines were made, and enjoined the former employee from using them in any manner; however, the Michigan Supreme Court, on appeal, found that the defendant, although he knew the three secrets, did not plan to use them in his own operations, and, accordingly, it reversed the lower court’s decision and vacated the injunction.

And so on. Outraged dancing teachers, cookie-machine manufacturers, and others have made their way through American courts, and the principles of law regarding the protection of trade secrets have become well established; any difficulty arises chiefly in the application of these principles to individual cases. The number of such cases has been rising sharply in recent years, as research and development by private industry have expanded, and a good index to the rate of such expansion is the fact that eleven and a half billion dollars was spent in this work in 1962, more than three times the figure for 1953. No company wants to see the discoveries produced by all that money go out of its doors in the attaché cases, or even in the heads, of young scientists bound for greener pastures. In nineteenth-century America, the builder of a better mousetrap was supposed to have been a cynosure—provided, of course, that the mousetrap was properly patented. In those days of comparatively simple technology, patents covered most proprietary rights in business, so trade-secrets cases were rare. The better mousetraps of today, however, like the processes involved in outfitting a man to go into orbit or to the moon, are often unpatentable.

Since thousands of scientists and billions of dollars might be affected by the results of the trial of Goodrich v. Wohlgemuth, it naturally attracted an unusual amount of public attention. In Akron, the court proceedings were much discussed both in the local paper, the Beacon Journal, and in conversation. Goodrich is an old-line company, with a strong streak of paternalism in its relations with its employees, and with strong feelings about what it regards as business ethics. “We were exceptionally upset by what Wohlgemuth did,” a Goodrich executive of long standing said recently. “In my judgment, the episode caused more concern to the company than anything that has happened in years. In fact, in the ninety-three years that Goodrich has been in business, we had never before entered a suit to restrain a former employee from disclosing trade secrets. Of course, many employees in sensitive positions have left us. But in those cases the companies doing the hiring have recognized their responsibilities. On one occasion, a Goodrich chemist went to work for another company under circumstances that made it appear to us that he was going to use our methods. We talked to the man, and to his new employer, too. The upshot was that the competing company never brought out the product it had hired our man to work on. That was responsible conduct on the part of both employee and company. As for the Wohlgemuth case, the local community and our employees were a bit hostile toward us at first—a big company suing a little guy, and so on. But they gradually came around to our point of view.”

Interest outside Akron, which was evidenced by a small flood of letters of inquiry about the case, addressed to the Goodrich legal department, made it clear that Goodrich v. Wohlgemuth was being watched as a bellwether. Some inquiries were from companies that had similar problems, or anticipated having them, and a surprising number were from relatives of young scientists, asking, “Does this mean my boy is stuck in his present job for the rest of his life?” In truth, an important issue was at stake, and pitfalls awaited the judge who heard the case, no matter which way he decided. On one side was the danger that discoveries made in the course of corporate research might become unprotectable—a situation that would eventually lead to the drying up of private research funds. On the other side was the danger that thousands of scientists might, through their very ability and ingenuity, find themselves permanently locked in a deplorable, and possibly unconstitutional, kind of intellectual servitude—they would be barred from changing jobs because they knew too much.

THE trial—held in Akron, presided over by Judge Frank H. Harvey, and conducted, like all proceedings of its type, without a jury—began on November 26th and continued through December 12th, with a week’s recess in the middle; Wohlgemuth, who was supposed to have started work at Latex on December 3rd, remained in Akron under a voluntary agreement with the court, and testified extensively in his own defense. Injunction, the form of relief that was sought by Goodrich and the chief form of relief that is available to anyone whose secrets have been stolen, is a remedy that originated in Roman law; it was anciently called “interdict,” and is still so called in Scotland. What Goodrich was asking, in effect, was that the court issue a direct order to Wohlgemuth not only forbidding him to reveal Goodrich secrets but also forbidding him to take employment in any other company’s space-suit department. Any violation of such an order would be contempt of court, punishable by a fine, or imprisonment, or both. Just how seriously Goodrich viewed the case became clear when its team of lawyers proved to be headed by Jeter himself, who, as vice-president, secretary, the company’s ultimate authority on patent law, general law, employee relations, union relations, and workmen’s compensation, and Lord High Practically Everything Else, had not found time to try a case in court himself for ten years. The chief defense counsel was Richard A. Chenoweth, of the Akron law firm of Buckingham, Doolittle & Burroughs, which Latex, though it was not a defendant in the action, had retained to handle the case, in fulfillment of its promise to Wohlgemuth.

From the outset, the two sides recognized that if Goodrich was to prevail, it had to prove, first, that it possessed trade secrets; second, that Wohlgemuth also possessed them, and that a substantial peril of disclosure existed; and, third, that it would suffer irreparable injury if injunctive relief was not granted. On the first point, Goodrich attorneys, through their questioning of Effler, Galloway, and one other company employee, set out to establish that Goodrich had a number of unassailable space-suit secrets, among them a way of making the hard shell of a space helmet, a way of making the visor seal, a way of making a sock ending, a way of making the inner liner of gloves, a way of fastening the helmet onto the rest of the suit, and a way of applying a wear-resistant material called neoprene to two-way-stretch fabric. Wohlgemuth, through his counsel’s cross-examinations, sought to show that none of these processes were secrets at all; for example, in the case of the neoprene process, which Effler had described as “a very critical trade secret” of Goodrich, defense counsel brought out evidence that a Latex product that is neither secret nor intended to be worn in outer space—the Playtex Golden Girdle—was made of two-way-stretch fabric with neoprene applied to it, and, to emphasize the point, Chenoweth introduced a Playtex Golden Girdle for all to see. Nor did either side neglect to bring into court a space suit, in each instance inhabited. The Goodrich suit, a 1961 model, was intended to demonstrate what the company had achieved by means of research—research that it did not want to see compromised through the loss of its secrets. The Latex suit, also a 1961 model, was intended to show that Latex was already ahead of Goodrich in space-suit development and would therefore have no interest in stealing Goodrich secrets. The Latex suit was particularly bizarre-looking, and the Latex employee who wore it in court looked almost excruciatingly uncomfortable, as if he were unaccustomed to the air of earth, or of Akron. “His air tubes weren’t hooked up, and he was hot,” the Beacon Journal explained next day. At any rate, after he had sat suffering for ten or fifteen minutes while defense counsel questioned a witness about his costume, he suddenly pointed in an agonized way to his head, and the court record of what followed, probably unique in the annals of jurisprudence, reads like this:

MAN IN THE SPACE SUIT: May I take this off? (Helmet).…

THE COURT: All right.

The second element in Goodrich’s burden of proof—that Wohlgemuth was privy to Goodrich secrets—was fairly quickly dealt with, because Wohlgemuth’s lawyers conceded that hardly anything the company knew about space suits had been kept from him; they based their defense on, first, the unquestioned fact that he had taken no papers away with him and, second, the unlikelihood that he would be able to remember the details of complex scientific processes, even if he wanted to. On the third element—the matter of irreparable injury—Jeter pointed out that Goodrich, which had made the first full-pressure flying suit in history, for the late Wiley Post’s high-altitude experiments in 1934, and which had since poured vast sums into space-suit research and development, was the unquestioned pioneer and had up to then been considered the leader in the field; he tried to paint Latex, which had been making full-pressure suits only since the mid-fifties, as a parvenu with the nefarious plan of cashing in on Goodrich’s years of research by hiring Wohlgemuth. Even if the intentions of Latex and Wohlgemuth were the best in the world, Jeter contended, Wohlgemuth would inevitably reveal Goodrich secrets in the course of working in Latex’s space-suit department. In any event, Jeter was unwilling to assume good intentions. As evidence of bad ones, there was, on the part of Latex, the fact that the firm had deliberately sought out Wohlgemuth, and, on the part of Wohlgemuth, the statement he had made to Galloway about the price of loyalty and ethics. The defense disputed the contention that a disclosure of secrets would be inevitable, and, of course, denied evil intentions on anyone’s part. It rounded out its case with a statement made in court under oath by Wohlgemuth: “I will not reveal [to International Latex] any items which in my own mind I would consider to be trade secrets of the B. F. Goodrich Company.” This, of course, was cold comfort to Goodrich.

Having heard the evidence and the lawyers’ summations, Judge Harvey reserved decision until a later date and issued an order temporarily forbidding Wohlgemuth to reveal the alleged secrets or to work in the Latex space-suit program; he could go on the Latex payroll, but he had to stay out of space suits until the court’s decision was handed down. In mid-December, Wohlgemuth, leaving his family behind, went to Dover and began working for Latex on other products; early in January, by which time he had succeeded in selling his house in Wadsworth and buying one in Dover, his family joined him at his new stand.

IN Akron, meanwhile, the lawyers had at each other in briefs intended to sway Judge Harvey. Various fine points of law were debated, learnedly but inconclusively; yet as the briefs wore on, it became increasingly clear that the essence of the case was quite simple. For all practical purposes, there was no controversy over the facts. What remained in controversy was the answers to two questions: First, should a man be formally restrained from revealing trade secrets when he has not yet committed any such act, and when it is not clear that he intends to? And, secondly, should a man be prevented from taking a job simply because the job presents him with unique temptations to break the law? Having scoured the lawbooks, counsel for the defense found exactly the text quotation they wanted in support of the argument that both questions should be answered in the negative. (Unlike the decisions of other courts, the general statements of the authors of law textbooks have no official standing in any court, but by using them judiciously an advocate can express his own opinions in someone else’s words and buttress them with bibliographical references.) The quotation was from a text entitled “Trade Secrets,” which was written by a lawyer named Ridsdale Ellis and published in 1953, and it read, in part, “Usually it is not until there is evidence that the employee [who has changed jobs] has not lived up to his contract, expressed or implied, to maintain secrecy, that the former employer can take action. In the law of torts there is the maxim: Every dog has one free bite. A dog cannot be presumed to be vicious until he has proved that he is by biting someone. As with a dog, the former employer may have to wait for a former employee to commit some overt act before he can act.” To counter this doctrine—which, besides being picturesque, appeared to have a crushingly exact applicability to the case under dispute—Goodrich’s lawyers came up with a quotation of their own from the very same book. (“Ellis on trade secrets,” as the lawyers referred to it in their briefs, was repeatedly used by the two sides to belabor each other, for the good reason that it was the only text on the subject available in the Summit County law library, where both sides did the bulk of their research.) In support of their cause, Goodrich counsel found that Ellis had said, in connection with trade-secrets cases in which the defendant was a company accused of luring away another company’s confidential employee: “Where the confidential employee left to enter defendant’s employment, an inference can be drawn to supplement other circumstantial evidence that the latter employment was stimulated by a desire by the defendant to learn plaintiff’s secrets.”

In other words, Ellis apparently felt that when the circumstances look suspicious, one free bite is not permitted. Whether he contradicted himself or merely refined his position is a nice question; Ellis himself had died several years earlier, so it was not possible to consult him on the matter.

On February 20th, 1963, having studied the briefs and deliberated on them, Judge Harvey delivered his decision, in the form of a nine-page essay fraught with suspense. To begin with, the Judge wrote, he was convinced that Goodrich did have trade secrets relative to space suits, and that Wohlgemuth might be able to remember and therefore be able to disclose some of them to Latex, to the irreparable injury of Goodrich. He declared, further, that “there isn’t any doubt that the Latex company was attempting to gain [Wohlgemuth’s] valuable experience in this particular specialized field for the reason that they had this so-called ‘Apollo’ contract with the government, and there isn’t any doubt that if he is permitted to work in the space-suit division of the Latex company … he would have an opportunity to disclose confidential information of the B. F. Goodrich Company.” Still further, Judge Harvey was convinced by the attitude of Latex, as this was evidenced by the conduct of its representatives in court, that the company intended to try to get Wohlgemuth to give it “the benefit of every kind of information he had.” At this point in the opinion, things certainly looked black for the defense. However—and the Judge was well down page 6 before he got to the “however”—what he had concluded after studying the one-free-bite controversy among the lawyers was that an injunction cannot be issued against disclosure of trade secrets before such disclosure has occurred unless there is clear and substantial evidence of evil intent on the part of the defendant. The defendant in this case, the Judge pointed out, was Wohlgemuth, and if any evil intent was involved, it appeared to be attributable to Latex rather than to him. For this reason, along with some technical ones, he wound up, “It is the view and the Order of this Court that Injunction be denied against the defendant.”

Goodrich promptly appealed the decision, and the Summit County Court of Appeals, pending its own decision on the case, issued another restraining order, which differed from Judge Harvey’s in that it permitted Wohlgemuth to do space-suit work for Latex, but still forbade him to disclose Goodrich’s alleged trade secrets. Accordingly, Wohlgemuth, with an initial victory under his belt but with a new legal struggle on his behalf ahead, went to work in the Latex moon-suit shop.

Jeter and his colleagues, in their brief to the Court of Appeals, stated unequivocally that Judge Harvey had been wrong not only in some of the technical aspects of his decision but in his finding that there must be evidence of bad faith on the defendant’s part before an injunction can be granted. “The question to be decided is not one of good or bad faith, but, rather, whether there is a threat or a likelihood that trade secrets will be disclosed,” the Goodrich brief declared roundly—and a little inconsistently, in view of all the time and effort the company had expended on attempts to pin bad faith on both Latex and Wohlgemuth. Wohlgemuth’s lawyers, of course, did not fail to point out the inconsistency. “It seems strange indeed that Goodrich should find fault with this finding of Judge Harvey,” they remarked in their brief. Quite clearly, they had conceived for Judge Harvey feelings so tender as to border on the protective.

The decision of the Court of Appeals was handed down on May 22nd. Written by Judge Arthur W. Doyle, with his two colleagues of the court concurring, it was a partial reversal of Judge Harvey. Finding that “there exists a present real threat of disclosure, even without actual disclosure,” and that “an injunction may … prevent a future wrong,” the court granted an injunction that restrained Wohlgemuth from disclosing to Latex any of the processes and information claimed as trade secrets by Goodrich. On the other hand, Judge Doyle wrote, “We have no doubt that Wohlgemuth had the right to take employment in a competitive business, and to use his knowledge (other than trade secrets) and experience for the benefit of his new employer.” Plainly put, Wohlgemuth was at last free to accept a permanent job doing space-suit work for Latex, provided only that he refrained from disclosing Goodrich secrets in the course of his work.

NEITHER side carried the case above the Summit County Court of Appeals—to the Ohio Supreme Court and, beyond that, to the United States Supreme Court—so with the decision of the Appeals Court the Wohlgemuth case was settled. Public interest in it subsided soon after the trial was over, but professional interest continued to mount, and, of course, it mounted still more after the Appeals Court decision in May. In March, the New York City Bar Association, in collaboration with the American Bar Association, had presented a symposium on trade secrets, with the Wohlgemuth case as its focus. In the later months of that year, employers worried about loss of trade secrets brought numerous suits against former employees, presumably relying on the Wohlgemuth decision as a precedent. A year later there were more than two dozen trade-secrets cases pending in the courts, the most publicized of them being the effort of E. I. du Pont de Nemours & Co. to prevent one of its former research engineers from taking part in the production of certain rare pigments for the American Potash & Chemical Corporation.

It would be logical to suppose that Jeter might be worried about enforcement of the Appeals Court’s order—might be afraid that Wohlgemuth, working behind the locked door of the Latex laboratory, and perhaps nursing a grudge against Goodrich, would take his one free bite in spite of the order, on the assumption that he would not be caught. However, Jeter didn’t look at things that way. “Until and unless we learn otherwise, we assume that Wohlgemuth and International Latex, both having knowledge of the court order, will comply with the law,” Jeter said after the case was concluded. “No specific steps by Goodrich to police the enforcement of the order have been taken, or are contemplated. However, it if should be violated, there are various ways in which we would be likely to find out. Wohlgemuth, after all, is working with others, who come and go. Out of perhaps twenty-five employees in constant touch with him, it’s likely that one or two will leave Latex within a couple of years. Furthermore, you can learn quite a lot from suppliers who deal with both Latex and Goodrich; and also from customers. However, I do not feel that the order will be violated. Wohlgemuth has been through a lawsuit. It was quite an experience for him. He now knows his responsibilities under the law, which he may not have known before.”

Wohlgemuth himself said late in 1963 that since the conclusion of the case he had received a great many inquiries from other scientists working in industry, the gist of their questions being, “Does your case mean that I’m married to my job?” He told them that they would have to draw their own conclusions. Wohlgemuth also said that the court order had had no effect on his work in the Latex space-suit department. “Precisely what the Goodrich secrets are is not spelled out in the order, and therefore I have acted as if all the things they alleged to be secrets actually are secrets,” he said. “Nevertheless, my efficiency is not impaired by my avoiding disclosure of those things. Take, for example, the use of polyurethane as an inner liner—a process that Goodrich claimed as a trade secret. That was something Latex had tried previously and found unsatisfactory. Therefore, it wasn’t planning to investigate further along those lines, and it still isn’t, I am just as effective for Latex as if there had never been an injunction. However, I will say this. If I were to get a better offer from some other company now, I’m sure I would evaluate the question very carefully—which is what I didn’t do the last time.” Wohlgemuth—the new, post-trial Wohlgemuth—spoke in a noticeably slow, tense way, with long pauses for thought, as if the wrong word might bring lightning down on his head. He was a young man with a strong sense of belonging to the future, and he looked forward to making, if he could, a material contribution to putting man on the moon. At the same time, Jeter may have been right; he was also a man who had recently spent almost six months in the toils of the law, and who worked, and would continue to work, in the knowledge that a slip of the tongue might mean a fine, imprisonment, and professional ruin.

12

In Defense of Sterling

I

THE FEDERAL RESERVE BANK of New York stands on the block bounded by Liberty, Nassau, and William Streets and Maiden Lane, on the slope of one of the few noticeable hillocks remaining in the bulldozed, skyscraper-flattened earth of downtown Manhattan. Its entrance faces Liberty, and its mien is dignified and grim. Its arched ground-floor windows, designed in imitation of those of the Pitti and Riccardi Palaces in Florence, are protected by iron grilles made of bars as thick as a boy’s wrist, and above them are rows of small rectangular windows set in a blufflike fourteen-story wall of sandstone and limestone, the blocks of which once varied in color from brown through gray to blue, but which soot has reduced to a common gray; the façade’s austerity is relieved only at the level of the twelfth floor, by a Florentine loggia. Two giant iron lanterns—near-replicas of lanterns that adorn the Strozzi Palace in Florence—flank the main entrance, but they seem to be there less to please or illuminate the entrant than to intimidate him. Nor is the building’s interior much more cheery or hospitable; the ground floor features cavernous groin vaulting and high ironwork partitions in intricate geometric, floral, and animal designs, and it is guarded by hordes of bank security men, whose dark-blue uniforms make them look much like policemen.

Huge and dour as it is, the Federal Reserve Bank, as a building, arouses varied feelings in its beholders. To admirers of the debonair new Chase Manhattan Bank across Liberty Street, which is notable for huge windows, bright-colored tiled walls, and stylish Abstract Expressionist paintings, it is an epitome of nineteenth-century heavy-footedness in bank architecture, even though it was actually completed in 1924. To an awestruck writer for the magazine Architecture in 1927, it seemed “as inviolable as the Rock of Gibraltar and no less inspiring of one’s reverent obeisance,” and possessed of “a quality which, for lack of a better word, I can best describe as ‘epic’” To the mothers of young girls who work in it as secretaries or pages, it looks like a particularly sinister sort of prison. Bank robbers are apparently equally respectful of its inviolability; there has never been the slightest hint of an attempt on it. To the Municipal Art Society of New York, which now rates it as a full-fledged landmark, it was until 1967 only a second-class landmark, being assigned to Category II, “Structures of Great Local or Regional Importance Which Should Be Preserved,” rather than Category I, “Structures of National Importance Which Should Be Preserved at All Costs.” On the other hand, it has one indisputable edge on the Pitti, Riccardi, and Strozzi Palaces: It is bigger than any of them. In fact, it is a bigger Florentine palace than has ever stood in Florence.

The Federal Reserve Bank of New York is set apart from the other banks of Wall Street in purpose and function as well as in appearance. As by far the largest and most important of the twelve regional Federal Reserve Banks—which, together with the Federal Reserve Board in Washington and the sixty-two hundred commercial banks that are members, make up the Federal Reserve System—it is the chief operating arm of the United States’ central-banking institution. Most other countries have only one central bank—the Bank of England, the Bank of France, and so on—rather than a network of such banks, but the central banks of all countries have the same dual purpose: to keep the national currency in a healthy state by regulating its supply, partly through the degree of ease or difficulty with which it may be borrowed, and, when necessary, to defend its value in relation to that of other national currencies. To accomplish the first objective, the New York bank coöperates with its parent board and its eleven brother banks in periodically adjusting a number of monetary throttles, of which the most visible (although not necessarily the most important) is the rate of interest at which it lends money to other banks. As to the second objective, by virtue of tradition and of its situation in the nation’s and the world’s greatest financial center, the Federal Reserve Bank of New York is the sole agent of the Federal Reserve System and of the United States Treasury in dealings with other countries. Thus, on its shoulders falls the chief responsibility for operations in defense of the dollar. Those responsibilities were weighing heavily during the great monetary crisis of 1968—and, indeed, since the defense of the dollar sometimes involves the defense of other currencies as well, over the preceding three and a half years.

Charged as it is with acting in the national interest—in fact having no other purpose—the Federal Reserve Bank of New York, together with its brother banks, obviously is an arm of government. Yet it has a foot in the free-enterprise camp; in what some might call characteristic American fashion, it stands squarely astride the chalk line between government and business. Although it functions as a government agency, its stock is privately owned by the member banks throughout the country, to which it pays annual dividends limited by law to six per cent per year. Although its top officers take a federal oath, they are not appointed by the President of the United States, or even by the Federal Reserve Board, but are elected by the bank’s own board of directors, and their salaries are paid not out of the federal till but out of the bank’s own income. Yet that income—though, happily, always forthcoming—is entirely incidental to the bank’s purpose, and if it rises above expenses and dividends the excess is automatically paid into the United States Treasury. A bank that considers profits incidental is scarcely the norm in Wall Street, and this attitude puts Federal Reserve Bank men in a uniquely advantageous social position. Because their bank is a bank, after all, and a privately owned, profitable one at that, they can’t be dismissed as mere government bureaucrats; conversely, having their gaze fixed steadily above the mire of cupidity entitles them to be called the intellectuals, if not actually the aristocrats, of Wall Street banking.

Under them lies gold—still the bedrock on which all money nominally rests, though in recent times a bedrock that has been shuddering ominously under the force of various monetary earthquakes. As of March, 1968, more than thirteen thousand tons of the stuff, worth more than thirteen billion dollars and amounting to more than a quarter of all the monetary gold in the free world, reposed on actual bedrock seventy-six feet below the Liberty Street level and fifty below sea level, in a vault that would be inundated if a system of sump pumps did not divert a stream that originally wandered through Maiden Lane. The famous nineteenth-century British economist Walter Bagehot once told a friend that when his spirits were low it used to cheer him to go down to his bank and “dabble my hand in a heap of sovereigns.” Although it is, to say the least, a stimulating experience to go down and look at the gold in the Federal Reserve Bank vault, which is in the form not of sovereigns but of dully gleaming bars about the size and shape of building bricks, not even the best-accredited visitor is allowed to dabble his hands in it; for one thing, the bars weigh about twenty-eight pounds each and are therefore ill-adapted to dabbling, and, for another, none of the gold belongs to either the Federal Reserve Bank or the United States. All United States gold is kept at Fort Knox, at the New York Assay Office, or at the various mints; the gold deposited at the Federal Reserve Bank belongs to some seventy other countries—the largest depositors being European—which find it convenient to store a good part of their gold reserves there. Originally, most of them put gold there for safekeeping during the Second World War. After the war, the European nations—with the exception of France—not only left it in New York but greatly increased its quantity as their economies recovered.

Nor does the gold represent anything like all the foreign deposits at Liberty Street; investments of various sorts brought the March ’68 total to more than twenty-eight billion. As a banker for most of the central banks of the non-Communist world, and as the central bank representing the world’s leading currency, the Federal Reserve Bank of New York is the undisputed chief citadel of world currency. By virtue of this position, it is afforded a kind of fluoroscopic vision of the insides of international finance, enabling it to detect at a glance an incipiently diseased currency here, a faltering economy there. If, for example, Great Britain is running a deficit in her foreign dealings, this instantly shows up in the Federal Reserve Bank’s books in the form of a decline in the Bank of England’s balance. In the fall of 1964, precisely such a decline was occurring, and it marked the beginning of a long, gallant, intermittently hair-raising, and ultimately losing struggle by a number of countries and their central banks, led by the United States and the Federal Reserve, to safeguard the existing order of world finance by preserving the integrity of the pound sterling. One trouble with imposing buildings is that they have a tendency to belittle the people and activities they enclose, and most of the time it is reasonably accurate to think of the Federal Reserve Bank as a place where often bored people push around workaday slips of paper quite similar to those pushed around in other banks. But since 1964 some of the events there, if they have scarcely been capable of inspiring reverent obeisance, have had a certain epic quality.

EARLY in 1964, it began to be clear that Britain, which for several years had maintained an approximate equilibrium in her international balance of payments—that is, the amount of money she had annually sent outside her borders had been about equal to the amount she had taken in—was running a substantial deficit. Far from being the result of domestic depression in Britain, this situation was the result of overexuberant domestic expansion; business was booming, and newly affluent Britons were ordering bales and bales of costly goods from abroad without increasing the exports of British goods on anything like the same scale. In short, Britain was living beyond her means. A substantial balance-of-payments deficit is a worry to a relatively self-sufficient country like the United States (indeed, the United States was having that very worry at that very time, and it would for years to come), but to a trading nation like Britain, about a quarter of whose entire economy is dependent on foreign trade, it constitutes a grave danger.

The situation was cause for growing concern at the Federal Reserve Bank, and the focal point of the concern was the office, on the tenth floor, of Charles A. Coombs, the bank’s vice-president in charge of foreign operations. All summer long, the fluoroscope showed a sick and worsening pound sterling. From the research section of the foreign department, Coombs daily got reports that a torrent of money was leaving Britain. From underground, word rose that the pile of gold bars in the locker assigned to Britain was shrinking appreciably—not through any foul play in the vault but because so many of the bars were being transferred to other lockers in settlement of Britain’s international debts. From the foreign-exchange trading desk, on the seventh floor, the news almost every afternoon was that the open-market quotations on the pound in terms of dollars had sunk again that day. During July and August, as the quotation dropped from $2.79 to $2.7890, and then to $2.7875, the situation was regarded on Liberty Street as so serious that Coombs, who would normally handle foreign-exchange matters himself, only making routine reports to those higher up, was constantly conferring about it with his boss, the Federal Reserve Bank’s president, a tall, cool, soft-spoken man named Alfred Hayes.

Mystifyingly complex though it may appear, what actually happens in international financial dealings is essentially what happens in private domestic transactions. The money worries of a nation, like those of a family, are the consequence of having too much money go out and not enough come in. The foreign sellers of goods to Britain cannot spend the pounds they are paid in their own countries, and therefore they convert them into their own currencies; this they do by selling the pounds in the foreign-exchange markets, just as if they were selling securities on a stock exchange. The market price of the pound fluctuates in response to supply and demand, and so do the prices of all other currencies—all, that is, except the dollar, the sun in the planetary system of currencies, inasmuch as the United States has, since 1934, stood pledged to exchange gold in any quantity for dollars at the pleasure of any nation at the fixed price of thirty-five dollars per ounce.

Under the pressure of selling, the price of the pound goes down. But its fluctuations are severely restricted. The influence of market forces cannot be allowed to lower or raise the price more than a couple of cents below or above the pound’s par value; if such wild swings should occur unchecked, bankers and businessmen everywhere who traded with Britain would find themselves involuntarily engaged in a kind of roulette game, and would be inclined to stop trading with Britain. Accordingly, under international monetary rules agreed upon at Bretton Woods, New Hampshire, in 1944, and elaborated at various other places at later times, the pound in 1964, nominally valued at $2.80, was allowed to fluctuate only between $2.78 and $2.82, and the enforcer of this abridgment of the law of supply and demand was the Bank of England. On a day when things were going smoothly, the pound might be quoted on the exchange markets at, say, $2.7990, a rise of $.0015 from the previous day’s closing. (Fifteen-hundredths of a cent doesn’t sound like much, but on a round million dollars, which is generally the basic unit in international monetary dealings, it amounts to fifteen hundred dollars.) When that happened, the Bank of England needed to do nothing. If, however, the pound was strong in the markets and rose to $2.82 (something it showed absolutely no tendency to do in 1964), the Bank of England was pledged to—and would have been very happy to—accept gold or dollars in exchange for pounds at that price, thereby preventing a further increase in the price and at the same time increasing its own reserve of gold and dollars, which serve as the pound’s backing. If, on the other hand (and this was a more realistic hypothesis), the pound was weak and sank to $2.78, the Bank of England’s sworn duty was to intervene in the market and buy with gold or dollars all pounds offered for sale at that price, however deeply this might have cut into its own reserves. Thus, the central bank of a spendthrift country, like the father of a spendthrift family, is eventually forced to pay the bills out of capital. But in times of serious currency weakness the central bank loses even more of its reserves than this would suggest, because of the vagaries of market psychology. Prudent importers and exporters seeking to protect their capital and profits reduce to a minimum the sum they hold in pounds and the length of time they hold it. Currency speculators, whose noses have been trained to sniff out weakness, pounce on a falling pound and make enormous short sales, in the expectation of turning a profit on a further drop, and the Bank of England must absorb the speculative sales along with the straightforward ones.

The ultimate consequence of unchecked currency weakness is something that may be incomparably more disastrous in its effects than family bankruptcy. This is devaluation, and devaluation of a key world currency like the pound is the recurrent nightmare of all central bankers, whether in London, New York, Frankfurt, Zurich, or Tokyo. If at any time the drain on Britain’s reserves became so great that the Bank of England was unable, or unwilling, to fulfill its obligation to maintain the pound at $2.78, the necessary result would be devaluation. That is, the $2.78-to-$2.82 limitation would be abruptly abrogated; by simple government decree the par value of the pound would be reduced to some lower figure, and a new set of limits established around the new parity. The heart of the danger was the possibility that what followed might be chaos not confined to Britain. Devaluation, as the most heroic and most dangerous of remedies for a sick currency, is rightly feared. By making the devaluing country’s goods cheaper to others, it boosts exports, and thus reduces or eliminates a deficit in international accounts, but at the same time it makes both imports and domestic goods more expensive at home, and thus reduces the country’s standard of living. It is radical surgery, curing a disease at the expense of some of the patient’s strength and well-being—and, in many cases, some of his pride and prestige as well. Worst of all, if the devalued currency is one that, like the pound, is widely used in international dealings, the disease—or, more precisely, the cure—is likely to prove contagious. To nations holding large amounts of that particular currency in their reserve vaults, the effects of the devaluation is the same as if the vaults had been burglarized. Such nations and others, finding themselves at an unacceptable trading disadvantage as a result of the devaluation, may have to resort to competitive devaluation of their own currencies. A downward spiral develops: Rumors of further devaluations are constantly in the wind; the loss of confidence in other people’s money leads to a disinclination to do business across national borders; and international trade, upon which depend the food and shelter of hundreds of millions of people around the world, tends to decline. Just such a disaster followed the classic devaluation of all time, the departure of the pound from the old gold standard in 1931—an event that is still generally considered a major cause of the worldwide Depression of the thirties.

The process works similarly in respect to the currencies of all the hundred-odd countries that are members of the International Monetary Fund, an organization that originated at Bretton Woods. For any country, a favorable balance of payments means an accumulation of dollars, either directly or indirectly, which are freely convertible into gold, in the country’s central bank; if the demand for its currency is great enough, the country may revalue it upward—the reverse of a devaluation—as both Germany and the Netherlands did in 1961. Conversely, an unfavorable balance of payments starts the sequence of events that may end in forced devaluation. The degree of disruption of world trade that devaluation of a currency causes depends on that currency’s international importance. (A large devaluation of the Indian rupee in June, 1966, although it was a serious matter to India, created scarcely a ripple in the international markets.) And—to round out this brief outline of the rules of an intricate game of which everybody everywhere is an inadvertent player—even the lordly dollar is far from immune to the effects of an unfavorable balance of payments or of speculation. Because of the dollar’s pledged relation to gold, it serves as the standard for all other currencies, so its price does, not fluctuate in the markets. However, it can suffer weakness of a less visible but equally ominous sort. When the United States sends out substantially more money (whether payment for imports, foreign aid, investments, loans, tourist expenses, or military costs) than it takes in, the recipients freely buy their own currencies with the newly acquired dollars, thereby raising the dollar prices of their own currencies; the rise in price enables their central banks to take in still more dollars, which they can sell back to the United States for gold. Thus, when the dollar is weak the United States loses gold. France alone—a country with a strong currency and no particular official love of the dollar—required thirty million dollars or more in United States gold regularly every month for several years prior to the autumn of 1966, and between 1958, when the United States began running a serious deficit in its international accounts, and the middle of March 1968, our gold reserve was halved—from twenty-two billion eight hundred million to eleven billion four hundred million dollars. If the reserve ever dropped to an unacceptably low level, the United States would be forced to break its word and lower the gold value of the dollar, or even to stop selling gold entirely. Either action would in effect be a devaluation—the one devaluation, because of the dollar’s preeminent position, that would be more disruptive to world monetary order than a devaluation of the pound.

HAYES and Coombs, neither of whom is old enough to have experienced the events of 1931 at first hand as a banker but both of whom are such diligent and sensitive students of international banking that they might as well have done so, found that as the hot days of 1964 dragged on they had occasion to be in almost daily contact by transatlantic telephone with their Bank of England counterparts—the Earl of Cromer, governor of the bank at that time, and Roy A. O. Bridge, the governor’s adviser on foreign exchange. It became clear to them from these conversations and from other sources that the imbalance in Britain’s international accounts was far from the whole trouble. A crisis of confidence in the soundness of the pound was developing, and the main cause of it seemed to be the election that Britain’s Conservative Government was facing on October 15th. The one thing that international financial markets hate and fear above all others is uncertainty. Any election represents uncertainty, so the pound always has the jitters just before Britons go to the polls, but to the people who deal in currencies this election looked particularly menacing, because of their estimate of the character of the Labour Government that might come into power. The conservative financiers of London, not to mention those of Continental Europe, looked with almost irrational suspicion on Harold Wilson, the Labour choice for Prime Minister; further, some of Mr. Wilson’s economic advisers had explicitly extolled the virtues of devaluation of the pound in their earlier theoretical writings; and, finally, there was an all too pat analogy to be drawn from the fact that the last previous term of the British Labour Party in power had been conspicuously marked, in 1949, by a devaluation of sterling from the rate of $4.03 to $2.80.

In these circumstances, almost all the dealers in the world money markets, whether they were ordinary international businessmen or out-and-out currency speculators, were anxious to get rid of pounds—at least until after the election. Like all speculative attacks, this one fed on itself. Each small drop in the pound’s price resulted in further loss of confidence, and down, down went the pound in the international markets—an oddly diffused sort of exchange, which does not operate in any central building but, rather, is conducted by telephone and cable between the trading desks of banks in the world’s major cities. Simultaneously, down, down went British reserves, as the Bank of England struggled to support the pound. Early in September, Hayes went to Tokyo for the annual meeting of the members of the International Monetary Fund. In the corridors of the building where participants in the Fund met, he heard one European central banker after another express misgivings about the state of the British economy and the outlook for the British currency. Why didn’t the British government take steps at home to check its outlay and to improve the balance of payments, they asked each other. Why didn’t it raise the Bank of England’s lending rate—the so-called bank rate—from its current five per cent, since this move would have the effect of raising British interest rates all up and down the line, and would thus serve the double purpose of damping down domestic inflation and attracting investment dollars to London from other financial centers, with the result that sterling would gain a sounder footing?

Doubtless the Continental bankers also put such questions to the Bank of England men in Tokyo; in any event, the Bank of England men and their counterparts in the British Exchequer had not failed to put the questions to themselves. But the proposed measures would certainly be unpopular with the British electorate, as unmistakable harbingers of austerity, and the Conservative Government, like many governments before it, appeared to be paralyzed by fear of the imminent election. So it did nothing. In a strictly monetary way, however, Britain did take defensive measures during September. The Bank of England had for several years had a standing agreement with the Federal Reserve that either institution could borrow five hundred million dollars from the other, over a short term, at any time, with virtually no formalities; now the Bank of England accepted this standby loan and made arrangements to supplement it with another five hundred million dollars in short-term credit from various European central banks and the Bank of Canada. This total of a billion dollars, together with Britain’s last-ditch reserves in gold and dollars, amounting to about two billion six hundred million, constituted a sizable store of ammunition. If the speculative assault on the pound should continue or intensify, answering fire would come from the Bank of England in the form of dollar investments in sterling made on the battlefield of the free market, and presumably the attackers would be put to rout.

As might have been expected, the assault did intensify after Labour came out the victor in the October election. The new British government realized at the outset that it was faced with a grave crisis, and that immediate and drastic action was in order. It has since been said that summary devaluation of the pound was seriously considered by the newly elected Prime Minister and his advisers on finance—George Brown, Secretary of State for Economic Affairs, and James Callaghan, Chancellor of the Exchequer. The idea was rejected, though, and the measures they actually took, in October and early November, were a fifteen-percent emergency surcharge on British imports (in effect, a blanket raising of tariffs), an increased fuel tax, and stiff new capital-gains and corporation taxes. These were deflationary, currency-strengthening measures, to be sure, but the world markets were not reassured. The specific nature of the new taxes seems to have disconcerted, and even enraged, many financiers, in and out of Britain, particularly in view of the fact that under the new budget British government spending on welfare benefits was actually to be increased, rather than cut back, as deflationary policy would normally require. One way and another, then, the sellers—or bears, in market jargon—continued to be in charge of the market for the pound in the weeks after the election, and the Bank of England was kept busy potting away at them with precious shells from its borrowed-billion-dollar arsenal. By the end of October, nearly half the billion was gone, and the bears were still inexorably advancing on the pound, a hundredth of a cent at a time.

Hayes, Coombs, and their foreign-department colleagues on Liberty Street, watching with mounting anxiety, were as galled as the British by the fact that a central bank defending its currency against attack can have only the vaguest idea of where the attack is coming from. Speculation is inherent in foreign trade, and by its nature is almost impossible to isolate, identify, or even define. There are degrees of speculation; the word itself, like “selfishness” or “greed,” denotes a judgment, and yet every exchange of currencies might be called a speculation in favor of the currency being acquired and against the one being disposed of. At one end of the scale are perfectly legitimate business transactions that have specific speculative effects. A British importer ordering American merchandise may legitimately pay up in pounds in advance of delivery; if he does, he is speculating against the pound. An American importer who has contracted to pay for British goods at a price set in pounds may legitimately insist that his purchase of the pounds he needs to settle his debt be deferred for a certain period; he, too, is speculating against the pound. (The staggering importance to Britain of these common commercial operations, which are called “leads” and “lags,” respectively, is shown by the fact that if in normal times the world’s buyers of British goods were all to withhold their payments for as short a period as two and a half months the Bank of England’s gold and dollar reserves would vanish.) At the other end of the scale is the dealer in money who borrows pounds and then converts the loan into dollars. Such a dealer, instead of merely protecting his business interests, is engaging in an out-and-out speculative move called a short sale; hoping to buy back the pounds he owes more cheaply later on, he is simply trying to make a profit on the decrease in value he anticipates—and, what with the low commissions prevailing in the international money market, the maneuver provides one of the world’s most attractive forms of high-stakes gambling.

Gambling of this sort, although in fact it probably contributed far less to the sterling crisis than the self-protective measures taken by nervous importers and exporters, was being widely blamed for all the pound’s troubles of October and November, 1964. Particularly in the British Parliament, there were angry references to speculative activity by “the gnomes of Zurich”—Zurich being singled out because Switzerland, whose banking laws rigidly protect the anonymity of depositors, is the blind pig of international banking, and consequently much currency speculation, originating in many parts of the world, is funnelled through Zurich. Besides low commissions and anonymity, currency speculation has another attraction. Thanks to time differentials and good telephone service, the world money market, unlike stock exchanges, race tracks, and gambling casinos, practically never closes. London opens an hour after the Continent (or did until February 1968, when Britain adopted Continental time), New York five (now six) hours after that, San Francisco three hours after that, and then Tokyo gets under way about the time San Francisco closes. Only a need for sleep or a lack of money need halt the operations of a really hopelessly addicted plunger anywhere.

“It was not the gnomes of Zurich who were beating down the pound,” a leading Zurich banker subsequently maintained—stopping short of claiming that there were no gnomes there. Nonetheless, organized short selling—what traders call a bear raid—was certainly in progress, and the defenders of the pound in London and their sympathizers in New York would have given plenty to catch a glimpse of the invisible enemy.

IT was in this atmosphere, then, that on the weekend beginning November 7th the leading central bankers of the world held their regular monthly gathering in Basel, Switzerland. The occasion for such gatherings, which have been held regularly since the nineteen-thirties except during the Second World War, is the monthly meeting of the board of directors of the Bank for International Settlements, which was established in Basel in 1930 primarily as a clearing house for the handling of reparations payments arising out of the First World War but has come to serve as an agency of international monetary coöperation and, incidentally, a kind of central bankers’ club. As such, it is considerably more limited in resources and restricted as to membership than the International Monetary Fund, but, like other exclusive clubs, it is often the scene of great decisions. Represented on its board of directors are Britain, France, West Germany, Italy, Belgium, the Netherlands, Sweden, and Switzerland—in short, the economic powers of Western Europe—while the United States is a regular monthly guest whose presence is counted on, and Canada and Japan are less frequent visitors. The Federal Reserve is almost always represented by Coombs, and sometimes by Hayes and other New York officers as well.

In the nature of things, the interests of the different central banks conflict; their faces are set against each other almost as if they were players in a poker game. Even so, in view of the fact that international troubles with money at their root have almost as long a history as similarly caused troubles between individuals, the most surprising thing about international monetary coöperation is that it is so new. Through all the ages prior to the First World War, it cannot be said to have existed at all. In the nineteen-twenties, it existed chiefly through close personal ties between individual central bankers, often maintained in spite of the indifference of their governments. On an official level, it got off to a halting start through the Financial Committee of the League of Nations, which was supposed to encourage joint action to prevent monetary catastrophes. The sterling collapse of 1931 and its grim sequel were ample proof of the committee’s failure. But better days were ahead. The 1944 international financial conference at Bretton Woods—out of which emerged not only the International Monetary Fund but also the whole structure of postwar monetary rules designed to help establish and maintain fixed exchange rates, as well as the World Bank, designed to ease the flow of money from rich countries to poor or war-devastated ones—stands as a milestone in economic coöperation comparable to the formation of the United Nations in political affairs. To cite just one of the conference’s fruits, a credit of more than a billion dollars extended to Britain by the International Monetary Fund during the Suez affair in 1956 prevented a major international financial crisis then.

In subsequent years, economic changes, like other changes, tended to come more and more quickly; after 1958, monetary crises began springing up virtually overnight, and the International Monetary Fund, which is hindered by slow-moving machinery, sometimes proved inadequate to meet such crises alone. Again the new spirit of coöperation rose to the occasion, this time with the richest of nations, the United States, taking the lead. Starting in 1961, the Federal Reserve Bank, with the approval of the Federal Reserve Board and the Treasury in Washington, joined the other leading central banks in setting up a system of ever-ready revolving credits, which soon came to be called the “swap network.” The purpose of the network was to complement the International Monetary Fund’s longer-term credit facilities by giving central banks instant access to funds they might need for a short period in order to move fast and vigorously in defense of their currencies. Its effectiveness was not long in being put to the test. Between its initiation in 1961 and the autumn of 1964, the swap network had played a major part in the triumphant defense against sudden and violent speculative attacks on at least three currencies: the pound, late in 1961; the Canadian dollar, in June, 1961; and the Italian lira, in March, 1964. By the autumn of 1964, the swap agreements (“L’accord de swap” to the French, “die Swap-Verpflichtungen” to the Germans) had come to be the very cornerstone of international monetary coöperation. Indeed, the five hundred million American dollars that the Bank of England was finding it necessary to draw on at the very moment the bank’s top officers were heading for Basel that November weekend represented part of the swap network, greatly expanded from its comparatively modest beginnings.

As for the Bank for International Settlements, in its capacity as a banking institution it was a relatively minor cog in all this machinery, but in its capacity as a club it had over the years come to play a far from unimportant role. Its monthly board meetings served (and still serve) as a chance for the central bankers to talk in an informal atmosphere—to exchange gossip, views, and hunches such as could not comfortably be indulged in either by mail or over the international telephone circuits. Basel, a medieval Rhenish city that is dominated by the spires of its twelfth-century Gothic cathedral and has long been a thriving center of the chemical industry, was originally chosen as the site of the Bank for International Settlements because it was a nodal point for European railways. Now that most international bankers habitually travel by plane, that asset has become a liability, for there is no long-distance air service to Basel; delegates must deplane at Zurich and continue by train or car. On the other hand, Basel has several first-rate restaurants, and it may be that in the view of the central-bank delegates this advantage outweighs the travel inconvenience, for central banking—or at least European central banking—has a firmly established association with good living. A governor of the National Bank of Belgium once remarked to a visitor, without a smile, that he considered one of his duties to be that of leaving the institution’s wine cellar better than he had found it. A luncheon guest at the Bank of France is generally told apologetically, “In the tradition of the bank, we serve only simple fare,” but what follows is a repast during which the constant discussion of vintages makes any discussion of banking awkward, if not impossible, and at which the tradition of simplicity is honored, apparently, by the serving of only one wine before the cognac. The table of the Bank of Italy is equally elegant (some say the best in Rome), and its surroundings are enhanced by the priceless Renaissance paintings, acquired as defaulted security on bad loans over the years, that hang on the walls. As for the Federal Reserve Bank of New York, alcohol in any form is hardly ever served there, banking is habitually discussed at meals, and the mistress of the kitchen appears almost pathetically grateful whenever one of the officers makes any sort of comment, even a critical one, on the fare. But then Liberty Street isn’t Europe.

In these democratic times, central banking in Europe is thought of as the last stronghold of the aristocratic banking tradition, in which wit, grace, and culture coexist easily with commercial astuteness, and even ruthlessness. The European counterparts of the security guards on Liberty Street are apt to be attendants in morning coats. Until less than a generation ago, formality of address between central bankers was the rule. Some think that the first to break it were the British, during the Second World War, when, it is alleged, a secret order went out that British government and military authorities were to address their American counterparts by their first names; in any event, first names are frequently exchanged between European and American central bankers now, and one reason for this, unquestionably, is the postwar rise in influence of the dollar. (Another reason is that, in the emerging era of coöperation, the central bankers see more of each other than they used to—not just in Basel but in Washington, Paris, and Brussels, at regular meetings of perhaps half a dozen special banking committees of various international organizations. The same handful of top bankers parades so regularly through the hotel lobbies of those cities that one of them thinks they must give the impression of being hundreds strong, like the spear carriers who cross the stage again and again in the triumphal scene of “Aida.”) And language, like the manner of its use, has tended to follow economic power. European central bankers have always used French (“bad French,” some say) in talking with each other, but during the long period in which the pound was the world’s leading currency English came to be the first language of central banking at large, and under the rule of the dollar it continues to be. It is spoken fluently and willingly by all the top officers of every central bank except the Bank of France, and even the Bank of France officers are forced to keep translators at hand, in consideration of the seeming intractable inability or unwillingness of most Britons and Americans to become competent in any language but their own. (Lord Cromer, flouting tradition, speaks French with complete authority.)

At Basel, good food and convenience come before splendor; many of the delegates favor an outwardly humble restaurant in the main railroad station, and the Bank for International Settlements itself is modestly situated between a tea shop and a hairdressing establishment. On that November weekend in 1964, Vice-President Coombs was the only representative of the Federal Reserve System on hand, and, indeed, he was to be the key banking representative of the United States through the early and middle phases of the crisis that was then mounting. In an abstracted way, Coombs ate and drank heartily with the others—true to his institution’s traditions, he is less than a gourmet—but his real interest was in getting the sense of the meeting and the private feelings of its participants. He was the perfect man for this task, inasmuch as he has the unquestioning trust and respect of all his foreign colleagues. The other leading central bankers habitually call him by his first name—less, it seems, in deference to changed custom than out of deep affection and admiration. They also use it in speaking of him among themselves; the name “Charliecoombs” (run together thus out of long habituation) is a word to conjure with in central-banking circles. Charliecoombs, they will tell you, is the kind of New Englander (he is from Newton, Massachusetts) who, although his clipped speech and dry manner make him seem a bit cool and detached, is really warm and intuitive. Charliecoombs, although a Harvard graduate (Class of 1940), is the kind of unpretentious gray-haired man with half-rimmed spectacles and a precise manner whom you might easily take for a standard American small-town bank president, rather than a master of one of the world’s most complex skills. It is generally conceded that if any one man was the genius behind the swap network, the man was the New England swapper Charliecoombs.

At Basel, there was, as usual, a series of formal sessions, each with its agenda, but there was also, as usual, much informal palaver in rump sessions held in hotel rooms and offices and at a formal Sunday-night dinner at which there was no agenda but instead a free discussion of what Coombs has since referred to as “the hottest topic of the moment.” There could be no question about what that was; it was the condition of the pound—and, indeed, Coombs had heard little discussion of anything else all weekend. “It was clear to me from what I heard that confidence in sterling was deteriorating,” he has said. Two questions were on most of the bankers’ minds. One was whether the Bank of England proposed to take some of the pressure off the pound by raising its lending rate. Bank of England men were present, but getting an answer was not a simple matter of asking them their intentions; even if they had been willing to say, they would not have been able to, because the Bank of England is not empowered to change its rate without the approval—which in practice often comes closer to meaning the instruction—of the British government, and elected governments have a natural dislike for measures that make money tight. The other question was whether Britain had enough gold and dollars to throw into the breach if the speculative assault should continue. Apart from what was left of the billion dollars from the expanded swap network and what remained of its drawing rights on the International Monetary Fund, Britain had only its official reserves, which had dropped in the previous week to something under two and a half billion dollars—their lowest point in several years. Worse than that was the frightful rate at which the reserves were dwindling away; on a single bad day during the previous week, according to the guesses of experts, they had dropped by eighty-seven million dollars. A month of days like that and they would be gone.

Even so, Coombs has said, nobody at Basel that weekend dreamed that the pressure on sterling could become as intense as it actually did become later in the month. He returned to New York worried but resolute. It was not to New York, however, that the main scene of the battle for sterling shifted after the Basel meeting; it was to London. The big immediate question was whether or not Britain would raise its bank rate that week, and the day the answer would be known was Thursday, November 12th. In the matter of the bank rate, as in so many other things, the British customarily follow a ritual. If there is to be a change, at noon on Thursday—then and then only—a sign appears in the ground-floor lobby of the Bank of England announcing the new rate, and, simultaneously, a functionary called the Government Broker, decked out in a pink coat and top hat, hurries down Throgmorton Street to the London Stock Exchange and ceremonially announces the new rate from a rostrum. Noon on Thursday the twelfth passed with no change; evidently the Labour Government was having as much trouble deciding on a bank-rate rise after the election as the Conservatives had had before. The speculators, wherever they were, reacted to such pusillanimity as one man. On Friday the thirteenth, the pound, which had been moderately buoyant all week precisely because speculators had been anticipating a bank-rate rise, underwent a fearful battering, which sent it down to a closing price of $2.7829—barely more than a quarter of a cent above the official minimum—and the Bank of England, intervening frequently to hold it even at that level, lost twenty-eight million dollars more from its reserves. Next day, the financial commentator of the London Times, under the byline Our City Editor, let himself go. “The pound,” he wrote, “is not looking as firm as might be hoped.”

THE following week saw the pattern repeated, but in exaggerated form. On Monday, Prime Minister Wilson, taking a leaf out of Winston Churchill’s book, tried rhetoric as a weapon. Speaking at a pomp-and-circumstance banquet at the Guildhall in the City of London before an audience that included, among many other dignitaries, the Archbishop of Canterbury, the Lord Chancellor, the Lord President of the Council, the Lord Privy Seal, the Lord Mayor of London, and their wives, Wilson ringingly proclaimed “not only our faith but our determination to keep sterling strong and to see it riding high,” and asserted that the Government would not hesitate to take whatever steps might become necessary to accomplish this purpose. While elaborately avoiding the dread word “devaluation,” just as all other British officials had avoided it all summer, Wilson sought to make it unmistakable that the Government now considered such a move out of the question. To emphasize this point, he included a warning to speculators: “If anyone at home or abroad doubts the firmness of [our] resolve, let them be prepared to pay the price for their lack of faith in Britain.” Perhaps the speculators were daunted by this verbal volley, or perhaps they were again moved to let up in their assault on the pound by the prospect of a bank-rate rise on Thursday; in any case, on Tuesday and Wednesday the pound, though it hardly rode high in the marketplace, managed to ride a little less low than it had on the previous Friday, and to do so without the help of the Bank of England.

By Thursday, according to subsequent reports, a sharp private dispute had erupted between the Bank of England and the British government on the bank-rate question—Lord Cromer arguing, for the bank, that a rise of at least one per cent, and perhaps two per cent, was absolutely essential, and Wilson, Brown, and Callaghan still demurring. The upshot was no bank-rate rise on Thursday, and the effect of the inaction was a swift intensification of the crisis. Friday the twentieth was a black day in the City of London. The Stock Exchange, its investors moving in time with sterling, had a terrible session. The Bank of England had by now resolved to establish its last-line trench on the pound at $2.7825—a quarter of a cent above the bottom limit. The pound opened on Friday at precisely that level and remained there all day, firmly pinned down by the speculators’ hail of offers to sell; meanwhile, the bank met all offers at $2.7825 and, in doing so, used up more of Britain’s reserves. Now the offers were coming so fast that little attempt was made to disguise their places of origin; it was evident that they were coming from everywhere—chiefly from the financial centers of Europe, but also from New York, and even from London itself. Rumors of imminent devaluation were sweeping the bourses of the Continent. And in London itself an ominous sign of cracking morale appeared: devaluation was now being mentioned openly even there. The Swedish economist and sociologist Gunnar Myrdal, in a luncheon speech in London on Thursday, had suggested that a slight devaluation might now be the only possible solution to Britain’s problems; once this exogenous comment had broken the ice, Britons also began using the dread word, and, in the next morning’s Times, Our City Editor himself was to say, in the tone of a commander preparing the garrison for possible surrender, “Indiscriminate gossip about devaluation of the pound can do harm. But it would be even worse to regard use of that word as taboo.”

When nightfall at last brought the pound and its defenders a weekend breather, the Bank of England had a chance to assess its situation. What it found was anything but reassuring. All but a fraction of the billion dollars it had arranged to borrow in September under the expanded swap agreements had gone into the battle. The right that remained to it of drawing on the International Monetary Fund was virtually worthless, since the transaction would take weeks to complete, and matters turned on days and hours. What the bank still had—and all that it had—was the British reserves, which had gone down by fifty-six million dollars that day and now stood at around two billion. More than one commentator has since suggested that this sum could in a way be likened to the few squadrons of fighter planes to which the same dogged nation had been reduced twenty-four years earlier at the worst point in the Battle of Britain.

THE analogy is extravagant, and yet, in the light of what the pound means, and has meant, to the British, it is not irrelevant. In a materialistic age, the pound has almost the symbolic importance that was once accorded to the Crown; the state of sterling almost is the state of Britain. The pound is the oldest of modern currencies. The term “pound sterling” is believed to have originated well before the Norman Conquest, when the Saxon kings issued silver pennies—called “sterlings” or “starlings” because they sometimes had stars inscribed on them—of which two hundred and forty equalled one pound of pure silver. (The shilling, representing twelve sterlings, or one-twentieth of a pound, did not appear on the scene until after the Conquest.) Thus, sizable payments in Britain have been reckoned in pounds from its beginnings. The pound, however, was by no means an unassailably sound currency during its first few centuries, chiefly because of the early kings’ unfortunate habit of relieving their chronic financial embarrassment by debasing the coinage. By melting down a quantity of sterlings, adding to the brew some base metal and no more silver, and then minting new coins, an irresponsible king could magically convert a hundred pounds into, say, a hundred and ten, just like that. Queen Elizabeth I put a stop to the practice when, in a carefully planned surprise move in 1561, she recalled from circulation all the debased coins issued by her predecessors. The result, combined with the growth of British trade, was a rapid and spectacular rise in the prestige of the pound, and less than a century after Elizabeth’s coup the word “sterling” had assumed the adjectival meaning that it still has—“thoroughly excellent, capable of standing every test.” By the end of the seventeenth century, when the Bank of England was founded to handle the government’s finances, paper money was beginning to be trusted for general use, and it had come to be backed by gold as well as silver. As time went on, the monetary prestige of gold rose steadily in relation to that of silver (in the modern world silver has no standing as a monetary reserve metal, and only in some half-dozen countries does it now serve as the principal metal in subsidiary coinage), but it was not until 1816 that Britain adopted a gold standard—that is, pledged itself to redeem paper currency with gold coins or bars at any time. The gold sovereign, worth one pound, which came to symbolize stability, affluence, and even joy to more Victorians than Bagehot, made its first appearance in 1817.

Prosperity begat emulation. Seeing how Britain flourished, and believing the gold standard to be at least partly responsible, other nations adopted it one after another: Germany in 1871; Sweden, Norway, and Denmark in 1873; France, Belgium, Switzerland, Italy, and Greece in 1874; the Netherlands in 1875; and the United States in 1879. The results were disappointing; hardly any of the newcomers found themselves immediately getting rich, and Britain, which in retrospect appears to have flourished as much in spite of the gold standard as because of it, continued to be the undisputed monarch of world trade. In the half century preceding the First World War, London was the middleman in international finance, and the pound was its quasi-official medium. As David Lloyd George was later to write nostalgically, prior to 1914 “the crackle of a bill on London”—that is, of a bill of credit in pounds sterling bearing the signature of a London bank—“was as good as the ring of gold in any port throughout the civilized world.” The war ended this idyll by disrupting the delicate balance of forces that had made it possible and by bringing to the fore a challenger to the pound’s supremacy—the United States dollar. In 1914, Britain, hard pressed to finance its fighting forces, adopted measures to discourage demands for gold, thereby abandoning the gold standard in everything but name; meanwhile, the value of a pound in dollars sank from $4.86 to a 1920 low of $3.20. In an effort to recoup its lost glory, Britain resumed a full gold standard in 1925, tying the pound to gold at a rate that restored its old $4.86 relation to the dollar. The cost of this gallant overvaluation, however, was chronic depression at home, not to mention the political eclipse for some fifteen years of the Chancellor of the Exchequer who ordered it, Winston Churchill.

The general collapse of currencies during the nineteen-thirties actually began not in London but on the Continent, when, in the summer of 1931, a sudden run on the leading bank of Austria, the Creditanstalt, resulted in its failure. The domino principle of bank failures—if such a thing can be said to exist—then came into play. German losses arising from this relatively minor disaster resulted in a banking crisis in Germany, and then, because huge quantities of British funds were now frozen in bankrupt institutions on the Continent, the panic crossed the English Channel and invaded the home of the imperial pound itself. Demands for gold in exchange for pounds quickly became too heavy for the Bank of England to meet, even with the help of loans from France and the United States. Britain was faced with the bleak alternatives of setting an almost usurious bank rate—between eight and ten per cent—in order to hold funds in London and check the gold outflow, or abandoning the gold standard; the first choice, which would have further depressed the domestic economy, in which there were now more than two and a half million unemployed, was considered unconscionable, and accordingly, on September 21, 1931, the Bank of England announced suspension of its responsibility to sell gold.

The move hit the financial world like a thunderbolt. So great was the prestige of the pound in 1931 that John Maynard Keynes, the already famous British economist, could say, not wholly in irony, that sterling hadn’t left gold, gold had left sterling. In either case, the mooring of the old system was gone, and chaos was the result. Within a few weeks, all the countries on the vast portion of the globe then under British political or economic domination had left the gold standard, most of the other leading currencies had either left gold or been drastically devalued in relation to it, and in the free market the value of the pound in terms of dollars had dropped from $4.86 to around $3.50. Then the dollar itself—the potential new mooring—came loose. In 1933, the United States, compelled by the worst depression in its history, abandoned the gold standard. A year later, it resumed it in a modified form called the gold-exchange standard, under which gold coinage was ended and the Federal Reserve was pledged to sell gold in bar form to other central banks but to no one else—and to sell it at a drastic devaluation of forty-one per cent from the old price. The United States devaluation restored the pound to its old dollar parity, but Britain found it small comfort to be tied securely to a mooring that was now shaky itself. Even so, over the next five years, while beggar-my-neighbor came to be the rule in international finance, the pound did not lose much more ground in relation to other currencies, and when the Second World War broke out, the British government boldly pegged it at $4.03 and imposed controls to keep it there in defiance of the free market. There, for a decade, it remained—but only officially. In the free market of neutral Switzerland, it fluctuated all through the war in reflection of Britain’s military fortunes, sinking at the darkest moments to as low as $2.

In the postwar era, the pound has been almost continuously in trouble. The new rules of the game of international finance that were agreed upon at Bretton Woods recognized that the old gold standard had been far too rigid and the virtual paper standard of the nineteen-thirties far too unstable; a compromise accordingly emerged, under which the dollar—the new king of currencies—remained tied to gold under the gold-exchange standard, and the pound, along with the other leading currencies, became tied not to gold but to the dollar, at rates fixed within stated limits. Indeed, the postwar era was virtually ushered in by a devaluation of the pound that was about as drastic in amount as that of 1931, though far less so in its consequences. The pound, like most European currencies, had emerged from Bretton Woods flagrantly overvalued in relation to the shattered economy it represented, and had been kept that way only by government-imposed controls. In the autumn of 1949, therefore, after a year and a half of devaluation rumors, burgeoning black markets in sterling, and gold losses that had reduced the British reserves to a dangerously low level, the pound was devalued from $4.03 to $2.80. With the isolated exceptions of the United States dollar and the Swiss franc, every important non-Communist currency almost instantly followed the pound’s example, but this time no drying up of trade, or other chaos, ensued, because the 1949 devaluations, unlike those of 1931 and the years following, were not the uncontrolled attempts of countries riddled by depression to gain a competitive advantage at any cost but merely represented recognition by the war-devastated countries that they had recovered to the point where they could survive relatively free international competition without artificial props. In fact, world trade, instead of drying up, picked up sharply. But even at the new, more rational evaluation the pound continued its career of hairbreadth escapes. Sterling crises of varying magnitudes were weathered in 1952, 1955, 1957, and 1961. In its unsentimental and tactless way, the pound—just as by its gyrations in the past it had accurately charted Britain’s rise and fall as the greatest of world powers—now, with its nagging recurrent weakness, seemed to be hinting that even such retrenchment as the British had undertaken in 1949 was not enough to suit their reduced circumstances.

And in November, 1964, these hints, with their humiliating implications, were not lost on the British people. The emotional terms in which many of them were thinking about the pound were well illustrated by an exchange that took place in that celebrated forum the letters column of the Times when the crisis was at its height. A reader named I. M. D. Little wrote deploring all the breast-beating about the pound and particularly the uneasy whispering about devaluation—a matter that he declared to be an economic rather than a moral issue. Quick as a flash came a reply from a C. S. Hadfield, among others. Was there ever a clearer sign of soulless times, Hadfield demanded, than Little’s letter? Devaluation not a moral issue? “Repudiation—for that is what devaluation is, neither more nor less—has become respectable!” Hadfield groaned, in the unmistakable tone, as old in Britain as the pound itself, of the outraged patriot.

IN the ten days following the Basel meeting, the first concern of the men at the Federal Reserve Bank of New York was not the pound but the dollar. The American balance-of-payments deficit had now crept up to the alarming rate of almost six billion dollars a year, and it was becoming clear that a rise in the British bank rate, if it should be unmatched by American action, might merely shift some of the speculative attack from the pound to the dollar. Hayes and Coombs and the Washington monetary authorities—William McChesney Martin, chairman of the Federal Reserve Board, Secretary of the Treasury Douglas Dillon, and Under-Secretary of the Treasury Robert Roosa—came to agree that if the British should raise their rate the Federal Reserve would be compelled, in self-defense, to competitively raise its rate above the current level of three and a half per cent. Hayes had numerous telephone conversations on this delicate point with his London counterpart, Lord Cromer. A deep-dyed aristocrat—a godson of King George V and a grandson of Sir Evelyn Baring, later the first Earl of Cromer (who, as the British agent in Egypt, was Chinese Gordon’s nemesis in 1884–85)—Lord Cromer was also a banker of universally acknowledged brilliance and, at forty-three, the youngest man, as far as anyone could remember, ever to direct the fortunes of the Bank of England; he and Hayes, in the course of their frequent meetings at Basel and elsewhere, had become warm friends.

During the afternoon of Friday the twentieth, at any rate, the Federal Reserve Bank had a chance to show its good intentions by doing some front-line fighting for the pound. The breather provided by the London closing proved to be illusory; five o’clock in London was only noon in New York, and insatiable speculators were able to go on selling pounds for several more hours in the New York market, with the result that the trading room of the Federal Reserve Bank temporarily replaced that of the Bank of England as the command post for the defense. Using as their ammunition British dollars—or, more precisely, United States dollars lent to Britain under the swap agreements—the Federal Reserve’s traders staunchly held the pound at or above $2.7825, at ever-increasing cost, of course, to the British reserves. Mercifully, after the New York closing the battle did not follow the sun to San Francisco and on around the world to Tokyo. Evidently, the attackers had had their fill, at least for the time being.

What followed was one of those strange modern weekends in which weighty matters are discussed and weighty decisions taken among men who are ostensibly sitting around relaxing in various parts of the world. Wilson, Brown, and Callaghan were at Chequers, the Prime Minister’s country estate, taking part in a conference that had originally been scheduled to cover the subject of national-defense policy. Lord Cromer was at his country place in Westerham, Kent. Martin, Dillon, and Roosa were at their offices or their homes, in and around Washington. Coombs was at his home, in Green Village, New Jersey, and Hayes was visiting friends of his elsewhere in New Jersey. At Chequers, Wilson and his two financial ministers, leaving the military brass to confer about defense policy with each other, adjourned to an upstairs gallery to tackle the sterling crisis; in order to bring Lord Cromer into their deliberations, they kept a telephone circuit open to him in Kent, using a scrambler system when they talked on it, so as to avoid interception of their words by their unseen enemies the speculators. Sometime on Saturday, the British reached their decision. Not only would they raise the bank rate, and raise it two per cent above its current level—to seven per cent—but, in defiance of custom, they would do so the first thing Monday morning, rather than wait for another Thursday to roll around. For one thing, they reasoned, to postpone action until Thursday would mean three and a half more business days during which the deadly drain of British reserves would almost certainly continue and might well accelerate; for another, the sheer shock of the deliberate violation of custom would serve to dramatize the government’s determination. The decision, once taken, was communicated by British intermediaries in Washington to the American monetary officials there, and relayed to Hayes and Coombs in New Jersey. Those two, knowing that the agreed-upon plan for a concomitant rise in the New York bank rate would now have to be put into effect as quickly as possible, got to work on the telephone lining up a Monday-afternoon meeting of the Federal Reserve Bank’s board of directors, without whose initiative the rate could not be changed. Hayes, a man who sets great store by politeness, has since said, with considerable chagrin, that he fears he was the despair of his hostess that weekend; not only was he on the telephone most of the time but he was prevented by the circumstances from giving the slightest explanation of his unseemly behavior.

What had been done—or, rather, was about to be done—in Britain was plenty to flutter the dovecotes of international finance. Since the beginning of the First World War, the bank rate there had never gone higher than seven per cent and had only occasionally gone that high; as for a bank-rate change on a day other than Thursday, the last time that had occurred, ominously enough, was in 1931. Anticipating lively action at the London opening, which would take place at about 5 A.M. New York time, Coombs went to Liberty Street on Sunday afternoon in order to spend the night at the bank and be on hand when the transatlantic doings began. As an overnight companion he had a man who found it advisable to sleep at the bank so often that he habitually kept a packed suitcase in his office—Thomas J. Roche, at that time the senior foreign-exchange officer. Roche welcomed his boss to the sleeping quarters—a row of small, motel-like rooms on the eleventh floor, each equipped with maple furniture, Old New York prints, a telephone, a clock radio, a bathrobe, and a shaving kit—and the two men discussed the weekend’s developments for a while before turning in. Shortly before five in the morning, their radios woke them, and, after a breakfast provided by the night staff, they repaired to the foreign-exchange trading room, on the seventh floor, to man their fluoroscope.

At five-ten, they were on the phone to the Bank of England, getting the news. The bank-rate rise had been announced promptly at the opening of the London markets, to the accompaniment of great excitement; later Coombs was to learn that the Government Broker’s entrance into the Stock Exchange, which is usually the occasion for a certain hush, had this time been greeted with such an uproar that he had had difficulty making his news known. As for the first market reaction of the pound, it was (one commentator said later) like that of a race horse to dope; in the ten minutes following the bank-rate announcement it shot up to $2.7869, far above its Friday closing. A few minutes later, the early-rising New Yorkers were on the phone to the Deutsche Bundesbank, the central bank of West Germany, in Frankfurt, and the Swiss National Bank, in Zurich, sounding out Continental reaction. It was equally good. Then they were back in touch with the Bank of England, where things were looking better and better. The speculators against the pound were on the run, rushing now to cover their short sales, and by the time the first gray light began to show in the windows on Liberty Street, Coombs had heard that the pound was being quoted in London at $2.79—its best price since July, when the crisis started.

It went on that way all day. “Seven per cent will drag money from the moon,” a Swiss banker commented, paraphrasing the great Bagehot, who had said, in his earthbound, Victorian way, “Seven per cent will pull gold out of the ground.” In London, the sense of security was so strong that it allowed a return to political bickering as usual; in Parliament, Reginald Maudling, the chief economic authority of the out-of-office Conservatives, took the occasion to remark that there wouldn’t have been a crisis in the first place but for the actions of the Labour Government, and Chancellor of the Exchequer Callaghan replied, with deadly politeness, “I must remind the honorable gentleman that he told us [recently] we had inherited his problems.” Everybody was clearly breathing easier. As for the Bank of England, so great was the sudden clamor for pounds that it saw a chance to replenish its depleted supply of dollars, and for a time that afternoon it actually felt confident enough to switch sides in the market, buying dollars with pounds at just below $2.79. In New York, the mood persisted after the London closing. It was with a clear conscience about the pound that the directors of the Federal Reserve Bank of New York could—and, that afternoon, did—carry out their plan to raise their lending rate from three and a half per cent to four per cent. Coombs has since said, “The feeling here on Monday afternoon was: They’ve done it—they’ve pulled through again. There was a general sigh of relief. The sterling crisis seemed to be over.”

It wasn’t, though. “I remember that the situation changed very fast on Tuesday the twenty-fourth,” Hayes has said. That day’s opening found the pound looking firm at $2.7875. Substantial buying orders for pounds were coming in now from Germany, and the day ahead looked satisfactory. So things continued until 6 A.M. in New York—noon on the Continent. It is around then that the various bourses of Europe—including the most important ones, in Paris and Frankfurt—hold the meetings at which they set the day’s rate for each currency, for the purpose of settling transactions in stocks and bonds that involve foreign currency, and these price-fixing sessions are bound to influence the money markets, since they give a clear indication of the most influential Continental sentiment in regard to each currency. The bourse rates set for the pound that day were such as to show a renewed, and pronounced, lack of confidence. At the same time, it appeared subsequently, money dealers everywhere, and particularly in Europe, were having second thoughts about the manner of the bank-rate rise the previous day. At first, taken by surprise, they had reacted enthusiastically, but now, it seemed, they had belatedly decided that the making of the announcement on Monday indicated that Britain was losing its grip. “What would it connote if the British were to play a Cup final on Sunday?” a European banker is said to have asked a colleague. The only possible answer was that it would connote panic in Albion.

The effect of these second thoughts was an astonishingly drastic turnabout in market action. In New York between eight and nine, Coombs, in the trading room, watched with a sinking heart as a tranquil pound market collapsed into a rout. Selling orders in unheard-of quantities were coming from everywhere. The Bank of England, with the courage of desperation, advanced its last-line trench from $2.7825 to $2.7860, and, by constant intervention, held the pound there. But it was clear that the cost would soon become too high; a few minutes after 9 A.M. New York time, Coombs calculated that Britain was losing reserves at the unprecedented, and unsupportable, rate of a million dollars a minute.

Hayes, arriving at the bank shortly after nine, had hardly sat down at his desk before this unsettling news reached him from the seventh floor. “We’re in for a hurricane,” Coombs told him, and went on to say that the pressure on sterling was now mounting so fast that there was a real likelihood that Britain might be forced either to devalue or to impose a sweeping—and, for many reasons, unacceptable—system of exchange controls before the week was out. Hayes immediately telephoned the governors of the leading European central banks—some of whom, because not all the national markets had yet felt the full weight of the crisis, were startled to hear exactly how grave the situation was—and pleaded with them not to exacerbate the pressure on both the pound and the dollar by raising their own bank rates. (His job was scarcely made easier by the fact that he had to admit that his own bank had just raised its rate.) Then he asked Coombs to come up to his office. The pound, the two men agreed, now had its back to the wall; the British bank-rate rise had obviously failed of its purpose, and at the million-a-minute rate of loss Britain’s well of reserves would be dry in less than five business days. The one hope now lay in amassing, within a matter of hours, or within a day or so at the most, a huge bundle of credit from outside Britain to enable the Bank of England to survive the attack and beat it back. Such rescue bundles had been assembled just a handful of times before—for Canada in 1962, for Italy earlier in 1964, and for Britain in 1961—but this time, it was clear, a much bigger bundle than any of those would be needed. The central-banking world was faced not so much with an opportunity for building a milestone in the short history of international monetary coöperation as with the necessity for doing so.

Two other things were clear—that, in view of the dollar’s troubles, the United States could not hope to rescue the pound unassisted, and that, the dollar’s troubles notwithstanding, the United States, with all its economic might, would have to join the Bank of England in initiating any rescue operation. As a first step, Coombs suggested that the Federal Reserve standby credit to the Bank of England ought to be increased forthwith from five hundred million dollars to seven hundred and fifty million. Unfortunately, fast action on this proposal was hampered by the fact that, under the Federal Reserve Act, any such move could be made only by decision of a Federal Reserve System committee, whose members were scattered all over the country. Hayes conferred by long-distance telephone (all around the world, wires were now humming with news of the pound’s extremity) with the Washington monetary contingent, Martin, Dillon, and Roosa, none of whom disagreed with Coombs’ view of what had to be done, and as a result of these discussions a call went out from Martin’s office to members of the key committee, called the Open Market Committee, for a meeting by telephone at three o’clock that afternoon. Roosa, at the Treasury, suggested that the United States’ contribution to the kitty could be further increased by arranging for a two-hundred-and-fifty-million-dollar loan from the Export-Import Bank, a Treasury-owned and Treasury-financed institution in Washington. Hayes and Coombs were naturally in favor of this, and Roosa set in motion the bureaucratic machinery to unlock that particular vault—a process that, he warned, would certainly take until evening.

As the early afternoon passed in New York, with the millions of dollars continuing to drain, minute by minute, from Britain’s reserves, Hayes and Coombs, along with their Washington colleagues, were busy planning the next step. If the swap increase and the Export-Import Bank loan should come through, the United States credits would amount to a billion dollars all told; now, in consultation with the beleaguered garrison at the Bank of England, the Federal Reserve Bank men began to believe that, in order to make the operation effective, the other leading central banks—spoken of in central-banking shorthand as “the Continent,” even though they include the Banks of Canada and Japan—would have to be asked to put up additional credits on the order of one and a half billion dollars, or possibly even more. Such a sum would make the Continent, collectively, a bigger contributor to the cause than the United States—a fact that Hayes and Coombs realized might not sit too well with the Continental bankers and their governments.

At three o’clock, the Open Market Committee held its telephone meeting—twelve men sitting at their desks in six cities, from New York to San Francisco. The members heard Coombs’ dry, unemotional voice describing the situation and making his recommendation. They were quickly convinced. In no more than fifteen minutes, they had voted unanimously to increase the swap credit to seven hundred and fifty million dollars, on condition that proportional credit assistance could be obtained from other central banks.

By late afternoon, tentative word had come from Washington that prospects for the Export-Import Bank loan looked good, and that more definite word could be expected before midnight. So the one billion dollars in United States credits appeared to be virtually in the bag. It remained to tackle the Continent. It was night now in Europe, so nobody there could be tackled; the zero hour, then, was Continental opening time the next day, and the crucial period for the fate of the pound would be the few hours after that. Hayes, after leaving instructions for a bank car to pick him up at his home, in New Canaan, Connecticut, at four o’clock in the morning, took his usual commuting train from Grand Central shortly after five. He has since expressed a certain regret that he proceeded in such a routine way at such a dramatic moment. “I left the bank rather reluctantly,” he says. “In retrospect, I guess I wish I hadn’t. I don’t mean as a practical matter—I was just as useful at home, and, as a matter of fact, I ended up spending most of the evening on the phone with Charlie Coombs, who stayed at the bank—but just because something like that doesn’t happen every day in a banker’s life. I’m a creature of habit, I guess. Besides, it’s something of a tenet of mine to insist on keeping a proper balance between private and professional life.” Although Hayes does not say so, he may have been thinking of something else, too. It can safely be said to be something of a tenet of central-bank presidents or governors not to sleep at their places of business. If word were ever to get out that the methodical Hayes was doing so at a time like this, he may have reasoned, it might well be considered just as much a sign of panic as a British bank-rate rise on a Monday.

Meanwhile, Coombs was making another night of it on Liberty Street; he had gone home the previous night because the worst had momentarily appeared to be over, but now he stayed on after regular work hours with Roche, who hadn’t been home since the previous weekend. Toward midnight, Coombs received confirmation of the Export-Import Bank’s two-hundred-and-fifty-million-dollar credit, which had arrived from Washington during the evening, as promised. So now everything was braced for the morning’s effort. Coombs again installed himself in one of the uninspiring eleventh-floor cubicles, and, after a final marshalling of the facts that would be needed for the job of persuading the Continental bankers, set his clock radio for three-thirty and went to bed. A Federal Reserve man with a literary bent and a romantic temperament was later moved to draw a parallel between the Federal Reserve Bank that night and the British camp on the eve of the Battle of Agincourt in Shakespeare’s version, in which King Henry mused so eloquently on how participation in the coming action would serve to ennoble even the vilest of the troops, and how gentlemen safe in bed at home would later think themselves accursed that they had not been at the battle scene. Coombs, a practical man, had no such high-flown opinion of his situation; even so, as he dozed fitfully, waiting for morning to reach Europe, he was well aware that the events he was taking part in were like nothing that had ever happened in banking before.

II

So that evening, Tuesday, November 24, 1964, Hayes arrived at his home, in New Canaan, Connecticut, at about six-thirty, exactly as usual, having inexorably taken his usual 5:09 from Grand Central. Hayes was a tall, slim, soft-spoken man of fifty-four with keen eyes framed by owlish round spectacles, with a slightly schoolmasterish air and a reputation for unflappability. By so methodically going through familiar motions at such a time, he realized with amusement, he must seem to his colleagues to be living up to his reputation rather spectacularly. At his house, a former caretaker’s cottage of circa 1840 that the Hayeses had bought and remodelled twelve years earlier, he was greeted, as usual, by his wife, a pretty and vivacious woman of Anglo-Italian descent named Vilma but always called Bebba, who loves to travel, has almost no interest in banking, and is the daughter of the late Metropolitan Opera baritone Thomas Chalmers. Since at that time of year it was completely dark when Hayes got home, he decided to forgo a favorite early-evening unwinding activity of his—walking to the top of a grassy slope beside the house which commands a fine view across the Sound to Long Island. Anyway, he was not really in a mood to unwind; instead, he felt keyed up, and decided he might as well stay that way overnight, since the car from the bank was scheduled to call at his door so early the next morning to take him to work.

During dinner, Hayes and his wife discussed subjects like the fact that their son, Tom, who was a senior at Harvard, would be arriving home the following day for his Thanksgiving recess. Afterward, Hayes settled down in an armchair to read for a while. In banking circles, he is thought of as a scholarly, intellectual type, and, indeed, he is scholarly and intellectual in comparison with most bankers; even so, his extra-banking reading tends to be not constant and all-embracing, as his wife’s is, but sporadic, capricious, and intensive—everything about Napoleon for a while, perhaps, then a dry period, then a binge on, say, the Civil War. Just then, he was concentrating on the island of Corfu, where he and Mrs. Hayes were planning to spend some time. But before he had got very far into his latest Corfu book he was called to the telephone. The call was from the bank. There were new developments, which Coombs thought President Hayes ought to be kept abreast of.

To recapitulate in brief: drastic action to save the pound, which the Federal Reserve Bank not only would be intimately involved in but would actually join in initiating, was going to be taken by the government banks—or central banks, as they are more commonly called—of the non-Communist world’s leading nations as soon as possible after the next morning’s opening of the London and Continental financial markets, which would occur between 4 and 5 A.M. New York time. Britain was face to face with bankruptcy, the reasons being that a huge deficit in its international accounts over the previous months had resulted in concomitant losses in the gold and dollar reserves held by the Bank of England; that worldwide fear lest the newly elected Labour Government decide, or be forced, to ease the situation by devaluing the pound from its dollar parity of about $2.80 to some substantially lower figure had caused a flood of selling of pounds by hedgers and speculators in the international money markets; that the Bank of England, fulfilling an international obligation to sustain the pound at a free-market price no lower than $2.78, had been losing millions of dollars a day from its reserves, which now stood at about two billion dollars, their lowest point in many years.

The remaining hope lay in amassing, in a matter of hours before it would be too late, an unheard-of sum in short-term dollar credits to Britain from the central banks of the world’s rich nations. With such credits at its disposal, the Bank of England would presumably be able to buy up pounds so aggressively that the speculative attack could be absorbed, contained, and finally beaten back, giving Britain time to set its economic affairs in order. Just what the sum necessary for rescue should be was an open question, but earlier that day the monetary authorities of the United States and Britain had concluded that it would have to be at least two billion dollars, and perhaps even more. The United States, through the Federal Reserve Bank of New York and the Treasury-owned Export-Import Bank, in Washington, had that day committed itself to one billion; the task that remained was to persuade the other leading central banks—habitually spoken of in the central-banking world as “the Continent,” even though they include the Banks of Canada and Japan—to lend more than a billion in addition.

Nothing of the kind had ever been asked of the Continent before, through the swap network or any other way. In September, 1964, the Continent had come through with its biggest collective emergency credit so far—half a billion dollars to the Bank of England for use in defending the pound, already embattled then. Now, with this half-billion loan still outstanding and the pound in far worse straits, the Continent was about to be called upon for more than twice that sum—perhaps five times that sum. Obviously, the spirit of coöperation, if not the quality of mercy, was about to be strained. So Hayes’ musings that evening may well have run.

With such portentous matters churning around in his head, Hayes found it hard to keep his mind on Corfu. Besides, the prospect of the bank car’s arrival at four o’clock made him feel that he should go to bed early. As he prepared to do so, Mrs. Hayes commented that since he would have to get up in the middle of the night, she supposed she ought to feel sorry for him but since he was obviously looking forward with keen anticipation to whatever it was that would get him up at that hour, she envied him instead.

DOWN on Liberty Street, Coombs slept fitfully until he was awakened by the clock radio in his room at about three-thirty New York time—that is to say, eight-thirty London time and nine-thirty farther east on the European Continent. A series of foreign-exchange crises involving Europe had so accustomed him to the time differential that he was inclined to think in terms of the European day, referring casually to 8 A.M. in New York as “lunchtime,” and 9 A.M. as “midafternoon.” So when he got up it was, in his terms, “morning,” despite the stars that were shining over Liberty Street. Coombs got dressed, went to his office, on the tenth floor, where he had some breakfast provided by the bank’s regular night kitchen staff, and began placing telephone calls to the various leading central banks of the non-Communist world. All the calls were put through by one telephone operator, who handles the Federal Reserve Bank’s switchboard during off hours, and all of them were eligible for a special government-emergency priority that the bank’s officers are entitled to claim, but on this occasion it did not have to be used, because at four-fifteen, when Coombs began his telephoning, the transatlantic circuits were almost entirely clear.

The calls were made essentially to lay the groundwork for what was to come. The morning news from the Bank of England, obtained in one of the first calls from Liberty Street, was that conditions were unchanged from the previous day: the speculative attack on the pound was continuing unabated, and the Bank of England was sustaining the pound’s price at $2.7860 by throwing still more of its reserves on the market. Coombs had reason to believe that when the New York foreign-exchange market opened, some five hours later, vast additional quantities of pounds would be thrown on the market on this side of the Atlantic, and more British dollars and gold would have to be spent. He conveyed this alarming intelligence to his counterparts at such institutions as the Deutsche Bundesbank, in Frankfurt; the Banque de France, in Paris; the Banca d’Italia, in Rome; and the Bank of Japan, in Tokyo. (In the last case, the officers had to be reached at their homes, for the fourteen-hour time difference made it already past 6 P.M. in the Orient.) Then, coming to the crux of the matter, Coombs informed the representatives of the various banks that they were soon to be asked, in behalf of the Bank of England, for a loan far bigger than any they had ever been asked for before. “Without going into specific figures, I tried to make the point that it was a crisis of the first magnitude, which many of them still didn’t realize,” Coombs has said. An officer of the Bundesbank, who knew as much about the extent of the crisis as anyone outside London, Washington, and New York, has said that in Frankfurt they were “mentally prepared”—or “braced” might be a better word—for the huge touch that was about to be put on them, but that right up to the time of Coombs’ call they had been hoping the speculative attack on the pound would subside of its own accord, and even after the call they had no idea how much they might be asked for. In any event, as soon as Coombs was off the wire the Bundesbank’s governor called a board of managers’ meeting, and, as things turned out, the meeting was to remain in session all day long.

Still, all this was preparatory. Actual requests, in specific amounts, had to be made by the head of one central bank of the head of another. At the time Coombs was making his softening-up calls, the head of the Federal Reserve Bank was in the bank’s limousine, somewhere between New Canaan and Liberty Street, and the bank’s limousine, in flagrant nonconformity with the James Bond style of high-level international dealings, was not equipped with a telephone.

HAYES, the man being awaited, had been president of the Federal Reserve Bank of New York for a little over eight years, having been chosen for the job, to his own and almost everyone else’s bewilderment, not from some position of comparable eminence or from the Federal Reserve’s own ranks but from among the swarming legions of New York commercial-bank vice-presidents. Unorthodox as the appointment seemed at the time, in retrospect it seems providential. A study of Hayes’ early life and youthful career gives the impression that everything was somehow intended to prepare him for dealing with this sort of international monetary crisis, just as the life of a writer or a painter sometimes seems to have consisted primarily of preparation for the execution of a single work of art. If Divine Providence, or perhaps its financial department, when the huge sterling crisis was imminent, had needed an assessment of Hayes’ qualifications for coping with this task and had hired the celestial equivalent of an executive recruiter to report on him, the dossier might have read something like this:

“Born in Ithaca, New York, on July 4, 1910; grew up mostly in New York City. Father a professor of Constitutional law at Cornell, later a Manhattan investment counsellor; mother a former schoolteacher, enthusiastic suffragette, settlement-house worker, and political liberal. Both parents birdwatchers. Family atmosphere intellectual, freethinking, and public-spirited. Attended private schools in New York City and Massachusetts and was usually his school’s top-ranking student. Then went to Harvard (freshman year only) and Yale (three years: mathematics major, Phi Beta Kappa in junior year, ineffectual oar on class crew, graduated 1930 as top B.A. of class). Studied at New College, Oxford, as Rhodes Scholar 1931–33; there became firm Anglophile, and wrote thesis on ‘Federal Reserve Policy and the Working of the Gold Standard in the Years 1923–30,’ although he had no thought of ever joining the Federal Reserve. Wishes now he had the thesis, in case it contains blinding youthful illuminations, but neither he nor New College can find it. Entered New York commercial banking in 1933, and rose slowly but steadily (1938 annual salary twenty-seven hundred dollars). Attained title (albeit feeble title) of assistant secretary at New York Trust Company in 1942; after a Navy stint, in 1947 became an assistant vice-president and two years later head of New York Trust’s foreign department despite total lack of previous experience in foreign banking. Apparently learned fast; astounded his colleagues and superiors, and gained reputation among them as foreign-exchange wizard by predicting precise amount of 1949 pound devaluation ($4.03 to $2.80) a few weeks before it occurred.

“Was appointed president of Federal Reserve Bank of New York in 1956, to his utter astonishment and that of New York banking community, most of which had never heard of this rather shy man. Reacted calmly by taking his family on a two-month vacation in Europe. The consensus now is that Federal Reserve Bank’s directors had almost implausible prescience, or luck, in picking a foreign-exchange expert just when the dollar was weakening and international monetary coöperation becoming crucially important. Is liked by European central bankers, who call him Al (which often comes out sounding more like All). Earns seventy-five thousand dollars a year, making him the second-highest-paid federal official after the President of the United States, Federal Reserve Bank salaries being intended to be more or less competitive in banking terms rather than in government-employee terms. Is very tall and very thin. Tries to observe regular commuting hours and keep his private life sacrosanct, as a matter of principle; considers regular evening work at an office ‘outrageous.’ Complains that his son has a low opinion of business; attributes this to ‘reverse snobbery’—but even then remains calm.

“Conclusion: this is the very man for the job of representing the United States’ central bank in a sterling crisis.”

And, indeed, Hayes readily fits the picture of a perfectly planned and perfectly tooled piece of machinery to perform a certain complex task, but there are other sides to him, and his character contains as many paradoxes as the next man’s. Although hardly anyone in banking ever tries to describe Hayes without using the words “scholarly” and “intellectual,” Hayes tends to think of himself as an indifferent scholar and intellectual but an effective man of action, and on the latter score the events of November 25, 1964, seem to bear him out. Although in some ways he is the complete banker—in conformity with H. G. Wells’ notion of such a banker, he seems to “take money for granted as a terrier takes rats,” and to be devoid of philosophical curiosity about it—he has a distinctly unbankerlike philosophical curiosity about almost everything else. And although casual acquaintances sometimes pronounce him dull, his close friends speak of a rare capacity for enjoyment and an inner serenity that seem to make him immune to the tensions and distractions that fragment the lives of so many of his contemporaries. Doubtless the inner serenity was put to a severe test as Hayes rode in the bank car toward Liberty Street. When he arrived at his desk at about five-thirty, Hayes’ first act was to punch Coombs’ button on his interoffice phone and get the foreign-department chief’s latest appraisal of the situation. He learned that, as he had expected, the Bank of England’s sickening dollar drain was continuing unabated. Worse than that, though; Coombs said his contacts with local bankers who were also on emergency early-morning vigil (men in the foreign departments of the huge commercial banks like the Chase Manhattan and the First National City) indicated that overnight there had accumulated a fantastic pile of orders to unload pounds on the New York market as soon as it opened. The Bank of England, already almost inundated, could expect a new tidal wave from New York to hit in four hours. The need for haste thus became even more urgent. Hayes and Coombs agreed that the project of putting together an international package of credits to Britain should be announced as soon as possible after the New York opening—perhaps as early as ten o’clock. So that the bank would have a single center for all its foreign communications, Hayes decided to forsake his own office—a spacious one with panelled walls and comfortable chairs grouped around a fireplace—and let Coombs’ quarters, down the hall, which were much smaller and more austere but more efficiently arranged, serve as the command post. Once there, he picked up one of three telephones and asked the operator to get him Lord Cromer, at the Bank of England. When the connection was made, the two men—the key figures in the proposed rescue operation—reviewed their plans a final time, checking the sums they had tentatively decided to ask of each central bank and agreeing on who would call whom first.

In the eyes of some people, Hayes and Lord Cromer make an oddly assorted pair. Besides being a deep-dyed aristocrat, George Rowland Stanley Baring, third Earl of Cromer, is a deep-dyed banker. A scion of the famous London merchant bank of Baring Brothers, the third Earl and godson of a monarch went to Eton and Trinity College, Cambridge, and spent twelve years as a managing director of his family’s bank and then two years—from 1959 to 1961—as Britain’s economic minister and chief representative of his country’s Treasury in Washington. If Hayes had acquired his mastery of the arcana of international banking by patient study, Lord Cromer, who is no scholar, acquired his by heredity, instinct, or osmosis. If Hayes, despite his unusual physical stature, could easily be overlooked in a crowd, Lord Cromer, who is of average height but debonair and dashing, would cut a figure anywhere. If Hayes is inclined to be a bit hesitant about casual intimacies, Lord Cromer is known for his hearty manner, and has—doubtless unintentionally—both flattered and obscurely disappointed many American bankers who have been awed by his title by quickly encouraging them to call him Rowley. “Rowley is very self-confident and decisive,” an American banker has said. “He’s never afraid to barge in, because he’s convinced of the reasonableness of his own position. But then he’s a reasonable man. He’s the kind of man who in a crisis would be able to grab the telephone and do something about it.” This banker confesses that until November 25, 1964, he had not thought Hayes was that kind of man.

Beginning at about six o’clock that morning, Hayes did grab the phone, right along with Lord Cromer. One after another, the leading central bankers of the world—among them President Karl Blessing, of the Deutsche Bundesbank; Dr. Guido Carli, of the Bank of Italy; Governor Jacques Brunet, of the Bank of France; Dr. Walter Schwegler, of the Swiss National Bank; and Governor Per Åsbrink, of the Swedish Riksbank—picked up their phones and discovered, some of them with considerable surprise, the degree of gravity that the sterling crisis had reached in the past day, the fact that the United States had committed itself to a short-term loan of one billion dollars, and that they were being asked to dig deep into their own nations’ reserves to help tide sterling over. Some first heard all this from Hayes, some from Lord Cromer; in either case, they heard it not from a casual or official acquaintance but from a fellow-member of that esoteric fraternity the Basel club. Hayes, whose position as representative of the one country that had already pledged a huge sum cast him almost automatically as the leader of the operation, was careful to make it clear in each of his calls that his part in the proceedings was to put the weight of the Federal Reserve behind a request that formally came from the Bank of England. “The pound’s situation is critical, and I understand the Bank of England is requesting a credit line of two hundred and fifty million dollars from you,” he would say, in his calm way, to one Continental central-bank governor or another. “I’m sure you understand that this is a situation where we all have to stand together.” (He and Coombs always spoke English, of course. Despite the fact that he had recently been taking French refresher lessons, and that at Yale he made one of the most impressive academic records in memory, Hayes doggedly remained a dub at languages and still did not trust himself to carry on an important business conversation in anything but English.) In those cases in which he was on particularly close terms with his Continental counterpart, he spoke more informally, using a central-bankers’ jargon in which the conventional numerical unit is a million dollars. Hayes would say smoothly in such cases, “Do you think you can come in for, say, a hundred and fifty?” Regardless of the degree of formality of the approach Hayes made, the first response, he says, was generally cageyness, not unmixed with shock. “Is it really as bad as all that, Al? We were still hoping that the pound would recover on its own” is the kind of thing he recalls having heard several times. When Hayes assured them that it was indeed as bad as all that, and that the pound would certainly not recover on its own, the usual response was something like “We’ll have to see what we can do and then call you back.” Some of the Continental central bankers have said that what impressed them most about Hayes’ first call was not so much what he said as when he said it. Realizing that it was still well before dawn in New York, and knowing Hayes’ addiction to what are commonly thought of as bankers’ hours, these Europeans perceived that things must be grave the moment they heard his voice. As soon as Hayes had broken the ice at each Continental bank, Coombs would take over and get down to details with his counterparts.

The first round of calls left Hayes, Lord Cromer, and their associates on Liberty and Threadneedle Streets relatively hopeful. Not one bank had given them a flat no—not even, to their delight, the Bank of France, although French policy had already begun moving sharply away from coöperation with Britain and the United States in monetary matters, among others. Furthermore, several governors had surprised them by suggesting that their countries’ subscriptions to the loan might actually be bigger than those suggested. With this encouragement, Hayes and Lord Cromer decided to raise their sights. They had originally been aiming for credits of two and a half billion dollars; now, on reconsideration, they saw that there was a chance for three billion. “We decided to up the ante a little here and there,” Hayes says. “There was no way of knowing precisely what sum would be the least that would do the job of turning the tide. We knew we would be relying to a large extent on the psychological effect of our announcement—assuming we would be able to make the announcement. Three seemed to us a good, round figure.”

But difficulties lay ahead, and the biggest difficulty, it became clear as the return calls from the various banks began to come in, was to get the thing done quickly. The hardest point to convey, Hayes and Coombs found, was that each passing minute meant a further loss of a million dollars or more to the British reserves, and that if normal channels were followed the loans would unquestionably come too late to avert devaluation of the pound. Some of the central banks were required by law to consult their governments before making a commitment and some were not, but even those that were not insisted on doing so, as a courtesy; this took time, especially since more than one Finance Minister, unaware that he was being sought to approve an enormous loan on an instant’s notice, with little evidence of the necessity for it beyond the assurance of Lord Cromer and Hayes, was temporarily unavailable. (One happened to be engaged in debate in his country’s parliament.) And even in cases where the Finance Minister was at hand, he was sometimes reluctant to act in such a shotgun way. Governments move more deliberately in money matters than central bankers do. Some of the Finance Ministers said, in effect, that upon proper submission of a balance sheet of the Bank of England, along with a formal written application for the emergency credit, they would gladly consider the matter. Furthermore, some of the central banks themselves showed a maddening inclination to stand on ceremony. The foreign-exchange chief of one bank is said to have replied to the request by saying, “Well, isn’t this convenient! We happen to have a board meeting scheduled for tomorrow. We’ll take the matter up then, and afterward we’ll get in touch with you.” The reply of Coombs, who happened to be the man on the wire in New York, is not recorded in substance, but its manner is reported to have been uncharacteristically vehement. Even Hayes’ celebrated imperturbability was shaken a time or two, or so those who were present have said; his tone remained as calm and even as ever, but its volume rose far above the usual level.

The problems that the Continental central banks faced in meeting the challenge are well exemplified by the situation at the richest and most powerful of them, the Deutsche Bundesbank. Its board of managers was already sitting in emergency session as a result of Coombs’ early call when another New York call—this one from Hayes to President Blessing—gave the Bundesbank its first indication of exactly how much it was being asked to put up. The amounts the various central banks were asked for that morning have never been made public, but, on the basis of what has become known, it is reasonable to assume that the Bundesbank was asked for half a billion dollars—the highest quota of the lot, and certainly the largest sum that any central bank other than the Federal Reserve had ever been called upon to supply to another on a few hours’ notice. Hard on the heels of Hayes’ call conveying this jarring information, Blessing heard from Lord Cromer, in London, who confirmed everything that Hayes had said about the seriousness of the crisis and repeated the request. Wincing a bit, perhaps, the Bundesbank managers agreed in principle that the thing had to be done. But right there their problems began. Proper procedure must be adhered to, Blessing and his aides decided. Before taking any action, they must consult with their economic partners in the European Common Market and the Bank for International Settlements, and the key man to be consulted, since he was then serving as president of the Bank for International Settlements, was Dr. Marius W. Holtrop, governor of the Bank of the Netherlands, which, of course, was also being asked to contribute. A rush person-to-person call was put through from Frankfurt to Amsterdam. Dr. Holtrop, the Bundesbank managers were informed, wasn’t in Amsterdam; by chance, he had taken a train that morning to The Hague to meet his country’s Finance Minister for consultation on other matters. For the Bank of the Netherlands to make any such important commitment without the knowledge of its governor was out of the question, and, similarly, the Bank of Belgium, a nation whose monetary policies are linked inextricably with the Netherlands’, was reluctant to act until Amsterdam had given its O.K. So for an hour or more, as millions of dollars continued to drain out of the Bank of England and the world monetary order stood in jeopardy, the whole rescue operation was hung up while Dr. Holtrop, crossing the Dutch lowlands by train, or perhaps already in The Hague and tied up in a traffic jam, could not be found.

ALL this, of course, meant agonizing frustration in New York. As morning began here at last, Hayes’ and Coombs’ campaign got a boost from Washington. The leading government monetary authorities—Martin at the Federal Reserve Board, Dillon and Roosa at the Treasury—had all been intimately involved in the previous day’s planning for the rescue, and of course part of the planning had been the decision to let the New York bank, as the Federal Reserve System’s and the Treasury’s normal operating arm in international monetary dealings, serve as campaign headquarters. So the members of the Washington contingent had slept at home and come to their offices at the normal hour. Now, having learned from Hayes of the difficulties that were developing, Martin, Dillon, and Roosa pitched in with transatlantic calls of their own to emphasize the extent of America’s concern over the matter. But no number of calls from anywhere could hold back the clock—or, for that matter, find Dr. Holtrop—and Hayes and Coombs finally had to abandon their idea of having a credit bundle ready in time for an announcement to the world at or near 10 A.M. in New York. And there were other reasons, too, for a fading of the early hopes. As the New York markets opened, the extent of the alarm that had spread around the financial world overnight was only too clearly revealed. The bank’s foreign-exchange trading desk, on the seventh floor, reported that the assault on the pound at the New York opening had been fully as terrifying as they had expected, and that the atmosphere in the local exchange market had reached a state not far from panic. From the bank’s securities department came an alarming report that the market for United States government bonds was coming under the heaviest pressure in years, reflecting an ominous lack of confidence in the dollar on the part of bond traders. This intelligence served as a grim reminder to Hayes and Coombs of something they knew already—that a fall of the pound in relation to the dollar could quite possibly be followed, in a kind of chain reaction, by a forced devaluation of the dollar in relation to gold, which might cause monetary chaos everywhere. If Hayes and Coombs had been permitting themselves any moments of idle reverie in which to picture themselves simply as good Samaritans, this was just the news to bring them back to reality. And then word arrived that the wild tales flying around Wall Street showed signs of crystallizing into a single tale, demoralizingly credible because it was so specific. The British government, it was being said, would announce a sterling devaluation at around noon New York time. Here was something that could be authoritatively refuted, at least in respect to timing, since Britain would obviously not devalue while the credit negotiations were under way. Torn between the desire to quell a destructive rumor and the need to keep the negotiations secret until they were concluded, Hayes compromised. He had one of his associates call a few key Wall Street bankers and traders to say, as emphatically as possible, that the latest devaluation rumor was, to his firm knowledge, false. “Can you be more specific?” the associate was asked, and he replied, because there was nothing else he could reply, “No, I can’t.”

This unsupported word was something, but it was not enough; the foreign-exchange and bond markets were only momentarily reassured. There were times that morning, Hayes and Coombs now admit, when they put down their telephones, looked at each other across the table in Coombs’ office, and wordlessly exchanged the thought: It isn’t going to be done in time. But—in the best tradition of melodrama, which sometimes seems to survive stubbornly in nature at a time when it is dead in art—just when things looked darkest, good news began to arrive. Dr. Holtrop had been tracked down in a restaurant in The Hague, where he was having lunch with the Netherlands’ Minister of Finance, Dr. J. W. Witteveen; moreover, Dr. Holtrop had endorsed the rescue operation, and as for the matter of consulting his government, that was no problem, since the responsible representative of his government was sitting across the table from him. The chief obstacle was thus overcome, and after Dr. Holtrop had been reached the difficulties began narrowing down to annoyances like the necessity for continually apologizing to the Japanese for routing them out of bed as midnight arrived and passed in Tokyo. The tide had turned. Before noon in New York, Hayes and Coombs, and Lord Cromer and his deputies in London as well, knew that they had agreement in principle from ten Continental central banks—those in West Germany, Italy, France, the Netherlands, Belgium, Switzerland, Canada, Sweden, Austria, and Japan—and also from the Bank for International Settlements.

There remained the wait while each central bank went through the painfully slow process of completing whatever formalities were required to make its action legal and proper. The epitome of orderliness, the Bundesbank, could not act until it had obtained ratification from the members of its board of directors, most of whom were in provincial outposts scattered around Germany. The two leading Bundesbank deputies divided up the job of calling the absent directors and persuading them to go along—a job that was made more delicate by the fact that the absent directors were being asked to approve something that, in effect, the bank’s home office had already undertaken to do. At midafternoon by Continental time, while the two deputies were busy at this exercise in doubletalk, Frankfurt got a new call from London. It was Lord Cromer, no doubt sounding as exasperated as his situation permitted, and what he had to say was that the rate of British reserve loss had become so rapid that the pound could not survive another day. Formalities notwithstanding, it was a case of now or never. (The Bank of England’s reserve loss that day has never been announced. The Economist later passed along a guess that it may have run to five hundred million dollars, or about a quarter of all that remained in Britain’s reserve coffers.) After Lord Cromer’s call, the Bundesbank deputies tempered their tact with brevity; they got unanimous approval from the directors, and shortly after five o’clock Frankfurt time they were ready to tell Lord Cromer and Hayes that the Bundesbank was in for the requested half-billion dollars.

Other central banks were coming in, or were already in. Canada and Italy put up two hundred million dollars each, and doubtless were glad to do it, inasmuch as their own currencies had been the beneficiaries of much smaller but otherwise similar international bailout operations in 1962 and earlier in 1964, respectively. If a subsequent report in the London Times is to be accepted, France, Belgium, and the Netherlands, no one of which ever announced the amount of its participation, each contributed two hundred million dollars, too. Switzerland is known to have come through with a hundred and sixty million dollars and Sweden with a hundred million dollars, while Austria, Japan, and the Bank for International Settlements rounded out the bundle with still undisclosed amounts. By lunchtime in New York, it was all over but the shouting, and the last part of the task was to make the shouting as effective as possible to give it the fastest and most forcible impact on the market.

The task brought to the fore another Federal Reserve Bank man, its vice-president in charge of public information, Thomas Olaf Waage. Waage (his name rhymes with “saga”) had been present and active in Coombs’ office almost all morning, constantly on the phone as liaison man with Washington. A born-and-bred New Yorker, the son of a Norwegian-born local tug pilot and fishing-boat captain, Waage is a man of broad and unfeigned outside interests—among them opera, Shakespeare, Trollope, and his ancestral heritage, sailing—and one consuming passion, which is striving to convey not only the facts but also the drama, suspense, and excitement of central banking to a skeptical and often glassy-eyed public. In short, a banker who is a hopeless romantic. So now he was overjoyed when Hayes assigned to him the job of preparing a news release that would inform the world, as emphatically as possible, about the rescue operation. While Hayes and Coombs struggled to tie up the loose ends of their package, Waage was busy coördinating timing with his counterparts at the Federal Reserve Board and the Treasury Department in Washington, which would share in the issuing of the American announcement, and at the Bank of England, which, Hayes and Lord Cromer had agreed, would issue a simultaneous announcement of its own. “Two o’clock in the afternoon New York time was the hour we agreed upon for the announcements, when it began to look as if we’d have something to announce by that time,” Waage recalls. “That was too late to catch the Continental and London markets that day, of course, but it left the whole afternoon ahead until the New York markets closed, at around five, and if the sterling market could be dramatically reversed here before closing time, chances were the recovery would continue on the Continent and in London next day, when the American markets would be closed for Thanksgiving. As for the amount of the combined credit we were planning to announce, it still stood at three billion dollars. But I remember that a last-minute snag of a particularly embarrassing sort developed. Very late in the game, when we thought the whole package was in hand, Charlie Coombs and I counted up what had been pledged, just to make sure, and we got only two billion eight hundred and fifty million. Apparently, we’d mislaid a hundred and fifty million dollars somewhere. That’s just what we’d done—we’d miscalculated. So it was all right.”

The package was assembled in time to meet the new schedule, and statements from the Federal Reserve, the Treasury, and the Bank of England duly went out to the news media simultaneously, at 2 P.M. in New York and 7 P.M. in London. As a result of Waage’s influence, the American version, though it fell somewhat short of the mood of, say, the last scene of “Die Meistersinger,” was nevertheless exceptionally stirring as bank utterances go, speaking with a certain subdued flamboyance of the unprecedented nature of the sum involved and of how the central banks had “moved quickly to mobilize a massive counterattack on speculative selling of the pound.” The London release had a different kind of distinction, achieving something of the quintessential Britishness that seems to be reserved for moments of high crisis. It read simply, “The Bank of England have made arrangements under which $3,000M. are made available for the support of sterling.”

APPARENTLY, the secrecy of the operation had been successfully preserved and the announcement struck the New York foreign-exchange market all of a heap, because the reaction was as swift and as electric as anyone could have wished. Speculators against the pound decided instantly and with no hesitation that their game was up. Immediately after the announcement, the Federal Reserve Bank put in a bid for pounds at $2.7868—a figure slightly above the level at which the pound had been forcibly maintained all day by the Bank of England. So great was the rush of speculators to get free of their speculative positions by buying pounds that the Federal Reserve Bank found very few pounds for sale at that price. Around two-fifteen, there were a strange and heartening few minutes in which no sterling was available in New York at any price. Pounds were eventually offered for sale again at a higher price, and were immediately gobbled up, and thus the price went on climbing all afternoon, to a closing of just above $2.79.

Triumph! The pound was out of immediate danger; the thing had worked. Tributes to the success of the operation began to pour in from everywhere. Even the magisterial Economist was to declare shortly, “Whatever other networks break down, it seems, the central bankers [have an] astonishing capacity for instant results. And if theirs is not the most desirable possible mechanism, geared always to short-term support of the status quo, it happens to be the only working one.”

So, with the pound riding reasonably high again, the Federal Reserve Bank shut up for Thanksgiving, and the bankers went home. Coombs recalls having drunk a Martini unaccustomedly fast. Hayes, home in New Canaan, found that his son, Tom, had arrived from Harvard. Both his wife and his son noticed that he seemed to be in an unusual state of excitement, and when they asked about it he replied that he had just been through the most completely satisfying day of his entire working career. Pressed for details, he gave them a condensed and simplified account of the rescue operation, keeping constantly in mind the fact that his audience consisted of a wife who had no interest in banking and a son who had a low opinion of business. The reaction he got when his recital was concluded was of a sort that might warm the heart of a Waage, or of any earnest explicator of banking derring-do to the unsympathetic layman. “It was a little confusing at first,” Mrs. Hayes has said, “but before you were finished you had us on the edge of our chairs.”

Waage, home in Douglaston, told his wife of the day’s events in his characteristic way. “It was St. Crispin’s Day,” he exclaimed as he burst through his doorway, “and I was with Harry!”

III

HAVING first become interested in the pound and its perils at the time of the 1964 crisis, I found myself hooked by the subject. Through the subsequent three and a half years, I followed its ups and downs in the American and British press, and at intervals went down to the Federal Reserve Bank to renew my acquaintance with its officers and see what additional enlightenment I could garner. The whole experience was a resounding vindication of Waage’s thesis that central banking can be suspenseful.

The pound wouldn’t stay saved. A month after the big 1964 crisis, the speculators resumed their assaults, and by the end of that year the Bank of England had used up more than half a billion of its new three-billion-dollar credit. Nor did the coming of the new year bring surcease. In 1965, after a relatively buoyant January, the pound came under pressure again in February. The November credit had been for a term of three months; now, as the term ran out, the nations that had made it decided to extend it for another three months, so that Britain would have more time to put its economy in order. But late in March the British economy was still shaky, the pound was back below $2.79, and the Bank of England was back in the market. In April, Britain announced a tougher budget, and a rally followed, but the rally proved to be short-lived. By early summer, the Bank of England had drawn, and committed to the battle against the speculators, more than a third of the whole three billion. Heartened, the speculators pressed their attack. Late in June, high British officials, let it be known that they now considered the sterling crisis over, but they were whistling in the dark; in July the pound sank again, despite further belt-tightening in the British domestic economy. By the end of July, the world foreign-exchange market had become convinced that a new crisis was shaping up. By late August, the crisis had arrived, and in some ways it was a more dangerous one than that of the previous November. The trouble was the market seemed to believe that the central banks were tired of pouring money into the battle and would now let sterling fall, regardless of the consequences. About that time, I telephoned a leading local foreign-exchange man I know to ask him what he thought of the situation, and he replied, “To my knowledge, the New York market is one hundred per cent convinced that devaluation of sterling is coming this fall—and I don’t mean ninety-five per cent, I mean one hundred per cent.” Then, on September 11th, I read in the papers that the same group of central banks, this time with the exception of France, had come through with another last-minute rescue package, the amount not being announced at the time—it was subsequently reported to have been around one billion—and over the next few days I watched the market price of the pound rise, little by little, until by the end of the month it was above $2.80 for the first time in sixteen months.

The central banks had done it again, and somewhat later I went down to the Federal Reserve Bank to learn the details. It was Coombs I saw, and I found him in a sanguine and extraordinarily talkative mood. “This year’s operation was entirely different from last year’s,” he told me. “It was an aggressive move on our part, rather than a last-ditch-defensive one. You see, early this September we came to the conclusion that the pound was grossly oversold—that is, the amount of speculation against it was way out of proportion to what was justified by the economic facts. Actually, during the first eight months of the year, British exports had risen more than five per cent over the corresponding period in 1964, and Britain’s 1964 balance-of-payments deficit seemed likely to be cut in half in 1965. Very promising economic progress, and the bearish speculators seemed not to have taken account of it. They had gone right on selling the pound short, on the basis of technical market factors. They were the ones who were in an exposed position now. We decided the time was ripe for an official counterattack.”

The counterattack, Coombs went on to explain, was plotted in leisurely fashion this time—not on the telephone but face to face, over the weekend of September 5th in Basel. The Federal Reserve Bank was represented by Coombs, as usual, and also by Hayes, who cut short his long-planned vacation on Corfu to be there. The coup was planned with military precision. It was decided not to announce the amount of the credit package this time, in order to further confuse and disconcert the enemy, the speculators. The place chosen for the launching was the trading room of the Federal Reserve Bank, and the hour chosen was 9 A.M. New York time—early enough for London and the Continent to be still conducting business—on September 10th. At zero hour, the Bank of England fired a preliminary salvo by announcing that new central-bank arrangements would shortly enable “appropriate action” to be taken in the exchange markets. After allowing fifteen minutes for the import of this demurely menacing message to sink in, the Federal Reserve Bank struck. Using, with British concurrence, the new bundle of international credit as its ammunition, it simultaneously placed with all the major banks operating in the New York exchange market bids for sterling totalling nearly thirty million dollars, at the then prevailing rate of $2.7918. Under this pressure, the market immediately moved upward, and the Federal Reserve Bank pursued the movement, raising its bid price step by step. At $2.7934, the bank temporarily ceased operations—partly to see what the market would do on its own, partly just to confuse things. The market held steady, showing that at that level there were now as many independent buyers of sterling as there were sellers, and that the bears—speculators—were losing their nerve. But the bank was far from satisfied; returning vigorously to the market, it bid the price on up to $2.7945 in the course of the day. And then the snowball began to roll by itself—with the results I had read about in my newspapers. “It was a successful bear squeeze,” Coombs told me with a certain grim relish, which was easy to sympathize with; I found myself musing that for a banker to rout his opponents, to smite them hip and thigh and drive them to cover, and not for personal or institutional profit but, rather, for the public good, must be a source of rare, unalloyed satisfaction.

I later learned from another banker just how painfully the bears had been squeezed. Margins of credit on currency speculation being what they are—for example, to commit a million dollars against the pound a speculator might need to put up only thirty or forty thousand dollars in cash—most dealers had made commitments running into the tens of millions. When a dealer’s commitment was ten million pounds, or twenty-eight million dollars, each change of one-hundredth of a cent in the price of the pound meant a change of a thousand dollars in the value of his account. Between the $2.7918 on September 10th, then, and the $2.8010 that the pound reached on September 29th, such a dealer on the short side of the pound would have lost ninety-two thousand dollars—enough, one might suppose, to make him think twice before selling sterling short again.

An extended period of calm followed. The air of impending crisis that had hung over the exchanges during most of the preceding year disappeared, and for more than six months the world sterling market was sunnier than it had been at any time in recent years. “The battle for the pound sterling is now ended,” high British officials (anonymous, and wisely so) announced in November, on the first anniversary of the 1964 rescue. Now, the officials said, “we’re fighting the battle for the economy.” Apparently, they were winning that battle, too, because when Britain’s balance-of-payments position for 1965 was finally calculated, it showed that the deficit had been not merely halved, according to predictions, but more than halved. And meanwhile the pound’s strength enabled the Bank of England not merely to pay off all its short-term debts to other central banks but also to accumulate in the open market, in exchange for its newly desirable pounds, more than a billion fresh dollars to add to its precious reserves. Thus, between September, 1965, and March, 1966, those reserves rose from two billion six hundred million dollars to three billion six hundred million—a fairly safe figure. And then the pound breezed nicely through a national election campaign—as always, a stormy time for the currency. When I saw Coombs in the spring of 1966, he seemed as cocky and blasé about sterling as an old-time New York Yankee rooter about his team.

I had all but concluded that following the fortunes of the pound was no longer any fun when a new crisis exploded. A seamen’s strike contributed to a recurrence of Britain’s trade deficit, and in early June of 1966 the quotation was back below $2.79 and the Bank of England was reported to be back in the market spending its reserves on the defense. On June 13th, with something of the insouciance of veteran firemen responding to a routine call, back came the central banks with a new bundle of short-term credits. But these helped only temporarily, and toward the end of July, in an effort to get at the root of the pound’s troubles by curing the deficit once and for all, Prime Minister Wilson imposed on the British people the most stringent set of economic restraints ever applied in his country in peacetime—high taxes, a merciless squeeze on credit, a freeze on wages and prices, a cut in government welfare spending, and a limit of a hundred and forty dollars on the annual amount that each Briton could spend on travel abroad. The Federal Reserve, Coombs told me later, helped by moving into the sterling market immediately after the British announcement of the austerity program, and the pound reacted satisfactorily to this prodding. In September, for good measure, the Federal Reserve increased its swap line with the Bank of England from seven hundred and fifty million to one billion three hundred and fifty million dollars. I saw Waage in September, and he spoke warmly of all the dollars that the Bank of England was again accumulating. “Sterling crises have become a bore,” the Economist remarked at about this time, with the most reassuring sort of British phlegm.

Calm again—and again for just a little more than six months. In April of 1967, Britain was free of short-term debt and had ample reserves. But within a month or so came the first of a series of heartbreaking setbacks. Two consequences of the brief Arab-Israeli war—a huge flow of Arab funds out of sterling into other currencies, and the closing of the Suez Canal, one of Britain’s main trade arteries—brought on a new crisis almost overnight. In June, the Bank of England (under new leadership now, for in 1966 Lord Cromer had been succeeded as governor by Sir Leslie O’Brien) had to draw heavily on its swap line with the Federal Reserve, and in July the British government found itself forced to renew the painful economic restraints of the previous year; even so, in September the pound slipped down to $2.7830, its lowest point since the 1964 crisis. I called my foreign-exchange expert to ask why the Bank of England—which in November, 1964, had set its last-line trench at $2.7860, and which, according to its latest statement, now had on hand reserves amounting to more than two and a half billion dollars—was letting the price slide so dangerously near the absolute bottom (short of devaluation) of $2.78. “Well, the situation isn’t quite as desperate as the figure suggests,” he replied. “The speculative pressure so far isn’t anything like as strong as it was in 1964. And the fundamental economic position this year—up to now, at least—is much better. Despite the Middle East war, the austerity program has taken hold. For the first eight months of 1967, Britain’s international payments have been nearly in balance. The Bank of England is evidently hoping that this period of weakness of the pound will pass without its intervention.”

At about that time, however, I became aware of a disturbing portent in the air—the apparent abandonment by the British of their long-standing taboo against bandying about the word “devaluation.” Like other taboos, this one seemed to have been based on a combination of practical logic (talk about devaluation could easily start a speculative stampede and thereby bring it on) and superstition. But now I found devaluation being freely and frequently discussed in the British press, and, in several respected journals, actually advocated. Nor was that all. Prime Minister Wilson, it is true, continued to follow a careful path around the word, even in the very act of pledging, as he did over and over, that his government would abstain from the deed; there would be “no change in existing policy” as to “overseas monetary matters,” he said, delicately, on one occasion. On July 24th, though, Chancellor of the Exchequer James Callaghan spoke openly in the House of Commons about devaluation, complaining that advocacy of it as a national policy had become fashionable, declaring that such a policy would represent a breach of faith with other nations and their people and also pledging that his government would never resort to it. His sentiments were familiar and reassuring; his straightforward expression of them was just the opposite. In the darkest days of 1964, no one had said “devaluation” in Parliament.

All through the autumn, I had a feeling that Britain was being overtaken by a fiendish concatenation of cruel mischances, some specifically damaging to the pound and others merely crushing to British morale. The previous spring, oil from a wrecked, and wretched, tanker had defiled the beaches of Cornwall; now an epidemic was destroying tens, and ultimately hundreds, of thousands of head of cattle. The economic straitjacket that Britain had worn for more than a year had swelled unemployment to the highest level in years and made the Labour Government the most unpopular government in the postwar era. (Six months later, in a poll sponsored by the Sunday Times, Britons would vote Wilson the fourth most villainous man of the century, after Hitler, de Gaulle, and Stalin, in that order.) A dock strike in London and Liverpool that began in mid-September and was to drag on for more than two months decreased still further the already hobbled export trade, and put an abrupt end to Britain’s remaining hope of ending the year with its international accounts in balance. Early in November, 1967, the pound stood at $2.7822, its lowest point in a decade. And then things went downhill fast. On the evening of Monday the thirteenth, Wilson took the occasion of his annual appearance at the Lord Mayor of London’s banquet—the very platform he had used for his fiery commitment to the defense of sterling in the crisis three years earlier—to implore the country and the world to disregard, as distorted by temporary factors, his nation’s latest foreign-trade statistics, which would be released the next day. On Tuesday the fourteenth, Britain’s foreign-trade figures, duly released, showed an October deficit of over a hundred million pounds—the worst ever reported. The Cabinet met at lunch on Thursday the sixteenth, and that afternoon, in the House of Commons, Chancellor Callaghan, upon being asked to confirm or deny rumors of an enormous new central-bank credit that would be contingent upon still further unemployment-breeding austerity measures, replied with heat, and with what was later called a lack of discretion, “The Government will take what decisions are appropriate in the light of our understanding of the needs of the British economy, and no one else’s. And that, at this stage, does not include the creation of any additional unemployment.”

With one accord, the exchange markets decided that the decision to devalue had been taken and that Callaghan had inadvertently let the cat out of the bag. Friday the seventeenth was the wildest day in the history of the exchange markets, and the blackest in the thousand-year history of sterling. In holding it at $2.7825—the price decided on this time as the last-line trench—the Bank of England spent a quantity of reserve dollars that it may never see fit to reveal; Wall Street commercial bankers who have reason to know have estimated the amount at somewhere around a billion dollars, which would mean a continuous, day-long reserve drain of over two million per minute. Doubtless the British reserves dropped below the two-billion-dollar mark, and perhaps far below it. Late on a Saturday—November 18th—full of confused alarms, Britain announced its capitulation. I heard about it from Waage, who telephoned me that afternoon at five-thirty New York time. “As of an hour ago, the pound was devalued to two dollars and forty cents, and the British bank rate went to eight per cent,” he said. His voice was shaking a little.

ON Saturday night, bearing in mind that scarcely anything but a major war upsets world financial arrangements more than devaluation of a major currency, I went down to the capital of world finance, Wall Street, to look around. A nasty wind was whipping papers through empty streets, and there was the usual rather intimidating off-hours stillness in that part-time city. There was something unusual, though: the presence of rows of lighted windows in the otherwise dark buildings—for the most part, one lighted row per building. Some of the rows I could identify as the foreign departments of the big banks. The heavy doors of the banks were locked and barred; foreign-department men evidently ring to gain entrance on weekends, or use invisible side or rear entrances. Turning up my coat collar, I headed up Nassau Street toward Liberty to take a look at the Federal Reserve Bank. I found it lighted not in a single line but—more hospitably, somehow—in an irregular pattern over its entire Florentine façade, yet it, too, presented to the street a formidably closed front door. As I looked at it, a gust of wind brought an incongruous burst of organ music—perhaps from Trinity Church, a few blocks away—and I realized that in ten or fifteen minutes I hadn’t seen anyone. The scene seemed to me to epitomize one of the two faces of central banking—the cold and hostile face, suggesting men in arrogant secrecy making decisions that affect all the rest of us but that we can neither influence nor even comprehend, rather than the more congenial face of elegant and learned men of affairs beneficently saving faltering currencies over their truffles and wine at Basel. This was not the night for the latter face.

On Sunday afternoon, Waage held a press conference in a room on the tenth floor of the bank, and I attended it, along with a dozen other reporters, mostly regulars on the Federal Reserve beat. Waage discoursed generally on the devaluation, parrying questions he didn’t want to answer, sometimes by replying to them, like the teacher he once was, with questions of his own. It was still far too early, he said, to tell how great the danger was that the devaluation might lead to “another 1931.” Almost any prediction, he said, would be a matter of trying to outguess millions of people and thousands of banks around the world. The next few days would tell the story. Waage seemed stimulated rather than depressed; his attitude was clearly one of apprehension but also of resolution. On the way out, I asked him whether he had been up all night. “No, last evening I went to ‘The Birthday Party,’ and I must say Pinter’s world makes more sense than mine does, these days,” he replied.

The outlines of what had happened Thursday and Friday began to emerge during the next few days. Most of the rumors that had been abroad turned out to have been more or less true. Britain had been negotiating for another huge credit to forestall devaluation—a credit of the order of magnitude of the three-billion-dollar 1964 package, with the United States again planning to provide the largest share. Whether Britain had devalued from choice or necessity remained debatable. Wilson, in explaining the devaluation to his people in a television address, said that “it would have been possible to ride out this present tide of foreign speculation against the pound by borrowing from central banks and governments,” but that such action this time would have been “irresponsible,” because “our creditors abroad might well insist on guarantees about this or that aspect of our national policies”; he did not say explicitly that they had done so. In any event, the British Cabinet had—with what grim reluctance may be imagined—decided in principle on devaluation as early as the previous weekend, and then determined the exact amount of the devaluation at its Thursday-noon meeting. At that time, the Cabinet had also resolved to help insure the effectiveness of the devaluation by imposing new austerity measures on the nation, among them higher corporate taxes, a cutback in defense spending, and the highest bank rate in fifty years. As for the two-day delay in putting the devaluation into effect, which had been so costly to British reserves, officials now explained that the time had been necessary for conferences with the other leading monetary powers. Such conferences were required by international monetary rules before a devaluation, and, besides, Britain had urgently needed assurances from its leading competitors in world trade that they did not plan to vitiate the effect of the British devaluation with matching devaluations of their own. Some light was now shed, too, on the sources of the panic selling of pounds on Friday. By no means all of it had been wanton speculation by those famous—although invisible and perhaps nonexistent—gnomes of Zurich. On the contrary, much of it had been a form of self-protection, called hedging, by large international corporations, many of them American, that made short sales of sterling equivalent to what they were due to be paid in sterling weeks or months later. The evidence of this was supplied by the corporations themselves, some of them being quick to assure their stockholders that through their foresight they had contrived to lose little or nothing on the devaluation. International Telephone & Telegraph, for example, announced on Sunday that the devaluation would not affect its 1967 earnings, because “management anticipated the possibility of devaluation for some time.” International Harvester and Texas Instruments reported that they had protected themselves by making what amounted to short sales of sterling. The Singer Company said it might even have accidentally made a profit on the deal. Other American companies let it be known that they had come out all right, but declined to elaborate, on the ground that if they revealed the methods they had used they might be accused of taking advantage of Britain in its extremity. “Let’s just say we were smart” was the way a spokesman for one company put it. And perhaps that, if lacking in grace and elegance, was fair enough. In the jungle of international business, hedging on a weak foreign currency is considered a wholly legitimate use of claws for self-defense. Selling short for speculative purposes enjoys less respectability, and it is interesting to note that the ranks of those who speculated against sterling on Friday, and talked about it afterward, included some who were far from Zurich. A group of professional men in Youngstown, Ohio—veteran stock-market players, but never before international currency plungers—decided on Friday that sterling was about to be devalued, and sold short seventy thousand pounds, netting a profit of almost twenty-five thousand dollars over the weekend. The pounds sold had, of course, ultimately been bought with dollars by the Bank of England, thus adding a minuscule drop to Britain’s reserve loss. Reading about the little coup in the Wall Street Journal, to which the group’s broker had reported it, presumably with pride, I hoped the apprentice gnomes of Youngstown had at least grasped the implications of what they were doing.

So much for Sunday and moral speculation. On Monday, the financial world, or most of it, went back to work, and the devaluation began to be put to its test. The test consisted of two questions. Question One: Would the devaluation accomplish its purpose for Britain—that is, stimulate exports and reduce imports sufficiently to cure the international deficit and put an end to speculation against the pound? Question Two: Would it, as in 1931, be followed by a string of competitive devaluations of other currencies, leading ultimately to a devaluation of the dollar in relation to gold, worldwide monetary chaos, and perhaps a world depression? I watched the answers beginning to take shape.

On Monday, the banks and exchanges in London remained firmly closed, by government order, and all but a few traders elsewhere avoided taking positions in sterling in the Bank of England’s absence from the market, so the answer to the question of the pound’s strength or weakness at its new valuation was postponed; On Threadneedle and Throgmorton Streets, crowds of brokers, jobbers, and clerks milled around and talked excitedly—but made no trades—in a city where the Union Jack was flying from all flagstaffs because it happened to be the Queen’s wedding anniversary. The New York stock market opened sharply lower, then recovered. (There was no really rational explanation for the initial drop; securities men pointed out that devaluation just generally sounds depressing.) By nightfall on Monday, it had been announced that eleven other currencies—those of Spain, Denmark, Israel, Hong Kong, Malta, Guyana, Malawi, Jamaica, Fiji, Bermuda, and Ireland—were also being devalued. That wasn’t so bad, because the disruptive effect of a currency devaluation is in direct proportion to the importance of that currency in world trade, and none of those currencies were of great importance. The most ominous move was Denmark’s, because Denmark might easily be followed by its close economic allies Norway, Sweden, and the Netherlands, and that would be pretty serious. Egypt, which was an instant loser of thirty-eight million dollars on pounds held in its reserves at the time of devaluation, held firm, and so did Kuwait, which lost eighteen million.

On Tuesday, the markets everywhere were going full blast. The Bank of England, back in business, set the new trading limits of the pound at a floor of $2.38 and a ceiling of $2.42, whereupon the pound went straight to the ceiling, like a balloon slipped from a child’s hand, and stayed there all day; indeed, for obscure reasons inapplicable to balloons, it spent much of the day slightly above the ceiling. Now, instead of paying dollars for pounds, the Bank of England was supplying pounds for dollars, and thereby beginning the process of rebuilding its reserves. I called Waage to share what I thought would be his jubilation, but found him taking it all calmly. The pound’s strength, he said, was “technical”—that is, it was caused by the previous week’s short sellers’ buying pounds back to cash in their profits—and the first objective test of the new pound would not come until Friday. Seven more small governments announced devaluations during the day. In Malaysia, which had devalued its old sterling-backed pound but not its new dollar, based on gold, and which continued to keep both currencies in circulation, the injustice of the situation led to riots, and over the next two weeks more than twenty-seven people were killed in them—the first casualties of devaluation. Apart from this painful reminder that the counters in the engrossing game of international finance are people’s livelihoods, and even their lives, so far so good.

But on Wednesday the twenty-second a less localized portent of trouble appeared. The speculative attack that had so long battered and at last crushed the pound now turned, as everyone had feared it might, on the dollar. As the one nation that is committed to sell gold in any quantity to the central bank of any other nation at the fixed price of thirty-five dollars an ounce, the United States is the keystone of the world monetary arch, and the gold in its Treasury—which on that Wednesday amounted to not quite thirteen billion dollars’ worth—is the foundation. Federal Reserve Board Chairman Martin had said repeatedly that the United States would under any condition continue to sell it on demand, if necessary down to the last bar. Despite this pledge, and despite President Johnson’s reiteration of it immediately after Britain’s devaluation, speculators now began buying gold with dollars in huge quantities, expressing the same sort of skepticism toward official assurances that was shown at about the same time by New Yorkers who took to accumulating and hoarding subway tokens. Gold was suddenly in unusual demand in Paris, Zurich, and other financial centers, and most particularly in London, the world’s leading gold market, where people immediately began to talk about the London Gold Rush. The day’s orders for gold, which some authorities estimated at over fifty million dollars’ worth, seemed to come in from everywhere—except, presumably, from citizens of the United States or Britain, who are forbidden by law to buy or own monetary gold. And who was to sell the stuff to these invisible multitudes so suddenly repossessed by the age-old lust for it? Not the United States Treasury, which, through the Federal Reserve, sold gold only to central banks, and not other central banks, which did not promise to sell it at all. To fill this vacuum, still another coöperative international group, the London gold pool, had been established in 1961. Provided by its members—the United States, Britain, Italy, the Netherlands, Switzerland, West Germany, Belgium, and, originally, France—with gold ingots in quantities that might dazzle a Croesus (fifty-nine per cent of the total coming from the United States), the pool was intended to quell money panics by supplying gold to non-governmental buyers in any quantity demanded, at a price effectively the same as the Federal Reserve’s, and thereby to protect the stability of the dollar and the system.

And that is what the pool did on Wednesday. Thursday, though, was much worse, with the gold-buying frenzy in both Paris and London breaking even the records set during the Cuban missile crisis of 1962, and many people, high British and American officials among them, became convinced of something they had suspected from the first—that the gold rush was part of a plot by General de Gaulle and France to humble first the pound and now the dollar. The evidence, to be sure, was all circumstantial, but it was persuasive. De Gaulle and his Ministers had long been on record as wishing to relegate the pound and the dollar to international roles far smaller than their current ones. A suspicious amount of the gold buying, even in London, was traceable to France. On Monday evening, thirty-six hours before the start of the gold rush, France’s government had let slip, through a press leak, that it intended to withdraw from the gold pool (according to subsequent information, France hadn’t contributed anything to the pool since the previous June anyhow), and the French government was also accused of having had a hand in spreading false rumors that Belgium and Italy were about to withdraw, too. And now it was coming out, bit by bit, that in the days just before the devaluation France had been by far the most reluctant nation to join in another credit package to rescue sterling, and that, for good measure, France had withheld until the very last minute its assurance that it would maintain its own exchange rate if Britain devalued. All in all, there was a good case for the allegation that de Gaulle & Co. had been playing a mischievous part, and, whether it was true or not, I couldn’t help feeling that the accusations against them were adding a good deal of spice to the devaluation crisis—spice that would become more piquant a few months later, when the franc would be in dire straits, and the United States forced by circumstances to come to its aid.

ON Friday, in London, the pound spent the whole day tight up against its ceiling, and thus came through its first really significant post-devaluation test with colors flying. Only a few small governments had announced devaluations since Monday, and it was now evident that Norway, Sweden, and the Netherlands were going to hold firm. But on the dollar front things looked worse than ever. Friday’s gold buying in London and Paris had far exceeded the previous day’s record, and estimates were that gold sales in all markets over the preceding three days added up to something not far under the billion-dollar mark; there was near pandemonium all day in Johannesburg as speculators scrambled to get their hands on shares in gold-mining companies; and all over Europe people were trading in dollars not only for gold but for other currencies as well. If the dollar was hardly in the position that the pound had occupied a week earlier, at least there were uncomfortable parallels. Subsequently, it was reported that in the first days after devaluation the Federal Reserve, so accustomed to lending support to other currencies, had been forced to borrow various foreign currencies, amounting to almost two billion dollars’ worth, in order to defend its own.

Late Friday, having attended a conference at which Waage was in an unaccustomed mood of nervous jocularity that made me nervous, too, I left the Federal Reserve Bank half believing that devaluation of the dollar was going to be announced over the weekend. Nothing of the sort happened; on the contrary, the worst was temporarily over. On Sunday, it was announced that central-bank representatives of the gold-pool countries, Hayes and Coombs among them, had met in Frankfurt and formally agreed to continue maintaining the dollar at its present gold-exchange rate with their combined resources. This seemed to remove any doubt that the dollar was backed not only by the United States’ thirteen-billion-dollar gold hoard but also by the additional fourteen billion dollars’ worth of gold in the coffers of Belgium, Britain, Italy, the Netherland, Switzerland, and West Germany. The speculators were apparently impressed. On Monday, gold buying was much lower in London and Zurich, continuing at a record pace only in Paris—and this in spite of a sulphurous press audience granted that day by de Gaulle himself, who, along with bemusing opinions on various other matters, hazarded the view that the trend of events was toward the decline of the dollar’s international importance. On Tuesday, gold sales dropped sharply everywhere, even in Paris. “A good day today,” Waage told me on the phone that afternoon. “A better day tomorrow, we hope.” On Wednesday, the gold markets were back to normal, but, as a result of the week’s doings, the Treasury had lost some four hundred and fifty tons of gold—almost half a billion dollars’ worth—in fulfilling its obligations to the gold pool and meeting the demands of foreign central banks.

Ten days after devaluation, everything was quiet. But it was only a trough between succeeding shock waves. From December 8th to 18th, there came a new spell of wild speculation against the dollar, leaching another four hundred tons or so of gold out of the pool; this, like the previous wave, was eventually calmed by reiterations on the part of the United States and its gold-pool partners of their determination to maintain the status quo. By the end of the year, the Treasury had lost almost a billion dollars’ worth of gold since Britain’s devaluation, reducing its gold stock to below the twelve-billion-dollar mark for the first time since 1937. President Johnson’s balance-of-payments program, announced January 1st, 1968 and based chiefly on restrictions on American bank lending and industrial investments abroad, helped keep speculation down for two months. But the gold rush was not to be quelled so simply. All pledges notwithstanding, it had powerful economic and psychological forces behind it. In a larger sense, it was an expression of an age-old tendency to distrust all paper currencies in times of crisis, but more specifically it was the long-feared sequel to sterling devaluation, and—perhaps most specifically of all—it was a vote of no confidence in the determination of the United States to keep its economic affairs in order, with particular reference to a level of civilian consumption beyond the dreams of avarice at a time when ever-increasing billions were being sent abroad to support a war with no end in sight. The money in which the world was supposed to be putting its trust looked to the gold speculators like that of the most reckless and improvident spendthrift.

When they returned to the attack, on February 29th—choosing that day for no assignable reason except that a single United States senator, Jacob Javits, had just remarked, with either deadly seriousness or casual indiscretion, that he thought his country might do well to suspend temporarily all gold payments to foreign countries—it was with such ferocity that the situation quickly got out of hand. On March 1st, the gold pool dispensed an estimated forty to fifty tons in London (as against three or four tons on a normal day); on March 5th and 6th, forty tons per day; on March 8th, over seventy-five tons; and on March 13th, a total that could not be accurately estimated but ran well over one hundred tons. Meanwhile, the pound, which could not possibly escape a further devaluation if the dollar were to be devalued in relation to gold, slipped below its par of $2.40 for the first time. Still another reiteration of the now-familiar pledges, this time from the central-bankers’ club at Basel on March 10th, seemed to have no effect at all. The market was in the classic state of chaos, distrustful of every public assurance and at the mercy of every passing rumor. A leading Swiss banker grimly called the situation “the most dangerous since 1931.” A member of the Basel club, tempering desperation with charity, said that the gold speculators apparently didn’t realize their actions were imperilling the world’s money. The New York Times, in an editorial, said, “It is quite clear that the international payments system … is eroding.”

On Thursday, March 14th, panic was added to chaos. London gold dealers, in describing the day’s action, used the un-British words “stampede,” “catastrophe,” and “nightmare.” The exact volume of gold sold that day was unannounced, as usual—probably it could not have been precisely counted, in any case—but everyone agreed that it had been an all-time record; most estimates put the total at around two hundred tons, or two hundred and twenty million dollars’ worth, while the Wall Street Journal put it twice that high. If the former estimate was right, during the trading day the United States Treasury had paid out through its share of the gold pool alone one million dollars in gold every three minutes and forty-two seconds; if the Journal figure was right (as a subsequent Treasury announcement made it appear to be), a million every one minute and fifty-one seconds. Clearly, this wouldn’t do. Like Britain in 1964, at this rate the United States would have a bare cupboard in a matter of days. That afternoon, the Federal Reserve System raised its discount rate from four and a half to five per cent—a defensive measure so timid and inadequate that one New York banker compared it to a popgun, and the Federal Reserve Bank of New York, as the System’s foreign-exchange arm, was moved to protest by refusing to go along with the token raise. Late in the day in New York, and toward midnight in London, the United States asked Britain to keep the gold market closed the next day, Friday, to prevent further catastrophe and clear the way to the weekend, when face-to-face international consultations could be held. The bewildered American public, largely unaware of the gold pool’s existence, probably first sensed the general shape of things when it learned on Friday morning that Queen Elizabeth II had met with her Ministers on the crisis between midnight and 1 A.M.

On Friday, a day of nervous waiting, the London markets were closed, and so were foreign-exchange desks nearly everywhere else, but gold shot up to a big premium in the Paris market—a sort of black market, from the American standpoint—and in New York sterling, unsupported by the firmly locked Bank of England, briefly fell below its official bottom price of $2.38 before rallying. Over the weekend, the central bankers of the gold-pool nations (the United States, Britain, West Germany, Switzerland, Italy, the Netherlands, and Belgium, with France still conspicuously missing and, indeed, uninvited this time) met in Washington, with Coombs participating for the Federal Reserve along with Chairman Martin. After two full days of rigidly secret discussions, while the world of money waited with bated breath, they announced their decisions late on Sunday afternoon. The thirty-five-dollar-an-ounce official monetary price of gold would be kept for use in all dealings among central banks; the gold pool would be disbanded, and the central banks would supply no more gold to the London market, where privately traded gold would be allowed to find its own price; sanctions would be taken against any central bank seeking to profit from the price differential between the central-bank price and the free-market price; and the London gold market would remain closed for a couple of weeks, until the dust settled. During the first few market days under the new arrangements, the pound rallied strongly, and the free-market price of gold settled at between two and five dollars above the central-bank price—a differential considerably smaller than many had expected.

The crisis had passed, or that crisis had. The dollar had escaped devaluation, and the international monetary mechanism was intact. Nor was the solution a particularly radical one; after all, gold had been on a two-price basis in 1960, before the gold pool had been formed. But the solution was a temporary, stopgap one, and the curtain was not down on the drama yet. Like Hamlet’s ghost, the pound, which had started the action, was offstage now. The principal actors onstage as summer approached were the Federal Reserve and the United States Treasury, doing what they could in a technical way to keep things on an even keel; the Congress, complacent with prosperity, preoccupied with coming elections, and therefore resistant to higher taxes and other uncomfortable retrenching measures (on the very afternoon of the London panic, the Senate Finance Committee had voted down an income-tax surcharge); and, finally, the President, calling for “a program of national austerity” to defend the dollar, yet at the same time carrying on at ever-increasing expense the Vietnam war, which had become as menacing to the health of America’s money as, in the view of many, it was to that of America’s soul. Ultimately, it appeared, the nation had just three possible economic courses: to somehow end the Vietnam war, root of the payments problem and therefore heart of the matter; to adopt a full wartime economy, with sky-high taxes, wage and price controls, and perhaps rationing; or to face forced devaluation of the dollar and perhaps a depression-breeding world monetary mess.

Looking beyond the Vietnam war and its incredibly broad worldwide monetary implications, the central bankers went on plugging away. Two weeks after the stopgap solution of the dollar crisis, those of the ten most powerful industrial countries met in Stockholm and agreed, with only France dissenting, on the gradual creation of a new international monetary unit to supplement gold as the bedrock underlying all currencies. It will consist (if action follows on resolution) of special drawing rights on the International Monetary Fund, available to nations in proportion to their existing reserve holdings. In bankers’ jargon the rights will be called S.D.R.’s; in popular jargon they were at once called paper gold. The success of the plan in achieving its ends—averting dollar devaluation, overcoming the world shortage of monetary gold, and thus postponing indefinitely the threatened mess—will depend on whether or not men and nations can somehow at last, in a triumph of reason, achieve what they have failed to achieve in almost four centuries of paper money: that is, to overcome one of the oldest and least rational of human traits, the lust for the look and feel of gold itself, and come to give truly equal value to a pledge written on a piece of paper. The answer to that question will come in the last act, and the outlook for a happy ending is not bright.

AS the last act was beginning to unfold—after the sterling devaluation but before the gold panic—I went down to Liberty Street and saw Coombs and Hayes. I found Coombs looking bone-tired but not sounding disheartened about three years spent largely in a losing cause. “I don’t see the fight for the pound as all having been in vain,” he said. “We gained those three years, and during that time the British put through a lot of internal measures to strengthen themselves. If they’d been forced to devalue in 1964, there’s a good chance that wage-and-price inflation would have eaten up any benefit they derived and put them back in the same old box. Also, over those three years there have been further gains in international monetary coöperation. Goodness knows what would have happened to the whole system with devaluation in 1964. Without that three-year international effort—that rearguard action, you might say—sterling might have collapsed in much greater disorder, with far more damaging repercussions than we’ve seen even now. Remember that, after all, our effort and the effort of the other central-banks wasn’t to hold up sterling for its own sake. It was to hold it up for the sake of preserving the system. And the system has survived.”

Hayes, on the surface, seemed exactly as he had when I last saw him, a year and a half earlier—as placid and unruffled as if he had been spending all that time studying up on Corfu. I asked him whether he was still living up to his principle of keeping bankers’ hours, and he replied, smiling very slightly, that the principle had long since yielded to expediency—that, as a time consumer, the 1967 sterling crisis had made the 1964 crisis seem like child’s play, and that the subsequent dollar crisis was turning out to be more of the same. A side benefit of the whole three-and-a-half-year affair, he said, was that its frequently excruciating melodrama had contributed something to Mrs. Hayes’ interest in banking, and even something, if not so much, to the position of business in Tom’s scale of values.

When Hayes spoke of the devaluation, however, I saw that his placidity was a mask. “Oh, I was disappointed, all right,” he said quietly. “After all, we worked like the devil to prevent it. And we nearly did. In my opinion, Britain could have got enough assistance from abroad to hold the rate. It could have been done without France. Britain chose to devalue. I think there’s a good chance that the devaluation will eventually be a success. And the gain for international coöperation is beyond question. Charlie Coombs and I could feel that at Frankfurt in November, at the gold-pool meeting—a sense everyone there had that now is the time to lock arms. But still …” Hayes paused, and when he spoke again his voice was full of such quiet force that I saw the devaluation through his eyes—not as just a severe professional reverse but as an ideal lost and an idol fallen. He said, “That day in November, here at the bank, when a courier brought me the top-secret British document informing us of the decision to devalue, I felt physically sick. Sterling would not be the same. It would never again command the same amount of faith around the world.”

Index

A. B. Dick Company, 145, 146, 147

Abadan refinery, 271

Account number, taxpayer, 90

Adrian H. Muller & Son, 245

Akron Beacon Journal, 304, 307

Alaska, 272

Allied Crude Vegetable Oil & Refining Co., 178, 179, 181

Allis-Chalmers Mfg. Co., 217, 218

American Bar Association, 312; taxation section of, 112

American Broadcasting Company, 156

American Education Publications, 156, 165

American Law Institute, 303

American Photocopy Co., 148

American Potash & Chemical Corp., 312

American Public Finance (Schultz & Harriss), 78

American Scholar, 162, 164

American Society of Corporate Secretaries, 278

American Telephone and Telegraph Co., 8, 9, 15–28, 278; contributions by, 154; stockholders’ meeting, 279–285

American Way in Taxation, The (Doris, ed.), 92

Anti-Intellectualism in American Life (Hofstadter), 108

Anti-Trust Division, Department of Justice, 268

Architecture, 315

Arkin, Frances, 282, 284

Arnold, Fortas & Porter, 94

Arrow Stores, 243

Arthur Young and Co., 291

Asbrink, Per, 358

Astor, John Jacob, 119

Atlantic Monthly, 11

Atomic Energy Commission, 250

Attapulgus Minerals & Chemicals Corp., 256, 257, 258

Auchincloss, Louis, 80

Australia, income tax in, 82

Austria, bank failure in, 338

Automobile dealers, 44, 71

Automotive News, 60, 65

Authors League of America, 109, 163

B. F. Goodrich Co., 297, 304, 306, 310

Bagehot, Walter, 317, 345

Bailey, Herbert S., Jr., 163

Balance of payments, 319, 322

Baldwin-Lima-Hamilton, 223

Bank failures, domino principle of, 338

Bank of International Settlements, 328, 329, 332, 364, 365

Bank of Austria, 338

Bank of Belgium, 362

Bank of England, 194, 316, 320–326, 333–375, 380

Bank of France, 316, 332, 360

Bank rate (Britain), 334, 335, 343, 347, 376, 377

Bar Association of the City of New York, 312

Baring, Sir Evelyn, 342

Baring, George R. S. (see Cromer, 3rd Earl of)

Baring Brothers (London), 357

Barrett, Emerson P., 302

Barron’s, 156

Basel, Switzerland, 329, 332, 333, 334

Basic Systems, 156

Battelle Memorial Institute, 150–153, 168

Bazelon, David T., 78

Bear raids, 227, 328

Becker, Horace W., 169, 170

Belgium, tax collecting in, 88

Bell Telephone Co., 268

Berle, A. A., 276, 277, 285

Bicks, Robert A., 201, 202

Bid-rigging, 200

Big Business: A New Era (Lilienthal), 251, 267, 269

Bishop, Robert M., 177, 180–184, 187, 191

Black, Eugene R., 255

Black Thursday, N.Y. Stock Exchange, 18

Blessing, Karl, 358, 361

Blume, Neil L., 52

Board of Trade (Chicago), 178

Bonsal, Dudley J., 120, 132, 136–144

Bowers Stores, 243

Bradford, E. W., 238

Brand, Martha, 291

Breech, Ernest R., 27, 30, 32, 41, 53, 54

Bretton Woods agreement, 320, 322, 329, 340

Bridge, Roy A. O., 324

Bromberger, Allen, 265

Bromberger, Daniel, 265

Bromberger, Nancy, 265

Bromberger, Sylvain, 265, 266

Brown, George, 326, 335, 342

Brown, Roy A., 30, 32, 43, 52, 56, 63, 68, 73

Brunet, Jacques, 358

Brusati, Louis A., 287, 288

Buckingham, Doolittle & Burroughs, 306

Burch, John C, 246

Bureau of Applied Social Research, Columbia University, 35

Burens, George E., 213, 217, 218, 219

Burke, Clarence E., 217, 218

Business Week, 68, 278

Callaghan, James, 326, 335, 342, 345, 374, 375

Campbell, Alexander, 210

Canada: Currency credit to, 347; tax collecting in, 88

Canadian Institute of Mining and Metallurgy, 130

Canadian Shield, 121

Capital gains, 96, 101, 103; taxes on, 86, 87, 102

Caplin, Mortimer M., 88–97

Carbon paper, early use of, 147

Carli, Guido, 358

Carlson, Chester F., 150, 151, 153, 168

Carrier Corporation, 255

Cary, William L., 197

Cascade Pictures, 46

Case, Josephine Young, 292

Cauca Valley (Colombia), 250, 267

Central banking, 330, 331, 332

Ceylon, expenditure tax in, 115

Champion, George, 187

Charitable contributions, as tax deduction, 110

Charitable foundations, tax exemptions on, 109

Charyk, Joseph V., 295

Chase Manhattan Bank, 186, 187, 192, 193, 315

Chenoweth, Richard A., 306, 307

Chile, 272

Chrysler Corporation, 149

Churchill, Winston, 338

Clapp, Gordon R., 250, 270, 271

Clark, Harold E., 167, 168

Clayton, Richard H., 122–139, 143, 144

Clayton Antitrust Act (1914), 201

Cleveland, Grover, 84

Cleveland Plan of charitable contribution, 154

Coates, Francis G., 131–136, 140–143

Cohan, George M., 105

Cohan rule, 105, 108

Cohen, Sheldon S., 91–97

Collier’s, 255

Colombia, 250, 267, 272

Columbia University, 35

Commerce Clearing House, 107

Commodity futures, 178

Communication, problem of, 199–223

Communications Satellite Corp., 278, 293

Communist countries, income tax in, 88

Community property laws, 116

Conduct and Complaints Department N.Y. Stock Exchange, 189

Cone, Fairfax M., 43, 44

Confusion of Confusions (De la Vega), 2

Consolidated Edison, 278

Consumer Reports, 58, 59, 66

Consumers Union, 60

Continental central banks, 364

Continental Illinois National Bank & Trust Co., 189, 190, 191

Cooke, Morris, 267

Coombs, Charles A., 319, 323, 326, 328, 332–334, 341–354, 359, 361–372, 383, 386, 388

Copeland, Robert F. G., 48

Copiers, as opposed to duplicators, 147

“Copy” as “counterfeit,” 146

Copyright laws, 163, 164

Cordiner, Ralph J., 208, 210, 211, 215, 219, 221, 222, 223

Corner, game of, 224–248

Corporate pension plans, 103

Corporations, income taxes on, 86

Coyle, Frank J., 176, 177, 180, 189

Cranley, John J., 18

Crawford, David M., 131–139, 143, 144

Creditanstalt (Bank of Austria), 338

Cromer, 3rd Earl of, 324, 332, 335, 342–343, 357–361, 364–366, 373

Crooks, Richard M., 182, 183, 184, 198

Crusoe, Lewis D., 28

Currency devaluation, 321

Currency weakness, 321

Curtis Publishing Co., 126

Curzon, Lord, 271

Dallas, Alexander J., 83

Darke, Kenneth, 122–139

Darius, King of Persia, 270

Davis, Evelyn, 282–284, 290–295

De Angelis, Anthony, 179

De la Vega, Joseph, 2, 3, 4, 5, 6, 7, 8, 11, 13, 15, 22, 24

Depletion allowance on petroleum, 86, 96, 103, 104

Depreciation, as tax deduction, 103

Dessauer, John H., 165, 166, 167

Detroit Free Press, 58

Deutsche Bundesbank, 361, 364, 365

Devaluation, 321, 322; of pound sterling, 374, 376; by various countries, 379–380

Development & Resources Corp., 250, 267–275

Dial-A-Matic Autostat, 148

Diamond, Walter H., 88

Dick, C. Matthews, Jr., 146

Dick mimeograph, 148

Dillon, Douglas, 341, 342, 347, 362

Discount rate, Federal Reserve System, 385

Dividends, withholding of taxes on, 96

Dollars: gold exchangeability of, 320, 323; weakening of, 347, 382–388

Doris, Lillian, 92

Douglas, Paul H., 117

Dow-Jones average, 2

Dow-Jones News Service, 4, 13, 14, 15, 134

Doyle, Arthur W., 311

Doyle, J. C. (Larry), 45, 48, 61–64, 69, 72, 73

Drew, Daniel, 119

Dreyfus & Co., 18

Dreyfus Fund, 18

Dry writing, 152

Dutch Cookie Machine Co., 303

Duplicators, as opposed to copiers, 147

DuPont de Nemours & Co., E.I., 312

DuPont, Homsey & Co., 185

E. F. Hutton & Co., 132

E. I. duPont de Nemours & Co., 312

E. L. Bruce Company, 224

Eastman Kodak, 148, 150

Eberstadt, Ferdinand, 260

Ebtehaj, Abolhassen, 270

Economist, 365, 367, 373

Edgar Brothers, 258

Edison Mimeograph, 147

Edison, Thomas A., 145

Edsel automobile, 26–75

Effler, Carl, 299, 300, 302, 306

Eisenstein, Louis, 113

Electrical-manufacturing industry, price-fixing and bid-rigging in, 200

Electrophotography, 150

Ellis, Ridsdale, 309

Entertainment deductions, 104, 105, 106, 107

Erben, Henry V. B., 207–211, 221

ETC: A Review of General Semantics, 65

Eurodollars, 192

European countries, income tax in, 82

Excise taxes, 114

Expenditure tax, 115

“Expense Accounts 1963,” 107

Export-Import Bank loan, 347, 348, 349, 352

F. Eberstadt & Co., 257

Fairman, Francis, 207, 208

Fair-use doctrine, 164

Federal income tax, 76–117

Federal lotteries, 114

Federal Pacific Electric Co., 217

Federal Reserve Act, 347

Federal Reserve Bank, 329, 341

Federal Reserve Bank of New York, 314, 315

Federal Reserve Board, 316, 329

Federal Reserve standby credit, 347

Federal Reserve System, 316; discount rate, 385

Feiffer, Jules, 222

Feller, Max, 299, 301

Financial Committee of League of Nations, 329

First National City Bank, 186

Floor specialists, N.Y. Stock Exchange, 16

Fogarty, Charles F., 122–138

Foodelectric, 248

Fool’s gold, 121

Foote, Cone & Belding, 40, 42, 43, 59, 71

Forbes, Harland C., 278

Ford, Henry, II, 27, 30, 32, 41, 51, 54, 63

Ford Foundation, 67

Ford Motor Company, 26–75

Ford Motor Company, Ltd. (England), 73

Foreign Tax & Trade Briefs, 88

Fortune, 149, 153, 203

Forward Product Planning Committee, Ford Motor Co., 28

France: income tax in, 81, 82; tax collecting in, 88; value added tax in, 114

Frank, Walter N., 187

Funston, G. Keith, 181, 185–188, 191, 194–198

Galloway, Wayne, 300, 306

Ganey, J. Cullen, 202–205, 213, 217, 223

General Electric Co., 203–207, 212–214, 217, 221, 222, 278, 279, 286–289

General Foods, 72

Germany: bank failure in, 338; revaluation of currency in (1961), 322; value added tax in, 114

Gezon, L. B., 213, 214, 219

Ghana, 250, 272

Gifts, taxes on, 109

Gilbert, John, 290

Gilbert, Lewis D., 280–282, 290–295

Gillespie, S. Hazard, 142, 143

Ginn, William S., 207–212, 215, 219, 221, 223

Gold, 317, 337; in exchange for dollars, 320, 323, 381

Gold-exchange standard, 339–340

Gold pool, London, 381–386

Gold standard: abandoned in U.S., 339; adoption of by European countries, 338; in Great Britain, 337

Goldman, Sachs & Co., 192

Goodrich Co. (see B.F. Goodrich Co.)

Goodrich v. Wohlgemuth, 304, 305

Gore, Albert, 117

Graphite, 121

Great Ascent, The (Heilbroner), 12

Great Britain: balance of payments of, 319, 372; bank rate of, 334, 335, 376, 377; gold standard in, 337; income tax in, 81, 82; introduction of xerography in, 170; raising of interest rates in, 325; sterling crisis in, 315–389; tax collecting in, 88; tax law of, 103

Great Treasury Raid, The (Stern), 117

“Greater Tax Savings—A Constructive Approach,” 110

Greene, Nathan, 260, 264, 265

Greenewalt, Crawford, 263

Gregory, Seth, 256, 257

Haemisegger, H. Fred, 134, 142

Haloid Co., 150, 152

Haloid Xerox, Inc., 149, 153

Harcourt, Brace & World, 162

Harding, Bertrand M., 91

Harlem Railway, 228

Harriss, C. Lowell, 78

Hart, Philip A., 205, 212

Harvard Business Review, 278, 281, 286

Harvey, Frank H., 305, 308, 310, 311

Haupt & Co. (see Ira Haupt & Co.)

Hayakawa, S.I., 65

Hayes, Alfred, 319, 323–326, 328, 341–370, 383, 388, 389

Head taxes, 80

Heart of Japan, The (Campbell), 210

Heilbroner, Robert L., 12

Hellerstein, Jerome, 85, 95, 102, 107

Henry Anspacher & Co. (London), 189, 194

Hentschel, H. Frank, 217, 218

Hickenlooper, Bourke, 253

Hinton, Longstreet, 135, 140–142

Hofstadter, Richard, 108

Holmes, Oliver Wendell, 303

Holtrop, Marius W., 362, 364

Holyk, Walter, 122–126, 130, 133, 136, 138

House Judiciary Committee, 164

Hovde, Frederick L., 287

Ideologies of Taxation, The (Eisenstein), 113

India, 255; devaluation of rupee in, 322; expenditure tax in, 115; income tax in, 82

Indus River, 255

Ingraham, Joseph C., 57

Injunction, origin of, 305–306

Income tax, 80–82; avoidance of, 100; in Communist countries, 88; in Florence (15th century), 80; in various countries, 88

Income-tax law, 97

Inside information, legitimate use of, 118–144

Insider Trading and the Stock Market (Manne), 120

Intellectual work, and taxes, 108

Interdict, defined, 306

Interest, withholding of taxes on, 96

Interest rates, 316, 325

Internal Revenue Code: (1954), 79, 96, 98; (1964), 100, 101, 102, 108, 113; complexity of, 111

Internal Revenue Service, 89–97; and taxpayer education, 112

International Business Machines, 8, 9, 14, 18, 152

International Harvester, 378

International Latex Corp., 298, 299, 301, 306–311

International Monetary Fund, 322, 324–325, 329, 330; members of, 328; special drawing rights on (S.D.R.), 387

International Telephone & Telegraph, 378

Ira Haupt & Co., 176–189

Iran, 250, 270, 274

Italy, 250, 272, 347

I-T-E Circuit Breaker Co., 213, 217

Ivory Coast, 250–251, 272

J. R. Williston & Beane, 177, 179, 181, 182, 185

Japan, income tax in, 82

Javits, Jacob, 384

Jefferson, Thomas, 260

Jeter, R. G., 302, 306–308, 311–313

John Birch Society, 155

Johnson, Lyndon B., 80, 197, 381, 384

Judge, J. Emmet, 48, 49, 50

Kaiser, Henry J., 29

Kaldor, Nicholas, 115

Kamerman, Morton, 176–180, 183

Kappel, Frederick R., 278, 280–285

Karp, Irwin, 163

Kashmir, 255

Keedoozle stores, 247, 248

Kefauver, Estes, 200, 207, 210, 214, 216, 218, 221–223

Kefauver Subcommittee, 205

Kennamer, Frank E., Jr., 136, 142

Kennedy, John F., 3, 80, 104, 105, 177

Keynes, John M., 339

Khuzistan, 250, 270–274

Kidd-55 segment, 121–136

Kleinwort, Benson, Ltd., 189, 192, 194

Kornei, Otto, 150, 151

Krafve, Richard, 28–74

Kreisler, Charles, 46, 63

La Branche, George M. L., Jr., 15, 16, 17, 18

La Branche and Wood & Co., 15

La Rochefoucauld, François, 146

Lamont, Thomas S., 128, 133, 135, 136, 140–143

Lasker, Albert, 255

Lasser Tax Institute, 107

Latex (see International Latex Corp.)

Lazard Frères & Co., 254–257, 269, 272, 275

League of Nations, Financial Committee of, 329

Lever Brothers, 72

Levy, Gustave L., 192, 193, 194

Libraries, photocopying activities of, 161

Lilienthal, David, Jr., 266

Lilienthal, David E., 249–275

Lilienthal, Helen Lamb, 252, 253, 254

Linowitz, Sol M., 151, 152, 165, 171, 172, 175

Livermore, Jesse L., 231–235

Lloyd George, David, 338

Locke, John, 147

London gold pool, 381–386

London Times, 334, 336, 341, 365

Long, L. W., 218

Loopholes, tax, 100, 104, 116

Louis XIV, King, 81

Luncheon Club (N. Y. Stock Exchange), 132

McCahill, Tom, 58

McCarthy, Eugene J., 117

McColough, C. Peter, 172, 173

McCormack, James, 293, 294, 295

McKeen, John E., 289

McKellar, Kenneth D., 251

McLuhan, Marshall, 162, 164

McNamara, Robert S., 72

Magnavox Corp., 157

Mahoney, James P., 196, 197

Maistre, Joseph de, 97

Manne, Henry G., 120

Manufacturers Hanover Trust Co., 186–187

Margin calls, N. Y. Stock Exchange, 9, 10

Martin, William McChesney, 341, 342, 347, 362, 381, 396

Martinsburg Monster, 91

Maudling, Reginald, 345

Maxims (La Rochefoucauld), 146

Mechanix Illustrated, 58

Mekong Valley, 275

Memphis Commercial Appeal, 238, 242, 243

Merrill, Lynch, Pierce, Fenner & Smith, 6, 7, 15, 141, 182

Meyer, André, 254, 256, 260, 269, 272

Mimeograph machine, 145

Mimeographing, early use of, 147

Minerals & Chemicals Corporation of America, 251, 256, 259

Minerals & Chemicals Philipp Corp., 256

Minerals Separation North American Corp., 256, 258

Minnesota Mining & Manufacturing Co., 148

Mollison, Richard D., 122–138

Morgan, Arthur, 268

Morgan, J. P., 1

Morgan Guaranty Trust Co., 135, 186

Morgan Library, 39

Morgenthau, Henry, Jr., 115

Moore, Marianne, 39, 40, 41

Mothner, Samuel, 6

Motor Trend, 58

Mullaney, Thomas E., 191

Municipal Art Society of New York, 315

Murray, Arthur, 303

Mutual funds, 23; selling by, 10

Myrdal, Gunnar, 336

Nance, James J., 64, 65

National Automobile Dealers Association, 71

National Broadcasting Co., 291

National Education Association, 163

National State Bank of Newark, 189

Netherlands, revaluation of currency in (1961), 322

New Republic, 202

New York Herald Tribune, 128, 129

New York Produce Exchange, 178, 181

New York Public Library, 161

New York Stock Exchange, 1–25, 176–198

New York Times, 12, 57, 128, 129, 183, 197, 230, 241, 250, 385

New York University Law School, tax department of, 112

New Yorker, 39

New Zealand, income tax in, 82

Newman, George H., 177

Northern Miner, The (Canada), 128, 130, 131, 132, 141

Northern Pacific Railway, 228

O’Brien, Sir Leslie, 373

Office reproducing machines, 147, 149

Offset printing press, 147

Oliver, John, 270

Olmstead, Fred, 58

“One-per-cent program,” of charitable contributions, 154

Open Market Committee, 347, 348

Overcopying, 160

P. R. Mallory & Co., 150

Page, Jerry, 219, 220

Pakistan, 255

Paper gold, 387

Paxton, Robert, 206–215, 219–223

Peel, Sir Robert, 82

Personal holding companies, 103

Pfizer & Co., 289

Phase-of-the-moon formula, 218

Philippines, 272

Phillippe, Gerald L., 278, 286–289

Photostats, early use of, 147

Piggly Wiggly Stores, 225, 229, 230, 235, 236, 238

Playtex Golden Girdle, 306, 307

Plumley, H. Ladd, 19

Pound sterling, 314–389; bourse rates of, 345; departure of from gold standard, 322; devaluation of, 336, 340, 374, 376; origination of, 337; symbolic importance of, 336

Powers, John J.Jr., 290

Powers of Attorney (Auchincloss), 80

Prentice-Hall, Inc., 91

Price-fixing, 200, 201

Professional stockholders, 280–296

Princeton University Press, 163

Procter & Gamble, 149

Professional athletes, and taxes, 109

Puerto Rico, 251, 272

Pyrites, 121

Radio Corporation of America, 149, 255; charitable contributions by, 154; stockholders’ meeting, 290–291

Regulations of tax law, 95

Restatement of the Law of Torts, 303

Restricted stock option, 87

Revenue Act (1964), 98, 104

Revolving credits, 329

Rhode Island, colonial revenue system of, 83

Roche, Thomas J., 344, 349

Rochester, New York, 171

Rochester Community Chest, 154

Rolo, Charles J., 11

Roosa, Robert, 341, 342, 347, 348, 362

Roosevelt, Theodore, 201

Rothschild, Nathan, 119

Rule 10B-5, of S.E.C., 119, 120, 139, 141

Ruskin, John, 146

Ryan, Allan A., 228

Ryan, Thomas Fortune, 228, 229

S. Japhet & Co., Ltd., 189, 194

Sarnoff, David, 291, 292

Sarnoff, Robert W., 291

Saturday Review, 163

Saunders, Clarence, 226, 229–238, 240–248

Saxon, O. Glenn, Jr., 278, 281, 286

Schlesinger, Arthur M., Jr., 95

Schultz, William J., 78

Schwegler, Walter, 358

Scott, Max, 213

Scott, Walter D., 291

Securities and Exchange Commission, 120, 136–143, 177, 232, 240, 241

Securities Exchange Act (1934), 119, 120

Security analysis, antiperistasis system of, 22

Selenium, 168, 169

Seligman, Edwin R. A., 81, 87

Selling short, 227, 328

Seymour, Walton, 270

Shepard, Leonard, 299

Sherman, John, 84

Sherman Antitrust Act (1890), 84, 201

Shilling, introduction of, 337

Short selling, 227, 328

Silver, 337

Singer Co., 378

Sixteenth Amendment, U.S. Constitution, 85

Smith, Raymond W., 214–217, 220

Sole Owner stores, 247

Sole Owner Tigers football team, 247

Soss, Wilma, 280–287, 292–295

Special drawing rights (S.D.R.), on International Monetary Fund, 387

Special-interest provisions of U.S. tax law (see Loopholes)

Spinoff, 257

Standard Oil of New Jersey, 8, 18

State and municipal bonds, tax exemptions on, 100

Statistics of Income (I.R.S.), 99

Stehlik, Frank E., 212–219

Stephens, Claude O., 124, 128–138

Stern, Philip M., 117

Stock crash (1962), 2, 4

Stock market fluctuations, 1–24

Stock-option provision, 101

Stock options, 103

Stock traders, 120

Stockholder meetings, 276–296

Stutz Motor Co., 228–229

Styling, of automobiles, 30

Suez crisis (1956), 329

Sulphides, 121

Sunday Times (London), 374

Susskind, David, 101

Swap network, 329, 330, 372–373

Switzerland, banking laws of, 327

Swope, Gerard, 219

T.V.A. (Tennessee Valley Authority), 250, 268

T.V.A.: Democracy on the March (Lilienthal), 251

Tape delays, on N. Y. Stock Exchange, 5

Tax advice, 112

Tax rates, 79

Tax-checking, automation of, 91

Tax deductions, 104–107

Tax-free foundations, 103

“Tax home,” 106

Tax laws, 95

Taxpayer’s account number, 90

Telecopier, 157

Territorial Enterprise, 83

Texas Gulf Sulphur Co., 120, 121, 123–140

Thermo-Fax machine, 148

This I Do Believe (Lilienthal), 251

Time Magazine, 68

Timmins, Ontario, 121

Toronto Daily Star, 128

Trans World Airlines, 72

Travel deductions, 104, 105, 106

Treasury Department, 117

Trusts, and taxes, 111

Twain, Mark, 83

Typewriter, early use of, 147

Trade secrets, 302–312

Trade secrets (Ellis), 309

United Nations, support of by Xerox, 155

United States: abandonment of gold standard by, 339; Army Corps of Engineers, 272; gold base in, 381; gold supply in, 381; tax collecting in, 88; weakening of dollar in, 347, 382–388

United States Steel Corp., 18, 149, 279

United Stores, 229

University Microfilms, 156, 162, 165

University of Rochester, 152, 153, 154, 171

User taxes, 114

Value-added tax, 114

Vanderbilt, Cornelius, 228

Verifax machine, 148

Vietnam, 275

Vinson, Arthur F., 214–220

Voluntary compliance in taxation, 92–95

Voorduin, W. L., 270, 271

Waage, Thomas Olaf, 365–366, 368, 373, 376–377, 380, 383

Wagner, Wieland, 132

Wall Street Journal, 64, 68, 69, 195, 203, 379, 385

Wallace, David, 34–42, 62–73

Wallis, W. Allen, 171

Walston & Co., 182

Warnock, C. Gayle, 47, 48, 51–54, 62, 72, 74

Warren, Earl, 223

Watson, Russell, 195

Watts, Henry M., Jr., 181, 186, 187, 191

Welch, Leo D., 293, 295

Westinghouse Electric Co., 4, 203, 204, 217

Wherry, Joe H., 58

Whitney, Richard, 18, 203

William Brandt’s Sons & Co., Ltd., 189, 193, 194

Williston & Beane (see J. R. Williston & Beane)

Willkie, Wendell L., 249

Wilson, Harold, 324, 334, 335, 342, 372, 374, 375, 377

Wilson, Joseph C., Jr., 149–156, 164–166, 170–175

Wilson, Joseph C., Sr., 150

Withholding tax, 96

Witteveen, J. W., 364

Wohlgemuth, Donald W., 297–313

World Bank, 255, 329

Xerography, 148–152; copyright infringements by, 161; introduced in Great Britain, 170; and offset press, 163; problems of, 160; use of selenium in, 168; uses of, 159

“XeroX” (trademark), 153

Xerox Copyflo, 157

Xerox Corp., 145–175; community’s attitude toward, 171; donations to educational and charitable institutions by, 154; United Nations support by, 155

Xerox 813 copy machine, 157

Xerox LDX, 157

Xerox 914 copy machine, 157, 158, 159, 169, 170

Xerox 2400 copymachine, 157

“Your Federal Income Tax,” 89

“Your Income Tax,” 107

Yukon, 272

Once in Golconda

A True Drama of Wall Street, 1920–1938

Foreword

“Golconda, now a ruin, was a city in Southeastern India where, according to legend, everyone who passed through got rich.” Its riches faded, its fine buildings collapsed, and its glories disappeared, never to return.

That tends to be the way with legendary sources of unimaginable wealth. They flourish for a time, and then they go forever. There’s one exception. It’s called Wall Street, a name that strictly speaking applies only to a narrow gully in the south of Manhattan, but that can be taken as a proxy for Tokyo, London, and other financial markets everywhere.

Unlike Golconda, Wall Street can come back from the dead. Although slumps follow booms, the grass never quite gets to grow over its pavements. It’s a concrete tribute to the human spirit–to ingenuity, to dynamism, to creativity, and, from time to time, to the willing suspension of disbelief. In the high wild times that occur every generation or so, when everyone makes money and it seems like a crime not to be rich, investors forget the lessons that their predecessors learned so painfully. They know, with absolute certainty, that this time it is going to be different.

In this book, John Brooks–who was one of the most elegant of all business writers–perfectly catches the flavor of one of history’s best-known financial dramas: the 1929 crash and its aftershocks. It’s packed with parallels and parables for the modern reader.

The great bull market of the 1920s was built on the growth of a completely new industry, based in Detroit as opposed to the Silicon Valley. It created a breed of business heroes, who passed easily from the top of big investment banks into the upper ranks of government. The most successful investments were to be found in a relatively small number of big companies. And it promised a new economic paradigm.

As President Coolidge explained at the end of 1927, America was “entering upon a new era of prosperity.” Speculation became respectable, and Wall Streeters generated the kind of glamour that goes with being an insider on the subject that everyone wants to talk about. In the perceptive words of an English journalist who arrived on the scene just before everything went wrong, “If the attitude of Americans to the stock market proved anything, it proved that they believed in miracles. That if you try hard enough, you can make wonderful things happen.” Then came the crash of 1929. Share prices recovered a bit the following year, before reaching a point that they were not to see again for nearly a quarter of a century.

The central character in Brooks’s story is Richard H. Whitney, who starts out at the top of the Wall Street establishment and ends up in Sing Sing. His story is an extreme example of another recurring feature of financial cycles: Bull markets create heroes and have a wonderful way of covering up mistakes, and worse.

Heroes can all too often come to believe that the rules don’t apply to them, especially if they live and work in a narrow community securely cordoned off from the little people. That’s when the temptations start.

Richard Whitney didn’t start out to be a criminal–the very notion of robbing a bank would have horrified this lofty and fastidious figure. Instead, he bent the rules, little by little, in the fond belief that the rising tide of the stock market would put everything right. When it didn’t, he bent the rules some more. Even when he was exposed, his friends were unwilling to admit the truth.

In the words of a top man at J. P. Morgan, “It never occurred to me that Richard Whitney was a thief. What occurred to me was that he had gotten into a terrible jam.”

I first read Once in Golconda back in the 1970s, during those long dull years when the Dow was strugglng to break decisively through the 1,000 mark and when Wall Street was a place where you went to get your bonds underwritten. It seemed at the time like a wonderful fairy story, peopled by characters out of Scott Fitzgerald. Brooks’s stories–the bomb outrage of 1920, the marvelous story of the bear raid on the Stutz Motor Car Company of America–stayed in my memory.

But I regarded those tales as artifacts from a distant age, with as much relevance to anything that was ever likely to happen again as the story of Golconda.

Rereading it in 1999, though, I’m not so sure.

RICHARD LAMBERT

The Financial Times

ONCE IN GOLCONDA

Golconda, now a ruin, was a city in southeastern India where, according to legend, everyone who passed through got rich. A similar legend attached to Wall Street between the wars.

Chapter One

Overtures: The Outrage

I

On Thursday, September 16, 1920, a few seconds after the Trinity Church bell had finished tolling noon, the pleasant fall air of downtown Manhattan (weather clear, temperature sixty-nine degrees, market up slightly) was rent by an enormous and devastating explosion. Emanating from a point on Wall Street a few yards east of the intersection of Wall and Broad, and directly between the marble edifice of J. P. Morgan & Company and the barred front of the brand-new United States Assay Office–that is to say, from the precise center, geographical as well as metaphorical, of financial America and even of the financial world–the explosion darkened the area for several minutes with a huge cloud of greenish smoke, set fire to awnings twelve stories above the street, broke virtually every window in the immediate vicinity and some as much as a half-mile away, and spattered a wide area with hundreds of small, shrapnel-like iron slugs that, on later examination, appeared to be fragments of cut-up window sash weights. It pock-marked the austere façade of the Morgan building, at 23 Wall Street, on the southeast corner of the intersection, and blew in all of its north windows, causing a hail of glass fragments to fall on persons on the banking floor below. It bent the heavy bars protecting the Assay Office, on the north side of Wall next to the Sub-Treasury; this building largely escaped interior damage precisely because it had been designed to be a fortress. It shook to the foundations, but by miracle or chance did not materially damage, Wall Street’s own church, Trinity, which stood, flanked by its famous old graveyard containing the bones of Alexander Hamilton, only a short block from the point of explosion. The toppling of Trinity’s Gothic Revival spire, had it occurred, would have symbolized the disruption of things as they were as much as the defacing of Morgan’s itself.

At the New York Stock Exchange, on Broad Street near the southwest corner of the intersection with Wall, the blast sent hundreds of brokers and traders surging to the center of the trading floor in an effort to avoid glass falling from the room’s huge windows; there, driven from Scylla to Charybdis, they were confronted with the prospect of mass extinction by the great glass dome overhead, which threatened to fall but didn’t. At the Bankers Trust Company, on the northwest corner, broken glass flew like leaves in a gale, and one of the iron slugs whizzed through the office window of Seward Prosser, the bank’s president, missing his head by a few inches.

Others were less fortunate than Prosser. Thirty persons were killed instantly or nearly so by the explosion, and injuries befell some three hundred more, of whom ten died later. But none of the dead were the kings and generals of finance, all of whose lives seemed to be as charmed with good fortune as Prosser’s. J. P. Morgan, the most famous man in Wall Street and the public symbol of its power, was on holiday in an English country house; of the five of his partners who were in the building when it was hit, all escaped injury except Morgan’s son Junius, who suffered a minor cut. Of the thirty who died at once, none were brokerage partners or senior bank executives, and only one was identified as a broker. Most of the others were Wall Street’s attendants and privates, young or old–the stenographers, clerks, bookkeepers, messengers, and porters who with untimely appetite had stepped out of their buildings a minute or two before noon on their way to an early lunch. Three were women, four were teenage clerks or messengers, one was a young banker of twenty-five, another was a retired businessman of sixty-eight. The value of the securities lost in the confusion was negligible, and as to property damage, which amounted to two or three million dollars, the owners of the buildings or their insurance companies could easily enough absorb that. Whatever the meaning of the explosion, it left Wall Street’s power unscathed.

II

Wall Street in 1920 had been the world’s principal money center for just about six years. Its triumph had been accomplished under the most humiliating circumstances imaginable–that is, by default, and at a moment when it was flat on its back and gasping for breath. For a century before the First World War, the City of London had been the world’s banker and had called the tune in the world’s money matters; financing for large American enterprises had usually come in whole or in part from London or from continental Europe via London, and Wall Street, while significant enough domestically, had in international matters served chiefly as a mere broker between American enterprise and transatlantic capital. Then in August, 1914, in the first weeks of the war, Britain appalled the financial world by suspending gold payments against pounds sterling–an action which, in that heyday of the international gold standard, was as if the most feared, respected, and trusted player in a poker game had suddenly announced that he found it necessary to quit the game and refuse to redeem his markers. Along with the Exchequer’s subsequent decision to forbid all British investments outside the Empire, the action meant, as the London Times admitted, “temporary abandonment of our historic claim as an international money centre,” and made it inevitable that “much of the international business we have been accustomed to do should pass to … the United States”–which nation, the Times declared grimly, “is capable of doing it.”

If so, just barely. So great was British financial influence in the United States that London’s abdication was as paralyzing to Wall Street as if the fighting had broken out in Philadelphia or Detroit. The day war began, stocks crashed sickeningly on the New York Stock Exchange; the following day the Exchange, which had never in its long history been closed for more than ten consecutive days, suspended trading for what was to be a period of nearly nine months. Moreover, there was near-panic in New York banking circles. United States businessmen in their international dealings were net debtors to the extent of more than three billion dollars, almost all of the creditors being from European countries that had become belligerents; these creditors now not only demanded their money but, in the time-honored tradition of creditors in wartime, demanded it in gold. Meanwhile, alarmed bank depositors at home made matters worse by rushing to withdraw their balances. In the first two weeks of the war enough money was taken out of New York banks to bring them to a condition almost as precarious as at the height of the great Panic of 1907. All that autumn, gold drained out of the Treasury, most of it to Canada for London’s account, at a frightening rate. With domestic business in shock and foreign trade at a standstill because German destroyers were thought to be watching the ocean highways. Wall Street was almost a ghost town–its banks teetering, its Stock Exchange and brokerage offices closed, and only a handful of “outlaw brokers” defying the Exchange by informally maintaining an “outlaw” stock market outdoors on New Street, where they traded a few issues at panic prices. Thus, the new champion of world finance.

But Wall Street, thanks largely to the circumstance that it was the United States’ role to finance and supply the war rather than be bankrupted or devastated by it, quickly grew into its new role. In November, 1914, the gold outflow slackened, in December it ceased, and in January, 1915, a reverse flow began. The Stock Exchange resumed normal operations that April. American loans to the Allies were increasing, and would soon amount to billions; the American export trade, consisting largely of war supplies, but also including huge amounts of food, feed, and cotton, was beginning an expansion that would continue until 1917 at a rate unparalleled in the commercial history of nations; and along with all that, European countries were sending their gold to New York for safekeeping even when they were not sending it in payment for guns. What began as a westward trickle of gold in early 1915 within a year or so became a torrent; for the single month of March, 1916, the United States imported almost as much gold as in any previous entire year. Overnight, as such things go, the world had taken its money out of one bank and put it into another–and not temporarily, since by the time Britain was finally able to resume gold payments in 1925, it was far too late to regain her status.

By 1920 Wall Street had the power to do London’s old job, with plenty to spare. The United States, having financed a year and a half of participation in the war largely by selling bonds internally, had changed from a three-billion-dollar international debtor to a three-billion-dollar creditor. The Treasury was sitting on something like one-third of the world’s monetary gold supply. The predicted postwar national depression had arrived, but was mild compared to the time of bankruptcies and bread lines that had been predicted. Wall Street even had an inadvertent benefit of the war in a horde of new customers–citizens whose purchases of Liberty Bonds seemed to have given them an enduring taste for investing. Wall Street was sitting pretty, but was still wholly lacking in the imperial self-assurance of its fallen predecessor.

Its lack of self-assurance was to be dramatically shown in its response to the event of noon, September 16.

III

The first local reactions, naturally enough, were individual rather than social or political. Survivors on the street first fled the scene in wild confusion, filling the air with their screams and stumbling over the bodies of the dead and injured; then, in a matter of minutes, their curiosity overcame their fear of a second explosion and they surged tidally back, joined by thousands of others pouring out of the surrounding buildings. Within five minutes there were ten thousand persons milling around the area. Underfoot, the injured cried out for self-protection if not for first aid. A badly hurt boy runner, as foolishly dutiful as Casabianca, pleaded for someone to take charge of the bundle of securities he was carrying so that he could die with his job performed–as he did. A clerk in Schulte’s cigar store, at 36 Wall Street, reacting according to habit acquired when he had been in the Army in France, clapped his felt hat on his head in lieu of a steel helmet. The president of the Stock Exchange walked calmly but rapidly (running was forbidden on the Exchange floor) from where he was standing to the rostrum overlooking the floor and rang the gong there, suspending trading for the day within one minute after the explosion. The New York Curb Exchange, which at the time still operated outdoors on Broad Street a couple of hundred feet from the site of the explosion, needed no gong to announce its closing, since its place of business had suddenly been transformed into a mob scene and many of its brokers, stunned or injured, were fighting for their physical rather than their financial hides. Platoons of policemen and doctors from nearby hospitals struggled to get to the fallen victims; a few minutes later came federal troops from Governors Island, who soon succeeded in clearing the immediate area and roping it off.

The cavernous interior of J. P. Morgan & Company, the office most seriously affected, was a shambles of broken glass, knocked-over desks, scattered papers, and the twisted remains of some steel-wire screens that the firm had providentially installed over its windows not long before, and that undoubtedly prevented far worse carnage than actually took place. One Morgan employee was dead, another would die of his wounds the next day, and dozens more were seriously injured. Junius Morgan, sitting at his desk near the north windows on the ground floor, had been pitched forward by the blast and then nicked by falling glass. The press reported that his cut was on the hand, but this was probably an example of the kind of genteel euphemism characteristic of the press in 1920; his surviving former partners later insisted the cut was on the backside. In any case, he himself, after being treated at Broad Street Hospital, announced gallantly that he had “escaped injury.” Another young Morgan man, William Ewing, was knocked unconscious, and awoke a few minutes later to find his head wedged into a wastebasket.

The firm’s senior partner after J. P. Morgan himself, Henry P. Davison, happened to be out of the building at the time. The other four partners present were fortunate in their situation. They were Thomas W. Lamont, soon to succeed Davison as Morgan’s right hand; Dwight W. Morrow, later to be Ambassador to Mexico and a leading national political figure; Elliott Bacon, member of another Morgan family powerful in national affairs; and Bacon’s relative by marriage, George Whitney–a fast-rising young member of the firm, and the brother of another fast-rising young man of Wall Street, the bond broker Richard Whitney. These four were in conference in the elder Morgan’s room on the building’s second floor, directly on the corner of Broad and Wall; since the room’s windows face west and it presents only a fortress-like, windowless wall to the north, they were safe. In view of the unexpectedness of the explosion they can hardly be accused of huddling like cowardly generals in a safe bunker during an attack; nonetheless, such may have been the assumption of an actual general who was among them–a visiting French military dignitary who was Morrow’s guest, and who, as the echo of the blast died away, smoke billowed up outside, and glass could be heard tinkling down everywhere, inquired of the partners, “Does this happen often?”

All that afternoon, the police and the federal troops, assisted by some five hundred ex-service men who volunteered their efforts, worked at giving the wounded first aid and getting them into ambulances, and at controlling the crowd, which soon grew to something like forty thousand. Much of the crowd remained into the night–or perhaps it was renewed by new arrivals after the closing of offices uptown–to watch the work of cleaning up debris and boarding up broken windows being carried out in a blaze of arc lights. A grim, exultantly embattled spirit pervaded the leaders of New York finance that night, and was communicated to the mob in the street; the essence of the spirit was: “Back to work tomorrow. The Reds will be defied.”

Few seem to have doubted for a moment that the explosion had been a bomb planted by radicals of one stripe or another, although in fact the evidence that was immediately available was equivocal. Witnesses to the events immediately preceding it could agree on hardly anything, but there did seem to be a consensus among them that at about 11:55 an old single-top wagon–red, yellow, or green in different versions–drawn by an even more antiquated dark bay horse, had proceeded along Wall Street and come to a stop in front of the Assay Office. Some went further and said that they had seen kegs or boxes, presumably containing dynamite, in the wagon, but none who immediately came forward could describe the driver or drivers, nor say what he or they had done after the wagon had stopped. Some of this evidence was corroborated by the remains found at the site–parts of a dismembered horse, including two hooves with shoes on them, and fragments of the axles and wheel hubs of the wagon. But none of this established or even suggested whether the blast had been a bomb or an accident. On one side of the question, a casualty said in his dying breaths that he had seen a wagon clearly labeled “Du Pont” overturn in the street; his testimony was supported after a fashion, although not a reassuring one, by others who said they had seen a wagon marked with the names of various other well-known manufacturers of explosives–Hercules Powder Company in one case, Dittmar Powder Company in another, Aetna Explosives Company in a third. Assuming that the wagon had belonged to some powder company, it was logical to suppose that the explosion had resulted from an accident to a shipment intended for a demolition project, of which there were several under way in the downtown area and one directly on the southwest corner of Broad and Wall, where the Stock Exchange was building an extension. Unfortunately for this thesis, though, all of the companies mentioned were able to show that they had had no horse-drawn wagons in the area that day, and Du Pont’s spokesman went on to offer a possible basis for the witnesses’ garbled testimony in the fact that a Du Pont motor truck, duly marked, and carrying not explosives but pigments, had passed a few blocks from Wall Street late that morning.

The evidence of a bomb consisted principally of the cut-up pieces of sash weights that had rained on the surroundings and caused much of the damage and many of the casualties; the police eventually collected over five hundred pounds of these destructive fragments, and it seemed beyond reason that a conveyance transporting explosives for innocent purposes might also have happened to be carrying such an eccentric load. But even more persuasive to many people, in the charged atmosphere of the time, were the implications of the precise location of the blast. The implications were more than symbolic. On the day in question, nine-tenths of a billion dollars in gold, in the form of small bars each weighing about twenty-five pounds and neatly packed in a wooden box, were being moved under armed guard from their old repository in the Sub-Treasury Building to a new one in the Assay Office next door. The workmen were carrying the gold along a wooden ramp crossing the narrow alleyway between the two buildings, and the spot in the street where the explosion occurred was almost directly opposite this alleyway. As it happened, at noon the porters of the treasure and their guards had just quit for lunch and withdrawn into the buildings, clanging shut the well-barred side entrances after them. They thus had escaped almost certain death and, it is possible to speculate, prevented a spectacular raid on the United States Treasury. The loss of all or most of the gold might have created the kind of instant world financial chaos more common in wild-eyed fiction than in life.

Such chaos bred of violence, many Americans were convinced, was just what the forces of radicalism were bent on bringing about; for more than a year the country had been in the grip of a Red scare in some ways comparable to that of the later era of McCarthy. In 1920 “bomb” meant “Red”–more often than not, “foreign Red”–and vice versa. But one way in which the period differed from the McCarthy era was that so many of the bombs of 1919 had been real. That April, bombs intended to explode when the packages containing them were opened were mailed to eighteen prominent persons, among them the mayor of Seattle, who had an antilabor record; the United States Commissioner General of Immigration; a judge famous for having sentenced two radical leaders; the Attorney General of the United States, A. Mitchell Palmer; the Secretary of Labor, William B. Wilson; and the owners of the two most familiar names in finance, John D. Rockefeller and J. P. Morgan. (Most of the bombs failed to reach their destinations for the wonderfully humdrum reason that they were delayed in the New York City Post Office, and therefore discovered, on account of insufficient postage.) A few days later, thrown or planted bombs exploded in Cleveland, Philadelphia, Pittsburgh, New York, and other places, and the anonymous enemies of Palmer–a stubborn Quaker driven by political ambition and a fanatic’s zeal, who was bent on making himself the nation’s leading radical-fighter–took another shot at him, this time not relying on the Post Office; his house in Washington was heavily damaged by a bomb, but no one was hurt except its thrower, who was killed. Having appointed William J. Flynn and Francis P. Garvan, two of the country’s most celebrated detectives, to his department’s two key police posts–head of the Bureau of Investigation and assistant in charge of Red-hunting–Palmer that autumn launched a terror campaign against radicals that reached its apogee on the night of January 2, 1920, when, in an elaborately planned system of simultaneous raids, more than four thousand persons suspected of being radicals were summarily arrested in thirty-three different cities. For the most part, the public cheered and hailed Palmer as the nation’s savior, even after most of the suspects had been released for lack of evidence.

On the night of September 16, “federal, state, and city authorities were agreed that the devastating blast signaled the long-threatened Red outrages,” reported the Times, and the conclusion was apparently the same from coast to coast. Police cordons had quickly been thrown around the financial districts of Chicago, Boston, and Philadelphia; police buildings, storehouses of wealth, and prominent men had been put under guard in various cities; thirty detectives encircled J. P. Morgan’s residence on Madison Avenue, even though he wasn’t there; and Flynn, the FBI chief, had already arrived in New York by express train from Washington and was directing the operations of a staff of investigators. Moreover, the news from Washington was that Palmer and Garvan were on their way.

The following day, September 17, the federal men let it be known that they had come up with–or rather, had had fall into their laps–a classic clue to the nature of the crime, though not to the identity of the criminals. The New York Post Office turned over to them five sheets of paper that had been found loose and with no address in a mailbox at the corner of Cedar Street and Broadway, a two-minute walk from Broad and Wall. On them was crudely printed by means of rubber stamps, with smudges and misspellings that varied from one to another, the incoherent but still lucid message:

Remember

We will not tolerate

any longer

Free the political

prisoners or it will be

sure death for all of you

American Anarchist Fighters

These circulars, the postal authorities told the Justice Department men, had been put in the mailbox on the day of the explosion some time between the 11:30 collection and the next one at 11:58. Since they had been deposited there immediately before the explosion rather than after it and therefore could not represent an effort of anarchists to claim credit for someone else’s work, and since, moreover, they were almost identical to some circulars that had been found after some of the 1919 bombings, the papers, unless they had been planted as a red herring, would seem to have represented all but clinching evidence that the explosion had been of an anarchist bomb. But, as other events before and since 1920 have shown, acts of public violence may engage many people’s emotions in such a way as to make them incapable of accepting facts that are irrefutable or explanations that are logically obvious–may compel them, in effect, to reject the actual crime and create in their imaginations another one nearer to their hearts’ desire. In this case Wall Street, and a good deal of the rest of the country, seems to have wanted the blast to be proved an anarchist bomb, all right, but not to have the question closed so quickly and unceremoniously; instead, it wanted with word and act to argue heatedly the case for an un-American plot, and that is what it did.

IV

The arc lights finally went out at dawn on the seventeenth, and Wall Street prepared to go back to work, not in a mood of “business as usual” but in one of defiance and patriotism. At Morgan’s, epitome of the Anglophile, stiff-upper-lip Wall Street style, as opposed to the more flamboyant manner characteristic of the Stock Exchange across the street, great sheets of canvas had been stretched over the shattered windows, a scaffolding buttressed the weakened dome over the banking floor, and what with executives sporting bandaged arms, legs, and heads, and clerks operating typewriters and adding machines with one good hand, the place had the air of an accident ward quietly undergoing occupational therapy. The Stock Exchange, assured by its engineers that the building was safe for occupancy, opened at its usual time, but without the usual heavy-handed joking among the floor brokers and traders, who, according to the Sun, had grim expressions and firmly set jaws. Brokerage houses wired their customers reassuring bulletins during the hour before the opening, to allay any panic. But no panic materialized; during the first hour of trading prices rose on the heaviest turnover in more than a month, some issues advancing as much as ten points. As the day proceeded and the firm tone remained, confidence grew, and a leading brokerage house changed the burden of its telegraphed messages from bulletins of reassurance to Fourth-of-July fulminations with pronounced political overtones. “Six years of continuous warfare; millions of dead and crippled,” came ticking into the branch offices of this firm.

Upon this ghastly foundation stand men and women of distorted mind, who have been preaching radicalism and appealing to every debauched mind. These have received courteous attention instead of deserved punishment.… Each found many defenders in high places.… What more natural result than an effort on the part of these radicals to destroy lives and property in America’s financial center? … Young men and women working for a living have been the victims of this foul conspiracy. And as for the effect on the stock market, I believe that the market will be stronger than it was. Law and order will prevail and business will continue to make progress.

That evening the Sun wrote: “The consensus of Wall Street might well be summed up in this wire.”

By coincidence the Sons of the American Revolution had previously scheduled for that day a celebration of the hundred and thirty-third anniversary of the adoption of the Constitution, and so precisely at noon–“the murder hour,” as the Times put it–a crowd of thousands gathered at the base of the George Washington statue in front of the Sub-Treasury Building, a few feet from a shallow indentation in the pavement of Wall Street made by the explosion. After all had sung “America,” boaters held over hearts, a brigadier general of the 79th Division declaimed, “Yesterday one of the greatest outrages ever committed against society was perpetrated on the very spot on which we stand. Are we, as American citizens, going to close our eyes to things like that? I say no, a thousand times no!”

“No!” roared back the crowd.

The general went on, “Those who would do such a thing should be killed every time they show their heads. They should be killed like a snake!”

“Yes!” roared the crowd, whereupon a member of it sprang forward and led everybody in the National Anthem, which hadn’t been on the program. Noticing, as the gathering broke up, that the Washington statue was untouched except for a nick or two on its base, some spoke of a miraculous portent. All in all, it was a great day in the Street.

V

For days following the blast, the press, the clergy, and an assortment of political voices viewed “the outrage,” as it became known by common consent, as the responsibility of everyone from the “blood-crazed proletariat” to the Wilson Administration. New York City offered a bounty of $10,500 for information leading to the arrest of the perpetrators, and the Burns Detective Agency, believed to be acting for J. P. Morgan & Company, upped the ante by $50,000. Preaching to an unexpectedly huge congregation at Trinity on Sunday morning, the Reverend Dr. William T. Manning, Rector, took occasion to get several things off his chest. Besides the plotters themselves, he said, “there is another class which needs to be rightly dealt with–those who call themselves intellectuals and make themselves safe by declaring that they do not advocate force.” It may be safely presumed that the congregation nodded in grim assent.

The spokesmen for the American radical movement seemed to find the whole affair a source of considerable amusement. The secretary of the New York Defense Committee of the most powerful and most feared radical organization, the Industrial Workers of the World, issued a prompt statement in which he expressed his organization’s regret that so many people had been killed or injured, and added that, no matter what anyone might say, the IWW “has other things to do than to mix in such stuff.” The Russian-language Russky Golos said a couple of days after the explosion, “People of the eighteenth century used to say that if there was no God it would be necessary to invent one. In the twentieth century, it is believed that if there are no bomb plots they must be invented. And they are being invented.”

No one of any political persuasion seemed to be doing himself any particular credit in reacting to the explosion, and that included the police, local and federal, whose accomplishments in the first few days after it consisted principally of the production of numerous suspects, most of them with foreign names and airtight alibis. The police questioned Carlo Tresca–the well-known Socialist leader, later to be tragically assassinated–but got nowhere. They also questioned one Alexander J. Brailovsky on the grounds that he was of Russian extraction, that he was “said to be a Trotsky-Lenin agent,” and that an anonymous letter had reported him to have been seen standing at the corner of Pine and Nassau streets soon after the explosion, talking to three other men and–even worse–laughing. However, Brailovsky was able to prove that he hadn’t been anywhere near Pine and Nassau streets that day, and he was released. A bit later, a Brooklyn man named Florean Zelenska was arrested because he possessed radical literature, had once been an employee of Hercules Powder, and had left his home at about eleven o’clock on the morning of September 16 carrying a reddish-yellow bag; it turned out that his destination had been a tailor shop where he worked and that the bag had contained his lunch. On the twenty-third Palmer’s man Flynn summed up the first week’s work on the case. “Our unshaken conviction is that talk of the disaster in Wall Street as being an accident is plain bunk,” he declared. “We are not being diverted or deterred by rumors and reports of stray powder-wagons in the neighborhood or anything of that sort. It was a criminal outrage.” “The government never sleeps and it never quits,” he added, after a pause for breath.

VI

Sleepless and persevering, the government over the next few months hauled in suspects named Carusso, Abato, Ferro, Fasulo, Luigio, and De Fillipos. No firm evidence could be found against any of them. A few clues and leads gradually turned up. A farrier with a shop in New Chambers Street, not far from Wall Street, identified the shoes of the dismembered horse as his work, but could not recall anything about the man to whom he had sold them; later another farrier in Elizabeth Street insisted that he had made the shoes, and said that the horse’s owner had been a young, short, barrel-chested, mustached Sicilian who had evidently been in a great hurry. A witness came forward with the information that he had seen the wagon just before the explosion and that its driver, who appeared to the witness to be a Jew, had dropped the reins, climbed down from the wagon’s seat, hurried west to Nassau Street, and disappeared behind the Sub-Treasury just in time. Another witness, a Jewish peddler, countered with testimony that the driver had had a rich Scottish accent. Others who claimed to have seen the wagon assigned to its driver other national origins, religions, and modes of escape. Among those who seemed to be able to conjure up vivid and highly personal versions of the affair was one leader of Wall Street itself–Samuel B. Wellington, the septuagenarian president of the West Indies Trading Company, whose account succinctly epitomized the received view in Wall Street circles. Wellington told the police four days later that he had emerged from 37 Wall Street, on the south side a few doors east of J. P. Morgan & Company, at 11:58 on September 16–conveniently enough, he said, he had glanced at the Trinity Church clock on reaching the sidewalk–and had immediately heard a voice calling “Hurry up! Beat it! Get out of this!” Looking around, he had seen two men who looked to him like “East Side peddlers” near the corner of Wall and William streets, beckoning and calling the warnings to a third man, a “greasy fellow” of about sixty, who was beside a wagon in front of the Assay Office. The little tableau burst into motion as all three men began running toward William Street, and turned northward up it; then the scene ended neatly in an unstaged blackout, because Mr. Wellington was knocked out cold by the explosion. Although nobody could be found to corroborate this story, it served perfectly for the revelation that Wall Street needed, and perhaps gained rather than lost force from the fact that the oracle had lapsed into unconsciousness immediately after experiencing his vision. But it did not help the police find a criminal.

One suspect, and indeed the leading one for a few days, was neither a Sicilian, a Jew, a Scot, an East Side peddler, nor a greasy fellow, but a middle-class professional man of Anglo-Saxon lineage with friends high in Wall Street. He was Edwin P. Fischer, a forty-two-year-old graduate of City College and New York Law School and a leading tennis player who had once ranked ninth nationally and had won the New York metropolitan singles championship three times. He had also twice been in mental hospitals, and had, in the days just before the Wall Street explosion, predicted it with hair-raising precision. About two weeks before it, Fischer had arrived early one morning at the West Side Tennis Club, then at Ninety-third Street and Amsterdam Avenue, and talked with the caretaker, Thomas Delehanty. After inveighing for a while–in a manner with which Delehanty was familiar from previous conversations with Fischer–against Wall Street in general and J. P. Morgan & Company in particular, he said in a tone of mystery, “Tom, I want to tell you a secret. We are going to blow up Wall Street on the fifteenth.” Or maybe, Delehanty testified later, Fischer had said “They are going to blow up Wall Street”; he could not be certain on that point, but he was certain that he had thought no more about the matter because he considered that Fischer, while charming, gentlemanly, and intelligent, was “a bit light in the head.” A week or so after that, a passenger in a Hudson Tube train had encountered a stranger who was carrying a tennis racquet and whose description tallied with Fischer’s, and who abruptly leaned forward and said, “Keep away from Wall Street until after the sixteenth. They have sixty thousand pounds of explosives and are going to blow it up.” This seems to have been the only occasion when Fischer picked the right day, but over the next week he kept repeating the forecast–sometimes in writing–and scoring remarkably near-misses as to the time. On September 11 he sent the following postcard from Toronto to a Wall Street broker friend of his named George F. Ketledge: “Greetings. Get out of Wall Street as soon as the gong strikes at 3 o’clock Wednesday the fifteenth. Good luck. Ed.” On the thirteenth he sent similar postcards to several other people who worked in the Wall Street area, including Léonce Arnaud, chief of the French High Commission, at 65 Broadway, where Fischer had been working until about a month earlier, and Sheppard Homans, a prominent insurance man, former partner of the soon-to-be-startled Mr. Prosser of the Bankers Trust and old friend of Fischer’s. In each case he warned of a bomb in Wall Street on the afternoon of September 15, in Arnaud’s case adding disarmingly, “It may be all bull,” and more ominously, “Have a just grievance or so I think.” For reasons similar to Delehanty’s, none of the recipients took the warnings seriously.

In the Toronto hotel from which he sent the postcards Fischer was heard muttering about “millionaires who ought to be killed.” He left it on September 14 to go to Niagara Falls, where he was overtaken on the evening of the sixteenth–the day of the explosion–by his brother-in-law, Robert A. Pope, who then knew nothing of the bomb warnings but had heard of the hotel threats and had immediately concluded that his relative was undergoing a mental breakdown. By the following morning Pope had learned of the bomb warnings, if not from Fischer himself then from the newspapers, which featured them in banner headlines; whichever the case, he persuaded Fischer to accompany him to Hamilton, Ontario, where they both had friends, and turn himself in to the authorities. On being questioned by them as to how he had predicted the explosion, Fischer replied, “I don’t know where the message came from–through the air, I guess.… I know when anything awful is going to happen.” He also described Wall Street as “the center of evil in the world.” Oddly enough, Pope, whose sanity was not in question, unhesitatingly corroborated Fischer’s view that he had psychic powers, and noted that the powers seemed to be particularly acute when his brother-in-law was in an abnormal mental condition.

Pending the arrival of United States authorities and the completion of extradition proceedings, Fischer was held in the Hamilton jail, where he was described as being cheerful and a model prisoner. On Monday the twentieth the authorities moved him by train to New York for further questioning. Arriving at Grand Central Station, where a large crowd of reporters and others was on hand to greet him, he lost no time in exhibiting his eccentricity. When asked why his clothes appeared bulky, he replied that it was because he was wearing three costumes–two outer layers of business suits for warmth, and tennis clothes underneath in case the opportunity to play should present itself. Then, walking across the terminal, he picked up three cigars that someone had dropped and pocketed them, saying, “I don’t smoke, but I’ll keep them.” (The cigars were instantly confiscated by his guards and sent to the police laboratory to be examined for concealed messages. None were found.) He was then questioned at great length by the police and examined at Bellevue Hospital. The conclusion reached as a result of these inquisitions was that he was innocent of any connection with the explosion, and that he was mad; on October 2 he was committed to Amityville Sanitarium, and after a two-month stay there he was released, apparently recovered. The last word on the Fischer affair, so far as Wall Street was concerned, was spoken by his friend Homans, who said, “No conspirators, after talking with Fischer for ten minutes, would consider letting him into a plot with them.” There remained–and remains–the tortured coincidence that his insistently repeated warnings had been so nearly right, which was considered strange enough at the time, and which latter-day probability analysts might well declare to be unacceptable as an explanation.

Whether or not he was innocent of any sort of complicity, Fischer was certainly mad, although not much more illogical than his friends the powers of Wall Street, who rejected the accident theory of the explosion perhaps because of the mailed anarchist threats but more likely because it called into question, by implication, the perfection of the free-enterprise system; rejected Fischer as a suspect perhaps because the police had rejected him but more likely because they felt that a man of his sort, even though a lunatic, would never have a part in such an act; and eagerly embraced the radical-conspiracy theory because it suited their prejudices. It did more than that; by making them feel embattled, it elevated their interests into principles. For months afterward, important financial men were guarded at announced public appearances, jaws remained set at the Stock Exchange, and brokers at lunch exchanged bomb experiences with the elaborate insouciance of veterans who have risked all in a good cause. Selling paper for money–the basic business of Wall Street–had graduated from a mere way of making a living into a defiance of the country’s enemies, a moral act, and Wall Street was well launched into a decade when it could savor the treacherous and comfortable sensation of feeling its activities to be right as well as profitable.

VII

For a decade and more, the local and federal police went on conducting one of the most extensive and prolonged investigations on record. They visited over four thousand stables up and down the Atlantic seaboard in an effort to establish ownership of the horse; every blacksmith east of Chicago, and even the editors of every blacksmith trade journal, in an effort to identify the horseshoes conclusively; and every sash-weight manufacturer and dealer in the country in an effort to trace the source of the iron slugs. These procedures, which were uniformly fruitless, were mocked from time to time by confessions to the crime, each of which caused a momentary stir until it was shown to be implausible. One confessor, a disaffected former Burns detective who subsequently recanted and backed up his recantation with an unbreakable alibi, may simply have been taking a devious revenge on his old employers. A man who came forward in 1924 to assume full responsibility for the explosion turned out to have been confined in San Quentin Prison at the time of it. As late as the end of the 1930s a New York police captain would occasionally assign a bright young detective to the case on the chance that a fresh mind might see it in some new perspective. But the case was hopeless. By then it was far too late for a solution, and, moreover, Wall Street had other problems to occupy it.

Meanwhile, all through the two decades of our story, the explosion had its dramatic and highly visible monument. The monument consisted of the scars that were allowed to remain untouched on the north façade of 23 Wall Street. Ragged and eye-catching, an inch deep in places and suggesting moon craters as seen through a telescope, they were concentrated just under the sill of the second window from the building’s east end. No plaque explained them, or was necessary; the passer-by who stopped to stare at them soon came to draw the knowing and superior smile that a native bestows on a tourist anywhere. Exactly why they were not erased was not clear; on this as on so many other subjects, J. P. Morgan & Company kept official silence. In the thirties some took to expressing the view that their survival for so long had come to make the Morgan bank look like a fusty old Blimp flaunting his ribbons from ancient campaigns. But Morgan men, when kidded on the subject, insisted that it was perfectly natural. “There’s no particular feeling of martyrdom behind leaving them there,” one old partner explained. “It’s the practical thing to do. After all, replacing those great blocks would be inordinately and unnecessarily expensive. And besides–it’s right and proper that they should stay there.”

Right and proper or not, the scars served to remind Wall Street of its heroic martyrdom, and to enhance its sense of being a stage for great events. As, indeed, they still do today.

Chapter Two

Ticker Tyranny

I

“In a sense, the financial conflict is more bitter and ruthless than war itself; in war, friend and foe can be distinguished.” So B. F. Winkelman, a shrewd Philadelphia lawyer with Wall Street connections, wrote in 1932 about the stock market in the 1920s. Except for a few newly arrived provincials who were instantly identifiable by outré items of apparel such as wide-brimmed hats and two-color shoes, the warriors of Wall Street wore pretty much the same uniform regardless of which particular army or task force they were enlisted in at any particular time, and never was the fighting so bitter and ruthless as when one foe was a former friend become a secret renegade. It was a time of transition, in Wall Street as in the nation as a whole, from the dominance of individual men to that of institutions. Single powerful bankers like J. P. Morgan or his key partners could still make or break industrial enterprises by granting or withholding capital, and the whole stock market could be moved sharply upward or downward by the mere rumor that a famous bull like W. C. Durant, or a famous bear like Jesse Livermore, was active in it. But institutions were coming up fast, and the Wall Street institution whose power and influence were growing most rapidly, the institution fast on its way to replacing Morgan’s as the center of national financial power, was the New York Stock Exchange.

Indeed, the Stock Exchange in 1920, so newly risen to such power that it had not yet mellowed into responsibility, was probably in a more arbitrary and arrogant mood than at any time before or since. Unshackled by any sort of public regulation, and governed by rules of its own devising, it was fully capable of summarily changing those rules to its own advantage, carrying on vindictive vendettas, and explaining itself to the public in terms so patently preposterous as to seem to express contempt. The men who ran the Exchange, like those who were to run the biggest corporations a generation later, were themselves relatively faceless; they drew their strength and courage from the institution, and were perhaps among the first “organization men.” Yet they were vastly different, too; they were organization men of an earlier sort, not less tough or aggressive, but more charming, more opinionated, more anxious to please their friends and less so to please everyone else, more frankly selfish and less socially responsible, far more anxious to be thought of, and to think of themselves, as gentlemen. They were out of a single mold. Later in the decade the key committees of the Exchange would include self-made men, intellectuals, Westerners, even Jews; but to a man these were products of old Eastern stock who had grown up in more or less genteel circumstances. They had gone to the best New England preparatory schools primarily to learn manners, participate in sports, and, of course, make the right friends–certainly not primarily to prepare for college, since in those days college was not considered necessary as a preparation for Wall Street and was often simply skipped as a waste of time. They were not overly bright, but they had a kind of stubborn shrewdness. Their lives were inclined to revolve around urban clubs, and they were consummate snobs. They were remarkably ignorant about art, literature, music, history, world affairs apart from business, theoretical economics–just about everything but the matter at hand, and sports. They were unabashedly preoccupied with money and never dreamed of trying to disguise the fact, of which they were not ashamed; they had no ambitions except to become richer and more socially prominent. They were politically conservative or reactionary; they wanted to tell government what it should do but not to serve in it themselves–another sort of Wall Streeter aspired to that. Above all, they were charming when they chose to be, and never discourteous except on purpose. They were looked down on by the Wall Street high-brows, especially lawyers, but idolized as the high-brows never were by the community’s striving newcomers–youngsters from the boondocks or the urban Irish slums–who admired from afar their lordly manners and often profited from their paternal patronage. They were just about the last, in America, of something or other, not quite a caste but perhaps a democratic version of one.

The Stock Exchange was the fortress of their popinjay airs and their mutually protective ruthlessness. Yet the fortress was not unassailable. Just as the most dramatic and characteristic financial conflicts of earlier times had been man against man, and those of later times would be business against government, so those of 1920 pitted man against institution.

The lone, rash challenger of the Stock Exchange that year was a member of it, though not a ruling member–Allan A. Ryan, son of one of the last survivors of another dying breed. Ryan père, whose impoverished Scotch-Irish parents in upcountry Virginia had given him the prophetic name of Thomas Fortune, started life as a dry-goods clerk in Baltimore, moved to New York to become a brokerage clerk, and in the mid-1880s fell in with William C. Whitney, the transit entrepreneur and founder of a famous dynasty whose protégé and then partner Ryan became, and who described Ryan later as “the most adroit, suave, and noiseless man that American finance has ever known.” Starting with horsecars, Thomas Fortune Ryan and Whitney began taking over and consolidating New York City’s public transportation, and by the time of Whitney’s death in 1904 they had, with the help of such tactics as stock-watering and franchise-buying that a grand jury in 1908 found “dishonest and probably criminal” but still not actionable, not only absorbed the Interborough Rapid Transit Company and gained control of the entire city system but had amassed what the historian Matthew Josephson later called “two of the quickest and largest fortunes of the whole era of frenzied finance.” All but penniless in 1886, Ryan was worth fifty million in 1905 by the estimate of his own representative. So suave and noiseless as to be all but inaudible to reporters–he was said to have talked to them only twice in his life, on each occasion merely to make a brief formal statement–he was nevertheless known admiringly in the press as “the great opportunist.” Eventually he broadened his business interests to include banking, tobacco, railroads, life insurance, diamonds, oil, rubber, coal, coke, lead, electricity, and typewriters; increased his fortune to more than one hundred million, and in 1924 paid the tenth-largest individual income tax ($791,851) in the country; became the leading benefactor of the Democratic Party and the leading American benefactor of the Catholic Church; and built a Fifth Avenue mansion with a private chapel and an art gallery specializing in busts of himself, three of them by Rodin.

II

The son of this classical capitalist buccaneer was quite a different sort of fellow. He was physically frail, inclined to moral scruple, and talkative to the press; at the same time, though, he had inherited his father’s stubborn will, independence, and aptitude for financial manipulation. Unlike his father, he had behind him a good formal education, at various private schools and at Georgetown University; moreover, the elder Ryan undertook to tutor him in the intricacies of finance, and in 1915, when Allan was thirty-five, turned over to him his seat on the Stock Exchange. Three years later the young man acquired another equally formidable mentor–Charles M. Schwab, the celebrated first president of United States Steel and later of Bethlehem Steel. “Thomas F. Ryan and I have been friends for many years,” Schwab explained to an acquaintance much later. “When he was retiring from business, he brought his boy Allan to me. Told me Allan was his hope for the future. Would I look after him? I have looked out for Allan ever since.” Under such guidance–and with an unknown amount of his father’s money as his initial stake–Ryan and his firm, Allan A. Ryan & Company, became forces to be reckoned with in Wall Street. He became known as a powerful and clever bull operator, optimistic about the economy’s future, and particularly adept at the delicate yet brutal art of squeezing short sellers, the pessimists who borrow stock and then sell it for future delivery in the hope of later buying it back at a lower price to settle their loans and clear a profit. In the great bull-market year of 1919, in which the rate of turnover of shares (that is, total sales in relation to number of shares listed) on the Stock Exchange exceeded that of any other year before or for many years after, he was generally thought of as the mightiest bull of them all; the very whisper that he was buying was enough to bring about a general rise in prices, and one day, riding uptown with a banker, he let fall that he was now worth thirty million dollars. He operated in many fields–oils, textiles, chemicals, candy, manufacturing tools, and so on–but his biggest investment was thought to be in the Stutz Motor Car Company of America, Inc., makers of the famous Bearcat, of which he had bought a controlling interest and assumed the presidency in 1916.

At the beginning of 1920 Ryan was just under forty, a somewhat formal man with a prominent but not flamboyant mustache and sad, probing eyes; he and his wife and children had a properly grand house in Murray Hill and, apart from an alleged penchant for the racetrack, he was reputed to lead the life of a conservative financier. His Stutz company, despite the keen competition among automobile manufacturers in those days when there were hundreds of makes of car on the market, was in excellent shape. Besides racing models like the Bearcat–so low and sleek of line that some models required the driver to lie all but prostrate at the wheel, and soon to be as much a hallmark of flaming youth as the raccoon coat and the hip flask–the company manufactured a family-sized car, long-hooded and classic in its lines, with a high price tag and a look of quiet authority, which, or so the advertisements for it boasted, “knows no master on the road.” Ryan estimated that Stutz’s net profit for the year 1920 would amount to around five million dollars. All in all, his life seemed to be one of unmarred success, except for the single blemish of a bitter and continuing quarrel with his father. In October, 1917, Thomas Fortune Ryan had remarried less than two weeks after the death of his first wife, Allan’s mother, and gossip both in Wall Street and in the salons uptown attributed the falling-out to this action. The gossip was never confirmed or denied by either the father or the son; what was known early in 1920 was that they were not on speaking terms.

That January, on a trip to Indianapolis to inspect the Stutz factory there, Ryan caught influenza and was hospitalized for two weeks. He had a long history of respiratory illnesses; in his youth his father had once sent him to a sanitarium in Denver in the belief that he had tuberculosis, and was supposed at one time to have despaired of his son’s recovery, and, more recently, friends had repeatedly urged Allan to retire from business, or at least from the hectic business of stock speculation, in the interest of his health. Illnesses and entreaties alike only goaded him to harder work. Back in New York, and suffering from pneumonia that had come as a sequel to influenza, Ryan during February learned certain things from his business associates that led him to believe his affairs needed his immediate attention. Stutz stock, which had been selling on the Stock Exchange at around $100 a share at the beginning of the year, had risen steadily throughout January and then, on February 2, had suddenly advanced in a bound from 120 to 134; at this stage, Ryan was told, organized short selling had appeared as speculators who thought the price had risen too high pounced on what they took to be its exposed position. This was a bear raid, and among the raiders, it was revealed later, were some of the leading members of the Stock Exchange–men whom Ryan, as an outsider to the Exchange’s ruling clique, could not call friends, but often joked and bantered with from time to time on the floor or in the Stock Exchange Luncheon Club. In the course of making a killing in Stutz they might maim the company and separate Ryan from much of his fortune–or, contrariwise, their maneuver might end up costing them their own shirts–but in either case the antagonists would be supposed to take it all in good part and continue the joking and bantering during the contest and after it. Such was the code.

At all events, a bear raid was precisely the maneuver Ryan was best equipped by experience, temperament, and aptitude to combat and crush. Rising from his sickbed in Murray Hill, he went to Wall Street, at first in the care of a nurse, to do battle. His aim was to buy all the Stutz stock that was offered for sale, on an ascending price scale that would close a vise progressively tighter on the short sellers, who, of course, would eventually have to buy stock themselves in order to cover what they had sold. To conduct his campaign, Ryan needed enormous sums of cash, and it later became clear that to raise it he resorted to enormous loans from persons and banks. Evidently he put up the personal possessions of himself and his family as collateral. “We never loaned him more than $1,500,000 on furs,” the president–by that time the ex-president–of the Chase National Bank told the Wall Street reporter Clarence Barron in 1921.

At first, Ryan lost ground. So great was the short-selling pressure that, despite his efforts, by early March the price of Stutz had dropped back to near 100. But then the tide turned decisively. By the morning of March 24 Stutz was up to 245; that day it shot up to 282, and a week later had skyrocketed to 391. In the course of the startling rise, practically all Stutz stockholders except Ryan, his firm, and members of his family decided to take their profits, and sold their stock–which was snapped up in every case by Ryan; meanwhile, the opportunity to get an inflated price for Stutz appealed more and more to the short sellers, whose number and activity increased, and Ryan bought their offerings, too. Toward the end of the month, the stock that they were selling to Ryan had first to be borrowed from him, since there was no longer anyone else who had any. Confident that he was winning, he gladly went on lending and then buying it, and the wild, uncontrolled rise to 391 on March 31 signaled his victory. The short sellers, it was clear, had disastrously underestimated his strength; they were overpowered, and their remaining choices were to buy back the stock they owed him, at his price, thereby incurring huge losses, or, alternatively, to face professional ruin and perhaps a prison term for breach of contract. Ryan, who was feeling much better by this time, had engineered in Stutz what Wall Street calls a corner.

In the light of this situation, certain events of March 31 appear odd indeed. Ryan was in a position to know who most of the short sellers were, since in recent days it was he and he alone who had loaned the stock; he knew, then, that most of them, like him, were members of the Stock Exchange, and some of them, unlike him, members of its key committees. On the morning of March 31 Ryan was summoned to appear before the Exchange’s Business Conduct Committee to explain the gyrations of Stutz. He might have thrown the question back at certain of his interrogators, whom he knew to be among the short sellers; instead, he explained to the committee that the scarcity of Stutz stock had apparently been brought about by the fact that he and his family now owned it all–and even, because of clerical confusion, had contracts for a few more shares than actually existed. He then named the terms on which he would settle with the short sellers, still diplomatically omitting to mention that some of them were seated in front of him. He would, he said, sell them all the shares they needed to fulfill their contracts at $750 per share.

The short sellers present may well have blanched at this proposition, since it meant a loss to them of from $350 to $650 on each share they were short, and some of them were short hundreds. But Ryan was apparently within his rights, and the sellers’ dilemma was of their own making; moreover, since a successful cornerer may theoretically set an infinite price, any finite one is theoretically a bargain. Just as the destruction of a company and its stockholders is the logical end of a successful bear raid, so a corner is the logical end of a successful bull counterattack; the losers’ only right was to plead for mercy, since Exchange rules at that time, while they discouraged both denouements, did not forbid either. Previous corners on the Exchange, like the famous one of 1901 in the stock of Northern Pacific Railroad, had sometimes caused vast social harm but had nevertheless always ended with the short sellers paying their conqueror’s price rather than with any sort of official intervention; no Geneva Convention existed to mitigate the cruelty of the financial war. But in this case the conquered instantly showed themselves to be in no mood to plead for mercy. Early the same afternoon, the Business Conduct Committee, now buttressed by the Law Committee, had Ryan on the carpet again, as if he were the one in trouble. This time the Exchange men seized the offensive by suggesting that they were considering striking Stutz from the trading list, on one pretext or another. Ryan, knowing that such a move might be a grave blow in that it would deprive Stutz of a ready market, boldly replied that if such action were taken his settlement price would be not $750 per share but $1,000. Following this exchange of threats, the meeting broke up and the two Stock Exchange committees went to report its outcome to their ultimate authority, the Governing Committee. During the half-hour between the end of the meeting and the end of the day’s trading on the Exchange floor, there was a further extraordinary development. Some of the Exchange members who were trapped short sellers, knowing full well that Ryan had them cornered, nevertheless dug themselves deeper into the corner by borrowing still more stock from him and then selling it short. This apparently suicidal move came to appear less illogical shortly after the close, when the Governing Committee announced that by unanimous vote it had decided forthwith to suspend all dealings in Stutz for an indefinite period. Reminded by a reporter that no precedent or rule of the Exchange appeared to sanction this action, a Stock Exchange spokesman replied airily, “The Stock Exchange can do anything.”

III

Thus deprived of a ready market, and with his huge borrowings hanging over his head, Ryan was indeed in trouble. But he still had his corner; the stock he had loaned was returnable on demand, and the short sellers were required to produce it, somehow or other, whenever he might call for it. Furthermore, Stutz Motor Car Company, of which he was now virtually the sole owner, was still profitably turning out Bearcats and cars that knew no master on the road. For a few days Ryan kept his own council, marshaling legal advice and planning tactics, while the Stutz affair became the chief, indeed almost the only, topic in Wall Street. The gossip centered on the identity of the short sellers, a matter of which the public knew nothing. Some could not resist suggesting, without evidence, that Ryan’s own father was among those seeking his ruin, to settle their quarrel; others said the villain was Schwab, but at least this calumny was laid to rest a few days later when Ryan was smoothly re-elected to the board of Schwab’s company, Bethlehem Steel. (Schwab said later that there had been a spell of bad feeling between him and Ryan, stemming from a casually slighting remark about the Stutz company that Schwab had made at a dinner party and that a helpful lady had then repeated to Ryan; but far from selling Stutz short, Schwab had lent Ryan a round million dollars with which to defend it.) Another story was that the whole thing was the result of a trifling fifty-thousand-dollar bet, a bit of blood sport among the financial titans. Stock Exchange spokesmen, apparently confident that Ryan would not dare violate the Wall Street code of secrecy on private contracts by naming the borrowers of stock, circulated as fact what may have been the wildest story of all. Most of the short sellers, said the Exchange men with straight faces, were just investors of modest means in outland towns like Kankakee and Peoria. The idea of the country’s Aunt Janes, most of whom had only discovered the existence of the stock market in the two years since the end of the war, as board-room regulars engaging in sophisticated maneuvers like selling short was so dumfounding to all that no one appears to have made any comment on it.

On April 5 the Exchange announced through its Law Committee that it considered Ryan’s contracts void. “The Exchange will not treat failure to deliver Stutz Motor stock, due to inability of the contracting party to obtain same, as a failure to comply with contract,” declared the committee, repudiating in a single sentence the principle on which all Exchange operations were based, and it went on to top off this astounding ukase with the suggestion that if Ryan was still unsatisfied he resort to “action at law.” (To emphasize the futility of this recourse, an Exchange member called the attention of the press to the fact that in the course of its 128-year history the Exchange had had only two of its rulings overthrown by the courts.) Accepting the challenge, though not in the manner proposed to him, Ryan the following day sent to the board of governors an ultimatum of his own that for toploftiness rivaled that of his antagonist. Blithely, or perhaps tactfully, ignoring the Exchange’s action of the day before, he simply assumed the validity of his contracts and laid down his terms for their settlement–among others, that the Exchange negotiate a price with him on behalf of all the short sellers who were its members, to save him the trouble of negotiating with them individually, and that Stutz stock be promptly relisted. The Exchange did not deign to reply.

With the impasse at the point where the alternatives seemed to be ruin for Ryan or grave loss of face for the Exchange, lawyers began to appear on the scene. Dos Passos Brothers, the leading experts on Stock Exchange law, and the firm of the novelist John Dos Passos’ father, rendered an opinion holding, on abstruse grounds, that Ryan’s contracts were probably unenforceable. A Protective Committee was appointed to represent the short sellers–it delicately avoided saying who its clients were–and for advisory legal counsel it obtained the Olympian Charles Evans Hughes, who four years earlier had missed by a whisker being elected President of the United States. Ryan himself engaged the humbler counsel of the firm of Stanchfield and Levy. “We contend that the outstanding contracts to deliver stock … are invalid,” said Charles A. Morse, chairman of the Protective Committee, on April 9. “We are going to fight it out on these lines if it takes all summer.” “I do not consider that the fight has yet started,” Ryan riposted three days later, garbling his military quotation a bit more than Morse had done, but preserving the spirit. By this time the fight had become a public entertainment in financial circles; crowds clustered around the news tickers in brokerage offices watching for the latest statement by Ryan or his enemies, and greeting it with cheers and applause or else boos, according to taste. And, indeed, there was high drama in the Stutz affair. Although probably no more of a reformer or hero than the next stockbroker, Ryan had trapped himself in a reformist and heroic role–that of singlehanded challenger of the integrity of the nation’s most powerful financial institution.

On April 13 he began his all-out offensive. Shortly after noon he called on the secretary of the Stock Exchange and tendered his resignation, submitting with it a long statement of explanation in which he said, “So long as your body is responsible only to itself, and so long as you can make your own rules and regulations for their immediate execution … so long as you permit men who have personal financial interest at stake to take part in your deliberations, your judgments, and your decisions … I cannot with self-respect continue as a member.” But besides being an act of conscience, his resignation was a tactical move, since it freed him from the discipline of Exchange rules, and, in his own view, of Wall Street customs as well. That evening he gave a reporter from the World the names of nine Stock Exchange members who, he implied without actually saying, owed him Stutz stock and were therefore caught short. The names, although none of them were well known outside of Wall Street even then, were those of some of the Exchange’s staunchest pillars, many of them members of the committees that had sat in judgment over Ryan. When the list was printed the following day, most of the men named, as soon as they had recovered from their shock at this flaunting of the code, denied categorically that they or their firms were short of Stutz, except perhaps on behalf of some of their customers–a qualification that made the denials almost laughable, since the circumstance that they had sold short for customers rather than for themselves in no way lessened their responsibility for their contracts.

Besides losing that point, the establishment suffered two other setbacks that day. People outraged by the implications of Ryan’s revelations began talking about a legislative investigation to consider the possibility of government regulation, state or even federal, of the Stock Exchange, and this, as one observer put it mildly, was “a development that many earnest friends of the Stock Exchange are extremely anxious to avoid.” And meanwhile, the same issue of the World in which the list of names appeared also carried a cryptic line or two about Thomas Fortune Ryan, whose name had hitherto been mysteriously missing from newspaper discussions of the Stutz case. Although the elder Ryan remained officially as noiseless as ever, the World, without giving the source of its information, declared that he “admired the fighting spirit of his son and would back him in his controversy to the limit of his resources.” If this was true–if family quarrels were forgotten and the old man’s unfathomed bag of tricks and uncounted millions were really at his son’s disposal–then the Stock Exchange and its suddenly wobbly pillars had further reason to tremble.

The Exchange did show signs of nervousness, in that two days later it issued an elaborate justification of its conduct. In suspending dealings in Stutz, the Exchange explained, it had acted to protect the public from losses that might have resulted from the wild gyrations in the price brought about by the corner; “There is not a word of truth in the statement that the action … was dictated by a desire to benefit the short interests.” As to Ryan’s contracts for borrowed stock, the Exchange backed down from its previous position that they need not be honored, and took the new tack that it had nothing to do with the question; the settlement of the contracts was “entirely a matter for negotiation between the parties.” The statement concluded on a note of warm self-congratulation: “The members of the Governing Committee of the Exchange are firmly convinced that in all actions taken in respect to Stutz Motor stock they have been guided solely by a sense of their duty to the best interests of the Exchange and of the public.”

It remained for Ryan to spring the trap by calling in the stock he had loaned; should it not be forthcoming, as it obviously would not be, since it had long since been sold back to him, he would be entitled, under Exchange rules, to “buy it in”–that is, barring the unlikely event that there was still someone idiotic enough to sell it short, to buy it from himself on behalf of those who owed it to him, at whatever price he might care to set, and charge the cost to the unfortunate borrowers. Such, under the terms of the market game, are the consequences of selling short and getting cornered–unless, of course, the cornerer’s contracts are invalid, and on this point the Protective Committee tacitly capitulated on April 20 by announcing that it was ready to accept impartial mediation on a negotiated-settlement price. (By this time the Protective Committee had admitted that it represented fifty-eight Stock Exchange firms that were caught short 5,500 shares of Stutz. The figure was euphemistically low, but the admission significant.) A mediation committee acceptable to both sides was formed, most of its members being understandably concerned representatives of the banks from which Ryan had borrowed millions of dollars to mount his operation, but it soon bogged down in resignations and pussyfooting occasioned by its desire to avoid publicity. Ryan postponed his “buying in” pending the outcome of the mediation efforts, but as the days dragged by without results he grew increasingly restive, and finally he announced his final deadline. He intended to buy in all the stock owed him on the morning of April 24, precisely at ten o’clock. “Patiently I have waited many days,” he pointed out. In what market did he plan to make this interesting transaction with himself? Why, on the outdoor Curb Exchange, membership in which was accomplished merely by showing up on Broad Street, where trading went on in all weathers. And what would his price be? Ryan wasn’t saying. On the twenty-third, frantic efforts were made by the Protective Committee to achieve a negotiated settlement, but in vain.

April 24 was a Saturday–still a half-working day in Wall Street then, as it was to continue to be until well after the end of the Second World War. On the fateful morning Broad Street was mobbed with brokers and finance fans waiting to see Ryan administer the coup de grâce to the shorts, whose close identification with the ruling clique of the Stock Exchange would make the carnage even more appetizing. The clerks who sat, as usual, in the office windows above the street, waiting to receive orders by hand signal from the brokers below, were all but falling from their perches in their excitement. Meanwhile, in the privacy of a law office nearby, the Protective Committee was at last considering capitulation. A broker named Colonel John W. Prentiss, who had assumed informal leadership of the group by virtue of his reasonableness, was urging the assembled short sellers that the time was long past for fulminations against Ryan, and that they had better come to terms with him in the few minutes remaining before ten o’clock if they valued their financial hides. After a few bad moments, his counsel prevailed. A motion was passed giving the committee full authority to act for all fifty-eight short sellers; then, at someone’s apt suggestion, slips of paper were passed around on which each wrote the settlement offer he thought appropriate. The resulting figures were averaged, and Morse, the chairman, announced that the committee was now ready with its offer. A delegation then proceeded to the office of Allan A. Ryan & Company, at III Broadway, arriving there at nine-forty. “Do you want to see anyone?” Ryan’s receptionist inquired innocently. The members of the delegation said yes, and on being ushered into Ryan’s presence, stated that they, on behalf of all the shorts, offered $550 a share for all the shares due him. Ryan unhesitatingly accepted, and forthwith canceled his order to buy in the stock. At two minutes before ten, Colonel Prentiss stepped out of Ryan’s office and said to reporters, “The Stutz matter is settled. The settlement price is $550 per share.”

Everyone seemed to be happy except the fans on Broad Street, who had been deprived of their show. All agreed that Ryan had scored a great victory over both the short sellers and the Stock Exchange, even though he had come down from his earlier prices of $750 and $1,000 per share; after all, his profit on the transaction was conservatively estimated at between a million and a million and a half dollars, and he was still virtual sole owner of Stutz. He said a few gracious words about Colonel Prentiss’ “unremitting tact and judgment and consistent courtesy under trying circumstances,” and then left for Hot Springs, Virginia. The short sellers, who among them had lost whatever sum Ryan had gained, nonetheless eschewed further recriminations; their representative, Morse, said simply, “The Stutz controversy is ended … we have concluded the matter.”

IV

But everyone wasn’t happy, and the controversy wasn’t ended. Ryan’s debts to banks, most of them due in the autumn or earlier, amounted to many times his profit on the corner; his obvious recourse was to raise the money now by selling off some of his Stutz stock, but that stock, without the Stock Exchange listing, was far from readily marketable, and if economic conditions should turn sour it might not be marketable at all. Soon after the settlement he exulted to his old mentor Schwab that on paper he was now worth $100 million–a fortune nothing less than comparable to his father’s. Perhaps Ryan hoped that Schwab, like the taskmaster in the Parable of the Talents, would say, “Well done, thou good and faithful servant”; if so, he was disappointed, because Schwab skeptically replied that that might be true if Ryan valued Stutz at a thousand dollars a share, but exactly how was he going to realize that much, or anything like it? Ryan apparently had no ready answer.

And the Stock Exchange, far from being willing to suffer its humiliation in silence, was not through with him. All through May there were rumors that it was “investigating” him and his affairs, and on one occasion Ryan showed that his own rancor had not abated by saying to Clarence Barron that he would never resume his membership even if his intransigence cost him millions, and adding–heretically, but prophetically–that in his view the Exchange ought to be under the guardianship of Washington. For one thing, the Exchange was dragging its feet in the matter of selling his membership, which would bring him some $100,000. Then early in June the Exchange suddenly let it be known that Ryan’s resignation back in April had not been accepted, after all. The reason for this belated revelation became clear a few days later when the Governing Committee adopted a resolution charging Ryan with being “guilty of conduct inconsistent with just and equitable principles of trade”; specifically, the committee said, he had created “an arbitrary and fictitious price” for Stutz and had then “exacted from the parties liable excessive and unreasonable amounts.” The case was to be tried at a closed hearing at which Ryan was invited to appear to defend himself. The Exchange, it seemed, had declined Ryan’s resignation so that it could throw him out.

In reacting to this development, Ryan disdained to point out the Exchange’s about-face on the question of the settlement price, which earlier it had explicitly said to be none of its business, but which it now undertook to pronounce excessive and unreasonable. Instead, he merely characterized the charges as a whole as “ridiculous on the face,” and concentrated his fire on the form of the planned trial and on the motives of those who were to judge him. “Your invitation to appear in a star chamber and join you in placing a laurel wreath upon the past and present conduct of your committees and to furnish myself as a sacrificial lamb is respectfully declined,” he said. “The judgment of ‘guilty’ awaits only my appearance for formal signature and summary execution.… No man appreciates more than I that the Stock Exchange is the keystone of the commercial structure of the country. No man has greater respect for its ideals and traditions.… But no man deplores more than I that this great institution … should have so fallen that these powers are employed for private ends and personal vengeance. It is a sad spectacle indeed.” The trial went off as scheduled, in the absence of the accused; after five hours of deliberation, the Governing Committee found Ryan guilty as charged and voted unanimously for his expulsion, and the next morning, after the Stock Exchange gallery had been cleared of visitors, the verdict was intoned from the podium. On the floor, it was received in silence. At his office Ryan said, “It is immaterial to me, and really I do not give a damn.” Then he left, reportedly for the racetrack at Jamaica.

But there were other matters on which he could not afford to be indifferent. All summer the banks pressed him for the return of their loans, and meanwhile the stocks of the companies other than Stutz in which he had invested heavily–Stromberg Carburetor, Continental Candy, Chicago Pneumatic Tool, and Hayden Chemical–suffered such mysteriously precipitous losses as to suggest that his enemies, the bears, were clawing at him again. In one case, when one of his stocks suddenly collapsed on the very day when a new issue of it was being made, the claw marks were all but unmistakable. At the same time his troubles were compounded by a coincidental collapse of the national economy. Consumers suddenly went on strike against inflated prices, organizing “overall clubs” and “old clothes days”; money became so tight that some leading banks had trouble maintaining solvency; world trade all but returned to its wartime condition of standstill; and, most crucially for Ryan, stock prices in general began such a drop that by the end of the year one-third of the April value of all Stock Exchange issues would be wiped out. The gods of finance were intervening on the side of Ryan’s enemies.

In August he brought a million-dollar defamation suit against the Stock Exchange’s president and Governing Committee, naming again the Stutz short sellers who were members of that body. (The Exchange immediately replied that the accused members had not been present at the “trial”–thereby conceding implicitly, and perhaps inadvertently, that they had been personally interested in Stutz.) This was probably not so much an attempt to avenge his honor as a serious move to raise money. But far from being able to realize the million in damages quickly, Ryan found that he still couldn’t collect even the relatively trifling sum due him for his Exchange seat; the Exchange had sold it in July for $98,000, and in November was still withholding the money from him on a technicality. Meanwhile, the bankers were closing in on him, and Wall Street gossip began to speak of his imminent bankruptcy. George J. Whelan, the cigar-store man, told Clarence Barron in November, “Allan Ryan is all cleaned out”; another Barron informant, a Boston broker, said positively that Ryan owed fourteen million that he couldn’t pay, and added, “Ryan has known for thirty days that they had him. He is now eating out of their hands.”

In such circumstances it was obvious that if Ryan would not turn to his father–and he wouldn’t–his creditors would. Some time in November representatives of the banks to which Ryan owed money, including the Chase and the Guaranty Trust, made an indirect approach to the old man through his long-time friend and associate, Whelan. They received no encouragement. “You loaned Allan A. Ryan money without any regard to his father when you knew Allan was not on speaking terms with his father,” Whelan pointed out to the bankers. “I don’t see how you have any claim upon Thomas F. Ryan.” The matter was complicated by the fact that the elder Ryan was the largest stockholder in the Guaranty Trust and, as Whelan put it, the bank’s boss in a showdown. Therefore in a negative sense, by not opposing the Guaranty Trust’s huge advances to his son early in the year, the elder Ryan had had a hand in them. Perhaps he thought that was enough. There is no evidence that he now showed the slightest disposition to commit his own funds to rescue his son, or that he had done so previously.

Allan Ryan’s enemies at the Stock Exchange knew that they had him at last; they could sit back and leave it to the banks to be the executioners. Late in November the banks announced that they had formed a committee “to take charge of” Ryan’s affairs; even though the bankers were careful to say that they believed he was still several million dollars in the black and that they confidently expected to get back all their money, this meant plainly enough that in fact they anticipated his failure. His credit ruined, a bankrupt in everything but name, Ryan for twenty months carried on a game, hopeless last stand. Only Schwab seemed to be still with him, putting in a good word for his protégé where he could. Ryan tried unsuccessfully to ally himself with John Shelton Williams, Controller of the Currency and a veteran critic of New York banks, particularly of their loan policies. (The banks expressed hurt surprise at this, protesting that they supposed Ryan liked them after all they had done for him. “I could never conceive that a man could be so mean,” complained the president of the Chase, suggesting that that bank felt that its loan department was running a sort of social service, rather than a business, even in those days before it adopted its now-famous advertising slogan.) He got as his lawyer Samuel Untermyer, who as counsel to the Pujo Committee in 1912 had become the national symbol of opposition to the banks and their “money trusts.” To win political friends, or to bolster confidence in his credit, or both, he somehow scraped together a forty-thousand-dollar contribution to the Democratic National Committee. But all in vain. On July 21, 1922, he filed a bankruptcy petition listing debts of $32,435,477 and available assets of only $643,533. For what satisfaction it might bring him, this made him one of the biggest bankrupts in the nation’s history, even though later calculations showed his debts to be smaller.

Like a bombed-out house, a bankruptcy statement suddenly reveals, piteously and shockingly, to the indifferent or curious public gaze all the details of shattered private lives. Ryan’s listed debts included $157.75 to Best & Company for children’s clothing; $3,260.25 to Black, Starr & Frost for jewelry; $60.36 to Buckley School for tuition; $768.68 to Charles & Company for groceries; $134.08 to E. P. Dutton & Company for books and stationery; $13.75 to the Montauk Club of Brooklyn for dues; and $207.80 to the Plaza Hotel for theater tickets. They also included $66,000 due to T. Coleman du Pont, of the Delaware clan; some $300,000 to Schwab, the balance of the million from his mentor having apparently been paid off; slightly more than a million to Harry Payne Whitney, son of his father’s old partner; about $3.5 million to the Chase National Bank; and $8.66 million to the Guaranty Trust Company. It was now plain enough what the banks had been concerned about.

Actually, Ryan’s situation was somewhat less hopeless than the bankruptcy papers implied, in that they assigned no value to the vast quantities of Stutz stock–some 135,000 shares–owned by Ryan and pledged as collateral for his loans. These were to be sold at public auction, and Ryan’s remaining hope of escaping bankruptcy was that they bring a good price. Allen Wardwell, lawyer for the Guaranty Trust, said a few days before the sale that the Stutz stock along with his other holdings would make Ryan solvent if the Stutz sold for $50 a share; he later revised the figure upward to above $60, but, in any case, there would be no question of Ryan’s solvency if only the price were 100, which is about what it had been early in 1920, before the whole melee had begun. Unfortunately, though, this was all dreaming. During 1921 Stutz had sold on the Curb in the 50-to-100 range, but Ryan’s bankruptcy and other reverses had knocked it galley-west, and in mid-July it stood at 5. Only an insane Croesus would bid 100 or 60 or 50 for 135,000 shares of it.

The auction took place on August 2, at the Exchange salesrooms on Vesey Street, and the Stutz stock was bought by a Guaranty Trust vice president for twenty dollars a share. Next day it was announced that the bidder had been acting for Schwab, who thereby became boss of Stutz. The banks thus recovered part of their loans, Ryan’s bankruptcy was certified, the short sellers had their revenge, and the Stock Exchange ruled supreme. Its next equally determined challenger, a decade later, was to be not one man but the national government backed by an overwhelming majority of the people.

V

Schwab proved to be a less effective magnate in automobiles than in steel. Stutz cars went on breaking records in speed tests, but the firm’s books showed deficits nearly every year. It did not share in the automobile industry’s great boom during the twenties. (The open, bucket-seat Bearcat that became a talisman of the time was not a product of the time; it was a used car, the manufacture of which had been discontinued after 1920.) In 1932 the company was reduced to making grocery wagons. In 1938, a year before Schwab’s death and two years before Ryan’s, it quietly went broke.

At the time of the auction Schwab was asked whether Ryan would get back on his feet again, and he replied, “I hope he does–I think he will.” In spite of several attempts, he never did. His hope, if he had one, for a new initial stake in the Wall Street game lay in his father, who, after all, besides being one of the last of the old financial freebooters, was also, to judge from his benefactions, one of the most generous-hearted. But his will, when it was read following his death in November, 1928, left his fortune to his other survivors, including Allan Ryan’s sons, and mentioned Allan himself only twice. Once was to give him third option, after two other survivors, to buy any object in the testator’s art collection. The other was to say, “I give and bequeath my white pearl shirt studs to my son Allan A. Ryan.”

Chapter Three

The Almost Aristocracy

I

By way of scene-changing: In the fall of 1921 the national economic picture reversed itself in sixty days. The postwar depression abruptly ended, and a new and more durable boom replaced it. With one accord the familiar economic barometers all began to rise. The recovery was officially smiled upon and encouraged by the Federal Reserve System, which, beginning in 1921, progressively reduced its discount rate from the postwar peak of 7 percent all the way to 3 percent by 1924. The discount rate, through its influence on the interest rates charged by banks and other private lenders, tends to determine whether credit is hard or easy to get for everyone from the giant corporation to the home-buyer in need of a mortgage, and such a dramatic thaw in the money market promoted general expansion, risk-taking, speculation, reckless spending–the flowers, or maybe weeds, of free enterprise that had bloomed too soon in the early postwar period and thus been blighted in the frosts of 1921, and now were to grow over the rest of the decade to unmanageable, nightmarish size. Meanwhile the U.S. Treasury, under the leadership of an old friend of industry, Andrew Mellon, who had resigned directorships in no fewer than fifty-one corporations to assume the secretaryship in 1921, augmented the confidence and the profits of business by embarking on a vigorous and systematic program of reduction of corporate taxes.

Business was in charge of the country to an extent that it had not been since the post–Civil War era of railroad expansion; and its new leader was a newer kind of transportation, the automobile. Just between 1921 and 1923 the annual factory sales of passenger cars rose from under 1.5 million to over 3.6 million, and the total number of motor vehicles on the American roads from 10.5 to 15.1 million; by the end of the decade the latter figure would be almost 27 million, and the automobile industry would account for not quite one-tenth of all manufacturing wages and more than one-tenth of the value of all manufactured goods. Automobile stocks were to the stock market of the 1920s what electronics would be to that of the 1950s; by the time the really big market advances of the period were under way, General Motors, Fisher Body, Du Pont, and Yellow Cab were called the Four Horsemen of the boom, and it was a standard Wall Street joke to speak of the market collectively as “a product of General Motors.”

(Of course, prosperity was not for everyone. The farmer, largely deprived of his huge wartime export trade, ill-equipped by temperament and technology to protect himself against suicide through overproductiveness, and virtually unassisted, in those days, by government, was in the direst of straits. The average price of all farm products was cut almost in half from 1920 to 1921, and was to regain only a fraction of the loss by 1927; per capita net income for persons on farms fell 62 percent between 1919 and 1921. These catastrophic declines, unprecedented in the country’s agricultural history, meant defaulted mortgages and the failure of the rural banks that held them; in the great years of “prosperity” from 1923 to 1929, banks in the United States were failing steadily at a rate of nearly two per day. As for wage-earners, throughout the 1920s almost one-third of them took home less than $2,000 per year, a fifth of them less than $1,000. But poverty programs, and even federal farm-price-support programs, were not the order of the day.)

Thus well before the death of Harding on August 2, 1923, had brought Calvin Coolidge to the Presidency, what came to be called the Coolidge boom was already under way. And most of the other familiar totems of the decade were already established. Prohibition, in force since January, 1920, was already largely ineffective (the national death rate from alcoholism, at a record low in 1920, had crept back most of the way to its old normal level), and the speakeasy was a national institution. Babbitt had been published, and the book’s hero’s prototype was rampant in every Chamber of Commerce. New immigration laws had closed the Golden Door in response to a national wave of “nativism.” As for Wall Street, in a country that had decided to be ruled by business enterprise it found itself a sort of rival to Washington. Its manners and morals, its important men, its social hierarchy took on in the public mind the sort of glamour more often associated with those of national capitals in times of high statesmanship.

II

J. P. Morgan the Younger–“Jack”–a kindly-eyed man with a white mustache and black eyebrows, with the tastes and bearing of an English gentleman, was the symbol and embodiment of Wall Street leadership, and his firm, in its bomb-pocked building at the Corner, was the leadership’s citadel. True, the firm had lost some of its former temporal power in domestic affairs. The passage of the Federal Reserve Act in 1913, which coincidentally had been the year of the elder Pierpont Morgan’s death, had marked the end of Morgan & Company’s de facto status as the nation’s central bank, and the rise of gigantic corporations with the capacity to finance their own growth out of retained earnings was beginning to deprive it of its purse-string power over corporate affairs. On the other hand, the war and its resulting devastation in Europe had left the firm far more important than ever before in international dealings, and, moreover, its 1920 acquisition of joint control with the du Ponts of the hottest new industrial giant of them all, General Motors, showed that the old suzerain had not lost its vitality at home. But it was not only money power that Morgan & Company exercised over Wall Street in the 1920s. In addition, it was the style-setter, the court of last appeal, and to a certain extent the conscience of the place.

Its qualities were both established by and magnificently epitomized in Morgan the man and the partners he chose. A partner himself since less than three years after his graduation from Harvard in 1889, and the heir to many millions, as well as the management of the firm, on his father’s death, he was born to the purple, and from the beginning had never shown any inclination to wear it without dignity and responsibility–according, at least, to his lights, which were worldly puritanism, class-consciousness, and solemn self-righteousness of late-nineteenth-century American Protestantism. Like his father, he permitted no divorces in his firm–not to partners, not to employees. The basis of commercial credit is not money or property but character, Pierpont Morgan the Elder had insisted, memorably joining his business philosophy to his religious one, before the Pujo Committee in 1912. He had explicitly placed character above brilliance as a business asset. His son Jack, in a favorite maxim, put the thought only a little differently: “Do your work; be honest; keep your word; help when you can; be fair.” Like his father, he discountenanced the notion that he rendered separate accounts to Caesar and to God, and once he remarked sentimentally that he would rather lose money by trusting a man too much than gain it from trusting one too little. Yet his partner Thomas W. Lamont noted that the elder Morgan’s “habit of swift, incisive thought” had been “amply inherited by his son, who joins to it, perhaps, a more sober judgment.” Delicately bred and shy of publicity, Morgan the Younger was nevertheless courageous and physically strong, as he showed in 1915 when he overcame in hand-to-hand combat a would-be assassin who, armed with two loaded revolvers and a stick of dynamite, had invaded his mansion at Glen Cove. Very much a working professional rather than a rich dilettante, he yet maintained–or affected–a kind of elegant, aristocratic amateurism in his attitude toward banking. He and his partners never entered the Stock Exchange, preferring to delegate their Exchange business to outside brokers. (A necessary institution, even a praiseworthy one, but not quite their sort.) His outward concern was always the style as much as the content of banking. When the counsel for a Senate committee once read back to him a crucial part of his testimony to it and asked him to make corrections if he liked, he replied only, “I should like it if the stuttering part were cut out of my answer. I am not used to this form of examination.”

At times it almost seemed as if Morgan and his firm felt that they could afford a certain disdain for money and money affairs, per se. They conceived of themselves as statesmen of finance (which they were) rather than mere money-getters (though they were that, too). And yet the slightest hint that their statesmanship made them part of national government was in their view an unforgivable gaffe, because of their deep-seated Jeffersonian, Adam-Smithian prejudice against government and all its works. When Harold Nicolson wrote that at the outbreak of the First World War the Morgan firm “ceased to be a private firm and became almost a department of Government,” Morgan wrote in longhand on the manuscript that had been submitted to him: “I have no right to ask you to alter this, but it will be interpreted as if we were reduced to the status of a department subordinate to the government.” Nicolson, who tended to think of bankers as “rather low-class fellows,” had supposed he was offering a high compliment; but he had reckoned without the lordliness of Morgan. One compliments the self-regarding mighty at one’s peril. Morgan’s partners pressed the matter harder than he, and the offending passage was changed.

These partners, whatever else they may have been, were the members of the most exclusive and influential club in the American financial world; the very furnishings of the private offices on the second floor at 23 Wall–wood-burning fireplaces, well-worn easy chairs and couches–created a clublike atmosphere of leisure and ease. If the gentlemanly tradition of Wall Street had been defeated at the time of the Civil War, as some historians argue, it was carrying on a strong holding action at the House of Morgan. The partners were extensions of and adornments to J. P. Morgan’s personality. Like him, they tended to be Anglophile (“Our firm has never for one moment been neutral,” Lamont said during the First World War; “we don’t know how to be!”), given to a certain unworldliness (real or affected), and Republican. All were Protestants of old American stock; they were the Old Yankee Trader gone high-brow, and as a matter of course welcomed among their number no one of other inheritance or faith. Their loyalty to their leader and their firm was so fierce as to be sometimes embarrassing in its mawkishness and even, to the irreverent, laughable in its parochialism. (Asked by the Pujo Committee in 1912 whether or not a certain action of the House of Morgan was defensible, a leading Morgan partner replied in passionate earnest, “I do not know why the House did it, but if the House did it, it was most defensible!” The line was to be publicly quoted, with entire approval, by another leading Morgan partner a generation later.) Up to shortly before the First World War, the ranks of partnership were not closed, to those otherwise qualified, by the lack of a college diploma; thus the American dream of the self-made man was honored. Indeed, although they were socially and ideologically fairly homogeneous, the partners were perhaps as much a physical as a social type, with a kinship more primitive than social background or like-mindedness. They were generally tall, slim, handsome, fair, with copious heads of hair that turned prematurely white; as early as the turn of the century it had been said in Wall Street, not quite wholly in irony, “When the angels of God took unto themselves wives among the daughters of men, the result was Morgan partners.” Like a rare breed of dog or horse, they shared a certain aura, and the aura was necessary to the role they conceived for themselves. In a society whose leadership automatically goes to successful traders and their heirs and successors, they were pretending that they were not the heirs and successors of successful traders but rather men destined, somehow or other, to rule that society wisely. They were trying to invent an American aristocracy–themselves.

Henry P. Davison, son of a Pennsylvania plow salesman, no college man, last right-hand man of the elder Morgan, and active up to shortly before his death in 1922, epitomized the Morgan aura, and suggested the Morgan methods, in a wartime episode when he was chairman of the American Red Cross War Council. At a Detroit rally at which he was exhorting a crowd to contribute to the Red Cross fund drive, a rude and raucous voice suddenly called out, “We want to know what the Morgan firm is doing with all these hundreds of millions of dollars it collects for the Red Cross!” A hush fell, and Davison let it ripen for a few seconds. “Do you think that is an entirely fair question?” he asked finally. The interlocutor vigorously made it clear that he did. “Very well,” said Davison, “I will tell you this: that the firm’s entire connection with this fund consisted of a subscription from the partners of one million dollars, and a stipulation that not one penny be ever deposited with the firm.” This information–previously withheld out of modesty, or shrewdly husbanded for just such a moment?–carried the day, and both applause and contributions were forthcoming. To combine success with righteousness–that was to be a Morgan partner, and if an element of what the churlish would call “taking advantage” seemed to creep in, that too could find roots in American Protestantism. It is entertaining, though perhaps a little startling, to note that Davison’s partner Thomas W. Lamont later wrote that what struck him about the episode was that Davison had “made no attempt at platform guile.”

Lamont was the quintessential Morgan partner of the 1920s, and after Davison’s death the habitual spokesman for his senior. “Mr. Morgan speaks to Mr. Lamont and Mr. Lamont speaks to the people,” it was said. Handsome and patrician as the best of them, Lamont was sometimes called “the soul of respectability.” Like so many powerful Americans of his era, he had been raised in a parsonage, the son of a poor Methodist minister in Claverack, New York, brought up to believe that cards, dancing, and even sidewalk strolling on Sunday were sinful. After working his way through Harvard he went to New York to seek his fortune, and became a Morgan partner in 1911 at the age of forty. During the 1920s he was thought to be the “brains” of the firm, and besides being its spokesman he was its chief diplomatic emissary–to China, Japan, Mexico, and Egypt, for example–in transacting loans and giving financial advice; but it was not so much on the strength of his public work as on that of his immense private influence, his virtual open wire to the White House during the tenancy of Hoover, that Ferdinand Lundberg was to write that during the decade Lamont “exercised more power … has put into effect more final decisions from which there has been no appeal, than any other person.” He became rich but not vulgarly so, and a leading benefactor of those respectable institutions, Harvard and Exeter. If there was a shadow of disappointment in the soul of respectability’s professional life, it may have been a secret wish to have been a literary man; he began as a newspaper reporter, always had many literary friends, was angel to a literary journal, and for a short time had a fling at owning a New York newspaper, the Evening Post. If there was a weakness in his exemplary character, it must have been that most Morganian shortcoming, self-serving sentimentality. In his unrelievedly worshipful biography of his partner Davison, Lamont sharply criticized the authors who had dealt with the life of Morgan the Elder for writing without knowing their subject personally–and then he cheerfully went on to add that “Mr. Morgan never undertook to meet newspaper or periodical writers.” Hardly the cool logic of a great banker. Toward setting the record straight as to Morgan’s character, Lamont told of how on his own very first day as a partner of the firm, in 1911, he had heard the senior Morgan, informed that a New York bank with thirty thousand depositors of modest means was in danger of failing, immediately offer unconditionally to guarantee the deposits in full, with the comment, “Some way must be found to help these poor people.” Lamont explained that he told the story only to “show the extraordinary impulse that always was in Mr. Morgan’s mind, to try to help people out of difficulties, regardless of the cost to himself.”

Well and good; the House of Morgan did guarantee the deposits, and ended up losing $200,000 as a result. But did Pierpont Morgan, that least sentimental and least egalitarian of men, really say, “Some way must be found to help these poor people”? The social historian Frederick Lewis Allen, a Pierpont Morgan enthusiast, couldn’t believe he did, and other students of the subject consider the sentence about as likely to have come from the lips of Genghis Khan. “When that the poor have cried, Caesar hath wept,” Shakespeare’s Mark Antony said in his funeral tribute to his late senior partner, and the listeners were not expected to take the orator too literally.

A more inscrutable but not necessarily less characteristic member of the club in the 1920s was Dwight W. Morrow. His disdain for great wealth in his young adulthood went to an extreme even for a future Morgan partner; he used to have a nightmare, from which he would wake up screaming, that he had become rich. As a young lawyer, he told his wife that the mundane life of the New York bar was not for him, and that when he had made one hundred thousand dollars he intended to retire and teach history. Instead, in 1914, when he was not quite forty, he left the bar to accept a Morgan partnership and to become rich, and by 1925 the nightmare had apparently materialized, because he was desperate to escape Wall Street for some more elevating milieu. He eventually found it in government service, as Ambassador to Mexico, behind-the-scenes mentor to his college classmate Cal Coolidge, and United States Senator from New Jersey in the year before his death in 1931. But he scarcely found peace of mind.

The contrast between Harold Nicolson’s biography of Morrow, a bland and syrupy paean to Morgan respectability and high-mindedness if there ever was one, and Nicolson’s later-published diary notes, is startling and illuminating. “A Protean figure. There was about him a touch of madness … or something inhuman and abnormal.… He had the mind of a super-criminal and the character of a saint,” Nicolson says of Morrow in the diary, written at the very time he was composing his innocuous book (of which he was later to speak contemptuously himself). Of some fatuous clubwomen in Pittsburgh who were oppressing Nicolson with clichés about the public, visible, respectable Morrow, Nicolson confided to his diary, “I longed to say, ‘But this is all nonsense and you know it. Dwight Morrow was a shrewd and selfish little arriviste who drank himself to death.’”

That would have been at least as much of a lie as the pap Nicolson actually wrote. Still, it was what he longed to say to the ladies, and perhaps to put in his book; like the general public, and Wall Street in particular, Nicolson hankered to deflate the Morgan partners’ eternal rectitude and catch them out as pious hypocrites. Morrow was a Protean figure indeed, and one suggesting a new dimension, unimagined tortured depths and contradictions, behind the elegant, gentlemanly façades of the aristocrats of 23 Wall. Were they the straightforward fellows they wanted to appear–or supreme stuffed shirts? Surely, like most of us, they were something of each. As naïveté can be the luxury of the well-placed, so false naïveté can be their weapon. Lamont, the product of the Claverack parsonage, surely believed twenty years later that he had heard Pierpont Morgan keening for the poor bank depositors; similarly, there is no reason to think Morrow doubted for a moment that he hated and despised wealth. It was part of the genius of the firm, perhaps the backbone of the moral grandeur that enthralled crass and skeptical Wall Street in spite of itself, that these questions could not be simply answered in the House of Morgan’s heyday and still cannot be now.

III

Kuhn, Loeb & Company, just down the street physically but a good deal more distant socially, was the second most powerful firm in the Street. Four years older than J. P. Morgan & Company, it, along with its German-Jewish colleagues like J. & W. Seligman & Company, Lehman Brothers, and Goldman, Sachs, had been the first American investment bankers in the post-Civil War period, and when the upstart House of Morgan had so vigorously entered the lists, Kuhn, Loeb had met the challenge for dominance in a series of epic struggles that had culminated in a turn-of-the-century free-for-all for control of the Northern Pacific Railroad, with Morgan and James J. Hill arrayed on one side and Kuhn, Loeb and E. H. Harriman on the other. After that the two firms had entered into an armed truce that amounted at times to an alliance to repel new invaders. The territory gradually became broadly and tacitly divided between them: in a test of strength, industrial and utility financing to Morgan, railroads to Kuhn, Loeb. In the early 1920s Kuhn, Loeb had a total business as large as or larger than that of the House of Morgan, but had far less prestige and influence; in that regard it was not equipped to compete with the intangible but inescapable facts of nativism, Yankeeism, and Protestantism, which the men of 23 Wall embodied so fully and could trade on so adeptly.

But Kuhn, Loeb had its own well-cultivated air of breathtaking superiority. As Judge Harold Medina would say of the firm later, it had “a high-toned and exclusive character” stemming from the natures of the men, almost all of them related to each other by blood or marriage, who made it up, and from the singular way it chose to do business. The first Kuhn, Loeb partner not related in one way or another to one of the others had been accepted in 1911; in the early 1920s, vast as the organization was in regard to volume of business, it was still so much a family affair that there were only four partners. Its basic business ethic, called “our show-window policy” by the chief of those partners, Otto H. Kahn, was described by him with his characteristic elegance: “It is not we that go to the corporations and ask them to do business with us. We hope that we have established a reputation which is our show window, which attracts customers. We hope that it is our trade mark.… We do not go after them. That may be conceited, but we do not.” Moreover, when corporations came hat in hand to Kuhn, Loeb, it was a point of honor that the firm never indulged in price competition, never accepted the applicants as new clients under conditions in which Kuhn, Loeb might be accused of having “stolen” them from another banking firm. Interestingly–and, in terms of social history, significantly–just this policy of which Kahn was so proud was finally to bring the firm afoul of the federal authorities, who insisted that the refusal to try to steal business from competitors was prima facie evidence of illegal conspiracy in restraint of trade. Thus gentlemanly values came into head-on collision with those of bureaucratic democracy.

Jacob Schiff, the financial genius who had brought Kuhn, Loeb to the fore and guided its destinies for almost half a century, had died in the fall of 1920, a few days after the Wall Street explosion (though not as a consequence of it). The new dominant figure, Otto H. Kahn, was an even more extraordinary man. He was far and away the greatest patron of the arts that the country had ever seen. “I must atone for my wealth,” he said–rationalizing, reducing to an entry on a kind of moral balance sheet, the same guilt that gave Dwight Morrow nightmares. The Morgan Yankees did not seek to atone for their wealth, but rashly undertook a tougher metaphysical task–to justify it. Kahn’s means of atonement was equally characteristic. The Morgan Yankees might collect rare books and hobnob with literary folk; in Puritan tradition the printed word had been highly respected, but the theater had been considered wicked, and the performing arts were seldom for them. Kahn had grown up in a lush atmosphere of music-dominated European culture in Mannheim. Thomas Lamont might buy control of the Evening Post and finance the Saturday Review of Literature; Kahn bought control of the Metropolitan Opera Company, brought to it Toscanini and Gatti-Casazza and thereby ushered in its most glorious era, annually made up its deficit out of his own pocket, and at his death in 1931 was still its president and chief stockholder. He introduced to American audiences the Russian ballet and Paris Conservatoire Orchestra, gave paintings and cash to many museums, endowed many art schools, opera companies, and theatrical projects, and even put up money prizes for Negro artists. And, showing the vein of steel that made him so eminent as a banker, the same man could write admiringly of E. H. Harriman, whom even the gruff and unfastidious Pierpont Morgan loathed for his ruthlessness: “His was the genius of the conqueror, his dominion was based on rugged strength, iron will, irresistible determination, indomitable courage.”

Kahn and the younger Morgan, both born in 1867 and in their prime in the 1920s, are a study in Wall Street comparison and contrast. Both attached great importance to personal deportment, liked to conceal their philanthropies, and were unashamedly Anglophile. But where Morgan’s style of life ran to the vigorous, the outdoor, the heartily athletic, Kahn’s emphasized the elegant frailty of a hothouse flower. Where Morgan radiated the faint anti-intellectualism of the country squire, Kahn was thoroughly intellectual and urban. Where Morgan’s “English accent” was that of an American who had lived in England and went there often, Kahn was a real Englishman who through most of his life kept the British citizenship he had acquired as a young London banker. Where Morgan in his office was a monument of staid sobriety, Kahn, in his, liked to sing. Twin eminences in their time in their big-little world, they were allies and enemies–each regarding the other with a subtle mixture of respect and scorn.

IV

In financial life, where values tend to take the candid form of prices, issues that may be smothered or confused or euphemized in the rest of society sometimes stand out with crystal clarity. So it has been in Wall Street with the issue of the relations between American Christians and American Jews. From the earliest arrival of Jews in Wall Street in numbers, following the great mid-nineteenth-century migrations from Germany, there had been a degree of more or less overt anti-Semitism, especially noticeable in panics when scapegoats were wanted. Jay Gould, personally unappetizing and professionally a cheat of monstrous proportions, was often spoken of in the Street as a descendant of Shylock and was described even by Henry Adams as “the complex Jew”–although his ancestors had settled in Connecticut in 1646 and probably not one of them had been Jewish. Pierpont Morgan’s hostility to Kuhn, Loeb in the years before the truce was a matter of professional rivalry more than of religious prejudice, but the latter question was by no means out of his mind. “Pierpont feels that he can do anything because he has always got the best of the Jews in Wall Street,” Andrew Carnegie crowed after he had got the best of Morgan, or so he thought, in the deal that led to the formation of U.S. Steel. “It takes a Yankee to beat a Jew, and it takes a Scot to beat a Yankee!” Carnegie’s and Morgan’s cheerful assumption of the existence of “Jewish” ethnic traits, combined with the equally cheerful assumption of their own superiority, was of course wholly characteristic of American life at the time. Not so characteristic of it, though, was the respect Morgan felt for his Jewish rivals. They were competitors worthy of his mettle; after the Northern Pacific affair he would have been slower to think that he could “do anything.” By accepting Jacob Schiff and his firm as an equal, Morgan, however grudgingly, admitted the Jews of Wall Street, or a few of them, into the American establishment. This happened at the outset of the twentieth century–considerably before the Jews of the rest of the United States were to achieve the same thing.

The old Morgan-Kuhn, Loeb armed truce was the very basis of Jew-gentile relations in Wall Street of the 1920s. Admission of Jews to the business establishment had been unaccompanied by their admission to the social one; in 1925 as in 1900, the clubs and drawing rooms of the Morgan Yankees and their like were generally closed as a matter of course to Jews, however cultivated and accomplished. (The chief exceptions were a few “Christianized” Jews with Anglo-Saxon names, who had been wholly accepted by the leading Protestants of the time.) You can do business with anyone, old Morgan had said with his genius for blunt prescience, but you can go yachting only with gentlemen. Perhaps, one may add, it all depended on one’s definition of gentlemen; there is no evidence that the cultivated and accomplished Jews of Wall Street felt their lives to be blighted by these exclusions.

But there was a more serious aspect to the matter. Ironically, the very success of a few persons of Jewish background in winning their way early to the innermost and uppermost circles of Wall Street had had the effect, not of opening that way for others to follow, but rather of strengthening the will of the opposition to bar the path. Growing fear and resentment of adventurous and successful outsiders led to their exclusion where exclusion was possible. Thus in the 1920s, by which time the country’s Jewish population had swelled to several times what it had been at the turn of the century, most of the Wall Street law firms hired no Jews at all, while some nine out of ten of the big banks followed the same policy (as, indeed, a few of them do today). In stock brokerage, according to one estimate, 60 percent of the firms adhered to rigidly anti-Semitic hiring policies, 15 percent gave preference to Jews because their customers were predominantly Jewish, and the remaining 25 percent were unprejudiced. The Stock Exchange was widely known to have an informal quota system designed to prevent Jews from gaining a foothold in its power structure. And there were office buildings on and around Wall Street that consistently refused to rent to Jews. While the connection of these conditions with the bitter old local business rivalries seems unmistakable, it ought to be added that they can surely be attributed in part to the national mood of the time–a time in which the blue-chip corporations went in for tokenism in the hiring and promotion of Jews, resort hotels openly advertised themselves as restricted to a gentile clientele, and some Jewish apartment-house owners in New York and elsewhere found it expedient to refuse Jews as tenants. American society seemed to find no anomaly in the fact that it had compelled such landlords to bar themselves from living under their own roofs.

Finally–to give life to statistics and to suggest the ambivalence of the Wall Street Jew-Christian relationship at its most elevated level–a true story. It is May 7, 1915, the morning of the sinking of the liner Lusitania by a German submarine off the Irish coast, with the loss of many American lives. Into the main room of J. P. Morgan & Company comes the white-bearded patriarch of Kuhn, Loeb, Jacob Schiff himself. There is a general stiffening of the partners in the room, J. P. Morgan among them; at the time, Kuhn, Loeb and Schiff are suspect of having German sympathies arising from ties of birth and long business associations, although in fact they, and Schiff in particular, are wholeheartedly for the Allied cause with the single reservation that they withhold their support from Czarist Russia, the land of pogroms. With a certain uncharacteristic timidity, Schiff approaches Morgan and murmurs regrets at “this most unfortunate outrage.” Morgan makes a curt rejoinder and turns abruptly on his heel, leaving Schiff–the one banker of them all whom Morgan’s mighty father had owned as an equal–to walk crestfallen out of the building alone.

After an awkward silence, Morgan says to his partners, “I suppose that I went a little far. I suppose I ought to apologize?” The silence grows longer and more painful, and then Dwight Morrow scribbles something on a writing pad and hands it to his senior partner. Morgan reads, “‘Not for thy sake, but for thy name’s sake, O House of Israel!’” Morgan nods in agreement; then he gets his hat and sets out for Kuhn, Loeb & Company to apologize to Schiff.

The tentative approach, the brutal snub, the instant remorse, the Biblical quotation that almost unconsciously introduces a religious question where none had been, and finally the apology too late to do much good–it all encapsulates the emotional climate of the old rivalry that a past-haunted Wall Street carried out of the war into the 1920s.

V

Apart from those few ancient and unassailable German-Jewish investment banking firms, the Wall Street establishment in general was emphatically in the Morgan rather than the Kuhn, Loeb mold. Allen compiled a list of fifty of the most powerful Wall Streeters of the decade, and found them to be remarkably homogeneous. Although many had been born in the West or Midwest, their educational backgrounds were generally Eastern and traditional; eleven on the list had been to Harvard, four to Yale, three each to Cornell and Amherst, and so on. Far more than American business leaders outside of Wall Street in the time of Sinclair Lewis’ Babbitt and H. L. Mencken’s “booboisie,” these New York financiers had the dress and demeanor of gentlemen; Wall Street, Allen pointed out, was a school of manners, and the place where the possession of manners or a good counterfeit of them had definite business value. About one in four of the fifty had been born into the financial ruling class, and those who had traveled furthest to achieve it tended to be not noisy and conspicuous mavericks, but the most sedulous apes of its characteristic style. Most of them lived on the Upper East Side of Manhattan (only four of the fifty commuted from the suburbs in winter), and had country houses in New Jersey or on the North Shore of Long Island, where they played golf, kept racing stables, and sailed (more than half of them owned yachts). They belonged, most often, to the Metropolitan Club in town and the Piping Rock Club in the country. Their extracurricular good works ran to trusteeships of universities and educational foundations, seldom to patronage of the arts or social-reform movements. Among the fifty, only about half were publicly identified with any religious denomination, and in the cases of many of those who were, the identification was clearly nominal or ceremonial. A sociologist, though, would have had no trouble classifying them as to religious standing: precisely, they were lapsed Protestants. Only seven on the list were of Jewish ancestry–all of these investment bankers except for the speculator Bernard M. Baruch–and apparently even fewer were Roman Catholics. Until the very end of the 1920s Catholics were excluded considerably more rigidly than Jews from the financial inner circle–although, as we shall see, they succeeded in drawing some inner circles of their own.

It was a time when Wall Street still claimed the chosen youth of the nation. The bright boys from the best colleges went there to be lawyers or bankers because that was the way one got rich and carved out a career–whether in law, finance, government service, or even politics. The dull boys from the same colleges, the well-born athletes and playboys, pleasant-mannered, socially at ease, intellectually incurious and indolent, drifted there because it was the natural thing to do and was also the easiest place for them to make a living. “I’ve always thought that there was very little wit wanted to make a fortune in the City,” says one of Trollope’s acerbic characters of the gilded Victorian youths who went from Oxford or Cambridge to London’s financial district. So it was of the correct young men from Harvard, Yale, or Princeton who went to Wall Street in the 1920s to sell bonds. “Everybody I knew was in the bond business,” says Nick Carraway, the young Yale graduate in the exemplary novel of the era, The Great Gatsby. “So I supposed it could support one more single man. All my aunts and uncles talked it over as if they were choosing a prep school for me, and finally said, ‘Why–ye-es.’” Yes, indeed; the Nick Carraways found that in the bond business connections were an entirely adequate substitute for wit; all one needed was good customers, and for good customers there were always one’s relatives and the well-heeled acquaintances one had made at school and college. Like Nick Carraway, one did not consider business hours the important part of one’s life. It was in the evenings, at the long, long parties in New Jersey or on Long Island, that one really came to life, to stay up until three or four in the morning and then catch just enough sleep to make it possible to drowse through another day downtown. Like few Americans, privileged or not, before or since, these young Wall Streeters strongly oriented their lives to leisure rather than to work.

Even in the more rigorously competitive business of stock brokerage, where the ups and downs of the market presumably went their neutral way without regard for birth or breeding or schooling, those things could still be of advantage. The key to success in stock trading was exclusive information, and the distribution of such information was arranged, informally but nonetheless carefully, along social lines. There was Metropolitan Club information and Links Club information, there was even Harvard-Yale-Princeton information and Williams-Amherst information, and a possessor of any such information would no sooner give it to someone outside his own circle, or withhold it from someone inside, than a Mafia man would betray a colleague to the police.

A caste, then–and a rather pale, uninteresting one at that–engaged in perpetuating itself? To a certain extent, yes. (“They’re a rotten crowd. You’re worth the whole damn bunch put together,” Carraway says finally to Jay Gatsby, the self-made man, and thus reaffirms the American gospel of social mobility.) But there was something else. Along with the indolent, charming snobs there were the almost-genuine aristocrats; the country’s most brilliant and public-minded men were still more apt to be found in Wall Street than in Washington or the universities. To work in the small town south of Fulton Street in those years was to have the possibility of meeting, if not of becoming, the great of one’s time or of a time soon to come; and if it seems strange that a nation’s school for leaders should have been a place dedicated solely and simply to the practice of dealing in money, it must seem almost miraculous how little the quality of leadership shown by the school’s graduates apparently suffered.

Recall, then, some of the men, actively working in the Wall Street area on financial matters in the middle 1920s, who were already celebrated in a wider world or were soon to become so.

Of the elder statesmen already full of years and honors, but with more years, honors, and their heaviest responsibilities ahead of them, there were Charles Evans Hughes and Henry Lewis Stimson. Both were lawyers back at their Wall Street desks between assignments in the wider world. Hughes, sixty-three years old in 1925, had come about as close to being elected President as is possible without actually being elected, and was by all odds, President Coolidge notwithstanding, the country’s first citizen; a former Associate Justice of the Supreme Court, he was just back from a four-year term as Secretary of State, and five years later would leave Wall Street again to return to the bench and become the Court’s Chief Justice. Stimson, approaching sixty, had been Taft’s Secretary of War in a bygone time, would be Hoover’s Secretary of State in the near future, and at last, incredibly, would return to the War Department an aeon later in social time and be charged with primary responsibility for the decision to use or not to use the atomic bomb against the Japanese. In 1925, unmindful of this dreadful burden to fall upon him in his old age, he was briskly treading Wall Street thinking about mergers and estates and perhaps a divorce or two.

Among men in their fifties, we find, besides Lamont and Morrow, a third equally establishmentarian figure, the West Virginia-born corporation lawyer and conservative Democrat John W. Davis freshly returned from having lost the 1924 Presidential election to Coolidge. Still in their forties in 1925, and very much on the Wall Street scene, were the Morgan partner Russell W. Leffingwell, a former practicing lawyer who had been Assistant Secretary of the Treasury from 1917 to 1920, and Herbert Lehman, an active partner in his family’s famous firm, Lehman Brothers, and before long to become Democratic Governor of New York State, and subsequently a Senator. Somewhat less prominent in the financial community just then was a lawyer in his forties, with offices at 52 Wall Street, who had done a stint as Assistant Secretary of the Navy, had run into a setback in the form of a spell of bad health that had left him crippled, but was nevertheless back on his feet and in a decade would become, among other things, Wall Street’s bitterest enemy. Few readers need be told that his name was Franklin D. Roosevelt.

Wall Streeters in their thirties in 1925 included John Foster Dulles, then a rising but not especially heralded lawyer; Averell Harriman, like Lehman a partner in a family banking firm; James Forrestal and Ferdinand Eberstadt, rising young men at Dillon, Read & Company; Robert A. Lovett, at Brown Brothers; John McCloy and Thomas K. Finletter, recent recruits at the Cravath law firm; Sidney Weinberg, a Brooklynite who had started as an office boy at Goldman, Sachs & Company, now a new member of the Stock Exchange and eventually to become the chief adviser to the Ford family and a director of perhaps more blue-chip corporations than anyone else living; and Joseph P. Kennedy, an aggressive stock speculator who had left Boston the previous year to get into the thick of Wall Street, and would remain in the thick of American life one way and another for almost forty years to come.

Taken as a group, these men made up a galaxy the like of which Wall Street has not seen since. Yet among the youngest Wall Streeters of the time, the men born around the turn of the century and thus still fledgling financiers in 1925, we find hardly any who would later distinguish themselves in public service. It is not hard to deduce why. The financial careers of that generation were to suffer an early blight due to circumstances beyond their control, and immediately afterward the character of national government would change abruptly and perhaps permanently: whether Democratic or Republican, government after 1932 would take to recruiting talent for appointive posts from the universities and from business rather than from finance. Wall Street as the nursery of statesmen was already, without knowing it, in its last years.

But two young men, each to become a public figure in his way, cannot be overlooked.

James Paul Warburg, the witty, ebullient, and debonair son of a Wall Street giant–the Kuhn, Loeb partner Paul M. Warburg, often called the father of the Federal Reserve System–was one of the brightest and most interesting young bankers of the middle twenties. Born in 1896 in Germany, he had had a bilingual, two-continent childhood, made a brilliant record both academically and socially at Harvard, flown the precarious crates of the U.S. Navy in the war, and then rapidly attained to a key vice presidency of the International Acceptance Bank, a sort of commercial-banking offshoot of Kuhn, Loeb. True enough, his father had founded the bank, but there was little question in the mind of anyone who knew him that Jimmy Warburg could have made his way without benefit of nepotism. At the age of twenty-five, for example, he had been offered the post of Assistant Secretary of Commerce by Herbert Hoover, and had turned it down on the ground that he considered himself too young. In addition, he was that rare bird, a serious professional banker whose interests and friendships in the worlds of the arts and entertainment were more than skin-deep. He was a Sunday painter of racy nudes, he sometimes played poker with the celebrated Algonquin group (with results that must have raised their regard for banking as an intellectual discipline), and his house on East Seventieth Street was a permanent salon frequented by the likes of George Gershwin and Sigmund Romberg. Indeed, he was actually a professional in both the arts and entertainment. Was he not a published poet–and not vanity-published, either? Was he not the lyricist of some quite successful popular songs? No one knew quite which way Jimmy Warburg was going, but there seemed little question that he was on his way–and he was.

Richard Whitney, older than Warburg–he was already in his middle thirties in 1925–was quite a different breed of cat, and was also further along the road to success. Indeed, he had emphatically arrived at it, and no wonder; he possessed impeccable connections, as good an education as the nation could offer, and the inborn ability to lead. Entirely unrelated to the New York Whitney clan stemming from the turn-of-the-century transit king and partner of Thomas Fortune Ryan, he was the scion of seventeenth-century Massachusetts settlers who had crossed on the Arbella, the ship that followed the Mayflower, the son of a Boston bank president, and the nephew of a former Morgan partner. At Groton School he had been captain of the baseball team, acting captain of the football team, manager of the school play, and that most awesome of schoolboy authorities, a prefect; decades later he was still a well-remembered favorite of his headmaster, the Reverend Endicott Peabody. At Harvard, while not distinguishing himself especially in academic work–he said later that intellectual pursuits had had no attraction for him, and that he had chiefly enjoyed “factual” subjects such as history–he had rowed on the varsity crew and been taken as a matter of course into the Porcellian Club, and so great was his enthusiasm for his entire Harvard class, not to mention the efficiency of his memory, that many years later he could entertain and astonish his friends by reciting the first, middle, and last names of every member of it. After Harvard he had spent a year with a Boston brokerage firm and then headed for Wall Street, where he had bought a Stock Exchange seat in 1912 and formed his own firm, Richard Whitney & Company, bond specialists, in 1916. Meanwhile, his elder brother George (also Groton and Harvard, also Porcellian) had married the daughter of a Morgan partner and by 1919 had become one of the most prominent junior Morgan partners himself. As for Richard, he had married the daughter of a former president of Wall Street’s beloved Union League Club and onetime business associate of Pierpont Morgan. In all these circumstances, he had naturally become the “Morgan broker”; when Morgan partners had transactions to make on the Stock Exchange that they fastidiously declined to frequent in person, it was usually he who made them. When the gods of 23 Wall materialized on the earthly market across the street, the bodily form they took was that of Dick Whitney.

It was an impressive form. Obviously this position alone gave Whitney great influence and even power, but he had personal qualities that made people notice him, too. If this outline of his status makes him sound like a Nick Carraway some years later, his personality was actually more like that of another Fitzgerald character, the snobbish, arrogant athlete, Tom Buchanan. Tall and muscular, with athletic build only slightly run to fat, always impeccably groomed, and handsome in spite of heavy features, with a liking for wearing formal clothes to work, he cut an imposing figure in the Street. He had a toplofty way of being able to deal perfectly factually and equitably with people he considered his social inferiors–which meant most people–and at the same time leaving no doubt of just how he considered them; he was master of the bully’s art of flattering people by seeming to treat them as his equals while at the same time reminding them they weren’t. But despite his snobbishness, he had business friends of all sorts, and his office hiring practice, unlike that of so many other firms, was not anti-Semitic. He lived on a grand scale at his house in New York and on his five-hundred-acre estate near Far Hills, New Jersey, where he rode to hounds, raised champion Ayrshire cattle, and augmented a staff of household servants with a platoon of twelve “outside hands”–herdsmen, grooms, a jockey.

Such were the lives of two of Wall Street’s comers–broadly speaking, one a Kuhn, Loeb man and the other a Morgan man.

VI

… And at the end of Wall, its single Gothic Revival spire rising like the hat of a worldly monk, its chancel extending a cliff overhanging Trinity Place, its green graveyard covering the bones of Hamilton, stood Wall Street’s church, Trinity. As befitted the occupant of that position, it was Protestant (specifically, Episcopal) and rich (the balance sheet in the late twenties showed annual productive assets of the parish, mainly real estate, at $14 million, and annual net income from investments, after deducting all expenses and taxes, at over $700,000; meanwhile, the one-acre plot on which the church stood was appraised by the current real-estate market at roughly $40 million). “Trinity is entirely surrounded now by tall buildings constantly rising higher, some of them the highest in the world,” wrote the Reverend Caleb R. Stetson, who had succeeded the future Bishop Manning as Trinity’s rector in 1921, in the Parish Year Book and Registry at the end of the decade.

One has the feeling that the forms of Mammon are like a circle of ravenous wolves waiting to pounce upon the only open space left in this section, the only witness to the things of the spirit in the midst of the great temples of materialism. But here the church has stood since long before the United States was born, since the time when Wall Street was really a wall built to protect the city from the attacks of Indians and wild beasts.…

He went on to say that the permanent population of the parish area, consisting chiefly of seamen originally from Middle Europe along with a smattering of Greeks, Armenians, and Syrians, was constantly growing smaller as new office buildings displaced old residential tenements, and that it had recently dropped below five thousand. The Sunday congregations, as always, came largely not from this tiny contiguous population (made up largely of Roman Catholics) but from uptown. The ground physically surrounding it was mission territory to Trinity–and as Stetson interpreted that mission, it was not just to the residents but to the immeasurably larger working population, the people who made Wall Street Wall Street, the hundreds of thousands who surged in each morning to occupy the temples of materialism and then surged out again at night. Every weekday at noon, Trinity held a half-hour service for downtown workers, at which the rector or one of his assistants exhorted those caught up in the excitement and absorption of money dealings to remember the things of the spirit; and, in addition, an actual Trinity missionary, the Reverend William Wilkinson, climbed a box in the open air on the Street each lunchtime to deliver a short sermon bringing the message directly to the heathen. The outdoor sermons generally were well, although perhaps not reverently, attended; the church services generally were not.

There was a reason: a Wall Street saying had it that a man seen entering Trinity was a man in trouble. Evidence of the urge to pray was a cause for tongue-clicking and a sign of impaired credit. “Poor Jones! There he goes into Trinity–he must be cleaned out.” But Trinity would have its day yet.

Chapter Four

So Near the Apes

I

One spring day during the late 1920s, a small group of Americans, acting in a time-honored tradition, met secretly and hatched a plot to make themselves some quick money. The method they chose was manipulation of the price of the stock of Radio Corporation of America, then one of the hottest issues on the market. Under a formal partnership agreement, duly approved by their lawyers, they committed themselves to deal in one million shares–valued, at the current price, at ninety million dollars. They then enlisted, for a fat fee, the services of Michael J. Meehan, the Stock Exchange member best in a position to carry out the manipulation because he acted as the floor specialist for Radio stock. At the start of the operation the stock stood at 90. Using a series of carefully contrived feints and maneuvers shrewdly and deliberately calculated to deceive the investing public, Meehan in a few days brought in thousands of unsuspecting buyers from the general public, and thus drove the price up to 109. At this point the men in the small group sold out their stock, and the public buyers were left holding theirs while the price quickly settled back to 87. The whole thing took just over a week, during which Meehan, along with his associates in handling the operation, earned a “management fee” of $500,000. The men in the group, who had spent the week in their offices doing no more than approvingly watching the stock ticker record Meehan’s virtuosity, divided a net profit of just under five million dollars.

This sort of thing, although legal at the time, was not very different in method or intention–only in the sums involved–from the confidence games that had flourished in the United States back at the turn of the century. It was, after all, another form of not-quite-outright larceny requiring high intelligence, great mental dexterity, and no violence. Yet the participants in the Radio operation were not criminal types of the sort of Yellow Kid Weil and the other celebrated con men. They were, on the contrary, rich and eminent Americans, national leaders whose names were known and honored everywhere. Among them, for example, were Walter P. Chrysler, founder and head of the Chrysler Corporation; Charles M. Schwab, the sainted steel man; Mrs. David Sarnoff, wife of the Radio Corporation’s president; Percy A. Rockefeller, nephew of John D.; Herbert Bayard Swope, celebrated editor of the World; John J. Raskob, Democratic National Chairman; and Joseph Tumulty, former aide and confidant of President Woodrow Wilson.

II

Speculation, trading for the principal purpose of taking a chance on a gain at the risk of a loss, has gone on in stock exchanges since the day the first of them was organized in Amsterdam in 1602. This need shock no one; by its nature a stock exchange rivals a racetrack or a roulette table as a natural medium for taking money risks, and, furthermore, speculation in commercial goods, rather than in pieces of paper representing stores of goods or the hope of acquiring them, had gone on for centuries before 1602. Most people, if asked to account for the urge to speculate, would certainly reply that it is rooted in human venturesomeness, acquisitiveness, and love of risk for its own sake, but the British sociologist Elias Canetti has a rather more engaging and original explanation. “The essence of trading is the giving of one object in exchange for another,” he writes.

The one hand tenaciously holds on to the object with which it seeks to tempt the stranger. The other hand is stretched out in demand towards the second object, which it seeks to have in exchange for its own. As soon as it touches this, the first hand lets go of the object; but not before, or it may lose both.… The trader remains on his guard during the whole transaction, and scrutinizes every movement of his opposite number. The profound and universal pleasure men take in trading is thus partly explained by the fact that trade is a translation into non-physical terms of one of the oldest movement patterns. In nothing else today is man so near the apes.

In Wall Street in the later 1920s, where speculation in stocks reached a degree of intensity and subtlety and an extent of public participation probably not matched anywhere before or since, it is doubtful that it occurred to any of the speculators that they were recapitulating the movement patterns of their subhuman ancestors swinging from tree to tree. Nor did this occur to the explainers and defenders of speculative activity. On the contrary, those explainers and defenders, led by the authorities of the New York Stock Exchange, emphasized as lyrically as their gifts would allow the creative, human, even almost superhuman accomplishments of speculation and speculators. “Of all the peoples of history the American people can least afford to condemn speculation in those broad sweeping strokes so beloved of the professional reformer,” wrote the Exchange’s official economist. “The discovery of America was made possible by a loan based on the collateral of Queen Isabella’s crown jewels.… Financing an unknown foreigner in the hope of discovering a mythical Zipangu cannot by the wildest exercise of language be called a ‘conservative investment.’” Such statements as that, which might have startled some of the speculators themselves with the grandeur imputed to their activities, evoked from the Princeton economist Joseph Stagg Lawrence the comment, “The Stock Exchange is the stage whereon is focused the world’s most intelligent and best informed judgment of the values of the enterprises which serve men’s needs. It is probable that upon this stage can be discovered the aristocracy of American intelligence.”

The critics of unrestrained speculation, whose voices were relatively few and muted in the age when the business of America was business, questioned the argument’s factual basis, insisting that actually stock speculation had played only a minor role in the growth of American enterprise. But they went further and questioned its morality. They maintained that, as practiced in their time, it was an outrage to the elementary sense of fair play. The earlier Wall Street battles, from Vanderbilt vs. Drew through Morgan vs. Harriman and on down to Allan Ryan vs. the Stock Exchange, had been waged among insiders armed with comparatively equal weapons. But now, for the first time anywhere, the public in large numbers was coming into the arena of speculation, and the question was whether its members, peering for portents at their financial pages and stock tickers in towns and villages around the country, were not hopelessly overmatched by the knowledgeable Wall Street professionals on the spot on the Exchange floor or handy to it in offices within a few blocks. As John T. Flynn was to put it a few years later, “The game of speculation is one played by some three or four thousand insiders and some half a million outsiders on terms of complete inequality.” The outsiders, he said, “are permitted to see only a part of their own cards while their professional adversaries have access to the cards of all the players as well as their own.”

The form the dispute was most apt to take was a semantic haggle about whether or not speculation was gambling. Emphatically not, said the Stock Exchange–and for good practical reason: quite apart from any moral obloquy attached to gambling, in New York State it was illegal and gambling debts unenforceable, and so if speculation had been judicially pronounced to be gambling, the Exchange would have instantly become incapable of functioning. In advancing its point, the Exchange’s economist, who had an intense affection for professors who saw things Wall Street’s way, was apt to dust off old Professor Henry C. Emery of Yale, who back in 1908 had drawn up a set of distinctions between speculation and gambling of positively medieval fineness. In their public statements, though, the Exchange leaders tended to deal with the problem through flat assertion rather than logical argument. Asked to make the distinction, the top Exchange spokesman once replied that speculation was “good,” since it “has built this country,” while gambling, on the other hand, was “bad.” So there you were.

The chief instrumentality through which the Wall Street insiders, with Stock Exchange approval, sheared the gullible public lambs was the stock pool (of which the Radio operation was a classic example). The point of a pool manipulation was simplicity itself: it was a way of inducing the Stock Exchange ticker tape to tell a story that was essentially false, and thus to deceive the public. Then as now, the stock ticker tape (as distinguished from the Dow-Jones financial news tape, which does not concern us here) printed no news or comment–only the price and volume, along with the letters identifying the particular stock, of each transaction as it occurred. As such it was every speculator’s prime source of information as to what was going on at any given moment; fortunes had been made by clever plungers using no other sources. It was also entirely neutral, giving exactly the same information to everyone, inside Wall Street or out. “The tape doesn’t lie” was the sucker’s folk wisdom; but, in fact, the tape could be made to lie. Even though it continued to record each transaction as faithfully and impartially as ever, the nature and sequence of those transactions themselves could be so arranged, by the people doing the transacting, as to make the watcher of the tape, in his innocence and greed, buy a gold brick.

The group of capitalists pooling their resources would first pick out a stock suitable to their purpose because it had glamour appeal to the public, and because there were comparatively few shares on the market, making for ease of manipulation. They would then accumulate a large block of those shares, through inconspicuous buying over a period of weeks or months, or, better yet, by getting the company’s management, which was usually involved in the pool, to give them an option to buy a certain number of shares at the current price whenever they might choose within a stated period–say, three or six months. They would, if possible, make an ally if not an actual partner of the stock’s specialist on the Exchange floor; normally he was involved as either broker or dealer in a large percentage of all transactions in it, and it was he who, holding in his hand the supposedly secret book listing all outstanding orders to buy or sell the stock, had access, in Flynn’s metaphor, to the cards of all the players. Finally, they would hire their key man, an expert in manipulation called a pool manager (who, as in the Radio case, might be the specialist himself). Then they were ready to go.

On behalf of the pool, the pool manager, as broker, would begin buying and selling shares of the stock at frequent intervals, in no apparent pattern. Often he would buy and sell it back and forth between the members of the pool, or between them and their relatives, and these essentially spurious transactions, accomplished with the sympathetic help of the specialist, would be so weighted that the price of the stock would begin to rise slightly. In speculators’ jargon it would be “active and higher”–a fact that would be advertised to tape-watchers by the constant appearance of the stock’s symbol on the tape as each transaction was recorded. Thus the stock would be called to public attention, and the notion of making a quick profit in it planted in the public mind. The eager tape-watchers would gradually begin to buy–cautiously and tentatively at first, then, as the activity continued to increase and the price to rise, more and more boldly. Now the pool manager’s operations would become more delicate. On some days he would abruptly switch to the selling side, simply to create confusion; then just when the public was about to decide that the picnic was over, he would come back in with a torrent of buying that would sweep all along with him. Finally, in a skillfully conducted manipulation, the thing would become self-sustaining; the public would in effect take the operation over, and in a frenzy of buying at higher and higher prices would push the stock on up and up with no help from the pool manager at all. That was the moment for the final phase of the maneuver, the pool’s liquidation of its own stock, often spoken of indelicately as “pulling the plug.” With a mousiness in sharp contrast to the elaborate fanfare with which he had begun his buying, the pool manager would begin feeding stock into the market. The price would respond by turning downward, gradually at first, then more rapidly as the pool manager’s trickle of sales mounted to a flood; and before the public could collect its senses, the retreat would have become a rout, the pool would have unloaded its entire bundle profitably, and the public would be left holding the suddenly deflated stock. At the end of such a successful roller-coaster ride the price of the stock would be back at about where it had been at the beginning, and it remained only for the members to divvy up the spoils and go home.

Pool managers with some justification thought of themselves as artists. A few low-class ones, looked down upon by the masters of the fraternity, resorted to such expedients as arranging to have the stock they were manipulating plugged in brokerage-house market letters, or they deliberately circulated false rumors, or they bribed newspaper writers to write favorable stories. This was the equivalent of the use of violence in the con game. But just as the best con men disdained to use violence, so the best pool manipulators disdained these artistically inelegant practices. Their medium was the tape; they took pride in their skill to make it and it alone create precisely the effect upon the public that they wanted. If–as seems quite unlikely–any of these artists of the tape ever happened to read Professor Lawrence’s paean to speculation, in which he had spoken of the aristocrats of American intelligence at the Stock Exchange, one feels that they would have been sure exactly whom he meant, and would have nodded their heads in approval. They would have been sure he meant them.

In practice: a pool conducted in the stock of Radio in March, 1928–not the one already described–raised the stock’s price 61 points in four days. A minor pool in Hudson Motor Car Company later the same year brought a return of $105,467.29 (as stated in the letter of remittance from the pool’s broker, which document came to light later) to just one of its participants, a dummy corporation behind which was concealed the president of the Chase National Bank. A pool in Anaconda Copper early in 1929 brought a big return to the president of another revered bank, the National City, who happened also to be the chief public sponsor of Anaconda stock at the time. And so on.

Does it all sound too easy and unsporting, the rich and politically powerful secretly mobilizing their vast resources of money and skill to flummox the struggling middle class and even the poor–those much-heralded bootblacks and newsboys who were being drawn into the market by the lure of easy money? Well, there was an element of risk; sometimes the suckers refused to play their assigned role, some pools failed and lost money. And there was a sporting element of sorts, too. The con game was not the pool’s only traditional antecedent. A great pool like the 1929 Radio one had some of the attractions of the hunt, of elegantly dressed socialites mounted on blooded horses joining forces with trained hounds to corner and slaughter an unsuspecting fox or rabbit. The kill was not the main point; what counted was the ceremony, the status that came with acceptance into the hunt; the businessmen in pools were the well-groomed riders, the socially inferior but technically proficient pool managers were their schooled hounds, and the public, of course, was the rabbit. One observer wrote that what brought businessmen into pools was “the lure of action, of quick profit, the thrill of battle, the call of the chase … the glamor of admission into a charmed circle, the attraction of a mysterious enterprise, and the social aura of association with the elect.”

To repeat, there was for practical purposes nothing illegal about pools. The evils of stock manipulation were recognized in the common law in its ancient proscription of the offenses of “engrossing,” “regrating,” and “forestalling,” but these charges had long fallen into disuse in American practice. The question of whether stock manipulation constituted common-law fraud was moot before 1930. Disapproval on the part of Wall Street’s own authorities was nominal and easily allayed. “Wash sales”–transactions with oneself to create a false appearance of activity in a stock–were outlawed by both New York State and the constitution of the Stock Exchange; so one satisfied the rules and achieved the same aim by making the spurious trades with one’s partners and associates. Specialists were forbidden by the Exchange to participate in pools–so they did it in their wives’ names, without objection. Pools in themselves were not considered improper; the president of the Exchange reported later that his staff had investigated the 1928 Anaconda pool and the 1929 Radio pool and found nothing out of order. Asked what, if not manipulation, had accounted for the odd gyrations of Radio that March, he replied in a puzzled tone that Radio just seemed to be a “mystery stock.”

Official frowns from Washington, then? Prior to 1928, none at all. President Coolidge and his fervently business-loving Secretary of the Treasury, Andrew Mellon, subscribed fully to the view that unrestrained stock speculation was a virtually unmixed blessing to the economy. At the smallest passing sign of an economic downturn, at the faintest hint of business pessimism in any important public figure, one or both of them would unfailingly come forward with optimistic pronouncements of their own, and the market would rebound in response. Only once, and then briefly, does the possibility seem to have occurred to Coolidge that a restraining hand might be beneficial. In 1927 Professor William Z. Ripley of Harvard brought out Main Street and Wall Street, in which, although he did not single out pools, he took up in detail a good many other devices being used by corporations to mislead their stockholders and by stock manipulators to mislead investors. “The first duty is to face the fact that there is something the matter,” Ripley wrote. “I am conscious that things are not right. The house is not falling down–no fear of that! But there are queer little noises about, as of rats in the wall, or of borers in the timbers.” Coolidge invited Ripley to the White House for a conference. He listened carefully to what the professor had to say, nodding now and again in apparent agreement that there was something the matter. When Ripley had finished, Coolidge took the cigar out of his mouth, leaned forward, and asked, “Is there anything we can do down here?” Under existing legislation, Ripley replied, the President was powerless; whereupon Coolidge leaned back and heaved a sigh of relief–one load off his mind.

Nor did the public object to pools, any more than it objects to roulette wheels with a double zero. It loved them because it thought it could turn them to personal advantage; someone else would be the sucker. Bona fide market letters, not under the control of pool managers, would confide to ordinary brokerage-house customers that the inside information was that General Motors or Radio was to be “taken in hand” at 2 P.M. The customers knew what that meant, and they would rush to climb aboard in hopes of taking a short ride to profit with the big money; and some of them were actually clever, coolheaded, and self-controlled enough to pull it off, getting out with a profit before the plug was pulled. So avid was the public for news of pool activities that pool operators, who in earlier times had as a matter of course maintained the strictest secrecy, eventually found that they could take advantage of the avidity. They need merely drop the hint that a pool was in effect, and their work would be half done. At last the point was reached where pools were reported in the newspapers while they were in progress, almost as if they were sports events. The Wall Street Journal, without revealing its source, more or less reported the classic Radio pool day by day, commenting on each day’s gyrations in the stock without using the word “pool,” but in language of unmistakable purport to the cognoscenti. On March 21, the day after the operation’s end, appeared the entirely candid and accurate note: “It is said that the one-million-share Radio pool has been terminated with a net profit of five points to the underwriters.” The five points–or, to put it another way, five million dollars–had come out of the pockets of the public, which had now been trained to manipulate a stock, to its own ruin, almost by itself.

So with just about everyone–the fleecer, the fleeced, the public authorities–treating pools as if they were hardly less commendable than Fourth of July celebrations, it clearly would have required self-examination of almost superhuman rigor for their organizers, operators, and participants to have concluded that what they were doing was evil.

Still–a Chrysler, a Rockefeller, a Schwab, a Democratic National Chairman, New York’s leading bank presidents, as spiritual cousins to Yellow Kid Weil? It speaks eloquently of the climate of 1928 and 1929.

III

Much has been written about what the master speculators and manipulators of the 1920s did to the investing public, to each other, and to the national economy, but since ours is a tale of men, with their times as background, we deal here chiefly with what they did to themselves.

Jesse Lauriston Livermore was the éminence grise among them, by 1920 already a historical figure as well as a leading actor in the stock-market drama, even though he was hardly into his forties at the time and would still, for years to come, retain the white-blond hair and smooth, ruddy complexion that made him look uncannily like a college boy. His talk, too, recalled a past time, peppered as it was with old-time rural slang expressions–“those birds,” “well, sir,” “sore as a pup.” He was the quintessential turn-of-the-century American farm boy who had come to the city and found his knack and his passion in making money by trading. The American philosophers of the time of his birth (1877) had spoken of that pursuit as if it were a kind of religion, and Livermore had come close to making it one for himself. He left school and his father’s Massachusetts farm in his early teens and went to Boston to try his hand in the bucket shops that flourished there and in other cities in the 1890s. Making book in stocks for hopeful tinhorn plungers, and juggling the book so that the plungers all but invariably lost, these institutions practiced in its most blatant form the small-time larceny that the country winked at in the name of free enterprise; and Livermore, a raw youth whose voice had hardly changed, almost immediately achieved the tinhorn’s dream of turning the tables on them. So uncanny were his judgments of short-term stock movements that the bucket shops soon began refusing to pay his winnings or accept his accounts. At fifteen he was a certified “ringer,” forced to resort to false names and disguises to get his bets accepted–but usually in vain. Thus frustrated by too much success, he moved on to the big league, Wall Street, just before the turn of the century. After some initial setbacks in the unfamiliar surroundings, he got his bearings and made his first big killing selling Union Pacific short on a hunch, just before the 1906 San Francisco earthquake; and in the money panic of 1907 his well-timed bear raiding was so massive and demoralizing to the whole market that the imperial Morgan took notice of him, an outland upstart of thirty, by sending emissaries to ask him to relent. The following year he lost a fortune trying to corner the cotton market, and then he went through a decade of spectacular ups and downs, culminating in a short-selling coup in the postwar depression that left him established, apparently permanently, as a man of great wealth. It was his third killing on a national disaster, and because it was well publicized as such he became the object of much public enmity, which left him unaffectedly bewildered. Wasn’t selling as legitimate a market transaction as buying? If not, could markets exist? How, then, could an ethical question be involved? If you accepted the market system, as those who criticized him professed to do, he was right.

Livermore in the 1920s was an invisible genie of the market, feared, envied, his wires sometimes tapped, his name often invoked, his face seldom seen. When the market rose, the rumor would spread, and often be printed in the newspapers, that Livermore was buying, was on a bull raid; when it dropped, that he was up to his old bear tactics again. Sometimes the rumors were true and sometimes not; Livermore kept his own counsel. He operated in secrecy and usually as a loner. Although he managed a few pools for others early in the decade, he did not join them himself, preferring in his operations for his own account to take no accomplices. Late in the decade his base of operations was a secret suite of offices eighteen floors above Fifth Avenue, equipped like a large brokerage office with private telegraph wires, dozens of telephones, a standard quotation board kept up to the minute by young clerks, and a staff of trained statisticians to supply him instant information. Doormen and elevator operators answered inquiries by saying that there was no such office; the telephone company told those requesting his number that none in his name was listed. All this for no purpose but the conduct of his personal investments.

Thus a Livermore legend grew, but Livermore, fact-bound, money-obsessed, did not intentionally foster it; legends were not for him. In his occasional written or spoken comments, with candor rare in Wall Street he called the market a game and spoke of a profit not in the usual ringing clichés about free enterprise and individualism, but as “taking money out.” He did not hesitate to refer to his “manipulation” of stocks, or the “advertising” he did by churning a stock to get it on the tape; manipulation, in his canon, was within the rules of the game unless it involved “deliberate misrepresentation,” in which he was never known to indulge.

His leisure life did not escape his obsession. He had yachts, special cars, fancy estates in several countries, fancy women; but time and again at Palm Beach or Deauville or Cannes a hunch would overtake him and he would rush to the nearest telephone or brokerage office, and then cut short his vacation to hurry back to his only home, Wall Street. He never acquired urban social polish–or, apparently, tried to. Culture in any form was not his dish. He liked to tell a story of a stock trader who was asked, “What do you think of Balzac?” and replied, “I never trade in them Curb stocks”; the trader might have been himself. Formal religion did not interest him, but once, explaining one of his setbacks to a friend, he showed the residue of the New England Calvinist in him: “It might have been the plan of Providence to chasten me.” Which meant by implication, of course, that when he won, that might have been Providence’s plan, too.

Why is there something so depressing about this single-minded and simplehearted man? Perhaps because his obsession looms in retrospect as a crippling disability; perhaps because he is a kind of gigantic real-life close-up of the kind of American European intellectuals like to imagine, and indeed, because he came so uncomfortably close to being the embodiment of a prevalent American dream. And yet we pity him at our risk, because his ghost may rise up to call us what we cannot call him–a hypocrite.

Other prominent speculators came to Golconda from other physical and social backgrounds. There were the Westerners out of the automobile business or the Chicago grain pit: William C. (“Billy”) Durant, grandson of the Civil War Governor of Michigan, founder of General Motors but long since displaced as its master, who by 1925 had won three stock-market fortunes and lost two, and whose vast bull pool with the multimillionaire Fisher Brothers (“Body by Fisher”) and other Westerners was jocularly called “the prosperity boys”; and Arthur W. Cutten, whose precise, almost pedantic operations in the grain pit had put him among the dozen richest men in the country, and who in 1925, although he loathed New York with the relentless loathing of a loyal son of the Middle Border, moved on to Wall Street seeking new fields to conquer. But the most cohesive group of them, and the one most interesting as a social phenomenon, was made up of Irishmen from the slums of Eastern cities.

IV

These men came out of what the old Wall Street aristocrats, Protestant and Jewish alike, had long regarded as virtually a servant class. But it was, of course, no longer anything of the sort; identified with big-city politics, the Democratic Party, and active opposition to Prohibition, the Irish found their champion in Alfred E. Smith, and the virulence of the campaign along religious lines that defeated him for the Presidency in 1928 showed the force of Protestant America’s ungracious reaction to that emergence. The Wall Street Irishmen, never dreaming of becoming Morgan or Kuhn, Loeb partners, glorying in their Irishness and Catholicism, turned those attributes to account by setting up their own command post where they rallied their forces and hurled defiance, often mixed with comic derision, at the older local settlers. The line of Wall Street endeavor most readily open to them was stock speculation, and that was the line they took.

They brought to it a zest, humor, and high-spiritedness all too lacking in the dour Livermore, in the grim Prohibition-boosting Durant, and in Cutten with his pince-nez and stiff collars and early bedtime. Perhaps inevitably, they usually “got their start” through the benign condescension of established men who found them worthy, or entertaining, or both. Mike Meehan, mastermind of the Radio pools, had started out in 1917 as a theater-ticket broker, scraping up aisle seats to Broadway hits for partners and executives of Morgan, Lehman, and Goldman, Sachs. The partners and executives rather liked the youngster, chubby and red-faced and high-pressure as he was, and some of them helped him set himself up as a Curb broker; he did so well that after a couple of years he moved on to the Stock Exchange. He was on his way then; a decade later he lived at the Sherry-Netherland, his firm owned eight Stock Exchange seats, he was a close friend of all the Democratic mighty starting with Al Smith and John Raskob, the walls of his inner office were lined with Shakespeare bound in calf, he was still as noisy and irreverent as ever, and the Morgans and Lehmans and Goldman, Sachs regarded him with fascinated horror. Meehan originated the idea of branch brokerage offices on ocean liners, and his firm maintained them on the Bremen, the Berengaria, and the Leviathan. Sometimes he and his associates, bent on some bull or bear caper attracting attention to which would not come amiss, would enter the Exchange in a phalanx–Mike Meehan, Esmonde O’Brian, Richard O’Brian, John Moyland, J. P. McKenna. In bulling his beloved Radio from a 1928 low of 85¼ to a 1929 high of 549, in the absence of any dividend payment by the company, he not only accomplished undoubtedly the most spectacular and probably the most disgraceful stock manipulation of the decade; he also, some observers feel, did more than any one man to make the public love the stock market and to plant the seeds of the “people’s capitalism” of the era after the Second World War.

Bernard E. Smith, Ben to his friends, grew up around the turn of the century in the shabby Irish neighborhood in the far-West Fifties of New York, left school without graduating, sold newspapers and bummed around the country for a while, sold cars, got a job as a clerk in a brokerage office, and there befriended the firm’s rich Protestant customers, who regarded him as “a diamond in the rough.” He was rough, all right–an incessant practical joker and kidder, whose kidding, later in his life, was apt to have the harsh edge of a none-too-veiled assault on whatever his former patron regarded as good and sacrosanct. A smallish man with broad shoulders, blue eyes, and an open Celtic face, he returned to stock brokerage in the early postwar years as an office manager, and again found a use for his ability to entertain the quality, to make them like him because they were helping him. It was the very blue-blooded broker Stuyvesant Fish who sponsored him for membership in the Stock Exchange in 1926. Percy Rockefeller, whom he had met in earlier years when he had been an automobile salesman, was now his fast friend and fellow participant in pools. Smith took part in many of the biggest bull pools of 1928 and 1929, and actively managed some of them. Yet despite the fact that he profited handsomely from them, he was not at heart a bull. He had gone broke playing bull in a passing market setback in 1926, and well remembered the experience. With a certain coldness of eye, call it realism or cynicism, Ben Smith–a Puritan of his own kind, who never smoked or drank liquor, beer, wine, tea, or coffee–saw through the ballyhoo of the Coolidge boom to its underlying insubstantiality; he felt a certain contempt for the pieces of embossed paper he was getting rich dealing in, just as he felt a certain contempt for the grave, pious, statesmanlike stuffed shirts who stood behind the boom, and who had served as steppingstones on his way. He was still relatively little known, but his day in the sun was coming.

Joseph Patrick Kennedy of Boston, born the same year as Smith and in somewhat similar circumstances, made his name and his pile a little sooner. He was more ambitious, more Protean, probably more ruthless; moreover, unlike Smith, he had an establishmentarian inside him waiting to be let out. Having broken away from a comparatively humble job with Hayden, Stone & Company’s Boston branch, in 1922 he set up his own office behind a door that grandly read “Joseph P. Kennedy, Banker.” He quickly made a reputation as an aggressive stock manipulator, and in 1924 he got the assignment of defending Yellow Cab Company, John D. Hertz’s Chicago-based taxicab operation, against a bear raid on its stock that seriously threatened the financial position of its owners. Hertz raised the money for a bull pool, and Kennedy, having taken a train from Boston and established himself with a ticker and a battery of telephones at the Waldorf-Astoria in New York, managed it brilliantly, routing the raiders, ending the decline in the stock, and doing it all so deftly that at the end of a month he was able to return the pool all of its money, besides earning himself a handsome commission. A few months later Yellow Cab stock dropped abruptly again, and Hertz, suspecting Kennedy himself of being the bear raider this time, threatened to punch him on the nose when they met next. The punch was never delivered; nor was the double-cross ever definitely pinned on Kennedy, but to his biographer Richard J. Whelan “it would not have been unthinkable.” In 1926 Kennedy picked up his brood of infants and young children (among them John F., aged nine, and Robert F., less than one year) and moved with his wife to Riverdale, north of Manhattan, so that he could operate in Wall Street without long-distance commuting. For the rest of the decade he was one of its major operators, specializing in motion-picture stocks.

Smith wanted money as his equalizer with life; Kennedy took money for granted and set his sights on power. Apart from his skill and ruthlessness, his greatest asset was a rare social adaptability that, as Whelan says, permitted him to be equally at home with Meehan or Smith and with Wall Street patricians like Jeremiah Milbank and the loftiest of corporation executives like Owen D. Young of General Electric. Thus he had a dimension lacking in most of the hard-driving and quick-thinking Irish rowdies who carved out a place for themselves in a hostile Wall Street that would have much preferred to be able to go on thinking of them as cops, firemen, ward heelers, or bartenders. But even for Kennedy there were limits. By early 1929 he was rich, powerful, and well known in the Street, and had even gained a certain reputation for wise conservatism by giving a wide berth to the wilder pool operations. Then one day he strolled into 23 Wall Street and casually asked to see J. P. Morgan. It was a move he must have been planning for some time; he was a calculating man who did not suffer slights gladly, and he must have believed that his influence had reached the point where Morgan would be curious to meet him, or, failing that, would judge that he could no longer afford to snub a man of such stature. For once he had miscalculated–Mr. Morgan, he was told shortly, was too busy to see him.

V

Meanwhile the mood of Wall Street’s solid backbone–its Nick Carraways, the proper young men of good family and good education who had come to it as a matter of course, and in the normal course might expect to go on to become its and the nation’s statesmen–was changing. It was not that these men were corrupted by the example of the well-publicized killings being made by plungers from the lower social orders; rather, they were changed by easy success, by business life’s unexpected compliancy, by how easy they found it to do well at what they had thought was going to call on all their efforts.

Their manners changed. They had been brought up in the old national tradition, going back to the Founding Fathers, of the generalist and the amateur. One did not discuss business on social occasions; in particular, one did not discuss it with women. But now suddenly women themselves talked about business–or rather about the stock market–all the time. If sex had been their favorite subject earlier in the decade when changed national mores had made it newly available to them as conversational material, now sex banter had become a bore; another social change had abruptly opened up another new and perhaps equally fascinating topic. Stock-market talk was no longer considered unfeminine. Brokerage houses maintained separate board rooms where women speculators, whose numbers now ran into the hundreds of thousands, could watch the tape and discuss it without the distraction of male presence; if women are, as they have been accused of being, chronic and inveterate gamblers, their emancipation had at last proceeded to the point where they could indulge this passion openly, in deed and word. And the young Galahads of Wall Street who counseled them and accepted their bets–how could they bring the dinner-table conversation to some more traditionally genteel topic when all the ladies wanted to talk about was Radio and Steel and Anaconda? And in any event, why should they try? What the young brokers had always thought of guiltily as shop talk had suddenly become fashionable social conversation.

It was being done everywhere, in the low saloons as well as the high salons. A perceptive British correspondent newly arrived in New York wrote later: “You could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.” The tradition of the well-rounded amateur, in American social conversation, was temporarily dead.

Worse than his shop talk was the young Wall Streeter’s mounting sense of infallibility. Let us glance at one such man–call him Leeds. The descendant of a line of New England clergymen, and a parsonage boy himself, he had come out of Harvard and gallant war duty in the Air Corps to become a broker. He was a modest, candid, and engaging fellow, and he was soon doing well. His aunts and Harvard friends entrusted their money to him, sparingly at first, then more liberally as the market went up and Leeds began to appear to them as a budding financial genius. As the decade wore on and the great boom developed, he made more and more money, even small paper fortunes–always for his clients; not that he was not accepting their commissions and thereby himself becoming well-to-do, but in his well-bred and scrupulous way he always gave the benefit of his most sober judgment to his clients first. There might be brokers who did otherwise (as, of course, there were); as for him, this was his code. He liked to explain it, with jocular self-deprecation, by saying that he had always preferred bartenders who didn’t drink themselves. Thus his inherited conscience was not merely assuaged, it was vastly gratified; business gradually became for Leeds, in his own mind, almost a form of social service, of living by the Golden Rule. And as he made more and more money for others, so he came to believe more and more in the remarkableness of his own gifts, and to think of his benign dispensation of them in more and more grandiose terms.

No matter that most other brokers were making lots of money for their clients too, that there were long stretches when it would actually have been difficult for any broker not to do so; those who deal successfully in stocks, even the professionals, almost always persuade themselves that theirs is a more or less isolated experience brought about by their own unusual acumen. And now Leeds’ friends and clients began to find his gentlemanliness yielding little by little to arrogance. They began to notice an edge of superiority in his manner with them, and sometimes after he had had a drink too many they had to admit to each other that he was getting to be something of a megalomaniac bore. In the time of a stock-market cult, he was coming to conceive of himself as a high priest. And then gradually the change spread through his whole character; there was a certain tendency to treat himself too leniently, a certain erosion of standards of behavior, a certain loss of self-control. Leeds was no longer the man he had been before, they had to admit. “Ill fares the land, to hastening ills a prey,” they might have quoted, but didn’t, “where wealth accumulates, and men decay.”

But of course, wealth was not accumulating for all, even all involved in the market, and thereby hung the generally untold tale of the boom, the tale of the disappointment, regret, mean recriminations, and bitterness of those who saw others getting rich but did not get rich themselves. Unrestrained euphoria and bland over-confidence, we tend to forget, have their inescapable opposite side. For every buyer of stock there is a seller; for every purchase that leads to a profit there is a sale that leads to the loss of a profit that might have been. Many people watch the prices of stocks they have recently sold more closely than the prices of those they still own; thus they show themselves to be more involved in fantasy than in reality, more concerned with justifying past actions than in planning future ones. In short, to be human. Think of those who got out of the market, say, in 1926 or 1928, and then all through 1929 (or almost all) cursed themselves every time they scanned the financial pages for letting a fortune slip through their fingers as a result of their foolish prudence.

Nor can their tempers have been improved by the din in their ears from the Bruce Bartons and John J. Raskobs of the land, who were forever telling them on radio and in the popular magazines and books that in selling their stocks–“selling America short”–they had been not only foolish but also downright unpatriotic and perhaps unchristian as well. (Barton’s The Man Nobody Knows, presenting Jesus as the “first businessman,” whose parables were “the most powerful advertisements of all time,” was a great best seller of the Coolidge era.) The sour, dog-in-the-manger mood of those who had lost their chance contributed as much to the American mood of the time as the bland fulminations of the boosters. Hear the wise Barnie Winkelman, a lawyer who handled estates and closings: “A few operators can play the game of finance unemotionally, accepting losses and profits quickly and urbanely. The average man is unfitted for such decisions.… Seas of regret and remorse wash the land of purchase and sale. Among considerable portions of the community the sale of securities or real estate at less than the highest attainable price is a major calamity to be regretted for the rest of one’s life.” There were many among the losers of the boom who, with nothing of their own at stake any longer, were hoping and waiting for a crash that would prove them to have been right and put an end to their envy of others. The mood of the time was two contrasting moods.

Summing up the America that he found on his arrival on these shores in 1929, Claud Cockburn denied that it reflected excessive materialism. He found something “tragic and even noble in this grotesque scene”–that “it was a brief enactment of what was essentially an old American dream.… If the attitude of Americans to the stock market boom proved anything, it proved that they believed in miracles … that if you try hard enough you can make wonderful things happen.” But a few years earlier another brilliant Englishman, John Maynard Keynes, not speaking specifically of Americans, had written in more somber terms of what happens to respectable and responsible people in times of excessive speculation:

Amidst the rapid fluctuations of his fortunes, [the businessman] loses his conservative instincts, and begins to think more of the large gains of the moment than of the lesser, but permanent, profits of normal business. The welfare of his enterprise in the relatively distant future weighs less with him than before, and thoughts are excited of a quick fortune and clearing out. His excessive gains have come to him unsought and without fault or design on his part, but once acquired he does not lightly surrender them.… With such impulses so placed, the businessman is not free from a suppressed uneasiness. In his heart he loses his former self-confidence in his relation to society, in his utility and necessity in the economic scheme.… He of all men and classes most respectable, praiseworthy, and necessary … was now to become, and know himself half guilty, a profiteer.

In Wall Street in 1928 and 1929 the sense of half-guilt, and the cause for it, was seeping upward through the ranks of respectability to the very top.

Chapter Five

Things Fall Apart

I

The perfect public forum for the mighty of finance was the transatlantic shipboard interview. In those times an annual summer trip to Europe, combining business with pleasure, was considered all but de rigueur in the upper reaches of Wall Street, and in the absence of transatlantic air service an ocean liner was the way of getting there. The appearance of a powerful man’s name on a passenger list was just about the only routine occasion for advance public disclosure of his whereabouts, and probable ready availability to reporters, at any given time. Thus each June and July, as the advance of summer gradually converted the city into a caldron that would steam intermittently until Labor Day or after and the North River piers came to echo with the farewell hoots of departing leviathans, the newspaper reporters culled the lists for the names of Morgan partners, Stock Exchange officials, or famous pool operators, and, finding them, took pains to be on deck with pad and pencil shortly before departure time.

As for the mighty men, they could refuse interviews or sequester themselves in their staterooms if they so desired. But often they did not so desire. On the contrary, they sometimes selected their departures and arrivals as the moments to make their public statements, invariably referred to in the press as “rare.” The fact that their presence on the ship was public knowledge gave them the opportunity to present themselves as reluctant subjects, men trapped into interviews that they could not in democratic courtesy refuse; in fact, they often came on board with carefully prepared and memorized statements. The circumstances gave them a chance to say what they wished to say while, to outward appearances, maintaining the financial traditions of conservative reticence, unavailability, dignity, and mystery.

So every early summer and early fall, the papers would be full of these “rare” public statements from the “usually unavailable” nabobs, and sometimes the market would be rocked by the wash from the statements. The great liners came to be the royal processions of American finance. The mighty men left for Europe, and the market, reacting to their buoyant words, bellowed “Bon voyage”; they landed at Southampton or Le Havre, and the market cried “Bravo”; their stately conveyances again approached New York, and, as Winkelman wrote, “great salvos of welcome arose from the floor of the Exchange.”

Around midnight on Saturday, July 31, 1926, the Morgan partner Thomas Cochran, having boarded the liner Olympic shortly before so as to get a night’s sleep before her early-morning departure, consented to an interview with a ship news reporter. The following Monday at just past noon, the Dow-Jones financial news ticker carried the result into banks and brokerage houses in Wall Street and around the nation. Among other things, Cochran was reported as having said, “General Motors running at its present rate is cheap at the price, and it should and will sell at least one hundred points higher.”

Doubtless many of the Dow-Jones subscribers rubbed their eyes and looked at the broad tape again. The elder J. P. Morgan, once asked by a reporter what the market was going to do, had replied with magnificent evasiveness, “It will fluctuate.” Evidently times had changed. Not only was a leading voice from the imperial Corner, 23 Wall Street itself, stooping to tout a specified stock with an explicit future-price prediction, in the terms usually associated with the more importunate sort of brokerage-house telephone salesman. That in itself would have been enough to cause jaws to drop. In fact, as the New York Times said later, “there was no precedent on Wall Street for such an episode.” But, in addition, Cochran was–and was publicly known to be–very much of a General Motors insider, in a quasi-fiduciary relationship to the company. J. P. Morgan & Company was General Motors’ banker, the firm had huge holdings of the corporation’s stock, and some of its partners were General Motors directors. Since the General Motors board had met recently and since it could be assumed that Morgan partners were in the habit of communicating with each other, there was reason to believe that Cochran knew what had taken place at the meeting, and his words appeared to be what was called–although not in Morgan circles–a feedbox tip.

Within minutes, more than half of all the brokers and traders on the Stock Exchange floor were clustered around the post where General Motors was traded. Before the day was over, more than a quarter-million shares of the stock had been traded and its price had risen from 189½ to 201. It was much the same the following day: other listed stocks, and the other trading posts on the floor, were virtually neglected in the frenzy to buy GM, which rose 12½ more points. On Wednesday Cochran, a thousand miles at sea but fully informed as to the brouhaha, sent a radiogram intended for publication in which he disclaimed the interview only partially. He had “authorized” no statement predicting the future price of the stock, he said; otherwise he stood by the interview. Wall Street had no trouble deducing what had happened–the shipboard reporter had violated the time-honored rule of Morgan partners, which they shared with kings and presidents, that they never be quoted directly except by specific permission. Cochran’s message from mid-ocean had saved his face before his partners, but it had not really much mitigated the strangeness of his and his firm’s action. Regardless of what he had authorized, the fact remained that he, apparently with his partners’ approval, had blatantly plugged a stock in which they were interested.

Next day, as GM continued to soar, the Wall Street Journal praised Cochran for his frankness, expressing the view that it was a sign of public-spiritedness when corporate insiders shared their favorable inside information with the public rather than keeping it for their own use. But this was rank heresy; even assuming Cochran had disclosed any secrets, which he hadn’t, the form of “disclosure” in which he had indulged was all too close to wanton and self-serving manipulation; surely the proper means of corporate disclosure of favorable news was a corporate statement, not an interview with one insider. That the tip was no bum steer became clear soon enough–on August 12, when General Motors announced a 50 percent stock dividend, worth $600 million to its stockholders, which soon sent the stock on up to new heights. So those who had acted on Cochran’s words had made money, pots of it, that might otherwise have gone to insiders like himself, and to this extent he might indeed be said to have worked in the public interest. But something more important had happened. J. P. Morgan & Company had descended from its pedestal. Perhaps just once–perhaps in part, yet not wholly, through a reporter’s ignorance or bad faith–it had lent itself to the spreading puffery and free-wheeling morality of the growing speculative boom.

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world.

II

Things didn’t visibly fall apart in 1927; instead, it was the year the big boom got going in earnest. A year after Cochran’s interview the Dow-Jones industrial average stood half again as high as at the time of it. Charles Lindbergh’s flight to Paris that May had helped by attracting attention to aviation stocks, but much more than that, it had helped psychologically, by bolstering national confidence in the unlimited possibilities of life–particularly life in America. What if there had never been such a stock market before, in this or any country? There was going to be one now. Nor was the boom all hopes and fantasies; in spite of a mild recession toward the end of the year, business in almost all its aspects was good, giving the stock market a sound underpinning. Who better than President Coolidge, for whom the boom had already long since by common consent been named, to put the new spirit into words? On November 17, 1927, he said that America was “entering upon a new era of prosperity.” So the New Era was born; the phrase meant permanent prosperity, an end to the old cycle of boom and bust, steady growth in the wealth and savings of the American people, continuously rising stock prices.…

There was only one recognized cause for concern. As more and more people sought to share in stock-market prosperity, more and more borrowed money in order to do so. They borrowed it from brokers, who permitted (or, rather, encouraged) them to buy stocks on a cash margin–sometimes a very thin margin, say 10 or 20 percent of the value of the stocks they bought, with the balance being borrowed; and the brokers in turn borrowed from banks, in what was called the call-money market. This had been standard practice for years, but now the total sum of banks’ loans to brokers suddenly began to rise to alarming new heights, and the credit structure of Wall Street began to look top-heavy and insecure. Such a contingency, too, had long since been anticipated, and the machinery to control it existed. It was chiefly to permit the regulation of credit, through the establishment of a master interest rate on loans and the adjustment of bank reserves, that Congress in 1913 had established the nation’s central bank, the Federal Reserve System, charged to act in the interest of monetary stability, and independent of political direction even from the President himself.

In 1927 the Fed, as regulator of the economy, might have been expected to restrain wildly proliferating stock-market credit by raising its master interest rate, the so-called discount rate, and reducing bank reserves. It did the opposite. At a famous–or infamous–meeting on July 27, its officers decided on a course of making money easier to borrow rather than harder. It was something like the police issuing guns to people on the streets in a time of threatened riot, and it was an action that has since been blamed for many unhappy events that followed. To explain it, we must know something of the extraordinary man who, as the Fed’s dominant force, was the nearest thing Wall Street in the 1920s had to a philosopher-king.

His name was Benjamin Strong, he was governor of the Federal Reserve Bank of New York, and he was quite probably the most dedicated central banker the country has ever had. He was a tall, handsome man with a large nose and ruthless eyes–a Morgan-partner type–racked with secret sorrows and ill health, and relentlessly self-driven. Born in 1872 in a small up-Hudson town, he came from a long line of Yankee merchants and traders, but did not grow up wealthy; he wanted to go to Princeton but never got there, and started working in Wall Street at sixteen. In 1898, married and the father of four, he moved with his family to suburban Englewood, that era’s dormitory of Morgan partners, and there met and became friends with the great ones–Henry Davison, Thomas Lamont, later Dwight Morrow. But for special circumstances he would surely in due course have become a Morgan partner himself. In 1900 he was appointed treasurer of the Englewood Hospital, of which Davison, five years his senior, was president. In 1904 Davison made him secretary, and in 1909 vice president, of the Bankers Trust Company; the man he succeeded in each post was Thomas Lamont. Obviously he was riding a trolley leading straight to a desk at the Corner. But then in 1913 the Federal Reserve System came into being (largely in belated reaction to the Panic of 1907), and the two leading bankers among its founders, Davison and Paul M. Warburg of Kuhn, Loeb, decided on Davison’s protégé Strong as the man to head the System’s New York bank. (Interesting, though hardly surprising, that when it was decided that the economy needed a degree of regulation, Morgan and Kuhn, Loeb should choose the man for the job.) Strong at first refused. He–along with Davison and Warburg–had opposed the structure for the System as approved by Congress, consisting of a network of regional banks directed by a board sitting in Washington; Strong like most Wall Streeters felt such an arrangement would inevitably make the System subject to political influence regardless of any disclaimers, and wanted a single central bank in New York, on the model of the Bank of England. But now, at the insistence of Davison and Warburg, he relented; in 1914 he assumed the governorship of the new Federal Reserve Bank of New York.

His life was unhappy and uncomfortable, and destined to become more so. In 1905 his first wife had killed herself (and Davison had taken the Strong children into his household). In 1916 his second wife left him. The same year he was stricken with tuberculosis, still, in the same era in which The Magic Mountain was written, known with dread as the White Plague; attacking first his lungs and later his larynx, the disease was to keep him away from his desk more than a third of the time over the twelve years, the years of his greatness, that remained to him. But his thoughts were seldom away. Emotional and physical adversity goaded him to harder work, and even when in sanatoriums or on sunny vacations he restlessly bombarded his bank colleagues with memoranda that came to have the force of ukases. He lived for central banking because he had little else; and, in particular, the task to which he applied his iron will was that of making the Federal Reserve Bank of New York in practice what he thought it should be, and what Congress had refused to make it in theory–the ultimate and dominant force in the System.

To a great extent he succeeded, partly because of his bank’s convenient physical presence in the country’s money center (a taken-for-granted characteristic of all other leading central banks), partly by the force of his personality, partly because most of his Washington rivals, the early governors of the Federal Reserve Board, were undistinguished and unqualified political appointees; the incumbent governor in 1927, for example, was a former Marion, Ohio, crony of Warren G. Harding’s with no banking background at all. Strong by that time was almost a figure of Greek or Shakespearean drama; so ill now that he could seldom be at his desk, but at the top of his powers as a banker and leader, he was from his sickbed the virtual tyrant of the Federal Reserve System. “The Fed” meant “Ben Strong”; it did nothing without him. His passion now was European recovery, the adaptation of United States monetary policy to that end, and perhaps behind that passion, more than anything else, was the deepest friendship of this lonely man’s life–with Montagu Norman, governor of the Bank of England.

For whatever reasons, in the early postwar years Strong’s fierce, restless attention turned more and more to international monetary cooperation–not the bureaucratic, official kind at which the League of Nations was making a few ineffectual stabs, but a more mysterious, secretive, highhanded sort achieved behind closed and guarded doors, over the best food and wine, among the esoteric little international band of central-bank governors. Anglophile by nature like the Morgan partners he so admired, Strong had a large, perhaps a decisive, part in the return of Britain to the gold standard in 1925 at the old $4.86 dollar parity–a gallant but blatant overvaluation reflecting not economic reality but nostalgia for Britain’s glorious past; it could probably not have been accomplished without loans to Britain of $200 million from the Federal Reserve, arranged by Strong, and another $100 million from the House of Morgan, arranged with Strong’s help. But in 1927 Strong found himself under pressure at home. A growing faction in Washington, privately championed by Secretary of Commerce Herbert Hoover, began urging a higher discount rate and a generally restrictive money policy designed to dampen stock speculation. Such a policy would be anathema to Strong’s European central-bank friends–particularly Norman, who came to New York especially to plead for lower American interest rates to stop the continuing outflow of Europe’s gold to the Golconda in the New World, and thus help defend the exposed position of the pound. Various other American officials, on one side of the question or the other, had other motives; indeed, the largely behind-the-scenes debate on the subject that raged through the summer of 1927 was a little classic of cross-purposes. Hoover, the careful engineer, counseled restraint; Coolidge, urged by Hoover to put pressure on the Fed, characteristically found a legal justification for taking no action at all, in the Fed’s statutory independence of the Executive; Mellon, the business-loving boss of the Treasury, was all for continuing cheap money to finance continuing expansion; while Carter Glass and a handful of other Senators complained bitterly that Fed policies were channeling practically all available credit into Wall Street to the further detriment of the nation’s struggling farmers.

Strong cared little for any of them. He was no New Era man, no rubber stamp for Coolidge or Mellon; rather, he nursed his own fixed idea–that America must have low interest rates that would stop the gold inflow from Europe–partly to eliminate its inflationary effect here, and partly to save Europe’s own economy. And the latter idea seems to have begun to assume the proportions of an obsession in his mind. Like any central banker, Strong was an economic nationalist, committed to putting his own country first in a clash of interests. But in this time of confusion as to what America’s interests were, his ties to England and Norman dominated his mind. Through the spring, while Strong was convalescent in North Carolina, the Fed’s policy seemed to waver. In the summer he was better and back on the job, and the Fed acted. In August the discount rate suddenly went down from 4 to 3.5 percent at most of the Federal Reserve banks. The governor of the one in Kansas City, where solicitude for the woes of Europe was not ordinarily notable, was asked by an astonished questioner why he had done it. “I did it because Ben Strong wanted me to,” he replied. One Reserve bank, that of Chicago, balked, exercising its prerogative to refuse to comply with the Board’s wishes unless directly ordered to do so; early in September, at Strong’s behest and in defiance of all precedent, the Board gave the order and Chicago was forced to submit. The cost of this victory for Strong was internal discord. The vote within the Board was only four to three, showing that his mastery was slipping away; but he was still master, and the deed was done.

The sequel is well known; the market went roaring upward and credit expanded faster than ever. Early in January of 1928 it was announced that over the course of 1927 brokers’ loans to speculators had shot up from $3.29 billion to $4.43 billion. There had never before been anything like such a rise in a year, and when Coolidge commented that he did not consider the rise enough to cause unfavorable comment, even Wall Street was dumfounded. That March was the high-water mark of pool operations; it was also the month when Cadillac sales in New York City hit an all-time high. On the twenty-seventh, an avalanche of trading broke all previous Stock Exchange records. April and May were more of the same. In mid-May the daily volume of Exchange trading was so high that lights burned in the Wall Street office windows far into the mild spring evenings, and the St. George in Brooklyn Heights, the hotel nearest Wall Street, reported scores of unexpected late arrivals each night–financial-district workers who had been forced to stay too late to go home. The Exchange doctor reported that in spite of constant overwork no members had recently suffered nervous breakdowns. “They’re all making money,” he explained dryly.

As for Strong, he was in London now, sick again for what was to prove to be the last time, comforted by the company of his friend Norman, and his grip on the reins of the Fed was loosening at last. He could take satisfaction in the fact that his policy of the previous year had achieved its purpose; the pound and Europe’s economy looked stronger for the moment–but, he must have asked himself as he read the news from Wall Street, at what cost, and what more to come?

III

Wall Street’s bull market collapsed [yesterday] with a detonation heard round the world.… Losses ranged from 23½ points in active Stock Exchange issues to as much as 150 in stocks dealt over the counter.… It was a day of tumultuous, excited market happenings, characterized by an evident effort on the part of the general public to get out of stocks at what they could get. Individual losses were staggering. Hundreds of small traders were wiped out.…

The sales were countrywide. They flowed into the Stock Exchange not alone from New York brokerage houses but from every nook and corner of the country.…

The newspaper was the sober New York Times; the date was June 13, 1928 (repeat: 1928). If the break was in reaction to any identifiable event, the event was the realization by the Republican National Convention that the boom’s patron, Coolidge, meant what he said and could not be drafted for another term in the White House. But if it hadn’t been that, it would probably have been something else; a moment had come when what the market needed to set off a collapse was not a reason but an excuse.

The collapse was short-lived; the detonation did not reverberate. In a matter of a few days the June 12 losses had been recovered, whereupon the market moved on into new higher ground at a brisker rate than ever. By August the Dow-Jones industrials were 20 percent above their June low; by November, 50 percent.

All that had happened was that the engine of the boom had coughed once, then resumed its former smooth purr. The question became, Had the cough meant anything? Could it be forgotten as some sort of chance occurrence of no significance, or was it time to stop and take the whole machine into the shop for a check-up? The country as a whole and Wall Street itself divided on the question, and now hindsight, with its graceless finger, points out to us which were the wise and prescient, or else lucky, men of the time on the one hand, and which the deluded–or unlucky–on the other.

Back at the beginning of 1928 a group of Senators raised a hue and cry against rising brokers’ loans and stock speculation. Their argument was agrarian, Populist, and long familiar in American life–that the sharks of Wall Street were absorbing the money supply of the country and thus depriving the real producers, the farmers. Not surprisingly, the protesting Senators came mostly from the farm states of the old frontier and Middle Border–Borah from Idaho, Brookhart from Iowa, Capper from Kansas, La Follette from Wisconsin, Mayfield from Texas, Pine from Oklahoma–where the prevailing attitudes were so often those of an earlier America: states where for many the bounds of a day were sunrise and sunset, where Prohibition and the more dour forms of Protestantism reigned, where the Eastern seaboard, and especially New York City, was automatically suspect of lawless saloons and foreign ways and libertine gambling in stocks. The struggle, one commentator wrote, was “founded upon a clash of interests and a moral and intellectual antipathy between the wealthy, cultured, and conservative settlements on the seacoast and the poverty-stricken, illiterate, and radical pioneer communities of the interior”; the same writer went on to say that “the Puritan instincts of the [farm] community are scandalized by the spectacle of men and women ‘doing nothing’ and enjoying the fat of the land which honest folk can get only by the sweat of their brows.” This was oversimplification to the point of cartooning; for one thing, the eminently Puritan farmers of New England in an earlier time had been inveterate gamblers and had helped finance their very War of Independence through lotteries, and for another, we have seen how many of the stock-market speculators of the 1920s were neither cultured and conservative nor products of the Eastern seaboard. Still, the Senate Banking and Currency Committee’s hearings on brokers’ loans in February and March of 1928, during which one witness after another denounced the plutocratic manipulators and the harm they did to men of the soil, served to polarize the issue in the public mind. From then on, the East was broadly thought to approve and promote the stock boom, the West to fear, suspect, and resent it. Coolidge, Mellon, and company notwithstanding, beginning in 1928 the country was far from unanimous on the market. The venom against it that was to break out a few years later did not come from nowhere.

Even the “wealthy, cultured, and conservative” East–Wall Street itself–came to be divided. Not at the Stock Exchange, to be sure; the authorities there spoke with one voice in defense of speculation, which, after all, was the Exchange’s main activity and the source of its vast prosperity. But at the great investment-banking houses, even the mighty and monolithic Morgan and Kuhn, Loeb, there was a certain discreet choosing up of sides. At Morgan’s, Thomas Lamont was a staunch New Era man, scoffing at the notion that the market was unsound, while Russell Leffingwell was openly skeptical. At Kuhn, Loeb, Otto Kahn was a hearty backer of the boom and a heavy investor in it himself, while his close associate Paul Warburg during 1928 and 1929 was gaining a reputation as a Cassandra by repeatedly predicting a collapse unless speculation were brought under control.

That the Federal Reserve Board was seriously divided within its own counsels was first shown in the close vote on the matter of cracking down on wayward Chicago. In 1928, under political pressure, and deprived of its indigenous driving force by the decline of Strong, it progressively reversed its easy-money policy. In three steps it raised the discount rate from 3.5 to 5 percent; at the same time bank reserves available for lending were reduced by Federal Reserve sales of government securities on an unprecedented scale. At the beginning of the year the Fed held $616 million in such securities, most of them bought under Strong’s expansionary policy during 1927; a little more than a year later, in the early part of 1929, constant and vigorous selling had reduced the portfolio to below $150 million. Strong in London took no part in the decisions leading to this startling turnabout, but he apparently favored or at least condoned them; he is on record as having recommended a 5 percent discount rate in one of his famous communications, sent that May. Had he decided, then, that he had been wrong the previous year, and wished to make amends? Or that conditions had reversed themselves–that the pound and the franc and the mark were safe, and that at last the primary concern was stock speculation at home? Or was he too ill and tired now to keep up the fight? We do not know; he was not destined to explain.

The effects of the new Fed policy began to be felt in the second half of 1928 and were to be felt in full force early in 1929. Nationwide, interest rates rose and the classic concomitants of dear money followed: building construction fell off, the borrowings of state and local governments were postponed, small businesses starved for the want of new funds. And meanwhile stock speculation–the chief target of the policy–went its merry way as if harassed by nothing more than a persistent mosquito. We have seen how the market shot up during the second half of 1928; over the same period brokers’ loans increased by another $1.5 billion, or more than they had increased during the whole of 1927–the year of Strong’s easy money! In short, the new Fed policy was an instant and spectacular failure. Loans from his broker now cost the speculator 8 or 9 percent; early in 1929 they were to cost him 12 percent and more. But how could an interest rate of 8 or 12 percent a year deter a man, or woman, who fully expected to use the money to make a profit of 100 percent in a month or even a week? Traditional monetary restraints were useless because they had come too late. The speculative virus was past being checked by that medicine.

And the physician, the Federal Reserve, which might have obtained from Congress the power to use such drastic and untraditional remedies as arbitrarily setting minimum margin requirements on stock purchases, was powerless because it was, relatively speaking, headless. Strong was dying. Back from Europe in August, he was informed by his doctors that he must give up all work at once. He offered his resignation to the Federal Reserve Board and to the New York bank; it was tabled. In September he wrote Montagu Norman of his situation, and got a moving reply: “Dear old friend, how hard and cruel life is.… But what a stage ours has been over these ten or twelve years! … Whatever is to happen to us–wherever you and I are to live–we cannot now separate or ignore these years.… God bless you and my love now and ever.” After a last-hope operation, Strong died in New York in October.

God bless Ben Strong! In hindsight he was to be accused by Hoover of “crimes far worse than murder” and by most financial historians of being the single chief cause of the coming crash; but he was a better man than most of his detractors, and was cursed by fate as well as by his own tragic flaw; if he had been given another year of life, his full attention would surely have focused on the American situation and his firm hand might have done much to set things to rights in time. As it was, he left behind, as so many big men do, a power vacuum, a shattered institution, weak, divided, and lacking enterprising leadership. Things had indeed fallen apart when disintegration could least be afforded.

IV

What did a New York banker have to do to make money in early 1929? Lend it in the call-money market at 10 or 12 percent, at a time when he could, if he chose, borrow it from the Federal Reserve at 5 percent. As simple as that; both transactions were cut and dried, requiring no business initiative and involving practically no risk, and although starting in early February the Federal Reserve Board officially disapproved of the practice, it continued to be done. Bankers, like royalty in a constitutional monarchy, were in the position of being handsomely paid simply for existing. A plum tree had been grown, tended, and brought to fruit just for their shaking. No doubt the situation had come about through inadvertence, rather than as a result of any conscious conviction of the American people or their government that bankers deserved the rights of royalty; but it does not seem too much to suggest that a prevailing national attitude not very different from this had been a contributing factor.

Specifically, the situation had come about as follows. Despite the Fed’s restrictive efforts, speculation not only continued but actually accelerated during January, 1929, a month during which the stock indexes rose another 20 or 30 points and brokers’ loans another $260 million. On February 2 the Fed, having failed so signally to produce results with higher interest rates and sales of government securities, resorted to what is called “direct action” and others called “moral suasion”; it announced publicly its belief that “the Federal Reserve Act does not … contemplate the use of the resources of the Federal Reserve System for the creation or extension of speculative credit.” In other words, please don’t shake the plum tree any more for a while. That such a sudden prohibition of what had long been standard practice was virtually unenforceable seemed clear; the Fed was appealing to the better natures of the nation’s bankers. Or–weak and vacillating as it was at the time–it was merely trying to save its face and its conscience, to wash its hands like Pilate. Certainly it seemed to back away from any vigorous prosecution of its wishes when, three days later, it issued a statement that it had “no disposition to assume authority to interfere with the loan practices of member banks so long as they do not involve the Federal Reserve banks,” and a week or so after that it seemed to be almost pleading rather than commanding when it wrote to the various member banks reminding them that it was now their duty to prevent the use of their funds for speculation “as far as possible.”

At all events, speculation went on–and Federal Reserve funds, hugely augmented now by money from American corporations and even from Oriental potentates lured into the New York money market by the soaring interest rates, continued to be used to some extent to finance it. The chief effects of the Fed’s efforts were another sharp stock slump, amounting this time to a genuine baby crash, during March, and finally, on the twenty-sixth, a wild climax in the clamor for more call money that sent the rate rocketing up from 12 to 20 percent. Whereupon a leading banker–President Charles E. Mitchell of the mammoth National City–took matters into his own hands by coolly and brazenly defying the Fed’s warning; he simply announced that his institution had on hand twenty million dollars, borrowed from the New York Federal Reserve Bank, that it would be happy to lend for speculative purposes at once. The mutiny prospered. The squeeze was instantly ended, panic was averted, the call-money rate settled back to a mere 15 percent, and the stock market resumed its upward course. Overnight the mutineer Mitchell became a national hero, replacing Coolidge as the great patron of the boom. As for the injured and insulted Fed, it dared attempt no action against Mitchell, maintaining a sullen silence. It was beaten again.

So bankers were free to resume shaking the plum tree without even feeling guilty about it. Government “interference” was humiliated and discredited; now anything went. In such circumstances one might have expected bankers, at least the most important, prestige-laden, and supposedly conservative among them, to lie low, to accept quietly the profits that flowed to them so effortlessly, to take the occasion of the happy market (a God-given market, one of them seriously called it later) to pursue sporting, cultural, or scholarly interests. But most of them were hard-driving, self-made men, ill-equipped by background or temperament to leisure activities. They were the sort of restless, competent, limited men that the system and the spirit of their times brought to the top of their profession everywhere except in the few tradition-bound firms like Morgan and Kuhn, Loeb. They had to have something to do, and they found things.

V

The same Charles E. Mitchell who so successfully bested the Fed was also the man who during the boom did most to destroy the old American image of the banker as a cautious guardian of traditional values along with other people’s money. A big, heavy-set, broad-shouldered, good-natured man with a bold jaw and features that expressed power rather than sensibility, he was a born supersalesman. As he saw it, the principal business of his bank–and it was the biggest commercial bank in the country–was not lending or conserving money but peddling securities, common stocks included. This in itself was untraditional enough–bankers were supposed to swear by bonds, and to look upon all but the most deep-dyed of blue-chip stocks with suspicion–but Mitchell went much, much further in his iconoclasm. Not content to wait with customary bankerly discretion for customers to come in and ask for securities advice, he believed in hawking his product, going out into the towns and villages to find customers and, if necessary, cram the product down their throats. True enough, banks were restricted by law in their freedom to trade in securities; but Mitchell’s bank (like others in his time) circumvented the restrictions with insolent ease through the use of a flimsy dodge called a “security affiliate”–a separate, paper company wholly owned by the bank and sometimes even sharing, down to the last man, the bank’s officers and directors, yet free to plunge in the market at will because of its nominal status as a nonbank. F. L. Allen was not alone in finding the institution of the security affiliate “a masterpiece of legal humor.”

The methods of Mitchell and the National City Company, the National City Bank’s affiliate, were without precedent. He simply thought of securities as merchandise like any other, and handled them accordingly. Maintaining a staff of hundreds of salesmen with offices in dozens of cities around the country, he pressed his men to move the merchandise as relentlessly as if it were shoes or hair oil. There were contests, prize money awarded to salesmen according to elaborate point systems–one point per share of General Mills common disposed of, four points for Missouri-Kansas-Texas preferred, and so on. Mitchell was nothing if not candid about his view of his business; he habitually spoke of the securities trade as a form of “manufacturing,” to be conducted like any other form. Once he explained, “We have a certain portion of our organization–and it amounts to a large force–devoting itself to the manufacture of long-term credits suitable for public distribution, and for the analysis of the production of other manufacturers.” The manufactured goods were, of course, pieces of paper priced at hundreds or thousands of dollars each, and representing promises that were by no means always kept. Many of the products of Mitchell’s manufactory were bonds of foreign countries with notoriously shaky treasuries, and in 1927 Thomas Lamont felt impelled to speak pointedly, with unmistakable intent, of “American banks and firms competing on an almost violent scale” to sell foreign bonds.

But a rebuke from the House of Morgan did not deter Mitchell; soon after that his National City Company successfully sold the two ill-fated issues of the Republic of Peru that were to make the term “Peruvian bond” for years a rueful metaphor for nearly worthless securities. About this time Mitchell switched his major effort to common stocks; in 1929 his affiliate pushed out more than a million shares of highly speculative Anaconda Copper, and more than a million of those of his own bank, the National City. By then Mitchell’s affiliate was blithely participating in Stock Exchange pools; it was taking wild speculative flyers with what, after all, was basically the bank depositors’ money; it was actively soliciting the holders of National City bank balances to get their money out of cash and into the stocks it was sponsoring; and Mitchell himself, taking a modest basic salary of $25,000, had pressured his bank’s board of directors into voting him such a lavish incentive bonus that for the first half of 1929 his personal compensation amounted to just over one million dollars. Every traditional banking inhibition was flouted, all the bars were down, and the man who had lowered them, far from being subject to censure now, was reaping general approbation along with money. Imagine an old-style American banker in a Midwest farm town–one who eschewed stock speculation on principle as his father and grandfather had always done, who lent cautiously in local mortgages, who never solicited business because he believed that salesmanship was alien to the fiduciary aspect of his profession, and who scrupulously absented himself from the board room when his own remuneration was under discussion–considering the doings of Charles E. Mitchell. He might have found himself confused. He might have had a sense of the world gone mad and of himself as a caricature of a fuddy-duddy, goody-goody old fool.

Albert H. Wiggin, boss of the nation’s second biggest commercial bank, the Chase National, is a study in comparison and contrast to Mitchell. Nine years the elder of the two, he, like Mitchell, had sprung from modest surroundings in the Boston area. Each in his way had the standard environmental impedimenta of successful American financiers–Wiggin was a clergyman’s son, Mitchell had worked his way through college; each began his business career in the humblest of positions; each reached the presidency of his mighty bank at an early age, Wiggin at forty-three and Mitchell at forty-four; each was shrewd, aggressive, and single-minded, little distracted by outside interests, cultural or otherwise. But in temperament the two were opposites. Where Mitchell had the glib tongue and brusque good humor of a high-class carnival barker, Wiggin was reserved, almost scholarly in demeanor. In the public conduct of the Chase’s affairs Wiggin was relatively traditional, even though his bank, too, appreciated and availed itself of the legal humor of a security affiliate. But in his private dealings for his personal account, he was considerably more daring than Mitchell. The latter could usually show that his garish actions were in the interest of his bank’s stockholders, and thus could lay claim to the honored virtue of corporate loyalty. Not so Wiggin; the bank might pay him $275,000 a year for guiding its destiny, but when he saw a chance to profit at its expense, he did not feel bound to deny himself.

In 1928 a national bank examiner reported that Wiggin “dictates the policies of the bank” and was “the most popular banker in Wall Street”; the previous year the popular dictator, without informing the bank examiner or virtually anyone else, but without breaking the law either, had formed several “personal holding companies” to enable him to speculate in stocks while concealing his identity and minimizing his taxes. By this means he played the market with notable success and participated in pools in various stocks; but his favorite vehicle for speculation was the shares of the company he knew best, the Chase National Bank. The president of any corporation is, of course, the nominal employee of its stockholders; therefore, stripped to essentials, Wiggin’s speculative operations in Chase stock consisted of trying to make money at the expense of his nominal employers, and between 1927 and 1929 he succeeded to the extent of several million dollars, doing it so discreetly and deftly as not to so much as cause them even a ripple of annoyance.

Then he went a step further. Beginning in July, 1929, Wiggin–as astute as ever–began to see the prospects for the stock market in general and Chase stock in particular as dim. Accordingly, through one of his personal companies he sold over 42,000 shares of Chase stock short. He was then in the curious position of having a vested interest, and a huge one, in the deterioration of the institution he headed. Just as corporate officers are usually encouraged to own stock so that they will have added incentive to put out their best efforts, so Wiggin, with his short position in Chase stock, had provided himself with incentive to produce his worst efforts. This was legal; the audacity of his action was such that the question of forfending it by law had apparently never come up. Moreover, it was perfectly timed. When the account was closed that November, the whole market had collapsed as Wiggin had foreseen, and the profit to his personal company came to just over four million dollars. And no one–for several years–was the wiser; when Wiggin retired in 1932, the Chase’s executive committee thanked him fulsomely for his uncounted services to the bank and unanimously voted him a life pension of $100,000 per year.

Enough; here and elsewhere, Mitchell and Wiggin have been overpilloried. Undoubtedly Mitchell wasn’t the most overaggressive among the bankers of his time, nor Wiggin the most perfidious; they were only the most prominent offenders. Even Wiggin seems to have acted acceptably by his own curious lights. He had a faculty for convenient, sentimental self-deception; it was he who later spoke feelingly of the 1929 market as a gift from God, and he maintained to his death, with evident sincerity, that his Chase short sales had been entirely proper. Victims of a Zeitgeist if ever men were, these two were reflectors as well as creators of the collapse of old values, the falling-apart of things, in the sphere of commercial banking.

VI

All this and more came out later. In the summer of 1929 the surface of Wall Street was a mixture of placidity and mania–stock averages at record highs and still headed upward, the dissenters momentarily routed, the dubious pastimes of some of the most trusted leaders hidden from public view. Even with all that we know now, it remains hard to see that summer whole. The present generations, and perhaps those to come too, are doomed by the technical imperfections of old films and phonograph records to see the life of the 1920s, its nuances of mood, in distorted perspective. Of earlier times we have virtually no aural or moving visual record; of later times we have technically perfect ones. The twenties are the limbo between, and if (as Richard Avedon has said) there is something in the way a woman moves that speaks with unique eloquence of the time in which she lives, there is a gap in our knowledge; only with an intellectual effort can we avoid thinking of 1929 as a time when people walked like jerky puppets and talked in tinny voices. But let us try, as best we can, to look at Wall Street as it was in August, 1929, to catch its essentials in a frieze:

It is the month of Wall Street’s traditional vacation, when even the most dedicated and the most obsessed drift off to mountains or seashore to wait, restlessly, for Labor Day and rebirth. But this year they have not drifted away. Stock Exchange volume for the month is a record for August and not far from a record for any month of the year. Coast to coast, more than half a million are playing the market on margin and perhaps as many more with cash. The days, for the most part, are unexpectedly and blessedly cool and dry; Golconda’s climate lacks the usual seasonal sniff of Hell. Not only do the regulars stay in town; newcomers have arrived in great numbers. They are men and women who are sacrificing their own vacations, or else have simply chucked their jobs, to spend their days sitting, or more likely standing, in the brokerage customers’ rooms watching the quotation board report the glorious news, and to share in the benefits. They arrive early to read the brokerage houses’ “morning letters” informing them confidently which stocks will rise how much that particular day, which will be “taken in hand” by a pool at what hour, which companies have favorable news to come out shortly. By Stock Exchange opening time, all along Wall and Nassau, Broad and Broadway and Pine, the customers’ rooms are jammed–there is standing room only and perhaps not even that, there is a premium on positions from which the quote board can be seen. Still, they all are sure it is worthwhile being there, right on the scene; they feel themselves to be part of something tremendous, and perhaps, too, they feel their physical presence in Wall Street makes them insiders, gives them some slight advantage over those who are maintaining the same vigil elsewhere–the barber or chauffeur or cab driver whose ear is cocked for a tip his important client may let fall, even the important man himself who has given up his vacation not in substance but only in spirit, and, sacrificing a seat in the sun, is glued all day to one in an office in Bar Harbor or Newport or Southampton or in a Catskill Mountain hotel. Brokerage house branches have suddenly made their appearance at every important resort, and the wires between them and their home offices hum all summer long.

Many of those now crowding Wall Street have burned their bridges. They have thrown over their jobs on reaching some predetermined goal, a paper net worth of $50,000 or $100,000 or $200,000; they have bought expensive houses and mink coats for themselves or their wives, and look forward to lives of leisure and affluence spent at this easy and entertaining game. Moreover, in their short time on Wall Street they have come to feel a sense of belonging there; the scars on Morgan’s are their scars and the grave of Hamilton in Trinity Churchyard is theirs. They have a new life and, if they wish, they can even partake of the very symbol of belonging. The most change-resistant of institutions, the urban club, has gone democratic on Wall Street; luncheon clubs, most of them no more than six months old, are everywhere, ranging from fancy cafés to one-arm counters in bare rooms, and membership is just a matter of knowing somebody–anybody–and paying a fee.

At lunch hour the streets of the district are jammed from building line to building line. Even at the height of the morning and afternoon business hours the streets are full of pedestrians, talking, gossiping, shouting to make themselves heard over the din of the new office-building construction going on everywhere. But at noon the crowds on the streets grow so thick that no car can pass, and the construction sounds are stilled for the workmen’s lunch break. A visitor from England, charmed by the silence broken only by talk and footfalls, is reminded of Venice. He finds the atmosphere “savagely exciting,” and, as an outsider watching the performance of a rite he does not understand, he feels loneliness and a certain alarm. He is not reassured when his American friend and guide breaks into a cool explanation of Wall Street and the American business system to say, abruptly and cryptically, “All the same, I don’t really believe it.”

All through the days, and long into the evenings, the talk, talk, talk goes on. There are tales of fortunes just made and of fortunes about to be made–above all, talk of fortunes. There is no talk of panic; the spring crisis is in the past now, brokers’ loans are soaring faster than ever but that is considered healthy now, there is no money squeeze and call money has settled back to a reasonable 6 or 7 percent. The market averages stand 34 percent above the March low and 76 percent above early 1928. When, on the ninth of the month, the New York Federal Reserve Bank raises its rate to 6 percent, nobody pays much attention; the Fed is a figure of fun now. There is constant talk about the new investment trusts, Blue Ridge and Alleghany, Shenandoah and United Corporation and hundreds more, that are the latest thing in stocks, a billion and a half dollars’ worth of new ones put on the market since January; paper companies with staffs of only half a dozen people, existing merely to hold and trade in the stocks of other companies, most of them elaborately designed to “move fast” by the application of “leverage” in their structure, they are considered flimsy and over-speculative by some, but why should they be? Weren’t Alleghany and United sponsored by that pillar of conservatism, J. P. Morgan & Company, and hasn’t Alleghany gone up from its February offering price of 20 to 56, United from its January offering price of 25 to 73? There is talk about John J. Raskob’s article in that month’s Ladies’ Home Journal entitled “Everybody Ought to Be Rich,” in which he explains how savings of $15 a month wisely invested in stocks will do the trick in twenty years, and talk about how the Stock Exchange, emulating so many of the companies whose shares it lists, has just declared a “stock dividend” to its members–one-fourth of a seat to each holder of one. There are jokes about well-fed, broad-beamed Exchange members needing a seat and a quarter each, these days.

Money is king–but there is something else. It is a high, wild time, a time of riotous spirits and belief in magic rather than cold calculation, a time of Dionysius rather than Apollo. People speak of “luck” and “the breaks” more than of earnings and dividends. They have given up their month at the lakes and beaches not in the puritanical spirit of “business first” or “come, labor on,” but in the hedonistic spirit of living more fully and not missing life’s chances. It is almost as if they believed the market existed for taking chances not on money but on happiness.

On the seventeenth the Ile de France and the Berengaria depart on transatlantic trips, the former eastward and the latter westward, each fully equipped for speculation with floating brokerage offices; when the Berengaria arrives in New York six days later, passengers tell of how every day the office on the promenade deck has been so mobbed that quotations had to be passed by word of mouth to passengers who couldn’t get near enough. The same week, there is much favorable comment on a new book, Wall Street and Washington, by that renowned Princeton economic authority Joseph S. Lawrence, in which he scores off the Federal Reserve for its insolent meddling with Wall Street (“an innocent community” mercilessly persecuted by “flannel-throated fanatics” in Congress) and suggests that anyone who favors stronger regulation of the stock market is undoubtedly an all-round bluenose and probably an advocate of Prohibition to boot. This is the kind of talk the tape-watchers dote on, and when it comes from a cloistered professor, so much the better. As the month draws to a close and the Stock Exchange decides to forgo its usual Saturday session and declare a full three-day holiday over the Labor Day weekend, there is further cause for jubilation. There are rumors, cited even in the Times, of many large pools being formed to buoy the market during the autumn, and it is said that a single brokerage firm has received invitations to join no fewer than five of them; meanwhile four important railroad stocks, Santa Fe, Union Pacific, Chesapeake & Ohio, and Norfolk & Western, are all nearing the magic price of 300 in what appears to be a race. Nobody doubts that they will all reach it; the only question is which will reach it first.

So, assuming one can get hold of a reservation–the railroads and the Trimotor airliner to Boston are all overbooked–one can take that three-day weekend with no fears for the future. And yet–can one really believe it?

VII

When the crash finally came, it came with a kind of surrealistic slowness–so gradually that, on the one hand, it was possible to live through a good part of it without realizing that it was happening, and, on the other hand, it was possible to believe that one had experienced and survived it when in fact it had no more than just begun.

The market did not all crash at once. Large segments of it had been depressed for a year or more. The 1929 boom was, in fact, quite a narrow and selective one. It was a boom of the handful of stocks that figured in the daily calculation of the Dow-Jones and New York Times indexes, and that was why those well-publicized indexes were at record highs. It was also a boom of the most actively traded stocks bearing the names of the most celebrated companies, the stocks mentioned daily by the newspapers and millions of times daily by the board-room habitués–and that was why it was constantly talked about. But it was emphatically not a boom of dozens of secondary stocks in which perhaps as many investors were interested.

As a matter of fact, a good part of the stock market had been more or less depressed all through 1929.

The soaring of the averages made a rousing spectacle. Yet the highest September, 1929, price of Celanese was 66; its high in 1927 had been 118. The September high of Cluett, Peabody was 46; its high in 1928 had been 110. The September high of Consolidated Cigar was 62; its high in 1928 had been 100. The September high of Freeport Sulphur was 43; its 1928 high, 105. The September high of New York Shipbuilding was 27; its 1925 high, 88. The September high of Pepsi-Cola was 10; its 1928 high, 19. The September high of Philip Morris was 12; its 1927 high, 41. The list, even if confined to well-known stocks, could be extended to astonishing length. The motor stocks, in particular, were in a virtual industry-wide depression. Studebaker, Hudson, Hupp, and Graham-Paige, at that peak of the most celebrated stock boom in history, were down from their previous highs by 22, 25, 43, and 55 percent, respectively. And even General Motors, the very bellwether of the boom all through the decade, was down over 10 percent. The persistence of the idea that all stocks were going through the roof in the autumn of 1929 is a monument to the power of popular myth.

But if a sort of slow, partial crash, invisible except to its victims, had been occurring over a period of at least three years, Tuesday, September 3, 1929–the day the market averages reached the all-time highs that were to endure for a quarter of a century–was not a day when the public at large gave its attention to such a matter. It was the first day after the Labor Day recess, and thus by traditional stock-market reckoning the start of the active season, almost the start of a new year. The fact that it was a record-setting scorcher in New York, with a maximum temperature of ninety-four degrees and brutal humidity, did not deter the mobs from thronging back to the downtown customers’ rooms and trading in such volume as to set a September record. Thus unaware of its achievement, in the atmosphere of a steam bath, the market of the twenties achieved its Everest. Next day there was a general, if unsensational, decline. The daily column of market comment in the Times–unsigned, but presided over and often written in those days by the paper’s justly celebrated financial editor, the learned Alexander Dana Noyes–contained the sober remark, “The pace of advancing prices during the past week has been so rapid, and so regardless of the money-market position, as to inspire a growing sense of caution even among convinced speculators for the rise.” The following day, September 5, there occurred the curious phenomenon ever afterward called the Babson Break. A not especially well-known, and hitherto even less influential, financial adviser operating far from Wall Street–a frail, goateed, pixyish-looking man in Wellesley, Massachusetts, named Roger Babson–said to an audience at a routine New England financial luncheon, “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming.” As Babson implied, his earlier warnings had been roundly ignored. He was, in fact, widely thought of as something of a nut. Evidently it was a slow day for financial news, because at 2 P.M. Babson’s words were quoted on the Dow-Jones financial news ticker and thus read in brokerage houses across the country. Without the slightest hesitation the market went into a nosedive that carried Steel down 9 points, Westinghouse down 7, and Telephone down 6 in a frantic last hour of trading during which two million shares were traded. The tiny cause and the huge effect, by any logical standard, were simply far out of proportion.

It was a prophetic episode–and so recognized at once. After the Babson Break the word “crash,” entirely taboo a month earlier, suddenly became common currency in Wall Street. In its more conservative circles, the notion of an impending crash came within days to be fully as much the received wisdom as the contrary notion of an endlessly continuing boom. Babson was, of course, promptly and violently refuted by such New Era champions as Professor Irving Fisher of Yale; but five days later the Noyes column in the Times was still brooding on “the idea of an utterly disastrous and paralyzing crash” in a most disconcerting way. The Times found certain parallels between the current situation and that of 1907, when unbridled panic had come totally unexpectedly. The best reassurance the paper could offer was that now there were the new forces of the Federal Reserve and the investment trusts, which would presumably serve to help stabilize the market if necessary. Meanwhile, the market crept erratically downward until September 24, when there was another big break, this one unassignable to any cause at all and therefore dismissed as a “mystery decline.”

October in Wall Street began in a mood of pessimism but calm. Rather spookily, brokers’ loans kept increasing, suggesting that more and more people were still coming into the market. Why weren’t their purchases raising prices? Or were they perhaps coming in on the short side? There began to be scary rumors of the formation of giant bear pools; Jesse Livermore was accused, and immediately denied it. Then there was a recovery, and everyone breathed easier. By the tenth the averages were back to about where they had been in mid-September. On the fifteenth the voice of the bull prophet Charles Mitchell was heard from the appropriate pedestal, a deck chair on an ocean liner; embarking for New York from Germany, he said, “The markets generally are now in a healthy condition.” Irving Fisher chimed in with his soon-to-be-immortal opinion that stocks had reached “what looks like a permanent high plateau.” It is not to be supposed that these statements were universally accepted; Mitchell and Fisher by this time had come to be monotonously predictable, and their views were ceasing to gain emphasis from repetition. Still, the market held steady for a week. Then on the nineteenth it sank again, in a huge two-hour break in the course of the second biggest Saturday-morning session ever.

By Monday the twenty-first it was clear that there existed the makings of the classic stock-market chain reaction downward: the decline in stock prices leading to calls for more collateral from margin customers; the inability or unwillingness of the customers to meet the calls, leading to the forced sales of their holdings; these sales leading to a further decline; and the further decline leading to more margin calls. There began to be hopeful talk of “organized support,” the kind of massive pooling of resources in support of the market by the most powerful bankers that had saved the situation in 1907. “For the time, at any rate, all Wall Street seems to see the reality of things, and to discard the catchwords and newly-invented maxims of an imaginary political economy,” said the Noyes column. The meaning was clear: sanity had returned, the New Era had become a thing of the past. The board rooms were less crowded now; the thousands of tyros who had jammed them in August were mostly discouraged if not wiped out, and had returned to their jobs and their old lives. The trumpets of the New Era still sounded, but they had a muted, valedictory sound now; Fisher dismissed the decline as a “shaking out of the lunatic fringe that attempts to speculate on margin,” and Mitchell, on his ship’s arrival at New York, could only say that the decline had gone too far. It went further that very day, with prices closing drastically lower in wildly confused trading that left the ticker an hour and forty-one minutes late; but the next day, Tuesday the twenty-second, there was a strong recovery.

So we come to Wednesday the twenty-third, a mild, clear fall day in New York, but a miserable one in the Midwest, which was swept by an early-season visitation of snow and sleet. This meteorological mischance, like the dazzling sun at the Battle of Hastings, has its niche in history. A market decline began early in New York; then the storm brought down many telephone and telegraph wires, and for the rest of the day a good part of the country was dependent on guesses and rumors as to exactly what was happening. Signs of panic appeared, and quickly fed on themselves. The day’s trading of 6,374,960 shares was the second greatest in history; among the losses were 96 points for Adams Express, 70 for Commercial Solvents, 20 for General Electric, 43 for Otis Elevator, and 35 for Westinghouse. There was no piece of bearish news to account for it, but no one spoke of a mystery decline now.

By another mischance of retrospective interest, the vice president of the Stock Exchange was absent from the floor that day. He was the elegant Richard Whitney, now forty-one, the coming man at the Exchange. Not only was he its acting president in the absence on vacation of its president, E. H. H. (“Harry”) Simmons, who was in Hawaii on a honeymoon, but so well known was his name and so great his reputation as a man of influence and leadership that the previous March, when President Hoover had wanted to confer with a Stock Exchange representative on the dangers of speculation, it was Whitney rather than Simmons whom he had summoned to the White House. On Wednesday the twenty-third of October, Whitney was away from Wall Street serving as one of the two stewards presiding over the climax day of the hunt’s racing program of the Essex Fox Hounds, at Far Hills, New Jersey, where a crowd of some two thousand was on hand to rub shoulders with the figures of the society pages and watch perhaps the most fashionable of American turf events. Two horses, Speckled Beauty and Proposal, finished too close for the judges to decide between them, and according to protocol the stewards were appealed to. Whitney and his counterpart declared a dead heat. Two other horses had slipped on the damp turf and collided, sending their riders flying; there ensued an acrid argument between the two owners as to which jockey had been at fault, with the stewards again called upon to adjudicate. It was, then, a busy day for Whitney, though less busy than the day ahead would be.

That night an avalanche of margin calls went out, and a settled gloom hung over Wall Street. It thought it had had its crash, and was mustering its spunk to go forward. It little suspected that soon the thousands wiped out would become tens of thousands; or that the next day, when trading volume would be not six million shares but nearly thirteen million, would go down in memory as Black Thursday.

Chapter Six

Enter the White Knight

I

From the Rector’s report, Trinity Church Parish Year Book and Registry, covering the year 1930:

The past year has presented many difficulties.… The problem of what we, as a church, could do to give comfort and help to the many who were in serious difficulties because of unemployment was a problem of the first importance.…

I decided, after consulting with several experts in charitable and social service work, that the Church could best serve the community by taking care of her own people. The Vestry contributed a considerable sum of money.… I then appealed for voluntary contributions toward a fund to care for the poor of the parish. It is not possible or proper to speak publicly of the particular cases of dire need that were relieved, or of the many persons who were tided over periods of acute distress.… Times of adversity bring out the best and the worst sides of human nature. I am glad to find this year that people are turning to the Church for comfort and courage.…

The regular Sunday services, the Rector went on, had had a revival of good attendance; so, notably, had the weekday noon services. And, in addition, Trinity had found it appropriate to inaugurate a new program intended specifically to give comfort and courage to people of the financial community. Each weekday from eleven-thirty until one-thirty, a member of the clergy was stationed at a desk just inside the entrance to the church, to be available for consultation. The Rector wrote:

If we could tell you of the various troubles and problems which are brought to us there, you would realize the great value of the ministry; but it is, naturally, impossible to speak of the matters which are brought to us. People unknown to us and to whom we are unknown are happy to be able to bring their troubles, which would in many cases be impossible to discuss with their own clergy, to a stranger whose business it is to assist if possible–frequently, and indeed usually, behind the screen of anonymity.

This new ministry was so popular during 1930 that at lunch hour there was often a small queue at the entrance to Trinity, waiting in turn for consultation and consolation–a bread line of the spirit.

As the congregation so often sang in “Lead, Kindly Light”:

I loved the garish day, and, spite of fears,

Pride ruled my will: remember not past years.

The garish day was over, and the pride that had kept Wall Streeters out of Trinity Church was broken.

II

On the first great day of the crash–October 24, or Black Thursday–Claud Cockburn, the visiting British journalist, who was staying at the old Lafayette Hotel in Greenwich Village, had noticed a startling phenomenon as he was having breakfast with an American companion at a marble-topped table in the hotel’s café. His companion kept distractedly jumping up and looking at the ticker machine at one end of the room–even though it was well before Stock Exchange opening time and therefore there could not possibly be anything on the ticker. With the percipience born of a foreigner’s detachment, Cockburn saw (he would write many years later) that it was no ordinary day but one long to be remembered; it takes nothing less than a major air raid to change the social atmosphere of London, he would write, but New York–New York lives more externally. Walking toward Wall Street later that morning, after the tickers had already begun to beat out their sad and shocking story, Cockburn found himself part of a sort of silent army streaming in the same direction. In the Street itself, he found an enormous crowd; its sound was subdued, a kind of murmur, hardly more than a whisper, broken occasionally by the distinct, surrealistic cackle of an isolated hysterical laugh. (Photographs taken around noon that day of the front of the Sub-Treasury, across the corner of Broad and Wall from the Stock Exchange, show people standing on all its steps, lined up and looking blandly straight ahead as if posed to record the membership of some sort of organization. Their faces show no excitement or hysteria or chagrin. They stare in the way a caught fish stares as it lies on the beach or in the creel.)

Cockburn had a lunch date at the home of an important Wall Streeter. He was Edgar Speyer, former Edwardian English nobleman–he had been Sir Edgar and a Privy Councilor–and now, as an American, a millionaire partner in one of the oldest and most aristocratic German-Jewish banking houses. He and his wife lived in one of those lovely rose-brick Greek Revival houses on the north side of Washington Square, in an exquisitely ordered household with an atmosphere of culture and elegant calm, amid a gorgeous collection of Chinese paintings and porcelain. Luncheon, Cockburn found, was served by a young English footman under the supervision of a middle-aged English butler; and the meal was proceeding gracefully, with talk not of the stock market but of recently published poets–Mrs. Speyer was one–when everything suddenly went inexplicably and shockingly wrong. There was a disturbance, a sound of thumping and voices, behind the closed door to the corridor leading to the kitchen. The handle of the door turned slowly, and then the door moved open a few inches. Clearly, some sort of bizarre struggle was going on behind it. A moment later, when the butler and footman entered with a saddle of lamb, Cockburn caught a glimpse down the corridor of four or five maid-servants of various ages standing behind the door in an excited and angry group. Having served the lamb, the butler and footman withdrew to the kitchen; there was more scuffling, after which a woman’s voice was heard to shout the threat, “Go on, or else,”

and then the door burst open and the butler, very red in the face, nearly bounced into the room as though he had been pushed violently from behind.… He closed the door and as collectedly as possible marched across the room to Speyer and in low apologetic tones begged him to come outside for a moment. Listening with an air of astonishment, Speyer, after a few seconds’ amazed hesitation, left the room with him. Almost immediately Speyer came back again looking a little dismayed. He begged us to excuse him. The staff, he explained, had of course their own ticker-tape in the kitchen premises and they were all heavily engaged on the stock market.…

Speyer abandoned his guests for good then, leaving his lunch uneaten; his wife and guests finished the meal “under conditions of confusion and makeshift.” The party was a disaster, a social enormity, a violation–perhaps the only one in his lifetime–of Speyer’s most cherished principles of taste and decorum and hospitality, and Cockburn, shocked as one can be only by watching a man’s being collapse before one’s eyes, began to understand something of what the crash meant. Lives were crashing along with paper fortunes.

But Black Thursday was only the overture. The ticker, unable to keep up with the rapidity of transactions, ran until after seven o’clock that evening before completing the recording of trades that had stopped at three. A bankers’ syndicate was formed to support the market, and the next day President Hoover said, “The fundamental business of the country … is on a sound and prosperous basis”; there was a two-day rally on Friday and Saturday, but on Monday the decline resumed, and on Tuesday the twenty-ninth, the worst day in the history of the Stock Exchange, the holocaust went far beyond the possibility of control and the national depression was on. The next day, John D. Rockefeller, Sr. came forward with his famous try at restoring confidence (“My son and I have for some days been purchasing sound common stocks”); after another brief rally the decline was resumed again and went on day after day with such intensity that the machinery of Wall Street was all but paralyzed. By November 13, when bottom for the year was reached at last, of the eighty billion dollars that stocks listed on the Exchange had been worth in September, thirty billion was gone. Jesse Livermore said, “To my mind this situation should go no further.” He was right, as far as 1929 was concerned. But 1929 was only the first act of the tragedy.

By December a mood of permanent crisis and settled gloom had descended on the Street. Workers there who opened their office windows on mild days heard a steady, low murmur coming from the crowd that gathered daily outside the Stock Exchange. One of those workers would recall a generation later, “The sound went on all through trading hours, and reached its peak around noon. It wasn’t an angry or hysterical sound. That was the most ominous thing about it. It was a kind of hopeless drone, a Greek dirge kind of thing. It was damned distracting, I must say.” The search for scapegoats had begun in earnest; new charges and indictments of stock swindles during the past summer and fall cropped up almost every day, and one Wall Street element after another–bucket shops, bear raiders, pool operations, put-and-call brokers, even the slowness of the Exchange ticker–was pointed to in turn as the cause of the crash. Meanwhile, the first tidal waves from the earthquake were already spreading across the city, the nation, and the world. The Russians were crowing that the crash proved their point–capitalism was decadent and doomed. Subway cars plunged under the New York sidewalks carrying carfuls of weirdly keening women. Coast to coast, there were no bread lines yet, but lifelong businesses and long-held insurance policies that had been pledged against loans to buy stock were being lost. College plans for young people were being canceled. Life styles were being changed–some thought for the better; Edwin Lefèvre quoted an intelligent traveling salesman as saying, “I firmly believe that there isn’t a town of ten thousand inhabitants or over in the United States that hasn’t at least one night club. In the past year and a half I have been in a hundred or more of them, and I’ll swear that nine-tenths of the people I saw were having the time of their lives spending their uncashed stock-market profits. It struck me that these people had acquired the worst habits of the idle rich, without the riches.”

Yet the real rich, especially the conservative rich, were the least hurt of anyone involved in the stock market–so far. Among the leaders of Wall Street there was much inconvenience but little catastrophe. J. P. Morgan, Thomas Lamont, and their partners could scarcely complain; their firm’s profits earlier in the year so far overbalanced their losses in the crash that for the whole year 1929 J. P. Morgan & Company and its affiliate Drexel & Company increased their net worth by $27 million. The ancient George F. Baker told the New York Times that he had lost nearly $15 million, but on the other hand, a Wall Street rumor had him getting up from a sickbed at the height of the carnage and tottering to Wall Street over the protests of his doctor with the explanation, “I have made money in every panic in the last sixty years, and I do not intend to miss this one.” Otto Kahn was reputed to have lost heavily and no doubt had–but not heavily enough to cause the slightest visible change in his exquisite way of life, his benefactions to the arts, or his showplace estate at Cold Spring Harbor.

The out-and-out speculators, whether or not they occupied seats of respectability, had fared according to their luck or their predilections. The bulls, naturally, were hurt worst. Billy Durant of the Midwestern “prosperity boys” pool would shortly be reduced to suing a broker for giving him a false tip that had cost him, or so he alleged, $75,000–a gambler squabbling with a tout. Arthur Cutten, the clean-living pool participant, found it expedient to reveal that he personally had been a heavy loser after it became known that people in his home town of twenty thousand had lost an aggregate of three million dollars on his tips. Mitchell of the National City, the “manufacturer,” had during the awful week of October 28 borrowed twelve million dollars to support the stock of his bank, failed in the attempt, and then resorted in his desperation to a maneuver that would subsequently lead to his indictment for tax evasion.

On the other side, Wiggin of the Chase, the short seller of his own bank’s stock, had, as we have seen, cleared more than four million dollars through his curious operations, during the worst period of the crash–and, in fact, as a result of it. Jesse Livermore, temporarily bullish at the start of the crash, had read the signs with his famous prescience, switched sides of the market in time, and come out still comfortably a millionaire. Mike Meehan, of the Radio pools and the shipboard brokerage offices, was all right, too.

III

Four other Wall Street figures and their fates merit our particular attention.

Ben Smith had become a national figure–a figure of villainy. The boisterous, bantering Irishman from the West Fifties was a big shot now: soon he would have a country house with a swimming pool in Bedford Village, be the American broker for Lord Rothermere, and become so inaccessible that reporters seeking an interview might wait a week or more before being called back, not by Smith or his secretary but by his public-relations representative. But Smith’s new fame came not from his wealth but rather from the manner in which it was said, and conspicuously without his denial, that he had acquired it.

Caught in the mood of the moment, he had been on the bull side of the market in the summer of 1929 and had been badly hurt in the first wave of the crash. Then he saw the light. The whole boom, it was revealed to him, had been a huge sham and now the country was returning to reality. Smith’s marked freedom from emotional ties with the Wall Street or national establishment now became a trading advantage. No loyalty to old school or class or even country blinded him to the truth; as Matthew Josephson said, he was a free soul. True enough, he had been swept along for a time by the mythos of the “New Era economics,” and this pious sentimentality had cost him dearly. But now he was free of it; to him the New Era was a rejected religion–an alien one that, in weakness, he had embraced briefly and tentatively, under pressure of mass psychology, against his better judgment and deepest convictions. For Smith’s true attitude toward the Morgans and Kuhn, Loebs and Melions and Hoovers had always been “To hell with them” or something stronger than that, and now he was being proved right. Indeed, what was America itself to him? His life in it had been no bed of roses. “I was right in the first place and all along!” he exclaimed at the time of the crash. Before the first wave was over he had reversed himself and become one of the most lusty and vengeful of bears, lending the weight of his enormous short sales to the plunge of prices and profiting richly as the facts of financial life came at last into congruence with his caustic convictions.

“Never before has American business been as firmly entrenched for prosperity as it is today.… Stocks may go up and stocks may go down, but the nation will prosper.” Thus the elder business statesman Charles Schwab, on December 10, 1929. He was enunciating the received view of the time, the view held by all those whose emotional commitment to the nation and its business, not to mention their own investments, was such that they were quite unable to countenance the notion of general national economic collapse–in short, to credit what was happening before their eyes. Smith, the free soul, could countenance and could see, and his response was not to make formal statements (he never made any of those) but to sell and sell and sell. And the response of the American public to Smith and his selling was characteristic of the time. When the newspapers made a legend of him, used his name to symbolize the dastardly and unpatriotic bears whose short sales were forcing the market down and down in a time when business was “perfectly sound,” he began to be harried like a marmot. Day after day he received threatening phone calls and letters; his two daughters eventually had to have bodyguards. Smith was not intimidated. His enemies, he felt, were getting what they deserved, and so was he.

Inadvertently, Smith fed the legend himself by giving it a slogan and himself a nickname. At some point–at the height of the November 29 panic in one version, several months later in another–he rushed into the crowded board room of the brokerage house where he had an office and shouted over the noise, “Sell ’em all! They’re not worth anything!” For the rest of his life he would be “Sell ’em Ben” Smith.

Joseph P. Kennedy, not so “free” as Smith because more ambitious for power (and certainly more committed to the national economic system), apparently had made no millions selling short in the crash, but he had not lost any through buying or holding, either. Feeling that “only a fool holds out for top dollar,” he had quietly taken his profits earlier in the year, and his biographer says that September found him “standing at a safe distance.” Later he would write of the period, “In those days I felt and said I would be willing to part with half of what I had if I could be sure of keeping, under law and order, the other half”–but there is no evidence that in fact he had to part with half of what he had or anything like that much. That winter he could afford, financially and emotionally, to turn his back on Wall Street and go to Palm Beach, and the high-level negotiations and operations he carried on from that pleasant base were aimed not so much at making or keeping money as at forming new alliances that might be of use in the future. Kennedy did not need to be concerned about money now; his pile was safe, and his thoughts were turning to the conversion of money into power–the power that goes with being a king-maker, or, more particularly, a President-maker. A few months later, through the good offices of Henry Morgenthau, Jr., he would go to lunch at the Governor’s Mansion at Albany to renew an old but slight, indeed rather hostile, acquaintance, dating back to the First World War, with Franklin D. Roosevelt. He would come away from this meeting convinced that he had found the man he wanted to be the next President. Thus his new career was launched.

James Paul Warburg, too, was among those who had survived the crash in a financial condition that permitted him to put his attention on matters higher and broader than personal survival. In the early aftermath he found himself working long hours to save not himself but his firm’s clients, and, as a high official of an international bank, not grubbing over a two-point drop in Steel or Radio but worrying about such cosmic repercussions of the crash as the new drain of gold from the United States and the drying up of the American capital market. In 1930 he would spend much of the year abroad, looking out for his bank’s European clients, and on his return would tell Wiggin of the Chase, over lunch, that he expected the upstart Adolf Hitler to come to power in Germany and subsequently to launch a new world war. Then Wiggin would call up the venerable Paul Warburg to say, “Your son is crazy. You ought to have him locked up.”

So Kennedy and Warburg, two of the survivors, were turning their thoughts from money-making to statecraft; for half a century Wall Street had been the cradle of statesmen, but before long these two would be almost alone among Wall Streeters in having a hand in the national government.

IV

Richard Whitney was nationally famous–not infamous like Ben Smith, but famous as a hero.

It happened quite literally overnight: over the night of October 24–25. At a few minutes after noon on Black Thursday, when the panic was at its height, the stunned crowd in the Street saw a little group of well-known bankers trooping into Morgan’s. Their names, which immediately passed in murmurs through the crowd, make a kind of Homeric catalogue of the banking chieftains of the time: Mitchell of the National City, Wiggin of the Chase, Prosser of the Bankers Trust, Potter of the Guaranty Trust, Baker of the First National; and inside the building to greet them as host was Thomas W. Lamont. The crowd, suddenly hopeful, guessed at once what it meant. The long-awaited “organized support” for the market had arrived; the bankers were meeting to commit millions of dollars to the defense of prices, to form a Morgan-centered consortium that, like the one in 1907, would stop the panic and save the country.

Nor was confirmation long in coming. Only a few minutes after they had entered 23 Wall, the chieftains departed, and Lamont held court for the press in his office, as was his custom. Silver-haired, looking cooler and more aristocratic than ever, gesturing idly with his pince-nez as he spoke, Lamont uttered the laughably and magnificently demulcent sentence, “There has been a little distress selling on the Stock Exchange, and we have held a meeting of the heads of several financial institutions to discuss the situation.” It had been caused, he went on, not by any basic disorder in the national economy but by “a technical condition of the market.” (Thus the new establishment line was promulgated at the very moment a new line became necessary.) Lamont did not say flatly that a support consortium had been formed, presumably because he knew that the existence of one was shortly to be demonstrated almost apocalyptically in action. At about one-thirty–by which time a rally of stock prices had already begun on the strength of word of the bankers’ meeting and the Lamont interview–Richard Whitney appeared on the Exchange floor. Broad-shouldered, bull-necked, his face flushed from the previous day’s outing at the race meeting, the gold Porcellian pig displayed on his watch chain, the Morgan broker strode to the post where U.S. Steel was traded and placed the most celebrated single order in Stock Exchange history–a bid for 10,000 shares at 205, the price of the last previous sale, although the stock was actually being offered at that moment at well below 200 and therefore Whitney was offering to pay several dollars per share more than he needed to. He then matched this grandly uneconomic gesture by proceeding to various other posts on the floor and placing similar orders for other blue-chip stocks–each in huge quantity, each at the price of the last previous sale. Within a few minutes his orders aggregated more than twenty million dollars, and everyone knew that the bankers’ consortium was in action and that Richard Whitney was its floor man. The rally in all stocks sharpened and extended, and Black Thursday ended a good deal less black than it might have.

“Richard Whitney Halts Stock Panic,” the headlines trumpeted next day. On that Thursday Whitney had been only an actor, and a good one, cast in the role of hero; his grandiose gestures had been consciously contrived for maximum effect. But in the days following, as acting president of the Exchange and field general in the bankers’ battle for an orderly market, he fulfilled a function as genuine as Canute’s against the sea. And somewhat more effective. Using his natural talent for leadership (or bullying, as some chose to call it) to maximum advantage, Whitney proceeded firmly, conscientiously, and imaginatively. On October 29, the day things got so far out of hand that whole basketfuls of orders to sell stock were simply forgotten in the confusion and stood unexecuted on the trading floor, in his capacity as acting president he called a noon meeting of the Exchange’s Governing Committee to discuss the situation. Maximum secrecy about the very existence of the meeting was ordered, and successfully maintained, to prevent feeding the panic with new fuel; to this end it was held not in the stately Governors’ Room as usual but rather in the office of the president of the Stock Clearing Corporation, a room tucked away in the Stock Exchange basement directly under the trading floor. Invited to the meeting, in addition to the governors, were two Morgan partners and some other representatives of the bankers’ consortium; the Morgan partners–just who they were remains uncertain even now, but surely one was Lamont and probably the other was Richard Whitney’s brother George–were actually refused admittance for a moment by an incompletely briefed guard. The partners’ efforts to slip into the Exchange building unnoticed had aroused the guard’s suspicion.

Many of the men meeting to allay panic were near panic themselves. The consortium, as a matter of fact, was already in a state of collapse; its resources ($240 million, according to later reports, although some say less) were vanishing into the maw so fast, and so ineffectually, that the effort at supporting the market would clearly be a failure unless more funds were supplied, which they weren’t: that day Lamont actually had to deny that the consortium had turned its coat and begun selling stocks. Whitney said later of the meeting, “The feeling of those present was revealed by their habit of continually lighting cigarettes, taking a puff or two, putting them out and lighting new ones.”

The chief question before the group was whether or not to close the Exchange out of hand, perhaps for an indefinite period–something that in all the Exchange’s history had been done only twice, in the dreadful Panic of 1873 and at the beginning of the First World War. Some maintained that in the present situation there was no alternative to such action; others, Whitney in their forefront, argued that it was “unthinkable.” An indefinite closing, the opponents argued, would freeze bank loans on security collateral, render security holdings illiquid, and still further inflame the public imagination; bootleg markets like those of 1914 would develop in the streets, the national banking system and the economy would be all but paralyzed. Courage and fortitude were needed; the show must go on. The noes won. The Exchange stayed open until its normal closing hour that day. But the next day, the thirtieth, Whitney and his colleagues came up with a compromise. It was beginning to be obvious that the physical stamina of the Exchange employees, who for almost a week had been working practically around the clock in a losing effort to keep abreast of the paperwork, was being taxed beyond endurance. The Governing Committee decided on a plan of “special holidays” and shortened trading sessions. On Thursday the thirty-first the Exchange would open at noon instead of ten o’clock as usual; Friday and Saturday would be “special holidays” devoted to paperwork, and regular hours would be resumed the following Monday. Whitney, announcing the plan from the Exchange rostrum on Wednesday afternoon, resorted to one more of the dramatic anti-panic devices for which he was showing such a flair. Ordinarily, the tickers were stopped while the president of the Exchange made a public announcement to the floor; but on this occasion, to prevent the impression from being abroad that the Exchange might close down even for a matter of seconds, he saw to it that the tickers went right on chattering while he spoke.

The plan essentially worked. Needed time and relative calm were gained, and the notion of attributing the partial closing to practical and humanitarian motives rather than to panic proved to have been a brilliant stroke. It worked so well that the partial closing was extended; trading was shortened most days throughout November and was suspended entirely on several more “special holidays” without noticeably increasing public alarm. Still, the sickening decline of stock prices went on until mid-November, when, on its climactic day, the volume of trades went uncounted because the Exchange authorities simply stopped counting them. All through the weeks of crisis Whitney was masterly. Everywhere he went, on the street, at his clubs, at public functions, he found himself confronted with the same anxious queries, the same pleading, trusting faces; lives were disintegrating, and he was the man who could hold them together if anyone could. He said later that through the crisis he and his fellow authorities lived “the life of hunted things.” But one may believe that part of him loved it; to command, to be thus relied on, to have the moral authority of a Groton prefect combined with the naked power of a potential temporal messiah is heady stuff, and Whitney had so superbly the patrician bearing, the aloof air, the broad shoulders, the steady gaze, the ready smile to carry off the role. The “cellar meetings” in the room under the Exchange floor went on; Wall Street finally got wind of them, and immediately concocted the quite unfounded rumor that Whitney and Lamont, using a periscope, were watching the activities above through a hole in the floor. As he and his fellow authorities left each meeting, Whitney would exhort them to keep up a bold front, regardless of their private feelings. In what, most ironically, can be considered a preview of a favorite tactic of Franklin D. Roosevelt in other dark days, he would say, “Now get your smiles on, boys!”

The boys went on smiling; and, at last, the market stopped dropping. Impressed by the rumors of bear raids, Whitney in November ordered a spot quiz of all Exchange members on their short positions in stocks; the results satisfied him that bear raiding was “so small as to be almost inconsequential,” and the announcement of the results of the quiz was credited with helping stabilize the market. On November 30 the Exchange’s Governing Committee passed a resolution of appreciation of Whitney’s work in the crisis. “Great emergencies,” said the resolution, “produce the men who are competent to deal with them.”

Whitney himself spread the credit more generally, and generously, commenting that the events of the autumn had “increased our faith in this marvelous country of ours.” Certainly they had increased the country’s faith in him. Nor did the country know under what personal difficulties he had accomplished what he had. He said years later that he had lost two million dollars of his own in the crash–by which he certainly meant only paper losses on securities he held at the time; but that was bad enough, and the fact that he had financial worries that autumn will become abundantly clear in the course of this narrative. Yet over the critical weeks he seems never to have let such worries distract him for a moment from his responsibilities as the Stock Exchange’s acting president, a job for which he was paid nothing. In truth, he had been magnificent: a born leader in his finest hour.

V

On the last afternoon of the year and the decade, wild bells of a sort rang out from the Stock Exchange floor; the annual New Year’s Eve party, bigger and louder than ever, began an hour and a half before the close of trading with the installation of the 369th Infantry Band on a stand erected right in the middle of the floor. Noisemakers had been supplied to everyone, members and clerks alike; speakeasies had clearly been well patronized at lunchtime; when the final gong sounded at three, the pandemonium could be heard as far away as Broadway. And there was reason for celebration; not only was “it” thought to be over, but the fantastic trading volume that had gone with the crash had meant thousands of new clerical jobs and millions of dollars in commissions. Over the period since September, which had seen unemployment nationally rise from less than three-quarters of a million to more than three million, Wall Street, for those whose money was not in stocks, had become an island of temporary prosperity. This was none of Wall Street’s calculated doing but an accident, a perfect irony; still, the contrast was not lost on the public. The first mutterings of generalized, unconsidered public hostility to Wall Street and all its works were being heard, and they would rise.

Whitney was Wall Street’s symbol, so famous now that his moves and his quips were reported in the press like those of a movie idol. When in January he gave his barber a free trip to Florida as a whimsical reward for remaining silent while shaving him, the Times duly carried the story. Later that year Stock Exchange Post No. 2, the one where his famous “205 for Steel” bid had been made, was ceremoniously retired from the floor and presented to Whitney in tribute; he had it put on display in his office lobby. Simmons, the absentee Exchange president of 1929, had finally returned from his wedding trip in December, but he had long since decided to retire from the job at the end of his term, and when the new Exchange elections came around in April, 1930, it was a foregone conclusion that Whitney would be formally elected to the post he had actually been filling for a year.

It was a spring of great recovery and greater optimism. In April the Dow-Jones industrials touched a point 50 percent above their November low; no one could know that it was a point they would not touch again until 1954. In May the Secretary of Commerce said that “normal business conditions should be restored in two or three months”; the following month the Secretary of Labor chimed in, “The worst is over without a doubt.” Also in June, President Hoover himself greeted a delegation of clergymen who had come to ask for a public works program with the cheery reply, “You have come sixty days too late. The depression is over.” (Hoover never said that prosperity was just around the corner; the now-indelible legend that he did may have arisen from the published indirect quotation of what he had said at a press conference in January–that he saw “definite signs that business and industry have turned the corner from the temporary period of emergency.”)

But as recovery waned during the summer and fall and the public hostility to the Stock Exchange began waxing, Whitney took to the lecture circuit in its defense. By now he was accepted, in New York, in Washington, and coast to coast, as the voice of Wall Street. That a dandiacal snob with no common touch, and little interest in common people as individuals, should have been a master advocate before the public seems paradoxical, but Whitney, again like Roosevelt, had a gift of leadership that transcended class barriers or even personal inclinations. He had a positive taste for, and ability at, communicating with the public; indeed, he was a far better communicator than financier. Moreover, he flourished in a time when many Americans still actually preferred to be influenced and led by those they felt to be socially above them. His very aloofness and unwillingness to stoop to or compromise with public taste served to impress the public; it might not love him–few did–but it listened to him and believed him.

In September, 1930, he was lecturing the Merchants Association of New York on how the “business slump” was due to overproduction and artificially stimulated high prices. “To attribute business depressions to stock-market panics is to place the cart before the horse,” he argued; in reality, stock prices were a “barometer” of business conditions, an effect rather than a cause of depressions; the current business depression could be traced back to May, 1929, rather than to September or October when the market had broken. The Times, in an editorial comment, found “much to support this interesting diagnosis,” but added, prophetically, that Whitney’s views tended to be “inexorable.” October, 1930, the month apple-sellers first became prevalent on American street corners, found him making mild, self-serving remarks about the Stock Exchange to the well-bred and presumably sympathetic ladies of the Junior League: “We endeavor to have righteous men as our members and to have their business done in a straightforward way.” The same month, on his initiative, he and his vice president Allen Lindley had dinner with Hoover at the White House. No statement came out of that occasion, although its occurrence was widely noted and interpreted as indicating warm relations between Wall Street and Pennsylvania Avenue; Lindley told the press afterward that the dinner had been “personal,” and added, “It was a delightful evening. We spoke about everything.”

During 1931–as stocks went on sliding and sliding until the averages stood at lower than half of their 1929 low, and as unemployment, which had soared from three to seven million during 1930, continued rapidly toward the ten-million mark–Whitney more and more went beyond the role of Wall Street advocate to assume the mantle of Wall Street statesman. In January he told the Boston Chamber of Commerce of his anxiety to dispel the idea that the Stock Exchange was “a machine which operates in arbitrary and unaccountable ways,” and, using analogies dear to his sporting heart, drawn from baseball and football, he went on to try to do so. In April, the month he was renominated unopposed for his second term as Exchange president, he addressed the Philadelphia Chamber of Commerce on “Business Honesty.” The notion that security frauds belonged to the past was, he warned, “absolutely false”; on the contrary, they were as rampant at that moment as at any time in the past, and were resulting in annual losses to investors running into hundreds of millions of dollars, much of it bilked from the poor or near-poor. Bucket shops, misleading company reports, over-speculative investment trusts were some of the leading agents of this deception, he said. Members of the Stock Exchange itself were not to be considered above suspicion. “The fraudulent security criminal is a coward,” Whitney declared, and went on to assure his listeners that the Exchange officials, cooperating with civil authorities, were doing everything in their power to ferret out such criminals in their midst. It was a rip-roaring reformist speech, and a notably candid one coming from the man charged with protecting Wall Street’s image, although it was later to come back and haunt him in quite a different context. In September he was sharply criticizing those who still refused to face the fact of depression: “There have been … too many empty platitudes, too great a lack of frankness and realism, too much of an attitude of trying to whistle in the graveyard at midnight.…”

The prefect was affirming that the school was in a mess, and taking his manly share of the responsibility. Well might he make the admission; the national economic picture was going from bad to worse. Over the summer of 1931 a series of banking panics and failures swept Europe; Hoover’s one-year moratorium on intergovernmental payments, proposed in June and adopted in July, eased the situation only temporarily, and in September the once-imperial British pound, kingpin of world currencies for a century, was forced off the gold standard, adding new force to the hurricane winds of the economic storm over here. As the United States continued to cling precariously to the gold standard–that is, to sell gold in exchange for dollars to all comers on demand–a drain from its Treasury to foreign countries and to its own citizens began that within six months would cut the nation’s gold reserve almost in half. Just in the five months between April and September, 1931, U.S. industrial production fell 18 percent, factory payrolls 20 percent, construction contracts 30 percent, and common stocks 40 percent.

And Whitney still dramatically rode the hurricane winds. On the morning after the British departure from gold–Monday, September 21, one more awful and thrilling day in Wall Street–he called the Governing Committee into session at nine-fifteen, three-quarters of an hour before opening time. Not a major stock exchange in the world was open except the Paris Bourse, and the question of closing this one was again on the table. Again the idea was rejected: both for practical reasons and as a matter of sacred principle, the market must continue to operate. This time Whitney did agree to a temporary departure from laissez-faire in the form of an emergency ban on short selling, to prevent deliberate exploitation of an already demoralized market, and announced the restriction from the rostrum just before the opening. Stocks dropped violently that day as expected, but over the next two days they rallied strongly, and on Wednesday morning Whitney announced that things were back to normal and short selling was again permitted. Another crisis bravely weathered: Whitney’s public career finished out 1931 still at zenith.

VI

But all the time Whitney was playing this grand role he was in deep personal financial trouble.

It dated back to long before the crash, and its sources were by no means to be found in the crash. Out of personal inclination, and to maintain his and his family’s pre-eminent social position, Whitney was a man who lived expensively; what with the Ayrshire herd and the horses and the debutante parties, later he would say that even at the depth of the depression his bills had run to over five thousand dollars a month, and that was probably a considerable understatement. And he had no personal fortune to support such a style of life. His original Stock Exchange seat had been bought with money borrowed from his family. The Morgan brokerage business brought him far more prestige than cash; specifically, it grossed something like sixty thousand dollars a year, but the firm’s overhead was high and its other brokerage business not really extensive, since Whitney found it congenial to do his business chiefly with a few wealthy friends and relatives rather than with the public. At almost all times throughout his career the Morgan broker and now Stock Exchange president had needed money, and he had sometimes needed it rather desperately. Moreover, there can be little doubt that he needed it psychologically as well as practically. Big, strong in body and will, well-born, capable (and, for what it may mean, left-handed), he nevertheless had his demons. Always across his path there fell the shadow of his brother George, the Morgan partner, and much more than “ordinary” Morgan partner since by 1930 George had been chosen as the destined successor to Lamont as right-hand man to Morgan himself: his brother George, then, a little older, a little more handsome, a little more personable, considerably more sober-seeming, infinitely more astute in finance, considerably more successful by the ineluctable Wall Street yardstick of personal financial worth. The brothers frequented somewhat different social circles–Richard was much the more sporting of the two, George the more serious-minded and intellectual–but they shared membership in various urban clubs (the Knickerbocker, the Links), where George was inclined to be the Whitney who was taken more seriously, while Dick was often treated as a kind of amusing bad boy. Only in the personal fame that came out of his new role could Dick outshine his paragon of a big brother.

As early as 1921 Richard Whitney began getting through periods of temporary embarrassment by borrowing sums of money from George. At first, he always duly made repayment. Thus in 1926 he borrowed $100,000–not such a staggering sum between these bravos–to finance the purchase of a town house; George seems to have got it back on the appointed date. Meanwhile, like less prominent men desperate for money, he was beginning to plunge in speculative stocks. In 1923 he first became interested in the Florida Humus Company, a marginal venture devoted to experimenting with the exploitation of peat humus as a commercial fertilizer. Not long after that, he found himself attracted to another obscure Florida concern, Colloidal Products Corporation of America. These were wild-blue-yonder stocks from which most prudent brokers even in those manic years would have shrunk away in horror; but the broker who would soon be the most famous in Wall Street had an unshakable conviction of the rightness of his opinions, and the further sad and astounding fact is that he was a classic stock-market sucker. When his first investments in the Florida ventures did not prosper, Whitney’s enthusiasm for them seemed to wax in inverse proportion to their success; he made the classic sucker’s error of compounding his losses rather than cutting them. By the later years of the decade, when a general Florida economic collapse had reduced the stocks to what he considered to be bargain-basement prices, he was throwing huge additional sums into them in hopes of making a killing on a recovery. These huge sums consisted of loans obtained from his brother and one of his broker friends. During 1928 George Whitney loaned his brother, all told, $340,000, and a certain E. B. Schley came through with another $250,000–all unsecured, and all to help Dick Whitney gamble on finally joining the permanent rich through peat humus and mineral colloids.

In 1929 he was still at it. That February he wanted $175,000 more from his brother for the Florida investments. In March he wanted (and this time even he must have hesitated before making the request) half a million dollars more, this time to finance the purchase of an additional Stock Exchange seat that he felt he needed for the expansion of Richard Whitney & Company. Even though the 1928 loans remained outstanding, George Whitney provided these new sums–trustingly and fraternally, but also from a more practical motive. The Morgan partner had, to put it mildly, no faith in his brother’s Florida ventures, and by now he had come to feel that Dick’s most valuable asset, the credit of Richard Whitney & Company, was in jeopardy as a result of them unless the firm had additional and firmer assets to call upon. Then came the crash, and Dick’s sudden rise to fame. But not to riches. In October, J. P. Morgan & Company advanced him $100,000 to help him handle the enormous daily clearings involved in the operation of the ill-fated bankers’ consortium. This sum was returned on the last day of December, but his other unsecured loans were not. Quite apart from huge sums that he owed to commercial banks that were holding his securities as collateral, Richard Whitney finished out the decade owing his friend Schley a quarter of a million dollars and his brother George slightly over a million.

And so, impaled on stocks that he would not have dreamed of considering as suitable for listing on the Stock Exchange he headed, shielded from the consequences of his bad judgment by the seemingly bottomless generosity of his brother, the feared and worshiped voice of Wall Street in 1930 and 1931 was teetering on the edge of financial collapse. Calculations made much later with the benefit of hindsight established that as of June 30, 1931, the firm of Richard Whitney & Company, which dealt regularly in sums in the millions, had an actual net worth of about $36,000–and that figure did not even reflect its proprietor’s unsecured personal loans! No one in Wall Street dreamed of such a precarious state of affairs–or almost no one. There was, it is true, a mounting sense of concern about Dick Whitney’s affairs in the offices of J. P. Morgan & Company, where, as a broker for the firm and the brother of a partner, he was generally well known (although only slightly known to J. P. Morgan himself) and generally liked as an amusing and effective emissary from the raffish world of the Stock Exchange across the street. George Whitney did not tell even his partners the staggering extent of his personal advances to his scapegrace brother, but he did put the word around the office that he had less than complete confidence in Dick’s business judgment. Accordingly, some time in 1930 or 1931 the Morgan partner Thomas Cochran made a discreet approach to Herbert G. Wellington, a prominent broker who was a great friend of Richard Whitney’s. The trouble with Dick, Cochran said, is that he has bad investment judgment. “We all love Dick around here,” the Morgan partner went on, in the breezy and unbusinesslike cadences that Morgan partners were famous for, “and we would like to help him reorganize his firm. He needs partners who aren’t office boys.” Then to the nub of the matter: would Wellington consider merging his prosperous firm, Wellington & Company, with Richard Whitney & Company?

Wellington, who was devoted to Whitney but no fool, said no. Then, having failed to help out Whitney through persuasion, the Morgan firm turned to direct action. The immediate problem was a $500,000 loan to Whitney from the Corn Exchange Bank that had recently come due but remained unpaid. To judge from later accounts, there was a good deal of stirring around in the Morgan offices about the matter–vague efforts to determine the actual worth of Whitney’s Florida investments, shock at the results of these efforts, and, at last, much talk about doing the right thing and helping out a good fellow in a jam. The upshot was that on June 29, 1931, J. P. Morgan & Company loaned Richard Whitney $500,000 for ninety days, unsecured, at an annual interest rate of 5 percent–a stiff rate for 1931, by the way.

So the immediate crisis passed; the Corn Exchange was paid off with the Morgan money, and Whitney’s debt transferred to a less importunate creditor. (The Corn Exchange could not have been too importunate, at that; Whitney had been a director of it at the time he had borrowed from it, another detail that had made the Morgan partners uneasy.) But Whitney remained locked in the disastrous Florida ventures, into which he had by now sunk a million and a half dollars, and when the ninety days were up and his loan to Morgan’s came due, he could not pay it. It was amiably renewed and then, after another ninety days, renewed again. Happily for Whitney, they all still loved him at the Corner–though not, apparently, all so much as his brother George, who in September put up his own securities as collateral for his brother’s loan, thereby taking over the risk. And Dick, still spending over five thousand dollars a month on family living expenses, still generally thought of as among the soundest men in Wall Street, and now, as the whole country knew, spending his days masterfully tiding the Stock Exchange over the crisis of a world depression, wound up 1931 owing almost two million dollars that he could not possibly pay. Now or ever, nothing but the perpetually continued indulgence of his creditors, or a business miracle in Florida, could save him from bankruptcy.

VII

Early 1932: unemployment above ten million and heading for twelve million, or not quite a quarter of the civilian labor force; industrial production nationally down to half its 1929 rate; industrial stocks listed on the Stock Exchange worth about one-fifth of their value at their 1929 peak; foreign withdrawals of United States gold running at a rate of $100 million a week, and more than a billion dollars’ worth of currency and coin, much of it gold, being hoarded by terrified Americans–in sum, a nation in the throes of economic disaster. The heart of the Hoover Administration’s effort to meet the crisis was the Reconstruction Finance Corporation, set up to pump federal funds into banks and businesses and, by saving them from failure, to enable them to provide jobs and thus cause the benefits to “percolate down” to the poor and the newly poor. In the absence of a penny of direct federal relief to the unemployed, and in a time of the virtual bankruptcy of private philanthropy, this was called, with a good deal of justice, a bread line for big business. With a Presidential election coming up in November, Hoover and the Republicans badly needed a scapegoat to blame for the general disaster. The one they found most readily at hand was Wall Street, and the particular aspect of Wall Street that they chose was that old bugaboo, short selling on the Stock Exchange.

The arguments against and for short selling on stock exchanges were–and are–complex but subject to being summarized briefly. The attack on it centers obviously on the capacity of organized bear raids artificially to depress the stock market and thus unnecessarily damage companies and their stockholders, as the bear raiders had ruined Stutz and Allan Ryan. Moreover, the very root purpose of making a short sale–to profit by the misfortunes of others–tends to make the practice, as the wise and thoughtful Otto H. Kahn once said, “inherently repellent to a right-thinking man.” A prime political target, then; and the more so because the defense of short selling, to the eternal frustration of its defenders, has to be based on more sophisticated and therefore less readily grasped concepts. In the first place, a short sale can be looked upon as nothing more than a sale for future delivery–such a transaction as is commonplace and universally accepted in almost all forms of commerce, and the interdiction of which, in most forms, would be universally regarded as intolerable tampering with the free market. And there are other points to be made. For example, every short sale necessarily implies a later purchase by the short seller; thus short selling can be looked upon as creating a reservoir of potential buying power that will ultimately work not to depress the market but to buoy it. Again, in the absence of short selling, which is widely practiced by the floor specialists and traders who give the market much of its liquidity, stocks would tend to gyrate all the more wildly, increasing the risk to the unwary investor. And these theoretical arguments, which were all advanced by defenders of short selling in 1930 and 1931, seemed to be backed by practical experience; all recorded efforts to forbid or severely restrict short selling on stock exchanges over extended periods–in Holland in the seventeenth century, in France in the eighteenth, in England in the nineteenth, in Germany at the opening of the twentieth–had ended in failure. The short sale like the earthworm is an unprepossessing object that plays a useful role.

But these arguments did little to deter a President and a party politically in extremis, and it was one of the many ironies of the time that their archvillain in their search for the sinister Wall Street forces that they charged with thus bringing the country to its knees for private gain was the arch-Republican Richard Whitney.

As we’ve seen, Whitney had already been called upon to investigate bear raids (and by implication to defend short selling) once before, immediately after the 1929 crash. The outcry against the practice had faded out abruptly during early 1930 when the market had been rising. (Criticism of market techniques always mysteriously vanishes during rising markets.) But it began to be heard again early in 1931, and this time it carried a new note of urgency. That May the Stock Exchange, at Whitney’s order, reacted by instituting a rule compelling every member firm to furnish every business day a record of the shares held short by the firm or its clients. This was a strong measure to keep tabs on just who was selling short, and how much, but it in no way actually restricted short selling, and it did not satisfy the critics. In October, the month after the sterling crisis had forced the emergency two-day ban against any and all short selling, Whitney and the Exchange went a step further, adopting a rule permanently forbidding short sales in stocks that were already on the way down.

Since the basic principle of a bear raid is to further depress a stock that is already on the way down, this was a formidable and long-overdue barrier to bear raiding–and one, incidentally, that still remains in force on the Stock Exchange today. However, the resourcefulness of market manipulators being what it was, it was not an entirely impassible barrier. With the election getting closer every day and the market still dropping dreadfully, the outcry went on. Indeed, it rose to a crescendo. In December the Senate passed a resolution calling for a major investigation of all the securities markets, with emphasis on the New York Stock Exchange and short selling; the impetus behind this move came from a Republican Senator from Connecticut who had heard a rumor that a group of Wall Street Democrats was deviously planning a series of mighty bear raids to coincide with the 1932 Presidential campaign, and thereby embarrass Hoover. How little the Senator understood Wall Street is suggested by his willingness to believe that a market manipulator, Republican or Democrat, would put large sums out at risk for a mere political motive. But that Senator and others were desperate enough to believe anything. Écrasez l’infame! In January, 1932, Whitney and some of his aides went to the White House again. This time he went at Hoover’s summons, and the meeting does not seem to have been as amiable as the one fifteen months earlier; Whitney gave no public account of it, while Hoover reported, in his memoirs years later, that he had “warned Richard Whitney … that unless they took measures to clean their own house I would ask Congress to investigate the Stock Exchange with a view to Federal control legislation.” Hardly another “delightful occasion,” then; rather, the Presidential threat of federal control, already Wall Street’s nightmare for a decade, probably marked the moment when the spirit of cooperation between Wall Street and Washington ended, and a long era of bitter, splenetic, and occasionally comical hostility between them began.

Early in March the Senate formally authorized its Banking and Currency Committee, under the chairmanship of Senator Peter Norbeck of South Dakota, to go ahead with an investigation of Wall Street and bear raids. Instantly Wall Street’s back shot up. At the beginning of April, with the hearings scheduled to begin in hardly more than a week, a group of top-drawer Wall Street bankers headed by Thomas Lamont himself sent an injured memorandum of protest to Hoover, which he rejected in a self-righteous reply. And the very day after he sent this reply, Hoover learned that Wall Street was resorting to a less straightforward method of persuasion. A committee of powerful New York bankers, Republicans all, and actually brought together through the good offices of Secretary of the Treasury Mills, had been organizing a pool to support the badly demoralized bond market and thus help out the Administration in its extremity. Now the committee sent word to Hoover that various “important financial houses” were refusing to join the pool–unless the Senate investigation were called off.

Thus Wall Street in its turn stooped to threats, and in the same act left the implication that it had things to hide. This was a shattered Wall Street, defensive and desperate, very different from the one where Lamont had debonairly waved his pince-nez at reporters on Black Thursday, or the gallant and embattled one that Whitney had so vividly depicted to the country in the early aftermath of the crash. With Lamont reduced to pleading to be spared exposure, with Whitney standing to be scolded before Hoover like a schoolboy by his headmaster, with leading bankers trying their hand at blackmail, the Wall Street of spring 1932 had lost both its exuberance and its sense of responsibility. Walter Gutman has compared the Street at the height of the depression to a Cape Cod beach resort in November–its inhabitants mostly fled, its landscape racked by hurricanes. With business near a standstill between days of panic, with unemployed apple-sellers standing at the very Corner, with responsible jobs in brokerage houses paying as little as ten dollars a week, with the cream of the nation’s youth now avoiding the place like the plague, Wall Street was like a trapped animal: what remained of its spirit was contained in a sullen, dangerous self-protectiveness. Whether Hoover or the Senate ever seriously considered calling off the hearings is not recorded; in any case, a series of dramatic events on April 8, 1932, put cancellation or even postponement out of the question.

That day–a Friday–rumors arrived from Europe of a concerted attack by French speculators on the dollar, allegedly designed to force the United States to follow Britain off the gold standard. Whether as a result of such an attack or merely as a result of the rumor of one, the dollar dropped sharply against other currencies on the international exchanges and the already disastrous drain of gold from the United States accelerated. If the story of the rumor and its effects has a familiar ring in our own time, it only goes to show that some things endure in international money affairs; but in the case of April, 1932, there were further presentiments of skulduggery to add spice. Also on Friday the eighth, the French police suddenly seized all copies of Forces, a scurrilous weekly financial journal published by one Marthe Hanau, a sort of financial Mata Hari who had been imprisoned in 1928 after her banking and brokerage business had been exposed as a bucket-shop operation on a huge scale, and who now, having served her term, was engaged in harassing the dollar by disseminating fiendishly plausible lies. Meanwhile, at home, a rumor of unknown origin spread to the effect that a million-dollar bear raid on the New York Stock Exchange–this one commercially rather than politically motivated–was scheduled for the following morning, Saturday the ninth. In reaction to all this, the stock market, which had already been through a two-week sinking spell as drastic as any during the whole depression period, crashed sickeningly; and in this atmosphere of general crisis and hysteria the Senate Banking and Currency Committee acted. Hearings were precipitately scheduled to begin the following Monday morning, April 11, and Whitney, melodramatically subpoenaed at his home in New York late on Friday, was ordered to appear as the first witness.

On Monday morning he appeared. The haste with which the hearings had been scheduled made for a great deal of confusion; the hearing room was jammed with spectators, some of them sitting on filing boxes, others for whom there were no seats of any kind leaning on the back of the witness chair where Whitney sat. Nationwide, public interest was intense–and, to the annoyance of the Senators and presumably of Hoover too, considerable public sentiment appeared to favor Whitney. He was still, in the public’s view, the gallant Wall Street knight sans peur et sans reproche–an aristocrat worlds apart from the cynical moneygrubbers and manipulators who were the real villains of the crash, and at the same time a strong field marshal who might still be the man to lead the country and its faltering multitudes out of the valley of the shadow. On the printed page his name and his picture were everywhere. A fortnight earlier the artist-reporter S. J. Woolf had depicted him in World’s Work as very calm and masterly, and had commented, “Richard Whitney belongs to [Wall Street’s] seething hubbub, yet strangely is not a part of it.” That week in Collier’s, John T. Flynn wrote of him with grudging respect, “Whitney represents the highest type of Wall Street broker”–the same John T. Flynn who was already known as a radical critic of Wall Street, and who a year later would become an energetic staff member of the very Senate committee conducting the investigation.

By way of further aid to Whitney’s and Wall Street’s cause, the Senators were ill-prepared. Only two of them, James Couzens and Carter Glass, were versed in finance; one of them, who apparently had Richard Whitney mixed up with his brother, thought the witness was a Morgan partner. Their ignorance gave Whitney just the edge he needed, enabling him to turn what was supposed to be an inquisition into an economics lesson. Elegant in bearing, precise in diction, meticulous of grammar and Groton of accent, Whitney lectured them and corrected their errors with weary patrician tolerance. The burden of his position was that there was no need for an investigation, since the Stock Exchange could and did adequately police itself. Although it had no specific rule forbidding bear raids as such, it forbade and punished any action intended to “demoralize the market”–and since that was the precise intention of a bear raid, therefore a bear raid was effectively forbidden. It followed logically, Whitney pointed out dryly, that the supposed raid of the previous Saturday had been nonexistent. “A bear raid,” said Whitney in his most pedagogical tone, “is a violation of the rules of the New York Stock Exchange. And it does not take place.”

Whether he meant that it was mythological like the unicorn or extinct like the dodo, he didn’t say. He scoffed at the stories of Wall Street plots to embarrass the Administration. Once, spreading himself in the course of his patient explication, he depicted himself as a practical farmer, and used an illustrative analogy involving his prize cows in New Jersey. As for short selling, he put forward the standard arguments in its defense, and summed them up by comparing a market without it to a man with one leg. He explained the Exchange’s system of keeping tabs on short sellers, and agreed to submit a list of the names of the current biggest ones. People who disagreed with him on the social and economic merits of short selling might be intelligent, he generously allowed–“but they are wrong.”

So it went at first. But as day followed day with Whitney still on the stand, and still conceding not even the smallest point, tempers began to wear thin. The tribunes of the people, and the people themselves, began to catch the whiff of tyranny. Once, when Senator Couzens suggested that a broker may use his customers’ stock to depress the market, the witness’ smooth brow clouded and he snapped, “I deny that!”–whereupon he immediately recovered himself, smiled, and added, “No broker may do that.” “You brought this country to the greatest panic in history,” asserted Senator Brookhart of agrarian Iowa. “We have brought this country, sir, to its standing in the world through speculation,” Whitney replied icily. On April 21, Whitney’s ninth day in the witness chair, the committee disclosed the names of the 350 biggest short sellers, as contained on the list he had submitted. The names were one more disappointment for the committee since–apart from the redoubtable Sell ’em Ben Smith, who was short 13,500 shares of General Motors, 15,000 of General Electric, 5,000 of Anaconda, and so on–hardly a single one on the list had ever been heard of. “These obviously are dummy names in many cases,” one chagrined committee member commented. That afternoon Chairman Norbeck, his patience exhausted by a typically unproductive exchange, suddenly stormed at Whitney, “You don’t grant that anything in the market is illegal. You don’t grant anything. You’re hopeless.” Whitney beamed benignly. A few moments later Norbeck abruptly dismissed him, subject to recall under his subpoena. Whitney and his counsel, Roland Redmond, were taken aback; they had, they protested, things they wanted to put in the record. “Oh, you will be back,” Norbeck replied–a promise and a threat.

So Whitney and the Exchange came out unscathed. Clearly, he had won, but it was a Pyrrhic victory. One committee member was to comment later that Whitney had been the most arrogant and uncooperative witness he had ever encountered. The monolithic quality of Whitney’s assumption of rectitude, his scarcely concealed sense of superiority to the Senators, the very fact that they had failed to extract even small admissions from him and had been made to look foolish along the way, all fed their frustration, anger, and desire for revenge.

With Whitney back in Wall Street and other witnesses in the chair, the hearings became more productive. Through May and June they went on, and after a six-month hiatus for the political campaign and election they were resumed the following January, to continue almost to the eve of Roosevelt’s inauguration. It was in the course of them that much of what we know about the underside of American finance in the 1920s first came to light. Ben Smith and a fellow speculator, Thomas E. Bragg, explained with a certain defiant glee the ins and outs of the Radio and Anaconda pools of 1928 and 1929; the rise and fall of the Kreuger match empire and the Insull utilities empire, with enormous public losses, were detailed. And, little noticed in the record, there was the recital of a curious, premonitory small episode that threw a fleeting shaft of light onto the relations between Richard Whitney and the firm of J. P. Morgan & Company. A lady named Grace Van Bram Roberts, of Highland, New York, had in 1928 written to the Stock Exchange pointing out that the brokerage firm of Hayden, Stone & Company, adjudged guilty of fraud by the New York Supreme Court in 1920, had never in any way been censured by the Exchange. On behalf of the Exchange, Whitney had replied that he happened to disagree with the Supreme Court’s decision, and therefore intended no censure action against Hayden, Stone then or ever. Now, in November and December, 1932, Miss Roberts addressed her complaint personally to J. P. Morgan the man, as Wall Street’s last court of moral appeal:

Your great house cannot be afraid of Mr. Richard Whitney or of Mr. Charles Hayden; and if you refrain from censure of their acts, you will be understood to approve them. Hayden was adjudged a cheat, and you did not appeal. Whitney is his defender.… For the financial district to defend these cheats is to invite a sweeping condemnation. If the members of this firm had cheated at cards or in a yacht race, they would have been expelled from their clubs. Will Mr. Whitney’s false statements tend to establish public confidence at a time when the stock exchange needs confidence?

More than a month went by, and then Miss Roberts got the following reply:

DEAR MADAM:

Mr. Morgan directs me to acknowledge receipt of your letters of November 16th and December 12th and to say that he has the highest regard for both gentlemen you mention and feels sure that you are misinformed.

Yours very truly,

V. AXTEN, Secretary

So much, then, for Miss Roberts’ complaint and the New York Supreme Court. But how curious, in the light of later events, that she had spoken of a yacht race!

VIII

That winter the doomed Hoover Administration moved swiftly toward its Götterdämmerung. After his election defeat Hoover repeatedly appealed to the President-elect for cooperation in the national interest in time of crisis, but Roosevelt rebuffed these overtures on the ground that what Hoover was asking for was abandonment of most of the New Deal’s planned programs. While the political leaders squabbled, the economy tottered. A conviction that Roosevelt would devalue the dollar led currency speculators and firms with international interests to exchange United States currency in huge quantities for gold and foreign money, causing the Treasury to lose gold at a frightful rate. Meanwhile, ordinary citizens came to fear, with good reason, for the safety of their bank deposits. By the hundreds of thousands, they lined up at the cashiers’ windows to make withdrawals; some of the weaker banks could not meet the concerted demand and had to close; the closings led to more withdrawals from the surviving banks, forcing them to close, and so the panic fed on itself. As early as October, 1932, the Governor of Nevada had to proclaim a bank holiday, and an epidemic of failures in the Western states quickly followed. Early in February came the closing of a group of large Detroit banks that were unnecessarily vulnerable because of the precarious holding-company structure of their ownership. Then things went out of control. On February 14 the Governor of Michigan declared an eight-day bank holiday that prevented access of almost a million persons to a billion and a half dollars of their money. Further bank holidays followed in Indiana on the twenty-third, Maryland on the twenty-fifth, Arkansas on the twenty-seventh, and Ohio on the twenty-eighth. During February those lucky enough to get to their banks in time withdrew in all $900 million, or not quite one-sixth of the amount of currency in circulation at the start of the month. Gold coins, in their last days on the American scene, vanished into private hoarding virtually down to the last five-dollar gold piece.

In sum, the whole complex of coin and currency, of credit and trust, was paralyzed because the trust was gone, and as a result the country was ripe for chaos, revolution, and tyranny. By March 3, the day before the inauguration of the new President, banks remained open in only ten states, and what with insufficient gold left in the coffers to back the currency and insufficient cash left in the Treasury to meet the government payroll, the United States was technically bankrupt.

In the midst of this holocaust Richard Whitney was called back for a reprise before the Senate committee. It was a subtly different Whitney now. Crisis and criticism had changed him; his maddeningly unshakable rectitude had shaded into sourness. On the conduct of the Stock Exchange he was as inexorable as before, but now he felt free to expound his social and moral attitudes, and took every opportunity to do so. What he expounded was not attractive. To restore confidence, he insisted, the national budget must first be balanced; as a start toward that goal, federal spending should be reduced by cutting government salaries and eliminating pension payments to service veterans with disabilities that were not battle-connected.

Looking back on Whitney at this period, we must remember and consider his secret troubles. How vividly aware he must have been of himself as a shell–a public leader of men of substance, a private near-deadbeat! Such realization cannot be comforting to one cast in the role of crisis leader. But as human understanding is imperfect, so is the human capacity for forgiveness. The Senators and the country could not know in February, 1933, that the man advocating a balanced national budget had a spectacularly and shamefully unbalanced personal one. But they could know that a man who spoke as an aristocrat and lived as a millionaire was calling for sacrifices not from his own kind but from those he would have been the first to describe as far below him. By any standard, this was not the gallant knight; this was not noblesse oblige. Wall Street’s long effort to invent an aristocracy seemed to have failed.

Chapter Seven

Gold Standard on the Booze

I

On the eve of the inauguration of the new President, Thomas Lamont (Harvard ’92) telephoned his old friend Franklin D. Roosevelt (Harvard ’04) to suggest that he take no precipitate action on the banking crisis, critical as it might be. It was Friday night, and Lamont believed that the leading banks that still remained open, meaning chiefly the key ones in New York City, could pull through the half business day on Saturday; then perhaps a sweeping change in national psychology might take place over the subsequent day and a half, by opening time on Monday morning a measure of confidence would have returned, and the crisis would be over.

Roosevelt, of course, did not follow this advice. His first act in office was to declare a four-day bank “holiday” (which actually turned out to be eight days long, and for many banks much longer than that). What Lamont had been counting on to restore confidence was, of course, the national impact of the accession to power of Roosevelt and the New Deal. Rather oddly, in the light of later events, Wall Street at that desperate moment clearly had more faith in the restorative powers of the New Deal than the New Deal had in them itself.

Wall Street wanted to be led out of the wilderness, and was in no mood to be particular about the character of its savior. This trusting attitude persisted, even flourished, all through the new Administration’s celebrated first hundred days, when, in a thrilling and unprecedented rush of action, it sent hurtling through Congress the National Industrial Recovery Act, the Agricultural Adjustment Act, the Tennessee Valley Authority, the Federal Home Owners Act, and the Farm Credit Act, along with–measures certainly not likely to evoke wild enthusiasm in Wall Street in normal times–the Banking Act, designed to break up long-established concentrations of money power (including the sacrosanct House of Morgan itself) by requiring the separation of investment banks from commercial banks, and the Securities Act, compelling the issuers of new securities to give the public a detailed account of the risks involved in buying them. After staying closed through eight business days while the worst of the bank crisis passed, the Stock Exchange was back in business on the morning of March 15. When Richard Whitney made the reopening announcement from his presidential rostrum, there was a whoop from the holiday-surfeited brokers on the floor, and in the course of that day’s trading stock values increased by some 15 percent–a larger advance than had ever occurred in any single day during the entire boom of the 1920s. Brokers instantly began talking about the “Roosevelt market,” even though the designation had certain macabre connotations of the “Coolidge market” of a few years back. As the weeks went on, the parallels to the earlier period increased. On April 20, the Exchange’s biggest trading day in three years, the ticker fell far behind in its recording of completed transactions–as it had done so often in 1929. By the end of April thousands of brokerage-office employees–secretaries, clerks, messengers, and the like–who had been laid off and unemployed for the past one, two, or three years, were being recalled to their old jobs. Wall Street was a boom town again, in large part because of the infectious enthusiasm and optimism of the man (not yet That Man) in the White House, who, as one of his associates put it, was “like the fairy-story prince who didn’t know how to shudder.” By mid-July industrial stock averages stood at more than double their Inauguration Day levels, and the four-month rise had been the steepest in Stock Exchange history.

II

Yet during this euphoric period a strange thing, almost unnoticed at first and then progressively more disconcerting and ultimately nightmarish, was happening to Wall Street. Its fixed star–money–had left its regular place in the heavens and begun to wander and dance and lurch. For generations the dollar had been held firmly fixed by a force that was accepted in banking circles as being equivalent to a natural law of astronomy, the gold standard–specifically, by the Treasury’s pledge to redeem dollars with gold in any quantity for all comers at $20.67 per fine ounce. Now, with that pledge temporarily abrogated in the emergency, the dollar was free to fluctuate in the world markets at the whim of speculators, just like some humbler currency, or, indeed, like some untrustworthy common stock. The hundred days marked the beginning of a unique, and for many people hair-raising, period of almost a year during which the most secure wealth for Americans consisted not of gold, which they were now forbidden to possess except for industrial use or in the form of jewelry, and not in money, every possessor of which found himself involved intentionally or not in a game of chance, but in land or goods. Wall Street’s sky had fallen.

It began to fall with a deceptive lack of clatter on Roosevelt’s second day in office when by proclamation he decreed a temporary end to the export or hoarding of gold. This was a technical departure from the gold standard, but the emphasis was on the word “temporary,” and in a time when the panic was causing gold to leave the Treasury for foreign shores or domestic hoarders’ mattresses at a fearful rate, few even among the flintiest of bankers questioned the expediency of the move. With the very banks closed, the gold embargo seemed a comparatively minor matter; naturally, it would end when the banks reopened, or shortly thereafter. “It is ridiculous and misleading to say that we have gone off the gold standard,” Secretary of the Treasury William Woodin reassured the nation shortly after the President’s proclamation. The Times of London, whose nation had been off gold for a year and a half, pronounced that the prospect of the United States’ taking a similar course now was “so unlikely that it may almost be left out of account.”

What was misjudged by everyone in Wall Street, and for that matter by almost everyone in the New Deal up to and including Roosevelt’s closest monetary advisers, was the stubbornly fixed purpose behind his temperamental attitude toward money matters. In the Presidential campaign the previous year he had vied with Hoover in proclaiming his devotion to “sound money,” which presumably meant the gold standard; on the other hand, in January, two months after his election, he had said to a journalist that if the depression continued “we may be forced to an inflation of our currency,” which sounded like just the opposite. His intimates were all but unanimous in their agreement that he combined virtual illiteracy in monetary affairs with unshakable confidence in the superiority of his own offhand notions about it to the accepted wisdom of the experts; that he treated the subject of money as a casual, rather amusing game that alternately bored and fascinated him; and that the game tended to bring out his strain of sophomoric humor. As one of the advisers, an accepted-wisdom man, put it, “You were up against a compulsive drive to do something in this area without ever being able to pin the man down so that he would really think about it.”

The advisers themselves were a mixed lot. There was Secretary Woodin, a shrewd, folksy former industrialist from Pennsylvania, certainly not known for unorthodox economic ideas. There was Lewis Douglas, Director of the Budget, a hard-shelled sound-money man if there ever was one. There was Assistant Secretary of State Raymond Moley, former professor of public law at Columbia, and chief of the famous pre-election “brains trust,” an ambitious, egotistical activist with a slightly sardonic gleam in his eye, who was supposed to outrank all others in access to the President’s ear. (“Moley, Moley, Moley, Lord God Almighty!” sang the Washington wits who knew the Hymnal.) There was Herbert Feis, astute and orthodox, economic adviser to the State Department since 1931 and the New Deal’s only important holdover from the Hoover Administration. Serving without portfolio until later in the year, there was Henry Morgenthau, Jr., Roosevelt’s old upstate New York neighbor and friend, the product of a family distinguished in diplomacy but as much of an innocent in monetary affairs as the President himself. And then there was the shadowy, publicity-shy figure of George Frederick Warren, professor of agricultural economics and farm management at Cornell; he had some odd and highly original ideas about government management of the relationship between commodity prices and the gold value of the dollar. These he was able to press upon Roosevelt and Morgenthau as a result of relationships that had begun, in Morgenthau’s case, when the latter had been a student at Cornell; and in Roosevelt’s case, it was said by Mrs. Morgenthau, when Morgenthau had brought Warren and one of his Cornell colleagues to Hyde Park to give expert advice on how to plant trees. “How different life would have been had Franklin and Henry not met those arboreal experts!” Mrs. Morgenthau remarked years later.

Finally, there were two men of Wall Street, one of them serving Roosevelt by choice and the other as a result of circumstance.

Jimmy Warburg, the spirited, song-writing young Lochinvar of Wall Street in the twenties, now at thirty-six the president of the International Acceptance Bank, had met Moley through Roosevelt’s son James, whom he had known for some years. In February, 1933, Moley brought Warburg along with other potential aides to the President-elect’s house in New York City. “Which of you gentlemen is Ikes?” Warburg recalled later that Roosevelt had asked at that meeting, whereupon the future Secretary of the Interior had stepped forward like a private at roll call to identify himself and diffidently correct the pronunciation of his name. Later, Roosevelt said to Warburg, “Ray Moley tells me that you are the white sheep of Wall Street.” Warburg replied modestly, and with characteristic quick wit, that the distinction belonged more properly to his father, and that, so far as he knew, a white sheep did not necessarily beget white lambs. Roosevelt was delighted with this response, and shortly thereafter offered Warburg the job of Under Secretary of the Treasury. Warburg turned it down for personal reasons; nevertheless, although he knew he risked ostracism in the street of black sheep where he had his career, he took leave of his bank, moved into the New Deal’s pet Carlton Hotel in Washington as an unofficial, unsalaried White House monetary adviser, and thereby became virtually the sole surviving strand of the old tradition of Wall Streeters high-mindedly in the nation’s service.

The other Wall Streeter–George Leslie Harrison, Benjamin Strong’s successor as governor of the Federal Reserve Bank of New York–cannot be counted as a preserver of that tradition because he made no choice to join the New Deal, nor was he chosen; his job itself, ostensibly outside politics and not subject to political appointment or dismissal, was the only permanent one directly linking the center of finance to the center of government. His office was in the heart of the Wall Street area–in that area’s most imposing structure, the New York Fed’s Florentine palazzo on Liberty Street–and his duties included serving as the government’s banker in all foreign dealings, so he and the new President were stuck with each other whether they liked it or not. A Yale and Harvard Law School graduate, a former legal secretary to the legendary Justice Holmes, a careful bureaucrat and a tactful diplomat, Harrison was a handsome, heavy-set, pipe-smoking, crinkly-eyed, confidence-inspiring sort of man–the more confidence-inspiring, perhaps, because he walked with a limp as a result of a childhood accident. He was destined over the months ahead to have his talent for diplomacy put to the comically excruciating test of adjudicating among Roosevelt and his wilder-eyed henchmen, the irascible commercial bankers of Wall Street, and the lordly central bankers of Europe.

III

In April there were rumblings from the West, and resounding echoes of them in Washington. The nation’s farmers were in a state approaching open revolt. Prices paid for their output had fallen piteously low–the index of wholesale farm commodities stood at about 40 percent of its 1926 level–and as a result, they were caught in a seemingly hopeless bind. Even though they sold every crop they grew, the prices were insufficient to meet their mortgage payments, and they were being dispossessed by the tens of thousands. There began to be incidents of violence; one day late that month, in Le Mars, Iowa, a mob of masked farmers dragged a judge from his bench to a crossroads and nearly lynched him in an effort to force him to promise to stop signing mortgage foreclosures. But criminal assaults on legal authority could serve no purpose; what the farmers chiefly needed was the classic remedial measure for debtors in hard times–a deliberate governmental inflation of the currency such as Bryan had preached so long and so eloquently, that would raise prices and enable the farmers to pay off in cheap money the debts they had contracted in dear money. Inflation talk raged in Congress, and came to a climax in an amendment to the Agricultural Adjustment Act offered by Senator Elmer Thomas of Oklahoma, authorizing the President at his discretion to issue greenbacks or resort to practically any other known inflationary measure.

To hard-money men in and out of Wall Street the Thomas Amendment meant financial anarchy. Its adoption would mean that the country had definitively abandoned its monetary religion since 1879, the gold standard. But there seemed to be no indication that Roosevelt wanted the Thomas Amendment or that any similarly drastic move was in the wind; on the contrary, during the first half of April government licenses to ship gold abroad in spite of the embargo were issued to several banks, apparently indicating a gradual return to the old gold standard. Then on the evening of the eighteenth, Roosevelt held a White House meeting ostensibly to discuss the forthcoming International Monetary and Economic Conference, plans for which had been inherited from the Hoover Administration, inviting to the meeting, among others, Secretary of State Cordell Hull, Secretary of the Treasury Woodin, Moley the Almighty, and the monetary men Douglas, Warburg, and Feis. It developed that the President had other things than the conference on his mind when he unexpectedly instructed Moley to prepare the Thomas Amendment for Congressional passage and his signature. Then, turning to the rest of the group, Roosevelt blithely informed them that the country had just “gone off gold” and asked them to congratulate him.

They didn’t; instead, according to Moley, “hell broke loose,” with the trio of monetary experts, in despair at the casualness with which the momentous step seemed to have been taken, frantically lecturing Roosevelt on the pitfalls and horrors of inflation for two solid hours, and even finally invoking the ghastly example of Germany in 1923, when the worst inflation in history had caused a state of chaos in which skilled workers had gone on strike for the equivalent of eight cents an hour and the going price for a luncheon chop, on one occasion, had risen from 600,000 marks one day to 1,500,000 the next. But Roosevelt, seemingly rather entertained by the storm he had provoked, remained coolly adamant. Later, after walking the streets with Warburg most of the night, Douglas exclaimed sepulchrally, “This is the end of Western civilization.”

Next day came the public announcement that the country was off the gold standard, and, from Wall Street, some astonishing reactions. The stock market leaped ahead in wild trading. That was logical enough; if the dollar was going to be cheaper–and leaving the gold standard could mean nothing else–then it made sense to transfer one’s assets out of dollars into stocks, and quickly. What was more astonishing was the total absence of anguished or angry protest from Wall Street on ideological grounds. The big bankers, the Wiggins and Mitchells, who only a few years earlier would surely have been howling for the President’s impeachment, had apparently been so reduced in self-assurance by the depression and its panics that they were humbly silent while their world toppled under this casual push from the White House. What was “the end of Western civilization” to a leading government bureaucrat was a matter for no comment by those whose stake in the thing meant by “Western civilization” was greatest. George Harrison, starting his career as the man in the middle, gingerly explained to the Federal Reserve officials that Roosevelt had acted because “something had to be done to prevent Congressional excesses,” and the officials meekly accepted the explanation. What was most astonishing of all, though, was the swift and decisive approval of Roosevelt’s move by the greatest banker of them all. From 23 Wall came a public message signed by J. P. Morgan–apparently the only formal statement of his career, apart from one that had followed British devaluation in 1931: “I welcome the reported action of the President.… It seems to me clear that the way out of the depression is to combat and overcome the deflationary forces.”

“Number 23” had spoken; heresy was enshrined, and, as a result, Wall Street remained calm. Whatever else it was, the Morgan statement represented a master stroke of government-business cooperation. But how in the world had it come about? Had the champion of hard money, the very prince of creditors, undergone some kind of conversion and become overnight a sort of Wall Street Bryan–an inflationist champion of the downtrodden debtor class? It was sheerly impossible. Was the House of Morgan, then, engaging in secret conniving and deal-making with the White House, as it had allegedly done so often during the Coolidge and Hoover Administrations? Interestingly, a newspaper column by the prodigiously influential Walter Lippmann, expressing the view that maintenance of the gold standard would only worsen the depression, had appeared on the very morning of the day of the fateful White House meeting–and Lippmann was known to have close ties with the House of Morgan. Such a hypothesis is intriguing but not convincing. After all, Roosevelt in his campaign had caustically criticized the ties between Hoover and Morgan’s, and (it came out much later) had even rejected his friend, the Morgan partner Russell Leffingwell, as a possible Assistant Secretary of the Treasury on the ground that “We simply can’t tie up with ‘23.’” More likely, the explanation for this most enigmatic action of Morgan’s life, and perhaps the most enigmatic in the House of Morgan’s long history, lies in a private letter Leffingwell wrote Roosevelt a few days later in which he said, “Your action in going off gold saved the country from complete collapse.” It would seem, then, that the feeling at “23” was that a time had come when only heresy could save the temple itself from falling along with everything else. If so, the Morgan statement was a statesmanlike act, the climax–and perhaps the end–of the best old Wall Street tradition.

Now the dollar was a speculative security; anyone who owned it was playing a volatile market. It could no longer be exchanged for gold, but, in the foreign-exchange markets in the European capitals, it was still exchanged freely and regularly for French francs, which were still firmly tied to gold. From the relationship of the current, fluctuating dollar-franc rate to the old fixed rate when the dollar, too, had been on gold, it was possible to calculate each day just how much the dollar was now worth in terms of gold. Immediately after Roosevelt’s announcement the dollar dropped to 88½ cents; it steadied for a while, then fell further during May when the Thomas Amendment was signed, making inflation formally the law of the land, and in early June it stood at 83 cents. Domestic commodity prices meanwhile rose somewhat, and the farmers felt better. But the monetary authorities of Britain and France were shocked–the British fearing that a cheaper dollar would undermine the world trade on which they relied for survival, and the French that it would force them, too, to go off gold. Roosevelt, thinking above all of domestic problems, had chosen monetary nationalism over internationalism; yet even so, he allowed plans to go forward for United States participation in the International Monetary and Economic Conference, and between June 12 and July 23, at the Geological Museum at Kensington, London, the conference took place.

Attended by delegations from sixty-six nations along with platoons of staff and experts–more than one thousand persons, all told–it was structurally the greatest international assemblage since Versailles. All the more anticlimax, then, when it proved to be a memorable disaster and farce. As originally planned by Hoover and British Prime Minister Ramsay MacDonald, it had been intended to discuss world currency stabilization and the reduction of trade barriers, but now there were no clear limits to its agenda. The United States delegation was a magnificently ill-assorted lot. Its chairman was Secretary of State Hull, whose idée fixe was reciprocal reduction of tariffs, a matter that it was now not clear whether or not the conference would take up at all. Among its members were James M. Cox, former Governor of Ohio and Democratic Presidential candidate in 1920, a devotee of monetary orthodoxy and low tariffs; Senator Key Pittman of Nevada, a survival of the Old West, a silver fanatic, and a high-tarift man; Senator James Couzens of Michigan, onetime partner of Henry Ford and another high-tariff advocate, making the delegation score on that particular issue an even 2–2; Ralph W. Morrison, a Texan with no visible qualifications of any sort for membership; and Representative Samuel D. McReynolds of Tennessee, chairman of the House Foreign Affairs Committee but a monetary illiterate. No member of this motley crew had ever attended an international conference before, and, moreover, Roosevelt was keeping his intentions so secret that they apparently set out for this one without specific instructions, each man free to ride his particular hobbyhorse to his heart’s content. The delegation did have an expert staff–an able group of monetary conservatives including Warburg, Feis, Harrison for the Federal Reserve, and Oliver M. W. Sprague for the Treasury.

Even on shipboard on the way to London, the delegates fell to wrangling among themselves so constantly that reporters on board predicted disaster for the conference and called the vessel a “funeral ship.” The conference had no sooner convened than an international dispute erupted between the gold-bloc countries, conspicuously led by France, which clung to gold with almost mystical fervor, and those who were off gold and favored greater flexibility, led by Britain and the United States. As the days went by without guidance from Washington, the American delegates became progressively more eccentric and unruly. Hull kept pleading doggedly for lower tariffs, but hardly anyone listened to him. Pittman, between set speeches in favor of silver coinage, was usually quarrelsome and often drunk; on one occasion he amused himself, Western style, by shooting out the street lamps on Upper Brook Street, and on another, informed that it was improper to wear a raincoat to meet royalty regardless of the inclemency of the weather, he nevertheless wore one to a Palace garden party, declaring loudly, “I ain’t going to get soaked for no king and queen.” (The King and Queen were delighted with him and his raincoat, or pretended to be.) McReynolds seldom attended conference sessions, concentrating instead on arranging to get his daughter presented at Court. At least one of the delegates was thought to be passing inside information obtained at the conference to associates in New York for purposes of speculation. The arrival of Moley, unexpectedly and dramatically dispatched to London by Roosevelt in mid-conference, led to a series of undignified rows between him and Hull, who had become bitter rivals and enemies, and to a comical competition between them to determine who could send the most sycophantic cables to Roosevelt. Behind the scenes, meanwhile, Warburg, Harrison, and Sprague, along with the monetary authorities of the European countries, were doing just about the only substantive business of the conference–trying to arrive at some sort of agreement to stabilize, even temporarily, the relationship between their currencies and thus end the state of chaos in the exchange markets.

Wall Street, knowing only what it read in the newspaper dispatches from London, was dismayed to the point of paralysis. On days when rumor said that a stabilization agreement was near, the dollar would go up and stocks would go down; on days when the stabilization talks were said to be going badly, the dollar would go down and stocks up; on days when there were no new rumors, everyone would hold his breath and wait. At the end of June, the word was that a joint declaration of the major powers on stabilization had been agreed upon and was being prepared for publication. At this moment, on the very verge of accomplishment, the conference suddenly exploded into fragments when Roosevelt, from aboard the cruiser Indianapolis off the Atlantic Coast, wrote out by hand and sent the conference what came to be called the bombshell message, in which he called the stabilization proposal “a purely artificial and temporary expedient” based on a “specious fallacy,” denounced the “old fetishes of so-called international bankers,” and made it clear that the United States was not prepared to enter into any stabilization agreement whatever. Although it would drag on for three more weeks, the conference was over in everything but name.

The representatives of the gold-bloc countries were dumfounded. Prime Minister MacDonald was so upset that the King was moved to comfort him by saying, apropos of Roosevelt, “I will not have these people worrying my Prime Minister this way.” All members of the United States delegation were completely demoralized at seeing their work go up in smoke except for Pittman, who hadn’t liked the idea of stabilization anyhow. The celebrated John Maynard Keynes, a veteran opponent of the gold standard, was almost alone among leading economists anywhere in pronouncing Roosevelt “magnificently right.” To a stunned and disillusioned Warburg, the Roosevelt message seemed “one that could not possibly have come from the man whom I had learned to love and admire”; three days later, just before leaving London to sail for New York, he resigned as financial adviser to the delegation on the ground that “we are entering upon waters for which I have no charts and in once in golconda which I therefore feel myself an utterly incompetent pilot.” And in the exchange markets the gold value of the unstabilized dollar dropped in two days to 73.4 cents, its lowest point since the Civil War.

IV

The method in Roosevelt’s madness, while it would remain opaque to Wall Street for three more months, began to reveal itself to his closest advisers during July. He had, it seemed, torpedoed the London conference on purpose; in fact, in retrospect it appears that he may have been considering such a move since before it had begun, inasmuch as his later moves make clear that he did not want the dollar tied to the pound and the franc any more than he wanted it tied to gold. (In mid-June, before the conference, he had privately offered to stabilize with sterling at $4.25 per pound, but had apparently been bluffing, and his bluff had not been called.) Roosevelt’s opposition to stabilization was based on the fact that it would limit his freedom of action at home. It would restore order to the foreign-exchange markets at the cost of much of his power to bring about domestic inflation. Nowadays when we think instinctively of inflation as a prime bugaboo, it is hard to conceive of those days when deflation was the problem, and inflation–or, more delicately, reflation–was held a worthy and necessary objective by the majority. Roosevelt considered it an objective worth almost any price to attain.

His domestic plans, it began to appear, were intimately connected with the theories of Professor Warren of Cornell, who by the end of July had become one of his closest economic advisers. Warren was–or else played at being–the archetype of the American hayseed, down to earth in every sense. Born on a farm in Nebraska in 1874, he had graduated from the University of Nebraska with a degree in farm management, written a number of books and pamphlets with such earthy titles as Alfalfa, An Apple Orchard Survey of Orleans County, and Some Suggestions for City Persons Who Desire to Farm, and since 1920 had served as professor of agricultural economics and farm management at Cornell. In 1933 he was a stocky, smooth-faced man approaching sixty, who peered through round spectacles with narrow black rims with a steady, vacuous gaze slightly reminiscent of Calvin Coolidge’s, and, invariably, carried a clutch of pencils with the ends sticking out of the breast pocket of his coat. He was given to careless dress, homely witticisms, and pithy, irrefutable sentences like “Here is a farm, here is a farmer, and here are the facts.” He was a master of that classic kind of rural American apothegm that is portentously delivered, as if it were a scintillating epigram, and that is numbing to an urban listener precisely because it seems to him to be not quite pointless; it makes a sort of oblique approach to sense, then veers away again. For example: “You paint a barn roof to preserve it. You paint a house to sell it. And you paint the sides of a barn to look at–if you can afford it.” (Smiles and wise, appreciative nods.) Warren himself had a large farm outside Ithaca on which he kept some four thousand chickens, and liked to characterize himself as a “dirt farmer.”

The Warren theory that bewitched Roosevelt was contained in a book entitled Prices, which he had written in collaboration with a younger Cornell colleague, Frank A. Pearson. It had the alluring simplicity of a syllogism. The prices of commodities, Warren and Pearson postulated, went up and down automatically with the price of gold in terms of paper currency, and as evidence of this they adduced a bewildering array of historical statistics and charts going back beyond the California and Australia gold rushes of the middle nineteenth century to the Spanish Conquest, and even further. Therefore, they concluded, all one had to do to control the price of commodities was to control the price of gold. In the present situation, the theory logically concluded, this meant that the government should go into the market and buy gold at progressively higher prices, thus forcing the gold value of the dollar progressively down and–if the theory was right–achieving the objective: higher prices of commodities. The ultimate goal was a “commodity dollar”–one that, through government manipulation of the gold price, would be kept constant in terms of goods rather than in terms of gold as was the case under the gold standard.

To orthodox economists, most of Roosevelt’s economic advisers included, the Warren theory’s syllogism was a false one. Commodity prices had usually moved with gold prices, they conceded; but the catch was that commodity prices were the cause of this conjunction and gold prices the effect. To reverse the roles by trying to make gold prices affect commodity prices was like a man in a building lobby trying to move an elevator from floor to floor by pushing the indicator dial from place to place: it wouldn’t work, and it could easily end up ruining the whole mechanism. Warren, then, was to the orthodox economists just another example of a hardy, perennial, and surprisingly numerous American species, the monetary nut. Of course, the orthodox economists could not prove their point empirically, since nothing like the Warren theory had ever been put into practice. Or not quite. In 1869 Jay Gould–the Mephistopheles of Wall Street, as Matthew Josephson called him–in attempting to bribe President Grant’s brother-in-law to help him corner the nation’s gold supply, had piously argued that market operations to force up the gold price would undoubtedly bring about great public benefit by inflating the price of Western grain. But Gould’s real concern had been not the welfare of farmers but his own illegal enrichment, and the chief effect of his plot had been not public benefit but the worst money panic in American history up to that time.

Moreover, Gould’s maneuver had been a matter of private manipulation rather than government action, and his premature adoption of the Warren theory had been an excuse rather than a reason. As to government policy, nations had often before 1933, and have often since then, intervened in the markets to defend the value of their currencies; conversely, over the years they have often deliberately lowered the relative value of their currencies in order to gain competitive advantage. But no nation had ever mounted a systematic and concerted attack on its currency, in a time when its gold stocks were ample, for the sole purpose of creating domestic inflation and thus helping debtors. They had not done so because the idea was so outlandish it had never occurred to them. If it had, it would have appeared to their economic ministers as about as sensible as repeatedly hitting oneself on the head with a hammer so it would feel good when one stopped.

Roosevelt’s fascination with Warren (whose sincerity no one doubted, or could possibly doubt) had begun before the inauguration, and continued during the first month after it. When Moley wrote later that during that March Washington had become a Mecca for “goo-goos of all types” who took the New Deal to be “a kind of crusade which the discontented of every variety were invited to join,” he did not mention Warren as one of the goo-goos, but no doubt had him in mind. During April and May Warren’s star appeared to wane–only to wax again. In mid-June, Fred I. Kent, foreign-exchange head of the Federal Reserve Bank of New York, felt called upon to warn in a speech that the idea of raising farm prices by reducing the gold content of the dollar was fallacious in principle and would lead the nation to disaster if attempted. It is illogical to suppose that Kent would thus go out of his way to attack a theory that was not current in government circles at the time. By midsummer Warren, although holding no official post, was unmistakably occupying a prominent place in the Presidential picture. On vacation from Cornell, he had his own office in the Department of Commerce building in Washington, where he pored over his charts and behaved like a hermit, refusing to answer his telephone, and responding to knocks on the door with a firm if self-refuting “Not in!” Some said he entered and left the White House by levitation; at all events, he was never seen doing so.

As the market value of the dollar eroded of its own accord during May and June, the prices of farm commodities rose sharply. Roosevelt let a few of his aides know that he was delighted with this combination of events. He did not say precisely why he was so delighted, but the aides were afraid that they could guess. Here was practical evidence that his new pet theory was working out just as it was supposed to–or at least the first half of it was. But in mid-July came a disconcerting reversal. Suddenly, for no very discernible reason except the collapse of the London conference, the New York stock market suffered its biggest setback in more than a year, bringing the “Roosevelt market” to an end; the dollar rallied slightly against gold; and, worst of all, commodity prices abruptly changed direction. Between July 18 and 21, wheat went down from $1.24 a bushel to 90 cents, its sharpest slump in years, and cotton from 11¾ cents a pound to 8 cents. Seditious mutterings were heard again from the West. And at this point, it seems clear, Roosevelt’s resolve to tinker with the dollar stiffened. The free market could not be trusted to continue depressing the gold value of the dollar. It would be necessary to put the second, activist part of the Warren theory into practice; it would be necessary, that is, for the United States Treasury to stage a bear raid on the dollar.

No one had more than an inkling of Roosevelt’s plans at the time. Warburg, although through with the conference, was still anxious to make his banking expertise available to the government; he was, after all, the only man with practical banking experience among Roosevelt’s economic advisers, and he thought he might at least serve as a sort of ballast to the high-flying theorists. On shipboard en route home from the conference, he read Warren’s writings for the first time. (They had been sent to him not by Roosevelt but by the Committee for the Nation, a rabidly inflationist organization with which Warren had been loosely associated for about a year.) Warburg was not surprised to find that his opinion of the Warren theory coincided with that of the great Keynes, who had told him just before his departure from London that he considered it “rubbish.” (This despite the fact that Keynes was known for certain inflationist leanings of his own.) Warburg, on going to lunch at the White House late in July, received confirmation of his worst fears about the company the President was now keeping when, on being ushered into the President’s office, he found him in conversation with Warren and Professor James Harvey Rogers of Yale, the proponent of a slight variant of the Warren theory. After Roosevelt had gaily introduced Warburg to the two theorists, they left, whereupon Warburg began remonstrating with the President about his message to London. Roosevelt reacted first angrily, then airily. “He takes the whole currency question very lightly,” Warburg wrote in a pained diary entry.

Roosevelt’s parting instructions to Warburg were to get together with Warren and Rogers during the next week, and then report back to him at Hyde Park early in August. Accordingly, Warburg gritted his teeth and spent the following evening with the professors in New York. For the son of the “father of the Federal System”–a family situation that seemed to make him a blood brother of the Federal Reserve System–the evening was a matter of finding oneself in Hell and taking some comfort in discovering that the Devil wasn’t as bad as he had been painted. Warren and Rogers didn’t seem to be as radical as he had feared, Warburg found; moreover, as he wrote afterward, he found Warren “earnest and well-intentioned,” “anxious to help,” and “not dogmatic or bumptious.” Arriving at Hyde Park ten days later, according to instructions, who did Warburg–no doubt wincing slightly–find there with the President but Warren and Rogers? Despite their presence, to Warburg the occasion was an entertaining one; Warren, to Roosevelt’s evident beguilement, produced “countless scrolls of tissue paper on which [he] had traced all sorts of curves and diagrams,” while Rogers kept smiling enigmatically and nodding his head. The three economists argued their conflicting ideas back and forth; the upshot was that the President said he wanted Warren and Rogers to go to Europe for a month or so to sound out opinion there on American monetary policies, while Warburg was to become a key member of a special, high-level Presidential monetary study group that was being formed. Was this exile for Warren and Rogers? Or the runaround for Warburg? None of them knew. Afterward, Warburg and Warren shared a taxi to the railroad station–epitomes, to a degree, of the two antagonistic forces that had always dominated American economic life up to then, the financier and the farmer. Warren said ruefully to Warburg, “Well, I guess you ruined my plan.” “On the contrary,” Warburg replied, “you have won.” On Wall Street, the innocent stock market, quite unaware that gods up the Hudson were trifling with its fate, held steady.

Meanwhile, farm prices went on dropping. In the first half of September, as rumors spread more and more insistently that Roosevelt was planning to do something of an inflationary nature, the dollar sank sharply–on the eighteenth it stood at a new low of 63¾ cents relative to gold–and farm prices turned up again, but not enough to satisfy the President. Late in the month Warburg visited him at the White House to plead with him for the last time not to try out the Warren theory. Roosevelt responded to his protests by saying, “If we don’t keep the price of wheat and cotton moving up, we shall have marching farmers,” and then challenged Warburg to say what he would do to raise prices. Warburg had to admit that he had no panacea; general recovery, which could be started only by removing this nerve-racking uncertainty about the currency, was the only way. This left Roosevelt cold. Well, Warburg then asked, would the President have any objection if Warburg were to take steps to stir up public sentiment against further inflation, through the agency of the big banks and life-insurance companies? That is–in effect, though not in Warburg’s words–how would Roosevelt like to have a well-financed public attack launched against his favorite economic policies? The President replied emphatically, but not without delicacy, that such action “would only create complications.” Warburg left the White House believing that he would never see the President again; although not yet an opponent of the New Deal in toto, he was now the prototype, the advance drummer boy, of the splenetic Wall Street Roosevelt hater who was to become a folk figure of the decade. Warburg’s departure from Roosevelt’s office that day has a symbolic impact something like that of Ibsen’s Nora slamming the door.

From then on there was no restraining Roosevelt from his purpose. As early as mid-August, a week or so after the Hyde Park meeting, he had mentioned to his friend Morgenthau, by that time Farm Credit Administrator, that he would like to have the Treasury buy gold in the open market to force its price upward. (Morgenthau had demanded whose idea that was, and Roosevelt had replied, blandly, “Mine”–an answer that suggests both defensiveness and sheepishness about his adherence to the economically disreputable Warren theory, since both men knew perfectly well whose idea it was.) Now he pressed forward, brushing aside some formidable legal obstacles to the prosecution of the plan by arranging for the gold purchases to be made not directly by the Treasury but on its behalf by the Reconstruction Finance Corporation. When the dollar turned bullish again in October, rising obstinately to around 72 cents, matters came to a head. Over the grim objections of Acting Secretary of the Treasury Dean Acheson, who was to resign in a rage less than a month later, Roosevelt on October 19 told his aides that the RFC gold-buying was about to begin; and three days later, in a “fireside chat” on radio briefly expounding the Warren theory (although the shadowy professor went unmentioned), he announced the program to the public. To the end of depressing the dollar and raising commodity prices, he said, the RFC would buy all gold newly mined in the United States at “prices to be determined from time to time,” and, when necessary, would also buy it in the world markets through the Federal Reserve Bank of New York. “This is a policy, not an expedient,” he added, as if to deprive the flinty international bankers and their hard-money allies of any crumb of comfort. And thus the stage was set for the whole national economy to become Professor Warren’s test tube, in a period that Keynes would describe as “a gold standard on the booze,” and of which the New York Times would say contemporaneously that it was characterized by “a sense of unreality,” and five years later would add as a postscript, “There is probably no instance in history of so bold an economic experiment.”

V

The first national reaction to the announcement was general bewilderment. Those closely involved in the events leading up to it reacted predictably; the archinflationist Senator Thomas, for example, was overjoyed, and Warburg, listening to the “fireside chat” at a friend’s home in Chicago, felt as if he had been dealt a body blow. But the lay public and the newspapers were hopelessly divided and confused. Even Wall Street itself seemed to be puzzled rather than outraged–stunned, indeed, into a momentary trance. Many leading bankers, according to the Times, “confessed themselves unable to understand the full import” of the plan. If the bankers couldn’t understand it, who could? One of them said that he “saw in the President’s announcement nothing which departed in any way from orthodox financial principles”–a comment that has a certain Zen quality, as if the banker had searched for, and found, a response that had a flabbergasting illogicality commensurate with the challenge. The House of Morgan was silent now; indeed, not one of the celebrated spokesmen of New York finance, Thomas Lamont or Richard Whitney or Otto Kahn, could find his tongue–an extraordinary and enlightening historical anomaly, since in reality the Roosevelt program was not all that confusing; perfectly clearly, it represented a direct assault on the very thing that Wall Street held most sacred, sound money. True, there was a practical reason for caution: Wall Street and the New Deal were already moving fast toward a head-on confrontation on the matter of federal regulation of the stock market, and it may not have seemed the politic moment to open up a second front. Washington was learning something, then: depression-riddled Wall Street, for all of its famously crusty old lions, could be taken by storm.

On October 25 the great experiment began. That morning and on each subsequent weekday morning, Roosevelt, Morgenthau, Jesse Jones, head of the RFC, and sometimes Warren, met in the President’s bedroom and, while the President ate breakfast, decided on the price at which gold would be bought that day. At first, operations were only domestic, and the world gold market was left to its own devices, in the hope that it would tend to conform to the U.S. government price without intervention. The little group in Roosevelt’s bedroom would simply decide, more or less arbitrarily, a gold price a few cents above the previous day’s free-market price, and upon concluding their deliberations would announce to the world the sum the RFC was now prepared to pay for all newly mined gold in the United States–that is to say, presumably all of the gold available for sale in the country now that private hoarding was illegal.

On the first morning, the price was set at $31.36 an ounce, 27 cents above that day’s world price. (The old gold-standard price had been $20.67; the difference represented the amount that the dollar had depreciated in the markets since April.) Obedient to the theory, commodity prices rose. On the second day, the gold price was edged up 18 cents more, but commodity prices declined. What was this? Surely a disconcerting reaction in the test tube? Or perhaps only some sort of temporary aberration; government officials let it be known that they were not downhearted. Next day the gold price was upped 22 cents. Commodities rose again. But another disturbing phenomenon was beginning to appear: the world exchange market was showing a tendency to disregard the RFC price and to arrive at a separate daily valuation for gold in terms of the dollar, suggesting all too plainly that the RFC price of domestic gold was of no great importance and could not have any permanent effect on anything. There were really two dollars now, the Warren dollar and the foreign-exchange dollar. This was alarming, in that it raised the prospect that the RFC might have to abandon its strict confinement to domestic operations and go directly into the world market, an act that might be interpreted by Britain and France as outright economic warfare. On the following day, a Saturday, the gold price was advanced 6 cents more, and commodities declined again. Professor Warren’s actions, and even his location, are unknown, but it stands to reason that he was scratching his head.

Meanwhile in Wall Street, confusion still reigned. The general feeling was based on negatives: the latest earnings reports of industry were dreadful, but the prospects for the stability of the dollar, all things considered, looked even worse, and consequently the stock market rose somewhat. Everybody in the Street was spending his odd moments trying to guess exactly how the amount of the daily gold price rise was being determined. Those engaging in this interesting activity could hardly have been reassured if they had known the truth. As they learned it years later from Morgenthau’s diary, one day he came into the daily breakfast meeting and suggested an increase of somewhere between 19 and 22 cents. Roosevelt proposed 21 cents. “It’s a lucky number,” he explained, cheerfully, “because it’s three times seven.” A touch of numerology was perhaps all the program needed.

In his private counsels with Warren, however, Roosevelt seems to have been less cocky; indeed, it appears that he demanded of Warren exactly why the theory wasn’t working. Warren appears to have replied doggedly that all that was needed to make it effective was to extend the gold-buying into the world markets. On October 29, five days after the campaign had begun, Roosevelt announced his intention to do just this, with the RFC to make its purchases daily in London and Paris through the normal agent of the Treasury in foreign-exchange dealings, the Federal Reserve Bank of New York. This would amount to introducing a far more volatile chemical into the test tube–perhaps even an explosive one. Immediately there was an anguished outcry from the British and French, whose own currencies would now beyond any question be competitively disadvantaged. “If it went far, it would be necessary for us, from a trading point of view, to do something also,” Sir Robert Home, Britain’s former Chancellor of the Exchequer, warned the Bond Club of New York, adding, “Believe me, it would not be done in any respect in the shape of retaliation. You must not think of that. But we have got to defend our trading position.” What the tactful ex-chancellor was saying, in effect, was that Britain might be forced in self-defense to mount a similar bear raid on its own currency. Hitting oneself on the head with a hammer was a game that two could play.

So began the agony of George Harrison, the man in the middle. As a good bureaucrat, he had the duty to carry out the outlandish policy. Meanwhile, he found himself simultaneously trying to explain and justify it to the outraged European bankers, damp down insofar as possible the protests of the bewildered Wall Street bankers in whose midst he lived, and use whatever influence he had to get the President to cease and desist from it. At least he had his heart in the last role; sound and conventional banker that he was, he personally loathed the policy. Moreover, with Warburg out of the picture he remained as almost the lone sound-money man among those who had Roosevelt’s ear.

On November 2 the first world-market orders for gold were placed. The price and amount of the order were kept secret, in order to achieve maximum effect and not tip off speculators; and, as planned, the dollar weakened in the foreign markets. From Liberty Street, Harrison kept the international telephone wires humming as he tried to calm down the French and British to abstain from retaliation. Robert Lacour-Gayet of the Bank of France told Harrison on the phone that the French simply couldn’t grasp what was going on in Washington; he had, he said aggrievedly, been called upon to explain the new American policy to the French press, and had found himself at a loss since he couldn’t make head or tail of it himself. The most comfort Harrison could offer was to say that the gold purchases would be made in as orderly a manner as possible. As for Governor Norman of the Bank of England, when he had first heard of the plan four days earlier he had, as Harrison confided to his office diary, “hit the ceiling”; today he was back on the floor, but still deeply worried. And so all through November, with only a day’s surcease now and again, the government’s assault on the dollar continued, with gold purchases made regularly on both the domestic and world markets at ever-higher prices. After a week of world-market operations, the dollar in terms of gold was down to 63.4 cents, another new low since Civil War days; Paris and London were jittery, and as a result of the uncertainty international trade was virtually paralyzed; the stock markets, both European and American, were still too confused to know which way to jump; and Alexander Dana Noyes, the venerable and judicious Times financial editor, was keening about what he called the “plainly needless intrusion” of the United States into world markets that had served to “reduce to despair the effort of serious home and foreign bankers to understand what Washington is driving at.” Meanwhile, farm prices had not risen significantly, and in Iowa farm strikers had burned a railroad bridge and shot at a passing train. Professor Warren was not answering his phone.

Matters came to a crisis on the ninth. The dollar on the world market suddenly plunged to under 62 cents as the speculators joined the United States government in trouncing it. Domestic grain prices rose substantially, but Governor Norman, seeing the pound against the dollar now at an all-time record high of well over five dollars, hit the ceiling again, and although his country still patiently refrained from retaliation, British commercial and merchant bankers began telephoning, cabling, or writing their American counterparts to beg pathetically for some intelligible explanation of what was going on and how far it was going. Since the American bankers were equally in the dark, they could offer no help. By that weekend it was statistically clear that the Warren theory was not working very well even with the foreign interventions; while the world price of the dollar had by then been forced down about 7 percent since the gold-buying had begun, domestic wheat prices had risen slightly less than 2 percent and cotton prices only 1.55 percent.

Still Roosevelt was not discouraged. (Certainly he seems to have been little moved by the moans from across the ocean; when he heard from Morgenthau of the frantic protests of the stately Governor Norman, whom he liked to call “old pink whiskers,” both men roared with mischievous laughter.) On Sunday the twelfth, he called a monetary meeting at the White House at which Morgenthau, Harrison, and Warren were present. After Roosevelt had said that he believed a farm revolt had now been averted and announced himself satisfied with the results of the gold-buying program so far, Harrison spoke up to predict that further depreciation of the dollar would result in a breakdown of the government’s credit, and urged, at the least, a slowdown. Well, replied Roosevelt, there were two sides to the question; and anyway, if at any time the dollar should get too weak, the RFC could always reverse itself and sell some gold to the world markets. Seizing on this idea, Harrison praised it enthusiastically. By all means, he said, let’s start selling some gold, and the sooner the better. The meeting broke up without any substantive decisions having been taken. During the following week, between sessions of fending off the continuing protests of the Banks of England and France, Harrison became Roosevelt’s almost hour-to-hour counselor–hardly a rewarding role, since little of his counsel was accepted, but still a highly anomalous one for a Wall Street banker, where the New Deal was concerned.

Back on Liberty Street the next morning, Harrison got a phone call from Roosevelt. How were things going in the foreign-exchange markets? the President wanted to know. Harrison, surely gratified by this evidence of a new convert to the ranks of students of foreign exchange, answered the question, and seized the opportunity to put in another plug for the gold-selling idea. Roosevelt was evasive on that point, but told Harrison that for the present he wanted a daily report on what was happening in the markets. Accordingly, early the following afternoon Harrison called the White House to make his report: the dollar was down sharply against the pound and the franc, and how about selling some gold now–or, rather, since the European trading day was already over, the following morning? Roosevelt surprisingly replied that that was a good idea, and suggested $200,000 worth. Such a sum would be only a drop in the bucket, Harrison replied, and suggested half a million dollars’ worth each in the Paris and London markets. Roosevelt agreed, and Harrison hung up feeling much better; it seemed that a vestige of sanity was about to return to the monetary scene.

But at four-twenty that afternoon Harrison got a call from Jesse Jones, who said the President wanted him to know that the United States would neither buy nor sell gold the next day, since more time was needed to look up the matter of whether selling gold abroad was legal. With characteristic conservatism, Harrison noted in his office diary that he was “surprised.” For one thing, a recision of the President’s verbal order of three hours earlier might be expected to come from the President himself; for another, the legal question had been thrashed out, and presumably disposed of, before the overseas program had begun, and no one wished more than Harrison that it had been decided the other way. After simmering for three hours, Harrison called Roosevelt at seven-fifteen. The White House operator explained to the Federal Reserve operator that Harrison would have to wait, because Mr. Jones wanted to talk to the President before Mr. Harrison did, and, in fact, was with him at the moment. Finally connected with Roosevelt some minutes later, Harrison encountered, as usual, a soft answer to turn away wrath. Jones, Roosevelt reported, was all up in the air about the legal questions involved in United States gold sales abroad. In reply Harrison could only point out the obvious–that such dealing had already been going on for almost two weeks without objections on legal grounds, and that presumably the same laws applied to selling gold as to buying it. Roosevelt said he would call back. In fact, though, it was Jones who called Harrison back a few minutes later, to say that his call was to be considered an oral and temporary revocation of the authorization to sell gold, and to add–a bit gratuitously, one can hardly help noting–that he didn’t see why Harrison wanted to sell gold, anyhow.

After what well may have been a restless night at his apartment on East End Avenue, Harrison tried to call the White House the next morning to learn what the latest instructions were. But Roosevelt proved to be a hard man to reach just then. After being shuffled from one aide to another for a while, toward noon Harrison was finally connected with Morgenthau, who informed him that the President was dressing and was therefore unavailable for the moment. But meanwhile, the foreign-exchange markets were approaching the point of panic again, with the dollar below 60 cents and in a state of violent collapse, and Norman and Lacour-Gayet were on the transatlantic phone again. After concluding his conversation with Morgenthau, Harrison, switching quickly to his role of mollifier, explained to the Europeans in turn that the situation in the U.S. farm belt was still bad, and calmed them somewhat by hinting that he had some evidence that Roosevelt’s inflation drive was about to level off. (The evidence, presumably, consisted of the rising confusion and indecision that he sensed from the White House; Harrison had no other.) Finally at noon, Jones called to tell Harrison that he had won their tiff–the legal problems were brushed aside again–and the authorization to sell a million dollars’ worth of gold in Paris and London. (Again, it was too late for European trading that day.) That afternoon, connected with Roosevelt at last, Harrison got still further cause for elation, and further material to use in tranquilizing Norman and Lacour-Gayet, when the President went so far as to ask him how Wall Street brokers felt about his program at this point. Well, Harrison said, he had explained it as best he could to six or seven of them, and after he had finished “they seemed a little more comforted.” “Fine,” said the President, heartily. “Keep up the good work.”

Harrison’s victory was equivocal. The next day, November 16, the gold was sold as agreed, and the dollar obediently strengthened. Roosevelt agreed to Harrison’s request that, in order to calm the markets, he state publicly that he was now fairly well satisfied with the results of his program, but when Harrison asked for authorization to sell at least a million dollars’ worth more of gold the next day in London and Paris, it was denied. Indeed, on the eighteenth gold-buying was resumed. But Roosevelt’s attitude was now showing unmistakable signs of change. Partly as a result of the cautious but constant pressure from Harrison, partly from seeing the foreign-exchange chaos that he had created, and perhaps most of all because massive and well-organized protests were at last being mounted by United States business groups, he was coming to see matters in a new light–to see that he was engaged in a cosmic juggling feat in which too much concentration on one ball, the plight of the domestic farmers, would result in his dropping the others, the nation’s economic relations with Europe and his own relations with American business, small as well as big. On November 21 he left Washington with Morgenthau for a stay in Warm Springs, Georgia. Distance only seemed to lend enchantment to Harrison, on whom Roosevelt was coming almost to rely. A kind of long-distance intimacy sprang up between these two very different men, with such conflicting temperaments and interests, who seemed to have nothing in common but two far from inconsiderable factors–genteel up-bringing and physical disability.

On the twenty-first Harrison succeeded in persuading Morgenthau to urge Roosevelt not to buy any more gold abroad for a few days, on the ground that the franc’s competitive position had now been damaged so much that France was on the verge of being forced off the gold standard, an eventuality that would leave no major currency tied to gold, and the world monetary outlook uncertain indeed. The plea worked. Harrison found to his relief that no order to sell gold reached him from the RFC that day. Very early the next morning, Roosevelt called Harrison, rousing him at home on East End Avenue. Morgenthau had relayed the message, the President said, and added that he was very glad he had followed the advice, in view of the uncertainty about the franc. Here, surely, was a new Roosevelt. When Harrison called Warm Springs from Liberty Street that afternoon to make his daily market report, he found the President in a thoughtful mood, and the two men fell to debating the question of exactly how well the Warren theory was proving out.

Despite all the dollar depreciation, Harrison pointed out, domestic wheat and cotton prices stood at about the same levels as they had at the start of November. Yes, countered Roosevelt, but look at rubber and tin–their prices were up. Harrison explained that this proved nothing, since rubber and tin, being largely imported commodities in the United States, had fixed world prices in terms of gold, and therefore a rise in the gold price automatically meant a rise in their prices. Apparently impressed by this logic, Roosevelt agreed to leave the exchange markets alone for the remaining three business days that week.

There were more such conversations. “It’s funny how [prices] sometimes seem to go against all the rules,” the President mused, in evident perplexity, in the course of one of them. The long-distance talks were becoming an economics seminar–which is to say that Harrison, as the tutor, was gaining the upper hand. On the twenty-third, even though the dollar strengthened and the price of wheat fell 3 cents a bushel, Roosevelt stuck to his pledge not to buy more gold that week. They returned to sparring, Roosevelt saying he had charts to prove that prices were improving as planned, Harrison reiterating his point of the previous day that the higher prices, being mostly those of imported commodities, didn’t count. Harrison noted in his office diary that he now felt Roosevelt was coming to understand the principle of stabilization. “On the whole, I considered it an encouraging conversation,” he wrote. His exalted pupil might finally grasp the basic concepts after all.

VI

While the seminar went on, the protests from across the country were mounting to a crescendo. On November 18 the United States Chamber of Commerce issued a blast calling for an early return of the country to the gold standard. On the twentieth Bernard Baruch, a vintage F.D.R. supporter, came out with an article in the Saturday Evening Post saying that the inflation resulting from the gold-buying might nullify the other accomplishments of the New Deal. On the twenty-first Oliver Sprague resigned his Treasury job to be free to attack the program. (“Sprague is a nuisance,” Roosevelt had just told one of his aides.) The same day, a leading commercial trade journal denounced Warren, who up to then had somehow remained almost entirely out of public view and even public discussion, as the “financial dictator of the United States.” On the twenty-third the chiefs of Du Pont, General Motors, and Macy’s joined the dissenters, and on the twenty-fourth Alfred E. Smith–the “happy warrior” himself, as Roosevelt had called him on a more harmonious occasion–joined the battle by announcing that he was “for gold dollars as against baloney dollars,” and attacking the “crackpots and quarterbacks” in Washington who were using all Americans for guinea pigs. Wall Street itself, encouraged and perhaps shamed by its outspoken allies, still stayed prudently mum in public, but began systematically whipping up the opposition behind the scenes, and silently manifested its changed attitude toward the New Deal it had welcomed so warmly eight months earlier. Although every bank and brokerage house in New York had endorsed an NRA code, a newspaper reporter who toured the whole Wall Street area on November 24 found only three blue eagles displayed in windows. And high in the councils of the protestors was the partially repatriated Wall Street renegade Jimmy Warburg. Following his disagreement with Roosevelt in September he had quietly begun laying the groundwork for a national anti-inflation campaign. “Here and there, little groups of businessmen foregathered to see if they could help each other understand what was going on,” Warburg wrote later. “I took part in organizing a protest by a group of Chicago businessmen and economists and urged various friends to take action. Bob Lovett helped the New York newspapers to understand the situation. John Schiff alerted the New York Chamber of Commerce.… I myself talked to some of the important life-insurance company presidents.” On November 22, before the American Academy of Political and Social Science in Philadelphia, Warburg came out in the open. Avoiding, out of sentiment or diplomacy, a personal attack on his erstwhile idol the President, he lashed out at the Warren theory and those in Congress and the Administration who had urged it on Roosevelt. Thus when Wall Street finally found its public voice, it was, ironically, an ex–New Deal voice.

Now groups and committees to protest the gold-buying were springing up almost hour by hour; they culminated in a huge “sound money” rally held on the evening of the twenty-seventh in Carnegie Hall, and cosponsored by, of all organizations, the American Federation of Labor. True enough, thirteen blocks south at the Hippodrome that same evening an even bigger rally (fifteen thousand persons, including those milling around in the streets outside) was being conducted in support of the gold-buying program, with Morgenthau, Senator Thomas, and the radio-preaching priest Father Charles Coughlin, at that time a rabid Roosevelt fan, as its stars. But here Roosevelt was unlucky in his backing, and the rally backfired badly. The rabble-rousing, anti-Semitic Coughlin, ranting intemperately against “British propaganda from these Tory bankers of lower Manhattan,” and dismissing inflation as “a trick word to scare us,” went too far. Even though it was not until several months later that Coughlin’s integrity would come into question with the revelation that his organization, the Radio League of the Little Flower, had all the while been speculating for private profit against gold and in favor of silver (which he rather arbitrarily pronounced to be a “gentile” metal), Coughlin’s bad showing at the Hippodrome, Warburg concluded later, was the single factor that turned the tide of public opinion against the Warren program. At all events, after raising the gold price 9 cents on November 28 and another 8 cents on November 29 in what seemed to be a last gesture of defiance, Roosevelt all but gave up. Repeal of Prohibition, effective on December 5, tended to crowd money out of people’s minds and off the front pages. On the ninth Roosevelt confided to Harrison that he now hoped “to maintain a period of relative quiet in all fields,” and Harrison, hardly able to believe his ears, knew that could only mean the experiment was essentially over. It was. Through the rest of December the gold price was raised only once, and then very slightly.

In his State of the Union message in mid-January, 1934, Roosevelt formally repudiated the Warren theory by proposing dollar stabilization in terms of gold at a relationship near the present open-market one, and on the last day of that month, following Congressional passage of enabling legislation, he put the stabilization into effect, decreeing a return to a modified gold standard at a dollar valuation of 59.06 percent of the old one. This odd figure was chosen to permit the round sum of $35 an ounce to become the official price of gold. And thus, what for a strange month had been changed daily and haphazardly over the President’s breakfast was now to be fixed, perhaps permanently. Just how permanently, no one could foresee. More than a generation later, in 1968, heads of state would travel halfway round the world to meet, a queen would confer with her ministers into the small hours, and the whole world of central banking would labor mightily, to hold the dollar price of gold at–$35 an ounce.

VII

The boldest of economic experiments was over, and the gold standard was off the booze, just as the country went back on it. The stock market, its sky some 40 percent lower than before but firmly back in place, leaped upward in relief. Professor Warren slipped inconspicuously back to Cornell to tend to his student farmers and his four thousand chickens. That October, he returned to Washington for a day and had lunch with Roosevelt, setting off a flurry of rumors of further dollar devaluation. Asked on this occasion if his unofficial connection with the government might be about to be resumed. Warren replied, “The place where I worked in the Department of Commerce has never been closed, so far as I know.” The world exchange markets plummeted at this news, but neither further devaluation nor Warren’s return to government materialized. Over the remaining three and a half years of his life he was little heard from, enduring in comparative silence the galling experience of seeing his theory, now that it had been discredited in practice, solemnly dissected and derided by just about every living economic pundit. But the Ithaca dirt farmer, if he had hardly been a success as a financial dictator, had surely been the most unlikely one in history.

Wall Street had won, but at its cost. Its honeymoon with the New Deal had ended with the bride’s committing the fatal gaffe of demonstrating that the groom’s favorite theory was wrong. In reality, both sides had lost. The New Deal, which had started out with Wall Street’s almost abject subservience and dependence, was now faced with a Wall Street that, confirmed in its worst suspicions about wild-eyed crackpots in Washington, had totally reversed itself in a year and now presented a practically solid phalanx of opposition; while Wall Street, for its part, now faced a New Deal fairly spoiling to return hostility in kind.

What can be said in retrospective summary about Roosevelt’s tinkering with the dollar during his first year in office? Certainly his understanding of the whole matter was ludicrously superficial and his attitude toward it scandalously offhand; certainly he disregarded the advice of all the learned and accredited money doctors of the land, and accepted that of a virtual quack. Yet somehow or other, the farmers neither starved nor made a revolution, and out of the episode, incredibly, came a stable dollar that would endure for a generation and more. Essentially, the wise but frightened Wall Streeters offered no program; the Warren program, unsound as it was, did no permanent harm and at least offered action and motion, bringing hope.

Through dumb luck or genius, Roosevelt pulled the country through; could Wall Street have done the same?

Chapter Eight

Ordeal in Washington

I

Almost everyone remembers the picture of a midget sitting on J. P. Morgan’s knee, but few recall, or ever knew, the end of that story. It is so near to being unbearably sad that it will be told first.

The thing happened in the Senate Caucus Room on the morning of June 1, 1933, while Morgan, surrounded by a cortege of partners and lawyers and assistants, was sitting in a leather-upholstered chair waiting to testify before the Senate Banking and Currency Committee. Reporters, photographers, and spectators were milling around, and suddenly, in the confusion, too quickly for official intervention, a press agent for the Ringling Brothers, Barnum & Bailey Circus, apparently with the connivance of a Scripps-Howard reporter named Ray Tucker, popped the midget, a member of the circus troupe, into Morgan’s lap. Instantly the photographers were climbing onto chairs and pushing people aside to get into position for pictures.

Morgan at the time was a dignified, avuncular-looking man in his middle sixties. The circus lady, whose name was Lya Graf and who was twenty-seven inches tall, was a plump, well-proportioned brunette with sparkling dark eyes and a fresh peasant prettiness, and she was decked out in a flounced blue satin dress and a red straw hat of fishnet weave. Morgan’s cortege stiffened as if frozen; but Morgan himself did not. His face, previously set into hard lines by a week of hostile questioning by the committee, relaxed, became disturbed, then turned kindly, and a small, warm smile crossed it, under the bushy black eyebrows and the neat white mustache.

“I have a grandson bigger than you,” he said.

“But I’m older,” Miss Graf replied.

“How old are you?”

The press agent said she was thirty-two, but Miss Graf corrected him: “I am not–only twenty.”

“Well, you certainly don’t look it,” Morgan said.

The photographers clamored for one more shot, and the press agent told Miss Graf to take off her hat. “Don’t take it off, it’s pretty,” Morgan said; then he lifted her from his lap and set her carefully on the floor. The partners, who had been looking on in rigid dismay, exhaled and collapsed in their chairs; Richard Whitney, ever the man to take charge of situations, brusquely shooed the press agent and Miss Graf away; and Morgan went on smiling, more feebly now. Next day the picture was famous almost everywhere in the world where newspapers are published.

Morgan, and even Wall Street as a whole, profited adventitiously from the encounter. From that day forward until his death a decade later, he was in the public mind no longer a grasping devil whose greed and ruthlessness had helped bring the nation to near-ruin, but rather a benign old dodderer. The change in attitude was instantaneous, and Morgan took advantage of it, seizing, whether by calculation or instinct, on further chances to “humanize” himself. The following day, asked by reporters possessed of a new interest in his personality to comment on the incident, he replied unaffectedly that it had been “very unusual and somewhat unpleasant,” but that he didn’t blame the photographers, who had merely been doing their job. Asked about a bloodstone set in a gold crescent that he was wearing as a watch charm, he became positively garrulous: “Oh, that. Well, now, I’ll tell you about it. My father’s mother was J. Pierpont’s daughter. She had that made. It has the Pierpont coat of arms on one side. She gave it to her father. He wore it day in and day out. I don’t think I would have known him without it. My father gave it to me. Does that tell the story?”

“Your father’s father gave it to your mother’s brother …” a reporter began in a puzzled tone.

“No, no,” Morgan said, with a chuckle, and launched into another round of ancestral rigamarole. “I still don’t–” the reporter began again, but Morgan had waved and swept grandly out. Could anyone hate such a man?

But Lya Graf did not benefit from the encounter. She was shy and sensitive, and where the role of ordinary circus freak, a kind of craft requiring skill, had been supportable to her, the role of celebrity freak was not. Two years later, hounded by fame, she left the United States and returned to her native Germany. She was half-Jewish. In 1937 she was arrested as a “useless person” and eventually she was shipped to Auschwitz, never to be heard of again. There had been no place for her anywhere: as the New World had exploited her, the Old had obliterated her. Her gift to a rich and famous old man had cost her first her peace of mind and then her life.

The story would be a cozy and manageable fable except for the picture, in which Miss Graf is smiling proudly, and has a plump hand splayed out on Morgan’s coat sleeve to steady herself. They both look happy and at ease; that is the almost unbearable part.

II

As early as that March, word had reached the Street that the new counsel to the Senate committee continuing its investigation of the stock market–a remarkable young New York City assistant district attorney named Ferdinand Pecora–intended to focus the spotlight on J. P. Morgan & Company. Thomas Lamont and another celebrated Morgan partner, J. Parker Gilbert, walked up to Liberty Street one day and called on George Harrison at the Federal Reserve Bank. Perhaps there was something a bit furtive, and un-Morgan-like, in their demeanor; in any case, it soon became clear that their mission was an anomalous one. The House of Morgan no longer had an open wire to the White House, and certainly none to Capitol Hill; Lamont and Gilbert were calling on Harrison in his capacity as the uneasy link between Wall Street and the new Administration. Pecora had been to 23 Wall the previous week and had wanted to see various private papers; there had been talk of subpoenas. That could mean only one thing. Now, Lamont said, J. P. Morgan & Company, following a normal routine, had recently filed its most recent balance sheet with the Federal Reserve Bank. Would the Federal Reserve Bank please be cooperative and refrain, if requested, from releasing the balance sheet to Pecora or anyone else connected with the Senate investigating committee?

Harrison replied that he did not feel he could give any such assurance.

There is a certain aura of shock about Harrison’s office diary entry for that day, and no wonder. The House of Morgan pleading with another bank–and a bank, after all, in whose establishment two decades earlier the House of Morgan had had a large hand–to keep its affairs from coming to public view! How the mighty were fallen! At all events, at the end of the inconclusive conversation Harrison felt called upon to volunteer a promise not to speak loosely of what had been said. Lamont smiled a small Morgan smile. “Of course,” he said.

The committee got the balance sheet; the plans for the investigation went forward. By the time it began, late in May, J. P. Morgan & Company had fully regained its aplomb and its lordliness. Scorning any show of frugality that might have smacked of defensiveness or even of guilt, the partners and their entourage moved into Washington to be investigated as if they were a Renaissance court taking over a conquered country, spending two thousand dollars a day on hotel bills alone. At the hearings they disdained to be furtive or secretive. They had moved on to a new phase now; they managed to be lordly in their very openness, their willingness to answer the most embarrassing questions or submit the most compromising documents candidly, without stint, and with no trace of remorse. In an extraordinary moral feat, they made candor under inquisition into a kind of arrogance, a form of noblesse oblige.

Morgan himself was the first witness, and the confrontation between him and Pecora, extending on and off over more than a week, was a thing of simplicity and beauty. The great man took the witness stand in an atmosphere of the most intense public interest–after all, no Morgan had been on public show since 1912 when J. Pierpont had been grilled by the Pujo Committee–and the character of the interest was curiously ambivalent; Morgan seemed to be thought of variously or in combination as a king and as a master thief. He presented himself as neither, but as a gentleman and a businessman, with the gentleman coming first in a pinch. Pecora, an immigrant in childhood from Sicily, was the other face of American life, short and squarish where Morgan was tall and commanding, swarthy where Morgan was fair-skinned, energetic and ambitious where Morgan was languid, all conscience and earnest intellect where Morgan was all style. Neither was afraid of the other. It was a confrontation out of Kipling.

Coolly, under questioning, Morgan described the autocratic articles of partnership under which his firm was governed. Any disputes among the partners must be submitted to the decision of the senior partner–Morgan himself–“which shall be final.” The senior partner might at any time compel any partner to withdraw, or he might dissolve the partnership. Annually, the profits were divided on a fifty-fifty basis–that is to say, half to Morgan, half to all the other partners. No capital contributions were required of new partners.

As to the firm’s methods of doing business, Morgan clearly relished the questions from Pecora and the Senators, and took satisfaction in answering them. Did the firm ever advertise or announce itself to the public or the banking trade? “We have our name on the door, that is all.” And nothing but the name–nothing, perhaps, to suggest the firm’s line of business? “Nothing but the name.”

MR. PECORA: Mr. Morgan, is the name of the firm on any outer door of the firm’s office?

MR. MORGAN: It is not on the outer door. It is on the inner door.

MR. PECORA: Not visible from the street to any passer-by?

MR. MORGAN: No. Most of them know the address.

MR. PECORA: You do not think the firm suffers any lack of prestige in the banking world because it does not advertise itself to the bankers, do you?

MR. MORGAN: It does not seem to.

Were statements of the firm’s financial condition ever submitted to depositors? No. “They never asked for it.” Would the bank lend money to anyone who could provide acceptable collateral? No–only to its own clients, and the same applied to the acceptance of deposits.

THE CHAIRMAN [Senator Duncan U. Fletcher, a seventy-five-year-old Floridian]: But you do not turn a man down; you do not select your clients? …

MR. MORCAN: Yes; we do.

THE CHAIRMAN: You do.

MR. MORGAN: Yes, indeed; we do.

THE CHAIRMAN: I suppose if I went there, even though I had never seen any member of the firm, and had $10,000 I wanted to leave with the bank, you would take it, wouldn’t you?

MR. MORGAN: No; we should not do it.

THE CHAIRMAN: You would not?

MR. MORGAN: No … Not unless you came in with some introduction, Senator … That has been the rule for many, many years.

THE CHAIRMAN: Then I am quite sure I could not borrow any $10,000.

MR. MORGAN: Not without an introduction.

Later he amplified this granitic regulation: “We do make … loans, and we make them because we believe the people should have the money; that we should loan money if these gentlemen [the firm’s clients] want it. They are friends of ours, and we know that they are good, straight fellows.”

This classic statement of the philosophy of old-fashioned hierarchical private banking, its reliance on economic trust enforced by social sanction, marked the watershed between Morgan and Pecora. Hereditary economic aristocrat and democratic son of Mediterranean peasantry, they could exchange views and even feel interest in each other’s views, but could not really communicate because their moral assumptions conflicted. But afterward, commenting on Pecora to his friends, Morgan dropped his majestic air and permitted himself scorn and a little petulance: “Pecora has the manner and the manners of a prosecuting attorney”; while Pecora, in a book published in 1939, spoke of Morgan on the stand as having been “courteous to a degree and cooperative in his attitude,” with the air of “a man who, far from having any guilty secrets to hide, manifested a pride in his firm and its works which was obvious and deeply genuine.” In this exchange, at least, who can deny that the peasant’s son comes off the aristocrat?

The Pecora-Morgan exchanges were a kind of entr’acte, of chiefly symbolic importance. The main attack on J. P. Morgan & Company centered on a single episode–the 1929 stock issue of the Alleghany Corporation–and the answers to Pecora’s questions were given mostly not by Morgan but by his partners, and most of all by George Whitney. Slim, immaculate, chain-smoking as usual, and handsome as ever, Whitney was the Morgan firm’s perfect prompter, ever ready with the facts and figures. Time and again one or another of the partners on the stand found himself at a loss to supply some detail; time and again the solution was to “ask George,” who always seemed to know, to have the documents in his briefcase or the figures in his head, and who poured forth the information with endless patience and with no hint of grudging–even when the information, more or less imperfectly understood by a committee and a public weary of depression and hungry for scapegoats, could give rise to a kind of Roman holiday of gloating over the discomfiture of these most patrician of custodians of private wealth.

III

In January, 1929–that far-distant time, to the Wall Street of 1933–the Van Sweringen brothers of Cleveland had set up the Alleghany Corporation as a holding company to consolidate their vast railroad empire in the East and Midwest. Of the 3,500,000 shares of common stock that they issued, the Van Sweringens had kept 2,250,000 for themselves, and issued the remaining 1,250,000 to J. P. Morgan & Company at $20 a share, for its own account and for distribution to the public. It had been unquestionably a highly speculative stock issue–emphatically not the sort Morgan’s normally handled–but for one reason or another the firm had taken it on, and the manner of distribution decided upon represented a curious compromise. Rejecting the idea of selling the stock directly to the public on the grounds that it would be wrong to subject the public to such great risk, the Morgan partners had taken most of the stock themselves and offered the rest, about 575,000 shares, to 170 of their well-to-do friends and clients–all men of sufficient substance, it was judged, to be able to “afford the risk.” It was the extent and nature of this “risk” that intensely interested Pecora, the Senators, and the country in 1933. Immediately upon announcement of the new issue on February 1, 1929, the stock, which would not become physically available for almost three weeks, had begun being traded over the counter on what was called a “when issued” basis (that is, for delivery when it became available), and, in the manic speculative atmosphere of the time, it had immediately gone to a price of around $35 a share. What Morgan’s had to offer its friends and clients, then, was stock priced at $20 that could instantly and readily be sold for $35. Put more crudely, what it had to hand out was the equivalent of money, and the amount of money it had to hand out, on the basis of those prices, totaled over eight million dollars.

The list of Morgan friends and clients who were offered shares in this windfall reads like a compendium of the American establishment of the time. The great names of Wall Street had been there: Baker of the First National Bank, Mitchell of the National City, Wiggin of the Chase, each offered 10,000 shares convertible at will into a risk-free profit of $150,000. Morgan had personally kept 40,000 shares ($600,000 potential profit), and his partners various lesser amounts ranging up to Thomas Lamont’s 18,000 shares; Dick Whitney, as the Morgan broker, had been cut in for 1,000, and John W. Davis, as Morgan’s personal counsel and the acknowledged leader of the Wall Street bar, for 400. The chief executives of the country’s leading corporations had been there. So had the powers in both political parties, John J. Raskob, chairman of the Democratic National Committee, coming in for 2,000 shares, and Joseph R. Nutt, treasurer of the Republican National Committee, for 3,000. So had cabinet officers past and future: former Secretary of the Treasury William Gibbs McAdoo (500 shares), former Secretary of War Newton D. Baker (2,000 shares), soon-to-be Secretary of the Navy Charles Francis Adams (1,000 shares), and later-to-be Secretary of the Treasury William Woodin (1,000 shares). (In explaining the presence of Adams to the committee, George Whitney said indignantly–and, by the Morgan code as previously set forth, righteously–that Adams had been included not because he was about to assume a powerful post in Hoover’s Cabinet but because he was J. P. Morgan’s son’s father-in-law.) And just plain national heroes, too: Charles A. Lindbergh and General John J. Pershing, 500 shares each, the former presumably because he was married to Dwight Morrow’s daughter, the latter presumably for old remembrance’s sake.

The letters and telegrams of notification that the Morgan partners had sent out to the elect during the early part of February, 1929, were read into the committee record in the quite different America of summer 1933. The passage of time had changed these communications into little masterpieces of unconscious irony–truly an investigator’s dream. For example:

MY DEAR MR. WOODIN:

… Although we are making no offering of [Alleghany] stock, as it is not the class of security we wish to offer publicly, we are asking some of our close friends if they would like some of this stock at the same price it is costing us, namely, $20 a share.

I believe the stock is selling in the market around $35 to $37 a share, which means very little, except that people wish to speculate.

We are reserving for you 1,000 shares at $20 a share, if you would like to have it.

There are no strings tied to this stock, so you can sell it whenever you wish.… We just want you to know that we were thinking of you in this connection.…

Sincerely yours,

WILLIAM EWING [a Morgan partner]

Whether Woodin found any “meaning” in the market price of Alleghany apart from an interesting instance of the human urge to speculate is unrecorded; at all events, he accepted the offer and sent in a $20,000 check for his 1,000 shares. Thomas Lamont’s telegram to Albert Wiggin (aboard the Golden State Limited, car No. 27, Room A, approaching Douglas, Arizona) was briefer and more informal in tone than Ewing’s letter to Woodin, and it omitted to explicate the Morgan firm’s scruples about the public risk; but it did not neglect to emphasize the happy situation obtaining in the market:

THE VAN ESS BOYS OF CLEVELAND HAVE JUST ORGANIZED ALLEGHANY CORPORATION.… WE ARE MAKING NO OFFERING OF COMMON STOCK, BUT HAVE SET ASIDE FOR YOU AND IMMEDIATE ASSOCIATES 10,000 SHARES AT COST TO US, NAMELY $20. THE … MARKET IS QUOTED AT $35. PLEASE WIRE PROMPTLY YOUR WISHES. I AM SAILING FOR PARIS TONIGHT. WITH BEST REGARDS, TOM.

Wiggin did not delay about wiring back that he would gladly take the stock; indeed, all 170 of the selected recipients accepted the offer with more or less alacrity. Nearly all of them, in their replies, accepted either explicitly or implicitly, and always with a straight face, the proposition that what they were doing was assuming a business risk inappropriate for less substantial investors; but one, Raskob–a man perhaps more accustomed to the blunt ways of politics than the more delicate ones of finance–failed to grasp this idea at all, and made it clear that he understood the matter quite differently. He wrote George Whitney from Palm Beach:

DEAR GEORGE:

Many thanks for your trouble and for so kindly remembering me. My check for $40,000 is enclosed herewith in payment for the Alleghany stock.… I appreciate deeply the many courtesies shown me by you and your partners, and I sincerely hope the future holds opportunities for me to reciprocate. The weather is fine.…

Best regards and good luck,

JOHN

“Everybody Ought to Be Rich,” Raskob would entitle his article in the Ladies’ Home Journal that summer; he, at least, evidently had little enough reason not to be.

The public stir caused by the Pecora committee’s revelation of the Alleghany preferred list was enormous; the House of Morgan would never thereafter entirely recover from it. Here was something everyone could understand. That the toploftiest of Wall Street dukedoms had dispensed patronage, presumably in the hope of future favors in return, just like the lowest and most cynical ward heeler, was lost on nobody; jokes about the list swept the country, and even solidly Republican newspapers had fun clucking and gloating. But they, and Pecora himself, went too far. In sober truth, the Morgan handling of the Alleghany issue had not really been as reprehensible as it was now being made to appear. For one thing, there really was an element of risk to the purchasers of the stock, as was to be amply demonstrated in practice. After soaring up to a peak price of 57 in the summer of 1929, Alleghany collapsed, and at the nadir of the depression was selling at one dollar a share; so those on the preferred list who had bought at $20 and then held on rather than selling immediately–Wiggin claimed to be among them–were left with a stinging loss. However, since the tone of the offering letters made it plain enough that the House of Morgan was not just permitting but actually suggesting that the recipients cash in their profits at once, this must be accounted a rather feeble argument for the defense. A far stronger one is that there had been nothing in the least exceptional about the whole operation. It was the sort of thing investment houses in 1929 did all the time, and had been doing regularly since large public distributions of stock had begun, during and immediately after the First World War. True enough, the House of Morgan was supposed to live not by the Zeitgeist but rather by its own more stringent ethical standards; it was also true enough that the firm traditionally never sold the public speculative common stocks, or for that matter any common stocks, and had no reason to break tradition in the Alleghany case. What it had done was to use its friends and clients as middlemen in the process of achieving the public distribution of the stock necessary to qualify it for listing on the Stock Exchange. Assuming that the distribution was to be undertaken in the first place by a firm that did not sell stock directly to the public, the method used had been a reasonably equitable method. To have distributed the bonanza among widows and orphans would scarcely have been practicable.

Pecora knew this, of course. But, brilliant, single-minded, crusading, politically ambitious as he was, he was in the role of advocate rather than that of judge; he painted his adversary as black as he could, and as black as the angry and frustrated country wanted him to. In this matter and in others, he overstated the case. In the different context of the Morgan partners’ absurdly, scandalously low, but still not fraudulent, income-tax payments during the early depression years, Pecora pilloried them mercilessly, and explained later that “the country in 1933 was in no mood for nice distinctions between tax ‘evasion’ and tax ‘avoidance.’” Which, of course, is to say that it was in no mood for nice distinctions between lawbreaking and law-abiding. The coin was turned; the irrational business worship of 1929 had become its equally irrational opposite; and Pecora, three-quarters righteous tribune of the people, was one-quarter demagogic inquisitor.

IV

Apart from the Morgan investigation, Pecora and the committee through that summer turned up all sorts of stones to reveal all sorts of repulsive things–the past pools, manipulations, and sundry deceptions of the Mitchells, the Wiggins, the Insulls, the Van Sweringens. On and on the revelations went, until there seemed to be no bottom to the sinkhole in lower Manhattan. But the mood of the hearings was not always heavy with squalid vice; often it was lightened by the comedy of turned tables, of the elephant tortured by the mouse, and never more so than in the attitude of some of the witnesses toward certain words–words like “manipulation” and “pool,” which by 1933 had become the slogans of the country’s effort to pin the depression on Wall Street, and which the Wall Streeters on the grill were understandably anxious to avoid.

The word that proved to be a problem for Murray Dodge, vice president of Chase Securities Corporation, was neither “pool” nor “manipulation” but the more universally understood jargon term “gravy.” In April, 1931, Dodge had written his boss, Wiggin, a confidential memo that had eventually found its way into Pecora’s hands. Speaking of a certain motion-picture company underwriting that had been under negotiation, Dodge had written: “With Halsey, Stuart out, it is possible for me to discuss the whole financing with Kuhn Loeb again, a thing that I am loath to do unless necessary, as the split-up of the gravy would hurt my feelings.” Now what, exactly, Pecora asked blandly, had Mr. Dodge meant by “gravy”?

“What I really meant,” replied Dodge, fighting for time, “was that I anticipated that going to Kuhn, Loeb and Company after Halsey, Stuart had withdrawn that we would be on the defensive, and that therefore what I called ‘gravy’ was a certain amount of–”

The witness hesitated desperately; unable to avoid confronting the barrier of definition any longer, he shied. “It is a difficult explanation, isn’t it?” put in Senator Couzens, a compassionate man.

“It is a difficult explanation,” Mr. Dodge agreed. Sweating, he stumbled on a bit more, plunged desperately into his vocabulary, and at last came up, triumphant, with “prestige.” “I would say that it was the prestige–that was the word I was trying to think of … I meant prestige.”

“I think you are not making it any better,” Senator Couzens said. “You had better stop.” It may be presumed that Mr. Dodge was glad to do so.

Wiggin himself, among others, had trouble with, or at least qualms about, the word “pool.” When Pecora was questioning him about the pools he had participated in, Wiggin, while not denying the deeds, all but pleaded with Pecora that the precise word for them be avoided; wouldn’t something like “investment account” do as well? But why not “pool”? Pecora wanted to know. “Just the reputation of the word,” Wiggin begged. Well, Pecora pursued, did it connote something reprehensible, then? “I don’t know,” Wiggin said, “but there is that feeling against the word ‘pool.’” Pecora courteously avoided it as much as possible during the rest of his examination of Wiggin, but could not resist putting into the record a 1928 letter to one of Wiggin’s private corporations, from the brokerage firm of W. E. Hutton & Company, which read in full:

“Enclosed please find a check of $105,467.29, being the amount of your subscription and profit on the Hudson Motor Car Company pool account.” Wiggin did not claim that either the check or the language of the covering letter had offended him at the time he had received them.

Even so, the curiousness of his attitude to the word “pool” was as nothing compared to that of another witness, a Stock Exchange specialist named Charles Wright, who had conducted many gaudy pools in his time, including one in behalf of a White Russian prince. Asked by Pecora to define “pool” and “pool account,” Wright replied unequivocally enough, “I do not understand those terms, Mr. Pecora. I have never been able to understand them.” Yet in almost his next breath he found himself not only explaining in detail how pools worked, but even learnedly distinguishing between different kinds of pools:

MR. WRIGHT: Some pool accounts operate on options … some by way of direct purchase of stock and redistribution of it, and others may be accumulation pools where they accumulate stock that somebody desires.…

MR. PECORA: And frequently, if not invariably, a pool has an option covering the stock in which it trades?

MR. WRIGHT: That is right.

MR. PECORA: And it gets that option as a rule from what kind of persons?

MR. WRIGHT: Sometimes from individuals, and sometimes from officers of the company, and sometimes from large stockholders, and sometimes from the corporation, which might hold a good block of stock and which wanted to get rid of it.…

To Pecora’s credit as a showman, he refrained from pedantically reminding Wright of what he had said at the outset, and thus avoided running this veritable vaudeville routine into the ground. A country sorely in need of laughs was getting some at Wall Street’s expense; if Wall Street with its sinister maneuvers had taken away people’s bread in the past, now it was generously, if inadvertently, giving them a circus.

But the last laugh that summer was Wall Street’s. In the very weeks when Pecora was patiently drawing out the stories of the pools and manipulations, exposing Wall Street’s misdeeds of the past to public indignation and derision; in the very days when Otto H. Kahn was appearing as a witness and declaring, on behalf of Wall Street’s most responsible and public-spirited element, that manipulation through pools was an “artificial, antisocial, illegitimate practice which thrives on the gullibility of the public”–in such days, one of the most picturesque and egregious stock-market pools of all time was in full cry, under the noses, so to speak, of Pecora’s staff of earnest investigators and the responsible Wall Streeters alike. It was a tour de force of social misbehavior that a Willie Sutton might have admired, and its chief initiator and benefactor was an obscure businessman named Russell R. Brown, chairman of the board of the American Commercial Alcohol Company, a Maryland corporation with executive offices in New York City. With repeal of the Eighteenth Amendment waiting only on ratification by the states, the star of the alcohol stocks was shining brightly that summer, and with the prospect that his firm would soon be able to add substantial sales of potable alcohol to its line of antifreeze, Brown and some of his associates saw the chance for a major coup in the stock of their own company. They first obtained control of 25,000 shares of it, then selling at around $20 a share, through a Byzantine series of maneuvers involving an exchange of stock with two dummy corporations created especially for the purpose–Maister Laboratories, Inc., headed by a Mr. Phagan, and Noxon, Inc., headed by a Mr. Capdevielle. (Unlikely as it may seem, there really was a K. B. Phagan, an accountant friend of Brown’s, and a C. C. Capdevielle, a molasses broker; indeed, there was even a Dr. Maister, a German-born fermentologist employed by American Commercial Alcohol who was supposed to have invented a secret process for making vitamins. Noxon apparently had no corporeal existence.) Brown and his associates formed an eight-man pool to manipulate the stock of ACA, and to make its operation possible they gave options on the 25,000 shares to the notorious market operator Tom Bragg. And whom did Bragg engage as manager of the pool? None other than Sell ’em Ben Smith, the famous, boisterous, rags-to-riches bear operator who had been the public’s favorite Wall Street villain in the first months after the 1929 crash–and who had testified with admirable candor and less than admirable lack of repentance to the Senate committee about the past pools he had managed, back in the spring of 1932.

Using techniques that by this time must have been second nature to him–and about which, in any case, his memory would have been refreshed if he had been reading the Pecora committee testimony in the newspapers or the Congressional Record–Smith began his market operations on May 3, 1933, to draw the gullible public into ACA stock by causing it to rise and to appear constantly on the ticker. The record of his transactions, which came to light later, is nothing short of dizzying. On May 4, for example, he sold 3,700 shares. The following day he bought 600. On May 8 he bought 500 and sold 1,000; then after three days of buying more than he sold, on the twelfth he suddenly sold 1,100, and topped this on the sixteenth and seventeenth, respectively, when he sold 1,600 and 3,300. Then back to buying, building up to a climax on May 29, when he kept the ticker racing by buying 8,200 and selling 4,800. By the end of the month he had bought, all told, 13,300 shares and sold 22,100, and in spite of the fact that he had lived up to his nickname by keeping sales in a solid preponderance, so successful had been his advertising of ACA on the ticker that the public under his guidance had forced the price upward from 20 to above 30. But this was only the beginning. Joined now by Bragg, Brown, and others in the pool who began operating in ACA on their own, through June Smith kept the stock churning around and gradually rising to just above 40; then in the first half of July, like a violin virtuoso building a passage to crescendo, he brought the public to the classic frenzy of buying that climaxes a well-run pool operation, and on July 18 ACA went completely wild and hit 89⅞. That was the day Smith chose to pull out the plug. Coincidentally, it was the day of the big general market break precipitated by the disintegration of the London Conference. The combination of circumstances caused matters to get a bit out of hand, and ACA, having risen strictly according to plan, now sank a bit faster than Smith or the pool participants found convenient. Charles Wright, who was the ACA specialist and was in on the pool, said later, “I shiver every time I think of it, of the price at which the stock was distributed and the price it went to.… That got to be a nightmare with me.” With the pool no longer buying, the public suddenly disillusioned, and the market as a whole in a state of collapse, in the three days following July 18 ACA plunged from 89⅞ to under 30, and the pool account was closed. The nightmare-ridden specialist Wright had a personal profit of $138,000; Bragg and Sell ’em Ben had their liberal commissions as managers and their trading profits; and the eight pool participants–including Phagan and Capdevielle, since even dummies get rewards for their availability–had their profit, which probably ran into millions. Eventually, Pecora got wind of the whole thing and tried to subpoena Bragg and Smith, but they had anticipated him; by that time, it turned out, Bragg was in Honolulu and Smith, even more prudent, in Melbourne, Australia.

As stock-market manipulation the ACA pool was fairly small-time stuff, a sort of last fling before the cops came and broke up the party. But, timed as it was, it retains a certain interest for two reasons. It shows more eloquently than any speeches or statements the response of Wall Street’s more raffish, speculative element to the Pecora committee and its mood of high moral indignation. And it is a small mine of a substance always in short supply, low comedy.

V

To be an outlet for public frustration wasn’t the investigation’s only point; in the background, and then later in the foreground, was the question of Congressional action in the form of a law to regulate the stock markets. Early in 1933, back in the hundred days, Roosevelt had quietly put the venerable Samuel Untermyer, hero of the Pujo investigation more than two decades earlier, to work writing a bill. But the Untermyer draft had not pleased Roosevelt and had never been introduced. Now in December, with the Pecora committee’s most lurid revelations in the public record and the public mind, work on a new bill began in good earnest. The drafters this time were men of a new generation: James M. Landis of the Harvard Law School faculty, Telford Taylor of the Department of the Interior, the blue-blooded Brain Truster Isaac Newton Phelps Stokes II, the New York lawyer Benjamin V. Cohen, and Thomas G. Corcoran of the RFC–all men in their twenties and thirties bursting with brains and energy, central members of the group of young intellectuals drawn to Washington by the excitement and high promise of the New Deal. In strictest secrecy, in an inconspicuous downtown Washington apartment that had been rented for the purpose, the group labored through the winter months, often consulting Pecora and his chief investigator, the energetic and talented crusading journalist John T. Flynn. Eventually, the writing of a final draft devolved chiefly on Cohen and Corcoran. In early February, 1934, with Congress back in session, Senator Fletcher suddenly demanded a bill, forthwith. The bright young men had not finished their work, but, as bright young men can do with an ideal to drive them, they worked without sleep until they did. Forty-eight hours and countless cups of coffee later, they had a draft ready. On February 9 Roosevelt, who up to then had been publicly noncommittal on the Pecora committee findings and had not expressed himself in favor of Stock Exchange regulation, sent a message to Congress demanding it at once. Immediately afterward, the fruits of the bright young men’s hectic and heroic labors–an intricate technical document fifty pages long outlawing all forms of stock manipulation, putting federal controls over stock-market credit, and giving the Federal Trade Commission wide powers to act as Wall Street’s policeman–was introduced in Congress as the Fletcher-Rayburn bill. So at last the federal intentions toward the stock market were out in the open.

Richard Whitney was ready. His attitude was simple: he was flatly opposed to any federal regulation of the Stock Exchange whatever. His always rigid personality and iron will had been forged to a new degree of hardness by a series of incidents in October. Pecora had written Whitney asking him to send out to all Exchange members a questionnaire designed to elicit various sorts of embarrassing information. Whitney had stalled. Pressing the matter, Pecora had sought a personal interview with Whitney. But somehow or other the Stock Exchange president always seemed to be engaged when Pecora wanted to see him. Seeking an appointment on a Saturday or Sunday, Pecora was told that it was impossible because of social engagements; asking about Monday, he learned that that was impossible because of business engagements. Eventually, Whitney, arming himself with the presence of his close and loyal friend Roland Redmond, a senior partner of the Exchange’s law firm, had received two Pecora emissaries, one of whom was John Flynn.

It was the same John Flynn who a year and a half before had characterized Whitney in Collier’s as “the highest type of Wall Street broker.” Just possibly that year and a half, during which Flynn had become the shrewdest and most aggressive of Pecora’s investigators, had revealed to Whitney a different man from the one who had described him thus. Just possibly, too, he felt at all times only contempt for personal flattery from journalists. In any case, the sight of Flynn in his office now had caused Whitney to flush purple, mutter something incomprehensible, and leave the room. Several minutes later he had composed himself sufficiently to return–but not sufficiently to speak prudently. Drawing himself up, Whitney in his iciest and haughtiest tone delivered a sentence that his enemies would never thereafter allow him to forget. “You gentlemen are making a great mistake,” he said. “The Exchange is a perfect institution.”

“We thought we would get the cooperation of the Stock Exchange,” Pecora commented in the committee hearings a few days later. “Apparently we cannot get it.” Indeed they could not; on October 16 Whitney wrote Pecora formally, refusing to distribute the questionnaire, citing in explanation Redmond’s legal opinion that “the information sought by the proposed questionnaire has no direct bearing on market practices or on the conduct of members of the Exchange.” Publicly, he insisted that the Exchange had not failed to cooperate with the committee. “Mr. Pecora sought to have the Exchange compel its members to answer the questionnaire,” he charged, adding that such a procedure deprived the members of their constitutional right to silence. Pecora countered by issuing subpoenas to the heads of a number of leading Stock Exchange member firms, with the intention of asking them directly the questions he could not get Whitney to ask them for him.

And now the first crack appeared in Wall Street’s façade. Among those subpoenaed was E. A. Pierce, proprietor of E. A. Pierce & Company, a prominent brokerage house that had recently absorbed the highly successful Charles E. Merrill Company, and would later add the New Orleans firm of Fenner and Beane. Pierce, as will later become clear, had a close business relationship with Whitney, but not really a close personal one. The two men were very different, and went very different ways; both were clubmen, but in different spheres; they seldom met at a club unless it was the Stock Exchange Luncheon Club. A son of Maine and of Maine’s beloved Bowdoin College, Pierce had grown up in modest circumstances, spent five years in his youth as a lumberjack, and started in Wall Street at the bottom. He had no pretensions to blue blood or influence in what the world still called “society.” On the other hand, he and Whitney shared several qualities–a nostalgic flamboyance manifested in a taste for wearing formal clothes to work, a desire to be Wall Street statesmen, and an imposing physical bearing; where Whitney radiated an athlete’s ruthless decisiveness, Pierce, fourteen years Whitney’s senior, with his crisp Maine speech and his mane of white hair, suggested experience and mellow wisdom. Hearing about the Flynn-Whitney confrontation from another member of Pecora’s staff, Pierce decided that Whitney was being unreasonable. The course of mature wisdom lay somewhere between the two; he resolved to assume the role of mediator between the committee and the Exchange, the voice of reason from Wall Street.

Pierce’s standard once set up, others rallied to it. Doubtless in some cases this was a matter of personal dislike of Whitney, whose charm did not affect everybody; but much more, it reflected a functional split in Wall Street that had grown up during the 1920s as a result of the entry of the mass public into the stock market. On the one hand was the Old Guard–the specialists and floor traders, the men who actually traded stocks face to face and knew the men they beat or were beaten by; heirs in role, if seldom in either daring or rapaciousness, of the Goulds and Fisks and Drews, the bulls and bears whose nineteenth-century battles had both built and corrupted the nation. They still controlled the Stock Exchange, and Whitney was their leader. But now there were also the far-flung many-branched brokerage firms serving the general public, most of whose members never saw the Exchange floor or made a stock trade face to face; firms whose business consisted of making trades for others, many of them in distant cities or towns tied to Wall Street by the thin strands of telegraph wires, and who, because their livings depended on the public, could not afford to turn their back on the public interest as the Old Guard could. It is neatly symbolic that the leader of this new Wall Street element, spawned by social change, should have been a future founder of the Wall Street colossus to come, the celebrated firm of Merrill Lynch.

Pierce testified to Pecora that he believed a certain amount of regulation of stock-trading was desirable and feasible. Whitney, for his part, sought and obtained an appointment at the White House. After the two Groton-and-Harvard men–the President of the United States six years senior to the president of the New York Stock Exchange–had conferred for forty-five minutes, Whitney emerged and told the press laconically that they had discussed Stock Exchange speculation, “each giving the other his ideas.” In mid-December, when rumors were circulating that a stock-exchange-regulation bill was being drafted, Whitney felt called upon to issue a denial that the Exchange was planning a huge publicity campaign to fight it.

No doubt his denial was in good faith, because Roosevelt’s February 9 message calling for legislation and the subsequent introduction of the Fletcher-Rayburn bill clearly took him by surprise. But he was not long in recovering. Instantly the Stock Exchange, at Whitney’s instigation, attempted to forestall federal action by passing a few speculation-control rules of its own. Immediately after that, Whitney called together the heads of thirty leading member firms for what amounted to a council of war, at which plans were laid for organized campaigns against the bill in New York, Chicago, Philadelphia, San Francisco, and Boston. At about the same time, in his capacity as head man of the Exchange he sent out circular letters to all member firms, and to the presidents of eighty leading corporations whose shares were listed on the Exchange. The Fletcher-Rayburn bill, he asserted, was “the most important legislation affecting the Stock Exchange and its listed corporations which has ever been introduced in Congress.” It would have “very disastrous consequences” for member firms and their clients alike.

To the corporation heads he addressed the warning, “The powers [granted in the bill] are so extensive that the Federal Trade Commission might dominate and actually control the management of each listed corporation.” Without suggesting what specific action the member firms and corporation heads might want to take, he ended by saying that additional copies of the letter and the bill were available to them on request. Meanwhile, in Washington, Tommy Corcoran, on behalf of the bill-drafting team of Cohen and Corcoran, was explicating the bewildering complexities of the bill to the Pecora committee.

The letters were only the beginning of the Whitney-led campaign of opposition, which soon became so intense that Roosevelt himself was moved to protest that “a more definite and highly organized drive is being made against effective legislation [for Stock Exchange regulation] than against any similar recommendation made by me.” Committees were formed and rallies held; special trains carrying anti-Fletcher-Rayburn delegations converged on Washington; a special drive was made to get the support of university professors. Follow-up messages went out from the Stock Exchange to member-firm offices in forty-three different cities, this time striking a more urgent, even a threatening note. “Will you please ascertain and advise,” one such message went,

what is being done by concerted action of savings banks, corporations listed or unlisted, insurance companies, in your territory in the way of organized effort for the fight …? Are your employees alive to the fact that with the passage of the bill a great many of them will be out of employment? Are they writing their Senators and Representatives? If not, they should do so at once, using their own note paper, not firm paper, and writing in their own way.… Please advise.

The letters to Washington poured in.

Meanwhile, with the battle fairly joined, Whitney’s turn came to testify publicly in rebuttal of Corcoran. Like the House of Morgan the previous year, the Stock Exchange moved into Washington in state; Whitney brought his whole general staff with him and set up headquarters in a handsome house. Pierce and his band of Wall Street moderates established a separate command post at the Carlton. Publicly the moderates maintained a reasonably solid front with Whitney. One Pierce ally told the press that the bill would give the government the power to destroy corporations, and another, a lawyer, chimed in that he doubted its constitutionality. Pierce himself allowed that he agreed with Whitney’s objectives, “since I’m quite sure Mr. Whitney and his associates are honest.” But behind the scenes the Carlton group was cooperating with the government on a revision of the bill–working day after day and week after week with Rayburn, helping to redraft it in terms of greater financial sophistication, and at the same time working for the elimination of those provisions that they found harsh or unfair to Wall Street. Finding out about these negotiations, Whitney became so enraged that he had one of his lawyers telephone Pierce at three o’clock one morning to give him a tongue-lashing. The rebuke had muscle behind it; Whitney, after all, was the dictator of the Stock Exchange, with a board of governors entirely obedient to his bidding, and thus he had in his hands the power to deprive Pierce of his livelihood by arranging to have him expelled from membership. The lawyer did not explicitly make that threat. Even so, to grasp the almost awe-inspiring arrogance of the postmidnight reprimand we must anticipate our story a step. At that moment Whitney personally owed Pierce’s firm the round sum of $100,000.

VI

But in the witness chair Whitney was magnificent, cool and forceful and persuasive and almost always reasonable. “Any attempt to regulate by statute in minute detail the operation of security markets is impossible of accomplishment,” he said, introducing his case. The Fletcher-Rayburn bill gave the government “an absolute power to manage and operate” stock exchanges. Patiently he refuted each provision of the bill, showing why he believed it would do more harm than good. Time and again he emphasized the telling fact of Wall Street competence and Washington inexperience in the technical aspects of finance: “The bill as drawn presumes that the drafters have the supreme knowledge of the subject, and grants us no knowledge.” He suggested that he was not opposed in principle to liberal ideas: “I do not believe that liberalism requires the federal government to operate our exchanges.… Reform should be limited to the correction of abuses and should not retard recovery by unwise restrictions.” He conceded that the “perfect institution” was not composed of perfect men: “I do not want to give an impression that our members have been & or are pure white lilies.” He skirted demagoguery: the bill “goes against human nature” and “is almost a full brother to the dead and unlamented Prohibition law.” To want regulation, then, was to be almost like a teetotaling bluenose. At last, in mid-March, he was done. “I thank you gentlemen,” he said courteously to Pecora and the Senators. “We are all at your disposal at any time.”

“Those old Wall Street boys are putting up an awful fight to keep the government from putting a cop on their corner,” Will Rogers said shortly after the end of Whitney’s testimony, pretty well hitting, as Rogers so often did, the precise temper as well as the language of the national majority. Indeed they were putting up an awful fight, and, largely because they had succeeded in enlisting a huge segment of big business, not without good effect. The government retreated under the attack; the draft of the Fletcher-Rayburn bill was abandoned, and Cohen and Corcoran submitted to the House a new and apparently much milder one that took into account not only the objections of the moderate Pierce group but even some of those of the intransigent Whitney group as well. Compromise that it was, the new bill outraged the fire-eating reformers like Flynn, who saw it as a sellout to Wall Street. But neither did it please Whitney; he promptly pronounced it no more workable and even more complicated than the previous version. “Of course,” Pecora commented, “if all Mr. Whitney’s objections were met, there would be no bill at all.”

The Stock Exchange campaign went on full blast. Committees to attack the bill, much of their voluminous prose suspiciously resembling that of Richard Whitney, kept on popping up here and there. Even the telephone clerks of Wall Street, several hundred strong, met on March 23 to organize themselves in opposition, the rationale being that if the bill were passed grass would grow in the streets of the financial district and they would be thrown out of work. Similarly, on March 25 word went out to the newspapers that two days later there was to be a mass protest meeting at the corner of Broad and Wall of thousands of brokerage-house employees, and that simultaneous mass meetings were to be held in dozens of commuting towns in New Jersey, Connecticut, Long Island, and West chester County where the Wall Street employees lived. Mysteriously, none of the meetings materialized. The implication was unmistakable that the Stock Exchange had put out the announcement in a last-ditch bluff, and that the bluff had been called. The little people of Wall Street were no longer on the Stock Exchange’s side. It was the seal of defeat: the troops were in sullen revolt against the generals.

So Whitney was beaten at last. On May 5 the House passed the bill by a huge majority; a week or so later the Senate passed a somewhat different version of it. By the beginning of June the two versions were reconciled, and on June 6 Roosevelt signed the Securities Exchange Act of 1934 into law; whereupon Whitney, acceding to defeat with an alacrity that might have been laid to either grace or expediency, but in a vein that certainly seemed uncharacteristic, announced that the Stock Exchange “intends to do everything in its power to cooperate … in the administration of the act,” and added, “I am truly hopeful that if wisely and judiciously administered, the act will be a constructive measure.” But after all, he had some reason to be in a cheerful frame of mind. On May 14, during the last stages of the downfall of his campaign, he and his Old Guard cronies had been re-elected by acclamation to another term in charge of the Stock Exchange. If the war was lost, the beaten army was still not routed or dispersed.

The essence of the compromise embodied in the law that had been passed consisted of creating an entirely new administrative body and passing the buck to it. The hated notion of having the Federal Trade Commission administer the law had been eliminated; instead, a new five-man Securities and Exchange Commission, to be appointed by the President subject to confirmation by Congress, was to do the job. Gone, too, were most of the earlier version’s specific and detailed antispeculation and antimanipulative provisions; these were replaced by more general directives giving no more than guidance to the new SEC, which was charged with making up its specific regulations as it went along. Flynn commented soon after its passage, “The law as it stands forbids and requires so little that we may truthfully say there is no body of laws as yet governing the securities markets until the commission considers, adopts and promulgates them.” But the point–and for Wall Street’s whole future, a crucial point–was that the commission existed, and had broad powers to do just that. An historic moment had passed almost unrecognized. The cops were on Wall Street’s corner, and they were well armed.

In these circumstances, everything turned on who the cops would be. Nominally bipartisan, Roosevelt appointed as commissioners two New Dealers, Pecora and Landis, and two liberal Republicans who as far as Wall Street was concerned might as well have been New Dealers, George C. Mathews of Wisconsin and Robert Healy of Vermont. His bombshell was the chairman he named. There had been speculation that it would be Pecora, or Landis, or even Moley; at any rate, the general assumption went, it would be someone without Wall Street connections and with unquestioned loyalty to the New Deal. And whom did the mercurial Roosevelt appoint but Joseph P. Kennedy–not just a Wall Streeter, but a speculator and manipulator hardly less notorious than Sell ’em Ben himself? The faithful were appalled. Here was a man who seemed to be better equipped, not to say more inclined, to participate in pools than to regulate them–who, in point of fact, was known to have participated profitably in a particularly gaudy pool in the stock of Libby-Owens-Ford only the previous summer, and whose sole basis for appointment to any federal job, let alone that of regulating the stock market, seemed to be his substantial contributions to Roosevelt’s Presidential campaign in 1932. It all looked like ward politics at its least attractive. “I say it isn’t true. It is impossible,” wrote a dazed Flynn. Not only intransigents like Flynn but New Dealers almost to a man were outraged. The New Republic wailed that the President had “exceeded the expectations of his most ardent ill-wishers,” and the Washington News commented that Roosevelt could not “with impunity administer such a slap in the face to his most loyal and effective supporters.” Yet such was the insight that went along with Roosevelt’s cool pragmatism that the Kennedy appointment was to turn out to be a good one; if the President had paid off a political debt, and appeared to placate Wall Street, in what seemed to be the most cynical and disillusioning manner possible, he had also, most improbably, brought to birth a vigorous and effective public servant who would start Wall Street on a new path from which there would be no turning back.

The Securities Exchange Act began functioning on July 1, and a few days later the cops arrived bodily on Wall Street’s corner when the five new commissioners came for their first visit to the Stock Exchange. A tight-lipped Dick Whitney led them on a formal tour of inspection, having first taken the precaution of surrounding the floor with guards to restrain any brokers who might seek to do the visitors physical harm. The brokers stared coldly at the commissioners; trading came almost to a standstill; and in this atmosphere of suppressed hostility the new era dawned.

VII

It will be recalled that we left Whitney’s private financial affairs in parlous condition, as he entered 1932 still living like the millionaire that, as the national symbol of Wall Street, he was universally assumed to be, but actually a negative millionaire, owing some two million dollars that he could not pay. The next couple of years were somewhat better for him. All but giving up hope of a miraculous recovery of his disastrous Florida fertilizer interests, he now undertook a new and at first more fruitful investment plunge. All through the years of Prohibition, the favorite bootleg drink in the New Jersey hills where he had his country estate was “Jersey Lightning,” a harsh but authoritative applejack that had been distilled locally for generations before Prohibition and, of course, had continued to be produced massively though inconspicuously in those well-wooded hills and valleys–then still remarkably remote and unpopulated–without the blessing of law. Incredibly (or so we can say in hindsight), this urbane and sophisticated man came to believe that after repeal Jersey Lightning would capture the fancy of the whole country, and become a standard national drink like Scotch or bourbon; and to make it a still more attractive investment prospect, the stuff had the great commercial advantage of requiring very little aging to be potable, or as potable as it would ever be. Accordingly, early in 1933, with repeal clearly on the horizon at last, Whitney and one of his brokerage associates took over a chain of old New Jersey and southern New York State distilleries and organized Distilled Liquors Corporation for the purpose of producing and marketing alcoholic beverages as soon as repeal should become effective. The firm’s principal product was, of course, to be applejack. Whitney himself, and the firm of Richard Whitney & Company, initially subscribed for between ten and fifteen thousand shares of Distilled Liquors stock at $15 a share.

This, of course, meant the need for new money. There was still the now-familiar nightmare of old loans continually coming due and needing to be either extended or replaced with new loans; and now this fresh capital outlay. On September 22, 1933, Whitney went to his old and trusted friend, and long-time henchman in the administration of the Stock Exchange, Herbert G. (“Duke”) Wellington, proprietor of a brokerage firm much like Whitney’s. “Duke,” said Whitney–as Wellington recalled years later–“this is one of the hardest things I’ve ever had to say to anyone. I have given my word that I would repay a loan today, and it’s not convenient for me. The money I thought was coming to me, was promised to me, has at the last moment turned me down. I pledged my word that I would repay this money, and I wonder if you would help me?” Then Whitney asked Wellington to lend him $250,000 for thirty days, without security.

In the ensuing discussion, the matter of Whitney’s Florida ventures was mentioned, although not, apparently, that of his new applejack firm; presumably the fact that he was embarking on a new flyer in the market would not be well calculated to reassure his friend. Also mentioned was the fact that Whitney had a rich, successful, and indulgent brother. Dick Whitney explained to Wellington, “George has been lovely to me, and I just can’t go over there and ask him to give me any more money.” Nevertheless, Wellington was to relate later that always in his mind was the feeling that as a last resort, if worse came to worst, Dick Whitney would swallow his pride and go to 23 Wall to see his brother. No doubt, then, it was with that in mind that Wellington, although he did not meet the request for $250,000, agreed to lend Whitney $110,000, unsecured–nominally for a month as requested, but actually, by tacit mutual understanding, until Whitney should be able to repay. (As a footnote on Wall Street mores it may be noted that the matter of interest on the loan was not even mentioned in the conversation during which the loan was arranged, yet in the subsequent accountings of it, interest at 2 percent–the nominal going rate at the time, more or less–was added with no objection from either party. The subject, then, had been too trifling to need discussion, since all that was at stake was $2,200 a year.)

A week and a half later, on October 2, Whitney borrowed $100,000 unsecured from Roger D. Mellick, not only a downtown friend of long standing but a New Jersey country neighbor, too; Mellick explained much later that he had made the loan because of “knowing Dick Whitney so many years and admiring him and thinking that he was such a good fellow.” (Morgan had said to Pecora, “We do make … loans, and we make them because we believe the people should have the money … they are friends of ours, and we know that they are good, straight fellows.”) And not quite two weeks later came the most astonishing of Whitney’s feats of borrowing for that year. On October 14, the same week that Whitney formally refused to distribute Pecora’s questionnaire and E. A. Pierce came out decisively as a Whitney opponent, E. A. Pierce & Company extended Whitney a loan of $100,000, fully secured by an assignment of one New York Stock Exchange seat and one New York Curb Exchange seat belonging to Whitney and his firm. Why, then, did Pierce–who just then could hardly have thought that Whitney was a particularly good fellow–do it? Perhaps, the collateral being so sound, it was a case of “business is business and politics is politics”; Pierce was a practical man. Or perhaps–though not likely in the case of the straightforward former lumberjack–Pierce wanted the power over Whitney that the debt and the possession of the collateral might give him. Or perhaps it was one more case of the operation of the famous Whitney charm.

At all events, the deal went through, and it marked an ominous turning point in Whitney’s borrowings: now he was taking money from men outside his circle of relatives and close friends, from people who might conceivably want to harm him. But he had the money, and he put it to work. Repeal became effective in December; Distilled Liquors leaped into business like a racehorse leaving the starting gate, and, as the great boom in liquor stocks continued, by the spring of 1934 its price on the over-the-counter market was being quoted at 45. Meanwhile, Whitney had continued to accumulate shares of it for himself and for his brokerage firm, and at that boom price his holdings were worth far more than a million dollars.

Right there, if he had been another man, he might have sold out wholly or in part, paid off all his debts except those to his brother and the Morgan firm–the debts that were, literally or figuratively, in the family–and made a fresh start. But he had a gambler’s faith in Distilled Liquors, not to mention in his own judgment; so he went on carrying the stock and owing the money, looking forward confidently to a glorious day when Jersey Lightning would be drunk everywhere, eagerly ordered by the harried commuter with five minutes between office and train and suavely served in fashionable houses and country clubs, and Whitney would at last have the money to live as he had always lived. In that same spring when he was suffering his great public defeat in Washington on the Securities Exchange Act, he was close to the business miracle that alone could salvage his tangled private affairs–as close, that is, as he would ever come.

Chapter Nine

The White Knight Unhorsed

I

In 1934 Wall Street was almost a ghost town; customers’ men drowsed in the empty board rooms, and brokers idled and joked the days away on the floor of the Stock Exchange, where trading volume was running at less than half the pace of 1933. The first fine rapture of the “Roosevelt market” had vanished with the failure of the early New Deal measures to bring about significant recovery, and apathy had settled over the market. When stocks were traded at all, they were traded listlessly, desultorily, with little price movement. The professional speculators were on the sidelines waiting to see what would happen next, and the public had little money to invest and less interest in investing. Brokerage firms were laying people off again, and giving them “apple weeks”–one week off without pay out of every four weeks, during which they could, and some did, sell apples. Investment bankers were no better off, since with scarcely any new money available the capital market was all but dead. Whole months would go by when new corporate issues of industrial stocks and bonds for the whole country totaled only one or two million dollars. The Banking Act of 1933 compelled firms that had previously engaged in both commercial and investment banking to choose one or the other, thereby forcing the Chase and the National City to get rid of their notorious “security affiliates,” and–far more significant from the standpoint of the Wall Street social structure–breaking in two even the House of Morgan. Grimly obedient, it chose commercial banking, and emerged with its prestige intact but its power and influence much reduced, especially, and perhaps most painfully, in relation to that of Kuhn, Loeb, which lost nothing because it had never gone in for commercial banking anyhow.

In this time of dissolution and stagnation there was talk of the end of finance capitalism.

Even the mighty of Wall Street felt the direct economic pinch to a degree–to a greater degree, at any rate, than the mighty of business, many of whom found themselves able to continue drawing annual salaries of $300,000 or $400,000 a year right through the depression, while their employees often endured pay cuts and their stockholders did without dividends. In 1934 J. P. Morgan, sixty-seven years old and increasingly embittered by events in spite of his refurbished public image, began to withdraw from active participation in his firm’s affairs. That winter he took his Corsair, the largest private yacht in the world, on an extended cruise of the British West Indies and the Galápagos Islands; the following spring he laid her up permanently as too expensive to maintain, and sold the cream of his famous art collection, including paintings by Fra Angelico, Fra Filippo Lippi, Rubens, Hals, and Holbein. It was in 1934 or 1935 that a du Pont is supposed to have rejected the proposal that his company sponsor a Sunday-afternoon radio program on the grounds that “at three o’clock Sunday afternoons everybody is playing polo”; but it was during the same period that Wall Streeters who were members of the Union League Club allowed themselves an unaccustomed kind of luxury, that of self-pity, by gloomily frequenting a room at the club that was wallpapered with securities, contributed for the purpose by members, that had once been worth millions and were now presumed to be worth nothing. (In 1936, when things looked brighter and some of the securities had regained some of their former value, the club would steam them off the walls and return them to their former owners.)

Indeed, one of the liveliest spots downtown in 1934 was a place called the “securities graveyard”–a room on Vesey Street where the auctioneering firm of Adrian H. Muller & Son regularly conducted public sales of huge blocks of worthless stock in bankrupt companies. A band of seedy bargain-hunters–the flotsam of wild optimism floating on the dark sea of depression–frequented the place, bidding minuscule sums for hundreds of thousands of shares that they hoped might somehow, sometime, be miraculously recalled to life. One of the band, an Englishman named Harold Deighton, always ritually bid one dollar for every lot offered, a hundred shares of this ruined company, a thousand shares of that. Sometimes his was the winning bid; but he never got rich.

II

Investigated, ridiculed, reviled, scorned, and even, relatively speaking, impoverished, Wall Street grew sullen, and its rancor focused on its chief tormentor, the New Deal. Joe Kennedy’s appointment was only momentarily comforting. Far from acting as a Wall Street agent in the New Deal camp, the old speculator turned out to fill just the opposite role. Moving deliberately but firmly, he first tackled the huge administrative job of registering the nation’s 24 stock exchanges, their 2,400 members, and their 5,000 listed securities; then, concentrating his attention on the one incomparably biggest and most powerful stock exchange, he used his knowledge of Wall Street to set up a system of Trojan horse listening posts there and was soon coolly putting their findings to work by initiating the SEC’s first legal actions against unreformed stock manipulators. Meanwhile, he was efficiently presiding over enforcement of the law’s new provisions requiring the issuers of new securities to tell the public the truth about them. Wall Street had called the new law unworkable; Kennedy was making it work. In the process he was not surprisingly losing the approbation of his victims and their allies. “Sane and sound,” Dick Whitney had said cozily, of Kennedy’s initial cautious, and apparently ineffectual, approach to Stock Exchange regulation; but in the weeks and months following, as it gradually developed that Kennedy was not only serious about his job but also downright good at it, Whitney’s cooperative attitude gradually gave way to one of surly obstruction to every SEC move.

Who did Joe Kennedy think he was? Back in the days when he was running pools for John Hertz he hadn’t given himself any high-minded airs! Talk about That Man in the White House being a traitor to his class–well, by God, Joe Kennedy was a traitor to his class, too! Or so they were saying in the clubs and pubs where bankers and brokers withdrew to lick their wounds.

There was a moment, in the fall of 1934, when relations between Wall Street and Washington might have turned decisively for the better–and then the moment passed and things went the other way. The occasion was the annual meeting of the American Bankers Association, held the third week of October in (of all places) Washington, D.C., with the chosen theme of cooperation between government and business and the chosen speaker–of all people–Roosevelt himself. Thus grasping the nettle, the bankers were nevertheless in a wary mood. Only a few months earlier the Senate investigation had been exposing the Mitchells and Wiggins and pillorying even the sacred Morgans; and at its convention in Chicago the previous year the bankers had invited Jesse Jones of the RFC to speak, only to hear him tongue-lash them as if they were miscreant children (“Be smart for once–take government into partnership with you”) and point out, with brutal lack of tact, that they were failures even in their own terms. Half the banks represented at the gathering, Jones had reminded them, were insolvent at that very moment.

Now, to tell the truth, the bankers were at bay and knew it; terrified of further government regulation and restrictive measures, they had chosen Washington as their 1934 site and Roosevelt as their chief speaker as a deliberate, if perhaps painful, show of propitiation toward the government. As if to emphasize the point by honoring the occasion, the bankers turned out in unprecedented numbers. Some four thousand came to Washington, from the presidents of the tiniest, most down-at-heel holders of defaulted mortgages and deposits in dimes and quarters–the kind of bank Bonnie and Clyde had lately been ravishing–to the elegant heads of practically every major banking institution in Wall Street. Rarest of all among the delegates were Lamont and Gilbert of Morgan’s. No Morgan partner had ever before honored an ABA convention with his presence.

On the surface, the convention was a love feast as planned. Dominated by the big men of Wall Street, who had decided that for the moment meekness and humility were the watchwords, the bankers, all but an unruly few from the boondocks, kept their rancor against government well in check. The ABA’s president declared that the organization was “wholeheartedly for any program of recovery that does no violence to sound banking principles and does not place in jeopardy the interests of [bank] depositors.” Jackson E. Reynolds, the gentlemanly, venerable president of the First National Bank of New York, in his speech introducing Roosevelt, went much further. “I do not mean to suggest any surrender,” he was careful to say in prelude–yet in the minutes following he was confessing the shortcomings of bankers in the precrash years, conceding that it was unreasonable to expect a balanced national budget immediately in a time of general poverty, describing the banking community as being now in a “chastened and understanding mood,” and finally making the ultimate self-abasement of thanking Roosevelt for all he had done to “rescue and rehabilitate our shattered banking structure.” It sounded like surrender, all right, and Roosevelt, responding magnanimously though lightheartedly with remarks about how banking and government in cooperation could make an “all-American team,” was actually greeted with an ovation. Next day the bankers salvaged some of their pride by voting a resolution calling for a balanced budget as soon as possible, and everybody went home glowing with goodwill and good intentions.

Or so it seemed. But many of the bankers privately had other feelings; in the corridors and hotel suites they were muttering that Reynolds had gone too far, that peace had been bought at the cost of honor. And then it gradually came to be known that there had been a secret sellout. Reynolds had indeed surrendered, privately and in advance. Roosevelt, it emerged, had insisted on seeing a transcript of Reynolds’ proposed introduction as a condition of his appearance. The draft Reynolds had submitted had included a slyly pointed comparison of Roosevelt to the Roman commander Scipio, who as a result of having rejected a laurel branch extended by his enemy Hannibal “died in exile.” It had also included a mildly needling reference to the time long past when Jackson Reynolds had been a young professor at Columbia Law School and Franklin Roosevelt had been one of his pupils–not a particularly apt pupil, Reynolds had planned to say, with a smile. The inclusion of these two paragraphs would have entirely changed the tone of Reynolds’ remarks; but Roosevelt had flatly and adamantly insisted on their deletion as the price of his acceptance of the bankers’ laurel branch.

It was the ultimate, gratuitous humiliation–denial to the conquered of the right to irony. When they found out about it, the bankers hardened their hearts, and the era of Roosevelt-hating in Wall Street was fairly launched.

III

But organized Roosevelt-hating in the nation did not begin in Wall Street. Precisely, it began two months before the bankers’ convention, in August of 1934, with the formation of the American Liberty League, a coalition of rich, conservative Democrats and top-level Republican businessmen chartered to “teach the necessity of respect for the rights of persons and property.” Nominally nonpartisan, the Liberty League at first proclaimed itself “definitely not anti-Roosevelt,” and Roosevelt, tongue firmly in cheek, declared himself in full agreement with its announced principles and suggested that perhaps he might be able to use a Liberty League advisory committee in the preparation of the next national budget. All this was political comedy of the sort Roosevelt relished; he, and the public too, realized from the start that the Liberty League had been formed for the specific purpose of doing away with the New Deal and restoring the Old Deal. As time passed and the League’s membership grew–to 36,000 by mid-1935, and finally to a peak of 125,000 during the 1936 Presidential campaign–it came to be the very focus and instrument of Roosevelt-hating by the rich and the well-to-do, a national symbol of selfish greed. Politically, its efforts were almost certainly counterproductive because of its undisguised sponsorship by the rich; as its historian, George Wolfskill, wrote later, “New Deal spokesmen did not have to refute the views of the League; they had only to call the roll.” Yet it struck a note sympathetic to a significant minority of Americans, not all of them rich. The orators its speakers’ bureau dispatched to business and service organizations throughout the country were the hard core of anti-New Deal political and ideological invective; and its individual members (although not, or not provably, its official management) were the conduits for the spreading of the always vicious, often scurrilous, and usually ludicrous anti-Roosevelt gossip that was a lamentable feature of the middle 1930s. Roosevelt was secretly Jewish (an entire faked genealogy was worked out for him, stemming back to a Colonel van Rosenfelt); his smile had been grafted on his face by a plastic surgeon; he was insane, as evidenced by his maniac laughter; he and his family were drunk all the time; he was having an affair with Frances Perkins; Mrs. Roosevelt was a Communist, and it was arranged that she would succeed him in the Presidency and turn the country over to Russia–such were the preposterous, and indeed pathetic, stories that Liberty Leaguers fell into the habit of telling each other, and anyone else who would listen. Some of the stories actually came to be widely believed. A national news service once distributed to its subscribers as news–or at least, as a “confidential background report” to the news–an item hinting at evidence that the President was afflicted with syphilis. Meanness of the spirit had become an epidemic sickness among the rich, and the contagion had spread beyond them.

Wall Street caught more than a touch of the sickness. It was saved from the worst public excesses of businessmen by its chronic tendency to pussyfooting on national issues–the same tendency that had caused it to stay mute until the last minute on the Warren gold buying scheme. But in the privacy of their clubs and board rooms, where they could safely indulge their deeper feelings without jeopardizing their relations with either customers or the government, Wall Streeters conducted their own soul-satisfying orgies of Roosevelt-hating . The Liberty League, for example, started out confidently expecting to enlist practically all leading bankers and brokers; it ended up with many Wall Street-based anonymous contributors and secret sympathizers, but only a handful of open members. Yet in the unrefined purlieus of the marginal brokerage houses the lowest anti-Roosevelt stories catering to sexual prurience and religious prejudice were freely repeated (and were repeated on occasion, too, in the elegant and sporty Protestant clubs of the Wall Street mighty); the head of one of the largest Wall Street banks confided in deadly earnest to Elliott V. Bell of the New York Times that he believed Roosevelt to be literally “a pathological case”; and newspapers containing photographs of Roosevelt were said to be kept from the sight of J. P. Morgan by acolytes fearful for his aging heart.

Morgan was old, and the story itself is no better substantiated than those that were circulated about Roosevelt. What, on firmer evidence, can be said about the quality of guidance provided by the House of Morgan–still at the time Wall Street’s moral and intellectual authority–during the Roosevelt-hating era? The record is curiously mixed. No Morgan partner joined the Liberty League, though Morgan himself openly contributed to its activities on occasion. Thomas Lamont, by then effectively the firm’s top man, told Harry Hopkins in October, 1934, that he considered Roosevelt to be “the only hope” and “a bulwark for sane policies” and went on to say that he did not consider the New Deal’s relief expenditures excessive. But Lamont was the firm’s diplomatist. Russell Leffingwell, a lifelong Democrat, went on doggedly sending Roosevelt letters of encouragement and what he hoped was helpful advice, even though Roosevelt always rejected the advice and reacted to the letters with growing coolness. In 1936 Leffingwell and Gilbert, the other Morgan Democrat, dutifully contributed substantial sums to Roosevelt’s campaign for a second term (along with virtually no other Wall Streeters, by the way, except W. Averell Harriman and Paul Shields), but their offers were far more than balanced by the contributions to the Republican cause of the Morgan family and George Whitney. Humanly enough, Leffingwell himself came to be less than a Roosevelt enthusiast. “Russell was a very tolerant man, with a good word for everybody,” one of his fellow Democrats in Wall Street has since said. “But I never remotely heard anyone call him a New Dealer.”

Suppressed rage, smooth diplomacy, cautiously offered advice, pained silence–these were the elements of Morgan leadership, and, while better than gutter invective and men’s room scurrility, they were too negative to keep the Street from doing itself discredit in the form and style of its predestined opposition to Roosevelt. Yet the irrationality of the personal hatred to which the Morgans never publicly gave way, and others did, would seem to have been rooted firmly enough in human psychology. On the one hand, bankers and brokers, far more specifically than businessmen, had indeed been saved from ruin by Roosevelt in 1933, and they knew it. On the other hand, whenever Roosevelt spoke of them or dealt with them, it was invariably with either condescension or contempt. To have a condescending, contemptuous savior is too much for all but the most secure egos, and outside of 23 Wall Street there were few secure egos in Wall Street in those days.

One Wall Street Roosevelt-hater, perhaps the most outspoken and surely the most endearing of them, deserves a niche of his own.

Brooding over his disillusionment with the monetary policies of his former idol the President, James P. Warburg, newly resigned from his Washington duties, persuaded his Wall Street banking associates to extend his leave of absence and spent the early months of 1934 on a long Caribbean cruise, writing a book giving his version of the London Conference and the Warren program. Entitled The Money Muddle, and of enough topical interest to be an instant national best seller, it was intended as friendly criticism of Roosevelt’s policies, and was accepted as such; Warburg sent the President a prepublication copy “with every good wish” and many protestations of his continued affection and admiration, and got back a “dear Jimmy” letter in which Roosevelt allowed with airy good nature that he had been reading the book “with plenty of interest,” and cordially invited his former adviser to “run down and see me some day” to talk it all over. But Warburg never accepted the invitation. Still brooding, and perhaps a bit carried away by his sudden public acceptance as an author–it has happened, after all, to other authors–he wrote in rapid succession two more books extending and enlarging upon the theme of his original smash hit. The first of them, It’s Up to Us, openly called for modification of three key New Deal measures, the Banking Act, the National Recovery Act, and the Gold Reserve Act; again the author sent the President an advance copy and again he got back a cordial reply, although this time the cordiality had a certain air of coming from between clenched teeth.

The other book–Hell Bent for Election, really an extended pamphlet, first serialized in the New York Herald-Tribune and then issued in book form in the summer of 1935–was another matter. This time no advance copy went to the White House, and no wonder. As his disillusionment had deepened, Warburg had found himself consorting more and more with the unrestrained Roosevelt-haters; without quite realizing it, he had edged almost into their ranks himself. Hell Bent for Election was emphatically not friendly criticism, despite its author’s elaborate protestations to the contrary. “It is much as if I had a brother who was a locomotive engineer and developed color blindness,” Warburg wrote. “I should continue to love my brother, but I should certainly not feel justified in urging his employers to continue entrusting him with the lives of others.” Specifically, he accused Roosevelt of having fulfilled not his own campaign promises but rather those of the Socialist candidate, Norman Thomas, and sweepingly dismissed the whole NRA as a “gigantic fiasco.” Far more unforgivable and less brotherly, he attacked Roosevelt’s character and motives, accusing the President of having “a rather pronounced flair for the dramatic,” of going in for “showmanship rather than statesmanship,” and of being irrationally driven by a desire “to be a hero” and “to be liked and admired by the greatest possible number of people.” Warburg’s conclusion was that “the present administration is doing more harm than good,” and that as to Roosevelt himself, “the sooner we have done with him the better.”

Hell Bent for Election sold almost a million copies, became the key piece of anti-Roosevelt propaganda, and made its author the darling of Roosevelt-haters of every stripe. And Warburg, as if swept along by his own rhetoric and the howls of delight it elicited, was carried toward the far shore, the Liberty League itself. When the League held its famous January, 1936, dinner launching its campaign against Roosevelt’s re-election, at which Al Smith said that the New Deal smelled of “the foul breath of communistic Russia,” the agonized brother of the color-blind locomotive engineer was on hand to lend his support to the occasion. So his apostasy was complete at last; he was one with the sullen carpers in the celebrated Peter Arno cartoon who went to the newsreel just to hiss Roosevelt.

But wait. All the while he had been edging toward apostasy, Warburg had been nourishing secret, half-conscious misgivings; and now that he had reached it, the misgivings took over. When the Republicans nominated Landon and Knox, Warburg’s support of the ticket was halfhearted. He spent a painful, conscience-stricken summer; then at last in October, seizing as a pretext a Landon speech against reciprocal tariff reductions, he wrote an open letter to Secretary of State Hull announcing that he was reversing himself and now intended to vote for Roosevelt.

Thus ended James P. Warburg’s political Wanderjahr. After the election he left both banking and active participation in party politics, to devote most of the rest of his life to writing and the cause of world peace. What makes his meteoric career as a Wall Street Roosevelt-hater such an engaging detail in an otherwise most unengaging chapter in American life is his own subsequent explanation of how it all came about. “A most illuminating psychoanalysis,” he wrote in his autobiography, eventually opened his eyes to his own motivations. His beloved father’s death in 1932 had been swiftly followed by his adoption of Roosevelt as a surrogate father-figure; but then, “unfortunately, Roosevelt proceeded to attack precisely those psychological symbols for which my father had stood: the traditional banking structure … and the general concept of ‘sound money.’ … President Roosevelt’s actions … aroused not only rational misgivings but an irrational unconscious feeling that my substitute father had betrayed the beloved parent whose place he had to a certain extent taken.” And so he had violently rejected the false father only to discover his mistake too late.

A handsome apology, to be sure! one perhaps unique in the annals of political confession, and certainly unique in those of Wall Street Roosevelt-hating. Would those other crusty old clubmen, the splutterers and newsreel-hissers of legend, have been similarly reformed if only they had submitted to the couch? At least no one can prove the contrary, and it’s fun to think so.

IV

The endemic Wall Street insecurity was felt at the Stock Exchange, and one expression of it was a revolt against Richard Whitney and his stubborn Bourbon regime. But it was a feeble revolt, and its backers, taken as a whole, must be accounted among the most reluctant rebels on record.

The issue, simple enough, was whether the Stock Exchange would continue to be run as a private club as it always had been, or would become the public-oriented institution its function by that time clearly called for. As of the end of 1934 the Old Guard, private-club faction was still firmly enough in the saddle; in that year’s elections Whitney had been smoothly returned for his fifth successive one-year term as president, and the slate of governors elected with him had, as usual, been his hand-picked men. Commission brokers–the potential opposition because they dealt with the public and therefore had a direct financial stake in the public’s interest–owned more than half of all Stock Exchange seats, but occupied only about one-third of the seats on the Governing Committee, and the perpetuation of the “ins” on that body from year to year was assured by a carefully stacked system of nominations and elections.

Still, the commission brokers–the men, after all, who had defied Whitney by cooperating with the government in the writing of the Securities Exchange Act–were restive. Their leadership had long since formed itself into a little group called the Elders, a sort of Stock Exchange shadow cabinet that met regularly for lunch to grumble about the arbitrariness of the Whitney faction and discuss strategy. Despite the presence among them of a real Wall Street maverick, E. A. Pierce, the Elders were scarcely a flaming liberal group. Indeed not! One of their number, Grayson M. P. Murphy, was soon to become the active and enthusiastic treasurer of the American Liberty League, and their lawyer, Raoul E. Desvernine, to become chairman of the Liberty League’s legal division. These were the Wall Street reformers of 1934 and 1935–but when it comes to reformers, Wall Street can hardly ever pick and choose.

In truth, the Elders were caught between fear of Dick Whitney and fear of Joe Kennedy. Above all, they lacked leadership–one man with the personality and drive to stand up to Whitney and beat him and his system in an election. Pierce or Paul Shields wouldn’t do, because they were already too well known as rebels to stand a chance of election. A candidate for the assignment finally emerged, more or less by accident, early in 1935. All through the second half of 1934 Kennedy had been hammering away at the Stock Exchange to start reforming itself before the government was forced to step in and do the job, but Whitney had rebuffed him again and again, and when Kennedy had turned to the Elders, he had encountered mainly foot-dragging. At last, out of patience, Kennedy issued a flat ultimatum calling on the Exchange to enact an eleven-point reform program without delay, and, after Whitney had contemptuously ignored it as usual, Kennedy laid the matter on the line to the Elders: “You people say you’re friends of mine. Now I want you to endorse the program.” Thus goaded, the Elders passed a resolution endorsing the Kennedy program and urging quick action on it. When, at their next meeting, the members of the Governing Committee indignantly denounced this rebellious action, it at first appeared that no one would speak in defense of the Elders since none of them were there–understandably, since Whitney had taken pains to see that none of them were on the Governing Committee. Or almost none. One Elder, a rather junior one at the age of forty-two, was present; he was John Wesley Hanes, senior partner of Charles W. Barney & Company, who had recently slipped into a temporary appointment to the Governing Committee to fill a vacancy. Hanes rose and, in a soft North Carolina accent, vigorously defended the resolution and dared to attack the Exchange Old Guard–right under Richard Whitney’s nose. When he sat down, there was a stunned silence. Later, the word the governors applied to Hanes’ outburst was “heresy.”

So the reformers had a hero–but what a hero! what a reformer! John Wesley Hanes, although by no means a Liberty Leaguer, was hardly out of the revolutionary mold. His family, major textile manufacturers in Winston-Salem, had been the original owners of the Reynolds Tobacco Company and had retained into his time a large enough interest in it to put them among the unassailably rich. After Yale, he had gone into investment banking and, hardly against odds, made a success of it. In the middle 1930s he was one of those gentle, courtly Southerners who used to bring a touch of languid grace to Northern business and professional life, with an air of genuine kindness and a florid, rather pious and sentimental manner; among his pieties was an almost worshipful attitude toward the House of Morgan, which in his canon stood for all that was right and proper, and it was his proudest boast that he could count Lamont, Leffingwell, and George Whitney among his dear friends. His philosophy was pure free-enterprise: that the one thing that makes men go forward on this distracted globe is the hope of reward. Although a good Southern Democrat, a close friend of the Democratic mighty who had attended the 1932 convention in the company of Harry Byrd himself, he had never voted for Roosevelt–not even in 1932, not even for Governor of New York State. In later life he would become a horse-breeder and co-owner of the great Nashua, and would keep a Bible on his desk along with his racing trophies. A model tobacco princeling, then, a fine Southern gentleman of the old school, John Wesley Hanes–but a radical reformer? Only in the Wall Street of 1935.

Hanes and Richard Whitney, the latter the older by four years, had had relations of various sorts for years, but they were scarcely friends. Their families were in contact because their daughters were roommates at Foxcroft, but Hanes opposed Whitney’s administration of the Stock Exchange, and, moreover–by some accounts, though not that of Hanes himself–the two men just didn’t hit it off. As early as 1932 Hanes had come to the conclusion that Whitney’s policies were too unresponsive to public opinion and were consequently doing serious damage to Wall Street’s public image. The following year he had gone to the House of Morgan and expressed this view to his friends and idols Lamont and George Whitney. George Whitney had said, “Don’t tell me–go over and tell it to Dick.” Hanes had done so, and Dick Whitney had given him the same short shrift he habitually gave all his critics. Then in 1934 straight business rivalry, and the suspicion of business vindictiveness, had come between them. Like so many other investment firms that year, Barney & Company had been going through a solvency crisis, and when speculators had launched a campaign of rumor and manipulation to push it over the brink into bankruptcy, Whitney had coolly declined Hanes’ plea that he intervene in his capacity as president of the Exchange. The raid failed, and in later years Hanes with Southern gallantry insisted that Whitney’s aloofness had not been a reprisal. But can the incident have been entirely out of Hanes’ mind when he stood before the august Governing Committee and its bull-necked president early in 1935 and, with fire in his soft voice, spoke the heresy that made him Wall Street’s radical champion?

V

Once again, Whitney rallied his forces for a fight. On February 7, immediately after the Elders had come out in the open in opposition to him, he said bitterly at a public dinner at the Plaza, “We have today a new boss. It is the Securities and Exchange Commission. They can do almost anything to us.… We are accused, and I in particular, of being arbitrary, antagonistic, noncooperative. Yet the only thing the Stock Exchange and its executives are trying to do is cooperate.…” Perhaps; but meanwhile Whitney and his cohorts did not bother to make even a show of cooperation with their opponents within the Stock Exchange. Just as in any private club, nominations for officers were handled by a nominating committee, which annually presented a single, unopposed slate of candidates who could then be smoothly elected by acclamation. This system is, of course, the traditional one by which oligarchies of many kinds perpetuate themselves. But Whitney was in danger of being hoist by his own petard; the nominating committee that had slipped into office in the confusing months following passage of the Securities Exchange Act the previous year was cautiously liberal and anti-Whitney, concerned above all about the Stock Exchange’s public reputation. During the two months between the Plaza dinner and the time when the nominating committee was due to present its 1935 slate, the Whitney forces conducted an all-out campaign of power politicking on the Exchange floor and attempting to influence the members of the committee directly. Arms were twisted, deals suggested, threats made; at one point cards were openly circulated on the floor calling for pledges of Whitney votes in the forthcoming election. Eager to drop Whitney as presidential nominee, but not quite daring to, the nominating committee in March planned to duck the issue by naming not one but three nominees for president and letting the membership decide between them in an open election. The nominees were to be Whitney, Hanes, and Charles R. Gay, a mild, likable broker who seemed to be able to get along with both sides in the controversy and was therefore the perfect compromise candidate. But this arrangement quickly came unstuck. Hanes, the putative firebrand, had by this time decided that on thinking it over he would prefer not to be president of the Stock Exchange, or to engage in a public campaign against Whitney, or both; whatever the case, he abruptly and definitively withdrew as a presidential possibility, agreeing only to run for membership on the Governing Committee. As for Gay, the putative compromise candidate, he muddied matters still further by amiably telling Whitney that if Whitney wanted to succeed himself in office–something that he knew very well Whitney wanted to do badly enough to taste it–then he, Gay, would be delighted to vote for him. So the radical tiger had declined to fight, and the moderate tiger had come out in favor of his supposed enemy the lion. Surely a sad situation for the antilion movement at the Stock Exchange.

For a while it looked as if Whitney would remain in office by default. But now the nominating committee, bolstered by the continued prodding of Kennedy and the Elders, mustered its courage and came to the firm decision that Whitney as president had to go; as a sop to him and his supporters he would be nominated for a place on the Governing Committee. The next problem was to persuade Gay to accept the presidential nomination he had been so cheerfully ready to renounce. “Charley, the job’s yours,” Gay was told heartily by R. Lawrence Oakley, chairman of the nominating committee. “You’ve got to lake it.” When the matter was put that way, Gay nervously consented; later he apologized to Whitney for having done so, adding placatingly, “I don’t care who wins. But I’ve told Larry Oakley that I was in this thing for good.” The nominating committee, too, had its troubles explaining things to Whitney. Oakley tackled the job, not without qualms; this time it was his turn to be nervous. “There’s nothing personal in this, Dick,” he pleaded, after informing Whitney of the decision to drop him. “It’s a matter of public relations.” As Whitney’s neck flushed crimson, he coldly replied that he might well decide to run for president as an independent, and that, moreover, he had the votes to win. So the fat was in the fire.

Early in April, a month before the election as required by the bylaws, the nominating committee bravely announced its slate: Gay for president, Benjamin H. Brinton, a neutral, for treasurer, and to fill the eleven vacancies on the Governing Committee a list containing eight anti-Whitney men of various stripes–among them Hanes, as well as a little-known twenty-eight-year-old St. Louis broker named William McChesney Martin, Jr.–and only two hard-core Whitney men in addition to Whitney himself. Now Whitney faced the alternatives of giving in gracefully or carrying out his threat to run for president as an independent. He took his problem, as he had so often taken other problems, across Broad Street to his brother George at No. 23. George, with the concurrence of Thomas Lamont, told him in no uncertain terms that an independent candidacy would be far too disruptive and divisive at a time when Wall Street’s national reputation was at rock bottom. It was a judgment from which there was no appeal. While he might endlessly defy, snub, and affront his enemies at the Stock Exchange and in Washington, for reasons certainly practical and no doubt psychological Dick Whitney could do none of those things to his elder brother. But if he slunk back from his visit to No. 23 in a self-pitying, et-tu-Brute mood, he was quick in recovering. Whitney was not through yet. He could salvage something from his chagrin. George and Lamont had forbidden only an independent candidacy for president; he was still free to sponsor some of his faithful followers as independent candidates for the vacant governorships, and thus bring about a test of strength with the reformers. Perhaps these followers might score smashing victories over the official nominees; perhaps one of those slaughtered in the carnage might be the willy-nilly symbol of reform, John Hanes; and perhaps, yes, perhaps Dick Whitney himself might still show who was the real boss by getting more votes for governor than Gay got for president. In sum, perhaps he could turn the semblance of defeat into the substance of victory.

So back to the floor with their arm-twisting and their pledge cards went the Whitney cohorts. Publicly giving pious assurances of support for Gay as the next president, they privately urged members to withhold their votes from him and thus indicate lack of confidence. They put up three independents, all reliable Whitney men, to oppose the official slate for the vacant governorships. The contest began to attract national attention. The gallant struggle of the Old Guard and its White Knight to hold its ground against progress came to engage financial-page readers almost as much as the prices of stocks. It was Wall Street drama of a new sort.

The election, held on May 13 with twice the usual number of Exchange members voting and with voting booths to ensure secrecy set up on the trading floor for the first time ever, resulted in precisely the smashing, symbolic victory Whitney had hoped for. The three independent candidates for the Governing Committee were swept into office with resounding votes of 844, 898, and 918. Gay got 1,131 votes for president; Whitney, just as he had hoped, topped that with 1,146 for governor. Possibly sweetest of all, the candidate most crushingly defeated for the Governing Committee was John Wesley Hanes; his 371 votes represented by a wide margin the lowest total given anyone running in the election.

VI

The new president of the Stock Exchange was a stout, bespectacled, Methodist, self-made man of sixty, with no special animus against anyone. Born in Brooklyn, Charley Gay had been educated there, too–at P.S. 35 and then at Brooklyn Polytechnic Institute. He had started in Wall Street as a three-dollar-a-week runner back in the 1890s, worked and saved like an Alger hero, at last bought himself a Stock Exchange seat in 1911, become senior partner of Whitehouse & Company in 1919, and served as a governor of the Exchange continuously since 1923. In background and social position he was far, far removed from Dick Whitney; on the other hand, as a floor member he fell naturally into the Whitney faction, and the two men had been business friends for many years. The question now was, To what extent would Gay as president feel compelled to carry out the mandate of the liberals and change or reverse Whitney’s policies? It was not long in being answered. The very day after the election the new Governing Committee, at Gay’s suggestion, picked as vice president to serve with him E. H. H. (“Harry”) Simmons, the man who had preceded Whitney as president–and a man who had never been known as anything but a steadfast Whitneyite. Step by step, in the days following, the Old Guard was allowed to consolidate its power in the supposedly new regime. The powerful Law Committee remained in their hands. The organizational reforms that the SEC and the Elders had called for showed no signs of coming about. And in dealing with the SEC, Gay, although a good deal more friendly and less arrogant than Whitney had been, turned out when the chips were down to be scarcely more cooperative than the old master of intransigence himself. Finally, Paul Shields–along with Pierce, one of the two most wholehearted backers of the reform movement–took Gay to dinner and accused him of having betrayed it.

“What else can I do?” Charley Gay pleaded. “My hands are tied.”

He had a point. The Whitneyites, of course, still had a large holdover majority of the Governing Committee, since only a quarter of its seats had been at stake in that year’s election. Moreover, by the end of the year they had managed to re-establish such an iron grip on the whole Exchange machinery that any liberal initiative by Gay could be quickly quashed. With the election setback the reform movement had lost its impetus, and Gay had been left a minority president, almost a puppet. It began to appear that Whitney’s victory had been a good deal more than symbolic–to appear, indeed, that he was still boss of the Stock Exchange.

And he had another reason for satisfaction. His retirement, or pseudo retirement, had provided the occasion for public manifestations of the extraordinary respect and even devotion he commanded in Wall Street. A couple of weeks after the election he was handed a testimonial signed by almost two thousand employees at all levels of the Stock Exchange and the Stock Exchange Luncheon Club, declaring that “during the past five years Richard Whitney has gained the loyalty, friendship, and confidence of all those who have served under his leadership.” Such a thing is not easily stage-managed. There is little reason to believe that the testimonial was not spontaneous or that what it said was not the literal truth.

Somewhat less surprising, everything considered, was the action of the Governing Committee that December 26, when it elected Whitney to a four-year term as one of the six trustees of the Stock Exchange Gratuity Fund. The Gratuity Fund was a mutual-benefit arrangement for the families of deceased members with a treasury running into millions, and its trusteeship, of all posts in the Exchange hierarchy, was perhaps the one calling most clearly for scrupulous and unassailable probity. This time the election was untroubled and the vote unanimous. Liberal or conservative, friend or foe, there was no one on the Governing Committee, or almost anywhere else for that matter, who so much as dreamed of questioning that Dick Whitney, whatever his other qualities, was anything but an exemplar of that one.

Chapter Ten

Rising Action

I

Whitney had fought so hard to hold power out of more than stubborn pride, or the love of power for itself; he needed the influence that power confers for urgent personal reasons. Jersey Lightning was still not sweeping the country, and the price of Distilled Liquors stock was sinking. From its early-1934 high of 45 it went into a long, inexorable decline that in a little more than two years would bring it down to 11.

In 1935, while the Stock Exchange fight was going on, he was feeling the vise of debt beginning to tighten. He had paid off his friend Mellick in full the previous July. But the $100,000 he owed Pierce–or, more accurately, owed E. A. Pierce & Company–was still very much outstanding. Open antagonists in public now, he and Pierce, for reasons that can only be guessed at, in private maintained with elaborate ceremony the relationship of debtor and creditor. Every ninety days, as the loan fell due, Whitney would decorously request an extension, and Pierce would decorously grant it. Eventually the renewals became so numerous that Whitney, possibly with a touch of deadpan humor, took to using a form letter to ask for them: “With sincerest thanks and appreciation, believe me, Dick Whitney.” The man who was one of the twin spearheads of the drive to oust Whitney from the Exchange presidency was unfailingly willing to go along with the joke–or, at least, with the request.

The $110,000 debt to Herbert Wellington was still outstanding, and this was in a sense a more difficult matter just because the men were old and close friends. That borrowings between friends can strain or destroy friendships is, of course, notorious. The dynamic of the strain is less often noted. The trouble is that the relationship is entirely one-sided; on the lender falls not only the practical burden, but the moral one as well. The borrower is in the position of testing his friend’s loyalty–entitled by the code of friendship to scrutinize the lender for the slightest sign of restlessness or unease that might signal a wavering of faith, and all the while holding the money, too. Let the lender venture to ask for repayment–a dun–and he runs the risk of being accused of impugning his friend’s honor. Apart from nominal interest on his money, and the dubious reward of gratitude–pale counters when matched against trust in most relationships between men–there is nothing the lender can win.

Wellington did not ask for his money back from Whitney, or not in 1935. The original loan two years earlier had been for a term of thirty days; it was renewed on request a half-dozen or so times, and then, by mutual consent, made open-ended: Whitney would pay when he conveniently could. The two men met constantly at the Exchange and at their clubs, and from time to time Whitney would say casually, “Duke, I haven’t forgotten about that loan and I hope to take care of it.” Wellington would nod equally casually; meanwhile, with Spartan correctness he never initiated a single conversation on the subject. But by late 1935, Wellington said later, he had begun to wonder whether Whitney wasn’t “imposing a little on my friendship.” Moreover, Wellington’s partners, who at least technically shared in the risk, were beginning to get openly nervous. Wellington soothed them by continuing to assume personal responsibility in the matter, and by invoking the sacredness of his friendship: Whitney, he told them, was a man of honor, his pledge was “as good as cash in the bank,” and he might interpret an abrupt request for repayment as an unfriendly act.

At the same time, of course, Whitney still owed J. P. Morgan & Company half a million dollars and his brother George almost a million; but these debts were in the family, and–the Morgan and George Whitney families being morally and financially what they were–causing no strain. Much worse, Richard Whitney in 1935 was borrowing new money, and not from family or even friends.

That January, he approached Paul Adler, a Stock Exchange floor specialist. The two men’s work had thrown them into close and generally harmonious association for over two decades, but their relationship scarcely extended beyond business hours; over the two decades they had dined together on just three occasions. Still, Adler admired Whitney extravagantly.

Whitney said to Adler, “Paul, I want you to do me a great personal favor.”

“Boss, I will be happy to do so,” Adler replied, without even waiting to hear what was to be asked of him.

Whitney asked for a loan of $100,000 for one week. Adler instantly consented, commenting, “I am glad you asked me.” After a number of extensions, Whitney repaid the loan in full. But shortly before making the repayment, he borrowed the same sum, $100,000, from another Stock Exchange member, Otto Abraham, who explained later that he had been willing to make the loan–and also, incidentally, to keep the matter confidential, even from his own staff–out of respect for Whitney’s “high honor and integrity.” In due time, or rather overdue time, Abraham, too, was paid off.

Both Adler and Abraham happened to be Jewish, and from this it might be inferred that Whitney was suffering the legendary fate of the hard-pressed Western businessman, that of “falling into the hands of the Jews.” Such was hardly the case. Interest on the loans, far from calling for a pound of the borrower’s flesh, was an inconsequential part of the arrangements. The loans of Adler and Abraham were motivated by neither avarice nor the wish for revenge. Rather, they were favors granted to ease the presumably temporary embarrassment of a man looked up to–and, no doubt, feared a little; to a man, withal, who headed a regime that still systematically excluded Jews from membership in the Exchange power structure. In truth, the Jews were falling into Whitney’s hands.

All the while, the Street knew nothing of Whitney’s borrowings. By ancient Wall Street custom a rigid code of secrecy shrouded personal loans. Gossip about them might impair the borrower’s future credit, and, moreover, today’s lender knew well enough that he might be tomorrow’s borrower. As Wellington once put the matter, “I have always considered that when I loan money to a friend, it was an act that one didn’t discuss, even with mutually best friends.” Even so, Wellington stretched the code a little once, in the cause of protecting precisely a mutually best friend. It was on Christmas Day, 1935, and Wellington, having slipped off in the afternoon from family doings to the Racquet Club, encountered there George H. Bull, president of the Saratoga Racing Association, and a former Stock Exchange member who had long been close to both Wellington and Whitney. When Bull mentioned that he was considering making a substantial loan to Whitney, Wellington reacted instantly. He strongly advised Bull not to do it without first consulting a lawyer and drawing up a formal note. He gave no elaboration, nor did Bull ask for it; the comment was sufficiently startling–at a club on a Christmas Day–and its implication sufficiently clear. Nevertheless, a week later Bull loaned Whitney $150,000.

II

Most of this money was going straight into Distilled Liquors stock, to which Whitney had by this time decided on a do-or-die commitment. If no one else would buy the sagging stock, he would. Whether or not he dreamed of getting a corner, like Ryan’s in Stutz, is not known. Probably he didn’t; there were no particular bear raiders to corner; the stock was sinking simply for lack of buyers. At any rate, Whitney, apart from all his unsecured borrowings, had huge bank loans outstanding that were secured by Distilled Liquors stock, and if its price were to drop too low, the banks would call for more collateral, which Whitney didn’t have. His alternatives, then, were to support the stock’s price by continuously buying it, thereby protecting his bank loans, or to allow the loans to be called and his insolvency exposed. He was in the classic debtor’s trap of needing to negotiate new loans to support old ones. Throughout 1936 and 1937 he bought Distilled Liquors by the bushel, effectively pegging its price at around 10–and, of course, constantly needing new money in enormous quantities for the purpose.

And in his quest for new money he soon slipped over the rather fine line between asking and taking.

For years he had been treasurer of the New York Yacht Club, as well as its stock and bond broker. In these capacities he had physical access to the club’s securities, and the authorization of the club to dispose of them for its benefit; as a matter of routine, in fact, some of the club’s holdings were usually, and properly, kept in the safe in his office. On February 14, 1936, having temporarily run out of Wellingtons, Adlers, and Abrahams willing to lend him short-term money without collateral, he withdrew from his safe $150,200 worth of bonds belonging to the New York Yacht Club, took them to the Public National Bank & Trust Company, and pledged them as part of the required collateral against a loan of $200,000 to Richard Whitney & Company.

This was criminal embezzlement–no more and no less criminal than the less esoteric form of grand larceny practiced by an ordinary bank robber, the chief difference being that Whitney’s position of trust gave him the vast advantage of being able to work in secrecy and of not requiring violence or the threat of it. Yet the curious fact is that Whitney–who was no psychopath, but a man of exceptional rationality as well as exceptional intelligence–does not seem to have thought of it as wrong. Much later, a psychiatric report would say that he had “never given a thought to the ethical aspects of what he did.” No doubt the psychiatrist was naïve–taken in by Whitney’s arrogant stoicism, his refusal to whine. But it is equally probable that, at the time, Whitney did not think of himself as a thief. Rather, he thought of himself as one who would not be a thief no matter what he did; that is, as a moral superman.

He had done it, or something like it, before. As early as 1926, long before he had become the White Knight, long before his strongman role in the crash had made him famous as well as powerful, he had misappropriated some bonds belonging to the estate of his wife’s father, George R. Sheldon, and pledged them against a personal loan to himself. Lifetime income from the bonds went to the testator’s daughter, Whitney’s wife; and the residuary legatees of the estate were to be Harvard University and St. Paul’s School. Three years later, Whitney had paid off the loan and replaced the bonds in the estate. Then in 1932, temporarily strapped again, he had again pledged some Sheldon estate bonds; again, he had later replaced them.

In both cases, no one had been the wiser, and no one had been hurt. The bank robber, having had the use of his loot, had figuratively re-entered the bank and replaced it. But it is impossible to imagine that Whitney saw the thing quite that way. He had only made temporary use of family money; he had merely caused his father-in-law’s estate to make him what a wit among embezzlers has described as an “involuntary loan.” It is even unlikely that Whitney ever felt the need to go through even such rationalizations as that. What he had done was, alas, very far from uncommon in the Wall Street of his time. Moreover, everything in his particular makeup and surroundings–his patrician background; his instinct for command; his natural hauteur; his antipathy to public authority; the incessant approbation of his peers, his inferiors, his schools, the great world itself–conspired to make him feel that what was placed in his trust was effectively given to him, as so much else in life had always been given to him. Would George Sheldon, if he were living, have loaned him the bonds? Emphatically so! Would Harvard and St. Paul’s have minded? Certainly not! The world repeatedly pronounced him a financial wizard as well as a man of the highest integrity. “Your career in the world of finance has now become of nationwide significance,” New York University had assured him, in conferring on him a Doctorate of Commercial Science in 1932, the year of the second Sheldon embezzlement. Was he not perhaps doing the family a favor in serving as a trustee of the estate–a favor for which the estate might well want to reciprocate?

In sum, the evidence suggests that his “borrowings” from the Sheldon estate prior to 1936 caused Whitney as many qualms as, and no more than, his unpaid loans from his brother George. One did not like to seek help from relatives, but when one did seek it, it went without saying that one intended to repay. Finely honed conscience may not have been Whitney’s predominant trait, as it has seldom been that of men of power, but he was insulated from such conscience as he had by universal approval and the clannishness of the American ruling class in a time when it was under fire. In temporarily taking family funds–Whitney may well have put it to himself–he had taken only what was his own.

Taking New York Yacht Club funds was rather another matter; a man has a sense of owning a club where he feels at home, but not of owning its money. In resorting to this step in the extremity of his situation in 1936, he may have gone through a crisis of conscience, even though never, then or afterward, is he known to have admitted anything of the kind. At the least, he was far too rational and intelligent not to have grasped the practical risks of his action. Now he had crossed his Rubicon; he knew full well that the danger of exposure and scandal was great, and that exposure would bring crashing down in ignominy not just his own life, but with it the old Wall Street of gentlemen and class privilege and noblesse oblige whose ethical code, whose justification of its existence, rested squarely on the concept of sacred private honor. Richard Whitney in 1936 knew that he and the class he had come to symbolize were living with the bright sword of danger.

And all for Jersey Lightning!

Meanwhile he went on borrowing–rather, attempting to borrow–more furiously than ever. That May of 1936 he was back to Paul Adler asking for another $100,000. “Paul, can you lend me a hundred for a week or so?” was the way he put it, according to Adler’s later recollection; Adler–stopping short, this time, of telling Whitney that he was pleased to have been asked–laconically said “O.K.” and went back to his business. He got his money back–not in a week or so, to be sure, but within three months. In June, Whitney took time out to go to his twenty-fifth Harvard class reunion, where he was not surprised to be voted the class’ No. 2 man in achievement, second only to Gluyas Williams, the cartoonist. Later that month Mellick came through with a second $100,000, unsecured. In July Whitney got a second $100,000 from Abraham. Sometime during the summer things took an ominous turn when his request for $200,000 from the firm of De Coppet & Doremus was refused for reasons unstated. It is the first recorded case of a flat turndown of a Whitney request for a loan, and it shows clearly enough that by that time the curtain of secrecy shrouding Whitney’s promiscuous borrowings was at last beginning to fray. And then in the fall the curtain frayed further, and rumors of the borrowings got back to George Whitney.

Apart from the old debts from the previous decade, the Morgan partner had been largely out of his brother’s financial life for years; Dick had come to him for money only twice since 1929. What George Whitney heard now via the grapevine was a good deal less than the whole story; indeed, as it happened, he did not hear about any of the cash borrowings just described. What he did hear about was a group of entirely separate borrowings by Richard Whitney, not of cash but of securities, which, having been borrowed, were promptly pledged as collateral for bank loans; he also got wind of one cash borrowing of $100,000 that was of particular interest in that it came from George F. Baker, Jr., chairman of the First National Bank, son of its renowned founder, and himself one of the most renowned bankers in the country. Wearily, perhaps, George Whitney called his younger brother on the carpet. Dick Whitney readily admitted to those loans–but volunteered no additional information. George Whitney explained that this situation would never do. With the rumors proliferating so wildly, and the facts behind them so blatant, Dick Whitney’s credit and that of his firm would shortly be destroyed. Again, as in 1929, George Whitney did not hesitate. He decided that he would forthwith lend his brother whatever sum might be necessary to clear up all his unsecured debts to others, and enable him to make still another fresh start; and to relieve himself of the detail work of determining what that sum should be, George Whitney asked his brother to submit a balance sheet of his and his firm’s affairs to a younger Morgan partner, Henry P. Davison.

The balance sheet that Richard Whitney accordingly submitted in December was far from complete or candid; for example, it omitted the fact that some of his customers’ securities were improperly pledged. Davison sensed the lack, but not the nature of what was lacking. Why, indeed, should he have sensed it? Promiscuous borrower or not, Dick Whitney was still a member of the Morgan family, still a member of that select circle of “good fellows,” the Morgan creditors, still the Morgan broker at the Stock Exchange, still a member of the Porcellian and the Links and the Knickerbocker! That fraud or larceny should be in the picture was unthinkable. On the last day of 1936 Davison wrote Whitney: “Dear Dick: Sorry to ask you to go to this additional trouble, but it would be very helpful to have a detailed list of all collateral under each loan. Sincerely yours, Harry.” Such a list, if truthfully submitted, would have laid bare Whitney’s defalcations and, it is possible to imagine, changed the course of Wall Street history. But during the first week of 1937 Dick Whitney, in the course of conversation about the jam he had got himself into, succeeded in persuading both his brother and Davison that the additional information was not necessary. Davison, thus misled, came to the conclusion that the sum needed to put George’s brother back on his feet was $650,000. Accordingly, on January 8 George Whitney wrote out to his brother a check for that sum–an additional, unsecured loan for an indeterminate period, on top of the huge sum that Dick already owed him and had owed him for years. And thus, as far as George Whitney knew, he had saved his brother from himself once more.

III

Of course, he hadn’t. Because the younger brother had not dared, or at any rate had not chosen, to confess to the elder that he was now an embezzler as well as a bad investor, and that the new loan had merely improved his situation from critical to desperate. After the $650,000 had been used to settle the securities loans and the Baker loan, the rumors, for good reason, continued. Reacting to them–and also to word that the bottomless well of riches and good nature, George Whitney, was again firmly behind his brother–Duke Wellington in January, 1937, at last decided that, friendship notwithstanding, the time had come for him to ask Whitney point-blank for his money back. Cool, but correct, Whitney returned it in April–three years and three months after the original due date. In an attempt to raise the cash for this purpose, he went again to Abraham asking for $100,000. Abraham risked insulting Whitney by cutting his offer to $65,000, no more; Whitney snapped the offer up, and raised the rest of his debt to Wellington elsewhere. Shortly before this, he had embarked on the venture in larceny that was to prove his undoing.

On the third Monday of February, 1937, the trustees of the Stock Exchange Gratuity Fund, to which the Governing Committee had so gratifyingly named Whitney shortly after his deposition as president of the Exchange, held their regular monthly meeting. Such meetings were always pleasant social events. Trusteeship of the Gratuity Fund was very much an Old Guard preserve; the chairman of the trustees was good old Harry Simmons, and all the other trustees were old friends and allies of Whitney except President Gay, and he, of course, had been coming around more and more lately. No wild-eyed reformers like Pierce, Shields, or Hanes were present to upset the even tenor of things. The only nontrustee who sat in on the meetings was George W. Lutes, an Exchange employee assigned, as part of his job, to serve as clerk of the Gratuity Fund. Lutes, in short, was a minion. Whitney had another reason for feeling at home with the Fund; as with the Yacht Club, his firm was its broker. At the February meeting, along with amiable chitchat, the trustees as a routine matter directed Richard Whitney & Company to sell certain Fund-owned bonds having a face value of about $350,000, and use the proceeds to buy other, more promising bonds. Whitney subsequently carried out the letter of the instructions; that is, he sold the bonds he was directed to sell and bought those he was directed to buy. What he did not carry out was a part of the instructions so wholly taken for granted that it had been unstated. He did not deliver the newly purchased bonds to the Gratuity Fund.

The following month, the trustees authorized a further sale of bonds worth $225,000. This time, for technical reasons, the sale was not made, or not until many months later; meanwhile, Whitney simply took over the Fund’s bonds and held them. So it went month after month. By that November somewhat more than a million dollars in bonds and cash belonging to the Gratuity Fund–almost half of its total assets–were missing from the Fund’s treasury because they were in the custody of its broker.

What Whitney had been doing, as the reader will have no trouble deducing, Was illegally pledging the Gratuity Fund assets against further bank loans to himself and his firm. It was, by all odds, his riskiest defalcation so far–a theft not from family or club but from an organ of the Stock Exchange itself. The Fund’s trustees did not normally consult its books. But one man, in the line of normal duty, did. The man who quite inevitably knew, over the months between February and November, that assets of the Fund were missing because they were being held by Whitney, was the clerk George W. Lutes–a rather meek and trusting man by all evidence, who did not assume that Whitney was using the Fund’s bonds for his own purposes; indeed, according to his later testimony he never dreamed of such a thing. Rather, he assumed that Whitney and his office staff were merely fashionably offhand about the paperwork of getting the Fund assets back where they belonged. As a meticulous clerk, however, Lutes did feel that for the bonds to remain so long in the broker’s hands was less than the “orderly and proper way” to do business. Therefore on five separate occasions between March and late summer he reminded Whitney that the bonds had not yet been delivered to the Fund, and inquired when Whitney would find it convenient to bring them over. On each occasion, Whitney gave approximately the same answer: he was very busy, he had meant to do it but hadn’t got around to it; he would make the delivery shortly; he would let Lutes know.

Lutes never doubted that Whitney meant what he said. (Presumably, in a sense, he did mean it; if only Distilled Liquors would suddenly get on its feet and its stock go rocketing up, he would pay off everybody!) Ostensibly for this reason, all summer Lutes never mentioned the continued absence of the bonds to any of the other trustees of the Gratuity Fund. But there seems to have been another reason for his silence. Commenting later on Whitney’s personality as it appeared in his relations with Exchange employees, Lutes said that Whitney had been “sort of sharp.… He was a man of great importance. He kept to himself. He was friendly enough, but … you could not talk to him if he was busy.… I was under him as an employee of the Exchange and I am only a clerk.… Frankly, I was afraid of him.” Which would seem to shed light on why Whitney was not particularly worried about exposure by George W. Lutes.

And others, not so lowly or humble, were getting sharp replies from him, too; it is interesting that through the summer of 1937, as his financial plight worsened and the web of his deceptions grew more tangled, his hauteur seems actually to have increased. No compromise with his Groton-Harvard accent and manner, his Bourbon political and social views, his patronizing air toward upstarts, accompanied his Gargantuan panhandling. He never tugged a forelock–because he couldn’t. That his panhandling continued, and on a Gargantuan scale, is recorded. Distilled Liquors by autumn was down to 9, and Richard Whitney & Company was pegging it there virtually unassisted, by meeting all offers; during the whole of 1937 the firm was the buyer in over 80 percent of all transactions in the stock. Down this rathole dollars by the hundreds of thousands simply disappeared, and more were constantly needed. George Whitney, who had been taken seriously ill shortly after making his bail-out loan, was unavailable, convalescing in the South. Once Whitney asked Pierce, whom he still owed the $100,000 from 1933, for half a million dollars more; Pierce, of course, turned him down. (Later Pierce was asked if he didn’t think that was a terribly large amount to be asked for; he replied that he didn’t consider it especially large “in the Wall Street sense.”) In mid-September Whitney asked Abraham for $100,000, and this time was offered only $30,000, which he eagerly accepted; the declining scale of Abraham’s loans was barometrically charting Whitney’s descent to disaster. That same month he mortgaged his New Jersey estate for $300,000.

IV

Public life was meanwhile still impinging on him, and he on it. More than ever now he was the power behind the scenes at the Stock Exchange; and now, after a marked lull in 1936, the war between the Stock Exchange and the SEC was moving toward a showdown confrontation. In midsummer 1937 William O. Douglas, a tough-minded professor of law with leftish ideas, was appointed to take over the reins of the SEC from James M. Landis, the man who had succeeded Kennedy in 1935. Landis, a practical man of legal training and legal turn of mind, had been generally conciliatory toward Wall Street, but Douglas, the product of a State of Washington sheep ranch with a Westerner’s distrust of slick Easterners and their ways comparable to that of the Populist legislators who had denounced Wall Street a decade earlier, was expected to be another matter. And rightly. Even before taking office, Douglas had resolved to force the Exchange truly to reform its structure, to cease operating as a private club, or face the prospect of nationalization in everything but name.

Sensing that a showdown fight was at hand, Wall Street contrived to strike the first blow. It was Charley Gay, the backslid reformer, who did the striking. In his Stock Exchange annual report, published in mid-August, he bluntly accused the SEC of harassing the Exchange and its members, maintained that the SEC had already hamstrung the market to the verge of destroying it, and left the clear implication that the Exchange demanded nothing less than repeal of the Securities Exchange Act and abolition of the SEC. The Exchange’s cards were on the table–and they were Whitney cards; the Gay report expressed the Whitney hard line precisely, and obviously signaled the return of the Whitney faction to effective control of Exchange policies after two years in limbo. In September Douglas took office with fire in his eye. But before he had time to master the routine of his job, much less prepare a riposte to Gay, the unexpected happened. Peace emissaries, perhaps even surrender negotiators from the enemy camp, appeared in his. They were Pierce and Shields, the indefatigable reformers and commission brokers, who, both morally outraged and materially damaged by the way things were going at the Exchange, presented themselves without prior introduction at Douglas’ Washington office.

Pierce, speaking for the visitors, abruptly asked Douglas, “What would you think of reorganization of the Stock Exchange?”

What would he think of it? It was the one goal he had set for his administration of the SEC. Douglas is said to have slapped his knee in delight and incredulity. “Would you mind saying that again?” he asked.

Pierce and Shields would not mind; they repeated, and amplified, saying the very things Douglas had been thinking: that the Exchange was being run like a private club, that the Old Guard that still controlled it was hopelessly out of date, that the proper solution was an entirely new organization with an independent paid president put in charge. Thus the stage was set for Douglas to move toward his objective stealthily, through this doughty fifth column within the Exchange itself, rather than through head-on attack. The only question was whether the Pierce-Shields faction had enough power to be useful. But before he could do anything, further events intervened. Two days after the Pierce-Shields visit–on October 18–the stock market, which had been declining since August, suddenly collapsed in panic. All summer the clouds of national recession had been gathering. The boomlet of the preceding two years had been based on government spending pure and simple; now Secretary of the Treasury Morgenthau finally prevailed on President Roosevelt to make a real effort to balance the national budget. The resulting cutbacks in federal spending did not balance the budget, but they all but ended the New Deal and emphatically ended the boomlet. Commodity prices, at a seven-year high early in 1937, went into a nosedive as buying power dried up in response to decreased government spending; strikes became epidemic; corporate dividends were cut; the familiar deflation spiral took over. On top of all that, the Gay report in August unsettled stock investors with its portents of Stock Exchange intransigence like that of 1934, and another long, tedious Wall Street-Washington bloodletting. What was most surprising was that the market collapse had not come sooner.

When it came, it was most frightening for the memories it aroused. Here it all was again–that nervous hum of talk outdoors in Wall Street every day, the worried crowds in the board rooms and outside them, and on the Exchange floor the constant appearance of huge blocks of stock for which no one would bid at any price, the sense of bottomlessness–a reprise of 1929, a sickening déjà vu, and, with panic feeding itself as usual, the market by the end of 1937 would have lost nearly all of its painful gains since 1934. The Stock Exchange and the SEC were not drawn closer together by the disaster. On the contrary, each blamed it on the other, the Exchange maintaining that the new crash merely bore out what Gay had said, and the SEC countering with the charge that it was a direct consequence of the Exchange’s backward-looking and self-seeking mismanagement.

In this atmosphere of rancor and crisis, negotiations looking toward Stock Exchange reorganization hobbled forward–with Whitney, simultaneously working so frantically toward the reorganization of his private affairs, doing all he could to cause the hobble. On October 20 Shields in Washington saw Joe Kennedy–out of office now, but still in official favor and acting as a personal emissary of the President. In picturesque language Kennedy made it clear that the President was unequivocally behind Douglas’ determination that the Exchange reform itself or be taken over. Back in Wall Street the next day, Shields passed along this information to a grim-faced group representing the Exchange power structure-Gay, Simmons, the lawyer Roland Redmond, Gayer Dominick, and, of course, Dick Whitney. Impressed, and a bit intimidated perhaps, the majority of the Old Guardsmen were willing to concede that the politic moment had come to surrender gracefully, to agree in principle to reorganization. But one man held out, and held out so forcefully that the memorandum to Roosevelt that finally came out of the meeting tersely and arrogantly informed the President of the United States that the Stock Exchange had reorganization “under consideration.” No more–the Exchange would decide what was best. The holdout, and principal author of the memorandum, was Richard Whitney, who, it was later reported by some of the participants, had been the most commanding and assured man in the room. Moralists who believe that secret debt and long-pursued wrongdoing undermine the character may well take note.

There followed, over the ensuing month while the market plunged on down, a confused series of skirmishes leading to stalemate. In the last week of October Shields took the Stock Exchange’s highhanded memorandum to Hyde Park and there apologetically presented it to Roosevelt, who, logically enough, was merely confirmed in his conviction that the Exchange was hopeless and must be dealt with ruthlessly. But soon afterward Pierce and Shields, still gamely fighting for compromise, rounded up a coalition Wall Street delegation–Simmons and Shields included so as to give representation to both factions, Whitney excluded as too infuriating to everybody but his friends–to go to Washington for one last try at an accommodation with the SEC. They went, and were greeted with harsh words from Douglas: “The job of regulation’s got to be done. It isn’t being done now and, damn it, you’re going to do it or we are.… If you just go on horse-trading, I’ll step in and run the Exchange myself.”

On a November Saturday a couple of weeks later, Gay, Shields, and Douglas, among others, spent some twelve hours in a private room in the Yale Club of New York, wrangling acrimoniously and unproductively. The only outcome of this session was that the matter of reorganization was referred to the Exchange’s Law Committee–in other words, to Richard Whitney; the Law Committee was just as much a Whitney preserve as the Gratuity Fund. The fate it suffered there was what might have been expected. After due deliberation, the Law Committee concluded that reorganization with a paid president was inpracticable, and that negotiations with the SEC should therefore be broken off. It drafted a harsh letter to Douglas saying so.

That was on Friday, November 19. The following Monday, Richard Whitney’s public and private careers came simultaneously to the point of crisis.

That morning his Law Committee formally approved the harsh letter; when an Exchange lawyer delivered it to Douglas in Washington a few hours later, the SEC chairman merely nodded and said grimly, “All right, then, we’ll take the Exchange over.”

Early that afternoon, when the Gratuity Fund trustees held their regular monthly meeting, Whitney, who was having a busy day with affairs of state, passed it up. This proved to be a costly slip. The clerk Lutes, emboldened by the absence of the man he found so formidable a presence, mustered his courage at last to inform the other trustees that Whitney had now been holding cash and bonds belonging to the Fund for months on end.

The interesting reaction to this bombshell on the part of the trustees, and in particular of their chairman, Simmons, was one of surprise and annoyance–the surprise occasioned by the fact that none of them could imagine Whitney doing such a thing, and the annoyance curiously directed chiefly not at the absent Whitney but at the present Lutes. What Simmons criticized the clerk for was not having mentioned the matter sooner; is it possible, too, that Lutes found in Simmons’ tone some hint of rebuke for his presumptuousness in implying–in merely raising the possibility–that Richard Whitney was guilty of wrongdoing rather than merely of carelessness? Whatever the case, Lutes felt that he had been thoroughly, and unjustly, chastised. “He spoke quite sharply. He seemed to be a little peeved,” the clerk later complained of Simmons. The lot of spear-carrier in the wars of the gods is not a happy one.

Immediately after the meeting, Simmons telephoned Whitney’s office. Whitney was out, and Simmons talked to F. Kingsley Rodewald, one of Whitney’s nominal partners, who, like all of them, had no personal investment in the firm and was for practical purposes really not so much a partner as an employee. Simmons told Rodewald (who, it later appeared, had known nothing of the whole matter) that his firm was holding Gratuity Fund cash and bonds that were long overdue; and the mystified Rodewald assured Simmons that they would be returned the next day.

At around noon the next day, Whitney called on Simmons at his office. We may imagine the complex moods of the two old friends and allies at this encounter–Simmons suspicious, and feeling disloyal for his suspicions, and desperately seeking reassurance that they were wrong; Whitney forcing himself to be calm and casual, guarding against the wrong word or gesture that would give him away; both thinking of the enormous implications, for Wall Street and even perhaps the nation as well as themselves, of what was at stake between them. Whitney, in any case, asked for a one-day delay in making the deliveries; his office was temporarily short-handed, he explained, and it was not convenient for him to get the paperwork involved in the restoration of the assets done that day. Simmons replied, carefully and regretfully, that as chairman of the Fund trustees he did not feel he had the right to grant such a request, and asked Whitney to make every effort to return the assets that same afternoon. Whitney said he would do the best he could.

His back was to the wall at last. At that moment he had $657,000 worth of Gratuity Fund bonds pledged as collateral on loans from the Corn Exchange Bank, and, in addition, he owed the Fund in cash $221,508.18. Yet the total cash he and his firm had on hand was just under $75,000. He could neither release the bonds nor repay the cash. From Simmons’ office he went the only place he could go–to his brother at 23 Wall. This time he did not evade. He had, he told his appalled brother, pledged as collateral a sum of securities belonging to a customer, and was unable to meet a demand for their return. The customer, he went on, was the Stock Exchange Gratuity Fund, and the sum was substantial.

Richard Whitney later described his brother’s reaction to this information: “He was terribly disturbed and aghast that it could have been done and asked me many, many times why I had done it, and just couldn’t understand it–thunderstruck, as he had reason to be.”

(George Whitney said later: “I asked him how he could have done it … and he said he had no explanation to offer.”)

The thunderstruck one asked what sum would be required to make possible proper delivery. The younger brother, after some calculating, replied that he regretted to say it came to $1,082,000. George Whitney apparently did not blanch. He saw his duty. But he did not have that sum in his pocket–or, at the moment, in his bank account either. Accordingly, he immediately went to his senior partner Lamont. To Lamont he explained that his brother had misappropriated from “some customer”–he was no more specific than that–and asked Lamont to lend him the money to bail Dick out.

Lamont said: “Well, this is a devil of a note, George. Why, Dick Whitney is all right–how could he mishandle securities, even for a moment, no matter what the jam?”

George Whitney said, “I don’t know, it is an inexplicable thing; it is an isolated instance; but he has got to deliver them tomorrow, and I am going to help him out; I have got to help him out, of course.”

Lamont said, “I think you are dead right. Certainly I will help you to help your brother; certainly.” Told the sum required, Lamont said, “Well, count on me. I am going South for some golf immediately after Thanksgiving. Put it in whatever shape you like and I will O.K. the ticket.”

The following morning–November 24, the day before Thanksgiving–Thomas Lamont wrote George Whitney a check for $1,082,000 representing a personal loan at 4 percent annual interest, and George Whitney immediately in effect endorsed it over to Richard Whitney. Using this money to repay the Corn Exchange Bank, Richard Whitney that morning released the Gratuity Fund bonds. Between twelve-thirty and one he delivered them and the cash, without comment, to Simmons, whereupon Lutes, in the presence of Whitney and Simmons, put the bonds in the Gratuity Fund’s vault and deposited the cash in its bank account. Whitney had missed Simmons’ deadline by a day, but he had met the extension he had asked for; above all, he had delivered, and now all was in order.

So far as Simmons, the other trustees, and even Lutes were concerned, the incident was closed: Whitney’s office short-handedness was the true reason for the delay in delivery, and his languid way of doing business the only occasion for the whole episode. For the present, then, no one knew for certain that Richard Whitney was an embezzler except George Whitney and Thomas Lamont. One other man, a couple of weeks later, was vouchsafed partial knowledge of the affair. George Whitney, in order to repay part of Lamont’s million-dollar loan to him, needed permission to withdraw funds from his capital account with J. P. Morgan & Company, and so went to the only man who was empowered to grant such permission. The man was J. P. Morgan. George Whitney said, “Dick got into an awful jam in November, and I went to Tom Lamont when you were not here and he loaned me the money. And so I want to pay him, and will you let me take it out?”

Morgan said, “Certainly.” And it was done.

“An awful jam”–horses? women? No, Morgan (who knew Richard Whitney only slightly) said later, he had realized it must be a business matter–“The sum was too big for anything else.” He had delicately refrained from inquiring further into the affairs of his partner’s brother.

Three men, then: Morgan knew of a million-dollar “jam,” Lamont knew it was a criminal misappropriation, George Whitney knew it was a criminal misappropriation from the Stock Exchange Gratuity Fund. And these three men, figures of legend in their own time, by instinct kept silence–without even verbally agreeing to do so. Thus the rich wine of friendship and class loyalty, of brothers and partners and wives and schools and clubs, outmatched the paler, watery moral vintage of social conscience.

Chapter Eleven

Catastrophe

I

George Whitney devoted Thanksgiving Day to trying to salvage his brother’s shattered affairs, and perhaps, too, his shattered opinion of his brother’s character. That morning, at his insistence, Richard Whitney came to his house and laid before him a hastily assembled set of figures purporting to show the condition of Richard Whitney & Company as of that moment. The figures, which Richard Whitney would later admit were false, showed the firm to be in the black to the extent of about one million dollars. The elder brother, however, did not question the bona fides of the accounting–only Dick’s high valuation of the enormous amount of Distilled Liquors stock that by this time had come to constitute most of the assets of Whitney & Company. After marking the stock down to a more realistic valuation, George Whitney concluded that the firm was still in the black by perhaps half a million–provided the stock could somehow be sold. He also concluded that the Distilled Liquors debacle demonstrated that Dick’s business judgment had gone to pieces, and that the best course now would be for Dick to get out of the brokerage business as quickly as possible, before other debacles ensued. Someone ought to be found who would want to take over a firm with such a fine reputation extending over two decades–some wealthy man, say, might want to put his son into it. Shocking as the notion of giving up his very foothold in the world he had lately ruled must have been to Richard Whitney, he responded like a younger brother whose elder brother had just saved him from a desperate jam by lending him a million dollars; he agreed.

The next step was taken even without waiting for the holiday to be over. George Whitney telephoned his brother’s old friend Harry Simmons and asked him to come over and join the brothers that afternoon. Simmons, taken aback, pleaded that he was committed to church and then a family dinner. Nevertheless, late that afternoon he came to George Whitney’s house to confer with the two brothers, the elder of whom outlined the situation and explained the plan. Nobody quite came out and said so, but it was clear enough why Simmons had been so hurriedly and urgently invited, if not summoned. Obviously the thought was that he might be the man to take over Richard Whitney & Company. Simmons was not having any of that. Without even looking at Richard Whitney’s sheet of figures, he volunteered the information that he knew nothing about bonds–ostensibly the principal business of Whitney & Company–and therefore wasn’t in the market.

A mood of disappointment settled over the conference. The conversation trailed off in discussion of various possible methods of disposing of the business; it was agreed among the three, for one thing, that a sale of the firm would be preferable to outright liquidation because of the value of its celebrated name. It was agreed that in the days following, Richard Whitney would devote himself energetically to the related matters of finding a buyer for his firm and finding a way–some way–of converting all that Distilled Liquors stock, delicately referred to by the conferees as the “slow assets,” into cash.

No one at any time mentioned the incident of the Gratuity Fund.

The day after Thanksgiving, George Whitney mentioned to his partner Lamont that he had decided Dick was no longer “capable of handling a business properly and adequately,” and that accordingly he was “going to get him to wind up his business.” “Well,” Lamont replied, with Morgan understatement, “I should think that was a good thing.” That same weekend, both George Whitney and Lamont left New York for their long-planned vacations in the South. As for Simmons–who, it will be remembered, had no firm evidence that Whitney had embezzled from the Gratuity Fund, and who, indeed, stated later that at this time he had not the faintest doubts as to Richard Whitney’s integrity–he had several meetings with Whitney during December at the Stock Exchange Luncheon Club, in the course of which he inquired how the plans for liquidation were coming along. Slowly, Whitney replied, mentioning one group or another that he thought might be interested in taking over the Distilled Liquors account or even the whole firm. In fact, the plans were not proceeding at all; nobody wanted the stock or the firm, and Whitney was continuing his frantic efforts to support the market price of Distilled Liquors and for this purpose, of course, to borrow more money. Just before Christmas Adler let him have another $100,000, which this time was repaid on the button a week later; but the harder-boiled Abraham, asked for the same sum, this time came through with only $15,000–almost an insult, but Whitney nevertheless took it. On January 3, 1938, Whitney had to report to George, back from the South, that his liquidation negotiations had “fallen through.”

Meanwhile Richard Whitney’s career as the White Knight was in its appropriately quixotic last phase. Privately defeated and dishonored, he played to the hilt the last act of his public role as man of iron principle. Gay had decided by Thanksgiving Day that there was nothing for the Stock Exchange to do but give in gracefully to Douglas and the SEC, and reform itself from top to bottom. The alternative, he understood clearly now, was just what Douglas had warned of–a “takeover” by Washington. Early in December, with the reluctant approval of the Stock Exchange governors, Gay put together a new group, composed partly of outsiders to the Stock Exchange and headed by Carle C. Conway, chairman of the board of Continental Can, and notably including the New Dealer A. A. Berle, Jr., to make recommendations as to reorganization of the Stock Exchange. Here was an all-but-formal concession of defeat; everyone understood that the Conway committee would recommend reorganization of the Exchange along the lines proposed by the SEC, and presumed that the Exchange would have to accept the recommendation. Whitney’s Law Committee stubbornly objected to both the existence of the Conway committee and its generally liberal makeup, but in vain. Majority sentiment in the Exchange leadership, while probably still privately on Whitney’s side, had opted for expediency; Whitney almost alone continued to stand on principle. By the first of January the Conway committee was writing its report; on the twenty-seventh, when the report was published, it was found to recommend everything–the paid president, the technical staff, the nonmember governors, the provisions for increased influence of liberals within the Exchange–that Douglas had wanted in the first place. Gay instantly endorsed the report in full, and Douglas warmly commended it. To emphasize the new mood of peace and harmony between Wall Street and Washington, the newest appointee to a seat on the SEC was the Morgan-worshiping North Carolinian John Wesley Hanes, who, interestingly enough, thereby became the first deep-dyed Wall Streeter since Joe Kennedy to join the New Deal in any top-level domestic capacity.

The long war was all but over at last; a stage had been reached when hostages were being exchanged. But Whitney was not done standing on principle. On January 31 the Governing Committee met to consider the Conway report. Overwhelming sentiment was for immediate and unconditional acceptance. Only Whitney and his cohorts, their ranks thinned to a pathetic few, held out, insisting that the report be accepted only in a general way, leaving leeway for rear-guard struggles on each individual provision, along the lines of the famous fight against the Securities Exchange Act. So great was Whitney’s eloquence that for a moment it appeared he might still win the day. But Gay, stepping down from the presidential rostrum into the well of the governors’ chamber to emphasize the gravity of what he had to say, replied with an impassioned exhortation that the Exchange at last stop maneuvering and temporizing and accept the inevitable with good grace.

Acceptance was unanimous–but for a single vote. It was, as a matter of fact, to be Whitney’s last vote as a Stock Exchange governor.

II

During January George Whitney applied himself one last time to his brother’s affairs, this time taking over the thankless task of personally trying to manage a liquidation of Richard Whitney & Company. Had he succeeded, he would later have been in trouble himself, since the firm, as his brother had not told him, was insolvent. But he did not succeed. His chief thought now was that the rescuer might be his own firm–that Morgan’s itself “might conceivably in some way” arrange to take over the Distilled Liquors stock as collateral for a new loan giving Whitney & Company the cash that would make it more appetizing to a prospective buyer. If the matter were viewed as strictly a business proposition, one formidable obstacle to this course of action was that Whitney & Company still owed Morgan’s all but $26,000 of the half-million dollars Whitney had borrowed back in the dark ages of 1931. Nevertheless, George Whitney doggedly, and maybe by this time a little sheepishly, asked Francis Bartow, the Morgan partner most versed in common stocks, to look over the Whitney Distilled Liquors portfolio with a view to seeing whether it might somehow meet his firm’s standards for collateral on a new loan.

Bartow had his troubles. Digging into the affairs of Distilled Liquors, he found that the company’s assets consisted mainly of about 550,000 gallons of Jersey Lightning (“brandy,” Bartow called it elegantly) and one million gallons of cider. As he recounted later, he asked himself, “How can any man living determine that such a volume of liquor can be sold within six months or within a year?” Perhaps some man living could have determined it, but Bartow could not, and neither could the two of his other partners whom he consulted. Thus the matter of the new loan remained in abeyance, and the crisis of Whitney & Company dragged on.

But meanwhile something else had happened. Rumors of financial stringency at Whitney & Company had at last reached the place where they could do the most harm–the Stock Exchange–and set in motion an inexorable chain of events. Simmons, right after Thanksgiving, had tortured himself with the notion that it was his duty to repeat the tale of Whitney’s slowness in producing the Gratuity Fund assets to the Stock Exchange’s Business Conduct Committee, its disciplinary body. On reflection, though, he had decided that since Whitney had come across with the assets and everything was now square, there was no call for such talebearing on his part. And now there re-enters our story a character who has been missing from it for a long time: Sell ’em Ben Smith, the bull-necked, bellowing speculator and pool operator and the public villain in the bear market of 1930 and 1931. In mid-December President Gay invited Smith, now a solid, respected member of the Exchange community, to lunch privately in his office. During the lunch Gay asked Smith what he thought could be done to create better public feeling toward the Stock Exchange.

The two men later differed on precisely how Smith had replied. Smith said, “I told him I didn’t think he would ever be able to do it as long as he had the Old Guard in there.… I cited Mr. Whitney, and I told him that the quicker he got rid of him the better off the Exchange would be; that I felt that he was in a large measure responsible for the discredit in which the Exchange stood today. He wanted to know what I had against him, and I … said that he was broke and owed money all over the Street and I didn’t think it was befitting for him to be one of the leading governors of the Exchange.” Gay later corroborated all of this except that he vehemently denied that Smith had said that Whitney was “broke.” He further commented that Smith’s attitude toward Whitney, as expressed by his manner during the lunch, had been antagonistic, bitter, and angry.

Perhaps so; the self-made Irishman and the haughty Brahmin were set against each other by almost every casus belli that the harsh little society of Wall Street and the harsh big society of the United States could offer them. What had come between them since 1931 and 1932, when Whitney’s fervent defense of short selling in Washington had been, after all–in general if not in particular–a defense of Smith? We do not know; but it is easy enough to imagine some offhand slight by the Brahmin or some tactless crudity by the Irishman, at one time or another, on the Exchange floor or somewhere else in the little world they both inhabited. At all events, because of Smith’s evident hostility toward Whitney, Gay discounted much of what he had heard. In the month following the lunch he made no effort to inquire into the financial affairs of Whitney & Company. But he was, inevitably, put on the alert for such news when it came.

By the kind of irony that life contrives with ease where art wouldn’t dare, the rumor that did start action was a wholly false one. One day in mid-January, John B. Shetlar, Stock Exchange specialist in the stock of Greyhound Corporation, noticed what he called “distress selling” in Greyhound. “It came in five-hundred-share lots,” Shetlar would recall later, “but was continuous”; moreover, the lots, coming from many different brokers, “were thrown in for sale at the market regardless of price.” Somehow or other–without evidence, but relying on the sixth sense about market operations without which no floor specialist could survive–Shetlar came to the conclusion that the distress selling originated with Richard Whitney & Company (in spite of the blind provided by the multiplicity of brokers) and was the tip-off that that firm was in dire trouble. As a matter of fact, later investigation showed that during mid-January not a single share of Greyhound was offered for sale by Whitney & Company on behalf of either itself or its customers.

If he knew that a member firm was in bad trouble, it was Shetlar’s clear-cut duty as a member to notify the authorities. Conscientiously acting on his hunch, he went to Duke Wellington, in his capacities as an Exchange governor and close friend of Whitney. He told Wellington of the distress selling and of his belief as to its source, whereupon Wellington nodded and replied, “I’ll take care of the matter.” Wellington immediately went to the proper Exchange authority–Howland S. Davis, chairman of the Business Conduct Committee–and passed along what he had heard, pleading with Davis that, in any action that Davis might see fit to take, Wellington’s name as the informant be kept out in consideration of his personal relations with Whitney. Davis agreed to that. And then a strange thing happened. Wellington had scarcely moved from the spot on the Exchange floor where he had the conversation with Davis when he was given a message that Whitney wanted to see him. Upon his meeting Whitney, the latter asked for a loan of $25,000, unsecured. Wellington, remembering the years he had waited to get back his original loan, had already turned down one request by his old friend for $100,000, the previous November. Now, with Shetlar’s report to add to what he knew already, he had no doubt what he had to say. His answer was no.

The chairman of the Committee on Business Conduct went into action. Howland Davis was by background and inheritance a potential Old Guardsman; son of an old-school gentleman broker, he had grown up in a house in Murray Hill across Madison Avenue from J. P. Morgan’s and had gone to the Morgan daughters’ coming-out parties; as a broker himself, he was often thought to be a “Morgan man” because he had social relations with several of the Morgan partners, but in fact his firm was never a house pet of No. 23 in a business way. Davis had met both George and Dick Whitney in their boyhood and his, and had taken an instant dislike to them–as he put it years later, he found the two boys “perfect snobs” and “pains in the neck.” Still, long after that, when Davis had become a Stock Exchange governor and had thus found himself often in Dick Whitney’s company, he had modified his opinion as to that brother, and even become cautiously fond of him, though never close. As to Wall Street politics, for all his connections Davis had never been an Old Guardsman, but neither was he a reformer; as an independent he had remained aloof in the 1935 Stock Exchange fight. Now, when he heard Shetlar’s report via Wellington, he saw his duty. One of the reforms that the Stock Exchange had lately adopted under SEC pressure was to institute the practice of sending questionnaires about current financial condition at intervals to all member firms. As it happened, the first of the forms under the new procedure were to be mailed out in just a few days, on January 20; in the normal course, Whitney & Company was not scheduled to receive its first form until mid-May, for reply by the end of May. But Davis now directed that Whitney & Company be advanced to the top of the list, and be sent its questionnaire immediately, for reply by February 15. That, he felt, would straighten out the situation; moreover, since the firms themselves in most cases did not know the Exchange’s schedule for mailing out the forms, there would be nothing particular in the early arrival of his questionnaire to arouse Whitney’s suspicion that he was under suspicion.

Thus a false scent had set the dogs on the true trail. Whitney got his questionnaire. On February 15, the due date for its return, he requested a week’s extension, which was granted. He filed his return on February 21; a quick check of it was made by the comptroller of the Exchange that same evening. Whitney’s return, although necessarily far more detailed than his Thanksgiving Day accounting for his brother, nevertheless similarly contained omissions that had the force of falsifications; even so, the comptroller’s preliminary analysis indicated that the firm’s capital position fell far short of the requirements of the Business Conduct Committee. So the next step, routine in such cases, was taken: on February 23 a staff accountant of the Exchange was sent to the Whitney offices at 15 Broad Street to make an audit of the books.

Again, the books themselves were falsified–but insufficiently. Realizing this, Whitney on February 24 called on Davis at his apartment uptown to plead for more time. He knew, he said, that his capital fell short of requirements, that his assets were injudiciously concentrated in certain specific securities, and so on. But, he explained, he was actively negotiating for a loan of about $700,000 that would enable him to correct all deficiencies; he very much disliked the prospect of having an even partially unfavorable report on his reputable firm go into the Exchange records; and in view of all this, might not the accountant now in his offices be withdrawn, to return in a few weeks when everything would be to rights?

The reply of the man who had once thought Whitney a pain in the neck, and later grown fond of him, was that it seemed to him advisable that the accountant be permitted to continue his work in the normal way.

By February 28–five days after he had begun his digging in Whitney’s office books–the Exchange accountant had extensive but not conclusive evidence of misappropriation of customers’ securities. On March 1 Davis told Gay of the findings so far. The following evening, at the Metropolitan Club, Gay, Davis, Simmons, and the Stock Exchange lawyers met with Whitney’s personal lawyer, L. Randolph Mason, to hash the whole thing over. Delicately, they warned Mason that there appeared to be serious doubt as to whether his client’s books truly reflected his financial situation. They would be in touch. The day after that–Thursday–Whitney made a second unsuccessful attempt to influence Davis to call off his dogs. On Friday the dogs found the corpse. The Exchange comptroller reported to his superiors that he had now established positive proof that Richard Whitney was an embezzler and that his firm was insolvent.

On Saturday morning, March 5, the comptroller confronted Whitney in person with the evidence he had uncovered. Whitney, as the comptroller put it later, gave a “tacit admission” that he had misused customers’ securities. This was a feint; Whitney had not given up yet. That afternoon he spent two hours in Gay’s office playing his last card. Readily admitting misconduct, he asked for special consideration–specifically, that the Exchange quietly allow him to sell his membership, then drop charges against him. On what grounds? Gay wanted to know–and then Whitney made his play. “After all, I’m Richard Whitney,” he said. “I mean the Stock Exchange to millions of people.” Therefore what affected him affected the Stock Exchange–and Wall Street. His exposure as a bankrupt was now inevitable, but his exposure as an embezzler–it would make a mockery of the trust on which all stock trading is based; it would be a triumph for the reformist forces in Washington; it would be a bonanza beyond the wildest dreams of the SEC.…

This was a telling point, and Whitney emphasized it; in the course of the two-hour session he brought the same argument up over and over again. “I wouldn’t say that Mr. Whitney was pleading,” Gay recounted later. “He assumed more of a reasoning attitude, as if he were discussing somebody else than himself.” Indeed he was: the White Knight was discussing the thief. It is possible to imagine that Charley Gay was sorely tempted. He had the deep conservatism of the self-made–had grown up admiring the Wall Street Old Guardsmen with their easy languorous charm, and had spent his life working like a peon to try to become one of them; now he was surely no more anxious than Whitney himself that Whitney should bring the Old Guard and its era crashing down with him. If Whitney were allowed to resign quietly with the announcement that he was going to retire from the bond business and take up some other line of work, there was at least a good chance that nothing would ever come to light about his defalcations and that, after a brief flurry of scandal, the whole thing would blow over and things would be back where they had been before. If, on the other hand …

But Gay was also a passionately honest and conscientious man. His horrified conscience triumphed over his desire to preserve the world he had accepted and admired so long. Adamantly, over and over again, he told Whitney that the drawing up of charges and specifications against him would proceed, and that they, along with the evidence, would be presented to the Business Conduct Committee on Monday morning as planned.

III

Through the two months preceding that Saturday afternoon, Whitney, fighting for his life and perhaps his way of life, had indulged in one last binge of cash-raising efforts, the details of which add some bizarre footnotes to his story and indeed to the history of borrowing. Turndowns on loan requests were getting to be commonplace now, and he was learning to accept them without batting an eye. “How about George?” people would ask him, bluntly, when he came to them for money. “My brother is out of town, and if he were here I wouldn’t be coming to you,” he would reply loftily. “Well, I am very sorry …” he would hear again and again, and would simply turn on his heel and leave. In January the long-suffering, long-awestruck Paul Adler turned him down; unable to face the idol he saw toppling before him, Adler scrawled on a piece of Stock Exchange notepaper: “Dick, I am sorry, but we have decided that we are not willing to make any loans to anyone at this time, and I deeply regret to say so. Sincerely, Paul.” In mid-February he walked up to John H. McMannus, a floor specialist far outside his normal social orbit, and asked for $100,000. McMannus, after a stunned pause, offered to make the loan provided Whitney’s note be endorsed by George. Whitney offered instead his wife’s endorsement–“She’s worth half a million dollars,” he confided without shame. McMannus said he never accepted a woman’s endorsement on a note. Whitney nodded. “Don’t say anything about this,” he remarked casually as he turned away. McMannus said later that the episode had been one of the most surprising events of his business life: “I thought he was the essence of everything fine in the world. I was so shocked I couldn’t think clearly.” If he had thought clearly, McMannus realized only afterward, he would have known that he didn’t have the $100,000 to loan anyway.

Late in February Whitney asked Sidney Weinberg, by this time a partner at Goldman, Sachs and well on his way to becoming the “Mr. Wall Street” of the early postwar years, for $50,000. The only trouble, or one trouble, was that Whitney seems to have thought the gentleman’s name was Weinstein.

But simultaneous, and more astonishing, were several spectacular successes. In mid-February Whitney asked Alexander B. Gale, an Exchange member, for the usual amount–$100,000. Gale said he could lend only $75,000, and immediately sent along a check for that amount. Whitney, however, brazenly sent back his note for $100,000. Thus made to feel like a piker, Gale sent along the additional $25,000 to round out the note. At about the same time Whitney approached one Walter T. Rosen for the usual amount–as usual, without offering collateral. Rosen handed over the money along with a charming and flattering little speech: “I have always been much impressed by the attitude of the elder Mr. Morgan, who held the view that the personal integrity of the borrower was of far greater value than his collateral.” “Mr. Morgan was entirely right,” the Morgan broker graciously allowed as he took his check.

Whitney’s two last borrowings were memorable for their own reasons. On March 1, four days before his Saturday showdown with Gay, he approached two partners of Brown Brothers, Harriman & Company, Knight Woolley and W. Averell Harriman–the latter not yet launched on his diplomatic career–for the usual amount. Unlike the elder Mr. Morgan, although members of an equally distinguished and aristocratic firm, Woolley and Harriman wanted collateral. Whitney promised to have the collateral delivered within a few days, and got his loan on the spot; somehow the collateral never arrived. That same day Whitney borrowed $25,000 from an old and none too hale friend of his, a man who has spanned our turbulent story–Colonel John W. Prentiss, the tactful mediator in the 1920 dispute between Allan Ryan and the Stock Exchange. Eighteen days later, Colonel Prentiss, unrepaid would be dead.

And late in January Whitney had made one last, grand embezzlement–his grandest. On the twenty-sixth, without explanation, he ordered the cashier of his firm, Robert J. Rosenthal, to turn over to him a batch of securities belonging to various customers of the firm, among them the estate of his father-in-law, and having a value of about $800,000. Two days later he took these securities to the Public National Bank and, representing them as his own, pledged them as collateral for a loan of no less than $280,000.

Let us sum up in broad strokes, for the astonishing record, Whitney’s true financial condition as of the first week of March, 1938. Over the preceding four months he had negotiated, all told, 111 loans aggregating $27,361,500; of this, more than $25 million had been in more or less soundly secured borrowings from commercial banks, constantly turned over as he made new loans to repay those that came due. Apart from this, he owed, entirely unsecured, $2,897,000 to George Whitney, $474,000 to J. P. Morgan & Company, and about an even million dollars to others. He owed borrowed stocks worth about $390,000. Quite apart, then, from the sums he “owed” to the customers from whom he had embezzled, he had managed to accumulate on the strength of nothing, or almost nothing, more than his character and good name net borrowings well in excess of five million dollars.

In those last days he was walking up to men he didn’t know on the Exchange floor and asking them in tones casual to the point of indifference to lend him his standard sum–$100,000. He also did one thing suggesting that madness or something like it was overtaking him at last. On Tuesday of the frantic week that ended with his Saturday-afternoon confrontation, he went to Ben Smith. He made no lame effort to ingratiate himself. Rather, he announced brusquely that he “wanted to get this over quickly”–as if, say, his mission were to administer a justified rebuke to an inferior. Then he said that he wanted to borrow $250,000 “on my face.” Smith’s reply was, in the circumstances, not startling, and can scarcely be described as ruder than the occasion called for. “I remarked he was putting a pretty high value on his face,” Smith recounted later. “So he told me that was his story and 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.” Whitney nodded; that was that.

Of course. But why had he done it? What had he expected from Ben Smith but a harsh rebuff? Was this the ritual of capitulation, the beaten wolf intentionally baring his neck to the teeth of his conqueror? It could not have been; as we know, on that Tuesday Whitney was by no means ready to capitulate. The remaining assumption must be that he was as insensitive in the matter of slights received as he had so long been in that of slights delivered; that he regarded this upstart so little as to be immune to his bad opinion, and had made the approach simply because it could cost him nothing; that, as Smith said, he had a lot of nerve, a rather awesome lot, and the nerve at least had not failed.

IV

Francis Bartow, J. P. Morgan’s “Stock Exchange man,” was the firm’s responsible partner in the absence of Lamont, who had followed his trip South with one abroad, and George Whitney, who early in 1938 had returned to the South to resume a long convalescence from his 1937 illness. Let Bartow tell, with a fine dramatic flair, what happened Saturday night after Whitney’s last-ditch attempt to persuade Gay to drop charges:

“On the afternoon of March 5, I was playing bridge with some friends at the Links Club in New York and I was called to the telephone by Richard Whitney. He said he wanted to see me as soon as possible. I explained where I was and inquired where he was and he said at his office. I suggested that he stop by and see me where I was. He said he would.

“Some time later he appeared and we sat down together to talk. As we did so, he drew from his pocket a large folded piece of paper which he proceeded to open. He said, ‘I am in a jam.’ I said, ‘Wait a minute, is your idea in talking to me now to borrow money?’ He said, ‘Yes.’ ‘Well,’ I said, ‘in all frankness I will not agree to that.’ I think in my mind at the moment I was a little impatient with him because I assumed he must have known that I had talked with Randolph Mason about his affairs and the promised audit report and other information had not been given to me. He said, ‘Well, on Monday at ten-thirty my affairs are coming up for examination before the Business Conduct Committee.’ I said, ‘Now, wait a minute, stop right there. I am not the proper person for you to talk to. My advice is that you go and get Randolph Mason and tell him.’

“He folded his papers up and left me. I resumed my game with my friends. I think as he left me I said to him, ‘I expect to be here some time longer, if you should want me.’

“Quite a considerable time later, word was brought to me that Richard Whitney would like to speak to me in the floor below. As soon as I was free I went there. He and Randolph Mason were together. He said, ‘Frank, we have been talking this over and I want to know if you have any suggestions to offer.’

“I said, ‘I have already told you that I have no suggestions to offer.’

“‘Well,’ he said, ‘when my affairs come up for review before the Business Conduct Committee on Monday, it is conceivable some embarrassing questions will arise.’

“I said, ‘What do you mean, embarrassing?’

“‘Well,’ he said, ‘for example, the New York Yacht Club have securities with me and I have taken those securities and I have pledged them in loans.’

“I said, ‘How much does the New York Yacht Club owe you?’

“He said, ‘They don’t owe me anything.’

“I said, ‘Do you mean that you have taken a client’s securities and pledged them in loans and taken the proceeds of that and placed it in your business when they did not owe you anything?’

“He said, ‘Yes, I do.’

“I said, ‘That is serious.’

“He said, ‘It is criminal.’

“I asked, ‘Are there any other cases where this had occurred?’

“He said, ‘Yes, two; the Sheldon estate of which I am an executor, and Mrs. Baird.’

“I said, ‘Dick, now this is such an entirely different nature than the matter that you originally discussed with me that I will not discuss it with you any further. And I want now to go to the telephone and call my counsel.’”

Does it seem rather odd that a man, on hearing a friend and business associate confess that he has been engaged in criminal activities, should react simply by saying that he is going to call his lawyer? It does, but it should not; remember that, in a time when Wall Street was still very much on the public griddle, Whitney was the most publicized man in Wall Street and Morgan’s the most publicized firm, and that private knowledge of a crime on the part of a Morgan partner raised the possibility of the Morgan firm’s being considered an accessory. Bartow called the Morgan lawyer no lesser lawyer than the former Presidential candidate John W. Davis–and made an appointment to see him that evening at his home at Glen Cove, Long Island. Then he went back to Whitney and Mason. The three of them had a hasty supper together at the Links, and just before or during the meal Whitney said to Bartow, “I would like to explain this to you. I have a loan of $280,000 at the Public National Bank. In that loan are all of the securities taken improperly from the accounts in my office–the Yacht Club, Sheldon, and Baird. If I could borrow $280,000 and pay that loan off, it would enable me to restore all of those improperly used securities and when I went before the Business Conduct Committee on Monday morning I could state truthfully that there were no irregularities in my office.”

Bartow gave no immediate answer. A prudent man, he was going to wait for advice of counsel. Immediately after dinner he and Mason left Whitney at the Links and took the hour’s drive to Glen Cove to see John W. Davis. Davis, after hearing the story, replied without hesitation that no one could or should do anything to help Whitney now–“Anyone who did would run the risk of taking actions that would be misconstrued,” as Davis put it euphemistically.

“All right, Mr. Davis,” said Bartow. “I accept your advice and counsel on that. I am glad I came to you.” One other question: would it be proper to call Gay, and ask him for a one-day or perhaps even two-day delay in the meeting of the Business Conduct Committee that would consider the Whitney case?

Davis gave it as his opinion that there was no reason not to do that.

So back to New York hurried Bartow and Mason, this time for a midnight meeting, arranged on the spur of the moment, with Gay at the Metropolitan Club. They found Gay there with a Stock Exchange lawyer, who, on hearing Bartow’s request, replied most emphatically that under no circumstances would there be a single minute’s delay in the scheduled Monday-morning meeting. That seemed to be that. Bartow and Mason went back to the Links, where they gave a glum Dick Whitney their grim news.

On Sunday there was more frantic scrambling. Bartow takes up the story again:

“Quite early, I called my partner, Mr. Anderson, and at the same time called my partner, Charles Dickey, in his home in Philadelphia, and in a general way told them of the events of the day before and asked if they would meet me at my house in New York at two-thirty that afternoon, and they agreed. I then called my senior partner, Mr. J. P. Morgan, at his house at Glen Cove, and made an appointment with him for twelve o’clock. I then called Mr. Randolph Mason and told him of a meeting that was to be that afternoon at my house and asked if he would come. I also asked–if it were possible, I would like to have Mr. Rodewald there, as I wished to learn from him firsthand how long, in his opinion, it would take to make an audit.

“Mr. Mason said he would come and, if possible, arrange for Mr. Rodewald to be there, too.

“I then motored to Glen Cove. I went to Mr. Morgan’s house, where I told him of the events of the night before, and my advice from John W. Davis, and the conclusions that Mr. Davis had reached. Mr. Morgan was naturally shocked beyond measure and gave it as his judgment, which was mine, that there was no course for us to follow except to abide by the advice that we had received from counsel.”

(But in view of what he already knew, can J. P. Morgan have really been all that shocked? Or did the old gentleman put on a show for the benefit of his junior partner?)

“I then left and returned to my house in town. Sunday afternoon Mr. Anderson and Mr. Dickey arrived and we sat down and I told them what I had learned in as great detail as I recalled. I then telephoned Mr. Sunderland, who is Mr. John W. Davis’ partner, and asked him if he would come to my house. He did. About that time Mr. Mason arrived. Some while after that Mr. Rodewald arrived. I asked Mr. Rodewald how long, in his judgment, he thought it would take for high-class accountants to make a proper audit. He was vague and to me disappointing because he gave the impression it would take a great deal longer than I presumed it would take.…

“When Mr. Sunderland arrived, I told him what I had done, and what I planned. I asked him if he thought it was a proper and right thing for me to do and he said, ‘Under no circumstances can you or anyone else from J. P. Morgan & Company go into the office of Richard Whitney & Company to find out anything.’

“I then told Mr. Rodewald that the reason for his being called was over with, and we did not need him any more and I presumed he was busy, and he left to go about his business. A little later … one by one I expressed my regret at calling [Anderson, Dickey, and Mason] from their homes in the country, and they went back to where they had come from, I presume.…

“Late in the afternoon I determined that the time had come when I must call my partner, George Whitney, on the telephone, and advise him of everything that I knew. Accordingly I put in a call to get him on the telephone in Florida, which I did. As guardedly as I could, yet as fully as I could, I told him of my knowledge.…

“Mr. Whitney said, ‘My God!’”

“My God” indeed: there was apparently little else George Whitney could say, and nothing more he could do.

So on Monday the wheels of Stock Exchange justice turned. That morning, right on schedule, the Business Conduct Committee met, heard the evidence, and voted unanimously to present forthwith the charges against Whitney and the two of his partners who held Exchange memberships, Edwin D. Morgan, Jr. and Henry D. Mygatt, to the Governing Committee for action. Early in the afternoon the Governing Committee considered the charges and voted unanimously that they be served on the three member partners, that the accused be notified that they would have the customary ten days to prepare their answers, and that a hearing on the charges be held at the end of the ten-day period, on March 17. The charges were served on Whitney, Morgan, and Mygatt the same day. That evening, by telephone, Gay notified the SEC in Washington of the affair.

Meanwhile, no public announcement had yet been made and there had rather astonishingly been no leaks to the press; and Whitney’s remaining allies, most of them now thinking chiefly of the public disaster for Wall Street that his exposure would be, were continuing with sinking hearts their furious efforts to find some way out. Early Monday morning George Whitney called Bartow back from Florida. He was very much disturbed about not being in New York, he said; shouldn’t he come at once? Bartow urged him not to, reminding him that he was still not entirely recovered from his illness, and pointing out that there was nothing he could do anyway. Later that morning, grasping at straws, Bartow–after again getting clearance from John W. Davis–called on Roland Redmond, the Stock Exchange lawyer who was perhaps Whitney’s closest friend. “Is there anything that anybody can humanly do in this thing that you know of?” Bartow asked. Redmond replied, “Absolutely not. I don’t know of a solitary thing.” Poor Redmond was obviously in distress; to him, as Exchange lawyer, fell the duty of drawing up the charges against his friend–a duty he had performed at his office the previous afternoon, with tears actually streaming down his face.

“We parted,” Bartow recounted later. “In the afternoon of that clay, Randolph Mason called me on the phone and said that he would like to see me that evening. He would probably be late, and would I wait at my house until he came, and I said I would. And that evening he did come, and I am not quite clear now why he came, because there did not seem to me any purpose in it, because the only thing he told me now was that he had been engaged all afternoon and evening on papers dealing with the proposed bankruptcy proceedings of Richard Whitney & Company the next day–and after a very brief talk he left.” But in retrospect it is clear enough why Mason came to Bartow’s house–he wanted to have a wake.

V

John Wesley Hanes, with mixed emotions, became the SEC’s liaison man in the Whitney case. Chairman Douglas on Monday night, right after hearing the news from Gay, picked Hanes for the assignment on the spot and called him shortly before midnight, asking him to take it on.

Hanes took the night train to New York, sleeping little and brooding much en route. “My first and principal concern was the extent of public participation in this failure,” he said later. “We were unable to find out the extent of the public interest [in Washington]. I came to New York to find out if I could get any more facts than we had at Washington.” Some insisted later that he had had another major concern. Far from lusting for the Morgan broker’s scalp, Hanes was indubitably as worried as his idolized friends, the men at No. 23 themselves, for the good name of Wall Street at large and J. P. Morgan & Company in particular, and there was talk in Wall Street early that morning–circulated, it is true, by the die-hard remnants of the Whitney Old Guard–that Hanes was coming to New York with the specific mission of recommending on behalf of the SEC that public announcement of the disaster be postponed while final efforts were made to negotiate some kind of accommodation. Whatever his intentions may have been–and he later denied that they were these–Hanes found, on his arrival in Wall Street at nine forty-five, only fifteen minutes before Stock Exchange opening time, that events were wholly beyond reversal. The place, he found, was seething with rumors about Whitney that were, if possible, even worse than the facts; from the point of view of Wall Street’s public image, no announcement would be the worst possible course. Hanes accordingly recommended to the Stock Exchange authorities that they go ahead with the announcement as planned. In any case, by that time it was already inexorably in the works. Some three-quarters of an hour earlier, at nine o’clock sharp, the Business Conduct Committee had convened with Howland Davis presiding; on the carpet before it were Mason as Whitney’s representative and two of Whitney’s partners. Davis had opened the meeting by saying, “Gentlemen, I think the thing the committee is most interested in is whether between now and ten o’clock we have to do something with regard to the plans of Richard Whitney & Company to do business today.”

Mason had said, “We don’t know all the figures.… I am obliged to say … that the firm is insolvent.”

The chairman then asked Kingsley Rodewald, Whitney’s partner–a bewildered man who, like all Whitney’s partners, had for years been kept entirely in the dark as to Whitney’s defalcations and even as to the desperate financial plight of the firm–whether he had anything to say. Rodewald replied that he had not.

“Can your firm meet its obligations?” the chairman had inquired.

“No, sir,” Rodewald had replied.

So the failure was formalized, ipse dixit; now the Exchange under its own rules had no choice. At ten-five, just after the start of the day’s trading, Gay mounted the rostrum overlooking the floor; the secretary rang the gong that suspends trading; the hum on the floor faded into dead silence; and Gay read an announcement of the suspension of Whitney & Company for insolvency. Immediately thereafter the Exchange released a statement that did not fail to make clear that wrongdoing was involved in the holocaust:

In the course of an examination of the affairs of Richard Whitney & Company, the Committee on Business Conduct discovered on March 1, 1938, evidence of conduct apparently contrary to just and equitable principles of trade, and on Monday, March 7, 1938, at 1:30 P.M., presented to a special meeting of the Governing Committee charges and specifications. Hearing on the charges was set for March 17, 1938. This morning the firm of Richard Whitney & Company advised the Exchange that it was unable to meet its obligations and its suspension for insolvency was announced from the rostrum of the Exchange shortly after 10:00 A.M.

With the fall of its champion, the fall of the Old Guard was accomplished.

Chapter Twelve

Denouement

I

It was, of course, an instant national sensation, “LINK WHITNEY TO MISSING BONDS,” the New York Daily News screamed on its front page. On Tuesday, March 8, the day of the Stock Exchange’s first announcement, Whitney and his partners filed bankruptcy papers; the New York State and County authorities, caught wholly by surprise, rushed to prepare indictments; and Whitney testified before a hastily convened hearing of the SEC. Here he was candid, self-possessed, almost offhand; to a questioner who asked him something that seemed to him not to make sense, he showed that he was determined to remain casual and in character by answering out of the language of the hunt: “Your question doesn’t gee and haw, Commissioner.”

Next day he did the thing that minimum decency required of him–exonerated his innocent partners. In the first place, as Cochran of Morgan’s had pointed out years before, they were hardly real partners at all. Apart from Edwin Morgan, an amiable hunting companion and fellow member of Porcellian, they belonged to neither Whitney’s social class nor presumed financial class, and had no financial investment in the firm–“office-boy” partners, Cochran had said, partners of convenience rather than of shared responsibility. One of them, indeed, had started with the firm as an office boy, and the wife of another, a former telephone clerk on the Curb Exchange, insisted even now that he was in fact and in law not a partner at all but an employee. In the second place, Whitney had long since elaborately set up a special “control account” for the express purpose of concealing from them his defalcations and the true state of the firm’s finances; knowledge of the control account was confined to Whitney’s accountant and his private secretary, both of whom understood well enough that their jobs depended on their silence.

In a statement issued through his newly engaged criminal attorney–Charles H. Tuttle, former Republican candidate for Governor of New York–Whitney said, “I want to say emphatically that the difficulties in which my firm has become involved are the result of actions as to which I alone have responsibility and in which none of my partners, none of my business associates or connections and, in fact, no one but myself has or had any responsibility or participation.… I fully realize that certain of my actions have been wrong. I am determined to meet the consequences.… I am, therefore, putting myself at the disposal of the Attorney General of the State, who is now investigating, and shall be ready to give him a full statement.”

On Thursday the tenth New York County District Attorney Thomas E. Dewey beat the state to the indictment, citing the 1932, 1937, and January, 1938, misappropriations from the Sheldon estate in his true bill. While Bowery derelicts stood around watching with bewilderment or glee, Whitney was booked at the Elizabeth Street police station by a sergeant who said, “Mr. Whitney, I’m sorry to see you in this trouble and I wish you luck.” “Thank you,” replied Whitney, and the two men shook hands–the sergeant with the abashed and delighted air of one unexpectedly hobnobbing with celebrity. Then in a ten-minute proceeding in General Sessions Court, after the clerk had called Whitney to the bar, he stood silent and motionless, his hands clasped behind his back, his head slightly bowed, his face quite expressionless, and his gold Porcellian pig hanging prominently from the watch chain across the vest of his dark-blue suit, while the indictment was read and he was released on ten thousand dollars’ bail. Then he posed willingly for photographers, but asked them to spare his wife.

The next day–while the Nazis were seizing Austria and the voices prophesying war were rising–he was haled into court again, this time by the State Attorney General on complaint of the Commodore of the New York Yacht Club, who spoke harshly indeed of his faithless treasurer. This time it was at the Criminal Courts Building, and this time the bail was $25,000; but again there was the cool, stoic prisoner, again the impassive stance, again the flaunted Porcellian emblem. After accepting a bail bond, Magistrate Thomas A. Aurelio ventured to comment ingratiatingly, almost humbly, “My little experience in life has been that it’s a whole lot easier to make money than to hold on to it, even in hard times. I guess that applies to all of us.” The judge waited for some reply; Whitney remained icily silent. He could still wear the pig, and he could still administer a snub.

II

Meanwhile there were repercussions everywhere. Old New York society, so long so closely involved with the downtown Old Guard, and now already weakened by hybridization with the newer café society, sensed a death blow. Nancy Randolph wrote in the Daily News: “Not in our time, in our fathers’ time nor in our grandfathers’ time has there been such a social debacle.… He had no need to overreach himself for power, for money, or for social position. He had them all!” Or so society had thought!

Wall Street at all levels was shocked into temporary catatonia–not only the big men who had liked and trusted Whitney, but the little men who had hated and trusted and, in a way, counted on him. The stock market scarcely even dropped in reaction to the terrible revelation; in truth, most of the brokers spent much of that day at the Luncheon Club bar discussing it.

In Whitney’s clubs there was strange, glum silence. Open discussion of the tragedy would be in poor taste. But how could one discuss anything else?

The day of the revelation or soon afterward, Harry Simmons said, “I have had a terrific shock over this thing–I am so stunned over it, and it is so beyond my comprehension … that Richard Whitney could do any of these things–absolutely impossible.” Duke Wellington said simply that it had “never occurred to him” that Whitney might do such a thing. Roland Redmond said, “I had more confidence, I think, in his personal integrity than in that of almost anyone else that I know.” Whitney’s old friend of both town and country, Roger D. Mellick, said, “There couldn’t have been a more straightforward person, to my knowledge.” Those beneath Whitney socially again and again echoed John McMannus’ stunned avowal of having thought of him as the essence of everything fine in the world. Even Whitney’s own cashier, Robert Rosenthal, who apparently would have had to be remarkably blind not to see what was going on under his nose, said emotionally, “I can’t believe it. I think I am in a fog; I honestly do, because I never would question Mr. Whitney. He is one man I would never question–one man I would take an arm off, if he wanted it he could have it. That is what I thought of the gentleman.” Of course, these statements were self-serving. Moreover, in light of the fact that most of these men were stuck with bad loans to Whitney, they take on a somewhat comical aspect. But for all that, can anyone mistake the note of pathetic, heartbroken sincerity in them?

By March 17, the previously designated date, the Stock Exchange Governing Committee had recovered sufficiently to hold its hearing and–with Whitney absent and offering no defense–unanimously expel him from the Exchange, while letting off his unfortunate partners Morgan and Mygatt with three-year suspensions.

And the country at large, sick of depression and thirsty for the blood of millionaires, was having such a field day as not even the Pecora hearings had afforded. As the Nation said, “Wall Street could hardly have been more embarrassed if J. P. Morgan had been caught helping himself from the collection plate at the Cathedral of St. John the Divine.” The Whitney exposure was the stuff of myth, yet was true–a happening so satisfying to the deeper and less admirable human drives, envy and aggression and desire for revenge, as to be beyond the contrivance of imagination; a work of muckraking fiction containing an invented episode like the Whitney case, had one been published before March, 1938, would surely have been dismissed as too fanciful and propagandistic. (Only a single detail marred the perfection of the allegory–that Whitney had not stolen from the poor or even from the “public,” but only from people and institutions of the plutocracy.) As if the whole affair were not already sufficiently to the mass taste, there was even a woman involved, and just the right sort of woman–no drab secretary or cliché showgirl, but a rich, handsome, well-born, foxhunting widow, as haughtily patrician as Whitney himself; the United States Attorney’s office did not neglect to inform the press that it had questioned her as to what she knew of Whitney’s finances. The United States Attorney apparently got little from the lady; she resolutely refused to receive the press, and managed, after a brief flurry, to vanish from public view.

Gloating, then, the country quickly became ashamed of its gloating. Hardly more than a week after the first shock of revelation, newspaper commentary began to emphasize Whitney’s personal tragedy, to take on a subdued tone of “Let the poor man pay his penalty in decent silence.” President Roosevelt, that sensitive barometer of the public temper, caught it this time, and made no political capital of Whitney’s disgrace. An old Grottie like Whitney as well as the scourge of economic royalists, Roosevelt never once alluded to it.

Gloating was so easy–and the man was behaving so well!

Indeed he was. He was hewing rigidly to the code of his class. It is almost possible to say that he had never deviated from it. That code, the code of old families and good prep schools and gentlemen’s clubs and Old Guard Wall Street, was equivocal on the matters of ruthless acquisitiveness and even on certain forms of stealing–many of the class’s members owed their membership to practices not far removed from stealing–but was explicit and inflexible on the matter of conduct when caught. There were even moments when it seemed as if Whitney had, by some psychological quirk, concocted the whole baroque drama to give himself the chance to play its last act. Pleading guilty to the State charge on March 14, he read a seven-hundred-word mea culpa expanding on the previous one. He read it in a firm, clear voice–almost with a certain joy. Sentencing was set for April 11; during the four-week interim, free on bail, as a routine matter he was examined by the court’s psychiatric clinic and by its probation officer. Together with his personal bankruptcy petition, which was filed March 25, the subsequent reports of the clinic and the probation officer show Whitney’s state of mind and demeanor as he passed what he knew well enough were the last days of his life as it had been.

The psychiatric clinic found his reactions to be “urbane and sportsmanlike,” his intelligence rating in the top one percent of the population; in sum, no shadow or trace of mental incompetence or disorder.

The bankruptcy petition showed his town and country houses and his life insurance all mortgaged to the hilt, but his prized New Jersey livestock–“seven hundred laying hens and chickens, the outstanding herd of Ayrshire cattle in this country, twenty thoroughbred Berkshire pigs, twenty horses of fair breeding stock which turns into excellent hunters”–still free and clear. It also showed that he still lived at a cost of over five thousand dollars per month, maintaining in both town and country his full staff of house servants and, in the country, his outside staff of twelve–the herdsmen, the grooms, the jockey. And it showed that he, of all men, was still as always a prime sucker for get-rich-quick schemes, a quaint votary at the obsolete American shrine of the better mousetrap, the apocalyptic, ever-opening frontier that would solve all problems and make everything all right: his current business interests, he revealed for the first time in the petition, included not only all that unwanted applejack and cider but also patent rights to a process for spraying metal to repair rust, and a patented air-pressure bearing that “is almost revolutionary in its possibilities.”

The probation officer was more fulsome than the psychiatric clinic. He found Whitney faultlessly groomed, self-composed, precise of speech; also “not without humor” and “alive to some of the ironical aspects of his difficulties.” The report went on:

Contributing factors in his delinquency are pride, obstinacy, unshakable belief in his own financial judgment, and a gambling instinct.… Egotistical to a marked degree, it was apparently inconceivable that he, a figure of national prominence in financial circles and one whose judgment in economic matters was considered that of an expert, should prove a personal failure.… Courage he possesses in an unusual degree. He also possesses a certain gentlemanly code of honor.… Combined with this he has a sustaining savoir-faire and a Spartan-like spirit of fortitude, which enables him to maintain unflinchingly his self-composure in the face of his present humiliating predicament.

Waxing unexpectedly literary, the probation officer summed up: “Pride and a Micawber-like capacity for borrowing are the keynote qualities of his inner character.” Did Whitney, we may wonder, spending his last free days sequestered at home on East Seventy-third Street, sheltered from the curious press and public by his servants and his family, take down a dusty old calfbound copy of David Copperfield, its pages perhaps previously uncut, to find out what his alleged prototype had been like?

At nine o’clock on April 11, the day of his sentencing, he left 115 East Seventy-third Street, escorted to the door by his liveried butler, who bowed ceremoniously low. The mob of onlookers in the street loved it. He was alone except for his lawyer, Tuttle; his wife and brother had wanted to come to court with him, knowing that their presence there would certainly have its effect on the suddenly sentimental public and perhaps on the judge, too; but Whitney had refused them. The crowd on East Seventy-third Street gradually dispersed. But all that day limousines drew up at intervals to No. 115 to deliver flowers to Mrs. Whitney, as if for a funeral.

In court this time Whitney showed signs of strain at last. His face was haggard and his hands unmistakably twitched as he heard District Attorney Dewey’s demand for a “substantial and punitive” sentence. Tuttle answered with a long, florid plea for mercy, emphasizing that Whitney had “neither avoided the law nor chosen the coward’s course of flight from the country.… He still has character.… He has faced his friends, which perhaps is the hardest task of all.” But Judge Owen W. Bohan seemed unimpressed; he preceded sentencing with a harsh tongue-lashing in which he said to Whitney, “Your acts have been deliberate and intentional and were committed with an unusually full opportunity for understanding their effect upon others and the consequences to yourself.” Once, when he called Whitney a “public betrayer,” the prisoner flushed scarlet. The sentence was five to ten years at Sing Sing, and an injunction against Whitney forbidding him ever again to deal in securities in New York State.

More curious crowds watched as Whitney was taken by an officer from the Criminal Courts Building to the Tombs. Through his overnight stay there he was constantly watched by guards to forestall any attempt at suicide; he made none. The next morning, handcuffed to two petty racketeers, he went by police van to Grand Central Station for the train trip up the Hudson. A crowd estimated at five thousand jammed the station waiting room to give him a send-off, but the police ducked them by driving the van into the baggage room and by-passing the waiting room. At the gate to Sing Sing there was another crowd that couldn’t be dodged. Whitney, fully composed again, looked in his black coat and bowler almost as if he were ready at any moment to ask one of his handcuff mates or a jailer to let him have a hundred for a week, simply out of force of habit; but he went through the gates refusing to say a word.

That very day, April 12, happened to be the birthday of a teenage godson of his, the son of one of his old friends and Wall Street associates. For years Whitney had punctiliously honored the occasion with a present that arrived on the dot: a gold piece until 1933, when possession of gold coins had become illegal, and thereafter a check. On this particular April 12 the young man got his check as usual. With it was a note from Whitney’s secretary, saying that she was sending it along in his absence, and adding that the godfather wanted to say that, in the circumstances, he regretted there would be no more checks on future birthdays.

Next day Harvard announced Whitney’s resignation from the Board of Overseers’ Visiting Committee to the Department of Economics.

III

Where, now, were the envied, hated, and slyly idolized Wall Street plungers of the wild gone days?

One of them, the one with the greatest capacity for growth and change, lived now in a different world. He was Ambassador to the Court of St. James’s, in London, and would go on finally to achieve heights of glory and horror beyond the scope possible to things recorded on ticker tape.

We have seen what had become of the former public enemy Ben Smith–he had become a pillar of Wall Street respectability. But others were less fortunate.

Michael J. Meehan of the shipboard brokerage offices and the famous Radio pools, for example, had fallen on evil days. He had not changed with the times. One of his friends later attributed his downfall to “an honest failure to realize that the New Deal in respect to Wall Street had made fundamental changes in its modes of business.” At any rate, he went on manipulating stocks after passage of the Securities Exchange Act, and the SEC caught him. During the week of May 15, 1935, using all the old shell-game methods at which he was so adept, he moved the price of Bellanca Aircraft from 2½ to almost twice that figure; between June 10 and early autumn, he held it at around 5 while he and his colleagues in the pool quietly disposed of the hundreds of thousands of shares they had acquired in the spring. It was almost a year later, in the summer of 1936, before Meehan learned that the SEC was actively and vigorously investigating him. He abruptly disappeared. Four months later, in November, 1936, he surfaced again in Bloomingdale, the posh private hospital for the well-to-do insane in Westchester County, New York. “He’s not under restraint; he’s been sick for about a year and has given no attention to business during that period,” a partner in his still-flourishing brokerage firm reported. Those who saw Meehan at Bloomingdale, however, did not find him conducting himself like a sick man, far less one broken in mind or spirit. Rather, they found him his old self, ebullient, generous with friends, strutting the grounds, puffing on cigars, and shouting greetings with all his old cockiness and élan.

In June, 1937, Meehan left Bloomingdale. The SEC was all but at the gate to greet him. That August it charged him with violation of the Securities Exchange Act in the Bellanca matter and ordered his expulsion from all national stock exchanges. So ended the Wall Street career of the man who, some say, did more than any other to bring together the stock market and the public.

We do not know whether Meehan at Bloomingdale was a subject for irony or pity, a shrewdly scheming malingerer or a man truly broken on the wheel of changing times. What we do know is that when he would die it would be in his own bed and with an intact fortune to pass along. If he did not change with the times, he contrived to carry something of the past with him.

Jesse Livermore, bleakest of the money machines of the old Wall Street, was destined for the bleakest end. Still rich after the crash, and far richer after a series of coups in the bear market of 1930, he plunged gratuitously, superfluously, all-out, the wrong way in 1931 and, as so many times before, went in a few days from regal riches to debt. But the day of the trading game was past. He could not make another million; it was all he could do to keep going. He published a book explaining his stock-market techniques–a tip-off that they were no longer working for him. Still, reaching sixty as the decade went on, he remained “eerily young-looking, his hair still blond, his complexion unlined.” Thus in 1938 the exterior of the onetime boy plunger who had made Pierpont Morgan take notice in 1907. But two years later, one November afternoon in 1940, he would walk from his office in the Squibb Building to the nearby Sherry-Netherland Hotel, take a table by himself in the bar, slowly drink two cocktails, go to the ground-floor men’s room, and there kill himself by shooting a bullet into his brain.

Livermore left behind, besides an estate publicly announced as being “less than $10,000,” a contrite and affectionate note to his wife–“tired of fighting,” “couldn’t carry on any longer,” “my life has been a failure”–that suggests some sort of final inner triumph, some last-minute conversion to humanity. Next day the Times wrote his epitaph in an editorial:

What good he did, what harm he did, what his life meant to himself and to others–such questions are for novelists.… His passion drove him on.… He lived in a time when the speculating he did came to seem like that of boys pitching pennies.… He left no clouds of glory behind him, nor any miasma of human misery that he had himself created.… The “Street” in which he operated is not what it used to be. His death punctuated the end of an era.

IV

The Fortinbras of 1938 Wall Street, the man of clean limb and forthright character who came in to pick up the pieces after the general holocaust, was William McChesney Martin, Jr., the startlingly young St. Louis broker who had first joined the Stock Exchange board of governors in the same election in which Richard Whitney had been denied its presidency.

The exposure of Whitney deprived the Old Guard not only of its champion but of its last intangible resource, its morale. Gallantry was made a mockery; the SEC had Wall Street over a barrel; resistance collapsed, and the long struggle was over. The very week of the exposure, the Governing Committee hastily passed a rule requiring every member firm to make available on request to any customer a statement of the firm’s financial condition. On May 9 the first election under a new set of rules providing for more democratic procedures was held; the slate elected virtually constituted a new management, since only thirteen of the new forty-man board of governors were survivors of the old one, while the other twenty-seven–not just a majority, but an overwhelming one–were avowed liberals. The nominating committee that had selected the new slate had forthrightly stated that it considered its duty to be “to take another forward step in applying the principles set forth in the Conway committee report.”

The new chairman, replacing Gay, was Martin. Still only thirty-one, he was already a remarkable man, a precursor of the even more remarkable man he would later become. A graduate of Yale, a son of the governor of the Federal Reserve Bank of St. Louis, he was a serious-looking bachelor who wore owlish round spectacles, never smoked or drank, lived soberly in bachelor quarters at the Yale Club of New York, served as a trustee of the liberal-intellectual New School for Social Research, and regularly attended evening classes in economics and politics at Columbia. He liked to think things out for himself in his own way. On evenings when he had no Columbia classes he would go to a room he kept at the Astor, in Times Square, apparently just for thinking; after a few hours’ cogitation there he would repair to Sardi’s, just down the block on Forty-fourth Street, where he would invariably order a cup of hot chocolate and was therefore known to proprietor, waiters, and other customers as “Mr. Chocolate.” Then at midnight he would place a long-distance call to St. Louis, to discuss whatever he was thinking about that evening with his father.

A far cry from Dick Whitney, or even Charley Gay!

In office, Martin and his board moved quickly. A week after his election the Exchange adopted a new constitution embodying the reforms proposed by the Conway committee and, in effect, converting it in one stroke from a private club to an essentially public institution. The next question was who would be the key man in the new setup, the independent, paid president with broad executive powers. During May various alternatives were considered by the governors–a business executive, a political figure, a prominent Stock Exchange member. Midway in the month they tended to conclude that they already had their man in young Bill Martin; they made him interim president as well as chairman. Next day, for his inaugural in the new job, the press was admitted to the Governors’ Room for the first time in history. On June 30 Martin was formally elected the first paid president of the Stock Exchange at an annual salary of $48,000, and he announced that he would immediately comply with the constitutional requirements for the presidency by selling his interest in his brokerage firm and his seat on the Exchange.

About that time, Chairman Douglas of the SEC said, “The day of the crackdown on Wall Street is over. The prosperity of the Stock Exchange is not incompatible with the national welfare.”

The Wall Street-Washington war was indeed over, with Washington and its liberal friends in Wall Street the winners. The reformed Stock Exchange was not perfect, as many subsequent events would amply show, but it at last had a structure appropriate to its function in a democratic society. Still–as perhaps in all triumphs of progress and virtue–something had been lost, some essence of kindliness and high-mindedness that the Old Guard, unlikely as it had often seemed, had harbored under its fierce exterior. Howland Davis, the gentle, high-minded man who had been the key figure in bringing Whitney to justice, put it this way many years later: “The Exchange before the reform was a private club, no question about it. But for the most part, the men who were running it–men like Warren Nash, Allen Lindley, Gayer Dominick–were decent men. They were trying to run a responsible Exchange. They were trying to run a decent club. And they were men you could sit down and talk to. Afterward, I don’t know, it all got so impersonal.”

The best, or at least the quintessence, of what was disappearing from Wall Street and perhaps from the country was embodied in Thomas Lamont. Sixty-seven now, he was still at the height of his career–still the brains of Morgan’s, still the man Lundberg had rashly characterized as the most powerful in the Western world, although he knew as well as anyone that his power, like that of his firm, had ebbed. Yet the firm was still set apart. “Morally and intellectually Morgan’s stands head and shoulders above the rest of the Street,” wrote Bell of the Times, perhaps the most astute daily financial reporter of those years. As for Lamont, the man who had come to stand for Morgan’s, he was personally not awe-inspiring; rather, he was a short, slender, gray-haired, slightly stooped, aging gentleman, charming, urbane, unfailingly polite, never brusque with anyone: very much the “serene and sturdy son” that his mother, the poor upriver parson’s wife, had once prayed for on her porch in Claverack facing the blue-green Catskills. A passionate Italophile, Lamont used a lovely antique Italian refectory table as his office desk, and–curious quirk!–even in 1938 kept an autographed photograph of his old friend Mussolini hanging prominently on his office wall.

Late in April the SEC, investigating the Whitney case and eagerly sniffing for evidence of collusion in high places, called the Morgan partners to Washington to testify. In the hearing room waiting their turn, they were sad and grim rather than defiant as in 1933. And sitting with the partners, making a point of being seen sitting with them, was a most unlikely figure–a key member of the very body that had called them on the carpet, a commissioner of the SEC. He was, of course, John Wesley Hanes, whose heart and mind had been torn so long between the old gentlemanly ideal that he found incarnate in Morgan’s and the liberal reform on Wall Street that his practical intelligence told him was essential. Now at last he was able to do something for the men he idolized above all others: to show them his devotion by risking being called a traitor. “I was widely criticized for sitting with them at the hearings,” Hanes recalled years later. “But I was thoroughly sympathetic with the heartbreak they felt, and, damn it, I stayed right with Mr. Lamont and helped him all I could.”

It came out soon enough how two of the Morgan partners, Morgan and Lamont, had learned from George Whitney before the end of 1937 something of Richard Whitney’s misdeeds. That George Whitney had kept the secret was understandable to the most inexorable SEC questioner–after all, the man’s brother. But what of the others? Why, with all the moral and intellectual superiority they stood for, had J. P. Morgan and Thomas Lamont not spoken up?

Morgan’s testimony was brief, laconic, resigned, almost dreamy. Almost all the while the old man sat with his eyes closed as if to protect himself from the ugly facts–a betrayed and abdicated monarch like King Lear. His interrogator, the SEC’s senior attorney Gerhard Gesell, had not the heart to press him much.

So it came to Lamont. He took the witness chair, and Gesell, well prepared and implacable, relentlessly drew out the details of how George Whitney had come to Lamont on the Tuesday before Thanksgiving, how George Whitney had explained his brother’s dilemma in connection with the Gratuity Fund assets, and how Lamont had instantly agreed to lend George Whitney the million dollars that both men believed would bail George’s brother out and cover up the defalcation. Then Gesell came to the crux–the moral implications of Lamont’s action and his subsequent silence; and Lamont, in a series of replies, revealed what the SEC later called “a stubborn indifference to the public responsibility”; and he also caught, perhaps for the last time in American public life, all the style, the charm and the hardness, the warmth and the ice, that were Morgan’s and the Old Guard:

Q. Did you consider your responsibilities as a citizen toward anyone or your responsibilities as a member of a Stock Exchange firm toward anyone, or did you consider only your responsibilities toward Mr. George Whitney?

A. Well, Mr. Gesell … my partner described the need of his brother. He thought it was a perfectly isolated thing. He never dreamed that anything like that could happen again nor did I, and he said he was going to see that the business was liquidated. Well, that was enough for me.…

Q. Did you feel that you had any obligations to advise anyone connected with the government of the Exchange about the matters which Mr. George Whitney brought to your attention?

A. No, Mr. Gesell; I did not!

Q. Did you feel you had any obligation to go to anybody–to any public authorities and acquaint them with the facts?

A. No …

Q. What did the district attorney’s office know about this thing–what did any prosecuting agency know about this thing?

A. Are you addressing a question to me?

Q. Yes.

A. They did not know anything as far as I am concerned, but would you expect me, Mr. Gesell, to say to Mr. George Whitney, “Yes, George, I will help you out to cure this default, which you believe is a perfectly isolated thing, but I must trot down to the district attorney’s office and denounce your brother forthwith”? Did you expect me to say that?…

Q. You did not conceive that you had any obligations as a citizen to report these facts to the prosecuting officials or any obligation as a member of the Exchange to report the facts to the Stock Exchange?

A. Why, no, Mr. Gesell, I did not. I did not.

Q. Let us suppose the Mayor of New York had improperly used the relief funds, Mr. Lamont, and it came to your attention. Would you assume that the relief board had ample opportunity to find out about this and not go and tell anybody about it?

A. That is a theoretical question, Mr. Gesell. It really does not interest me, if you please.…

Later in his testimony Lamont said, “I had the utmost confidence Richard Whitney,” and Gesell was quick to pick him up:

Q. You had absolute confidence in Mr. Richard Whitney after this event [the pre-Thanksgiving conference] occurred?

A. After this event occurred. The news of what happened in early March came to me when I was abroad as the greatest shock in the world.

Q. Even though you had known on the 23rd of November, 1937, that Richard Whitney had stolen approximately a million dollars’ worth of securities?

A. Mr. Gesell, I don’t think I ever put it in … the term which you put it now. Do you see what I mean? I did not use–

Q. You thought it was something unwise or improper?

A. No, sir.

Q. You knew it was illegal and unlawful?

A. Sure; but you used the word stealing. It never occurred to me that Richard Whitney was a thief. What occurred to me was that he had gotten into a terrible jam, had made improper and unlawful use of securities; that his brother was proposing to try to make good his default. That is what occurred to me, and even then, as I say, my confidence in him was such that when the story came out, when I was abroad, it gave me the most tremendous shock in the world. It made me ill almost that all that time he could have been deceiving his brother, deceiving his partners, deceiving his wife and community. Well, it was just–it is inconceivable.

Q. Well, you must have been more or less unwilling to face the facts of November 1937, Mr. Lamont?

A. (No response.)

Q. Isn’t that the answer to it: you were just unwilling to believe even after what you heard what Mr. George Whitney told you?

A. Well, I don’t agree with you, Mr. Gesell. With all due respect, I have to say as I said before, that if I had been a lawyer or if I had retained a lawyer, I might possibly have adopted a somewhat different course, but I don’t know that I should have, but I am not a lawyer and I did not consult a lawyer and I moved as my heart dictated.

So Thomas Lamont, the greatest man in our story, to whom it never occurred that Richard Whitney was a thief; to whom the later revelations came as a terrible shock not on account of their public effect but because his partner’s brother had deceived his brother, his partners, and his wife; who kept Mussolini on his wall even after the Ethiopian rape because he was an old friend; who moved, as he said, as his heart dictated.

V

At Sing Sing the prison barker called, “All men who came Thursday, Friday, Saturday, Monday, or Tuesday and Mr. Whitney please step out of their cells!” “Mr. Whitney” had a cell exactly like those assigned to other prisoners, but there was no stopping his fellow convicts, as well as his guards, from lifting their caps to him and asking for his autograph. He took no undue advantage of this deference. His code, where it called upon him to snub as brutally as possible those who showed pretensions above their proper class, conversely required graciousness to those who did not. For Sing Sing life, it was by no means a bad code. First assigned to mop-and-broom duty, Whitney performed it with dispatch and dignity, and was within two months assigned to teaching in the prison school; soon he was playing first base on the prison school baseball team, and it is recorded that in a game on June 25, 1938, between the school and another Sing Sing detachment he lined out two solid base hits in three times at bat and fielded flawlessly.

In May the once-sacred Stock Exchange Post No. 2, where Whitney had bid “205 for Steel” on Black Thursday, and which had been on display in the office lobby of Richard Whitney & Company since 1930, was put on the auction block along with his other office effects; it brought five dollars.

What remains to be said about the man who helped pull down a way of life with him? That his almost incredibly loyal brother George eventually made good every penny he had borrowed or stolen. That his Distilled Liquors Corporation quietly went bankrupt not long after he did. That at Sing Sing he continued to be a “model prisoner,” eventually coming to function as a kind of host to new arrivals, handing out cartons of cigarettes to them as they entered, and earning parole in the earliest month when he was eligible–August, 1941. That, his town house and his country estate having long since been sold in mortgage foreclosures, he then went to stay for a period with relatives on Cape Cod, not far from where the Arabella had once landed with his ancestors. That his life thereafter, details of which are no part of this chronicle–except that his wife, Gertrude Sheldon Whitney, stuck with him always–was quiet and law-abiding and even apparently productive; that a young lady at a dinner party in 1968, the year he turned eighty, was startled to hear the “twinkly old man” she sat next to introduced by his name. That with his background, education, and connections it would certainly appear that, had he wished, he could have been rich enough even for his extravagant purposes without making waves of any sort; that what happened to him instead may perhaps draw attention to something George Santayana wrote in 1931 about American life: “Despite preachers and professors of sundry finer moralities … we are invited to share an industrious, cordial, sporting existence, self-imposed and self-rewarding.”

But in the summer of 1938 Whitney was visited at Sing Sing by his old mentor and admirer, heartbroken but staunch in his loyalty, the American Dr. Arnold, the Reverend Endicott Peabody, headmaster of Groton, who had attended both Presidential inaugurals of his other famous former charge, Franklin Roosevelt. On those occasions he had offered Roosevelt the benefit of his continuing prayers and advice, and the President, thanking him, had remarked on how much he relied for strength in meeting his terrible responsibilities on the memories of his school days. Now, in this less happy reunion with another old boy, Peabody again offered his services, asking the old boy whether there was anything he could do to help him.

“Yes,” Whitney said. “I need a left-handed first baseman’s mitt!”

ACKNOWLEDGMENTS

Among the many persons who gave me help of one sort or another in connection with this book, I should like to express my particular thanks to Arnold Bernhard, Henry Billings, Philip Claflin, Howland S. Davis, John Diebold, Lewis Galantière, Perry E. Hall, John W. Hanes, Eliot Janeway, Elizabeth Janeway, Henry S. Morgan, E. A. Pierce, Jeffrey Potter, and Thomas O. Waage.

Sources

CHAPTER ONE: OVERTURE: THE OUTRAGE

I

Sidney Sutherland, “The Mystery of the Wall Street Explosion,” Liberty, April 26, 1930.

Edmund Gilligan, “The Wall Street Explosion Mystery,” The American Mercury, September 1938.

New York Times, New York World, New York Sun, and New York Herald, September 1920.

II

Alexander Dana Noyes, The War Period of American Finance, 1908–1925 (New York, 1926).

George Soule, Prosperity Decade: From War to Depression, 1917–1929 (New York, 1947).

Robert Sobel, The Big Board (New York, 1965).

III–VII

Robert K. Murray, Red Scare: A Study in National Hysteria, 1919–20 (Minneapolis, 1955).

“Wall Street’s Bomb Mystery,” Literary Digest, October 2, 1920.

See also references under Section 1.

CHAPTER TWO: TICKER TYRANNY

I

Barnie F. Winkelman, Ten Years of Wall Street (Philadelphia, 1932).

Matthew Josephson, The Robber Barons (New York, 1934).

Gustavus Myers, History of the Great American Fortunes (revised edition, New York, 1936).

New York Times, September 6, 1925.

II–V

They Told Barron: The Notes of the Late Clarence W. Barron, edited and arranged by Arthur Pound and Samuel Taylor Morse (New York, 1930).

New York Times, 1920; also November 24, 1928, December 1, 1928, and November 27, 1940.

New York World, 1920.

McClure’s magazine: Automobile Yearbook 1920.

Motor magazine, 1919–20.

CHAPTER THREE: THE ALMOST ARISTOCRACY

I

Winkelman, Ten Years of Wall Street.

Soule, Prosperity Decade.

Frederick Lewis Allen, Only Yesterday (New York, 1931).

II

Frederick Lewis Allen, The Great Pierpont Morgan (New York, 1949).

Edwin P. Hoyt, Jr., The House of Morgan (New York, 1966).

Harold Nicolson, Diaries and Letters, 1930–1939, edited by Nigel Nicolson (New York, 1966).

Frederick Lewis Allen, The Lords of Creation (New York, 1935).

Josephson, The Robber Barons.

Thomas W. Lamont, Henry P. Davison: The Record of a Useful Life (New York, 1933).

Harold Nicolson, Dwight Morrow (New York, 1935).

Ferdinand Lundberg, America’s 60 Families (New York, 1938).

Thomas W. Lamont, My Boyhood in a Parsonage (New York, 1946).

Current Biography, 1940, article on Thomas W. Lamont (New York, 1940).

III

Joseph Wechsberg, The Merchant Bankers (Boston, 1966).

Stephen Birmingham, “Our Crowd”: The Great Jewish Families of New York (New York, 1967).

Sobel, The Big Board.

Allen, The Lords of Creation.

In the District Court of the United States for the Southern District of New York, Civil Action No. 43–757: Opinion of Harold R. Medina, C.J. (1953).

Dictionary of American Biography, article on Otto H. Kahn, Vol. XXI, Supp. 1 (New York, 1944).

IV

Birmingham, “Our Crowd.”

Sobel, The Big Board.

E. Digby Baltzell, The Protestant Establishment (New York, 1964).

Heywood Broun and George Britt, Christians Only (New York, 1931).

Nicolson, Dwight Morrow.

V

Allen, The Lords of Creation.

James P. Warburg, The Long Road Home: The Autobiography of a Maverick (New York, 1964).

VI

Frank Parker Stockbridge, “The Problem of the Downtown Church,” Saturday Evening Post, March 31, 1928.

CHAPTER FOUR: SO NEAR THE APES

I

Elias Canetti, Crowds and Power (New York, 1966).

Joseph Stagg Lawrence, Wall Street and Washington (Princeton, 1929).

John T. Flynn, Security Speculation (New York, 1934).

Soule, Prosperity Decade.

II

Flynn, Security Speculation.

Allen, The Lords of Creation.

Stock Exchange Practices: Report of the Committee on Banking and Currency pursuant to Senate Resolution 84, 72nd Congress, and Senate Resolutions 56 and 97, 73rd Congress: Report No. 1455, Senate, 73rd Congress, 2nd Session, 1934.

Winkelman, Ten Years of Wall Street.

William Z. Ripley, Main Street and Wall Street (Boston, 1927).

Alexander Dana Noyes, The Market Place (Boston, 1938).

III–IV

Dana L. Thomas, The Plungers and the Peacocks (New York, 1967).

Earl Sparling, Mystery Men of Wall Street (New York, 1930).

Sobel, The Big Board.

Edwin Lefèvre, Reminiscences of a Stock Market Operator (New York, 1931).

Josephson, “Sell ’em Ben,” The New Yorker, May 14–21, 1932.

Richard J. Whalen, The Founding Father (New York, 1964).

V

Claud Cockburn, In Time of Trouble (New York, 1956).

J. M. Keynes, Essays in Persuasion (paperbound. New York, 1963).

CHAPTER FIVE: THINGS FALL APART I

I

New York Times and Wall Street Journal, August 1926.

II

John Moody, “The New Era in Wall Street,” Atlantic Monthly, August 1928.

Allen, Only Yesterday.

Lester V. Chandler, Benjamin Strong, Central Banker (Washington, 1958).

Literary Digest, May 12, 1928.

III

Lawrence, Wall Street and Washington.

Arthur M. Schlesinger, Jr., The Crisis of the Old Order (Boston, 1957).

J. K. Galbraith, The Great Crash, 1929 (Boston, 1961).

Chandler, Benjamin Strong.

IV–V

Allen, Only Yesterday.

––, The Lords of Creation.

Stock Exchange Practices.

Galbraith, The Great Crash.

VI–VII

Matthew Josephson, Infidel in the Temple (New York, 1967).

Sobel, The Big Board.

Noyes, The Market Place.

Allen, Only Yesterday.

Cockburn, In Time of Trouble.

Alec Rackowe, All the Millionaires (New York, 1967).

Graphic Stocks 1924–1935 (F. W. Stephens, distributor, New York, 1949).

New York Times, August–September–October, 1929.

CHAPTER SIX: ENTER THE WHITE KNIGHT

I

Trinity Church Parish Year Book and Registry, 1930.

II

Cockburn, In Time of Trouble.

Schlesinger, The Crisis of the Old Order.

Allen, Only Yesterday.

Josephson, Infidel in the Temple.

Edwin Lefèvre, “The Little Fellow in Wall Street,” Saturday Evening Post, January 4, 1930.

––, “The Bigger They Are,” Saturday Evening Post, January 11, 1930.

Hoyt, The House of Morgan.

Winkelman, Ten Years of Wall Street.

Galbraith, The Great Crash.

Thomas, The Plungers and the Peacocks.

Sparling, Mystery Men of Wall Street.

III

Whalen, The Founding Father.

Josephson, Infidel in the Temple.

Warburg, The Long Road Home.

IV

Allen, Only Yesterday.

Josephson, “Groton, Harvard, Wall Street,” The New Yorker, April 2, 1932.

Richard Whitney, “The Work of the Stock Exchange in the Panic of 1929,” speech to the Boston Association of Stock Exchange Firms, June 10, 1930.

V

Caroline Bird, The Invisible Scar (New York, 1966).

Edward Angly, Oh Yeah! (New York, 1931).

Broadus Mitchell, Depression Decade, 1929–1941 (New York, 1964).

Herbert Hoover, The Memoirs of Herbert Hoover: The Great Depression 1929–1941 (New York, 1952).

VI

Securities and Exchange Commission in the Matter of Richard Whitney, Edwin D. Morgan, Jr., F. Kingsley Rodewald, Henry D. Mygatt, Daniel G. Condon, John J. McManus, and Estate of John A. Hayes, individually and as partners doing business as Richard Whitney & Company; pursuant to Section 21 (A) of the Securities Exchange Act of 1934 (three volumes: Washington, 1938).

VII

Mitchell, Depression Decade.

Flynn, Security Speculation.

Sobel, The Big Board.

Hoover, The Great Depression.

Flynn, “Bearing Down on Short Selling,” Collier’s, April 16, 1932.

S. J. Woolf, “The Man Behind the Ticker,” World’s Work, March 31, 1932.

“Whitney’s Defense of Wall Street,” Literary Digest, April 23, 1932.

Stock Exchange Practices.

VIII

William E. Leuchtenberg, Franklin D. Roosevelt and the New Deal, 1932–1940 (New York, 1963).

Mitchell, Depression Decade.

Bird, The Invisible Scar.

Hoover, The Great Depression.

Stock Exchange Practices.

CHAPTER SEVEN: GOLD STANDARD ON THE BOOZE

I–III

Raymond Moley, After Seven Years (New York, 1939).

Arthur M. Schlesinger, Jr., The Coming of the New Deal (Boston, 1959).

Hoover, The Great Depression.

Herbert Feis, 1933: Characters in Crisis (Boston, 1966).

James P. Warburg, The Money Muddle (New York, 1934).

––, The Long Road Home.

Leuchtenberg, Franklin D. Roosevelt and the New Deal.

Mitchell, Depression Decade.

IV

Newsweek, November 25, 1933.

Literary Digest, December 9, 1933.

Warburg, The Money Muddle.

––, The Long Road Home.

Charles O. Hardy, The Warren-Pearson Price Theory (Washington, 1935).

G. F. Warren and Frank A. Pearson, Prices (New York, 1933).

Josephson, The Robber Barons.

John M. Blum, From the Diaries of Henry Morgenthau, Jr. (Boston, 1959).

New York Times, May 25–26, 1938.

V–VII

Schlesinger, The Coming of the New Deal.

Feis, 1933: Characters in Crisis.

Hoover, The Great Depression.

Warburg, The Money Muddle.

Leuchtenberg, Franklin D. Roosevelt and the New Deal.

Noyes, The Market Place.

Papers of George Harrison, the Columbia University Library, New York.

CHAPTER EIGHT: ORDEAL IN WASHINGTON

I

New York Times, June 2–3, 1933, and June 1, 1963.

II

Ferdinand Pecora, Wall Street Under Oath (New York, 1939).

Stock Exchange Practices.

Hoyt, The House of Morgan.

George Harrison papers, March 28, 1933.

T. L. Stokes, Chip off My Shoulder (Princeton, 1940).

Leuchtenberg, Franklin D. Roosevelt and the New Deal.

III–IV

Flynn, Security Speculation.

Pecora, Wall Street Under Oath.

Stock Exchange Practices.

V–VI

Joseph Alsop and Robert Kintner, “The Battle of the Market Place,” Saturday Evening Post, June 11 and June 25, 1938.

Stock Exchange Practices.

Schlesinger, The Coming of the New Deal.

“Wall Street’s Raid on the New Deal,” Today, April 21, 1934.

John T. Flynn, “The Marines Land on Wall Street,” Harper’s, July 1934.

Josephson, Infidel in the Temple.

VII

S.E.C. in the Matter of Richard Whitney, esp. Vol. I, pp. 10, 60–63, 72–76.

Time, March 21, 1938.

CHAPTER NINE: THE WHITE KNIGHT UNHORSED

I

Hoyt, The House of Morgan.

Robert Bendiner, Just Around the Corner (New York, 1967).

John Brooks, The Seven Fat Years (New York, 1958).

New York Times, May 19, 1936.

II

Schlesinger, The Coming of the New Deal.

New York Times, October 1934 and September 25, 1953.

Whalen, The Founding Father.

III

Frederick Rudolph, “The American Liberty League, 1934–40,” American Historical Review, October 1950.

George Wolfskill, The Revolt of the Conservative (Boston, 1962).

Marquis W. Childs, “They Hate Roosevelt,” Harper’s, May 1936.

David C. Coyle, Ordeal of the Presidency (Washington, 1960).

Baltzell, The Protestant Establishment.

Lundberg, America’s 60 Families.

James P. Warburg, Hell Bent for Election (New York, 1935).

--, The Money Muddle.

--, The Long Road Home.

IV–V

Alsop and Kintner, “The Battle of the Market Place.”

Rudolph L. Weissman, The New Wall Street (New York, 1939).

New York Times, 1935.

CHAPTER TEN: RISING ACTION

S.E.C. in the Matter of Richard Whitney.

Alsop and Kintner, “The Battle of the Market Place.”

CHAPTER ELEVEN: CATASTROPHE

S.E.C. in the Matter of Richard Whitney.

CHAPTER TWELVE: DENOUEMENT

I–II

S.E.C. in the Matter of Richard Whitney.

New York Daily News, March 10 and 12, 1938.

Time, March 21, 1938.

New York Times, 1938.

III

Thomas, The Plungers and the Peacocks.

Weissman, The New Wall Street.

New York Times, August 3, 1937, November 29–30 and December 6, 1940.

IV

Elliott V. Bell, “The Decline of the Money Barons” (in We Saw It Happen, edited by Hanson W. Baldwin and Shepard Stone, New York, 1938).

S.E.C. in the Matter of Richard Whitney.

V

Newsweek, May 16, 1938.

George Santayana, The Genteel Tradition at Bay (New York, 1931).

Index

Abraham, Otto, 232, 234, 238, 241

Acheson, Dean, 166

Adams, Charles Francis, 188

Adams, Henry, 53

Adams Express, 113

Adler, Paul, 232, 234, 236, 259

Aetna Explosives Company, 8

Agricultural Adjustment Act (1933), 149

Thomas Amendment to, 154, 157

Alleghany Corporation, 107–8, 186–90

Allen, Frederick Lewis, 48, 56, 101

American Academy of Political and Social Science, 177

American Bankers Association, 213–15

American Commercial Alcohol Company, 194–96

American Federation of Labor, 177

American Liberty League, 215–17, 219–20, 221

American Red Cross War Council, 46–47

Anaconda Copper, 71, 72, 102, 143–44

Anderson, Arthur Marvin, 265–66

Arnaud, Léonce, 17

Arno, Peter, 220

Aurelio, Thomas A., 272

Babson, Roger, 111

Bacon, Elliott, 7

Baker, George F., 120, 124

Baker, George F., Jr., 237

Baker, Newton D., 187, 188

Bank of England, 91–93, 170

Bank of France, 170

Bankers Trust Company, 2, 16, 91, 124

Banking Act (1933), 149, 211, 219

Barney, Charles W., & Company, 222, 224

Barron, Clarence, 27, 35, 37

Barton, Bruce, 84

Bartow, Francis, 252, 262–66, 267

confession by R. Whitney to, 262–64

J. P. Morgan and, 265

G. Whitney and, 266, 267

Baruch, Bernard, 176

Bell, Elliott V., 217

Bellanca Aircraft, 278

Berle, A. A., Jr., 251

Bethlehem Steel, 24, 29

Black Thursday, 114, 141

J. P. Morgan & Company on, 124

New York Stock Exchange on, 116–17, 124

Blue Ridge investment trust, 107

Bohan, Owen W., 276

Boston Chamber of Commerce, 131

Bragg, Thomas E., 144, 194–96

Brailovsky, Alexander J., 14

Brinton, Benjamin H., 226

Brookhart, Smith W., 96, 143

Brown, Russell R., 194, 195

Brown Brothers, Harriman & Company, 59, 260

Bull, George H., 233

Burns Detective Agency, 13, 19

Business Conduct Committee of New York Stock Exchange, 27–28, 254

R. Whitney investigated by, 255–59, 262–65, 266, 268–69

Byrd, Harry, 223

Cadillac, 94

Capdevielle, C. C., 194, 196

Carnegie, Andrew, 53

Canetti, Elias, 66–67

Celanese, 110

Chase National Bank, 27, 38, 39, 103–5, 120, 123–24

effect of Banking Act on, 211

involved in stock pools, 71

Chase Securities Corporation, 191

Chesapeake & Ohio Railroad, 109

Chicago Pneumatic Tool, 37

Chrysler, Walter P., 66, 74

Chrysler Corporation, 66

Cluett, Peabody, 110

Cochran, Thomas, 87–89, 136, 270

Cockburn, Claud, 84, 116–18

Cohen, Benjamin V., 196, 197, 203

Collier’s (magazine), 142

Colloidal Products Corporation of America, 134

Commercial Solvents, 113

Committee for the Nation, 164

Congress, U.S., 91, 98, 139, 177–78

New Deal legislation in, 149, 154

Consolidated Cigar, 110

Continental Can, 251

Continental Candy, 37

Conway, Carle C., 251–52, 281

Coolidge, Calvin, 43, 49, 58–59, 84, 96, 156, 161

approval of speculation by, 72–73

boom during administration of, 79, 100, 149

Federal Reserve System and, 93–94

New Era of, 89–90

refusal to run for re-election by, 94

Corcoran, Thomas G., 196–97, 207

Corn Exchange Bank, 136, 246, 247

Coughlin, Father Charles, 177

Couzens, James, 142–43, 157, 192

Cox, James M., 157

Cravath law firm, 59

Cutten, Arthur W., 77, 78

Davis, Howland S., 255–58, 269, 281–82

Davis, John W., 59, 187

as counsel for J. P. Morgan & Company, 264–66, 267

Davison, Henry P., 6–7, 46–48, 91

Davison, Henry P., Jr., 237–38

De Coppet & Doremus, 236

Deighton, Harold, 212

Delehanty, Thomas, 16, 17

Department of Commerce, U.S., 163

Desvernine, Raoul E., 221

Dewey, Thomas E., 271, 276

Dickey, Charles, 265–66

Dillon, Read & Company, 59

Distilled Liquors Corporation, 208, 230, 233–34, 240–41, 249–51, 259, 287

Distress selling, 255

Dittmar Powder Company, 8

Dodge, Murray, 191–92

Dominick, Gayer, 245, 282

Dos Passos Brothers, 30–31

Douglas, Lewis, 151, 155

Douglas, William O., 241, 251–52, 268, 281

Gay and, 245

Pierce and, 242–43

Shields and, 242–45

supported by Roosevelt, 244

Dow-Jones, 87, 89, 95, 110, 129

financial news ticker of, 111

Drexel & Company, 120

Dulles, John Foster, 59

Du Pont, T. Coleman, 39

Du Pont Company, 8, 42, 176, 211

Du Pont family, 43–44

Durant, W. C., 21, 77, 78

Eberstadt, Ferdinand, 59

Ewing, William, 6, 188, 189

Explosion on Wall Street, 1–20

J. P. Morgan & Company in, 1–2,6–7, 11–13, 15–16, 20

Lamont during, 7

J. P. Morgan in, 2, 6–7, 10

New York Stock Exchange during, 2, 6, 8, 11–12

Farm Credit Act (1933), 149

Federal Bureau of Investigation, 10

Federal Home Owners Act (1933), 149

Federal Reserve Act (1913), 43, 99

Federal Reserve Bank of New York, 100, 107, 153, 163, 166, 169

J. P. Morgan & Company and, 91, 182–83

Strong as governor of, 90–94, 98

Federal Reserve Bank of St. Louis, 280

Federal Reserve Board, 92, 97–99

Federal Reserve System, 41, 90–94, 97–98, 111, 164

Coolidge and, 93–94

criticism of, 108

gold standard and, 155

used for speculative credit, 99–100

Feis, Herbert, 151–52, 158

Fenner and Bean, 198

Finletter, Thomas A., 59

First National Bank, 124, 214–15, 237

Fischer, Edwin P., 16–18

Fish, Stuyvesant, 79

Fisher, Irving, 111, 112

Fisher Brothers, 42, 77

Fletcher, Duncan U., 185, 197

Fletcher-Rayburn Bill, 196–97, 203

Florida Humus Company, 134

Flynn, John T., 68, 70, 142, 197

opposition to Securities Exchange Act by, 204–5

R. Whitney and, 198

Flynn, William J., 10, 14

Forces (weekly), 141

Ford, Henry, 157

Ford family, 59

Forrestal, James, 59

Freeport Sulphur, 110

French High Commission, 17

Gale, Alexander B., 260

Garvan, Francis P., 10

Gay, Charles R., 225–28, 239, 242–45, 254–55, 280–81

W. O. Douglas and, 245

in investigation of R. Whitney, 257–59, 260, 262, 264

notification of Securities Exchange Commission, 267, 268

reform accepted by, 251–52

General Electric, 80, 113, 143

General Mills, 102

General Motors, 42, 77, 87–89, 143, 176

drop in price of, 110

J. P. Morgan & Company and, 43–44, 88–89

traded on New York Stock Exchange, 88

Gesell, Gerhard, 283–85

Gilbert, J. Parker, 214, 217

Harrison and, 182–83

Glass, Carter, 142

Gold drain, 123, 132, 141, 145–46

during early days of New Deal, 150–53

during World War I, 4–5

Gold Reserve Act, 219

Gold standard, abandoning of, 150–57

Goldman, Sachs & Company, 50, 59, 78, 260

Gould, Jay, 53, 162

Governing Committee of New York Stock Exchange, 29, 31, 36, 125, 128, 132, 239

hearing on R. Whitney case before, 267, 273

reforms accepted by, 252

revolt against Whitney on, 221–29, 230, 280

sued by A. Ryan, 37

Graf, Lya, 180–82

Graham-Paige, 110

Gratuity Fund of New York Stock Exchange, 229, 239

embezzlement by R. Whitney of, 239–40

discovery of, 245–48, 251, 254

Greyhound Corporation, 255

Guaranty Trust, 38–40, 124

Gutman, Walter, 140

Hanau, Marthe, 141

Hanes, John Wesley, 222–27, 239

J. P. Morgan & Company and, 223

on Securities Exchange Commission, 252, 282

in Whitney case, 268

R. Whitney and, 223–24

Harding, Warren G., 43, 92

Harriman, E. H., 50, 52, 68

Harriman, W. Averell, 59, 217, 260

Harrison, George Leslie, 153, 155, 158, 170–77

Gilbert and, 182–83

Lamont and, 182–83

Hayden, Charles, 145

Hayden Chemical, 37

Hayden, Stone & Company, 80, 144–45

Healy, Robert, 205

Hell Bent for Election (Warburg), 219

Hercules Powder Company, 8, 14

Hertz, John D., 80

Hill, James J., 50

Homans, Sheppard, 17, 18

Hoover, Herbert, 47, 59, 61, 118, 130, 152, 156

International Monetary and Economic Conference planned by, 157

Lamont and, 140–41

moratorium on intergovernmental payments and, 132

before 1932 election, 137, 139–40, 151

Roosevelt and, 145

as Secretary of Commerce, 92

B. Smith’s attitude toward, 121

Strong denounced by, 98

R. Whitney and, 113, 131, 139–40

Home, Sir Robert, 169

House Foreign Affairs Committee, 157

Hudson Motor Car Company, 71, 110, 193

Hughes, Charles Evans, 31, 58

Hull, Cordell, 157, 158

Hupp (motor car company), 110

Hutton, W. E., & Company, 192

Industrial Workers of the World, 14

Insull, Samuel, 144

Interborough Rapid Transit Company, 23

International Acceptance Bank, 60

International Monetary and Economic Conference, 157–60, 163, 195

message from Roosevelt to, 158–60

planned by Hoover, 157

Investment trusts, 108

It’s Up to Us (Warburg), 219

Jews in New York Stock Exchange, 50, 53–55, 232

Jones, Jesse, 168, 172–73, 213

Josephson, Matthew, 23, 121, 162

Junior League, 130

Kahn, Otto H., 51–52, 120, 138, 167

J. P. Morgan and, 52

speculation defended by, 97

testimony to Senate Committee by, 194

Kennedy, Joseph P., 59–60, 79–81, 122–23, 244

as Chairman of Securities and Exchange Commission, 205, 212–13, 222, 225

snubbed by J. P. Morgan, 81

R. Whitney and, 213

Kent, Fred I., 163

Ketledge, George F., 17

Keynes, John Maynard, 84–85, 159, 164, 167

Knox, Frank, 220

Kreuger match empire, 144

Kuhn, Loeb & Company, 50–54, 91, 101, 192, 211

J. P. Morgan & Company and, 50, 53–55

partners in, 60, 62, 78

B. Smith’s attitude toward, 121

views on speculation of, 97

Lacour-Gayet, Robert, 170, 173–74

Ladies’ Home Journal (magazine), 108

Lamont, Thomas W., 44–48, 50, 59, 214, 262

defense of speculation by, 97

during explosion on Wall Street, 7

Hanes and, 223

Harrison and, 182–83

Hoover and, 140–41

issuance of Alleghany Corporation stock to, 187

Mitchell rebuked by, 102

J. P. Morgan and, 47

New York Evening Post controlled by, 52

during 1929 crash, 120, 124, 126–27

Roosevelt and, 148–49, 167, 217

Strong and, 91

telegram to Wiggin from, 189

testimony to Securities and Exchange Commission by, 282–86

G. Whitney and, 226, 247–48, 250–51, 283–85

Landis, James M., 196, 205, 241–42

Landon, Alfred, 220

Law Committee of New York Stock Exchange, 28–29, 30, 228, 245

headed by R. Whitney, 252

Lawrence, Joseph Stagg, 67, 71, 108

League of Nations, 92

Lefèvre, Edwin, 119

Leffingwell, Russell W., 59, 97, 156, 217–18, 223

Lehman, Herbert, 59

Lehman Brothers, 50, 59, 78

Libby-Owens-Ford, 205

Liberty Bonds, 5

Lindbergh, Charles, 89, 188

Lindley, Allen, 131, 282

Lippmann, Walter, 156

Livermore, Jesse, 21, 74–78, 119–20, 279

epitaph in New York Times for, 279

J. P. Morgan and, 75

Lovett, Robert A., 59, 177

Lundberg, Ferdinand, 47–48, 282

Lutes, George W., 239–40, 245–46

McAdoo, William Gibbs, 188

McCloy, John, 59

MacDonald, Ramsay, 157, 159

McKenna, J. P., 78

McMannus, John H., 259–60, 273

McReynolds, Samuel D., 157, 158

Macy’s, 176

Main Street and Wall Street (Ripley), 73

Maister Laboratories, Inc., 194

Manning, Rev. Dr. William T., 13, 63

Martin, William McChesney, Jr., 226, 280–81

Mason, L. Randolph, 257–58, 263–65, 267–68, 269

Mathews, George C., 205

Medina, Harold, 51

Meehan, Michael J., 65–66, 120

investigated by Securities and Exchange Commission, 278–79

in New York Stock Exchange, 78

Mellick, Roger D., 208, 230, 236, 273

Mellon, Andrew, 42, 72–73, 93, 96

B. Smith’s attitude toward, 121

Merchants Association of New York, 130

Merrill, Charles E., & Company, 198

Merrill Lynch, 200

Milbank, Jeremiah, 80

Mills, Ogden L., 140

Missouri-Kansas-Texas, 102

Mitchell, Charles E., 100–4, 112, 124, 155, 187

rebuked by J. P. Morgan & Company, 102

Senate investigation of, 213

Moley, Raymond, 151, 152, 154, 158, 163

Money Muddle, The (Warburg), 218

Morgan, Edwin D., Jr., 266–67, 273

Morgan, John Pierpont (1837–1913), 48, 50, 62, 68, 87, 279

anti-Semitism of, 53

before Pujo Committee, 44

death of, 43

Livermore and, 75

Morgan, John Pierpont (1867–1943), 21–22, 43–45, 120, 187, 211

Bartow and, 265

bomb sent to, 9

during explosion on Wall Street, 2, 6–7, 10

hatred of Roosevelt by, 217

Kahn and, 52

Kennedy snubbed by, 81

Lamont and, 47

photograph with midget of, 180–82

Schiff snubbed by, 55

Senate investigation of, 180, 184–86, 213

statement on gold standard by, 155–56

testimony before Securities Exchange Commission by, 283

G. Whitney and, 248

R. Whitney and, 135, 145

Morgan, J. P., & Company, 78, 101, 106, 260, 262

in bankers’ consortium, 124–26

on Black Thursday, 124

capital accounts with, 248

effect of Banking Act on, 211

effect of 1929 crash on, 120

in explosion on Wall Street, 1–2, 6–7, 11–13, 15–16, 20

Federal Reserve banker chosen by, 91

General Motors and, 43–44, 88–89

Hanes and, 223

investment trusts sponsored by, 108

issuance of Alleghany Corporation stock by, 186

Kuhn, Loeb & Company and, 50, 53–55

as leading Wall Street firm, 43–50

loans to England by, 93

Mitchell rebuked by, 102

New Deal and, 149

partners in, 44–50, 59, 61–62, 78, 91, 180–81

at American Bankers Convention, 214

voyages by, 86, 87

relations to H. Davis of, 256

Senate investigation of, 190–91

B. Smith’s attitude toward, 121

trading on New York Stock Exchange by, 44–45, 62

R. Whitney as broker for, 133, 135–36, 144–45

views of

on Roosevelt’s policies, 167, 217–218

on speculation, 97

in Whitney case, 268

investigation by Securities Exchange Commission, 282–85

J. W. Davis as counsel, 264–67

R. Whitney’s debts to, 232, 253, 261

during World War I, 42–47, 57

Morgan, Junius, 2, 6

Morgenthau, Henry, Jr., 123, 152, 166, 168–69, 171, 173–75, 177

as Secretary of the Treasury, 243

Morrison, Ralph W., 157

Morrow, Dwight, 7, 51, 55, 59, 188

as Morgan partner, 48–50, 91

Morse, Charles A., 31, 35

Moyland, John, 78

Muller, Adrian H., & Son, 212

Murphy, Grayson M.P., 221

Mygatt, Henry D., 266–67, 273

Nash, Warren, 282

Nation (magazine), 273

National City Bank, 100, 101–2, 124, 211

National City Company, 101–2

National Industrial Recovery Act (1933), 149

New Deal, 210, 241, 243, 278

gold drain during, 150–53

J. P. Morgan & Company and, 149

opposition to, 166–67, 176, 179, 215–21

passage of legislation for, 149, 154

Stock Exchange during, 149–50

New Era, 89–90, 111, 112

New Republic (magazine), 205

New York Chamber of Commerce, 177

New York Curb Exchange, 6, 33, 39, 208

New York Daily News, 270, 272

New York Evening Post, 48, 52

New York Shipbuilding, 110

New York Stock Exchange, 59, 61, 128, 133, 135, 137

Business Conduct Committee of, 27–28, 254

R. Whitney investigated by, 255–59, 262–65, 268–69

on Black Thursday, 116–17, 124

during crash of 1929, 119, 125–28

General Motors traded on, 88

Governing Committee of, 29, 31, 36, 125, 128, 132, 239

reforms accepted by, 252

revolt against R. Whitney on, 221–29, 230, 280

sued by A. Ryan, 37

R. Whitney hearing in, 267, 273

government regulation of, 213

Gratuity Fund of, 229, 239

embezzled by R. Whitney, 245–48, 251, 254

Jews in, 50, 53–55, 232

Law Committee of, 28–30, 228, 245

headed by R. Whitney, 252

loans to R. Whitney by members of, 232, 260

losses on, 95

Meehan as member of, 78

during New Deal, 149–50

officers of, 86, 113

pressure by Securities and Exchange Commission on, 241–45, 258, 280–81

reform of, 251–52, 256, 280–81

record breaking trading on, 95, 105–6

reduced trading volume on, 210

rise to financial power of, 22–23

A. Ryan and, 26–40, 68, 261

Senate investigation of, 141–44, 146–47

short selling on, 137–39

B. Smith as member of, 79

speculation on, 67–68, 97

through stock pools, 65–66, 69–74

stock dividend of, 108

toured by Securities and Exchange Commission, 206

trading by J. P. Morgan & Company on, 44–45, 62

during Wall Street explosion, 2, 6, 8, 11–12

during World War I, 4–5, 126

New York Sun, 12

New York Supreme Court, 144–45

New York Times, 10, 12, 88, 120, 167, 217

editorial comment in, 130

epitaph for Livermore in, 279

financial column of, 110–12, 171

stock index of, 109

New York World, 31, 32, 66

Nicolson, Harold, 45, 49

Norbeck, Peter, 140, 143–44

Norfolk & Western Railroad, 109

Norman, Montagu, 92–94, 98, 170–71, 173–74

Northern Pacific Railroad, 28, 50, 53

Noxon, Inc., 194

Noyes, Alexander Dana, 110–12, 171

Nutt, Joseph R., 188

Oakley, R. Lawrence, 225–26

O’Brian, Esmonde, 78

O’Brian, Richard, 78

Palmer, A. Mitchell, 9–10, 14

Paris Bourse, 132

Peabody, Rev. Endicott, 61, 287

Pearson, Frank A., 161

Pecora, Ferdinand, 205

as counsel for Senate Committee, 182–86, 190–203

R. Whitney and, 197–98

Pepsi-Cola, 110

Perkins, Frances, 216

Pershing, General John J., 188

Phagan, K. B., 194, 196

Philadelphia Chamber of Commerce, 131

Philip Morris, 110

Pierce, E. A., 230, 239, 241

Douglas and, 242–43

loans to R. Whitney by, 198–99, 201, 221, 222

testimony before Senate Committee of, 210

Pierce, E. A., & Company, 198, 208, 230

Pittman, Key, 157–59

Pope, Robert A., 17

Potter, William C., 124

Prentiss, Col. John W., 34–35

Price manipulation, see Stock pools

Prices (Pearson and Warren), 161

Prosser, Seward, 2, 16, 124

Public National Bank & Trust Company, 234

Pujo Committee, 38, 44, 46

Radio Corporation of America, 65–66, 69–72, 74, 78, 121, 144, 278

Radio League of the Little Flowers, 177

Randolph, Nancy, 272

Raskob, John J., 66, 78, 84, 108, 188–89

letter to G. Whitney from, 189

Rayburn, Sam, 202

Reconstruction Finance Corporation, 137, 166, 168–69, 172, 213

Redmond, Roland, 144, 198, 245, 267, 273

Republic of Peru, bonds of, 102

Reynolds, Jackson E., 214

Reynolds Tobacco Company, 223

Ringling Brothers, Barnum and Bailey Circus, 180

Ripley, William Z., 73

Roberts, Grace Van Bram, 144–45

Rockefeller, John D., 9, 66, 118

Rockefeller, Percy A., 66, 74, 79

Rodewald, F. Kingsley, 246, 265–66, 269

Rogers, James Harvey, 164–65

Rogers, Will, 203

Romberg, Sigmund, 61

Roosevelt, Franklin Delano, 59, 123, 128, 130, 144, 243, 287

at American Bankers Association convention, 213–15

appointments to Securities and Exchange Commission by, 205

criticized by Warburg, 218–20

Douglas supported by, 244

federal regulation of Wall Street and, 196–97

hatred of, 215–21

Hoover and, 145

inflationary policies of, 148–79

criticism of, 176–79

gold standard and, 150–57

government gold purchase in, 167–76

Warburg as adviser on, 152–53, 155, 164–67, 170, 176–77

Warren as adviser on, 160–67, 175, 177, 217

Lamont and, 148–49, 167, 217

meeting between R. Whitney and, 200

message to International Monetary and Economic Conference from, 158–60

1934 State of the Union message, 178

reaction to Whitney case of, 274

views of J. P. Morgan & Company on, 167, 217–18

Roosevelt, James, 152

Rosen, Walter T., 260

Rosenthal, Robert J., 261, 273

Ryan, Allan A., 23–40, 68, 138, 233

conflict between New York Stock Exchange and, 26–40, 68, 261

Governing Committee sued in, 37

Ryan, Allan A., & Company, 24, 34

Ryan, Thomas Fortune, 23–26, 32, 38, 40, 61

Santa Fe Railroad, 109

Saratoga Racing Association, 233

Saturday Evening Post, 176

Saturday Review of Literature, 52

Schiff, Jacob, 51, 53

snubbed by Morgan, 55

Schiff, John, 177

Schley, E. B., 134–35

Schwab, Charles M., 24, 29–30, 35, 38–40, 122

in stock pool, 66, 74

Securities Act (1933), 149

Securities Exchange Act (1934), 204, 221, 224, 278

opposition to, 204–5

Securities and Exchange Commission, 212–13, 228

appointments to, 205

Hanes on, 252, 282

investigation of J. P. Morgan & Company by, 282–85

Kennedy as chairman of, 205, 212–13, 222, 225

Meehan investigated by, 278–79

notified of Whitney case, 267–68

pressure on New York Stock Exchange by, 241–45, 251–52, 256

tour of New York Stock Exchange by, 206

Seligman, J. & W., 50

Senate, U.S., 139–40

Senate Banking and Currency Committee, 96, 140

investigation of New York Stock Exchange by, 141–44, 146–47

Mitchell investigated by, 213

Morgan investigated by, 184–86, 213

Pecora as counsel for, 182–86, 190–203

R. Whitney subpoenaed by, 141–44, 146–47, 202–3

testimony of Kahn before, 194

testimony of Pierce before, 210

testimony of J. P. Morgan to, 180

Sheldon, George R., 234–35

Shenandoah investment trust, 107

Shetlar, John B., 255–56

Shields, Paul, 217, 222, 239

W. O. Douglas and, 242–45

Kennedy and, 244

Short selling, 137–39, 143

Simmons, E. H. H., 113, 129, 228, 239, 244

embezzlement by R. Whitney discovered by, 245–48, 251, 254

in investigation of R. Whitney, 257–58

reaction of, to Whitney indictment, 273

Smith, Alfred E., 78, 176, 220

Smith, Bernard E., 79, 80, 143, 144, 278

approached for loan by R. Whitney, 261–62

attitude toward J. P. Morgan & Company of, 121

criticism of R. Whitney by, 254–55

managing of American Commercial Alcohol pool by, 194–96

as member of New York Stock Exchange, 79

profits made from 1929 crash by, 121–22

Sons of the American Revolution, 12–13

Speculation, 65–74, 97

approval by Coolidge of, 72–73

Federal Reserve System used for credit for, 99–100

through stock pools, 65–66, 69–74

views of J. P. Morgan & Company on, 97

Speyer, Edgar, 117–18

Sprague, Oliver M. W., 158

Stanchfield and Levy, 31

Stetson, Rev. Caleb R., 63

Stimson, Henry Lewis, 58–59

Stock Clearing Corporation, 125

Stock pools, 65–66, 69–74

Chase National Bank in, 71

National City Bank in, 71, 102

Schwab in, 66, 74

Stokes, Isaac Newton Phelps, II, 196

Strong, Benjamin, 90–94, 97–98, 153

denounced by Hoover, 98

as governor of Federal Reserve Bank of New York, 90–94, 98

Lamont and, 91

Studcbaker, 110

Stutz Motor Car Company of America, Inc., 25–37, 39, 138, 233

Sunderland, Edwin, 266

Swope, Herbert Bayard, 66

Taft, William Howard, 59

Taylor, Telford, 196

Tennessee Valley Authority, 149

Thomas Amendment to Agricultural Adjustment Act, 154, 157

Thomas, Elmer, 154, 167, 177

Times of London, 3, 151

Treasury, U.S., 5, 150, 164, 166, 169

Tucker, Ray, 180

Tumulty, Joseph, 66

Tuttle, Charles H., 271, 276

Union Pacific Railroad, 75, 109

United Corporation, 107

United States Chamber of Commerce, 176

United States Steel, 24, 53, 125

Untermyer, Samuel, 38, 196

Van Sweringen brothers, 186–87

Wall Street Journal, 74, 88

Wall Street and Washington (Lawrence), 108

Warburg, James Paul, 60–61, 123, 158

criticism of Roosevelt by, 218–20

as monetary adviser to Roosevelt, 152–53, 155, 164–67, 170, 176–77

Warburg, Paul M., 60, 91, 97

Wiggin and, 123

Wardwell, Allen, 39

Warren, George Frederick, 152, 179–80

influence on Roosevelt by, 160–69, 171, 175, 177, 217

Washington News, 205

Weinberg, Sidney, 59, 260

Wellington, Herbert G., 136, 233–34, 255–56, 273

loan to R. Whitney by, 207, 231

Wellington, Samuel B., 15–16

West Indies Trading Company, 15

Westinghouse, 113

Whelan, George J., 37, 38

Whelan, Richard J., 80

Whitehouse & Company, 227

Whitney, George, 7, 61, 126, 133–34, 217, 262

Bartow and, 266, 267

H. Davis and, 256

Lamont and, 226, 247–48, 250–51, 283–85

letter from Raskob to, 189

and liquidation of Richard Whitney $ Company, 249–51, 253

loans to R. Whitney by, 134–36, 232, 235, 237–38, 241, 247–48, 261

loans to R. Whitney repaid by, 286–87

J. P. Morgan and, 248

testimony before Senate Committee by, 186, 188

Whitney, Harry Payne, 39

Whitney, Richard, 7, 61–62, 113, 167, 181, 281

balance sheet submitted by, 237–38

as broker for J. P. Morgan & Company, 133, 135–36, 144–45

confession to Bartow by, 285–86

conviction of, 274–76

criticized by B. Smith, 254–55

Distilled Liquors Corporation and, 202–9

embezzlement by, 234–36, 261

discovery of, 245–48, 251, 254

of Gratuity Fund bonds, 239–40

exoneration of partners by, 270–71

J. Flynn and, 198

Governing Committee hearing of, 267, 273

Hanes and, 223–24

Hoover and, 113, 131, 139–40

indictment of, 271–74

investigation of J. P. Morgan & Company in connection with, 282–85

investment judgement of, 209

issuance of Alleghany Corporation stock to, 187

Kennedy and, 213

Law Committee headed by, 252

liquidation of firm by, 249–51

loans to

last attempts for, 259–62

by J. P. Morgan & Company, 232, 253, 261

by Pierce, 198–99, 201, 208, 221, 222, 230

refused by B. Smith, 261–62

repaid by G. Whitney, 286–87

by Stock Exchange members, 232,

by Wellington, 207, 231

by G. Whitney, 134–36, 232, 235, 237–38, 241, 247–48, 261

meeting between Roosevelt and, 200

J. P. Morgan and, 135, 145

in 1929 crash, 124–28

opposition to federal regulation of Wall Street of, 197, 200–1, 203–4

Pecora and, 197–98

personal finances of, 133–37

in prison, 286–87

sentencing of, 276–77

short selling defended by, 138–39,

Stock Exchange investigation of, 257–59, 260, 262, 264, 267–69

as symbol of Wall Street, 129–32, 140

testimony to Securities and Exchange Commission by, 270

testimony to Senate Committee by, 141–44, 146–47, 202–3

Whitney, Richard, & Company, 61, 135, 239, 269

attempted liquidation of, 249–51, 253

assets of, 249–50, 256–57

distress selling by, 255

shares in Distilled Liquors of, 207, 209, 234, 241

Whitney, William C., 23

Wiggin, Albert H., 103–5, 120, 124, 155, 190, 192

Senate investigation of, 213

telegram from Lamont to, 189

testimony to Senate Committee by, 192–93

P. Waldburg and, 123

Wilkinson, Rev. William, 64

Williams, Gluyas, 236

Williams, John Shelton, 38

Wilson, William B., 9

Wilson, Woodrow, 66

Winkelman, B. F., 21, 84, 87

Wolfskill, George, 216

Woodin, William, 151, 188–89

Woolf, S. J., 142

Woolley, Knight, 260

World War I

gold drain during, 4–5

J. P. Morgan & Company during, 45–47, 57

New York Stock Exchange during, 4–5, 126

World’s Work, 142

Wright, Charles, 193, 195–96

Yellow Cab Company, 42, 80

Young, Owen D., 80

The Go-Go Years

The Drama and Crashing Finale of Wall Street’s Bullish 60s

Foreword

“This may be, conceivably, one of the last books to be written about ‘Wall Street’ in its own time.” Thus John Brooks concludes his famous portrait of Wall Street in the 1960s. Well, we all know what happened to that prediction. Books about Wall Street in its own time went forth and multiplied. You could fill a small library with the books about Wall Street that have been published since The Go-Go Years first appeared in 1973. In the past few years alone I have seen manuscripts, or outlines, or proposals, for books about Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, George Soros, Michael Steinhardt, and Michael Milkin. These days, no book about money is considered too trivial, or ill conceived, to publish.

Brooks himself is partly to blame for this state of affairs. He was one of the first journalists to prove that an outsider could walk into Wall Street and emerge with a long and detailed story that a generally educated but specifically ignorant outsider could read with pleasure. The Go-Go Years is such a story.

The tendency with books about Wall Street is to put them down with a reassuring sigh and say, the more things change, the more they stay the same. (Or as Brooks would no doubt put it to his old New Yorker audience, plus ça change, plus ça la même chose.) This book contains plenty in it to justify that response. As the stock market chart races to the roof, a cast of characters familiar to observers of the financial 1990s takes the stage. In 1960s Fidelity-mutual-fund-guru Gerald Tsai there are echoes of 1990s Fidelity-mutual-fund-guru Jeff Vinik. In the detached aloofness of the original hedge fund manager, A. W. Jones, there is at least a trace of the detached aloofness of his successor, George Soros. In the money grubbing of 1960s Market Man there is an echo of the money grubbing of the 1990s Market Man. “In America,” writes Brooks, “with its deeply imprinted business ethic, no inherent stabilizer, moral or practical, is sufficiently strong in and of itself to support the turning away of new business when competitors are taking it in. As a people we would rather face chaos making potsfull of short term money than maintain order and sanity by profiting less.”

But what is mainly interesting today for readers of John Brooks is how different the market of the 1990s feels from the market of the 1960s. There is no real equivalent in Brooks’s account to the technology stocks of today, for instance. There are no foreign markets, no bonds, almost no computers. On the other hand, all those Great White Institutions that these days barely merit a mention in today’s books on Wall Street—the SEC, the NYSE, the Establishment—loom large in Brooks’s account.

Then there is the moral of the story, or stories. The Go-Go Years reduces fairly neatly to a series of morality tales about the most outlandish events of the 1960s: Ross Perot dropping $450 million in one day; Saul Steinberg having the nerve to consider—much less to attempt—a takeover of Chemical Bank; Eddie Gilbert seducing some rich people into investing in his ill-starred ventures before vanishing into Brazil with the other stock market losers. How tame they now all seem! At least to this reader they have lost their ability to shock. The author clearly considers his subjects engaged in an endless cycle of falls and redemptions. But the modern reader is constantly having to remind himself who has fallen, and why he needs to be redeemed. These are moralist tales in which the moral has at least in part been lost.

This may help to explain the most curious thing about The Go-Go Years: its tone of voice. Those lovely, long, multipartite sentences, the glorious arch of the authorial eyebrow, Brooks’s palpable feeling that you, gentle reader, are a broadly educated person who instinctively disapproves of these … speculators.… Brooks’s voice is, above all, the voice of the Old Establishment. The reader Brooks imagines himself to be speaking to is the same shockable character who has vanished from the financial world over the past thirty years. Who on Wall Street these days thinks twice about speculation? Who disapproves of large corporate takeovers? No such person exists, or if he does he’s living on some island so remote that no word of the market will ever reach him.

In the end, The Go-Go Years is not to be read in the usual manner of Wall Street classics. You do not read this book to see our present situations reenacted in the past, with only the names changed. You read it because it is a wonderful description of the way things were in a different time and place. If Brooks’s sense that the end of the Old Establishment would mean the end of Wall Street led him occasionally to get things wrong, at least he got them wrong in an interesting way. “Wall Street as a social context is apparently doomed not by reform but by mechanization,” he wrote toward the end of the book. “Already in the early nineteen seventies, a significant proportion of stock trading is being conducted not face to face on the floor under a skylight but between men sitting in front of closed circuit television screens in offices hundreds or thousands of miles apart.… Wall Street (is heading) toward transforming itself into an impersonal national slot machine—presumably fairer to the investor but of much less interest as a microcosm of America.”

The description was dead-on, but the forecast could not have been more wrong. In a mere twenty-five years, Wall Street has become the largest microcosm on earth.

MICHAEL LEWIS

CHAPTER I

Climax

1

On April 22, 1970, Henry Ross Perot of Dallas, Texas, one of the half-dozen richest men in the United States, was so new to wealth, at forty, that he was not listed in Poor’s Register and had just appeared for the first time in Who’s Who in America. Only a small fraction of his fellow countrymen had ever heard of him. Many who had met him by happening to sit next to him on airliners had not found him particularly impressive or interesting. Barely five and a half feet tall, with a naïve, straightforward gaze, an unamused smile, a crooked nose, a hillbilly East Texas accent, and a short crewcut tended like a tennis lawn, he was inclined to talk at length and with enthusiasm about things like patriotism and the Boy Scouts of America. More than anything else, he seemed to be a nice, promising young man who was probably selling something.

Yet that day Perot made a landmark in the financial history of the United States and perhaps of the Western world. It was hardly a landmark to be envied, but it was certainly one to be remembered. That day, he suffered a paper stock-market loss of about $450 million. He still had, on paper, almost a billion dollars left afterward, but that wasn’t the point. The point was that his one-day loss amounted to more than the total assets of any charitable foundation in the country after the top five; more than the annual welfare budget of any city except New York; and more—not just in figures, but in actual purchasing power—than J. Pierpont Morgan was known to be worth at the time of his death in 1913. It was also quite possibly more in actual purchasing power than any man had ever lost in a single day since the Industrial Revolution brought large private accumulations of money into being.

2

It was Earth Day; the environment had recently become a national mania, especially among the young, and a group of conservationist leaders headed by Senator Gaylord Nelson of Wisconsin had picked April 22 as a day of national dedication to the cause of eliminating pollution in all its forms. (Were preposterously large paper stock-market profits such as Ross Perot had made to be considered a form of pollution? Quite possibly.) In Washington, in front of the Department of the Interior Building, twelve hundred young people milled around shouting “Off the oil!” and “Stop the muck!” to protest government leases to oil producers whose operations were thought to cause pollution. There were antipollution rallies of twenty-five thousand or more (watched by the F.B.I., it became known later) in New York, Chicago, and Philadelphia. In Bloomington, Minnesota, former Vice President Humphrey urged the United Nations to establish an environmental agency to combat pollution around the world, and at Georgetown University in Washington, Senator Birch Bayh of Indiana called for a national agency “to conquer pollution as we have conquered space.” Interior Secretary Walter Hickel—an authentic hero of environmentalism, since he was a convert soon to be martyred professionally for his views—was in his home state of Alaska, getting a hero’s welcome. In New York City, children rode bicycles to school; huge, lighthearted crowds gamboled on an automobile-free Fifth Avenue; at Seventeenth Street people were offered the opportunity to breath “pure air” from the nozzle of a blocklong polyethylene bubble; and so on, as all the artillery of promotion and public relations was turned, momentarily, in an unfamiliar and uncharacteristic direction. The same day, the novelist Kurt Vonnegut, after alluding to President Nixon’s statement that he did not propose to be the first American President to lose a war, commented, “He may be the first American President to lose a planet.”

All this resolution and high spirits fought upstream against one of the deepest moods of gloom to darken any American April since the Civil War. The first My Lai revelations were five months old; the dangerous and disturbing New Haven strike in support of the Black Panthers, which would spread quickly to campuses all over the Northeast, was to begin that same day, April 22; the stunningly unpopular invasion of Cambodia was eight days off, the Kent State University killings of students by National Guardsmen twelve days off. The gloom, compounded by signs of an approaching national economic recession, had caused a stock-market panic that, though far from over, was already comparable in a remarkable number of ways to that of October 1929. The Dow-Jones industrial average of common stocks had sunk relentlessly through almost all of 1969; then, after holding fairly firm through the first three months of the new year, it had gone into a sickening collapse that had carried it, by April 22, to a level some 235 points below where it had been at its peak sixteen months earlier. Much worse, the Dow did not begin to tell the whole story. Interest rates were at near-record highs, strangling new housing construction and making most industrial expansion impractical. The dollar was in bad trouble in the international markets, with foreigners holding American currency worth many billions more than the national gold hoard. One hundred or more Wall Street broker age firms were near failure. As for the Dow, made up as it was of the old blue chips that had long since been deposed as sensitive and accurate market leaders, it was a pale, watered-down reflection of the real stock-market situation. A better indication is to be found in the fact that in May 1970, a portfolio consisting of one share of every stock listed on the Big Board was worth just about half of what it would have been worth at the start of 1969. The high flyers that had led the market of 1967 and 1968—conglomerates, computer leasers, far-out electronics companies, franchisers—were precipitously down from their peaks. Nor were they down 25 percent, like the Dow, but 80, 90, or 95 percent. This was vintage 1929 stuff, and the prospect of another great depression, this one induced as much by despair as by economic factors as such, was a very real one.

The visible parallels to 1929, in the business and financial spheres, were enough to make a man agree not merely with Santayana, who said that those who forget history are condemned to repeat it, but with Proust, whose whole great book, read one way, seems to say that man’s apparent capacity to learn from experience is an illusion.

Before the crash in 1929 the financial sages had insisted repeatedly that there couldn’t be another panic like that of 1907 because of the protective role of the Federal Reserve System; before the crash of 1969–70 a later generation observed repeatedly that there couldn’t be another panic like that of 1929 because of the protective role of the Federal Reserve System and the Securities and Exchange Commission. In each case a severe market break had taken place about eight years earlier (in 1921 and 1962, respectively), followed by a period of progressively more unfettered speculation. In each case huge, shaky financial pyramids, built on a minimum of cash base, had been erected by financiers eager to take maximum advantage of the public’s insatiable appetite for common stocks. Before 1929 they had been called investment trusts and holding companies; now they were called conglomerates. In each case there had been a single market operator to whom the public assigned the star role of official seer. In the 1920s the man to whom the public ascribed almost supernatural power to divine the future prices of stocks had been Jesse L. Livermore. In the middle 1960s, it was Gerald Tsai.

In each case, certain insiders contrived to use privileged information and superior market technique to manipulate stock prices and thus deceive the public; in the 1920s the manipulators had been called pool operators, in the 1960s they were called portfolio managers. (It is curious to note that, while the operations of both the pools of the 1920s and the high-performance funds of the 1960s were obviously unfair if not illegal, there was no public disapproval of either so long as people were making money on them.) In each case, the practice of slack ethics started in the untended underbrush on the fringes of Wall Street and moved, sooner or later, to the very centers of power and respectability. In 1926 (although it wasn’t known publicly until over a decade later), the future president of the New York Stock Exchange committed the first of a series of embezzlements of funds entrusted to his care; in 1929 the president of the Chase National Bank made a personal profit of $4 million by selling short the shares of his own bank. No wrongdoing so melodramatic occurred among the Wall Street leaders of the 1960s—or, at least, none has so far been uncovered. But in 1926 a partner of J.P. Morgan and Company shocked the financial world, which believed the Morgans sat on the right hand of God, by openly touting a stock, General Motors, in which his firm was substantially interested; and forty years later, in 1966, a not dissimilar shudder went through the Street when it became known that two years earlier a key vice president of J.P. Morgan and Company’s successor firm, Morgan Guaranty Trust Company, had bought or caused to be bought ten thousand shares of Texas Gulf Sulphur in less than half an hour, apparently on the basis of privileged information of a great ore strike in Ontario.

The parallels go down to certain curious details. In each case, the market collapse occurred under a Republican President who had been elected on the crest of the preceding boom, and who had a strong pro-business orientation. In each case, the crisis was marked by carefully planned and publicized Presidential meetings at the White House with Wall Street leaders. Finally, in each case the crash gave rise to an orgy of recrimination and finger-pointing.

Of course, there were tremendous differences, too—not just the fact that the more recent crash did not lead to a catastrophic national depression (though it did lead to a severe one), but differences in style and nuance and social implication that will be the main subject of this chronicle. One might, in comparing 1929 with 1969–70, even find a certain appositeness in Karl Marx’s famous observation that history repeats itself the first time as tragedy, the second time as farce.

3

Wall Street, in the geographical sense, was to become an actual battleground that spring, less than three weeks after Earth Day and Ross Perot’s Down-to-Earth Day. By Wednesday, May 6, 1970, a week after the Cambodia announcement and two days after the Kent State incident, eighty colleges across the country were closed entirely as a result of student and faculty strikes, and students were boycotting classes at over three hundred more. Most New York City schools and colleges were scheduled to be closed that Friday, May 8, in a gesture of protest, and among the student antiwar demonstrations being planned was one to be held in Wall Street. On Wednesday the sixth, a small group of white-coated students and faculty members from several medical and nursing schools in the city came to Wall Street to demonstrate for peace on their own. There they were greeted warmly by the vigorous, youth-oriented, peace-crusading vicar of Trinity Church, Donald R. Woodward. In the course of the ensuing conversations, the medical people suggested that it might be a good idea, considering the vast daytime population of the Wall Street area, to establish a noon-hour first-aid center at Trinity Church, which, standing as it has since colonial times right at the head of Wall Street, is at the very heart of the financial district in the physical—though scarcely, it often seems, in the spiritual—sense. If Trinity would provide space, the medical people said, they would undertake to set up and man the first-aid center on a volunteer basis. The vicar gratefully and enthusiastically accepted the offer. The first day that the center was in operation was Friday, May 8—a circumstance that in retrospect seems little less than providential.

That Friday morning—a damp, drizzly, bone-chilling morning such as New York can often produce in early May— beginning at about seven-thirty, boys and girls by the hundreds began debouching from Wall Street’s two principal subway stations, the Seventh Avenue–Broadway stop at Chase Manhattan Plaza and the Lexington Avenue at Broadway and Wall. Most of them were from New York University, Hunter College, and the city’s public high schools, all of those institutions being closed for the day. Eventually something like a thousand strong, they jammed into the financial district’s central plaza, the intersection of Broad and Wall, where they milled around under the apprehensive scrutiny of a good-sized cadre of city policemen who had been dispatched there in anticipation of their arrival. But the students seemed to be in no mood to cause the police any trouble. In light rain, under the columns of Federal Hall, where George Washington had once taken the oath of office as the United States’ first President, and facing the intimidating entrance to the great marble building from which imperial Morgan had once more or less ruled the nation, they spent the morning rallying their spirits and formulating their demands. The demands, not too surprisingly, turned out to be the same as those agreed upon a few days earlier by a secret convention of radical youth leaders in New Haven, and now being put forth on dozens of northeastern campuses. One: immediate United States withdrawal from Vietnam and Cambodia. Two: release of all “political prisoners” in the nation—a pointed, not to say loaded, reference to the Black Panthers imprisoned on charges of participating in the torture and murder of Alex Rackley, a Panther accused of being a police informer. Three: cessation of all military-oriented research work under the auspices of American universities. Unlike many student demonstrations in the spring of 1970, this one was wholly nonviolent. Indeed, it was positively good-humored, and when, as noon approached, the rain stopped and a warm sun broke through, the mood became even better. Most of the demonstrators sat down on the sidewalk to listen to speakers.

Eleven fifty-five: suddenly, simultaneously from all four approaches to the intersection, like a well-trained raiding force, the hardhats came. They were construction workers, many employed in the huge nearby World Trade Center project, and their brown overalls and orange-and-yellow helmets seemed to be a sort of uniform. Many of them carried American flags; others, it soon became clear, carried construction tools and wore heavy boots that were intended as weapons. Later it was said that their movements appeared to be directed, by means of hand signals, by two unidentified men in gray hats and gray suits. There were perhaps two hundred of them.

As they pushed through the mob of seated students, it became manifest that their two objectives were to place flags at the base of the Washington statue in front of Federal Hall, otherwise known as the Subtreasury Building, and to break up the demonstration, if necessary by violence. As to the first objective, they marched toward the statue shouting “All the way, U.S.A.!” and “Love it or leave it!”; their way was barred on the steps by a thin line of policemen; the policemen, overwhelmed by greater numbers, were brushed aside; and the flags were triumphantly planted under the statue. As to the second objective: construction workers repeatedly struck students with sticks, fists, boots, screwdrivers, and pliers. They chased screaming students of both sexes down the canyons of the financial district, striking to hurt when they came within range. They ripped the Red Cross banner, indicating the presence of the new first-aid station, from the front gates of Trinity. The air was filled with the cries of the enraged and the injured, and the acrid, ominous aroma of a storm-troop putsch. Vicar Woodward, brave and exposed, stood through it all by the Trinity front gates, directing victims to the aid station inside; twice, fearing an actual invasion of the church, he ordered the gates closed.

Inside Trinity, a communion service was in progress—a Mass, as it happened, for peace and in commemoration of the Kent State students and all the war dead in Vietnam. Those in the congregation were first aware of the noise of a rising mob filtering in from the street; then, as the service proceeded, they watched a steady stream of bloodied students walking or being carried down the nave’s side aisle to the Sacristy and Clergy Vesting Room where the young doctors and nurses were ready to treat them. In all, about fifty demonstrators were treated at the Trinity first-aid station; another twenty-three were serious enough cases to require attention at Beekman-Downtown Hospital.

For more than a week afterward, Wall Street bristled daily with police as if it were in a fascist state.

To the extent that it had any part in this dispiriting affair—this small but fierce and rancorous struggle that came so close to being a crystallization of the whole nation’s tragedy at that moment—professional Wall Street, the Wall Street of finance and law, of power and elegance, seemed to be on the side of the students. Perhaps out of common humanity, or perhaps out of class feeling, the bulls and bears felt more kinship with the doves than with the hawks. At Exchange Place, Robert A. Bernhard, a partner in the aristocratic firm of Lehman Brothers, was himself assaulted and severely cut in the head by a construction worker’s heavy pliers, after he had tried to protect a youth who was being beaten. A few blocks north, a young Wall Street lawyer was knocked down, kicked, and beaten when he protested against hardhats who were yelling “Kill the Commie bastards!” But most of the mighty of the Street—Communist bastards or not—had no part in the struggle. They were not on the street. Like the famous, allegedly anarchist bombing on Wall Street in 1920, when thirty persons were killed and hundreds wounded, the riot of 1970 occurred just before noon: not quite lunch time. There was a racket in the street, and everyone above (or everyone privileged to have a window) looked out. The market was unaffected. Most of Wall Street’s elite working population watched the carnage from high, safe windows.

Indeed, there was little else they could sensibly have done; no purpose would have been served by their rushing down and joining the fray. Nevertheless, there is an all too symbolic aspect to professional Wall Street’s role that day as a bystander, sympathizing, unmistakably, with the underdogs, the unarmed, the peace-lovers, but keeping its hands clean—watching with fascination and horror from its windows that looked out over the lovely (at that perspective) Upper Bay with its still-green islands and its proud passing liners, and down into the canyon from which there now rose, inconveniently, the cries of hurt or frightened children.

4

The event (like the unreal gyrations in the fortunes of Perot) called attention to the relationship, or the lack of one, between Wall Street and the nation in the new times. Did it make sense anymore to live—and live at the top of the heap—by playing games with paper while children screamed under the window? Could not one almost hear the tumbrils to the revolutionary guillotine rattling in the distance? Well, at any rate, if you were a Wall Streeter in 1970 you were at least no longer directly profiting by war. As late as the Eisenhower era the market had adhered to its age-old habit of greeting war news with complacency if not with outright glee, and of greeting peace news— “peace scares” was the local term—with panic and hysteria. But sometime in late 1967 Wall Street had come to decide that the Vietnam war was bad business, and had broken all precedent by turning decisively bearish on war and bullish on peace. The defense contractors were no longer blue chips; one of the biggest, Lockheed, would soon be in danger of bankruptcy. The peace initiatives of early 1968 had caused or contributed to a huge bull market on record volume. An unheard-of phenomenon; an old shame of Wall Street ended, to sighs of relief from financiers with consciences.

Or again: if you were a conscientious Wall Streeter you could tell yourself that you were contributing to progress by financing industrial expansion that would help reduce poverty and would finally abolish it. But now you knew, or had recently been compelled at last to reflect, that industrial expansion was not an unalloyed blessing; that each new factory, however modern and antiseptic, would mean new money for many but might also mean—through pollution—ugliness, suffering, and death.

Wall Street as a political issue was long dead except in those homes of the stuck record, Moscow and Peking. Even the American Old Left had stopped attacking Wall Street long since (and was probably long since in the market itself). “Lackeys of Wall Street” was a phrase to laugh at when Mao or Khrushchev mouthed it—as well say “lackeys of Monte Carlo.” Spreading affluence and the rise of corporate and federal power had reduced Wall Street to the status of a national facility without important political influence. The New Left simply ignored it, except in 1967 when Abbie Hoffman and his Yippie friends had the inspired notion of throwing dollar bills from the visitors’ gallery onto the Stock Exchange floor. A few months later, the Exchange management did its bit for the Yippie cause by installing bulletproof glass around the visitors’ gallery, thereby seeming to indicate that it considered thrown-away dollar bills to be lethal weapons. (And maybe, after all, from the Exchange’s point of view they were.) In short, a taunt was offered and magnificently accepted. But the taunt was not even to Wall Street; Wall Street had become a convenient metaphor for commercial America. Hoffman was right to crow, “Throwing money onto the floor of the Stock Exchange is pure information. It needs no explanation. It says more than thousands of anticapitalist tracts and essays.” And how magnificently bulletproof glass underlines the message! Wall Street, which despises suckers, had been suckered.

And all through the stormy course of 1967 and 1968, when things had been coming apart and it had seemed that the center really couldn’t hold—the rising national economic crisis culminating in a day when the dollar was unredeemable in Paris, the Martin Luther King and Robert Kennedy assassinations, the shame of the Chicago Democratic convention, the rising tempo of student riots—the silly market had gone its merry way, heedlessly soaring upward as if everything were O.K. or would surely come out O.K., as mindlessly, maniacally euphoric as a Japanese beetle in July. Or as a doomed man enjoying his last meal. One could only ask: Did Wall Street, for all its gutter shrewdness, have the slightest idea what was really going on?

Beyond that, wasn’t Wall Street the very living symbol and embodiment of everything—the Protestant work ethic, Social Darwinism, market orientation, money-madness—that America was only now learning, if not to reject, at least to get into a new and lesser perspective? Wasn’t Wall Street backward-looking, a kind of simplified, idealized version of the older and now largely discredited America, unrelated or even antipathetic to the new America that was struggling now to come into being?

Of course, Wall Street itself claimed to be more broadly American than ever before. Even at the height of the 1929 boom, Wall Street could and did point out, there were only 4 or 5 million Americans in the stock market. In the summer of 1970 the Stock Exchange proudly unveiled a survey showing that the country now held over 30 million shareowners. “People’s capitalism” had arrived, then, and there were figures to prove it. Yet in another and perhaps more important perspective, the stock market was not more closely related to American life in 1970 than in 1929; in fact, the contrary was true. In 1929, America— the America of history, the one described in books and newspapers and popular magazines and even in the intellectual journals—had been essentially still a small country consisting of people possessing either land or money. Everybody else had been simply considered beneath notice. As the majority consisting of slaves is ignored in the idyllic histories of the democracy of ancient Greece, so the majority of the poor was ignored in the social histories of America circa 1929. By 1970, social commentary at all levels had become democratic; minorities, black and other, had become consequently self-conscious, aware of their right to be included and noticed even though they remain as they are rather than remolding themselves in the white Protestant image, as the Jews and the Irish had so largely done in earlier times. Even among the affluent, discussing the stock market at social occasions—a custom not just sanctioned but approved in 1929—had come to be considered generally dull or boorish. In the national context, the 4 or 5 million stockholders of 1929 loomed far larger than the 30 million of 1970. And in 1970, people’s capitalism—as almost any black, Mexican, Puerto Rican, Appalachian poor white, unemployed laborer, or hardscrabble farmer would tell you—was still largely a myth.

Wall Street—sometimes so beautifully, so patly metaphorical that it could break a poet’s heart—was not only a place sorely in need of physical and spiritual “greening,” but had been almost the first place in the nation to be literally ungreened. A print made in 1847, long before the coming of large-scale industrialization, the age of asphalt, hangs in the famous old restaurant Sweets in Fulton Street. It shows almost the whole six-hundred-yard stretch of Wall Street looking toward Trinity Church, and the scene contains exactly one tree. With the physical ungreening went—and goes—the spiritual concomitant, a certain dehumanization. For generations, Wall Street as a social ambiance has tended to represent what is hardest, coldest, and meanest in America. Sneaky, parsimonious, hypocritical old Daniel Drew is not a Wall Street legend for nothing. This is not to say that life there has been (or is) all mean and inhuman. Along with Drew’s unprepossessing qualities, in Wall Street there has always been extraordinary enterprise, generosity, courage, villainy on a grand scale, the drama of success and failure, even now and again a certain nobility. In the nineteen sixties Wall Street still had a stimulating tendency, as it had had for a century and more, to project humanity (and specifically American humanity) on a wide screen, larger than life; to be a stage, perhaps one of the last, for high, pure, moral melodrama on the themes of possession, domination, and belonging.

But at a cost. As few plants bloom there, so do few people. While the Wall Street kings play out their classic dramas in the filtered air behind the high windows, the vassals, footmen, and ladies-in-waiting of the Street are short of the little satisfactions that make life bearable. Numbers and machines that they don’t understand benumb them. One gets off the subway at Broadway and Wall and begins to feel depressed. Men’s faces seem pinched and preoccupied. Pretty women seem flesh without magic. In winter a savage wind curls around the corners of those canyons; in summer the air lies heavy, dank, and sunless. The debaters of theology who cluster outside the Bankers Trust seem disturbingly psychotic, not engagingly zany. Not greed nor avarice, but footling bad temper, is too often the prevailing mood.

In a revolutionary time like 1970, could it be that Wall Street, that summary of so much that is least engaging about our national tradition, was coming to be—in the cliché of the moment—irrelevant?

5

Not to Ross Perot. To him, Wall Street was a Puritan’s Hell, dangerous and fascinating, and also, as he well knew, the source of his almost incredible riches. He had entered Hell, conquered it, and remained pure. By environment and temperament he was a perfect Western populist, feeling toward “city slickers,” including those in Wall Street, a fear and suspicion not unmixed with envy and contempt. His boyhood in East Texas, as the son of a depression-ridden small-town cotton broker and horse-trader, had set the pattern of his life: he had broken horses for pay before he was ten (and repeatedly broken his nose in the process), become an Eagle Scout, learned the cult of self-reliance and learned to make a holy Calvinist doctrine of the pursuit of the honest dollar by honest effort. In some senses he was an anachronism. He had grown up, before and during World War II, believing that the frontier not only existed but still dominated American life. What had been physically extinct long before his birth summed up his spiritual reality. He believed that all things were possible in America for the man of enterprise and that the natural habitat of the man of enterprise was the “frontier.” Even now, when he had turned the tables and was admired, envied, perhaps hated in Wall Street itself, he instinctively equated “West” with “good” and “East” with “bad”; traveling on airliners—as I learned when I spent three days traveling with him on them, late in 1970—he found that his fellow passengers became more pinched, constricted, snobbish, close-mouthed as a plane moved eastward over the nation, and more generous, open-hearted, and free-thinking as it moved westward.

He was of pioneer stock; his grandfather Perot, son of an immigrant from France to Louisiana before the Civil War, in the true frontier days, had made his way upriver and overland to New Boston, Texas, where he had hacked out a clearing, hewed timber, and built a trading post and general store. Ross Perot, after high school and two years of junior college in nearby Texarkana, had wangled an appointment to the Naval Academy, where he had graduated in 1953 with an average academic record but had been recognized for leadership through election as class president. Already he showed promise as a supersalesman. After four years of active Navy duty he had taken a job as a computer drummer, on commission, for I.B.M. in Dallas. He had soon turned out to be such an overachiever that any promotion to a salaried job would have involved a cut in pay, so the company had taken drastic steps to control his income. It had cut his commission on sales by four-fifths and assigned him an annual sales quota beyond which he would get no commission. For the year 1962, he had made his annual quota by January 19, thus putting himself effectively out of business for the next eleven months and twelve days. After brooding on his dilemma, he quit I.B.M. that June and incorporated his own company—Electronic Data Systems Corp., designers, installers, and operators of computer systems—taking with him a couple of brilliant young I.B.M. colleagues, Milledge A. Hart, III, and Thomas Marquez. He had no investors or backers; his initial investment was $1,000, the minimum required for incorporation under Texas law; his directors, apart from himself, were his wife, his mother, and his sister. Hard times followed for a while. (When E.D.S. put up its own building in Dallas and decorated it with the firm’s initials, some local people took the place for a restaurant called “Ed’s.”) But persistence and salesmanship paid off. In 1965, opportunity knocked for E.D.S. when federal Medicare legislation was passed and E.D.S. quickly got in on the ground floor. Perot actually spent a spell working part-time for Texas Blue Shield, which had a contract with the Social Security Administration to develop a computerized system for paying Medicare bills. Out of this association came a subcontract from Texas Blue Shield to E.D.S. That was only the beginning. Eventually E.D.S. had subcontracts to administer Medicare or Medicaid in eleven states, including Texas, California, and Indiana; the firm derived the major portion of its revenue from these contracts, and was, as Ramparts remarked scathingly in 1971, “America’s first welfare billionaire.” All told, by 1968 E.D.S. had twenty-three contracts for computer systems, 323 full-time employees, about $10 million in assets, annual net profits of over $1.5 million, and a growth curve so fantastic as to make investment bankers’ mouths water.

Of such cloth was cut the man who, by early 1970—and by methods that we shall soon see—had beaten every one of the city slickers on their home ground, and become the single biggest winner in what the writer “Adam Smith” called “the money game,” emerging with paper assets to his name of almost $1.5 billion. His personal relations with Wall Street and its slickers began early in 1968, when the market was going through the roof and the hungry investment bankers had suddenly realized that Perot’s little clutch of refugees from the fur-lined trap of I.B.M. was now ripe for a public sale that might be a bonanza all around. Seventeen investment bankers visited Perot in rapid succession and urged him to put his stock on the market. At first he said, as he had always said previously, that he never would.

He didn’t want outside interference in his company’s affairs, he just wanted to be left alone to do a job. But the seventeenth banker got to Perot. He was Kenneth Langone of R.W. Pressprich and Company, a respectable enough Wall Street firm. Langone was a youngish, sympathetic, fast-talking stock peddler of urban Italian extraction. In character, temperament, and background he and Perot presented a study in contrasts—in almost everything except that great binding tie, a shared respect for money. Other investment bankers had offered to sell Perot’s stock at thirty times current annual earnings, then at fifty times, then at seventy times. Langone, however, offered one hundred times, possibly somewhat more. Perot hesitated for several weeks, during which he conducted a series of windy seminars within his company on the abstract moral question of whether or not a company like theirs ought to go public. Predictably, the seminars turned out to be largely a grotesque exercise in middle-management men trying to guess which way the cat would jump. But as to Perot, was all this soul-searching merely self-deception? Did his principles, like so many principles, have their price? Was his mind made up? Whatever the case, Perot said yes to Langone.

Then began Perot’s education in the ways of the slickers, and he proved to be an astute pupil indeed. First of all, Langone wanted to know, who were the company’s directors? His wife, his mother, and his sister, Perot reported. Langone said that wouldn’t do. So Perot wrote himself a more acceptable board, consisting of Hart, Marquez, and other principal employees. Next, the company would have to be recapitalized: say, 11.5 million shares. A preposterous capitalization for a company that earned only $1.5 million a year? Necessary, Langone explained, if you wanted that high earnings multiple and also a reasonable stock price. E.D.S., then, would be the seller of 325,000 shares of stock; Perot himself would be the seller of another 325,000. The rest would be kept by Perot and the E.D.S. employees— around 1.5 million shares for the employees (he had issued it to them by way of bonuses), and not quite 9.5 million for Perot himself. Wasn’t 650,000 shares for public trading a dangerously small float, likely to make for a highly volatile market in which small investors might possibly get hurt? Langone told Perot it was plenty. After all, he pointed out, R. W. Pressprich itself would make the market, and could be counted on to maintain a fair and orderly one. The offering price finally agreed upon was $16.50 a share—118 times current E.D.S. earnings, and an infinite number times current dividends, since there were none.

Through all the negotiations Perot played barefoot boy to the hilt, pretending to be baffled by Wall Street’s baroque rituals while actually learning to turn them to his own advantage. Was this a way to do business, he demanded of Langone, letting natural market forces be flouted by a local social pecking order that often required higher-ranking investment bankers to abstain from participation in offerings headed by lesser ones? Langone, scarcely a lover of Morgans or Lehmans or their kind, just smiled and shrugged. Perot made outlandish suggestions such as that the original buyers of his stock be offered a ninety-day money-back guarantee—surely knowing well enough that such an arrangement would be both legally and practically impossible—and tried to write his own prospectus in Frank Merriwell language (“All alone, against overwhelming odds, with little money. …”), only to see it rewritten in the usual legalese. He indulged in classic frontiersmanship with the underwriters’ legal counsel, the proper firm of Winthrop, Stimson, Putnam, and Roberts: in New York one of the lawyers invited Perot to lunch at a distinguished Wall Street club, and then when the lawyer came to Dallas, Perot insisted on returning the favor at a local greasy spoon. But when, on September 12, 1968, the E.D.S. stock was publicly offered and was quickly subscribed for in one of the most sensationally successful new-issue promotions of the whole headlong era, the bumpkin came out overnight with $5 million in personal cash and more than $200 million in stock equity at market value. All the tolerant Wall Street smiles faded abruptly.

Had the bumpkin, then, really been a superslicker all along, even though he pronounced head as “haid” and yes as “yais”? Perhaps; but surely not consciously. In fact, Perot could legitimately claim to be by his own lights a pure-hearted moral idealist. His code embodied the early American virtues—thrift, early rising, work, competition, individualism—and it worked for him. He had the useful, if to many people annoying, ability of finding a moral homily to support whatever he did. Wall Street had made him rich, so Wall Street might not be so bad—maybe, at bottom, a simpleminded, paper-tiger sort of villain. In the months following the stock offering, Perot’s fascination with the place grew. He talked to Langone by telephone from Dallas every working day, and visited in person whenever he could. On his visits, he would frequent the Pressprich trading room where the E.D.S. market was made. The stock took off. Institutions began buying it. Strange orders came in from places like Geneva and Lebanon, and this made the xenophobic Perot uneasy. Sometimes he would protest: “Don’t sell my stock to him! I don’t want him for a stockholder!” But the traders would laugh and sell the stock anyhow at ever-rising prices. At last, early in 1970, E.D.S. sold at 160. Perot, with his 9-million-plus shares, was now worth on paper almost $1.5 billion—which, it happens, is about 40 percent of the whole United States federal budget for 1930, the year he was born.

The new billionaire saw himself, characteristically, not as a grandee but as an example to the nation’s youth: “Somewhere in the United States there’s a young man or woman who will break every financial record I’ve set! That’s the amount of opportunity that exists in this country.” Again characteristically—and in marked defiance of recent practice among other newly rich Texans—he set about being a moral billionaire. He decided to will only modest sums to his five children, “so they’ll have the same opportunities I’ve had.” Substantially all of his fortune would go, sooner or later, to “the improvement of American life.” For a starter, he gave a million dollars to the Boy Scouts in the Dallas area. He gave over two million to the Dallas public school system to finance a pilot elementary school in a black ghetto area. He refused to avail himself of his legal right to take personal income-tax deductions on his charitable contributions on the ground that morally he owed the tax money to a country that had done so well by him. In 1969, he became obsessed with the plight of United States prisoners of war in North Vietnam, and that December he attempted personally to intervene with the North Vietnamese authorities in their behalf. (His efforts, which included two excursions to Indochina in chartered airliners, failed, but they seem to have been not without rewards in personal satisfaction—in serving to convince people, perhaps including himself, that one man alone is not powerless in the modern world, and that Americans, particularly capitalist Americans, are a force for good no matter what anyone says.) By instinct he involved himself in moral confrontations in which, in his terms, he was always the winner. Once in 1969 a group of young West Coast radicals came to ask him—with tongues fairly protruding from their cheeks, it may be guessed—to finance “the revolution.” Did Perot avoid them or send them away? Indeed not; rather he took the opportunity to give them an object lesson. In his most businesslike manner he asked, “How long will it take and what will it cost?” The radicals, with no ready answer, were speechless.

He made what he did a virtue, and a virtue of what he did. But was Perot a hypocrite? Hypocrisy in common morals, like fraud in common law, is an offense that requires an element of “scienter”—knowledge of the offender that he is committing the offense. Viewed in that light, Perot, without scienter, was innocent.

6

The way Perot received the news of his monumental setback on April 22 was casual to the point of comedy. All that morning he was closeted in his Dallas office with executives of a potential client company to which E.D.S. was making its sales pitch. On emerging around one o’clock, he picked up a phone and called down the hall to Tom Marquez.

“What’s new?” Perot asked.

“Well,” Marquez said, “the stock is down fifty or sixty points.”

Later Perot was to say that he had felt nothing at all. The event, he would add, had been “purely abstract.” Despite a certain liking for history, insofar as history fitted in with his preconceived ideas, Perot did not immediately put in it a historical context. As we have seen, he had philosophical inclinations of a sort, too, but these, like those of most businessmen, tended to be of the ad hoc rather than the gratia artis sort. What did occur to him was that the whole thing didn’t really matter much, since the $1.5 billion he had made in eight years wasn’t quite real money anyway because it was not quickly or readily convertible into cash. It also probably occurred to him that he wasn’t exactly left destitute by the sudden crash, since he still had (on paper) that residual billion or so dollars. He had, he was to say later, the sense that nothing much had really happened.

Exactly what happened to the market in E.D.S. on the morning of April 22 is not known and may never be known in detail. What is certain, however, is the fact that its collapse was not based on any bad news about the company’s operations. To the contrary, the news was all spectacularly good; per-share earnings for 1969 were more than double those for 1968, and even for the first quarter of 1970—a time of fast-deepening general business recession—E.D.S. showed a 70 percent profits increase over the same period for 1969. Quite evidently, there had to be some other cause.

E.D.S. was traded in the over-the-counter market. Less than a year later the operation of that long-notorious thicket of rumor, confusion, and secrecy would be revolutionized by the introduction of an electronic marvel called NASDAQ—a computer system that makes it possible for an over-the-counter trader, by merely punching some buttons and looking at a screen on his desk, to see precisely which firm is making the best current bid and the best current offer in any of several thousand stocks not listed on the stock exchanges. In effect, NASDAQ would bring the over-the-counter market up from under the counter, a nether region it still inhabited to a marked extent in April 1970. At that time, there was no such screen on the trader’s desk; to get the best price on a thinly traded stock like E.D.S., he might have to telephone a dozen other firms to get their quotes, engage in shouted conversations with other traders in his own firm to find out what kind of bids and offers they were getting, and finally agree to a price that would never be reported to the public at all. In such a market, the opportunities for manipulation were endless. Conducted in windowless back rooms by excitable hagglers, many with a full measure of larceny in their blood, and policed only negligently by the overworked and understaffed S.E.C., the over-the-counter market in the nineteen sixties was the perfect arena for the feeding of lions and the ingestion of Christians.

What was “wrong” with E.D.S. was that the price of its stock had not dropped at all while the rest of the market had been going through a panic. By way of comparison, University Computing, a leading company in E.D.S.’s very industry, was selling on April 22 at a price 80 percent below its peak of the previous year; meanwhile, E.D.S. was selling almost at its peak. Good earnings record or not, E.D.S. stock at around 150 was, from a technical standpoint, in an almost freakishly exposed position. At the same time, much of the available supply of stock was in the hands of fast-performance mutual funds that, at any sign of decline, would quickly unload. This is a condition known to market players as “weakly held.” Such facts do not go unnoticed, nor did they on April 22. Presumably some big punter or a group of them—perhaps in Geneva, perhaps in Lebanon, perhaps right in New York—saw a golden opportunity to recoup the drastic losses they had suffered over the previous days in other stocks. So they mounted a bear raid on E.D.S., probing its strength with testing short sales. As it gave way under the pressure and dropped a few points (it may be presumed), they increased the sales. The suddenly lower price then came to the attention of the itchy-fingered portfolio managers of the fast-performance funds that held E.D.S. With their celebrated speed and dexterity, the portfolio managers began unloading. Down and down the bid went—to 145, 135, 120—and the panic was on. The men in the back rooms decide fast and move instantly, and in their market a selling panic can blacken the sky as quickly as an August afternoon’s thunderstorm.

Toward noon, with E.D.S. down in the 80-90 range, it firmed; presumably the bears who had started the slide felt that their killing was made and were beginning, leisurely, to consume their prey.

That, at least, is the scenario that may be reasonably deduced from the circumstances and events that are known. Langone of Pressprich, who was in the thick of the entire collapse, professes ignorance of what happened. He does say, cautiously, “The roof fell in. It was a terrible market, and E.D.S. at such a high price was vulnerable. No one can prove it, but it certainly appears that there was an organized raid of some kind on the stock.” Certainly, no one can logically accuse Pressprich of complicity. With a substantial inventory of E.D.S. stock on hand before the selling storm struck, and thus a vested interest in keeping the price up, the brokerage firm had a bad morning that would not soon be forgotten. Some say it barely survived. But it did survive, and so, needless to say, did Ross Perot.

7

Thus the greatest one-day fall of a titan ever. But what of the investing public? The tens of thousands who, either directly or through the investments of their mutual funds, had put some of their savings into E.D.S., were far more than bemused spectators at a landmark event in financial history. In a word, they were losers, perhaps of a college fund or a vacation fund or part of a retirement nest egg. Few of them were so fortunate as to have bought their E.D.S. stock at or near its original offering price of $16.50. As is usual with hot new issues, particularly in such manic markets as that of 1968, most of the original issue had soon found its way into the hands of professional traders. Many small investors had come in later, buying from the professionals after the stock had been talked about in brokerage offices and mentioned in the market letters and pushed by the eager commission producers—and, of course, after its price had shot up almost out of sight. In the familiar pattern, the investing public, with its thousands rather than billions, had suddenly become interested in hot stocks at the very height of the boom, and had bought E.D.S. near its top. For an investor who had bought it at 150, the $15,000 he had risked had in a single day become $10,000, or the $1,500 he had risked became $1,000. To him, whatever had gone on in Lebanon or Geneva or in Wall Street or Perot’s Down-to-Earth Day was emphatically not abstract. In human terms, the real and necessary hundreds or thousands that he lost were more important than the abstract millions that Perot lost.

Had the small investor, then, been gulled? The evidence is that, as such things go, he had not. E.D.S., in issuing such a small number of shares to the public, had indeed, it appears in retrospect, subjected the public to a considerable degree of risk. But the expert advice Perot had received from the seventeen investment bankers he had consulted had been that the number of shares necessary to make an orderly national market was between 300,000 and 500,000—and he had actually issued 650,000. So the error had apparently been Wall Street’s rather than Perot’s. Moreover, E.D.S., unlike many new companies of the era, was not known for any special tendency to mislead investors with high-pressure salesmanship of its shares or with accounting tricks to pretty up its balance sheets. It was a sound, profitable operation, and the market’s madness in its shares was the market’s own. And as a matter of fact, even after the big April 22 collapse investors in E.D.S. were better off than those who had plunged in many better-known issues, including most of the favorites of the boom years. As of April 22, their investment in Ling-Temco-Vought at 170 was worth 15; in Four Seasons Nursing Centers at 91 was worth 33 (and would shortly be all but worthless); in Data Processing at 92 was worth 11; in Parvin-Dohrmann at 142 was worth 19; and in Resorts International at 62 was worth 7. And unlike Perot, those whose bad judgment, or that of their advisers, had led them to make such investments, did not still have a billion dollars left.

The very fact that E.D.S. was a relatively sound, respectable young company emphasizes the larger importance of its sudden stock collapse, so abstract to a lofty general like Perot and so concrete to the foot soldiers of finance. If E.D.S. stockholders had been gulled, so, that April, had tens of millions of other small investors.

The E.D.S crash and Perot’s dizzying personal loss were symbolic, in magnitude and unreality, of the 1970 panic. They are its single event that stands out in memory, like Richard Whitney’s appearance on the Exchange floor to bid 205 for Steel on behalf of the bankers’ pool, at the height of the panic on October 24, 1929—Black Thursday. Nor is it without symbolic importance that the larger market calamity of which the E.D.S. crash was a part resembled in so many respects what had happened forty years before—what wise men had said, for more than a generation, over and over again as if by way of incantation, could never happen again. It had happened again, as history will; but (as history will) it had happened differently. The nineteen sixties in Wall Street were the nineteen twenties replayed in a new and different key—different because the nineteen sixties were more complex, more sophisticated, more democratic, perhaps at bottom more interesting.

CHAPTER II

Fair Exchange

1

On the last day of 1960 Wall Street was in a euphoric New Year’s Eve mood, and volume on the New York Stock Exchange set a record for the year of 5,300,000 shares traded. It was a promising red sunset after a long stretch of leaden skies; the last Eisenhower administration was expiring amid general stagnation and a mild business recession, and the market, then as nearly always reflecting hope or fear about the future rather than current facts, was clearly reacting to the go-ahead spirit created through both instinct and intention by a young President-Elect, John F. Kennedy. People felt that now there would be action, movement, indeed forward movement; good things, never mind what, were bound to be ahead. A statistic no one in Wall Street could then imagine was that eight years later the average daily Stock Exchange volume would be two and a half times that 1960 record.

The new mood persisted and grew; very soon, in fact, it grew ominously from cheerfulness to something near mania. It was fed by the Kennedy inaugural on that well-remembered cold day in January—a speech that now appears conventional in its cold-war rhetoric and its hackneyed call for self-sacrifice to the common good, but animated by the Biblical elegance of its language and the fierce dignity with which it was delivered. By mid-February the stock averages were up some 15 percent from their October lows, and there began to be talk of a “Kennedy boom.” Not even the Cuban Bay of Pigs disaster in mid-April could stem the tide; a week after Castro’s men drove out the C.I.A.-backed invaders, the market was up almost 25 percent, the fastest recovery since the end of World War II. The attention of buoyant investors was turning from blue chips to more speculative issues—Brunswick, Sperry-Rand, Hupp, Ampex, Transitron—and already some of Wall Street’s horizon scanners were beginning to express alarm and urge caution. On April 4, Keith Funston, president of the Stock Exchange and ordinarily, in his carefully restrained way, the nation’s leading backer of common stocks, reversed his field and began emphasizing the dangers of speculation. Gerald M. Loeb, the venerable Polonius of brokers, who would live to be one of the last men on Wall Street to have vivid memories of 1929, was saying a couple of weeks later, “If you want to sleep and smile when the wonder shares return to reality, now is the time to break away from the crowd.” (The wonder shares were those of new, all-but-untried companies with which investors were just then having an intense love affair. A few of them, like Polaroid, Xerox, and Litton Industries, would go on to greater things; most of them would be forgotten before the end of the decade.) In mid-May Funston was back on the same theme, this time more forcefully. “There still seems to be a preoccupation with low-priced shares because they are low-priced, and an unhealthy appetite for new issues of unseasoned companies merely because they are new. … Anyone who invests on a vague tip from an uncertain source is courting financial disaster.”

Still seems to be? The preoccupation and the appetite, it developed, were just beginning to build up. In the second quarter there came a sharp business recovery, but that promising development was almost beside the point to avid stock purchasers. The bull market, in the classic way of bull markets, had begun to lead a happy and profitable life of its own, independent of underlying reality. The week of Funston’s second warning the Welch Scientific Company of Skokie, Illinois, makers of laboratory equipment, offered the public 545,000 common shares at $28. It is pretty safe to say that of the people who bought all of the shares on opening day, and those who on the very same day bid the price for them up to $52, only a small minority were well informed about or particularly interested in Welch’s profits or asset position. What they knew, and all they needed to know, was that at that particular moment in time new issues in the scientific-technical field were like found money, and the man whose broker would be so kind as to cut him in for a few hundred shares could count himself blessed.

By the end of May the blue chips were beginning to lose ground—evidently because people were digging their old certificates out of bank boxes, selling them, and putting the proceeds into the new-issues market. By autumn, when the over-the-counter averages reached an all-time high, the money-coining machine was working at full capacity. Goaded by stock underwriters eager for commissions or a piece of the action, owners of family businesses from coast to coast—laundry chains, soap-dish manufacturers, anything—would sell stock in their enterprises to the public on the strength of little but bad news and big promises. In conformity with the law, the bad news would be all spelled out in the prospectus: the company had never made any money and had no real prospects of making any; the president had a record of three business failures in succession; the competition had the market for the company’s sole product all sewed up; and so on. But the effectiveness of warnings is limited by the preconceptions of those being warned, and the stock would be snapped up, leaving the underwriter with his easy commission and the owner of the company with more cash than he had ever seen before in his entire life. To top it all off, the heedless buyers of the stock would come out ahead, too; they would ride it up while waiting for the six-month tax-holding period to expire, and then they could sell, take their profits, and buy a new car—or a new issue.

When the accounts for 1961 were added up—after a final day when the Stock Exchange tape ran ten minutes late because of heavy volume, once again promising good things for the future—the accomplishments of the year, quite apart from the new-issue killings, seemed substantial indeed. Trading on the Big Board had totalled just over a billion shares, the greatest for any year since 1929. (1929? A myth of ancient horror, like the Black Death.) An analyst with a computer calculated that during 1961 all Stock-Exchange-listed issues had risen on the average 23 percent, for a dollar-value appreciation of seventy billions. Eighty-six Big Board stocks had cheered their owners by splitting two-for-one or more. Korvette had almost tripled, Certain-teed had doubled and a half, Interstate Department Stores had doubled. And in the over-the-counter market where the new issues bloomed, gains for the year of 4,000 or 5,000 percent were not unknown. No wonder John F. Kennedy was popular in Wall Street.

And yet, not quite all was euphoria and gratified greed. The year 1961 also brought a major scandal, involving not just a man or a firm but a key institution—the American Stock Exchange, Wall Street’s second largest. It was, of course, the successor to the old Curb Market, roofless and raffish like the world’s first stock exchange in Amsterdam in the seventeenth century; conducted outdoors, in one or another part of the Wall Street area, from long before the Civil War until 1921; a ragtaggle gang of brokers haggling daily in all weathers and wigwagging the results of their trades to office men perched in the windows of surrounding buildings. Over the loud objections of some of its members, the Curb had moved indoors in 1921, establishing itself in its present building (later modernized and enlarged) at 86 Trinity Place, behind Trinity churchyard. In 1953, under the leadership of its new, modern-minded president, Edward T. McCormick, it had renamed itself the American Stock Exchange and been quickly nicknamed the Amex. It had become a pillar of Wall Street, serving the necessary function of providing a ready market for stocks of companies too small and unseasoned to qualify for listing on the Big Board. In 1961, however, this financial pillar almost fell in disgrace, perhaps dragging a good part of Wall Street with it, but was redeemed just in time by the steadfastness and courage of a few of its members.

2

Casting a long shadow over the Amex, and indeed over all of Wall Street, during the later nineteen fifties, had been two particularly implausible swindlers, Lowell McAfee Birrell and Alexander Guterma, alias Sandy McSande. Birrell, like Richard Whitney before him, was apparently a scoundrel as much from choice as from necessity. The son of a small-town Presbyterian minister, a graduate of Syracuse University and Michigan law school, a handsome, brilliant, and charming man who began his career with the aristocratic Wall Street law firm of Cadwalader, Wickersham and Taft and soon belonged to the Union League and Metropolitan Clubs, Birrell, if he had not been Birrell, might easily have become the modern-day equivalent of a Morgan partner—above the battle and beyond reproach. He was the sort of man who has everything going for him in America—who can hardly fail to be dowered with both money and respect in return for little more than a pleasing manner and an air of probity and affable reticence. Instead, Birrell left the gilded cage of Cadwalader, Wickersham and Taft to become perhaps the leading wrecker of corporations and deluder of investors in the postwar era. Birrell’s gothic deals with Serge Rubenstein, the Mephistophelian financier who was murdered in his Fifth Avenue mansion in 1955; the cool and efficient way he issued himself huge quantities of unauthorized stock in corporations he controlled, like Doeskin Products and Swan-Finch Oil, and then illegally unloaded the shares on the market; the strong-arm methods he used to keep dissident stockholders in line—such things belong in another chronicle. It is enough to say here that the S.E.C. finally caught up with Birrell in 1957, and that to escape prosecution he fled first to Havana and then to Brazil, where he served a short prison term for illegal entry but thereafter lived in splendor, beyond range of the volleys of indictments and stockholder suits that issued periodically, and harmlessly, from his native land.

Guterma was in the mold of the traditional international cheat of spy stories—an elusive man of uncertain national origin whose speech accent sometimes suggested Old Russia, sometimes the Lower East Side of New York, sometimes the American Deep South. On occasion he presented himself as a Russian from Irkutsk, at other times as an American named McSande. Whoever he was and wherever he came from, he apparently made his first fortune in the Philippines during World War II, running a gambling casino that catered to occupying Japanese servicemen. After that he married an American woman, survived a charge of having collaborated with the enemy, and in 1950 moved to the United States. During the succeeding decade he controlled, and systematically looted, more than a dozen substantial American companies, including three listed on the New York Stock Exchange and a leading radio network, the Mutual Broadcasting Company. After some sour deals in 1957 and 1958 left him short of cash, he was reduced to taking money from General Rafael Trujillo of the Dominican Republic in return for promises (never fulfilled) to boost the Trujillo regime on Mutual. The law caught up with him; in September, 1959, he was indicted for fraud, stock manipulation, violation of federal banking laws, and failure to register as the agent of a foreign government; a few months later he went to prison and vanished unmourned from the business scene.

These two rogues out of past time, both offstage—one in Brazil, one behind bars—were only catalysts in the Amex drama of 1961, but without them it would hardly have happened as it did.

It began at the end of April, with a set of sensational charges by the S.E.C. against Gerard A. (Jerry) Re and his son, Gerard F. Re, who together formed the Amex’s largest firm of specialists. Stock specialists are, of course, the broker-dealers on the floor of every stock exchange who man the various posts at all times during trading hours, taking the responsibility for maintaining orderly markets in the particular stocks in which they specialize, and, when necessary, for risking their own resources in the performance of that duty. As has been widely noted, theirs is a calling with a built-in anomaly, because sometimes situations arise in which a specialist’s private financial interest comes into direct conflict with his stated public responsibility. Pushed in one direction by prudent self-interest, in the other by sense of duty or fear of punishment, a specialist at such times faces a dilemma more appropriate to a hero in Corneille or Racine than to a simple businessman brought up on classic Adam Smith and the comfortable theory of the socially beneficent marketplace. Disquisitions could be written on the moral situation of the specialist, and indeed, they have been. Until recent years—when it has come to be the widely received view that eventually specialists can be replaced entirely by computers backed by a pool of money supplied by investment firms—it was generally accepted that the specialist, with all his temptations, was necessary to supply liquidity on stock exchanges. So long as most specialists were able to make a decent living (and they clearly were) while discharging their public responsibilities fairly well (as they outwardly seemed to do), it was thought best, even by the hottest-eyed reformers in the S.E.C., to leave the system basically alone and rely on strict rules and close surveillance to keep the specialists in line.

If the role of the specialist seemed to make a particular and perhaps even an unreasonable call for men of good character, this call was not always answered. According to the S.E.C. complaint, it was not in the case of the two Res, who had, it seemed, consistently yielded to the temptations while failing to meet the responsibilities. Over a period of at least six years, the S.E.C. charged, the father and son had abused their fiduciary duties in just about ever conceivable way, reaping a personal profit of something like $3 million. They had made special deals with unethical company heads—Lowell Birrell in particular—to distribute unregistered stock to the public in violation of the law. In order to manipulate the prices of those stocks for their private benefit and that of the executives they were in league with, they had bribed the press, given false tips by word of mouth, paid kickbacks to brokers, generated false public interest by arranging for fictitious trades to be recorded on the tape—the whole, infamous old panoply of sharp stock-jobbing practices. Between July 1954 and April 1957, according to the complaint, they had improperly disposed of more than half a million unregistered (and therefore legally unmarketable) shares of Birrell’s Swan-Finch Oil Corporation; in 1959, their operations had been so pervasive as to account for one in every twenty-three shares traded on the Amex for the year. To cover their tracks, they had used the standard dodge of trading through dummy nominees. Two of their nominees were alleged Cubans who, in the S.E.C. men’s opinion, may never have existed. A third, one Charles A. Grande, through whose account the Res had filtered several million dollars’ worth of securities, did exist, though he had no money of his own to speak of; he was a retired horse trainer, and his chief asset as a dummy was his interesting home address—10 Downing Street, which, to be sure, was not the London residence of the British prime minister but an old apartment house in the Italian section of Greenwich Village, New York. Among those the Res had managed to make victims of, the S.E.C. noted, were a number of political figures and celebrities of various kinds, including Vincent F. Albano, Jr., a New York State Republican leader; Abraham J. Gellinoff, a New York City Democratic leader; Toots Shor, the restaurant owner; Chuck Dressen, manager of the Milwaukee Braves baseball team; and—most eye-opening of all—the Amex’s own president, Edward T. McCormick.

The investigation had been conducted under the leadership of the S.E.C.’s young assistant director of the Division of Trading and Exchanges, Ralph S. Saul, of whom, one way and another, the Amex would hear much more over the coming years; and when, on May 4, the charges—unrefuted by the Res—were presented to the full Commission, the upshot was the fastest punitive action in its history: permanent expulsion of the Res from the securities business, after only two hours of oral arguments.

3

Justice done, then—the bad apples had been detected and removed, if rather belatedly, from the Amex barrel. Two aspects of the affair remained disturbing. One was the ominously exact way the Res’ methods of cheating had aped those of the manipulators in the bad and presumably gone old days before the New Deal had brought the S.E.C. into being. The other disquieting aspect was the presence on the S.E.C.’s list of Re associates of the name of Edward T. McCormick. If the Amex’s president had been a personal participant in Re transactions, was it not implied that the Amex authorities, or at least the chief of them, may have known what was going on all along?

Before examining that question we may well take a look at those authorities. To a marked extent, they were a breed. President Ted McCormick, Arizona-born of an Irish father and a Spanish mother, a former S.E.C. commissioner who had jumped the fence from bureaucrat to businessman; Chairman Joe Reilly, slum-bred, one of nineteen children, a tough-talking self-made man who had worked his way up from floor page on the Curb to his present eminence; Vice-chairman Charley Bocklet; Jim Dyer, finance committee chairman; and Johnny Mann, chairman of the important committee on floor transactions—it was they who ran the Amex in 1961 and, with some variations, they who had run it over the preceding seven years during which the Res had romped. By and large, they had the blunt good humor and the disinclination toward fine moral distinctions of men who have bulled their way from nowhere to somewhere. Few, like McCormick, were scholars with advanced academic degrees; few had any degrees, and some had never finished high school. Virtually all of them were hard drinkers who brought indoors an old and honored tradition of the Curb that, in the outdoor days, had at least enjoyed the justification that alcohol helped keep out the cold and the damp.

To a man, they were of Irish extraction. The boisterous Irish like Mike Meehan and Ben Smith who had first made their mark in Wall Street thirty years earlier were now followed by a generation that had captured a key Wall Street institution, or come near enough to capturing it so that, in the middle fifties, to speak of the Irish-American Stock Exchange was almost a definition, rather than just a joke. But they did love jokes, too, loved them as few in dour Wall Street had ever done before them, and they gave the place a kind of rough levity. Old Joe Haff, for example, an Amex man, used to like to jump off ferry-boats and race them to shore swimming, and at Christmas on the Amex floor, a clerk would dress up as Santa Claus, other clerks would mount headlights on one of the posts and pretend it was a truck, and everyone would get gloriously drunk.

The reasons this rather aberrant Establishment undertook to shelter the Res—for, in retrospect, it is fairly clear that they did in fact shelter them—can only be inferred. It was not chauvinism; the Res were of Italian extraction. Plainly, it was not a case of conspiracy for profit; there is no evidence that the Amex officials shared in the Res’ boodle. On the other hand, some of them were good friends of the Res, and frequent house guests of the elder Re at his place in Florida. More important, they were by temperament boosters; they believed passionately in the Amex, wanted it to grow and to rise in public esteem; and they knew that the Res were powerful old timers who could not be eliminated without a scandal. Like politicians, they would do almost anything to avoid a scandal. As for McCormick, he may well have had only the vaguest notion of what the Res were up to. Unlike Reilly, Bocklet, Dyer, and Mann, he was seldom actually on the floor, and, as the Amex’s paid administrator rather than a member, he did not know the intricacies of stock trading at first hand. He was the upstairs man, the front man, and when he wasn’t upstairs he was out on the road spreading word of the expanding Amex and bringing new business to it.

During his ten-year term as Amex president, McCormick had functioned chiefly as a salesman. The holder of a B.A. from the University of Arizona (Phi Beta Kappa, at that), an M.S. from the University of California, and a Ph.D. from Duke, in 1934 he went to work for the S.E.C. in a lowly job that paid $1,900 a year. Over the subsequent years, while clambering up the bureaucratic rungs, he wrote a standard text entitled Understanding the Securities Act and the S.E.C., and in 1949 was appointed a S.E.C. commissioner by President Truman. In 1951 he made the familiar switch from low-paid government work to high-paid private-industry work that has been the bane of the S.E.C. from its beginnings, constantly draining it of talent. Never before, though, had a S.E.C. man—commissioner or staffer—left to become head of a major stock exchange. McCormick’s appointment to the Amex was hailed as the beginning of a new era in which government and the securities business would work in happy cooperation for the public good. As a booster for the Amex, McCormick was notably successful; by 1961, daily share volume had more than quadrupled in a decade, and the price of an Amex seat had jumped from $9,500 to $80,000. The scholar and bureaucrat had turned out to be a born salesman. But with the Amex’s growth, it began to appear toward the end of the decade, a certain laxness of administration had crept in. Restless at his desk, Ted McCormick was always out selling up-and-coming companies on listing their shares on the Amex, and while he was in Florida or at the Stork Club drumming up trade, sloppy practices were flourishing back at Trinity Place.

Or so it seemed in the light of the S.E.C. report, which pointed out that as early as 1957 a federal court had enjoined the Res against further violations of the Securities Acts and further trading in the stock of Swan-Finch, and that in 1958 the elder Re had been formally accused by the Amex’s Business Conduct Committee of willfully violating the rules governing specialists. Late in 1959, this matter had finally come to a vote of the Board of Governors, which had inexplicably exonorated the Res, 18 to 5. Immediately the Business Conduct Committee had held its own meeting and showed its defiance of the Board by voting to suspend Jerry Re from trading for the month of January—a painless sentence, to be sure, since January was the month Jerry Re customarily spent in Florida.

Curiously, or perhaps not so curiously, most of the Amex members had known very little of all this. “Everybody knew there was something smelly in Jerry Re’s corner of the floor, but only in general,” one of the specialists has since said. For many members, the S.E.C. complaint of 1961 provided their first knowledge of the court injunction, the vote of the governors, even the month’s supension. It also provided their first knowledge of the fact that in 1954 and 1955 McCormick had been personally involved in stock transactions with the Res. There is some irony in the fact that he had actually lost money on the transactions. Still, what he had done had certainly been, to say the least, indiscreet. Leaving aside the whole matter of the Res’ later-revealed misdeeds, for the salaried administrative head of a stock exchange to enter into deals with members of that exchange—and specialists at that—would seem to imply a perfectly clear conflict of interest. For one reason or another, only a handful of Amex members seemed to be disturbed by the revelation of McCormick’s indiscretion, or by the implication that the disciplinary actions against the Res had been largely swept under the rug. The members most disturbed were another father-and-son specialist team—or more precisely, a father-and-son-in-law specialist team. They were David S. Jackson and Andrew Segal.

4

The big men of the Street are of two kinds: those who come to it from outside with a driving urge to conquer, and those who through inheritance belong to it from the start, and therefore, because they do not need to discover it for themselves, can bring it fresh perspectives. The first kind, obsessed with the need for money and power, are the ones who bring innovations and variations to the craft of money-making, and who usually become the richest. They treat Wall Street purely as an arena; they accept its rules and customs and exploit them, often with some thing close to art, but they do not seek to change its ways. The second kind—who, curiously, often have a temperamental indifference to money but nonetheless stay in Wall Street, never dreaming of turning their backs on it, simply because it is their world—are the ones who most often seek to remold it nearer to their hearts’ desire.

Jackson, although only a shade over five feet three inches tall, and not even a millionaire most of the time, was one of the big men of the Street in 1961, and one of the second kind. He had been born into it, though hardly in the silver-spoon tradition of, say, J.P. Morgan the Younger. His father had been a hit-or-miss trader on the outdoor Curb, in the money one day and out of it the next, and he himself had been born on Henry Street during the time that the Lower East Side was still a Jewish ghetto. Jackson had gone two years to Brown and one year to St. John’s University Law School before joining his father’s business. A Curb (and later Amex) specialist since 1925, he had achieved a measure of fame, and more than a measure of honor, in 1955 when a Walter Winchell radio tip had resulted in a buying panic in Pantepec Oil, one of the stocks he specialized in (and a venture, incidentally, of the notable progenitor William F. Buckley, Sr.). Jackson, at personal risk far beyond the call of duty, had saved the deluded public from the consequence of its folly by selling short a block of more than one hundred thousand shares of Pantepec, at a price more than six points lower than he might have sold it, in order to keep the market orderly. This quixotically high-minded act had made him, for a time, a sort of Exhibit “A” of the securities industry before Congressional committees (and, it appears in retrospect, an unwitting cover for the actions of other less scrupulous specialists of the era). It had also earned him—and, subsequently, his handsome young partner Segal, a graduate lawyer who joined him on the floor the following year—some surly glances from a few of their colleagues.

As a result partly of the Pantepec incident and partly of his predilection, so uncharacteristic of many Amex men, for moral issues, Jackson came to occupy a special position there, respected, somewhat feared, and by no means universally liked. This is not to say that he was generally unpopular. As an ex-governor, he was fond of boasting that he was the first Jew ever to have finished anywhere but last in an Amex election; he attributed his assimilation to the fact that he was “a pretty good golfer and a pretty good drinker.” Far from being an evangelist at heart, he was a liberal by instinct, and a philosopher by choice. “Every institution needs a house philosopher,” he used to say. “I’m the Amex’s.” During the ten years of McCormick’s Amex presidency the two men had become close friends, and Jackson had practiced his philosophy on McCormick. Over those years Jackson had watched McCormick gradually changing from a quiet, reflective man into a wheeler-dealer who loved to be invited by big businessmen to White Sulphur Springs for golf, and the change had worried him. “Ted,” he would say, when they were at dinner at one or the other’s house, “why don’t you read any more?”

“I haven’t got time,” McCormick would reply.

“But you’ll lose your perspective,” Jackson would protest, shaking his head.

During the later 1950s Jackson served two terms on the Amex Board of Governors, and, although he wasn’t serving at the time of the court injunction, he learned enough about the Res’ operation to argue before the Floor Transactions Committee that they ought not to be allowed to serve as specialists. His motion was defeated. Jackson, incidentally, had always liked Jerry Re, in the rough-and-ready manner of Amex friendships. Back in the forties Re had organized a softball team up at Monroe in the Catskills, where he had a summer place, and Jackson had sometimes gone up there to play on it. “Jerry looked like a crook, and it’s my tendency to sympathize with people whose appearance is against them,” Jackson said long afterward. “For example, take me. I’m not exactly prepossessing in appearance myself.”

Now came the S.E.C. exposure and suspension of the Res, and—more shocking to Jackson—the peripheral revelations about McCormick. These things led Jackson and Segal, almost alone among Amex members, to be seriously concerned about whether McCormick was fit to be their president. His dealings with the Res back in 1954 and 1955; his presumed part in brushing the Re injunction under the rug in 1957; and his taking part in the exoneration, or whitewash, of the Res by the Amex board in 1959—all those actions, Jackson and Segal felt, had been a good deal less than presidential. One day in May 1961, Segal made up his mind and said to his senior partner, “I’ve decided to go to Ted and ask for his resignation.”

Jackson nodded unhappily; his thoughts had been running in the same direction. McCormick was his friend, after all. But all through the two weeks or so that had passed since the S.E.C. complaint had become public, he had been asking himself what to do. At home, on East Sixty-eighth Street, he had agonized so constantly and obsessively that at last his wife, Fritz, had said, “You’ve got to do one of two things—demand Ted’s resignation, or sell your seat.” And he had agreed that she was right.

Now he said to his son-in-law, “Don’t you do it, Andy. Let me take care of it.”

So Jackson formally requested an appointment with McCormick, and it was granted. Upon arriving at the presidential office, alone and unsupported, no longer a member of the board, knowing he represented a minority view on the floor, he found McCormick flanked by the top brass of his administration, the formidable Chairman Reilly and Vice-chairman Bocklet. Whether or not they knew exactly what to expect, they clearly enough expected trouble.

Jackson said, “I don’t know how to say this, Ted, but you’ve got to resign.”

McCormick’s reaction was so violent that Jackson has since said he felt physically frightened. The president picked up a batch of papers from his desk and slammed them down. Then he walked to one of the walls of his office and punched it several times, hard enough to bruise his fist. Finally he said, “I don’t know what you’re talking about. I’ve never done anything dishonest.”

“No, I don’t think you have,” Jackson said, his voice shaking. “But you’ve been indiscreet.”

The confrontation ended inconclusively, with Jackson repeating his demand—indeed, extending it to include the whole top echelon of Amex officers and the Amex counsel, Michael E. Mooney—McCormick rejecting it, and Reilly and Bocklet remaining silent. Jackson made it clear that he did not intend to let the matter rest there. Afterward, Bocklet, clearly a McCormick supporter and therefore now Jackson’s political enemy, took him aside and said, with a kind of admiration, “Davy, you go home and tell your Fritz that she’s married to a man.”

Reilly also took Jackson aside, to make another kind of comment. “You haven’t got any proof of anything against Ted,” he said—rather irrelevantly, it would seem, since Jackson’s charge was based entirely on published material that was now common knowledge. “The thing for you to do is to appear before the Board of Governors, and argue your case there.”

“Joe, you know perfectly well that would be like pissing up Niagara Falls,” the house philosopher replied.

Jackson and Segal—a fifty-nine-year-old maverick and a thirty-two-year-old upstart—were now official enemies of the Amex management. Through the summer and into the fall, they went on arguing their case, but not before the board. Instead, Jackson committed what in the view of the Amex management was almost the ultimate sin—he argued it in the newspapers. This was in defiance of explicit orders from Reilly to all Amex members, and particularly specialists. The House Committee on Interstate and Foreign Commerce had scheduled hearings on the Amex for that summer, and the S.E.C. had laid similar plans for early fall. Anticipating that many Amex members, and specialists in particular, would be called to testify at the various hearings, Reilly began taking them aside separately and in groups. “When you talk to the government people, don’t tell them anything you don’t have to,” Reilly, according to Segal, would caution in his characteristic corner-of-the-mouth style. He would go on to say that, in view of the delicate state of affairs at the Amex in the wake of the Re exposure, in the Exchange’s best interest it was equally necessary to avoid talking to the press under any circumstances. And in the case of Jackson, Reilly added a further urgent instruction—do not, he said, press the matter of McCormick’s resignation any further, at least until the hearings are over and things have had a chance to cool down.

But Jackson had made his decision; he talked to the press— Ed Cony of the Wall Street Journal in particular—and he pressed his case against McCormick in conversations with other members on the floor. In early summer, Reilly took the unusual step of mounting the podium overlooking the floor and interrupting trading to make a brief speech. In it, he asked the members for loyalty in a time of crisis, emphasized that the good name of the Amex must come first in all considerations, and defended McCormick, whom he said had been publicly maligned. But he made no mention of Jackson or Segal. Then in July the House held its hearings, at which both McCormick and Reilly testified in public. McCormick listed some of the mighty American companies that in their salad days had been traded on the Amex— Armour, Swift, Cities Service, Eversharp, Alcoa, Gulf Oil, Pittsburgh Plate Glass, Quaker Oats—and said roundly, “I will stack the honesty and efficiency of our specialists against any other specialists … in the country.” He admitted his 1954 and 1955 dealings with the Res, but pointed out that such things belonged to a closed chapter in his past: “I have not owned a single share of stock traded on the American Stock Exchange since 1957.” The implication—though only an implication—was that the Congressmen were looking at a penitent who had reformed. The reason McCormick would not come out and say that he was reformed was, of course, that such a statement would be an admission that he had previously been unreformed.

Reilly, after telling the Congressmen about his rise from lowly beginnings in a huge, impoverished family, described in some detail the Amex’s rules for specialists and its disciplinary procedures against erring members. He insisted that the only reason the stock manipulations and nominee trading of the Res had not been uncovered by the Amex authorities as early as 1957 was the fact that they, unlike the S.E.C. and the courts, lacked subpoena power over nonmembers of their institution like the useful dummy Charles A. Grande. This seemed to Jackson to be a poor excuse, and when Reilly stopped him on the floor a few days later to ask what he had thought of the testimony, Jackson replied that he had found it inadequate.

5

By this time, the floor was seething. A little cluster of a dozen or so other members, most of them under forty and soon nicknamed the Young Turks, had rallied to Jackson’s and Segal’s standard and joined them in calling for McCormick’s resignation and a complete reorganization of the Amex. But they were badly overmatched in both numbers and influence, and soon they found the power of the in-group pressing upon them most uncomfortably. According to Segal’s account, the classical arm-twisting methods of ward politics were applied to the dissenters by representatives of the administration. One Young Turk, for example, was pointedly reminded of a questionable stock transaction in which he had been involved some years earlier, and of how easily the matter could be called to the S.E.C.’s attention; to another it was suggested that certain evidence at hand, if revealed, could make a shambles of his pending suit for divorce; and so on.

So it was a hot summer on Trinity Place for the Young Turks, and when Labor Day came bringing with it the first breezes of autumn and the real beginning of a new Wall Street year, they were all but routed, leaving Jackson and Segal standing almost alone. And then came the turning point. It came in a strange form—that of a savage attack, or what Jackson construed as such, on him by the only people he still had reason to think of as his allies in the cause of reform. On September 18, Jackson, under subpoena, appeared before representatives of the S.E.C. at their New York office on lower Broadway. The S.E.C. men present were the agency’s top investigators—Ralph Saul, who had headed the Re investigation, and two other lawyers, David Silver and Edward Jaegerman. Possibly the investigators came to the hearing with the preconceived idea that Amex specialists were a bad lot and that, the Pantepec affair notwithstanding, Jackson was no better than the rest. At all events, for more than four hours they grilled him with what seemed to him to be hostility, scorn, and sarcasm. Their attention focused on a single incident several years earlier in which a former member of Jackson’s firm had, by his admission, done a poor job of specializing. But the S.E.C. men were not to be put off by admissions; hour after hour they bored in until Jackson, on the verge of hysteria, found himself in tears.

He was released early in the afternoon, and when he got to his Amex post, his partner Segal was alarmed to find him completely distraught. “So that’s the way they treat an honest man,” Jackson was muttering. “As if he were a criminal and they needed a confession.”

“But Dave, what happened?” Segal asked. “The S.E.C. is supposed to be our friend!”

“I can’t talk about it now,” Jackson said. He went home, and that evening, after consulting Segal by phone, dashed off in longhand a furious and agonized letter that he planned to address to various public officials, including Senator Jacob Javits of New York. “I was besieged and harassed continously,” he wrote of the hearing. “The questioners were never satisfied until they got the answers they wanted.… I never really understood brain-washing before. We in America believe people innocent until proven guilty. When those of us with immaculate records of ethical and moral responsibility are treated with scorn and contempt, badgered to the point of emotional breakdown, then our representatives must take action.…” That evening, feeling like a prophet without honor not just in his country but everywhere, Jackson almost let despair persuade him to abandon the fight to reform the Amex.

What he did, instead, after finishing his letter, was to read it on the telephone to Ralph Saul of the S.E.C. before mailing it to Javits. Horrified, Saul pleaded with him not to mail it, apologized for the excessive zeal of his colleagues, and promised that some sort of amends would be made. Somewhat mollified, Jackson did not mail the letter. (But neither did he destroy it. He still has it, the almost illegible scrawl testifying eloquently to his emotional state at the time.) A couple of days later a delegation of S.E.C. men—headed by none other than Silver, one of the inquisitors at the hearing—came to the Amex floor and spent the entire trading day watching the Jackson-Segal operation, trade by trade. It turned out to be an unusually lively day for them, because one of the stocks in which they specialized, Mead Johnson, was fluctuating wildly on conflicting rumors about a new contraceptive product, calling for particularly risky and fast-footed specializing. All day, the S.E.C. men watched without comment. After the close that afternoon, they declared themselves convinced that Jackson and Segal were honest, and flatly asked them to become allies of the S.E.C. in the reform of the Amex. With a lack of enthusiasm that in the circumstances must be considered understandable, Jackson and Segal agreed.

“Now, what do you know about what’s going on upstairs?” Silver asked his new allies, when they were all gathered on the Amex floor, late that afternoon after the janitors had swept up and everyone else had gone home.

In fact, one of the things that was going on upstairs just then was the surreptitious retyping, with significant emendations and deletions, of the minutes of certain recent meetings of the Amex Board of Governors. But Jackson and Segal, of course, did not know this. Indeed, they told the S.E.C. men that they knew nothing of what the Amex administration was doing and could only promise to cooperate with the S.E.C. in its investigation in any way they could. The following week, Jackson made good this promise by going to Washington and, in a long session with the S.E.C. at its headquarters, giving his views on what reforms were needed.

So at last, painfully, the federal investigators came to believe in the existence of a minority element within the Amex that, if encouraged, might be able to bring about reform from within. Much later, S.E.C. officials would say that until the day when their delegates came to the Amex floor and reached an understanding with Jackson and Segal, the agency had been on the verge of exercising its legal prerogative to padlock the executive offices of the Amex and take over its operation in toto. Such a seizure, representing socialism rampant in one of the last bastions of free capital, would have been a crushing, perhaps fatal blow not just to the Amex but to all of Wall Street.

6

In October, the rest of the Street finally came to realize that it would be caught in a backlash from the Amex scandal. Wall Street at its highest level took action, forming a securities-industry committee to review the Amex’s rules, policies, and procedures and make recommendations. Its membership was a cross section of top-echelon Wall Streeters, including the president of Merrill Lynch, the managing partner of Paine Webber, the senior partner of Goodbody, the president of Clark Dodge, and, as chairman, the formidable Gustave Levy, senior partner of Goldman, Sachs. The Amex, meanwhile, went on its bumbling way. A meeting of the remnants of the Young Turks, intended for regrouping and for planning a new offensive, was scheduled for the day following the announcement of the Levy committee. Reilly, getting wind of the meeting, arranged to have its location changed from someone’s private office to the Amex governors’ room, invited all Amex members to attend, and, as a final touch of irony, called in the press. Just as he had planned, the well-reported meeting fell flat in a morass of platitudes about unity. Even Jackson, thus mousetrapped, found himself saying, “Let us close ranks, forget personal feelings, and save our Exchange.” Over the subsequent days, though, he resumed his defiant contacts with the press, giving his version of the state of affairs at the Amex in pointed detail; and at last Reilly was goaded to a reprisal that stands unique in the annals of Wall Street.

It was October 18; Reilly had just learned that Jackson had talked frankly again, this time to Robert E. Bedingfield of the Times, and that the result would be printed within a couple of days. During that day’s trading the following notice was distributed on the floor:

TO THE MEMBERS:

The Chairman of the Board will address the membership today, October 18, 1961, at 4:00 o’clock P.M.

In view of the importance of the subject, members are requested to remain on the trading floor for the Chairman’s statement.

Charles E. McGowan, Secretary

What subject? The day’s trading ended as usual at 3:30; the members, or most of them, stayed on the floor instead of going to their lockers on the floor below to change their coats and shoes and exchange gossip before going home. Right on time, Reilly appeared on the podium. Whether by intention or coincidence, a brand-new hi-fi public address system had just been installed. Only one newspaper reporter was invited—a man from the old Herald Tribune whom the Amex administration considered to be relatively sympathetic to it. On the stroke of 4:00, Reilly’s rasping, tough-guy voice, duly amplified and faithfully reproduced by the shiny new speakers, began to be heard, and spoke in part as follows:

MEMBERS:

Although I have frequently faced troubled waters since I became Chairman in 1960, nothing has disturbed me more than the painful task I feel it is my duty to perform this afternoon.

My heart is heavy as a result of the news articles in the Wall Street Journal and the subsequent coverage by other newspapers. Since I have accepted your mandate to lead our Exchange I … permit you to judge a man who has made our Exchange a public spectacle.

I know Mr. Jackson, along with others, gave interviews. I also understand Mr. Jackson was asked to correct the latest story before it was printed. He refused! As long as he was so glib with his tongue he should at least have checked his handiwork since those news articles shook the very foundation of our Exchange. I hope Mr. Jackson realizes now that the caption could have read:

“Young Turks led by David Jackson publicly assassinate the American Stock Exchange.”

Whether or not he or Mr. Segal was the leader is not important! Since Mr. Jackson sought the fame I will give him the title.

How he or anyone else can judge any official or the governing Board without knowing the full record and before the facts, goes beyond my comprehension. How he, through thoughtless action, can re-open the wounds caused by the Re case, goes beyond human understanding.…

I have been asked since the articles appeared in the newspapers to recommend that measures be taken against the members involved. I will refuse to do so unless I am commanded by the proper Standing Committee or the Board of Governors, because, in my opinion, any member or members who personally indict their own weak characteristics by causing these disturbances must be going through a greater punishment than any that could be levied by the Board of Governors.

I would like it thoroughly understood that it is my belief that members should have the right to protest any weaknesses that develop on our Exchange whether they be of an operational or administrative nature. Common sense also dictates that in order to overcome such weaknesses—if they exist—members must have the right to express their opinions and politic amongst themselves seeking stronger candidates to make the necessary changes. But while I wholeheartedly endorse such action I must remind all that you have signed our Constitution—agreed to abide by it, and all amendments thereto. Therefore, all expressions should be made to the proper Committee provided for that purpose; that is, the Nominating Committee. And, as in the past, if you are not satisfied with the candidates proposed for election, you may express your objections through petitions.

At this time your Chairman wishes to state that he is very tired and, as you know, he has had quite a rough time for the last two years. It has been difficult enough to handle the routine duties of my office and at the same time devote the time necessary to fight brush-fires created by the Re and Re case. I should not have to dissipate my strength to fight for our Exchange over arguments born of dissension by minority groups aired in the newspapers which add so greatly to my burden. …

I am proud to represent the American Stock Exchange. … I am firmly convinced your officials and our members, through self-discipline, have enforced the rules. …

I conclude by saying, “What has been done, let it be done!”

I must insist that no member or group of members in the future turn this Exchange into a public battleground. I am going on record as your Chairman that I will no longer tolerate it.

At the end of this unusual oration—the only public attack in history by one member of a leading United States stock exchange upon another, unless one is to count the minor dust-ups with fists that used to occur from time to time on the outdoor Curb—there was a rousing ovation for Reilly. It is ironical, though not entirely accidental, that neither Jackson nor Segal was there to hear it. Segal was at home for his normal day off; no one had notified him in advance that the chairman was to speak on the floor that day. Jackson had indeed been on the floor during trading hours, and had been notified of Reilly’s plans along with everyone else; but he was booked to sail for a Paris vacation two days later, and he had decided that no matter what Reilly had to say he would go ahead with his plans to get home early and get packed.

So neither of the stated targets of the attack knew its contents, and neither, one way and another, would know them precisely for more than a month to come. That evening, by which time the Reilly speech had naturally become the talk of Wall Street, a reporter called Ted McCormick to ask for a comment. As an example of Wall Street understatement, McCormick’s answer was a classic. He described Reilly’s speech as “a routine report to the membership by the chairman of the board.”

Next day Jackson, at his Sixty-eighth Street apartment, was asked for a comment on the speech, the contents of which he knew only by hearsay. He said only, “Mr. Reilly must live with his conscience and I must live with mine.” Then he sailed for Europe with his wife.

During his absence, Segal held the besieged fort at the Amex. Long afterward he said of the subsequent weeks that every single day had been torture for him. He was systematically ostracized; in place of the Amex floor’s usual joking and backslapping he met with cold silence almost everywhere. For a month no more than six or eight members spoke to him except in the business of making trades. He was pointedly given the maximum fine allowed under the Amex rules for a minor offense against them, and was kept under daily hostile surveillance by a staff man sent by Mann’s committee on floor transactions. Finally this got to be too much for him; when Mann’s representative sauntered up to the Jackson-Segal post one morning, Segal angrily asked him to leave. The representative did not reappear; instead, Mann himself came over, threw an ingratiating arm around Segal in the best Amex style, and said, “You know, Andy, we wouldn’t harass you!”

But still the freeze went on. And meanwhile, Jackson and Segal were in the strange position of finding themselves unable to get a transcript of the speech in which they had been attacked. On Jackson’s return from Europe late in November, he found that Segal had failed in several attempts to obtain a copy through informal requests to the Amex management. Accordingly, he and Segal wrote formally to Reilly and McCormick asking for a copy through official channels. In reply, they were informed that the Amex archives contained no record of any kind of the address that McCormick had described as a “report to the membership by the chairman.” They were finally told that the only such record extant might be found in the files of the Securities and Exchange Commission in Washington.

Thus, early in December, Jackson and Segal applied to the S.E.C. and got their copy. Having read it, they showed it to their lawyer and were advised that they might have a libel and slander case against Reilly, whoever might have helped him prepare the speech, and even the Amex itself. After brooding on the matter, they decided not to sue. And so matters stood at the Amex in the second week of December; there seemed to be a winter of deadlock ahead, when a deus ex machina emerged to bring the little drama of Trinity Place to a swift climax.

7

The deus was no god, and he came not from the machine but from a federal penitentiary, furloughed from a four-year, eleven-month term to testify before the S.E.C. in its Amex investigation around the end of November. He was Alexander Guterma, alias Sandy McSande, and for one reason or another he found it appropriate to reminisce for the S.E.C. about Amex people he had known from time to time, one of whom was President Ted McCormick. Back in late 1955—Guterma said, and McCormick did not subsequently deny when given the opportunity— McCormick had been Guterma’s guest in Florida and subsequently in lush, pre-Castro Havana. At that time Guterma was, so far as anyone knew, a law-abiding businessman if perhaps not quite a respectable one. He was also a businessman to be reckoned with. At only forty-one, Guterma was president and chairman of F. L. Jacobs Company, chairman of Bon Ami Company, and chairman of United Dye and Chemical Corporation. Never before had one man headed three separate New York Stock Exchange firms. That he was already engaged in Byzantine crimes involving manipulation of the stock of all of those companies would not begin to come to light until more than two years later. So on the face of the matter, in associating socially with Guterma, McCormick was not even guilty of an indiscretion.

But the face of the matter was not all. Guterma just then was attempting to attain listing on the Amex of the stock of one of his ventures, Shawano Development Corporation, and it was far from clear that Shawano could normally qualify for such listing. In Havana, McCormick took to the gambling tables, as did almost everyone who visited Havana in those days. He lost in the neighborhood of five thousand dollars, and his host Guterma obligingly offered to underwrite his losses. McCormick was a big spender, but he was not a man to whom five thousand dollars was a small matter. He accepted the offer, and his losses were paid.

It was one of those borderline transactions that quasi-public officials cannot afford to engage in—or at least to be caught engaging in. In the climate of 1961, when Guterma’s name stood simply for sin in Wall Sreet, the mere linking of his name with McCormick’s in a dubious context was the clincher. The Levy committee quickly heard of the new scandal, presumably from the S.E.C. Inevitably, versions of it got onto the extraordinarily active grapevine of Wall Street, where gossip is money. The issue was settled: McCormick had to go. It was only a matter of when and how.

Amex men have since said that in those last days of the old regime there was a kind of tomorrow-we-die atmosphere about the “upstairs” at 86 Trinity Place—the Old Romans knowing that the Young Turks had them beaten now, and finishing out their term refusing to compromise or retreat, with a kind of bleak and bull-headed dignity. Liquor, the Old Romans’ traditional solace, seems to have flowed more and more freely, and earlier and earlier in the day, to the point where the last ukases coming down to the floor from “upstairs” were all but incoherent. Jackson and Segal stayed in the background; the spark that they had ignited was now a blaze that needed no fanning. Jackson said later that his chief emotion was not triumph but sadness. Meanwhile, the Levy committee spelled out the complaints against McCormick and Reilly. When the Amex Board of Governors met on Monday, December 11, it had no choice. Everyone understood that it was too late for further stalling. McCormick’s resignation was asked for and obtained, and the reorganization of the Amex was under way at last.

It proceeded swiftly. On December 21, the Levy committee issued an interim report calling for the quick selection of a new Amex president and sweeping revisions in the Amex’s administrative machinery; the most substantive changes recommended were the compulsory rotation of directors to end the self-perpetuating leadership, and the elimination of standing committees to prevent domination of operations by a clique. On December 28 Reilly, at the insistent urging of the Levy committee, withdrew as a candidate for reelection as chairman. In announcing his withdrawal to the press, Reilly explained that he was “very tired” and wanted “to devote more of my time to personal considerations.”

On January 5, 1962, the S.E.C. came out with its report on its investigation, accusing a “dominant group”—specifically, Reilly, Bocklet, Dyer, and Mann—of having passed the essential power at the Amex back and forth among themselves for a decade; criticizing, in general and particular, this group’s discipline over specialists and floor traders; bringing out into the open the charges against McCormick, including the Guterma episode; demanding swift action to end the “manifold and prolonged abuses” of the decade past; and threatening once again to move in and assume command if the Amex should fail to clean its own house. A week later, Bocklet, Dyer, and Mann let it be known that they would not run to succeed themselves. So in February, when a new board was elected, the rout of the Old Romans was complete. Later in the year a brilliant and spotless new president, Edwin D. Etherington, was brought in to replace McCormick, and an entire new Amex constitution was written and ratified that conformed largely to the recommendations of the S.E.C. and the Levy committee. Probably never— not even in 1938 when the New York Stock Exchange was turned upside down following exposure of Richard Whitney— has any stock exchange reformed itself so thoroughly so fast.

Jackson was a backstage Richelieu during the period of reorganization, remaining out of sight to avoid further inflaming the Amex conservatives, but scrupulously consulted on each move. He moved out to center stage to serve as chairman for three years—from 1965 to 1968—and during the latter part of that term, the Amex president with whom he worked, generally harmoniously, was Ralph Saul, the man he had first met as a harsh and hostile questioner for the S.E.C. Saul built himself a reputation as one of the soundest presidents in Amex history, and could have had the presidency of the Big Board in 1971 if he had wanted it. Over the decade as a whole, the Amex made such extraordinary strides in efficiency and public confidence that by 1971, when people were talking about a merger between the two leading exchanges, it was being seriously suggested in high places that the New York Stock Exchange ought to be merged into the American, rather than vice versa. As for Jackson—not a power-lover or a natural rebel, but a simple man of unblocked feelings, as eager as the next for acceptance by his peers—perhaps he deserves a small niche among those who, at various times and in various places, have found in themselves the stubborn courage, abetted by luck and good timing, to save what was worth saving.

And at the right moment. The Amex happened to reform itself precisely at the beginning of a notorious decade of Wall Street speculation and concomitant chicanery. As if with foreknowledge, it battened down while the hurricane lay just beyond the horizon.

CHAPTER III

The Last Gatsby

1

The stock-market collapse of 1962—which broke the 1961 bucket shops and their eager patrons, sent the Dow industrials down more than 25 percent, and taught a whole new generation of investors and gamblers alike that it is possible to lose—looked back to the past rather than forward to the future. It was a thing not of firsts but of lasts: the last crisis in which little brokerage offices in distant towns and villages, and the amateur plungers who frequented them, were a significant factor; the last time in Wall Street that the tune was called not by the computer-assisted decisions of institutions like mutual funds and pension trusts, but by the emotions—fear and greed, chiefly—of individual men and women acting for themselves.

Diabetic coma, the preventable catastrophic crisis of a human disease, comes on slowly; the sinister lassitude it induces neutralizes the rational alarm that would otherwise lead the patient to take measures to head it off. So it is with stock-market crashes. That of 1929 had actually been going on, in important ways, for a year or so before it reached its climax, and that of 1962—a smaller model in all respects—for some five months. After the Dow had reached a high just short of 735 at the turn of the year (not quite double the high of September 1929, incidentally), a gradual, fairly consistent decline began. But experts who a year earlier had been sounding prudent warnings of the dangers of speculation were now victims of the very euphoria they had warned against; in January and February, 1962, they pointed out that business was good, spoke of a “healthy correction,” and recommended the continued, if cautious, purchase of stocks. What a falling market needs to become a diving market is not a reason but an excuse, and in April it found one when President Kennedy chose to engage in a to-the-death confrontation with the steel industry and its bellwether, U.S. Steel, on the matter of a price increase. In the Kennedy grand manner, the clash became a thing of high melodrama, like the Cuban missile crisis six months later; there were closed-door White House meetings between Kennedy and Chairman Roger M. Blough of U.S. Steel, there were F.B.I. men ringing doorbells at dawn, and at last there was a clean, soul-satisfying ending—the steel industry’s capitulation and price rollback.

But at what a cost! Investors, who had profited so handsomely from the “Kennedy market” of the previous year, suddenly decided that the energetic young man in the White House was an enemy of business, after all. Whether or not Kennedy, in the heat of confrontation, had actually said in private, “My father always told me that businessmen were sons of bitches,” was not the point; the point was that a good proportion of the 17 million American owners of corporate shares believed he had said it. For several weeks in succession, the market slumped ominously, until the week of May 21–25 saw the worst decline for any week in more than ten years. And then, on May 28, the day that has gone down in Wall Street annals as Blue Monday, the Dow average dropped 34.95 points, a one-day collapse second in history only to that of October 28, 1929, when the loss had been 38.33. Moreover, the decline took place on the then-fantastic volume of 9,350,000 shares. Later in the decade such volume would come to constitute a slow day, and up-to-the minute Stock Exchange machinery would make it possible to handle more than twice that volume without confusion; but the type of ticker in use in 1962—the very same type that had been doggedly and perhaps sometimes rustily ticking at 11 Wall Street since 1930—was so overwhelmed that by the close of Monday’s trading it was more than an hour late in recording transactions, and it did not print the last of them for the day until two hours and twenty-eight minutes after the closing bell. Twenty billion dollars in paper values that had existed in the morning had evaporated by evening.

But it was on Tuesday that confusion was compounded. Sell orders in dozens of leading stocks, including blue chips like I.B.M., so overwhelmed buy orders that trading simply couldn’t be opened; the stocks that did open were down so drastically that at the end of the first hour the Dow had fallen another 11 points. Stock Exchange and brokerage communications broke down so completely under the strain that some floor brokers found that their best hope of reporting a trade to their clerks was to shout it at the top of their lungs. Many orders were simply lost in the shuffle, and perhaps these frustrated orderers were lucky; customers who did get trades executed found later that they had paid several points more than they had bargained for on a purchase, or had received several points less on a sale. Around noon, without warning, a strong rally started, and the ticker, fifty-six minutes late, was caught telling the ultimate Wall Street lie—it was solemnly recording the prior down market rather than the current up market. When the carnage ended that afternoon, the Street, with its vaunted pretensions to being an efficient market place, was clearly in disgrace. The rally continued, and by Thursday night all of the losses of Monday and early Tuesday were recouped. But soon the decline resumed at a more leisurely pace; by mid-June the Dow had sunk to 535 and the Kennedy boom—a sort of prologue in miniature to what was to come later in the decade—was something of the past.

Who lost, or lost the most, in the 1962 “little crash?” Most obviously, the hot-issue boys, the penny-stock plungers, the bucket-shop two-week millionaires of 1961, who, operating on the thinnest of margins in the most volatile of stocks, were wiped out either before May 28 or during the first hours of that disastrous day. But what about those who dealt more conservatively, on wider margins in more respectable issues? The Stock Exchange, rueful about its technical collapse, made a study later in the year to determine who had done what in the events of late May. The results were instructive. The great rising giant of American finance, the mutual fund industry, had come out with honors. Cash-heavy, still conservatively managed in the prudent fiduciary tradition, the funds had bought on balance in the falling market of Monday and had sold on balance in the rising market of Thursday; thus, besides protecting their shareholders from excessive risk, they had perhaps actually done something to stabilize the market. The panic had been among individuals—especially people in rural areas, especially foreigners, and especially the nouveau riche of whatever sex or nationality. It was a personal crash, the effect of a mass mood that swept suddenly over Broadway and Little Falls, Zurich and Grand Junction; and if May 1962 was the last great stock-market event controlled by people rather than institutions, it is fitting that its most conspicuous victim, its symbolic loser, should have been such a past-haunted romantic as Edward M. Gilbert.

2

Gilbert was born in December 1922 into the curious half-world of smalltime New York City millionaires and soon-to-be millionaires. His father and his uncle were substantial owners and principal operators of Empire Millwork Company, a solid little lumber business that their father had founded, and that had first flourished on contracts generated by the mysterious and lethal bombing of Wall Sreet in September 1920. Long afterward, Eddie Gilbert’s father, Harry, said of him, “As a kid he ran everywhere he went.” But Budd Schulberg’s Sammy Glick was only a part of Eddie Gilbert; he grew up dreaming more complex and grandiose dreams than that of becoming a ruler of Hollywood. From the first, he was a bright but lazy student with a particular aptitude for mathematics, a talented and fanatical athlete, and something of a spoiled darling. His father’s indulgence, then and later, was his financial strength and his moral weakness. At Horace Mann School for Boys, among other merchant princelings, he was a formidable tennis player and a champion diver and long-distance runner. At Camp Winnebago, in Maine, he was acclaimed the best athlete in four successive summers.

Matriculating at Cornell in the early stages of World War II, he made a name for himself in tennis and boxing, won the chess championship of his dormitory, and earned a reputation as a prankster, but went on neglecting his studies. In his first or second year he left to enlist in the Army Air Force. Shipped to North Africa and later Italy, he worked there for Army newspapers, and showed a marked interest in and aptitude for acquiring foreign languages. An American with this quality is, of course, an anomaly among his tongue-tied countrymen, but by this time it was clear that Gilbert was exceptional in more ways than one. In the service he continued to make a fetish of physical fitness and became proficient in more sports—water skiing and paddle tennis among them. He went at games, as he always had, as if they were work rather than play.

Back home at the end of the war, he returned to Cornell for a spell, but did not stay long; soon he joined his father’s company. During the period of his business apprenticeship he embarked on a series of personal ventures that were uniformly unsuccessful. He backed a prizefighter who turned out to be a dud. He was co-producer of a Broadway play, How Long Till Summer? that starred the black folksinger Josh White’s son and that, as a pioneer in the equal-rights-for-all genre of entertainment, won the public approval of Mrs. Eleanor Roosevelt. But How Long Till Summer? was either ahead of its time or wrong for all seasons; it opened at the Playhouse Theatre on December 27, 1949, got disastrous notices, and closed a week later. Gilbert also dabbled in the stock market without any notable success. While thus conforming to the old tradition that the princeling sons of successful businessmen show scant aptitude for business, he was acquiring a deep and genuine love of music and, in particular, of opera. He seemed to be assuming the familiar shape of the ineffectual, esthetic second generation—an impression that could scarcely have been more wrong.

His career at Empire Millwork came to an early crisis. The firm, flourishing in the postwar building boom, sold stock to the public, and the sale left Harry Gilbert with a liquid and bankable fortune of around $8 million. He was ever ready to use his money to indulge his son, and over the years he would do so again and again. The arrangement came to be a kind of unspoken trade between the two. Harry Gilbert had never been the brains of Empire Millwork; he was an amiable man who had inherited a tidy concern. Never a corporate rainmaker, Harry Gilbert, humanly enough, yearned to appear vital, enterprising, and interesting to his friends and colleagues. The son’s deals and the electric office atmosphere they created were made possible by the father’s money. Doubtless the father on occasion did not even understand the intricate transactions his son was forever proposing—debentures and takeovers and the like. But to admit it would be to lose face; and besides, what satisfaction there was in saying over cocktails, “We’ve got a big one going now but I just can’t talk about it yet.” And so, again and again, he put up the money. Harry Gilbert bought commercial glamour from his son.

As early as 1948, Eddie Gilbert had decided that the family company was too small to hold him, and he began to dream of using it as a vehicle to construct, through mergers with other companies, an enterprise that would live up to its grandiose name—a true Empire. In 1951, when he was twenty-eight, he demanded of his father that he be given greater responsibility in the form of a directorship. When Harry Gilbert turned him down, Eddie Gilbert quit to enter the hardwood-floor business on his own.

It turned out to be a case of reculer pour mieux sauter. There are two versions of what happened to the younger Gilbert’s independent business venture. In one—the one that was published in 1962—the venture was a success, and four years later Harry Gilbert bought it out, and thus brought his son back to Empire, in exchange for 20,000 shares of Empire stock. In another, Eddie, through his own company, made a bumbling attempt to corner the lumber market, failed, lost considerable money, and was rescued by his father, who bailed him out to bury the costly mistake. At any rate, in 1955 Eddie returned to Empire with new power and freedom to act. Ever since 1948, when he had done a stint at an Empire plant in Tennessee and had there become acquainted with E. L. Bruce and Company, the nation’s leading hardwood-floor company, he had dreamed of acquiring Bruce as a gem for Empire’s crown. With net sales of around $25 million a year, Bruce was considerably larger than Empire, but it was a staid firm, conservatively managed and in languid family control, of the sort that is the classic prey for an ambitious raider. In 1955, Eddie Gilbert persuaded his father to commit much of his own and the company’s resources in an attempt to take over Bruce.

Now Eddie came into his own at last. He began to make important friends in Wall Street—brokers impressed with his dash and daring, and delighted to have the considerable commissions he generated. Some of the friends came from the highest and most rarefied levels of finance. He apparently won over John Loeb, Sr., of Loeb, Rhoades by pledging $100,000 to Loeb’s beloved Harvard; later he could claim to be an important client of André Meyer, the shy eminence of Lazard Frères and close friend of Mrs. Jacqueline Kennedy Onassis. At the same time, Gilbert began gathering unto himself a coterie of rich social allies, people who might tap him for his stock-market tips and whom he could use in turn for the aura of social acceptance their propinquity implied.

3

The key word for these new friends is “social.” Like almost all of the great American financiers of the nineteenth century—and even more, like F. Scott Fitzgerald’s Jay Gatsby, the bootlegger who yearned toward the green light on the dock of Daisy Buchanan, the heiress who had money in her voice—Gilbert believed that a special quality of human possibility attached to the rich. In his case the quest took the form of striving to become a part of the uneasy American version of court life that we have always called Society. It is interesting that he apparently made little distinction between Real Society, based on inherited money and Anglo-Saxon lineage, and the newer, less exclusive, more flamboyant version associated with the entertainment world called Café Society. He sought them both impartially, although he kept them separate. By 1960 the process of democratic thought, or perhaps merely the breakup of traditional fortunes by taxes, had advanced to the point where Real Society had gone suburban or disappeared within the upper middle class, while Café Society, born of the entertainment-mad depression and war years, had lost status with the growing public realization of its loose rites of passage and easy-money-spending ways.

But if Gilbert believed that Society no longer existed in turn-of-the century form, he gave no clue. On the contrary, it seems clear he believed in its vitality, and sought to fulfill himself through it. In fact, he had much to offer his new friends. In his early thirties, a short, compact man with pale blue eyes and a sort of ferret face under thinning hair, Gilbert had a direct, personal charm that compensated for his vanity and extreme competitiveness. Sometimes his newfound friends patronized him behind his back, laughing at his social pretensions and his love of ostentation, but they continued going to his parties and, above all, following his market tips. Some accused him of being a habitual liar; they forgave him because he seemed genuinely to believe his lies, especially those about himself and his past. He was a compulsive gambler—but, endearingly, a very bad one; on lucky streaks he would double bets until he lost all his winnings, or draw to inside straights for huge sums at poker, or go for broke on losing streaks; yet at all times he seemed to take large losses in the best of humor. It was almost as if he lost just so that he could show what a sport he was, and how little money as such meant to him. He was spoken of as interesting—a natural, a source of conversation to those who followed the gossip columns and who in turn spread the gossip even wider.

At his constant urging, his newfound friends bought Bruce stock—and so did his parents, his sister, his cousins and his aunts and anyone else susceptible to his persuasion. The buying began to approach its climactic phase in March 1958, when Bruce was selling on the American Stock Exchange at around $25 a share. All that spring, the Gilberts and their relatives and Eddie’s friends accumulated the stock, until in June it had reached the seventies and was bouncing up and down from day to day and hour to hour in an alarming way. What was in the process of developing in Bruce stock was the classically dangerous, sometimes disastrous market situation called a corner. As the price had risen, the Bruce family management had come, belatedly, to realize that a raid was in progress; their defensive countermeasure was to begin buying the stock themselves, thereby redoubling the upward pressure. Meanwhile, a third group, consisting of speculators, had been watching the wild and apparently illogical rise, and had seen a chance for a profit in short sales—sales of borrowed stock that could presumably be bought back and delivered at a lower price later, after the bubble had burst. Thus it came about that in May and early June, much of the stock bought by the Bruce side and the Gilbert side alike was bought from persons who did not own it at all. Borrowed from a “floating supply” that was more theoretical than actual, it was stock that really did not exist; and in June when the price reached 77, the two antagonist factions together owned, or had documents to show that they owned, more shares than were actually outstanding. The short sellers were squeezed; if called upon to deliver the stock they had borrowed and then sold, they could not do so, and those who owned it were in a position to force them to buy back what they owed at a highly inflated price.

Corners have a long and infamous history in Wall Street. Old Commodore Vanderbilt engineered three of them in the eighteen sixties, causing disaster not only to the short sellers he had trapped but to the companies whose stock he manipulated. The Northern Pacific crash of 1901 was the sequel to a corner that came about in exactly the same way as the Bruce one—through a contest for control; its result was a national panic with worldwide repercussions. The last corner on the New York Stock Exchange occurred in 1922, in the stock of Piggly Wiggly Stores. In the Bruce case, probably neither Gilbert nor the Bruce mangement had wanted a corner—it was an accidental by-product of the fight for control—and, because of the insignificance of Bruce in the larger economy, there was no danger of a national panic. There was, however, a danger that Bruce stockholders not involved in the fight would become accidental casualties, and, moreover, in Wall Street—including even the 1958 American Stock Exchange—the very word “corner” was frighteningly evocative of a disreputable past. So in mid-June the Amex acted, suspending trading in Bruce to protect the innocent bystanders. Immediately the stock began to be traded over the counter, and the short sellers, wildly buying what few shares were available in a scramble to fulfill their commitments, sent the price rocketing insanely up to 188. (The available shares came from the innocent bystanders, and perhaps a few from the faithless among Gilbert’s friends, who sold their loyalty for quick profit.) The S.E.C. stepped in, there were negotiations and recriminations, moves and countermoves, and at last a compromise was reached between Gilbert and the Bruce family; when the dust settled in September, Gilbert had 50 percent of Bruce stock and was made chairman of the Bruce board. Empire took notice of its new enhanced status by changing its name to Empire National; later, in 1961, when Empire National and Bruce were formally merged, the surviving company took the name of E. L. Bruce and Company.

Eddie Gilbert, coming out of the fray in the fall of 1958, seemed to have arrived at last—apparently paper-rich from his huge holdings of high-priced Bruce stock, rich in the esteem of his society backers, nationally famous from the publicity attendant on the corner he had brought about. Because of the parallel to 1901, his name had been linked in the press with those of J. P. Morgan and E. H. Harriman—giants of the past. The goal of this new, apprentice giant was one that the old ones might have treated with Olympian scorn: to become a leader of what was essentially a parasite society, the international social and fringe-artistic group that was just about then beginning to be called the Jet Set. But Gilbert did not see it that way. The metaphor he used for Bruce during his long struggle to seize it showed the texture of his aspirations; it pleased him to call it the Tiffany of the building-materials industry. Now, as the winner, he began to spread himself. He kept a regular Monday box at the Metropolitan Opera—a lover of music, as not all of his fellow-box-holders were, but one who loved appearing among them, too. He cultivated the two leading arbiters of Café Society, Elsa Maxwell and Igor Cassini; sometimes he would self-indulgently ask Cassini if he knew anyone Gilbert’s age who was richer and more important than he, and Cassini, with a smooth smile, would shake his head. He hired Cassini’s firm, Martial and Company, as public-relations counsel for Bruce; it does not seem to have bothered either man that the items about Gilbert’s doings that appeared in Cassini’s newspaper column had been supplied by Cassini himself as Bruce’s press agent, meaning that in effect Gilbert was simply buying, and Cassini selling, space in the column. He sent his wife, a beautiful Brooklyn girl named Rhoda, to a speech therapist and a posture school. Eventually his market transactions came to be handled by Francis Farr, clubman and broker, brother of a member of the aristocratic law firm of White and Case and a vestryman of St. James Episcopal Church. He installed flooring in Le Club, a raffishly élite New York membership-by-invitation discothèque, in exchange for a charter membership. He acquired a huge Fifth Avenue apartment and, when and as he could, filled it with French antiques, a fortune in generally almost-first-rate paintings, and a staff of six. Sometimes he lived in a mansion at Palm Beach, epitome of Real Society in faded turn-of-the-century photographs. He took an immense villa at Cap Martin on the French Riviera, where he mingled when he could with Maria Callas and Aristotle Onassis and their like, and gave huge outdoor parties with an orchestra playing beside an Olympic-size swimming pool. At his parties, Eddie was always the maestro, directing, giving whimsical instructions, trading hospitality for the right to command. “Let’s all go bowling!” he might shout to his assembled guests after lunch, so ingenuously that forty or fifty of the rich and chic or almost-rich and almost-chic of the world would dutifully jump into their cars, or into one of his waiting limousines, and be off to Monaco’s elegant four-lane bowling alley to indulge him. He was living a dream, filling out its details as he went along, and waiting, like Gatsby, for the sound of the tuning fork struck against a star.

4

And he was not really rich, in any genuine sense. Probably he spent beyond his income every year except 1961. It was believed that at his peak he had a paper net worth of around $10 million, but in retrospect this seems unlikely. His paper profits were built on borrowing, and he was always mortgaged right up to the hilt; to be thus mortgaged, and to remain so, was all but an article of faith with him. In 1959 he borrowed money from the Empire National treasury without informing the company’s board. This was clearly an improper act; but he repaid the loan with interest before it was discovered by the S.E.C., and the matter was allowed to drop. He was habitually so pressed for cash that on each January first he would draw his entire $50,000 Empire salary for the coming year in a lump sum in advance. By the summer of 1960 he was in bad financial trouble. Empire National stock was down, Gilbert’s brokers were calling for additional margin, and Gilbert was already in debt all over New York. He owed large sums to dozens of art dealers. Some sources maintain that, counting his personal debts to his father, he was by then insolvent by at least $1 million. But he hung on gamely; when friends advised him at least to liquidate the art collection, he refused. To sell it, he explained, would be to lose face.

What saved him at that particular moment was the bull market of 1961, and a timely psychological boost that came about in an odd way. On the advice of a friend, he sought to hire as a consultant Jerry Finkelstein, the powerful business and political figure (later New York City Democratic chairman) who was then generally considered the top financial public-relations man in the country. Depressed as he was, Gilbert made an offer to Finkelstein expecting rejection. But to his joy and amazement Finkelstein accepted, taking on the job in exchange for a fat allotment of Bruce stock options. And then came the curious part: his self-confidence restored by the mere fact of Finkelstein’s acceptance, Gilbert was transformed into a demon and proceeded to do on his own the job that he had hired the leading expert to do. The act of hiring a champion released the champion in himself, and Finkelstein had little to do but collect his profits when Bruce stock rose sharply. Now Gilbert had gained clear-cut precedence over his father; when Bruce was merged with Empire National, Eddie Gilbert became president of the combined company and Harry Gilbert “chairman of the executive committee,” a title that meant—as it so often does—“kicked upstairs.” And now he had also, for the first time, become respectable to important segments of the business community; as a result of his success with Bruce, investment bankers who would scarcely have let him through their doors two years earlier were knocking on his and suggesting that they be allowed to help finance his subsequent ventures. Gilbert’s buying power in the market had also been vastly increased, not only by the rise in value of his own holdings but by a swift and apparently miraculous increase in the number of “friends” who would gladly put their money where he told them to. It all induced a dangerous new euphoria. By May 1961, Gilbert was feeling so flush that the urge for expansion overtook him again, and he embarked on the venture that would destroy him.

What he wanted for his empire, called Bruce but truly an empire now, was Celotex Corporation, a large and important manufacturer of building-insulation materials with headquarters in Chicago and a listing on the New York Stock Exchange. He began by buying its stock at around 30, stepped up the pace when it conveniently fell back to 24 later in 1961, and then chased it all the way up to 42 early in 1962. His acquisition work was cut out for him this time, since Celotex was bigger game than Bruce; half-again as big in sales, Celotex had more than three times as many shares outstanding. But Gilbert, convinced now of his infallibility, was confident. He held perhaps half a million Bruce shares, some in Memphis, some in Switzerland with moneylenders, some in other places; it gave him several million dollars’ buying power. He began using this to buy Celotex; he put his friends (and cousins and aunts) into Celotex up to the last dollar they would allow; he borrowed still more cash from his father, and put that into Celotex too. Even his old enemies, the Bruce family, became so mesmerized by the man who had wrested control from them that early in 1962 they authorized his use of $400,000 of the company’s money to buy Celotex shares, and later they raised the ante by a round million more. In March, Gilbert showed his cards. He held 10 percent of Celotex stock, he announced, and he wanted a place on the board of directors. Henry Collins, Celotex’s president, at first refused, but did so in such a tentative way that it was clear he felt he was simply postponing the inevitable. Gilbert seemed on the verge of a stunning success.

And then two events in quick succession, one public and one private, hastened the course of his destiny. The market started to go sour with the Kennedy-steel encounter, and Gilbert, whose marriage had gone sour the November before, flew to Las Vegas to serve the six-week residency that was a prerequisite to getting a Nevada divorce. Doubtless he felt, like the gambler he was, that the Celotex campaign was so near victory that he could command its final moves by long-distance telephone. Or perhaps, in what appeared to be his moment of approaching triumph, he had forebodings of disaster and yielded to an inclination to flee in panic. In any case, at the end of April, he suddenly left the suite at the Waldorf where he had been living since he and his wife had separated some months earlier, and flew to Las Vegas to establish residence.

Gilbert took elaborate security precautions, apparently to forestall any panic in the market for Bruce and Celotex stock that his flight might cause. Only a few people at Bruce were allowed to know where he had gone, and they were sworn to secrecy. He took an assumed name—Edward Heaton. (Edward with the heat on; Gilbert’s sense of humor had survived his tribulations so far.) He had a private telephone installed in his motel room and connected by tie line to the switchboard of his New York office, so that callers could be put through to him immediately, exactly as if he were in his office in Manhattan. His outgoing letters were sent first to New York or to Bruce headquarters in Memphis, and then remailed with the appropriate postmarks.

His personal predilections, and the turning of the earth, imposed a strange and exhausting schedule on Gilbert in Las Vegas. The three-hour time differential meant that the New York markets opened at 7:00 A.M. Nevada time. Every morning, therefore, Gilbert would be up at the desert dawn and on the phone getting early New York quotations from brokers. Then at the market opening the pace of his telephoning would be stepped up, and he would keep the wires humming until lunch time in Las Vegas, when the day’s trading ended in the East. In the afternoon he would wander into the casinos, where he would gamble on into the evening. Did he dream of the perfect jeux, the magic coup that would give him the means to bring Celotex within his grasp? If so, in vain; later he admitted that his gambling losses in Las Vegas had been heavy.

Sometimes, like a wary spider, he would make a quick foray out into the real world, and then hasten back into hiding. The exigencies of Nevada divorce law made such a procedure necessary. To qualify as a resident, he had to be certifiably within state boundaries at some time each day over a six-week period. He hired a permanent Nevada resident to be his witness—and, incidentally, his bodyguard; the witness would accompany him to the airport to see him off in the afternoon, and would be there to meet him, and take formal note of his presence, on his return the following afternoon. Twice, early in May, he made such trips to New York in search of additional cash. But the stock market had begun its descent in earnest now, and with it Gilbert’s claim to solvency, and the moneylenders were unwilling to accommodate him. Indeed, his Nevada-based trips were not only worthless but probably counterproductive; the word spread swiftly among lenders that Eddie Gilbert was in trouble and running hard. At the middle of the month he went to Chicago to see Collins of Celotex (arising at midnight, touching foot to Nevada soil for the new day, passing the glittering lights of the Strip en route to the airport, and then flying off at 1:30 in the morning). In Chicago, Collins now offered Gilbert a seat on the Celotex board and the right to choose one other director. But Gilbert, for the sake of his crumbling credit status, needed the board seat immediately, and Collins insisted on holding up the announcement until after the next Celotex board meeting on June 20, so the victory Gilbert brought back to his desert hideaway was a hollow one.

Gilbert’s Celotex holdings now amounted to over 150,000 shares, and for each further point that the stock dropped, he had to find and deliver $150,000 in additional margin or risk being sold out by his brokers. Those of his friends holding Celotex on his advice now numbered around fifty, and they, too, since most of them held it on margin, were being squeezed as the price continued to fall. Many of them also had positions in Bruce. Their alternatives were three: to sell Celotex; to sell Bruce to cover Celotex, which would depress the price of Bruce and thus be equally disastrous for Gilbert; or to find more cash margin. Gilbert himself had all but exhausted his borrowing power. His debts to brokers, to friends, to Swiss bankers, to New York loan sharks on the fringes of the underworld, all loomed over him, and the market betrayed him daily by dropping even more.

The third week of May became for Gilbert a nightmare of thwarted pleas by telephone—pleas to lenders for new loans, pleas to brokers to be patient and not sell him out, pleas with friends to stick with him just a little longer. But it was all in vain, and in desperation that same week Gilbert took the old, familiar, bad-gambler’s last bad gamble—to avoid the certainty of bankruptcy he risked the possibility of criminal charges. Gilbert ordered an official of Bruce to make out checks drawn on the Bruce treasury to a couple of companies called Rhodes Enterprises and Empire Hardwood Flooring, which were actually dummies for Gilbert himself, and he used the proceeds to shore up his personal margin calls. The checks amounted to not quite $2 million; the act amounted to grand larceny.

It was a bold stroke, based, of course, on the faint hope that the prices of Bruce and Celotex would suddenly rise enough to reduce Gilbert’s need for margin and enable him to redeem the improper checks and repay Bruce. By his own calculations—which no doubt excluded his huge debts to his father—he was solvent were Celotex above 31 and Bruce above 32. On Friday, May 25, Celotex closed at 31 and Bruce at 32 3/8, actually up a fraction for the day. Thus he still had a fingerhold on survival. But for the first time Gilbert was not optimistic. That Friday he told a part-time secretary, “The way this is going, Monday will be murder.” Later he told M.J. Rossant of The New York Times, “I suddenly knew that I couldn’t get through this without getting hurt and getting innocent people hurt.” It is ironic that Gilbert’s market prescience, such as it was, should have worked so well at a time when, through pyramiding of debt and then through misappropriation of funds, he had trapped himself in a net so confining that it prevented him from taking advantage of what he knew. As the reader will recall, the Monday he said would be “murder” turned out to be Blue Monday, the Stock Exchange’s second worst day of the century up to then.

5

That fateful Monday morning Gilbert was closeted in his motel room, his telephones in constant use, learning minute by minute of the progress of the Wall Street collapse almost three thousand miles away. All morning long, Bruce held teeteringly at 30. The blow fell at around noon, New York time, when a broker told Gilbert that Bruce was now quoted at—23. Stunned into disbelief, he hung up and called another broker, who confirmed the devastating news. Hardly a moment later, the phones began jangling with incoming calls from his frightened creditors in New York and Switzerland.

Gilbert now admitted to himself that he was beaten. He said later that he spent the rest of Monday “like a punch-drunk fighter going through the motions.” Bruce closed for the day at 23, down 9 3/8, and Celotex closed at 25, down 6. Gilbert’s personal losses for that Monday came to $5 million. In addition to the creditors, he had to deal all afternoon with the friends he had tipped to buy Bruce and Celotex, who now had disastrous losses of their own. In the big turnaround on Tuesday, Bruce gained 5 3/8 points, but the recovery was too moderate and too momentary to save him; Celotex did not recover at all, and his other, unredeemable debts, including the $2 million he had taken from the unsuspecting Bruce company, remained outstanding.

Late on Tuesday, Gilbert assessed his position as coolly as he could. Clearly, the dream of capturing Celotex was ended. It was a question now not of building an empire or even protecting one, but of avoiding bankruptcy and, if possible, the penitentiary. His hope, as he saw it, lay in finding a block buyer for all or most of his Celotex holding, and using the proceeds to pay back what he had “borrowed” from Bruce. He remembered that a company in the building-materials business called Ruberoid had expressed interest in taking a position in Celotex. Whatever the chances of swinging such a deal, they depended on his availability in New York for more than one-day flying trips. So, with only a couple of weeks remaining in his Nevada residency term, he abandoned another dream, that of getting his divorce, and on Wednesday, the Memorial Day holiday, he flew to New York and moved back into his suite at the Waldorf.

Thursday the storm around him gathered new force. Gilbert found that the earliest appointment he could get with the officials of Ruberoid was the following Monday, June 4. Yet all day Thursday his Waldorf suite was besieged by creditors, some of whom had come from Switzerland for the purpose. He could give them no satisfaction, only vague hopes of a possible sale of Celotex. On Friday, friends to whom he confided his position, and the criminal action it had led him into, urged him to declare bankruptcy at once. Rueful and contrite, but still stubborn, he refused.

In fact, Gilbert still had a little time—to be precise, six business days. Tuesday, June 12 was the scheduled date of the next Bruce board of directors meeting, at which the matter of $2 million loans to Rhodes Enterprises and Empire Hardwood Flooring was almost certain to come up; so he would have to have some solution ready by then or stand exposed. The six borrowed days were the last loan he could negotiate—a loan of time rather than money. On Monday the fourth—Day One—he met with Ruberoid officials as planned, freely admitted to them that he was in a squeeze, and suggested that, since they wanted to purchase a block of Celotex shares anyway, they might take profitable advantage of his distress by assuming his Celotex holdings. The Ruberoid men seemed interested, but stopped short of giving him a firm and binding commitment. On Day Two, still desperate, he told the whole story to his lawyers at the firm of Shearman and Sterling. Understandably, they were horrified, and set about taking such defensive steps as were available. To prevent Gilbert from compounding his felony in panic, they instructed Bruce officials not under any conditions to sign any more checks on his instructions. As a first step toward redeeming the felony he admitted to having committed, they ordered him to give the company personal notes backed by his personal property.

Day Three passed without any promising developments, but on Day Four—Thursday the seventh—there suddenly appeared a ray of hope when the executive vice president of Ruberoid gave Gilbert the almost incredibly good news that he believed his firm was ready to buy 300,000 shares of Celotex at a fair price. The sale, when and as consummated, would not save him from bankruptcy, but it would enable him to save his friends and followers, and to bail himself out of his improper borrowing from Bruce.

Gilbert spent the rest of Thursday and then Friday frantically rounding up the Celotex shares from his friends, to have them ready for delivery; and on Monday the eleventh, the last day before the Bruce meeting, with the shares safely in hand, he savored for a few hours the feeling that he might still end the affair with some sort of honor, and perhaps without losing everything—his villas, his followers, his place in the great world. The Bruce meeting convened at 10:30 Tuesday morning; Gilbert was there smoking a cigar, dapper in a gray suit and black loafers. For two hours he told the other directors—some of whom already knew, or knew enough—the story of his frantic, reticulated dealings and of how they had led at last to an unauthorized withdrawal from the funds with which the men in the room were jointed entrusted. There followed a heated debate; some wanted Gilbert’s immediate resignation, while others counselled caution, or at least a delay until after the day’s market closing to forestall a further panic in Bruce stock. It was in the midst of this tense and gloomy discussion that word came to Gilbert from Ruberoid that the company had withdrawn its offer to buy his block of Celotex shares.

It was the coup de grace for Gilbert. The meeting broke for lunch, but he did not join his fellow directors in the meal. Instead, he went home and packed a suitcase, visited his bank vault and picked up $8,000 in cash, and made a reservation on a plane leaving that evening at 7:30 for Brazil. His last legitimate escape hatch sealed off, he had decided on literal and figurative flight. Brazil at the time had become a secular sanctuary for erring American financiers; down there already, wasting time, boasting about old triumphs, playing poker, and putting together such penny-ante local deals as they could manage, were Lowell Birrell, the well-brought-up eviscerator of companies; the giant Texan embezzler BenJack Cage; and Earle Belle, almost equally Runyonesque by baptism, a youthful jobber of watered bank stocks. Gilbert must have hated the prospect of geographical association with these grimly comic rogues; later he would maintain with indignation that he had nothing in common with any of them. But the fact was that on June 12, 1962, he had one thing in common with them all—the pressing need for a distant jurisdiction like Brazil that had no effective extradition treaty with the United States.

Gilbert appeared back at the Bruce meeting, cool and confident, when it reconvened that afternoon at 2:30. His need now was to persuade the Bruce board to postpone public announcement of his resignation and its disgraceful cause until he was out of the country. Just until 7:30! he pleaded. Why that particular hour? He explained that he needed just five hours to approach one final potential lender. After another long and heated argument, the board acceded, and Gilbert breathed again. Of course, the potential lender was mythical. He departed his Bruce office around 5:30, ostensibly to see the last-hope lender, saying he would be back around 7:00 with news of the results. While the other directors waited tensely, Gilbert hired a limousine and picked up his parents, who then accompanied him to Idlewild Airport. In the car, Harry Gilbert said later, Eddie was “frantic and hysterical.” But at the airport he was calm enough to pay cash for his ticket and board his Rio-bound flight without attracting attention. The plane’s departure was delayed for some reason, giving him a final fright, but shortly after 8:00 it took off.

At the Bruce offices, the directors became progressively more apprehensive. At 8:15 they called the S.E.C. and reported all that they knew. It was too late. At 8:30, as Eddie Gilbert’s jet reached altitude and sped southward, Harry Gilbert called the Bruce directors to say, ruefully, that his son would not be back.

6

In Brazil he lived in relative quiet, taking an only moderately plush apartment in the Copacabana section of Rio, often going unshaven, avoiding nightclubs and casinos, writing letters, dabbling a bit in local business, exercising his language skill by studying Portuguese. (He did allow himself a chauffeur-driven Cadillac.) From time to time his ever-loyal parents sent him money. “I just can’t face people,” he told the Times’ Rossant, who visited him there; but he also said more resolutely, “I will pay back everything if it takes the rest of my life.” Meanwhile, he was sometimes heard to put the blame for his debacle on anybody and everybody but himself: on Lazard, on Loeb, Rhoades, on Collins of Celotex, on faithless friends, on President Kennedy. To one visitor from home he complained, “I’m just an ordinary guy. They called me a genius, but I’m not. If they hadn’t blown the whistle on me, it could all have been avoided.”

That was his line, and that of such of his friends as chose to remain loyal to him: Gilbert, without the undue impatience of his creditors and the bad timing of the May market crash, would have bagged Celotex, covered the Bruce borrowing before it became public knowledge, and emerged a hero. In the light of retrospect, it is a line that simply does not correspond to reality. In fact, it would later appear that his debts exceeded his assets by somewhere in the neighborhood of $14 or $15 million. It is probable that neither the most indulgent set of creditors nor the most complaisant of markets could have saved him permanently from the consequences of his overweening ambition; and almost certainly the May crash merely accelerated his demise.

At home, meanwhile, there were the predictable recriminations and unseemly squabbles, lending a sort of false dignity by contrast to the lonely exile pouring over Portuguese grammar. At the end of June, the Bruce company sought and got a court injunction to prevent Mrs. Gilbert from disposing of the couple’s furniture and art collection for her own benefit: particular reference was made to Boucher’s La Toilette de Venus and Psyche and Cupid, asserted in the injunction plea to be worth $95,000; Monet’s Flowers, $75,000; and Fragonard’s Portrait of a Young Woman, $92,000. At about the same time, the Justice Department got an indictment against Gilbert on fifteen counts of securities fraud, and the Internal Revenue Service added a touch of comedy by filing tax liens against him dating back to 1958 and amounting to over $3 million. In mid-July, he was further indicted in New York for grand larceny in connection with the Bruce misappropriation. As for his friends, a few of them loyally insisted that he was a misunderstood man who had never meant to do wrong; others, however, would no longer acknowledge that they knew him. His old pal and business associate Igor Cassini, who had lost money on Bruce and Celotex, now found it appropriate to pronounce Gilbert “a crook.” And then, in November, by which time there were federal and state charges outstanding against him the penalties for which added up to 194 years in prison, Gilbert suddenly came home. He got off the plane at New York flanked by federal marshals. He was arrested, and then promptly released on bail.

He said he had returned because he was bored with inaction and the Latin American spirit of mañana, and surely this was true. (Some of his friends joked that five months is as long as a Jewish boy can stay away from home.) But it also seems clear that Arnold Bauman, the New York criminal lawyer whom Gilbert’s father had hired in his absence to defend him, had told him that the coast was now as clear as it would ever be. And that, it turned out, was pretty clear. Gilbert remained free on bail for no less than four and a half years, while he and his lawyer dangled before the various prosecutors the promise that he would implicate other wrongdoers. He could implicate various people, he said; he had something on Lazard and Loeb, Rhoades. These promises were never fulfilled. In May 1963, he and Rhoda Gilbert were finally divorced, and a week later he married a Norwegian airline stewardess named Turid. The villas, the art collection, and the poolside parties were now in the past, but Gilbert and his new bride did well enough for a time. They dressed well; they lived in a Park Avenue apartment; they had two children, and went to Puerto Rico on vacation. With help, as usual, from his father, Gilbert set himself up in a new business, the Northerlin Company, flooring brokers. He was still a good salesman. Northerlin made over $200,000 its first year, and Gilbert, besides beginning to fulfill his promise by paying off some of the smaller of his old debts—$2,300 to a painter of his old Fifth Avenue apartment, $138 to F.A.O. Schwartz—began trying to live in his old way on $100,000 a year. He began again to wheel and deal in the market—in his wife’s name. Very tentatively, a few of the not-so-beau monde began to take notice of him again.

There are second acts in some American lives, but not Eddie Gilbert’s. Given his temperament, his comeback attempt could not succeed, but even so, it was quite a feat. Still under multiple indictments, free on bail, bankrupt for over $10 million all the while, between 1963 and 1967 he twice “got rich,” twice “went broke,” once even managed to get himself investigated by the S.E.C. He cut too many corners in his operations at Northerlin; the promising young company began to lose money, and finally had to be sold for a tax loss. And time ran out on his unfulfilled bargain with the civil authorities. In 1964 he pleaded guilty to twelve counts of grand larceny and three of securities fraud; in each case a sentencing date was set, and in each case, when the date arrived, sentencing was postponed. It almost seemed as if he might escape imprisonment indefinitely. But in 1967 the authorities finally lost patience with his failure to come up with usable state’s evidence. That April—with only a trivial fraction of his 1962 debts repaid, and with a flock of new ones accumulated—the federal penitentiary doors finally closed on him. He would be paroled a little over two years later, but by that time his career as Gatsby was gone for good.

7

As a financier Gilbert cannot be taken seriously; at the gambling tables and in the stock market he operated by the world’s oldest and surest formula for failure—to double your winning bets until the law of averages overtakes you, and you are wiped out. As a catalyst for reform, he has little importance; neither his speculative methods nor his ultimate crime were original in conception or execution, and the exposure of them did not lead to new loophole-closing S.E.C. rules or legislation. Nor, indeed, were large numbers of innocent investors, apart from his too-trusting friends and relatives, significantly hurt by his operations. Why, then, need he detain us?

It is as a social figure, a reflection of the texture of financial life in the United States at the start of the nineteen sixties, that Gilbert’s career has a kind of resonance. The style that he embodied with instinctive perfection was a once-familiar but now-fading American one: the style of romantic self-destructiveness, of seeking risk for its own sake, of wild midnight rides in fast cars or on roulette wheels that ended in disaster not by accident but because the courting of disaster was integral to the style itself. The doomed and gilded youth of America, the beautiful and damned, had gone out with the depression, or certainly with World War II. But Gilbert did not know that; he had formed his unconscious stylistic aspirations early in life, and he clung to them and projected them into an alien era. A generation too late, he set out unknowing to destroy himself in the grand manner.

And so, perhaps, though in a smaller way, did all of the people who with high hopes sank their savings into the far-out new stock issues of 1961 and got wiped out in 1962. At the end of the decade, between 1968 and 1970, there would be an even bigger speculative boom and bust. But that one would be dominated by institutions; by that time the American stock market would be so huge as to be beyond manipulation by individuals or small groups operating for themselves, and Gilbert and his little band of followers would have been ineffective in it.

Coming just before the mutual and pension funds took charge of the stock market, the 1961–1962 investment scene was perfect for Gilbert, and he remains its symbolic figure. Tinsel-mad, he burned for personal transfiguration by riches and fame. Money-seekers later in the decade would set themselves more practical goals—to revenge themselves on the Establishment by joining it, to improve the nation, to thumb one’s nose at the whole world; they would know what Gilbert did not, that the possession of money cannot turn life to magic. He was the archetypal loser of 1962, a stock-market crash for romantics, and yet also a harbinger of things to come.

CHAPTER IV

Palmy Days And Low Rumblings

1

Usually after general disaster in Wall Street or elsewhere, one man takes charge of cleaning up and putting things back together, of dragging the bodies off stage and rearranging the set for the next performance—rearranging it neatly and primly, as if in hopes that subsequent action will turn toward drawing-room comedy rather than more bloody melodrama. There was no such one person after 1929. That Street scene was a disaster of such magnitude that the whole cast of characters was left paralyzed for years, and an entire new federal government with a mandate to do anything was needed to supply resolution and to restore a semblance of order. In 1938, after Richard Whitney’s fall had disorganized the Old Guard that ran Wall Street by unmasking its impeccable leader as an embezzler, there was William McChesney Martin, Jr., a quiet, scholarly bachelor of thirty-one, who wore owlish round spectacles and never smoked, or drank anything stronger than hot chocolate. It was to this prudent and serious young man that the Stock Exchange turned in its extremity, making him acting chairman and then its first paid president, to undertake the necessary job of reform.

After the shambles in 1962, however, the man Wall Street turned to was neither on the inside like Martin, nor entirely outside like the New Deal. He was the chairman of the S.E.C., William Lucius Cary.

Cary in 1962 was a lawyer of fifty-one with the gentlemanly manner and the pixyish countenance of a New England professor. A late-starting family man, he had two children who were still tots; his wife, Katherine, was a great-great-granddaughter of America’s first world-famous novelist, James Fenimore Cooper. His reputation among his colleagues of the bar was, as one of them put it, for “sweetness of temperament combined with fundamental toughness of fibre.” In fact, his roots were not in New England but in Mount Vernon, Ohio, although there was some New England in his blood: a New England ancestor had fought in the battle of Lexington. The family had trekked westward to Ohio in 1814, and had stayed there. He had grown up in and around Columbus, the son of a lawyer and president of a small utility company; he had graduated from Yale and then from Yale Law, practiced law a couple of years in Cleveland, then done a long stretch in federal government—first as a young S.E.C. assistant counsel, later as an assistant attorney general in the tax division of the Justice Department, then as an Office of Strategic Services cloak-and-dagger functionary in wartime Roumania and Yugoslavia. In 1947 he had entered academic life, teaching law thereafter, first at Northwestern and later at Columbia. He was in the latter post, taking one day a week off to go downtown to the “real world” of Wall Street and practice law with the firm of Patterson, Belknap and Webb, when John F. Kennedy appointed him S.E.C. chairman soon after assuming the Presidency in January 1961.

Cary never knew how he came to be tapped; he had worked in the Stevenson campaigns of 1952 and 1956 and had become a close friend of the candidate, then had worked with Robert M. Morgenthau, a New York City neighbor, in the Kennedy campaign of 1960. Thus he had many friends in the upper echelons of the Kennedy ranks, and one or another of them must have suggested his name to the President-elect. At all events, the appointment proved to have been a brilliant one—perhaps the most brilliant to that post since Franklin D. Roosevelt, to the dismay of all good liberals, had chosen the ex-stock manipulator Joseph P. Kennedy to be the S.E.C.’s first head back in 1934. Cary brought to the organization a vigor and a drive that it had lacked for years.

“Regulatory bodies, like the people who comprise them, have a marked life cycle,” John Kenneth Galbraith has written. “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 S.E.C., although widely considered to be generally the most successful of the regulatory bodies, had not been immune to the aging process. Aggressive, evangelistic, and intolerant in New Deal days, during World War II, when the securities industry itself was at a near standstill, it had fallen into virtual desuetude, lying low in temporary quarters that were not even at the seat of government in Washington but were situated in Philadelphia. And in the early postwar years the S.E.C. did not noticeably revive. This was far from entirely its own fault; Presidents Truman and Eisenhower both showed a pointed lack of interest in it; its chairmanship was often used as a political payoff (as, indeed, it technically was in Cary’s case), and its appropriations were cut again and again by Congress and the Bureau of the Budget. In June 1941, the S.E.C. had a roster of 1,683 employees; in 1955, by which time the industry it was supposed to regulate had expanded vastly, the number was down to 666, and when Cary assumed office some six years later the total was around 900. The S.E.C.’s premature onslaught of senility, then, was compounded by starvation. During the latter nineteen fifties it gained considerable public acclaim for the noisy campaign of its New York office chief, Paul Windels, Jr.—“Pistol Paul” to the culprits—who took after boiler-room operators peddling worthless penny uranium stocks by telephone. But meanwhile the agency as a whole was all but moribund. While the Birrells and the Gutermas were weaving their schemes and the Amex was all but falling to pieces, the sparse staff at S.E.C headquarters—restored to Washington now, but assigned there to an unimpressive temporary building on Second Street called the “tarpaper shack”—generally contented themselves with routine; they were never seen on the trading floors of the exchanges, they enjoyed all too amiable social relations with the authorities of those exchanges, and one S.E.C. chairman developed the comfortable habit of falling asleep during the Commission’s deliberations. “Literally and figuratively, the S.E.C. slept for most of the decade,” Louis M. Kohlmeier, Jr., a historian of regulatory agencies, wrote of the nineteen fifties.

2

A strong Report on Regulatory Agencies to the President Elect, commissioned by the President-elect himself and written late in 1960 by James M. Landis, who had been an S.E.C. chairman in New Deal days, showed that Kennedy was bent on bringing the S.E.C. back to life, and it set the stage for the Cary regime. Landis called for more funds as well as greater regulatory zeal, and Kennedy and Congress implemented the Landis conclusions with practical backing; between 1960 and 1964 the S.E.C.’s annual appropriation increased from $9.5 million to almost $14 million and its payroll from fewer than one thousand persons to almost fifteen hundred. But the change was not only quantitative. Cary concentrated on recruiting talented and enthusiastic lawyers, devoting perhaps a third of his time to the task. His base supply naturally enough consisted of his former students and their friends; the atmosphere at the tarpaper shack soon changed from one of bureaucratic somnolence to one of academic liberal activism.

Cary treated the securities industry warily, and generally, as he liked to put it, “with deference,” but hardly with friendship. As David Jackson learned, the Cary men were sometimes overzealous about boring in with hard questions, and certainly in Jackson’s case deference was severely strained. Cary had a reserved opinion of Keith Funston as New York Stock Exchange president, for reasons that were scarcely Funston’s fault—because, as a former businessman and college president who had been hired to fill an essentially public-relations function, he didn’t really know the securities business. But Cary and his staff did not avoid face-to-face meetings with Funston or anyone else; rather, they spent as much time in Wall Street as they could, watching and listening. Although Cary himself had a few close friends holding the levers of Wall Street power—perhaps the chief among them being Amyas Ames of Kidder, Peabody and Company—he generally avoided social contacts there, and once when he took George Woods of First Boston Corporation to lunch, he was startled to find that it was the talk of the Street.

Two actions during his first year in office gave the financial district an inkling of Cary’s mettle and the S.E.C.’s new mood. One was a case called In the Matter of Cady, Roberts and Co., which concerned events that had. taken place two years before. In November 1959, Robert M. Gintel, a young member of the brokerage firm of Cady, Roberts and Company, had been informed one morning by one of his associates, J. Cheever Cowdin, that Curtiss-Wright Corporation was about to announce a drastic cut in its quarterly dividend. Gintel had the very best of reasons to believe that Cowdin knew what he was talking about, since Cowdin was a director of Curtiss-Wright and had presumably participated in the very decision he was reporting on. Possessing this classic piece of insider information, Gintei immediately ordered the sale of 7,000 shares of Curtiss-Wright stock on behalf of his firm’s customers. The order was executed at above 40; one-half hour later the dividend cut was publicly announced, and the first trade in Curtiss-Wright thereafter was at 36 1/2—not quite 10 percent lower.

Such profitable use of privileged information was apparently illegal under Rule 10B-5 of the S.E.C., promulgated in 1942 under authority of the 1934 Securities Exchange Act, and intended to prohibit precisely this sort of thing. But so firmly entrenched was the Wall Street tradition of taking unfair advantage of the larger investing public, and so lax the S.E.C.’s administration of that particular part of the law between 1942 and 1961, that not a single stockbroker had ever been prosecuted for improper use of privileged information during those two decades. In the tarpaper shack, 10B-5 had simply been considered too hot to handle. It was the law in name only, and thus it is not surprising that prior to Cary’s time the S.E.C. had taken no action in the matter of Cady, Roberts. But now, in an opinion written by the new chairman himself, the S.E.C. decided that in not waiting until the public announcement of the dividend reduction before selling Curtiss-Wright stock, Gintei had violated the antifraud provisions of the law, and accordingly it suspended him from trading in securities for twenty days.

The sentence was light, no doubt in consideration of the fact that by the Wall Street standards of the time, Gintei had done nothing seriously wrong; indeed, it was his argument that his fiduciary relationship with his clients compelled him to act on what he knew. But the implication was far-reaching: at last the S.E.C. had affirmed that the easygoing days were over and that Rule 10B-5 now meant precisely what it said. Presumably the agency would pursue the new policy in the future—as, in fact, it did in 1966, when it brought, and for the most part eventually won, a civil complaint against Texas Gulf Sulphur and thirteen of its directors and employees charging that they had made improper use of inside information of a Canadian ore strike, in a case that shook Wall Street to its foundations. Cady, Roberts was the little-publicized forerunner of Texas Gulf, and marked a sharp turn toward stiffer S.E.C. policy on insider trading, the most ubiquitous of stock-market frauds in all countries at all times. One who immediately recognized the importance of what had happened was Keith Funston, who telephoned Cary to complain bitterly that the S.E.C. action was unnecessary and improper in view of the fact that the Stock Exchange had already disciplined Gintel on its own. There were other grumblings from Wall Street, used as it was to Washington permissiveness. But soon the grumbling died down, and the Stock Exchange turned around and issued a strong set of new directives to its members against the use of inside information by brokers. Thus the stock market had moved in the direction of fairness for the outsider, and no pillars of finance had fallen; that is to say, regulation had worked as it is supposed to work.

The Re case and the ensuing Amex reorganization were not Cary projects. They had been initiated by his predecessors; but the success with which they were carried forward was a second feather in his cap. Many of the people involved came to believe that the rapid self-transformation of the Amex from a sort of Tammany ward in Wall Street to a reasonable approximation of a model stock exchange simply would not have happened without such a tough and conscientious regulatory climate as the new chairman was beginning to achieve. So Cary headed into his second and most challenging period at the S.E.C., the summer of the ’62 market crash, the aftermath of which would give rise to his masterwork.

3

When a market panic is in progress, the S.E.C. is as helpless as a meteorologist in a storm. No power vested in it enables it to turn markets around, or cause persons and institutions that are selling stocks to change their minds and begin buying them instead. The agency’s mandate, or one of its mandates, is to promote conditions that will make panics least likely to occur. When one does occur, as one did in May of 1962—and there can be little doubt that the S.E.C.’s somnolence over most of the preceding decade was one of the contributing causes—the regulators can only watch ruefully, and prepare to get back to their regulatory drawing board as soon as possible.

So it was with Cary and his S.E.C. in 1962. What comfort they could find came from the fact that the previous year they, with help from Congress, had recognized the unhealthy state of the markets and had attempted to do something about it in advance—but not far enough in advance, as things turned out. In June 1961, when Cary had been in office three months and the speculative market was near the peak of its unhealthy flowering, he told a subcommittee of the House Committee on Interstate and Foreign Commerce that he strongly favored the immediate undertaking by the S.E.C. of a comprehensive study and investigation of the adequacy of protection to investors provided by the rules of all the major stock exchanges and the over-the-counter market. There was, of course, a price tag attached. As Cary explained to the subcommittee, the S.E.C.’s current budget and manpower supply simply wouldn’t support such a study: “The constant danger in our Commission is that with market activity at an all-time high, we become so overwhelmed with immediate problems that we are virtually forced to concentrate all our funds and manpower upon them and cannot do any long-range planning.” He called attention to the irony of the situation—the frantic boom itself creating so much work for the regulators that they were all but prevented from exercising their regulatory function. Recognizing the need for action, in August of 1961 the House and Senate passed a measure authorizing $750,000 to the S.E.C. for a two-year Special Study of the Securities Markets—such a study as had not been undertaken for a generation—and on September 5, President Kennedy signed it into law.

Work began almost at once; a blue-ribbon staff of sixty-five was assembled, headed by Milton H. Cohen, a Chicago lawyer whom Cary imported, with the S.E.C.’s own Ralph Saul as second in command. But when the bottom fell out of the market in the spring of 1962 the Special Study could be of no immediate use because it was less than half finished.

Through that summer and fall work went on, and late in November Cary gave an indication of what was to come. The occasion he chose was a speech he gave at the annual meeting of the Investment Bankers Association, at Hollywood, Florida. Into this sun-warmed outing of fat cats only slightly thinned and chastened by the events of the past May, Cary injected a shaft of criticism like a sharp New England icicle. He spoke of the customary bland tameness of the S.E.C., so often lately looked upon as a harmless adjunct of Wall Street, and said pointedly—in allusion to an incident well remembered by all good Wall Streeters, the famous encounter of Morgan with Miss Lya Graf in 1933—“I do not intend to be a midget on anyone’s lap.” He singled out the New York Stock Exchange, the National Association of Securities Dealers, and the Investment Company Institute as specific organizations that had been consistently recalcitrant about regulating themselves and correcting abuses. He zeroed in on the Big Board’s president, with a touch of sarcasm: “Keith Funston has framed his attitude toward self-regulation.… Who, he asks, can best set operating standards and determine the most effective level of service to the public? The securities industry—or the government? He did not answer that rhetorical question, but I doubt that we need to be more explicit with this distinguished audience. I can appreciate the basis for his point of view. After all, he is the head of the New York Stock Exchange.” Then Cary made the most telling jab of the icicle. “Every member of the New York Stock Exchange will concede,” he said, that the Exchange, for all of its evermore-important public function, “still seems to have certain characteristics of a private club—a very good club, I might say.”

It was, like the Morgan allusion, a deliberate reference to Wall Street history. On November 23, 1937, at a time when the S.E.C. was heading into its greatest confrontation with the Stock Exchange up to then on the matter of the Exchange’s internal organization, William O. Douglas, then S.E.C. chairman and later a Supreme Court justice, had inflamed the Whitney Old Guard and its allies by speaking of the leading stock exchanges as “private clubs” that in the context of public marketplaces were “archaic.” Their rage at the criticism had goaded that particular regiment of Old Guardsmen into excesses of intransigence that, a few months later, would be their final undoing. Cary in 1962 was a Douglas admirer of some thirty years’ standing—ever since he had been a law student of the eminent jurist at Yale. His quotation from his old master was conscious and intentional and surely intended to achieve the same effect Douglas had achieved in 1937. To some extent, he was successful. Funston, commenting on the speech that evening, said curtly that he had been quoted out of context on self-regulation, and allowed himself to add that he particularly resented the private-club remark. Other sources high in the councils of the Street commented with asperity: “Such talk does no one any good at any time.”

Did it in fact do the public any good this time? One might argue that it didn’t, because despite their touchiness the private-club forces in Wall Street were better armed with moderation in 1962 than in 1937; they were also more sophisticated and less given to Blimpish sputtering against the plebs, and moreover, now they had no Richard Whitney to disgrace and discredit them. But the Special Study went forward in a new climate; the staff men working on it knew that their chief meant business and feared no one. For its part, Wall Street knew that it was not to be let off with a slap on the wrist. It was the climate of serious reform.

As the work drew toward a close early in 1963, Wall Street braced itself. The S.E.C. announced that the study would be released in three sections—the first on April 3, the second and third in July and August, respectively. As the date for the first installment drew near, there was such tension as had never before attended the impending release of any document from the S.E.C., or perhaps from any regulatory agency. A sharp, reactive drop in the market was feared, and elaborate precautions were taken against premature leaks of the contents of the study. At length, just after noon on the appointed day, the first part of the Special Study was released simultaneously to Congress and to the press.

The document’s tone was reasonable but stern. “Grave abuses” had been found in Wall Street’s operations, Cary wrote in his letter of transmittal to Congress, but the picture was “not one of pervasive fraudulent activity.” He emphasized that

although many specific recommendations for improvements in rules and practices are made … the report demonstrates that neither the fundamental structure of the securities markets nor of the regulatory pattern of the Securities Acts requires dramatic reconstruction. The report should not impair public confidence in the securities markets, but should strengthen it as suggestions for raising standards are put into practice.

Serious shortcomings are apparent and the report, of course, has concentrated on their examination and analysis. Yet it is not a picture of pervasive fraudulent activity and in this respect contrasts markedly with the hearings and findings of the early thirties preceding the enactment of the federal securities laws.

Specifically, the first installment said that insider-trading rules should be tightened; standards of character and competence for stockbrokers should be raised; further curbs should be put on the new-issues market; and S.E.C. surveillance should be extended to the thousands of small-company stocks traded over the counter that had previously been free of federal regulation. In sum, it was a fair and moderate report that Wall Street could take more or less in stride; the expected selloff of stocks did not materialize. But, of course, there was another shoe still to drop—or rather, two more shoes.

The second part of the study, duly issued in July, concentrated on stock-exchange operations, recommending that brokers’ commissions on trades be lowered, that the freedom of action of specialists be drastically curtailed, and that floor traders—those exchange members who play the market with their own money on the floor itself, deriving from their membership the unique advantages over nonmembers of being at the scene of action and of paying no commissions to brokers—be legislated right out of existence through the interdiction of their activities. The third and final part, out in August, was probably the harshest of the three—and in view of political realities the most quixotic. Turning its attention to the wildly growing mutual-fund business, the S.E.C. now recommended outlawing of the kind of contract, called “front-end load,” under which mutual-fund buyers agreed (and still agree) to pay large sales commissions off the top of their investment. It also accused the New York Stock Exchange of leaning toward “tenderness rather than severity” in disciplining those of its members who have broken its rules.

If the Special Study’s rigor irritated much of Wall Street, its air of elaborate fairness was equally galling to some of the younger and more hot-eyed S.E.C. staff men, one of whom wrote a parody of Cary’s letter of transmittal that delighted no one more than Cary himself:

Sir:

I have the honor to transmit the first segment of the Old Testament. The first segment includes … five chapters … and is referred to as the Torah.

At the outset we emphasize that, although ten specific recommendations for improvements in rules and practices are made, the Torah demonstrates that neither the fundamental structure of society nor of the tribal chiefs requires drastic reconstruction.… The Torah should not impair public confidence in society, but should strengthen it as suggestions for raising standards are put into practice. Serious shortcomings are apparent (see Chapter III on Sodom and Gomorrah) and the Torah, of course, has concentrated on their analysis. Yet it is not a picture of pervasive sinful activity and in this respect contrasts markedly with the reign of Genghis Khan. …

4

All in all, the Special Study was a blueprint for a fair and orderly securities market, certainly the most comprehensive such blueprint ever drawn up, and if all of its recommendations had been promptly put into effect, what follows in this chronicle’s later chapters would be a different tale. But, of course, they were not. Once the study had been published, there began the long, tedious, and often frustrating process of fashioning the recommendations into a bill and of getting the bill passed by Congress. There were meetings of S.E.C. men with representatives of the securities business; here the chance of frayed tempers was lessened by the prominent presence among the Wall Streeters of Cary’s friend Amyas Ames. (Interestingly, Wall Street mounted no campaign of diehard intransigence against any bill such as Whitney had generaled in 1934. Three decades had passed; Wall Street and Washington had learned to live with each other, and Keith Funston, whatever his limitations, was no Richard Whitney.) Then there were endless Congressional hearings, and almost endless Congressional and bureaucratic cross-currents. The Controller of the Currency complained that the S.E.C. was trying to usurp his power over banks, Congressman John Dingell of Colorado complained that the S.E.C. was not being tough enough, and another liberal, Senator Eugene McCarthy, made a speech attacking the bill as too tough, only to recant later with the admission that he had misunderstood some of its provisions. The law that was finally passed—the Securities Acts Amendments of 1964—had two main sections, one extending S.E.C. jurisdiction to include some twenty-five hundred over-the-counter stocks (about as many as were traded on the New York and American exchanges combined), and the other giving the government the authority to set standards and qualifications for securities firms and their employees.

As far as it went, it was a good law, a landmark law, a signal achievement for Cary and his egghead crew. But it fell far short of what the Special Study had asked for. Not a word, for example, about mutual-fund abuses; no new restrictions on the activities of specialists; and nothing to alter the Stock Exchange’s habit of “tenderness” toward its erring members. Those items had been edited out in the course of the political compromises that had made passage of the bill possible. And for Cary the greatest disappointment must surely have been that the Act left the club about as private as it had been before. The New York Stock Exchange continued to have thirty-three governors, only three of them nonmember representatives of the public; and of those three, two continued customarily to be corporation heads hardly likely to be passionate proponents of the small-investor point of view. The Exchange continued to have rules and qualifications for election to its board that stacked the deck strongly in favor of “floor” members—those who never dealt with the public and often felt little concern for its welfare—over “upstairs” members, the commission brokers who were more inclined to consider the public because their livelihood depended on it. And—bitterest pill of all—there continued to be floor traders, those specially favored Exchange members who, to Cary, were the very crux of the private-club issue.

When Cary had come to the S.E.C. there had been more than three hundred Exchange members who sometimes availed themselves of their privilege of trading for their own accounts on the floor (and who, unlike the specialists, were not even responsible for maintaining orderly markets in the stocks in which they traded). The Special Study asked that their privilege be revoked out of hand. A fierce outcry—probably the fiercest against any of the study’s recommendations—arose first from the Stock Exchange and later from business in general. The sacred freedom of the marketplace was invoked, and so, at the other extreme, was the welfare of the investing public. The Exchange commissioned the management firm of Cresap, McCormick and Paget to study the problem and come up with a conclusion as to whether floor trading served the public weal or not.

Built into this situation was one of those moral absurdities that are so dismayingly common in American business life. The Stock Exchange, largely run by floor traders and their allies, had a vested interest in finding that floor traders serve a socially useful purpose. Cresap, McCormick and Paget, being on the Exchange payroll, had a vested interest in pleasing the Exchange. If a schoolmaster were to assign one of his pupils to write an essay (to be graded by the schoolmaster himself) on whether or not he was a good schoolmaster, it might be cause for merriment all around. Similar practices cause little mirth in business life because they are done all the time.

Cresap, McCormick and Paget labored mightily. One may imagine the Exchange’s gratification when the report, finished at last, concluded that abolition of floor trading would decrease liquidity and thereby introduce a dangerous new volatility into Stock Exchange trading, doing “irreparable harm” to the free and fair operation of the auction market. But perhaps the Exchange’s gratification was less than complete. The magisterial authority of the report was somewhat sullied when James Dowd, head of the Cresap team that had compiled it, stated publicly that his actual finding had been that floor trading was far from an unmixed blessing for the public, and accused the Stock Exchange of having tampered with the report before publishing it. It seemed that the schoolmaster had not entirely liked the student’s report on him, and so had exercised his prerogative to improve upon it. Cary wanted to hold S.E.C. hearings on the matter, but was voted down by his fellow commissioners.

At all events, the report as finally published did not seem to be a triumph of logical thought.

Essentially, what it said was that if a few insiders with a definable advantage over everybody else were to be ruled out of the stock-market game, the interests of everybody else would be irreparably harmed. It sounded like Alice Through the Looking Glass. But the myth of the perfectly free market is still strong, and moreover, there was a grain of truth—just a grain—in the liquidity argument in favor of floor trading. At all events, enough of the people’s tribunes in Washington accepted the Stock Exchange’s point of view to keep abolition of floor trading out of the 1964 Act.

Thus frustrated, Cary’s S.E.C. came to achieve through administration much of what it had failed to achieve through legislation. In August 1964, just before the bill became law, it issued stringent new rules under its pre-existing authority requiring Stock Exchange members to pass a qualifying examination before being allowed to operate as floor traders, and once qualified, to hand in after each day’s trading a form detailing each of their transactions. Whether through the threat of exposure, or the extra work, or just the insult to dignity implied in the test and the daily reports, the new rules had the desired discouraging effect on floor trading. “They sat us down with a pencil and a glass of water and handed us this test, right in the Board of Governors room,” a floor trader cried in outrage. “Our seats were even spaced far apart, so we couldn’t crib!” Shortly after imposition of the new rules, the number of floor traders on the Stock Exchange dropped from three hundred to thirty. As an important factor in the market, floor trading was finished. Cary had won through indirection.

5

On November 22, 1963, Wall Street did itself little credit. During the twenty-seven minutes between the moment when the first garbled rumors of the President’s assassination in Dallas reached the Stock Exchange floor and the emergency closing of the market at 2:07 P.M., stocks declined at their fastest rate in the Exchange’s 170-year history to erase $13 billion in values. For an ordinary citizen to react to news of a President’s death by thinking first of protecting, if not of enlarging, his personal treasure, is perhaps defensible behavior in a materialistic civilization, though it can hardly be called attractive behavior. But for investment professionals, whose jobs have a fiduciary aspect, to react similarly is not defensible. A certain small percentage of the $13 billion lost that day apparently went into the pockets of Stock Exchange members. A subsequent S.E.C. report maintained that a few specialists—among them, those who dealt in Korvette, International Telephone and Telegraph, American Motors, and American Photocopy—not only failed to perform the stabilizing function to which they were pledged but rather acted in such a way as to aggravate the decline. Asked to comment on these findings, Funston said, “Quite humanly, some people do not perform as well as others in a crisis”—a strangely mild reaction, some felt, to the stock-market equivalent of looting during a fire.

Did the pathetic, rootless Lee Harvey Oswald really kill for once and all the spirit of a proud nation? Or had the nation, having citizens who could act as some did in Wall Street, lost all unnoticed the spirit at some earlier time? Those are questions still unanswered a decade later. For the short term, the nation and its barometer, Wall Street, chose—quite humanly—to pretend that nothing irreparable had happened, that no national wound had been opened, that everything was somehow going to be all right. On November 26, the first day of business after the assassination, the market performed its symbolic function of eliminating—literally wiping out—the damage that had been done Friday, by producing the greatest one-day rise in its history. And the new President, wanting to thank someone for this timely miracle, grabbed his telephone and congratulated Funston.

The rise continued through December; 1963 ended with the Dow at an all-time high, and when the Stock Exchange trading volume for the year was added up, it, too, came to an all-time record, topping even 1929. Then came 1964, a market year for bulls to dream about, as everyone’s taxes were cut and an American space craft took the first close-up pictures of the moon and northern children went to Mississippi to spread the gospel of equal rights (three not to return) and the United States asserted itself at Tonkin Gulf (“Don’t tread on me!”) and people talked about what was “In” and what was “Out” and Johnson was elected President in his own right along with the most liberal Congress ever. In Wall Street’s little world, meanwhile: in February, the Dow went through 900; in April, Texas Gulf Sulphur hit the biggest mine of modern times near Timmins, Ontario, touching off a wild binge of speculation along Toronto’s Bay Street, and Lowell Birrell turned up in New York to face charges; in June, Funston put down a mild rebellion of Stock Exchange members against his administration, commenting jocularly that he, like a former Yale football coach, aimed to keep his constituents “sullen but not mutinous” (Exchange members quickly got in the spirit by appearing on the floor wearing buttons reading SULLEN or MUTINOUS); in August, the Securities Acts Amendments were passed, showing that God was properly in his heaven if all was not quite right with the world; in December, the Stock Exchange finally unveiled its new 900-character-a-minute ticker that could handle 10 million shares a day without delay and thus laid the ghost of the May 1962 mess; and at the end of the year it was found that so many previous Wall Street records had fallen that it was hardly worth keeping track of them any more. No one could know, of course, that 1964 would be the last year of the decade in which the market would rise in an almost straight line.

Meanwhile, Cary’s day as Wall Street’s conscience came to an end. He found himself less happy under Lyndon Johnson as President than he had been under Kennedy; Johnson had a habit of telephoning him from time to time about political matters, something Kennedy had never done. Moreover, in December 1963, Johnson called the heads of all the various regulatory agencies into the Cabinet Room of the White House and said to them, in connection with the role of regulation, “we are challenged … to concern ourselves with new areas of cooperation before we concern ourselves with new areas of control.” It was a clear enough warning to slow down and not rock the boat; and Cary, over the following months, gradually made up his mind that he had been at the S.E.C. long enough. He resigned on August 20, 1964, the day the Securities Acts Amendments became law, and was succeeded by Manuel F. Cohen, who, Johnson’s warning notwithstanding, would run a reasonably tough S.E.C. regime over the next five years. As for Bill Cary, gentle strongman or strong gentleman, he went back to his favorite parlay, teaching law at Columbia and practicing it one day a week in Wall Street.

6

In mid-1965 the market underwent a substantial correction—from 940 to 840 on the Dow, or just over 10 percent. It began in late spring, and President Johnson was soon on the phone again, asking Funston to do something about it. Funston may be presumed to have explained to the President that it was neither proper nor possible for him to control the course of stock prices; shortly afterward, Johnson is known to have called Cohen at the S.E.C. and asked him to do something. For a change, Funston and the S.E.C. had a problem in common: a President who thought the market could be made to do what he wanted it to do when he wanted it to be done.

Then on the first day of June, William McChesney Martin, Jr., once the high-level Wall Street white wing and now the respected old warhorse who had been chairman of the Federal Reserve Board since 1951, gave the principal address at a Commencement Day luncheon of the Alumni Federation at Columbia University in New York City. As boss of the Fed, Martin had long since gained a reputation as any federal administration’s dour conscience in economic matters, ever counselling unpleasant restraints on money and credit while the politicians in the White House and Congress revelled in the political hay that was to be harvested from expansionist policies that promoted stock-market booms. In particular, relations between Johnson and Martin were said to have become severely strained over this very issue. Now, at Columbia, Martin preached a ripsnorting sermon of old-time economic religion. He saw, he said, “disquieting similarities between our present prosperity and the fabulous twenties,” with the concomitant unsettling implication that the present boom might end as painfully as had the earlier one. “Then as now,” he pointed out,

many government officials, scholars, and businessmen were convinced that a new economic era had opened, an era in which business fluctuations had become a thing of the past, in which poverty was about to be abolished, and in which perennial economic progress and expansion were assured.

He spoke of the resolve of “responsible leaders” (for which it took no genius to read “Lyndon Johnson and his economic advisers”) to prevent a repetition of 1929—“but,” he went on, “while the spirit is willing, the flesh, in the form of concrete policies, has remained weak. With the best intentions, some experts seem resolved to ignore the lessons of the past.” Getting down to specifics, he ticked off the similarities he saw between the present and the period just before 1929: then as now, there had been seven years of virtually uninterrupted economic progress, in each case following a period of disruption by war; then as now, world prosperity was unequally concentrated in the developed countries and, within them, in their industrialized sectors; then as now, private domestic debt was soaring, and the supply of money and bank credit was continuously growing with no increase in gold supply; then as now, international indebtedness has risen along with domestic, and the payments position of the main reserve money center—Britain in the first instance, the United States in the second—was shaky in the extreme. In sum, Martin saw the footprints of impending disaster everywhere. Toward the end, he shaded the picture somewhat by pointing out some differences between the two situations—for example, national income was better distributed now, wholesale prices were more nearly stable, stock-market credit was under better control. But even so, the old preacher, when he sat down, had painted the fires of economic Hell in vivid colors, and had warned sinners and blameless alike that they all stood on the edge of the descent.

The Dow dropped 9.81 points that very day. In the next three weeks it dropped another 60 points, to its lowest level in nearly a year. Wall Street began talking of the “Martin market.” Meanwhile, Johnson did not deign to take public notice of Martin’s tongue-lashing, or to alter his expansionist policies. July arrived without any apocalypse, and then the market turned around. It kept charging upward the rest of the year, passing the old Dow record of 940 in October, a month when the Stock Exchange saw its busiest week in history up to then, with almost 45 million shares changing hands. (And when had that previous record been set? At the end of October and the start of November, 1929.) The Martin market was consigned emphatically to the past—and so, it seemed, was Martin himself as a prophet.

The talk of Wall Street that glorious autumn, the last one quite so glorious for quite so many people, was of 1,000 on the Dow—that, and of the great new force in the market, the mutual funds. The magic 1,000 had not even been dreamed of in the boom of 1929, when the peak reached by the giddy bull market was a mere 381.17. Nor, indeed, had it been dreamed of in 1961, when the peak had been 735. But now the magic figure was within easy reach, mentioned on every financial page and in every market letter: in October the Dow just missed touching 960, in November it passed 960, in December it went on to 970. Just a good week or two, and Wall Street’s millenium, or the nearest thing it had to one, would be achieved. …

And then there was the mutual-fund industry, the force that was in the process of transforming Wall Street both economically and socially, a vast new shadow of uncertain portent looming across Wall Street’s sky. As recently as the end of World War II, the funds had been a trivial element in securities trading, with just over $1 billion under their management; now the figure was $35 billion and rising fast, with new money flowing into them at net annual rate of $2.4 billion; already fund trading accounted for a quarter of the value of all Stock Exchange transactions. And with such momentum, it was clear that this was no more than the beginning.

It was said repeatedly in Wall Street that autumn that at last the funds were making “people’s capitalism” a reality instead of a catch phrase; through fund investment the small investor could get the expert advice and fast action his limited resources otherwise denied him. Skeptics at the S.E.C. retorted that their contractual plans with large front-end commissions, sometimes amounting to half of the initial investment, were almost fraudulently unfair to the new investor with small resources—the very person the funds were supposed to benefit most; the Wall Street wisdom replied that such contracts were necessary incentive for the salesmen who made such growth of the fund industry possible. Skeptics feared that the funds, with their unmatched power to buy or sell huge blocks of stock, had almost precisely the same muscle and incentive to manipulate the market to their own advantage, and to the disadvantage of others, that the infamous private investment pools of the nineteen twenties had had; the Wall Street wisdom replied that the securities laws, and the integrity of mutual-fund managers, made such abuses unlikely. Skeptics worried about the “redemption nightmare”—how, in a sudden market panic, mutual-fund shareholders might redeem their shares in great quantities, forcing the funds to sell portfolio holdings, leading to further redemptions, and so on down into a 1929-type pit; the Wall Street wisdom replied—most convincingly—that the funds’ ability to withstand a panic had been tested in May 1962, and they had passed the test with flying colors.

The paradoxical thing was that the funds, in making the American stock market for the first time a market primarily of institutions rather than of persons, were bringing back the power and fame of individual men. The old Wall Street star system, in its heyday before 1929 and now entirely absent from Wall Street for a generation, was returning. The new stars were the portfolio managers, the men who made the investment decisions for the mutual funds. It was coming to be more and more widely believed that these decisions could not be made by committees in the traditional way of money managers; they required the speed, dash, and intuition of one man working alone on his sole responsibility.

Dangerous power, and the potential for dangerous abuses, yes. But there was a final, crushing argument in favor of the funds in 1965. With almost $2.5 billion net in new money a year coming into the stock market through the funds, wasn’t the market, over the long term, bound by the law of supply and demand to go up and up and up, to everyone’s benefit? Weren’t the funds, so long as they thrived, a sort of guarantee of a permanent bull market?

Poor old Bill Martin! He was still living back in the nineteen thirties (the Street wisdom went) when mutual funds had scarcely existed; he simply did not comprehend this new and decisive force. Gerry Tsai, hottest of the new fund managers, predicted that the Dow would go through 1,000 before the end of 1965. He was wrong, but not by much; it was during the morning of February 9, 1966, that it touched 1,001.11, and stayed above the magic number for a matter of minutes before falling back. As things turned out, that was the peak. The Dow would not again touch the 1,000 mark during the decade, and in the fullness of time, Bill Martin would have his day.

CHAPTER V

Northern Exposure

1

By 1965, Wall Street as a social context—a place to have one’s being half of one’s waking weekday hours—had changed in a generation probably more than it had ever previously changed in a lifetime; but it had not had its real revolution. Like the rest of the nation, it was poised on the verge of a strange take-off into new, totally unexpected and totally uncharted directions, new ways of looking at life and dealing with it that would seem not to have come out of evolution from the past or from reaction against it, but out of the blue, as if the past did not exist.

Wall Street as a social context? Twenty paces across from building to building, some six hundred paces end to end, a few hundred acres comprising the whole district that goes by the name—Wall Street as a social context seems at first glance not to exist, not because of its limited acreage but because of its artificiality. It is a region where no one—apart from a thousand or so seamen and artists and urban hermits—really lives; where nearly half a million people arrive in the morning and depart in the afternoon, passing the hours between, unless they are so money-obsessed as to want nothing out of life but money for its own sake, with their deeper and more pleasurable thoughts playing over other scenes, other people somewhere else; a place where, at night, a few students and late-working clerks hurry down vacant streets, wary of muggers or perhaps ghosts; where work is everything, and yet no cows are milked or potatoes dug, no lampshades or shirts or steel ingots produced; where love and desire wax as often and as strongly as anywhere else, but cannot often be consummated without a trip several miles away by subway, car, train, or boat. For most of this century, the whole area south of Fulton Street has got along without a single hotel or apartment house above the marginal-slum level, and hardly anyone has ever thought twice about this strange fact.

Wall Street, then, would seem in this sense to be what the painter Willem de Kooning used to call a no-environment.

And yet, through history it has been not only a social context but a style-setting one. In the nineteen twenties, Wall Street’s last great era before the present one, it was a kind of super-university as well as a marketplace. The young Corinthian of ambition, coming there in those days to learn the bond business, could get an Athenian education in manners as well as a Spartan outlook as to life strategies while meeting the people who would help him to become first rich and later influential. Walking the storied canyons, as compact as a large campus, as ingrown as any academic community, he might brush shoulders with the newly mighty or the ancient great: with J.P. Morgan himself, Wall Street’s unquestioned ruler who, though born to the purple, had overcome an armed assassin with his bare hands; with Thomas W. Lamont, the ambassador of Morgan to nations that needed loans or financial advice; with Herbert Lehman, Otto Kahn, Franklin Roosevelt, Averell Harriman, Ferdinand Eberstadt, Robert Lovett, Thomas Finletter. And—provided only that his background was proper Protestant or old-family German Jewish—he might even meet some of them. Then having profited over a period of fifteen or twenty years, he would find the grandees he had met along the way easing his path into the important clubs, committees, and even councils of state. Thus Wall Street triumphed over (or perhaps profited by) its limitations of space, function, and human situation and emerged as a kind of American Mount Olympus where the gods walked, bluffed and blustered, gossiped, made mistakes, and sometimes touched aspiring mortals with financial godhood.

2

Almost all that was gone now. The reign in Wall Street of the Old Establishment and its archetypal figure, the Protestant gentleman, had long since been ended by a whole complex of forces and events, of which the paradigmatic one was the exposure of Richard Whitney. The Wall Street of the middle nineteen sixties was a far more open society where performance (a new key word in Wall Street) counted for more than education, manners, or breeding. Within limits, that is; for in the year of the Selma march and the second Civil Rights Act, the year when the Texan President of the United States cried, “We shall overcome!,” there was no black member of any stock exchange and there were no more than half a dozen blacks working above the messenger-boy or clerical level in the whole nationwide securities business.

To begin with, Wall Street in the physical sense was still the national financial center only by the grace of God—or, perhaps, by that of William Zeckendorf. In the early nineteen fifties, with the tremendous midtown office-building boom, one great corporation after another moved its headquarters northward, and the money world showed signs of following. Once upon a time the corporations, credit-starved, had come willingly to the commercial and investment banks, but now with the growing wealth and power of corporations the balance had shifted. First National City Bank moved uptown, and Manufacturers Trust, soon to become Manufacturers Hanover, followed. Wall Street took to living with its hat on, ever ready to jump in a cab and fight traffic through the tortuous streets to midtown where the big clients held court. Not a single new office building had been started in the downtown area since before the Depression, and no one wanted to be the first to build one. There was talk of the financial district becoming a ghost town.

Then the Chase Manhattan Bank, which needed a new and larger headquarters to replace its old one at 18 Pine Street, took the plunge by deciding to stay in the area—and to stay in a big way—and suddenly the tide was turned. In Zeckendorf’s account, the decision was made at a meeting he attended, and dominated, at 18 Pine Street in 1954. Present, in addition to the mercurial real-estate man, were the Chase’s young suzerain David Rockefeller and several of his distinguished colleagues. After making an eloquent plea for the survival of Wall Street as a financial center, Zeckendorf pointed out the window to the old Mutual Life site at Pine and Nassau, then owned by the Guaranty Trust Company, and said that it could be bought for under $5 million, but only by instant action. When the Chase men hesitated and talked about consulting their board of directors, Zeckendorf made his strongest pitch: “Your whole future is at stake, you can’t wait to go to your board with a silly thing like that.” According to Zeckendorf, they didn’t wait; the $5-million deal was consummated over the telephone that day; there followed a rounding up of adjacent properties and a protracted game of musical chairs among the other leading banks, which, emboldened by the Chase, decided to stay, too; and the new sixty-four-story Chase Manhattan Plaza, opened in 1960, immediately became—almost as much as the Stock Exchange itself—the vital center of a firmly reconstituted Wall Street. (Zeckendorf went broke in 1966, four years before a good part of Wall Street did. Once again, he showed it the way.)

So it was, to some extent, a rebuilt Wall Street in the nineteen sixties—an old house nearly abandoned by its tenants, who had decided at the last minute to rehabilitate it instead. The new buildings were coldly and starkly modern, in contrast to the ornate palazzos and temples put up in the nineteen twenties and earlier. But the new architecture did not immediately change the style of the place.

Lunch, for example—the only time of potential leisure in Wall Street life—was still a time of rush and push and bad temper for most people. The high and mighty—and many of the not-too-high and mighty, provided only that they were white, male, presentable, and doing well enough to pay dues—had their luncheon clubs: the Down Town Association for the remnants of the old Protestant élite; the Recess, more businesslike but quite respectable, frequented by investment bankers; the huge Bankers and Lawyers for almost anyone over thirty (banker, lawyer, whatnot) who worked in the area; the Lunch Club for young men on the way up; and so on. There were still the expensive restaurants like Whyte’s on Fulton Street and Oscar’s Delmonico, successor to the fabled Delmonico’s where the robber barons once supped in splendor. And for just about everybody else there was a wait for a counter seat, followed by a hasty bite made more urgent by the impatient presence at one’s back of someone else waiting in turn, at Chock Full o’ Nuts.

Most astonishing, in view of the importance of private lunch clubs in Wall Street and their all-male character, was the fact that many of the public restaurants in the area did not take advantage of the situation by encouraging women, but rather fell in line with the clubs by banning them. Whyte’s maintained male exclusivity in its taproom; some other restaurants declined to serve women anywhere on the premises. Without a reservation or a long wait, a woman could scarcely get a decent lunch anywhere in the area at any price. Professionally, prejudice against women in the financial business was wide, deep, and largely unquestioned. Although women made up slightly more than half of the total Wall Street work force, there was no woman member of the New York Stock Exchange and no woman officer of a major Wall Street bank. Of the thousands of partners in brokerage firms, some sixty were women—most of them in research, the one kind of work in which by common consent Wall Street women were allowed to rise above the secretarial level. The explanation for the exception apparently lies in the fact that a research analyst works alone; that is, the ladies doing research didn’t have to deal directly with men, either colleagues or customers. They could be kept hidden in a back room.

In sum, Wall Street in 1965 was still unblushingly—one might almost say innocently—male chauvinist in precisely the ways that were to be defined so acerbically later in the decade by women writers and politicians. It stood out as a last bastion of all-but-unchallenged male supremacy. It thought working women ought to be office drudges or sex objects, or both. One summer about that time, the Street took a collective notion to make a fuss over a young stenographer of exceptional physical endowments. By word of mouth it became known that she was in the habit of emerging from the subway stop at William and Wall at a certain time each day. Huge crowds began collecting to watch her appearance with cheers and whistles. Newspapers and television joined in the sport, and one day when she surfaced, there was a real mob and a near riot, as if the girl’s arrival were some sort of highly charged political event. The girl herself, understandably enough, was first flattered, then abashed, and finally horrified. In a sense, this little episode was a political event; Wall Street was unconsciously demonstrating exactly what it thought of women and of what they were good for.

The question of why women in the United States have always been, and to a marked extent still are, considered incompetent to manage money or deal in it with men is probably one for psychology rather than for social history. The great Wall Street chronicler Henry Clews put the matter coolly: “Wall Street is not the place for a lady to find either fortune or character.” Hetty Green, the nineteenth-century shipping heiress who over some forty years ran a fortune of a few million dollars, most of it tied up in trust, to more than one hundred million—and who once threatened the notoriously ruthless Collis P. Huntington with a revolver when she thought he was cheating her in a deal—stands almost alone as an American woman of unquestioned financial genius; and she achieved this standing at the cost of being generally considered a witch. Then there was the astonishing firm of Woodhull, Claflin and Company, of 44 Broad Street, floruit circa 1870-1872, affectionately known as “the bewitching brokers,” consisting of Victoria Claflin Woodhull, free-love advocate and later free-lance Presidential candidate, and her almost equally astonishing sister Tennessee (later Tennie C.) Claflin. The sisters made a big stir and apparently even some money in the harsh post-Civil War Wall Street, but they were scarcely financial geniuses; they and their firm were protégés of the septuagenarian financier Cornelius Vanderbilt, whose mistress Tennie had briefly been. Perhaps the key, or one key, to the genesis of the lasting prejudice is to be found in the Hetty-Huntington episode: Americans of both sexes have always tended subconsciously to equate financial deals with physical fighting—the latter a form of competition in which the hardest-shelled feminist admits that women are usually ill-equipped to compete equally with men.

At any rate, women in the middle nineteen sixties still tended to accede to the view that they could not or should not compete with men in financial affairs. Emancipated, highly competent and successful women in other fields—the arts, publishing, real estate, retail trade—still found it consistent with their self-esteem to affect a coy bewilderment when conversation turned to the stock market or the intricacies of finance. In Wall Street, women analysts accepted with little protest being excluded or jostled at lunch, and signed their research reports “Jones” or “Smith” rather than “Mary Jones” or “Susan Smith,” so that their readers would not discount the reports. Wall Street feminists discussed their views only in private. “Up against the Wall Street!” a women’s-lib group would snarl later in the decade, but not yet in 1965.

Blacks simply did not exist. The notion of applying for professional-level jobs in Wall Street did not even occur to them, and the concept of business firms conducting professional training programs as a social duty had not yet gained a foothold, either in Wall Street or in the nation. Even as messengers bearing securities, blacks were not much to be seen; the financial district had no “race problem” just because, like so many Northern cities a century before, it still had hardly any blacks.

3

In political ideology, by contrast, Wall Street was now somewhat more liberal—or less reactionary—than previously. The day of the Liberty League was over; there were no more J.P. Morgans requiring aides to screen from their eyes all newspapers containing photographs of Roosevelt so as to protect the master’s blood pressure. Liberal Democrats, many of them Jewish, were about as common as conservative Republicans in the positions of power; now, one of them, Howard Stein of Dreyfus Corporation, would be the chief fund-raiser for Eugene McCarthy’s 1968 Presidential campaign. This was not entirely a matter of high-mindedness, however. With the federal government in generally liberal Democratic hands there was little to be gained by conservative intransigence on the old issues—balancing the budget, federal meddling in business, high costs of welfare and social security. Such intransigence now led only to nasty rows with Washington officials, and those, in turn, could lead only to more regulation, bad publicity, and loss of the confidence of customers. Downtown, Colonel Blimpism no longer paid.

Many of the men putting together the stock market’s new darlings, the conglomerates, were liberals—and, of course, it didn’t hurt a Wall Street analyst or salesman to be on close and sympathetic terms with such men. There were even former Communists high in the financial game. Much of Wall Street had long had a surprisingly tolerant attitude toward Communism, derived from a perspective that put any alien ideology so far beyond the pale as to make it an object of exotic interest. In the early postwar years a young man out of Columbia and the Army went to work for a long-established Wall Street firm; assigned to the library, he took to browsing in the firm’s extensive collection of books on Marxism and Communism; an unscheduled conversion took place, and the young man left the library, and Wall Street, presumably intending to join the Party.

Bart Lytton, born in New Castle, Pennsylvania, in upper middle-class circumstances, came of age in the Depression, joined the W.P.A. Federal Theatre Project, and became a Communist. His proper mother wrote him, “You who were raised in country clubs, you who used to buy a dozen golf balls and two tennis racquets at a time, you who could have been governor of Pennsylvania—you want to run off and join the radicals. Well, go eat bread with your comrades then.” After a time he left the Party, but without totally and violently rejecting its beliefs as so many renegades did. In 1939 he went to California to become a screenwriter and public-relations man, and in 1948 he moved into the savings-and-loan business. By 1965 his Lytton Financial Corporation had grown so fantastically that it was among the five biggest savings-and-loan companies in the country; and Bart Lytton, with hundreds of millions of his own, was describing himself without refutation as “the most successful businessman in this decade in the United States.” He served for four years as finance chairman of the California Democratic Central Committee, backed John F. Kennedy with a $200,000 contribution in 1960, was a major benefactor of local art museums and a founder of one, and decorated his company’s annual reports with pictures of himself with Elizabeth Taylor, Levi Eshkol, and Hubert Humphrey. He boasted that he considered a morning wasted when he didn’t wake up $500,000 to $1,000,000 richer than the night before. The very next year, 1966, his headlong business style would backfire and his company collapse into reorganization; meanwhile, though, the Communist Party of the United States had apparently been for him a far more effective academy of commerce than the Harvard School of Business Administration is for most.

The sudden youth explosion that was to overtake Wall Street life, and most particularly the management of money, had not occurred yet, but its fuse was burning short. It had an easily found sociological cause. For almost a generation, from the 1929 crash to the bull market of the nineteen fifties, young men of talent and ambition grew up thinking of Wall Street as anathema and did not go to work there, leaving a vacuum when the Wall Street leaders who had started before 1929 began to retire and the positions of power and responsibility to fall open. (Between 1930 and 1951, for example, only eight persons were hired to work on the New York Stock Exchange trading floor.) The positions were being filled, faute de mieux, by the soon-to-be-celebrated sideburned young hotshots of the late nineteen sixties, most of whom had started working in Wall Street after 1960.

Indeed, by 1969 half of Wall Street’s salesmen and analysts would be persons who had come into the business since 1962, and consequently had never seen a bad market break. Probably the prototypical portfolio hotshot of 1968 entered Wall Street precisely in 1965. Of course, he was no hotshot in 1965. He was a young man with conservative clothes and neatly trimmed hair who had a degree from a business school or perhaps only a liberal arts college, and who, assessing his chances for a quick fortune, had hit on the business of picking stocks for mutual funds as a good bet and accepted a starting salary of perhaps $7,500. Portfolio management had the appeal of sports—that one cleanly wins or loses, the results are measurable in numbers; if one’s portfolio was up 30 or 50 percent for a given year one was a certified winner, so recognized and so compensated regardless of whether he was popular with his colleagues or had come from the right ancestry or the right side of the tracks. Again as in sports, the winner became an instant star, his name known and revered in Wall Street. In 1965 the gunslinger-to-be was only a brisk young man poring over reports in a bullpen or a tiny back office. In three years his salary might quintuple or he might be raking off a fat percentage of his portfolio gains; his sideburns would be longer and his shirts louder, and he would be the new characteristic figure in a new Wall Street. But not yet.

4

The loss of power and influence of the Old Establishment was partly its own fault. Morally and intellectually, it seemed to be in decline. That keen observer of Anglo-Saxon Protestant manners and morals, the writer Louis Auchincloss—who kept in touch with his fictional material by maintaining a lively Wall Street law practice—found in the nineteen sixties that the attitude of the standard bearers downtown toward ethical niceties was largely one of indifference—of “everybody else is cutting corners, why not us?” A young financial lawyer in Wall Street then was making his way rapidly upward in the hierarchy of respected firms while leaving behind him a trail of court judgments resulting from passing bad checks. Apart from the victims, nobody—including the eminent and unassailably respectable chiefs of the young man’s firms—cared to blow the whistle. In the crush of business resulting from the stock-market boom, the pressure for legal manpower was such that the chiefs needed to hang onto a young man of talent, and to promote him, even though he happened to be a bit of a fraud.

Again, there is a sad and illuminating story of a Wall Streeter of those years—a man so strictly and traditionally conscientious that, after his father’s death, he had paid off his father’s debts even though he was not legally responsible for them and had received no inheritance out of which to pay them. This paragon of Puritan morality, having learned that another member of his firm had done something dishonest, was so disturbed by the discovery and its implications that he landed on a psychiatrist’s couch. The psychiatrist’s treatment consisted of pragmatic reassurance: “Don’t worry,” he told the troubled patient, “it doesn’t matter. Nobody will say anything.” And nobody did—to the painful disappointment of the patient, whose cure consisted of becoming disillusioned with his class.

It was open season now on Anglo-Saxon Protestants even when they stayed plausibly close to the straight and narrow. Their sins, or alleged sins, which had once been so sedulously covered up by press and even government, were now good politics for their opponents. They had become useful as scapegoats—as was perhaps shown in the poignant personal tragedy of Thomas S. Lamont. Son of Thomas W. Lamont, the Morgan partner who may well have been the most powerful man in the nation in the nineteen twenties, “Tommy” Lamont was an amiable, easygoing man. He was a high officer of the Morgan Guaranty Trust Company and a director of Texas Gulf Sulphur Company, and on the morning—April 16, 1964—when Texas Gulf publicly announced its great Timmins ore strike, he notified one of his banking colleagues of the good news at a moment when, although he had reason to believe that it was public knowledge, by the S.E.C.’s lights in fact it was not. The colleague acted quickly and forcefully on Lamont’s tip, on behalf of some of the bank’s clients; then, almost two hours later, when news of the mine was unquestionably public, Lamont bought Texas Gulf stock for himself and his family.

He thought he had done nothing wrong; indeed, inasmuch as he had known all about Timmins several days earlier and had taken no advantage of the fact by either word or deed, he had clearly resisted a powerful temptation to wrongdoing. But the S.E.C—promulgating an entirely new doctrine of insider trading to the effect that fiduciaries with inside information were required not only to wait until after public announcement before acting on it, but then to wait an additional “reasonable amount of time”—accused him of violating the securities laws. In so doing, it lumped him with flagrant violators, some Texas Gulf geologists and executives who had bought stock on the strength of their knowledge of Timmins days and months earlier, and who made up the bulk of the S.E.C.’s landmark insider case of 1966.

Could it be, then, that the S.E.C. knew well enough that it had a weak case against Lamont, and dragged him into the suit purely for the publicity value of his name? The outlandishness of the charge against him, and the frequency with which his name appeared in newspaper headlines about the case, suggest such a conclusion. At all events, the publicity and attendant opprobrium were too much for Lamont, and soon after the S.E.C. charges his health went into a decline. In the end, he, almost alone among the defendants, was vindicated through the dropping of all charges against him. Too late, however, to do him any good. The vindication came after his death, to which he was hounded, some of his friends maintained, by the ruthlessness and irresponsibility of bureaucrats who sacrificed him to get public attention to their cause—made him, because of his name and lineage, a wholly involuntary martyr to the public interest.

Even in strictly religious terms, it was hardly surprising that Protestantism had lost its dispensation as Wall Street’s established church. The faith itself, in Wall Street’s part of the country, had largely lost its traditional character. The Protestant church in New York City was becoming a black church. Shortly before 1960 Negroes had for the first time become a majority of the city’s Protestants, and by 1965 they amounted to six out of ten. White membership was declining rapidly, and the various Protestant churches in the area, responding to their new constituency, were abandoning their old role of serving as the austere and worldly conscience of economic rulers to become agencies to fill the spiritual, and sometimes the material, needs of the culturally and economically deprived. Was this deeply integrated and sometimes activist church, then, the one for virtually all-white and surely nonactivist Wall Street? Apparently not.

The new downtown religion was liberal Judaism. German Jews had been among the founding fathers of Wall Street; the Seligmans, the Lehmans, the Goldmans and the Sachs had founded American investment banking before even Pierpont Morgan’s bulky presence had arrived on the scene, and from the time at the turn of the century when Kuhn, Loeb had fought Morgan to a standoff in the Northern Pacific affair, the Jews of Wall Street had enjoyed recognition as equal to the Yankees in both prestige and power. But those Jews had tended to be sedulous apes; awed and inspired by the new nation in which they or their fathers were immigrants, inclined to put Old Europe behind them except in matters of business, they became more Yankee than the Yankees, more Protestant than the Protestants, and thus did little to change the atmosphere. Moreover, with a few exceptions (like Paul M. Warburg, the Kuhn, Loeb partner who was virtually founder of the Federal Reserve System) they were by common consent excluded from the formal and official Wall Street leadership, and it went without saying that they never assumed the leadership of any but Jewish firms. In the nineteen sixties a great change came. By that time, some of the staid old Jewish firms had literally Protestantized themselves; their Anglophilia and Yankeephilia had reached the point where many of their partners and some of their senior partners were Protestants, not by conversion but by birth. Meanwhile, a newer strain of Jews, most of them more recent immigrants than the Germans and with origins in Eastern Europe, were taking over Wall Street leadership in a way that their predecessors had never aspired to. Even at the conservative New York Stock Exchange, the power struggle had largely come down to an armed truce between Jews, Catholics, and Protestants; President Funston, a Yankee Protestant if there ever was one, was widely thought of by the membership as a compromise candidate acceptable—like a Liberal Party member—precisely because his constituency was weak.

The change brought with it a new ethical climate. The new Jewish men of power were not temperamentally religious any more than the old Protestant ones had been, but they, like the Protestants, brought with them a certain culture and set of attitudes and responses and outlook on life, which became the new climate of Wall Street. It was a style a little less dour—not less materialistic or grasping but more candid and humorous about the materialism as well as the manner; a style not less interested in the trappings and icons of culture, but undoubtedly by tradition more capable of enjoying culture; a style with more of a bent for justice and less of an acceptance of caste. It was a style neither more nor less honest than that of the Protestants, but probably less inclined to be hypocritical on the subject. And it probably was—although this would be hard to prove—a style more inclined to dash and daring as opposed to respectability, less concerned about preservation of values and appearances and more sympathetic toward speculation and outright gambling. Our story of Wall Street from 1965 to 1970 involves a number of Jewish plungers, sometimes pitted directly against Old Protestant conservators.

5

Into this fast-changing, yet still relatively complacent, Wall Street of mid-decade there came, in June, 1965, a thunderbolt from the north.

The Texas Gulf ore strike at Timmins in early 1964 had dramatically shown Canada to United States investors as the new Golconda. Here was a great, undeveloped land with rich veins of dear metals lying almost untouched under its often-frozen soil; with stocks in companies that might soon be worth millions selling for nickels or dimes on Bay Street, the Wall Street of Toronto; and with no inconvenient Securities and Exchange Commission on hand to monitor the impulsiveness of promoters or cool the enthusiasm of investors. American money flowed to Bay Street in a torrent in 1964 and early in 1965, sending trading volume there to record heights and severely overtaxing the facilities of the Toronto Stock Exchange. Copies of The Northern Miner, authoritative gossip sheet of the Canadian mining industry, vanished from south-of-the-border newsstands within minutes of their arrival; some Wall Street brokers, unwilling to wait for their copies, had correspondents in Toronto telephone them the Miner’s juicier items the moment it was off the press. And why not? Small fortunes were being made almost every week by quick-acting U.S. investors on new Canadian ore strikes, or even on rumors of strikes. It was as if the vanished western frontier, with its infinite possibilities both spiritual and material, had magically reappeared, with a new orientation ninety degrees to the right of the old one.

The Canadian economy in general was growing fast along with the exploitation of the nation’s mineral resources, and among the Canadian firms that had attracted the favorable attention of U.S. investors, long before 1964, was Atlantic Acceptance Corporation, Ltd., a credit firm, specializing in real-estate and automobile loans, headed by one Campbell Powell Morgan, a former accountant with International Silver Company of Canada, with an affable manner, a vast fund of ambition, and, it would appear later, a marked weakness for shady promoters and a fatal tendency toward compulsive gambling. As early as 1955, two years after he had founded Atlantic, Morgan saw the possibilities of raising capital for expansion in Wall Street—and elements in Wall Street saw the possibilities of making profits in Toronto. Morgan was an acquaintance as well as a countryman of Alan T. Christie, a Canadian-born partner in the small but rising Wall Street concern of Lambert and Company. The founder and head of this firm—whose members liked to describe it as a “banque d’affaires,” and to pronounce its name the French way, “Lombaire”—was Jean Lambert, a suave gentleman in his thirties, born and educated in France, who had come to America and married Phyllis Bronfman, daughter of the president of Seagram’s. A divorce had ensued, but $1 million of Bronfman money had stayed in Lambert and Company, whose founder liked to present himself as an international statesman of finance—as a delegate to the celebrated Bretton Woods monetary conference of 1944 (where he had, in fact, served, though not as a delegate but as a translator), and as the architect of a “Lambert plan” for international monetary reform. At Christie’s recommendation, Lambert and Company in 1954 put $300,000 into Atlantic Acceptance, thereby becoming Atlantic’s principal U.S. investor and chief booster in Wall Street and other points south.

The years passed and Atlantic seemed to do well, its annual profits steadily mounting along with its volume of loans. Naturally, it constantly needed new money to finance its continuing expansion. Lambert and Company undertook to find the money in the coffers of U.S. investing institutions; and Jean Lambert, backed by Christie, had just the air of European elegance and respectability, spiced with a dash of mystery, to make him perfectly adapted for the task of impressing the authorities of such institutions. Characteristically, Lambert decided to start at the top. In 1959, his partner Christie called on Harvey E. Molé, Jr., head of the U.S. Steel and Carnegie Pension Fund, probably the largest institution of its kind in the world at that time, with assets of more than $1.6 billion. Christie made the pitch for the Steel fund to invest in Atlantic. Molé, born in France but out of Lawrenceville and Princeton, was no ramrod-stiff traditional trustee type; rather, he fancied himself, not without reason, as a money manager with a component of dash and daring. Atlantic Acceptance was just the kind of relatively far-out, yet apparently intrinsically sound, investment that appealed to Molé’s Continental sporting blood. The Steel fund took a bundle of Atlantic securities, including subordinate notes, convertible preferred stock, and common stock, amounting to nearly $3 million. The following year, Lambert and Company—again starting at the top—approached the Ford Foundation, far and away the largest institution of its kind. The foundation’s investment men made a check (perhaps not too careful a check) on Atlantic with the company’s management, its competitors, and various Canadian banks; apparently the findings were favorable, and the Ford Foundation took a good-sized plunge in Atlantic debt securities.

After that, it was easy. With the kings of U.S. institutional investing taken into camp, the courtiers could be induced to surrender virtually without a fight. Now Lambert and Company could say to the fund managers, “If this is good enough for U.S. Steel and the Ford Foundation, how can you lose?” “We were all sheep,” one of them would admit, sheepishly, years later. Before the promotion was finished, the list of U.S. investors in Atlantic had become a kind of Burke’s Peerage of American investing institutions: the Morgan Guaranty and First National City Banks; the Chesapeake and Ohio Railway; the General Council of Congregational Churches; Pennsylvania and Princeton Universities (perhaps not coincidentally, the man in charge of Princeton’s investment program was Harvey Molé); and Kuhn, Loeb and Company, which, to the delight of Lambert, gave the enterprise its valuable imprimatur by taking over as agent for the sale of Atlantic securities in the United States. Perhaps the final turn of the screw, as the matter appears in hindsight, is the fact that the list of Atlantic investors eventually included Moody’s Investors Service, whose function is to produce statistics and reports designed specifically to help people avoid investment pitfalls of the sort of which Atlantic would turn out to be an absolutely classic case.

But nobody knew that then. Indeed, in the early nineteen sixties Atlantic seemed to exceed the wildest hopes with its almost unbelievable rate of growth. Its reported sales for 1960 were $24.6 million, for 1961 $45.6 million, for 1962 $81 million, for 1963 $176 million—a consistent improvement approaching 100 percent a year. The growth rate itself might well have been interpreted as a danger signal. In the loan business, the easiest way to expand faster than your competitors is by consistently making loans that they are unwilling to make because they consider them unsound. In fact, that was precisely what Atlantic was doing, intentionally and systematically. But the presence of the Steel fund, the Ford Foundation, and the rest on the investor list served as an effective smoke screen; any cautious critics were easily dismissed as flatulent grumps; and the bandwagon rolled on.

Late in 1964, Atlantic, hungry for capital as always, sold more stock; and early in 1965, Kuhn, Loeb helped place $8.5 million more in Atlantic long-term debt with U.S. institutional investors. By this time, Lambert and Company’s stake in Atlantic amounted to $7.5 million. The firm’s commitment was a do-or-die matter; it would stand or fall with Atlantic. Moreover, it is now clear that by this time Morgan and his associates were engaged in conducting a systematic fraud on a pattern not wholly dissimilar to that of Ponzi or Ivar Kreuger. Atlantic would use the new capital flowing from Wall Street to make new loans that its major officers knew to be unsound; the unsoundness would be deliberately camouflaged in the company’s reports, in order to mislead investors; the spurious growth represented by the ever-increasing loans would lure in new investment money, with which further unsound loans would be made; and so on and on. Morgan had taken to intervening personally each year in the work of his firms’ accountants— some of whom were willing enough to commit fraud at their client’s request—to ensure that a satisfactory rise in profits was shown through overstatement of assets and understatement of allowances for bad debts. For 1964, it would come out later, Atlantic’s announced $1.4 million profit, under proper accounting procedure, should have been reported as a loss of $16.6 million.

The game, like all such games, could not go on forever. By early 1965, suspicion of Atlantic’s operations was in the wind. In April, the New York Hanseatic Corporation, a $12-million investor in Atlantic paper, asked the Toronto-Dominion Bank for a credit check on Atlantic. The response—which in retrospect appears dumbfounding—was favorable. In fact, if the bank had been able to penetrate the mystifications of Powell’s accountants, it would have discovered that Atlantic was by that time actually insolvent. For several years, at the instigation of some of the various international schemers for whom Morgan had a fatal affinity, the firm had been increasingly involved in a desperate and doomed plunge in a shaky venture far from home: between 1963 and early 1965 it had committed more than $11 million to the Lucayan Beach, a hotel with a gambling casino attached, on balmy, distant Grand Bahama Island. A Royal Commission would later describe the investment as “the last throw of the dice to retrieve all the losses created by years of imprudence and impropriety.” But the Lucayan Beach venture, managed incompetently and fraudulently, did not flourish, and the losses were not to be retrieved.

The ingenuity with which Atlantic’s desperation was concealed from the investing public, even from its usually most knowledgeable sectors, is indicated by the fact that during the last part of May, only three weeks before the bubble finally burst, the Madison Fund, a good-sized U.S. investing institution, bought one last million dollars’ worth of Atlantic paper through Kuhn, Loeb. On June 14, the Toronto-Dominion Bank abruptly refused to honor $5 million in Atlantic checks covering notes that had matured. This was technical failure; but worse was to come. That same day, it became known that forty-one Wall Street brokers had just received orders for various stocks closely connected with Atlantic, on the letterhead of “Sassoon’s Far Eastern Trust, Ltd., of Nassau, Bahamas,” and accompanied by ostensibly certified checks amounting to nearly $6 million, drawn on the same bank. The certification, however, was faked, and the bank on which the checks were drawn was nonexistent. Later it would emerge that this strange affair was not Morgan’s doing but part of a Byzantine scheme hatched by one of his unreliable associates; but the untimely whiff of fraud did nothing to restore confidence in Atlantic in its hour of need. More notes were called, and as a result, on June 15, the firm required $25 million to cure the default. Of course, it neither had nor could raise such a sum.

So the game was up at last. Waves of shock and bewilderment ran through the U.S. investment Establishment. There were frantic thrashings for several subsequent days, including the dispatching by Kuhn, Loeb to Toronto of a member of the firm with the resounding name of Thomas E. Dewey, Jr., son of the former New York State governor and Presidential candidate. To no avail. Atlantic shortly went into formal receivership, leaving the American Burke’s Peerage, which seemed to have been gulled in a way that would do discredit to a shrewd schoolboy investor, shorn of a sum that was at first estimated to be around $50 million.

The repercussions of the failure, the greatest in Canada’s history, were wide, deep, and long-lasting. Shortly after Atlantic’s default, a confidential report prepared for the Montreal Trust Company, Atlantic’s receiver in bankruptcy, began to reveal just how unsound the whole Atlantic operation had been. “There is a paucity of credit information,” the report said, “and, as far as we were able to ascertain, no real financial control. … There appears to have been no reporting procedure.… On real estate, machinery, and other types of fixed-asset loans, apparently no appraisals were obtained and there was no evidence on file of the value of loan collateral.… In sum, procedures considered necessary in the conduct of a financial business were missing.” At the end of 1965, the Ford Foundation bit the bullet and formally wrote off $4,775,000 of its Atlantic investment as worthless; it continued to carry on its books another $2 million of Atlantic paper that showed little promise of turning out to be any better. The Steel fund revealed that it held $2.25 million in Atlantic notes, 12,000 shares of common stock, and $125,000 in convertible preferred shares. Connecticut General Life Insurance was stuck with $2 million in notes and $240,000 in convertible preferred, Massachusetts Mutual Life with $4.446 million in notes. And so it went. An officer of the First National City, still another loser on Atlantic, explained with poignant rue that the whole operation had had “an aura of respectability.” Brave and candid, or simply unguarded, the comment pointed the moral. The Old Establishment of U.S. investing had fallen for its own fading mystique. Believing, with tribal faith that can only be called touching, that no member of the club could make a serious mistake, the members had followed each other blindly into the crudest of traps, and had paid the price for their folly. As for the unfortunate Lambert and Company, it simply vanished; one week its Wall Street office was present and active, the next week it was gone.

But the Atlantic collapse meant more than that. For the Canadian economy as a whole it meant the threat of a credit panic, and in the first two months after the default, the Bank of Canada was forced to increase the national money supply by a billion dollars to avert one. The northward flow of U.S. funds, already slowed by President Johnson’s balance-of-payments plea in February 1965, became a trickle. In the autumn of 1965 there was a government crackdown on the casual ways of Bay Street. A Royal Commission of Ontario was formed to look into the entire Atlantic matter. In May 1966—a time when the Canadian economy was still suffering from the Atlantic shock waves—Morgan, dying of leukemia, testified dramatically to the Commission from his deathbed. The Commission reported later that his testimony had been given “under circumstances in which the physical weakness of the witness was a painful and pervasive fact,” and that he had complained about colleagues of his who had their “fingers in the till,” neither admitting nor denying his own complicity in fraud. He died that October, but the Commission’s work went on; at last, in December 1969, it issued its final report, in four volumes comprising 2,700 pages. Among its findings and conclusions were that the misrepresentations in Atlantic’s financial statements had been “deliberate, designed to encourage the purchase of shares and notes in the company”; that “the activities of C.P. Morgan, prosecuted with considerable energy and ingenuity as they were, have been shown to be dishonest”; and that the loss to Atlantic’s investors in the debacle had been not $50 million as originally estimated, but in excess of $65 million. In the last analysis, much of that had come not out of the pockets of millionaire professional investors, but out of those of ordinary shareholders in mutual funds and insurance companies, donors to leading universities, pensioners of U.S. Steel, and recipients of the largesse of the Ford Foundation.

The sad affair of Atlantic, its effects spreading southward like the frigid Canadian air that often suffuses much of the United States in winter, was a foretaste of the homegrown bad weather soon to appear in Wall Street. A smooth operator with a streak of the gambler; a company more interested in attracting investors than in making real profits; the resort to tricky accounting; the eager complicity of long-established, supposedly conservative investing institutions; the desperation plunge in a gambling casino at the last minute; the need for massive central-bank action to localize the disaster; and finally, reform measures instituted too late—we will see all of these elements reproduced with uncanny faithfulness in United States financial scandals and mishaps later in the nineteen sixties. Thus the Atlantic episode neatly divides Wall Street’s drama of the decade, ending the first act, and beginning the second and climactic one.

CHAPTER VI

The Birth of Go-Go

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When Webster’s Third New International Dictionary was published in 1961, it defined the term “go-go” as “a vine found in the Philippines,” or, alternatively, as “a Bantu people.” The Random House Dictionary of the English Language, in 1966, ignored these arcane meanings, and under the entry “go-go” referred the reader to the phrase “à gogo,” which it defined, “as much as you like; to your heart’s content; galore (used esp. in the names of cabarets, discothèques, etc.).” The American Heritage Dictionary of the English Language, which appeared in 1969, provided the term with by far the most ancient and scholarly provenance to that date. “À go-go,” it said, means “in a fast and lively manner; freely. Chiefly used as an adverb: dancing à go-go; also used as an adjective: an à gogo dance.” It went on to explain that the phrase was a French one meaning, in France, “in a joyful manner,” and that it was probably derived from the Old French word “gogue,” merriment or hubbub, which also gave rise to the English (originally, Middle English) “agog.”

Sometime in the middle nineteen sixties, probably in late 1965 or early 1966, the expression as used in the United States came to have a connotation that the dictionaries would not catch up with until after the phenomenon that it described was already over. The term “go-go” came to designate a method of operating in the stock market—a method that was, to be sure, free, fast, and lively, and certainly in some cases attended by joy, merriment, and hubbub. The method was characterized by rapid in-and-out trading of huge blocks of stock, with an eye to large profits taken very quickly, and the term was used specifically to apply to the operation of certain mutual funds, none of which had previously operated in anything like such a free, fast, or lively manner.

The mood and the method seem to have started, of all places, in Boston, the home of the Yankee trustee. The handling of other people’s money in the United States began in Boston, the nation’s financial center until after the Civil War. Trusteeship is by its nature conservative—its primary purpose being to conserve capital—and so indeed was the type of man it attracted in Boston. Exquisitely memorialized in the novels of John P. Marquand, for a century the Boston trustee was the very height of unassailable probity and sobriety: his white hair neatly but not too neatly combed; his blue Yankee eyes untwinkling, at least during business hours; the lines in his cheeks running from his nose to the corners of his mouth forming a reassuringly geometric isoceles triangle; his lips touching liquor only at precisely set times each day, and then in precise therapeutic dosage; his grooming impeccable (his wildest sartorial extravagance a small, neat bow tie) with a single notable exception—that he wore the same battered gray hat through his entire adult life, which, so life-preserving was his curriculum, seldom ended before he was eighty-five or ninety.

And yet, the Boston trustee was not unimaginative; he was an outward-looking Athenian, not the ingrowing Spartan he was often accused of being. As early as 1830, Justice Samuel Putnam of the Supreme Judicial Court of Massachusetts wrote in a famous opinion,

All that can be required of a Trustee to invest is that he conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

The Boston-born “prudent man rule,” as it came to be called, represented a crucial liberalization of the law governing trustees, and such a durable one that it is still their basic guide almost a century and a half later. In 1924, Boston was the site of another epoch-making innovation in American money management, the founding of the first two mutual funds, Massachusetts Investors Trust and State Street Investing Company. And then, in the years after World War II, the go-go cult quietly originated hard by Beacon Hill under the unlikely sponsorship of a Boston Yankee named Edward Crosby Johnson II.

Although never a trustee by profession, Johnson was almost the Boston-trustee type personified. In the nineteen sixties, which corresponded roughly with his sixties, he was a spry, smallish, clean-cut man, proud of the hole-in-one he once made at La Gorce Country Club; in orthodox trustee style, he favored a battered hat and a bow tie. He seemed much younger than he was, as if a gentle upbringing and a comfortable life had sheltered him from the whips and scorns of time. He said “annathing” and “annabody” in the charming accent of his breed, but what he said was packed with ore; his talk tumbled out enthusiastically, yet he seemed inarticulate because his mind encompassed more than his tongue could often convey.

He was born in a Boston suburb in 1898, the son of a partner in the old Boston dry-goods firm of C.F. Hubby, and a descendant of John Johnson, a Puritan freeman in seventeenth-century Massachusetts. He was named for another ancestor who had been a Union officer in the Civil War. He went to Milton Academy and then, all but inevitably, to Harvard; he married another Brahmin, his second cousin Elsie Livingston. In deference to his father’s wish that he become a lawyer, he went on to Harvard Law and then joined the proper Boston law firm of Ropes and Gray. He stayed there for fourteen years, from 1925 to 1939, specializing in corporate reorganizations and mergers. But all the while his heart belonged to the stock market.

The market bug first bit him in 1924 when he read a serialization in the old Saturday Evening Post of Edwin Lefèvre’s “Reminiscences of a Stock Market Operator,” the story of the career of the famous speculator Jesse Livermore. “I’ll never forget the thrill,” he told a friend almost a half century later. “Everything was there, or else implied. Here was the picture of a world in which it was every man for himself, no favors asked or given. You were what you were, not because you were a friend of somebody, but for yourself. And Livermore—what a man, always betting his whole wad! A sure system for losing, of course, but the point was how much he loved it. Operating in the market, he was like Drake sitting on the poop of his vessel in a cannonade. Glorious!” Under the influence of Lefèvre’s book, this young romantic of commerce, this privileged young man in danger of becoming what he became because he had always been a friend or relative of somebody, began playing the market in his spare time between his legal chores; his colleagues teased him for keeping stock-market charts on the walls of his law office. He lost along with everyone else in the 1929 crash, but, unlike many, survived the setback and, in the following years, as the market sank into the abyss, he scored his first coup. “I’d noticed a certain group of signs that, when they came together, meant a big bust was ahead,” Johnson recounted long afterward. “I saw the signs, and I anticipated the 1931–1932 drop. I sat on my little poop-deck potting away, and kept my capital intact. God, it was glorious!”

In 1935, Johnson became counsel for Incorporated Investors, a small, old-line Boston mutual-fund firm. Gradually, he was drawn by his predilection deeper into finance and further from the law. In 1939 he left Ropes and Gray to become full-time vice-president and treasurer of Incorporated Investors. Four years later, he was offered the opportunity to take over Fidelity Fund, another Boston mutual-fund operation that then managed only the unimpressive total of $3 million—and Johnson had an investment company of his very own. It is particularly significant, in the light of subsequent events, that the man who turned the Fidelity organization over to him refused to take a nickel for it, in keeping with the traditional Boston concept of a trusteeship as a sacred charge rather than a vested interest to be bought and sold.

The notion of a mutual fund as a trust was deeply ingrained in State Street at the time, and would remain so until about 1955—this in spite of the fact that a mutual fund is actually not a trust at all. A trust is a property interest held under law by one person for the benefit of another—typically, an inheritance held by an older person for the benefit of a younger person who is the heir. The beneficiary has not chosen the trustee, or indeed the situation of trusteeship, and may have no control over either one. In the case of a mutual fund, on the other hand, the share owner, or beneficiary, has chosen the fund he wants to invest in and has thereby granted the fund’s managers the right to reinvest his money, for a fee. The managers of the fund are not trustees but investment advisers, and are therefore bound not by the laws governing trustees but rather by those governing investment advisers. Nevertheless, before 1955—in Boston and elsewhere—they felt like trustees. Or most of them did. Edward Crosby Johnson II, for all of his trustee-like ways, clearly had a speculative background and temperament; after all, his stock-market idol was one of the master speculators. Right from the start, his approach to investing Fidelity funds was an unorthodox one that he would later describe in the following characteristically picturesque terms: “We didn’t want to feel that we were married to a stock when we bought it. You might say that we preferred to think of our relationship to it as ‘companionate marriage.’ But that doesn’t go quite far enough, either. Possibly now and again we liked to have a ‘liaison’—or even, very occasionally, ‘a couple of nights together.’”

His maverick operations as head of Fidelity, while they fell far short of creating a scandal on State Street, nevertheless caused a certain amount of talk there during the nineteen forties. What in Tophet had come over Edward Johnson, a good sound Boston and Harvard man if there ever was one? But what he was doing then was only the beginning, and the next stage in Fidelity’s evolution began with Johnson’s first encounter with Gerald Tsai, Jr.

This encounter occurred early in 1952, when Johnson received a telephone call from a friend of his at the investment counselling firm of Scudder, Stevens and Clark. “I’ve got a young Chinese here, a clever fellow, but we don’t seem to have a place for him at the moment,” the friend said. “Anything you can do for him?” Johnson asked his friend to send the young man around. When Tsai appeared, Johnson liked his looks and hired him on the spot as a junior stock analyst.

The young man, then twenty-four, had been born in Shanghai in 1928 to Westernized Chinese parents; his father had been educated at the University of Michigan and later become Shanghai district manager for the Ford Motor Company. In 1947, with the war over at last, the younger Tsai was sent to America to college. He went first to Wesleyan University; finding Middletown, Connecticut, too much of a hick community for his liking after the bright lights of Shanghai, he transferred to Boston University, where he felt right at home, and applied himself so diligently that he finished his undergraduate courses in economics six months ahead of schedule, and devoted the last term of his senior year to writing a master’s thesis on “Economic Development in Shanghai.” Thus, in the summer of 1949, he was able to take his B.A. and M.A. in quick succession. He worked for a year with a textile company in Providence, then for another year or so with the securities giant Bache and Company in New York, getting married along the way to a Chinese-American girl. Then he went back to Boston and, having decided once and for all that stock investment was his métier, met Johnson and Fidelity. “I liked the market,” he would explain years later. “I felt that being a foreigner I didn’t have a competitive disadvantage there, when I might somewhere else. If you buy GM at forty and it goes to fifty, whether you are an Oriental, a Korean, or a Buddhist doesn’t make any difference.” The reader’s attention need hardly be called to the similarity between Tsai’s reason for liking the market and that of Edward Crosby Johnson II—“you were what you were not because you were a friend of somebody, but for yourself.” Boston Yankee and Asian immigrant, they were kindred souls in appreciating the market’s cool objectivity, which gave both a chance to escape any feeling of prejudice. That the polarity of the prejudice differed—differed, indeed, by precisely 180 degrees—was beside the point.

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For ways that are dark

And for tricks that are vain

The heathen Chinee is peculiar.

Gerald Tsai’s Oriental appearance and background, and the aura of dark ways and vain tricks that Bret Harte in 1870 so airily associated with Orientals, were eventually to work as a powerful asset in projecting him to the public as a genius. But the bonds that drew him and Edward Johnson together in 1952 were more fundamental than a common love of the stock market.

Johnson was something of an Orientalist in two separate ways, by local tradition and by personal predilection. His ancestors, the early Yankee traders, had been Orientophiles for the most practical of reasons—that the Orient was in large part the source of their wealth. Clipper-borne around Cape Horn, Oriental culture, along with Oriental goods, influenced Boston’s architecture and interior decoration and thought and even its hierarchy of social values. In the Union Club, which occupies two houses just off the Common that were once owned by the Lawrences and the Lowells, there hang among the portraits of whiskered old nineteenth-century Yankee eminences two solemn, respectful representations of Chinese traders. Again, Johnson personally had a lifelong hobby—inherited, as hobbies so seldom are, from his father—of studying Oriental religions. A sense of affinity with the Far East came almost as naturally to him as going to Harvard.

Tsai, for his part, was prepared to meet Yankee culture a good deal more than halfway. If his heart was just Oriental enough to stimulate and fulfill the fantasies of a Bostonian, his mind and manner were eminently Western. With only the faintest trace of his origin in his fluent and slangy American speech (he said “thouand” for “thousand”), he was brisk, practical, ambitious, energetic, logical, aggressive—almost a very model of a modern Yankee trader.

And one more force drew Johnson and Tsai together. The young man had always been close to his mother—a strong and remarkable woman with a trading sense of her own, whose haggling in Shanghai markets was one of her son’s strongest childhood memories—but relatively remote from his father. In Edward Johnson he found, no doubt, a chance for a surrogate father, and Edward Johnson was glad and proud to assume the role. That Johnson had a son of his own, a bright and personable young man named Edward Crosby Johnson III and called Ned, who also worked at Fidelity, was a circumstance that, predictably enough, serves to thicken our plot.

At Fidelity, Tsai was not long in making his mark. Always impeccably groomed, his moon face as impassive as a Buddha, he showed himself to be a shrewd and decisive picker of stocks for short-term appreciation, and so swift and nimble in getting into and out of specific stocks that his relations with them, far from resembling a marriage or even a companionate marriage, were often more like those of a roué with a chorus line. Sometimes, to continue the analogy, the sheets were hardly cool when he was through with one and on to another. Johnson—“Mister” Johnson to Tsai, as he was to almost everyone else in his own organization and the mutual-fund business in general—was fascinated and ever so slightly scandalized. Years later Tsai said of his old boss, “Basically, Mr. Johnson was not as orthodox as other Boston investment men. He is a very flexible person, not really fond of tradition. He always wanted to give you your head, give you your chance to work on your own rather than as part of a team or committee. But when he gave you your head he was also giving you your rope—‘Here’s your rope,’ he’d say. ‘Go ahead and hang yourself with it.’ That was one of his favorite expressions. Another was, ‘Do it by yourself. Two men can’t play a violin.’”

By 1957 Tsai felt confident enough of his position at Fidelity to write Johnson a memo asking—indeed, very nearly demanding—permission to start his own growth fund. “It took him only half an hour to decide,” Tsai recalled long afterward. “He called me into his office, handed my memo back to me, and said, ‘Go ahead. Here’s your rope.’”

Tsai’s rope was called Fidelity Capital Fund, and it was the company’s first frankly speculative public growth fund. Right from the start, he operated it in a way that was at the time considered almost out-and-out gambling. He concentrated Fidelity Capital’s money in a few stocks that were then thought to be outrageously speculative and unseasoned for a mutual fund (Polaroid, Xerox, and Litton Industries among them). He bought in huge blocks of ten thousand shares or more at a time, coolly notifying his brokers that if they couldn’t assemble the block without pushing the price up substantially—say, more than a point or two—the deal was off. The brokers grumbled, but usually assembled the large positions; with huge commissions at stake, if one broker wouldn’t deal with Tsai according to Tsai’s specifications another assuredly would. His annual portfolio turnover generally exceeded 100 percent, or a share traded for every one held—a rate of trading unheard of in institutional circles at the time. He got a well-deserved reputation for catlike quickness in calling a market turn. “It was a beautiful thing to watch his reactions,” Johnson says. “What grace, what timing—glorious! Why, if he had been on the Stock Exchange floor, he’d have become its number one trader in no time.” As Fidelity Capital’s net asset value rose and new money poured into it, Tsai came to be close to key men in corporate management: Harold Geneen of International Telephone, Nathan Cummings of Consolidated Foods, Laurence Tisch of Loews. And, gradually—although his name was still unknown to the general public—he came to be known and feared in corporate circles. The sudden dumping of ten thousand shares of one’s stock was not to be taken lightly, and the man capable of doing it on a moment’s whim was worth cultivating.

All rising artists suffer setbacks, and this young Picasso of the portfolio suffered one in the bad market of 1962. His whole method of operation—emphasis on growth stocks, concentration of his purchases in a few issues in which he took huge positions—implied maximum exposure in a crash; after the carnage of May 1962, Fidelity Capital Fund suddenly looked like a punctured balloon. But Tsai was quick to recover. After the Cuban missile crisis that October he suddenly turned decisively bullish. In six weeks, he put $26 million into stocks for Fidelity Capital; the market leaped upward, and by the end of the year the fund’s asset value had risen nothing less than 68 percent within three months.

Tsai had now perfected his method, and over the following three years he had the ideal market in which to project it. At the same time he began to rise within his own organization. By 1963 Tsai owned 20 percent of the Johnson management vehicle, Fidelity Management and Research—half as much as Edward Johnson—and was beginning to think of himself as Johnson’s successor. Up and up went Fidelity Capital’s asset value, and finally, for the vintage market year of 1965, the fund achieved a rise of not quite 50 percent on a turnover of 120 percent.

The go-go years had begun, and Gerry Tsai, more than any other one man, had brought them into being. Suddenly, he was nationally famous. Like Greta Garbo he courted publicity while quite sincerely shunning it. Fidelity never hired a public-relations firm, and when the press and electronic media began beating a path to his door, he was surprised and abashed. To a reporter from The New Yorker who asked to do a personality sketch of him for the magazine’s “Talk of the Town” department, he had a secretary reply, “Mr. Tsai never allows anything personal to be written about him.” But, of course, much was written and said anyhow, personal and otherwise, and by that manic autumn he was the stock market’s certified golden boy. Once, more than a generation earlier, Johnson’s hero Jesse Livermore had filled the same role, his every move and gesture studied by the hangers-on who hoped to ride to riches on his coattails. As once “Jesse Livermore is buying it!” had been the signal for a general stampede into any stock, so now it was “Gerry Tsai is buying it!” Like Livermore’s, his prophecies by force of his reputation came to be to a certain extent self-fulfilling. His legend itself was self-perpetuating, and a move by him in or out of a stock could in itself add to, or subtract from, the market value of a given company by hundreds of millions of dollars in the space of a few hours. The federal securities laws, which had not been on the statute books to bother Livermore in his heyday, now categorically forbade manipulation of stocks. But what could the securities laws do about Tsai? Was it his fault that everyone else wanted to follow his bets? A law-abiding man, he was a stock manipulator in spite of himself. As the first big-name star of the new era, he created fresh problems of regulation that the regulators in Washington did not at first recognize as having arisen.

As for Edward Johnson, who dreamed of Jesse Livermore as a naval commander on deck in a cannonade, he had never become another Livermore himself—at heart he was too reticent and Bostonian for that. But now, surely without conscious intention, he had brought one up in his office.

So arises the question of to what extent, and with what moral overtones, Tsai’s race and national origin contributed to the mystique of his success. Wall Street had never had a non-white leader—seldom enough, indeed, one who was not purest Anglo-Saxon Protestant—and now it had one. Presumably it could pat itself on the back for broad-mindedness. But could it really? The Oriental as a powerful and morally equivocal force in Western society was nothing new; he was Bret Harte’s heathen Chinee in gold-rush California, or Peter Lorre in an old movie or Sessue Hayakawa in a newer one: suave, composed, his manners courtly and elegant, his intellect superior and essentially Western in character, his motives automatically suspect but subject to being used by the good guys. An un-stuffy Boston trustee had found a new, real-life Oriental genie in a bottle and loosed him on the nation. The Wall Streeters who eagerly followed Tsai into the go-go game, and the investors who flocked to get what they were beginning to call a piece of the action, were not responding to elevated social impulses. They were following a money magician whom they expected to make them rich, a winner with whom they had neither the desire nor the opportunity to engage in any human intercourse.

3

In 1965, Tsai’s career with the Fidelity organization came to a fork in the road. The elder Johnson was over sixty-five now and likely to retire soon. Who was to be his successor—Tsai, or Johnson’s own son Ned? The younger Johnson was a good-looking, highly competent man in his thirties, with a marked speculative flair of his own. He had a dry sense of humor. To his father he would say: “Talk all you want about your poop-decks and companionate marriages. Some people have a well-developed sense of self-preservation, and you are one of them.” The elder Johnson would smile delightedly; in truth, the two men had unusual rapport for a father and son. To Gerry Tsai, Ned Johnson would say little, except when they occasionally became engaged in a heated boardroom debate about the merits of some stock—a debate in which it may have sometimes seemed that there was more at stake than was being said. Self-confident with fame and success now, a national force in the market, Tsai could no longer be expected to sit quietly in the counsels of Fidelity. Finally he put the question of succession directly to Johnson. It must have been a hard moment for both, but Johnson faced it forthrightly and without evasion; he said simply that Ned was his son and that he intended that Ned should eventually succeed him. Tsai understood; he knew that Fidelity was basically a family business. But he also knew that he could not and need not endure a future of being permanently number two man. Later that year he resigned, sold his Fidelity stock back to the company for $2.2 million, and set out to New York to organize a new mutual fund of his own.

The movement he had had such a major role in starting toward a new, exciting, and dangerous conception of how to manage other people’s money was by now a national ground-swell. As mutual-fund asset values went up, new money poured in. Tsai and others like him seemed to have invented a money-making machine for anyone with a few hundred or several thousand dollars to invest. There were around three million holders of shares in standard mutual funds, and at the end of 1965 their holdings in those funds amounted to $35 billion. True enough, the holders were paying through the nose for the privilege of having their money managed by Tsai or the likes of Tsai; half of their first year’s investment often went for the original sales commission, and in late 1966 the S.E.C. would indignantly declare these charges to be excessive. But that was after the market had dropped; as we have seen, reform is a frail flower that languishes in the hot glare of prosperity, and at the end of 1965 the S.E.C. remained silent. So, for that matter, did the customers themselves, and no wonder. Wiesenberger Reports announced that for the year, twenty-nine leading “performance” funds had averaged a net-asset-value rise of just over 40 percent, while the laggard Dow industrial average, made up not of swingers like Polaroid and Xerox but of old-line blue chips like AT&T, General Electric, General Motors, and Texaco, had risen only 15 percent. Here, then, was a new form of investment in which it appeared that by picking your fund at random you could still make 40 percent on your money in a year’s time. The trick seemed to be to pay your front-end load, relax and be happy. You got what you paid for—assuming, of course, what just about everybody did assume, that the Dow would appreciate annually around 15 percent and the performance funds 40 or 50 percent. It was the sort of assumption that is widely made only in times when people have taken leave of their senses.

A constellation of money-management stars rose swiftly around Tsai; some of the stars in that constellation will have roles, lightly or not so lightly shaded, in the rest of our chronicle. There was Fred Alger, a mere thirty years old, of Security Equity Fund in New York: a man with one foot in the Establishment and one out, his stance perfectly symbolized in the career of his father, who was on the one hand a former U.S. ambassador to Belgium and on the other a former Detroit pol; himself a graduate of Yale, yet a favorite of the scapegrace international mutual-fund operator Bernard Cornfeld; a man with tousled hair and broad suspenders and quick reflexes whose widely publicized fund set an industry performance record for 1965 by shooting up 77.8 percent. There was Fred Carr, not yet thirty-five, a veteran of the Ira Haupt-salad oil fiasco of November 1963, who had then done a stint in the Hollywood-style brokerage house of Kleiner, Bell, and who now sat in his Los Angeles office surrounded by antique furniture and op art, swinging his Enterprise Fund in and out of emerging (and, one might add, frequently merging) growth companies that nobody had previously heard of. “The Enterprise Fund,” Carr professed in a pronunciamento aimed at his conservative competition, “will no longer trade an imposing building or pinstriped suit for capital gains.” In Wall Street itself, there was Howard Stein, one-time violinist, eminence of the Dreyfus Fund, following in the footsteps of Jack Dreyfus, who in a decade had brought the fund’s assets from $1 million to over $300 million, and showing, as Dreyfus had done, that people who stood at the dead center of the financial world—the imposing-building and pinstriped-suit set—could be light on their feet, too. These men, along with Tsai, were the early stars of the go-go years; and, at a time in the world’s financial history that stock investment had become a milieu for the millions, they were becoming something like a new kind of national hero.

4

The funds had queer excrescences, exotic offshoot plants deriving from the same root, and the oddest of these was the hedge fund. The hedge fund was a private mutual fund open only to the rich, requiring a minimum investment of $100,000, or sometimes considerably more, for entry. Federal law generally forbade publicly held mutual funds to operate on margin or to make short sales; therefore their speculative leverage was limited, and although they could soar in a good market, they had little chance of doing more than hold their own in a bad one. But hedge funds are not publicly held, nor are they mutual funds. Never advertised or offered to the public, they are actually limited investment partnerships, and in the nineteen sixties were totally exempt from the federal laws governing investment companies. They could pyramid debt and sell short just as an individual investor can, playing both sides of the Street, maximizing both their risk and their opportunity for profit in good markets and bad. In certain ways, they bear comparison with the famous pools of the nineteen twenties, in which the rich and celebrated of the time—Walter P. Chrysler, Charles M. Schwab, John Raskob, Percy Rockefeller, Herbert Bayard Swope, and many others—would get together a kitty of a few millions and turn it over to a stock-market technician whom they charged, for a fee or a percentage, with turning them a profit in a few days or weeks by market manipulations at the expense of less powerful and knowledgeable investors. Market rigging became a federal crime in 1934, but the banding together of rich investors did not. Like the pools of ill repute a generation earlier, the hedge funds of the sixties were the rich man’s stock-market blood sport.

Although until 1968 there were only a handful of hedge funds, their origin goes back to 1949—the very beginning of the long unparalleled postwar boom—and to a most unlikely man. He was Alfred Winslow Jones, no sideburned gunslinger but a rather shy, scholarly journalist trained in sociology and devoted to good works. Born in Australia at the turn of the century to American parents posted there by General Electric, he graduated from Harvard in 1923, got a Ph.D. in sociology at Columbia, served in the foreign service in Berlin during the thirties, and became a writer for Time-Life in the forties. Somewhere along the line, he conceived the idea that he could make money in the stock market, and, having convinced several friends on the point, in 1949 he left Time-Life and formed A.W. Jones and Company as a private investment concern with capital of $100,000—$40,000 of it his own, the rest from his friends. Jones’ notion was to use the classic speculative means—operating on margin and balancing stock purchases with short sales—to achieve what he, at least, described as conservative ends: to increase his investors’ profit while minimizing their risk. The term “hedge fund” to describe his sort of operation derives from the fact that short sales are (at least in theory) used to hedge market bets on the upside. It was characteristic of Jones the scholar that he considered the popular term for the style of investment he invented to be a grammatical barbarity. “My original expression, and the proper one, was ‘hedged fund,’” he told friends in the late nineteen sixties, when the expression in its corrupt form had become fixed by common usage. “I still regard ‘hedge fund,’ which makes a noun serve for an adjective, with distaste.”

Buying stocks, and hedging with short sales according to a complicated mathematical formula that Jones devised, the first hedge fund flourished. (Its main problem was that the market kept rising so broadly and steadily that Jones and his associates were always having trouble finding stocks to sell short.) The firm’s investors—or more properly, its partners—were mainly highbrows like Jones himself, writers, teachers, scholars, social workers. An early one was Louis Fischer, prize-winning biographer; other later-comers were A. Arlie Sinaiko, a doctor turned sculptor, and Sam Stayman, bridge expert and inventor of the celebrated bridge convention “Stayman over no-trump.” Jones compensated his management organization, which he personally headed, by simply taking 20 percent of profits off the top—a steep cut, but on the other hand, no profits, no compensation to management. Jones’ partners had little call to complain. Year after year the fund made money on its trades, even, because of its capacity to sell short, in disastrous markets like that of 1962.

By 1965, when the name of Alfred Jones and the corrupt expression “hedge fund” were just coming into the general Wall Street lexicon after a long period of carefully preserved privacy, his fund showed a five-year gain of 325 percent and a ten-year gain of more than twice that amount. His partners for a decade had almost sextupled their money, while the Dow industrials had hardly more than doubled. The average individual investment in the Jones enterprise had swollen to almost half a million dollars. The partners, to be sure, had started out rich or near-rich; now, to a man, they were considerably richer. People pleaded to be let in. An emulative hedge-fund “industry” had begun to make its appearance, manned chiefly by alumni of A. W. Jones and Company. Jones’ two principal hedge-fund competitors, City Associates and Fairfield Partners, were both run by former Jones associates who had broken away to start their own firms.

Jones neither objected to the competition nor wanted the new publicity. Exclusivity and secrecy were crucial to hedge funds from the first. As with the old pools, partnership in a hedge fund, and particularly in the hedge fund, was like membership in a highly desirable club. It certified one’s affluence while attesting to one’s astuteness. Casual mention of such membership conveyed status in circles where associations mattered. With applicants begging at his door, Jones could scarcely worry about competition. As for publicity, what could it do but harm? True enough, hedge funds were exempt from regulation—so far. But was not such a fund, potentially at least, a private concentration of capital like the old pools, free of the necessity to disclose its operations in public statements, that might (like the pools) use inside information and manipulate the market to make profits at the expense of other, smaller investors? And as such, was it not—again potentially—in violation of the Securities Exchange Act after all? At any rate, in the middle nineteen sixties representatives of the S.E.C. were beginning to pay “courtesy calls” on the offices of the various hedge funds. Nothing came of them.

The hedge funds of 1965, then—offshoots though they were of the great brawling public mutual funds that symbolized and epitomized the coming of democracy to Wall Street—were Wall Street’s last bastions of secrecy, mystery, exclusivity, and privilege. They were the parlor cars of the new gravy train. It was fitting that their key figure was a man who had taken up stock investing as a sideline, an elegant amateur of the market who liked to think of himself as an intellectual, above and beyond the profit motive. Alfred Jones, in his own middle sixties, had made so much money out of A. W. Jones and Company’s annual 20 percents that he could well afford to indulge his predilections. Spending less and less time at his office on Broad Street, he devoted himself more and more to a personal dream of ending all poverty. Considering material deprivation in the land of affluence to be a national disgrace, he set up a personal foundation devoted to mobilizing available social skills against it. He sometimes took season-long Peace Corps assignments in South America and Africa, leaving the management of his company to his associates. He set to work on a book (never finished) that he hoped would become a sequel to Michael Harrington’s famous study of United States poverty, The Other America. Some in Wall Street, perhaps enviously, called him a financial hippie; the charge could not be made to stick so long as his fund was earning its few lucky partners 75 or 80 percent a year. Jones could afford to go the way of the aristocrat, treating money-making as something too simple to be taken very seriously, and putting his most profound efforts into work not in the cause of profit but in that of humanity. Rarefied and above the battle as they were, though, the hedge funds were not exempt from the common condition of Wall Street: they too were living on borrowed time, and when its time ran out, so would theirs.

5

Moving half-consciously toward apotheosis, Tsai in late 1965 cleared his desk at Fidelity, said a deeply regretful good-bye to Edward Johnson and a more coolly casual one to Ned, and moved himself to New York to establish his own Manhattan Fund. He took a suite of rooms at the Regency Hotel and a suite of offices at 680 Fifth Avenue; at the latter, he established himself in a large corner room, where the carpet was beige, the thermostat was always set at a chilly 55 degrees to keep the occupant’s head clear, and the principal ornament was a large leather-covered representation of a bull. There he set about selling shares, at $10 each, to establish initial participation in his new enterprise and give him some assets upon which to work his presumed investment magic. What he was really selling, of course, was that magic and nothing else; the real initial asset of Manhattan Fund was Tsai’s reputation for investment skill. In his new role as his own boss, he was cool, composed, and commanding. He had come a long way from the raw, promising youth who had walked into Johnson’s office thirteen years earlier. Publicity, although he still feared it, agreed with him; he had learned well enough to live with it; in fact, he had about it the hot-stove-you-can’t-help-touching ambivalence that is common among financiers. Now he sparred with the press, jocularly, easily, and with evident pleasure. Early that year someone asked him why he was always buying stocks like Polaroid, Syntex, and Fairchild Camera and never the old wheelhorses like U.S. Steel. “Well, you can’t kiss all the girls,” Tsai replied, extending his old boss’s metaphor with an Oriental grin. Still, to preserve his and his family’s privacy he kept his home telephone number a secret even from his office colleagues.

How many shares of Manhattan Fund would be sold before the official opening date, February 15, 1966? Tsai set himself on an original conservative goal of $25 million worth. But he far underestimated the extent to which he had captured the public imagination. It is possible to believe that more was at work than rational appraisal based on Tsai’s record. There was in the middle sixties an underground current of thought in the country that said the West had failed, that its rational liberalism was only a hypocritical cover for privilege and violence; that salvation, if possible at all, lay in the more intuitive approach of the East. Such ideas, to be sure, did not seem to have taken firm root among the kind of people who invest in mutual funds. But perhaps many of the original investors in Manhattan Fund, contemptously as they might reject such ideas in their conscious thought, were reacting to them unconsciously when they decided to entrust their savings and thus a part of their future to Tsai. At all events, checks poured in to Manhattan Fund in a torrent. What would the opening total finally be, then? Not twenty-five but one hundred million? Or, unbelievable as it sounded, one hundred and fifty?

Not at all. On February 15, at the staid Pine Street offices of Manhattan Fund’s staid bankers, the Chemical Bank, there took place the chief event of that season in American finance. Harold L. Bache, head of the firm that managed the Manhattan Fund share offering, handed Tsai a check representing the proceeds of the sale and the original assets of his mutual fund. The sum inscribed on the check was $247 million. At the standard management fee of one-half of 1 percent per year, Tsai’s new organization, called Tsai Management and Research, was starting life with an annual gross income of a million and a quarter dollars.

He was off and running on his own. As the magazine The Institutional Investor reported later, he

set up Manhattan Fund just like Fidelity Capital. He loaded it with all of his big glamour favorites. To facilitate his chartist maneuverings, he built an elaborate trading room with a Trans-Jets tape, a Quotron electronic board with the prices of relevant securities and three-foot-square, giant loose leaf notebooks filled with point-and-figure charts and other technical indicators of all his holdings. Adjoining the trading room was erected “Information Central,” so aswarm with visual displays and panels that slid and rotated about that it resembled some Pentagon war room. Three men were hired to work full time maintaining literally hundreds of averages, ratios, oscillators, and indices, ranging from a “ten-day oscillator of differences in advances and declines” to charts of several Treasury issues, to 25-, 65- and 150-day moving averages for the Dow. “We keep everything,” [said] Walter Deemer, a former Merrill Lynch analyst and boss of Information Central who regards his charts the way an expert horticulturalist might regard a bed of prize geraniums. “You may only want a certain graph once a year, but when you do, it’s here.”

All the time there were ironies abounding. The social impartiality of the stock market, and the fact that the performance record of a mutual fund was as reducible to exact figures as a ballplayer’s batting average—the factors that had worked in Tsai’s favor when he had been an unknown Chinese boy knocking at panelled doors in a land far from home—had now turned into factors against him. He was on the spot, watched by a nation of investors and expected to make 50 percent profit a year on his customers’ money. Less would be failure, and the fickle public would convert its hero overnight into a bum. And the timing of the situation was inexorably bad. The market was too high. The leather idol in Tsai’s office was not a bull by accident. Temperamentally he was a bull himself, and therefore he needed an up market to keep winning. But by the greatest irony of all, he happened to start his own fund only a few weeks after the bull market of the nineteen sixties, as measured by the Dow industrials, had reached a peak that it would not reach again.

So Tsai in 1966 rode unawares toward his fall, and his adoring public toward its disillusionment.

6

The epilogue is anticlimax. The first meteor of the nineteen sixties was the first to burn out. But by shrewd and nimble footwork Tsai managed to get his heart’s desire nonetheless.

Through its first two years, the Manhattan Fund, as well as the other smaller funds Tsai managed from his new independent stronghold, stayed popular with investors though they were generally undeserving of popularity. Away from Johnson’s benign paternal surveillance, Tsai seemed to lose his stock-picking flair. After performing creditably in 1967, his funds took a beating in the tricky market of 1968; for the first seven months of that year, Manhattan Fund’s asset value per share declined 6.6 percent, leaving it 299th among the 305 leading funds whose performances were regularly analyzed and compared by the brokerage firm of Arthur Lipper. At the height of the decade, the master of go-go was going in the wrong direction. Still, in the face of such depressing performance figures, the magic of Tsai’s name remained undimmed when it came to attracting new investment money; by mid-1968 the assets managed by Tsai Management and Research had grown to over $500 million, which meant that the firm had a gross annual income from fees of over $2 million. Whether, on the basis of performance, it was earning the fee was another matter. But if Tsai no longer seemed to know when to cash in the investments he made for others, he knew when to cash in his own. In August, 1968, he sold Tsai Management and Research to C.N.A. Financial Corporation, an insurance holding company, in exchange for a high executive post with C.N.A. and C.N.A. stock worth in the neighborhood of $30 million.

Thus Tsai, just in time and in one stroke, joined the nearly big rich of America. As executive vice president and the largest individual stockholder of C.N.A., he turned over the running of Tsai Management and Research to others and devoted himself to heading C.N.A.’s acquisition program. As a fund manager, he was retired. And why not? He was now a major stockholder of a huge, long-established American corporation with a listing on the New York Stock Exchange; he had a sizable office and golf clubs and country homes; he had a trust fund that would assure his son a considerable income for life.

The immigrant from Shanghai—in his aims and aspirations the simplest and most straightforward of any of the five or six prototypical moneymen of the nineteen sixties—had, like so many Irish, Jews, Italians, and others before him, emerged from a distant foreign city in response to a glimmer on a golden shore. Yet he was already failing at his chosen calling when he got rich from it. By another strange irony, he got rich in a way that would shortly be called illegal. In June 1971, Judge Henry J. Friendly of the U.S. Court of Appeals for the Second Circuit held that any profits from sale of a mutual-fund management company belong not to the sellers of the management company but to the shareholders of the fund. The decision was a return to the traditional doctrine—from which, as we saw, Edward Johnson had benefitted in acquiring Fidelity back in 1943—that a trustee may not traffic in his trust. Had the new decision been in effect in 1968, Tsai would have been prevented from selling out.

But no matter. The Friendly decision was not retroactive; Tsai and the many other fund managers who had sold their organizations early enough were allowed to keep their gains. Tsai might now be scorned in his profession for the early loss of his investment skill, and he might even be considered in some quarters a man who had cashed in his chips just before the casino’s doors were barred. But for all that, in his heyday in 1966 the young wizard from Boston had been Wall Street’s first Oriental hero.

CHAPTER VII

The Conglomerateurs

1

The year 1966 found Wall Street slowly and reluctantly beginning to recognize itself as a marketplace for the millions rather than an élite gambling club with a limited membership list. Manuel Cohen, Cary’s activist successor as head of the S.E.C.—a Brooklyn-born lawyer, as flamboyant in manner as Cary had been reticent, whose wife engagingly characterized her husband’s job by saying, “If I were doing it, it would be called nagging”—was nagging Wall Street as vigorously as he could. That summer, his S.E.C. forced a recalcitrant New York Stock Exchange to relax slightly the ironclad monopoly implied in its cherished Rule 394, which forbade members, except in rare instances, to transact business in listed stocks off the Exchange; under the amended rule they were allowed to deal off the Exchange in cases where they could not fill an order at a fair price on it. Seeking to implement Cary’s Special Study, Cohen and his men pressed for commission discounts on large-volume stock transactions, and for an end to “give-ups,” the time-honored commission splits between brokers that were lately being used by mutual funds to reward brokers for pushing their shares, and that in some businesses less given to euphemism might have been called kickbacks. With enthusiastic S.E.C. support and approval, the Amex made the reform-minded S.E.C. veteran Ralph Saul its new president. In December, the S.E.C. came out at last with its long-awaited report to Congress on mutual funds. The report recommended strongly worded legislation to require that mutual-fund management fees be reduced to more reasonable levels; to prohibit contractual share-buying plans that involved “front-end commision loads”; and to sharply lower the limits on all mutual-fund sales charges to investors.

Funston, in the twilight of his day as Stock Exchange president, became a progressively more stubborn conservator of the status quo. The earlier Funston, who had been chiefly responsible for the arrangements that had saved the hapless customers after the Ira Haupt and Company disaster in November 1963, now began to look like a flaming liberal by contrast with the later Funston. When New York City, pressed for money like all large American cities, proposed to raise its relatively modest stock transfer tax by half, Funston threatened (as Richard Whitney had done in 1933) to move his Exchange to New Jersey. The new tax, raised 25 percent, went into effect in July, and the Stock Exchange stayed where it was—but with diminished credibility and diminished grace as an institutional citizen.

On the matter of Rule 394, Funston simply dug his heels in and said, “We cannot and will not budge on this issue”—and then, under S.E.C. and public pressure, he budged. In related areas, the mulishness of Funston and of others on Wall Sreet was more productive. The Exchange argued that give-ups and unreduced commissions on large transactions were necessary to the orderly and profitable functioning of the securities business; as things turned out, give-ups would not be abolished, and volume discounts instituted, until 1968. The ever-more-powerful mutual fund industry fought the S.E.C.’s proposals to Congress for dear life—and fought them so effectively that the decade would run out four years later with Congress still dithering and mutual-fund reform bills still tied up in committee.

And Funston, increasingly isolated as champion of the rear guard, announced his resignation, to take effect in September 1967.

All this happened while the market, as measured by the hoary but still standard Dow industrials, was having its worst year, in terms of net January-through-December percentage loss, since 1937. The problem was chiefly a shortage of money. Back in December 1965, in the face of mounting inflationary pressures, the Federal Reserve had applied the monetary screws in classic fashion by raising the discount rate from 4 to 4 ½ percent, and over the succeeding months it had conducted its operations in a way calculated to restrain further the expansion of credit. But the medicine failed twice, effecting no cure and causing dangerous side effects. Credit continued to expand and inflation to proceed; meanwhile, the credit-dependent home-building industry collapsed, exacerbating an already existing national housing crisis; and—more important for Wall Street—money in huge quantities deserted the stock market to take advantage of the soaring interest rates on bonds that tight money had brought about. By the end of August 1966, the paper value of all issues listed on the New York Stock Exchange had declined more than $100 billion since February, and in late December—by which time the Fed had reconsidered and then reversed its ill-fated policy—the Dow, which had started the year at near 1,000, was hovering around 790.

However, this decline was not in all stocks. Certain groups of issues not among the blue chips that made up the Dow—and one such group in particular—not only resisted the downward trend but actually bucked it. Among those in the most favored group, Ling-Temco-Vought was up almost 70 percent for the year, City Investing was up about 50 percent, Litton Industries and Textron were up between 15 and 20 percent, while International Telephone and Telegraph and Gulf and Western Industries were up by smaller percentages but were poised for huge rises early in 1967. The group, of course, was the one that comprised the new corporate Wunderkinder of the stock market, the conglomerates.

2

Nobody seems to know who first applied the term “conglomerate”—which in earlier times had usually meant a kind of mineral popularly called pudding stone—to corporations given to diversifying their activities through mergers with other corporations in other lines of business. At any rate, the new usage made its popular appearance in 1964 or 1965, shortly before conglomerates became the darlings of investors. Derived from the Latin word glomus, meaning wax, the word suggests a sort of apotheosis of the old Madison Avenue cliché “a big ball of wax,” and is no doubt apt enough; but right from the start, the heads of conglomerate companies objected to it. Each of them felt that his company was a mesh of corporate and managerial genius in which diverse lines of endeavor—producing, say, ice cream, cement and flagpoles—were subtly welded together by some abstruse metaphysical principle so refined as to be invisible to the vulgar eye. Other diversified companies, each such genius acknowledged, were conglomerates; but not his own. Roy Ash of Litton Industries thought “conglomerate” implied “a mess” and pleaded for the term “multi-company industry” to describe Litton; Rupert Thompson hoped wistfully that people would speak of his Textron as engaging in “non-related diversification”; Nicolas Salgo of Bangor Punta wanted his company known as a “unique conglomerate.” In vain. Wide-based or narrow, stuck together by synergism or chewing gum, they were called conglomerates, and for a time, almost everybody made money on them.

The aversion of the conglomerateurs (as The New York Times social page called their leading lights) to the term is understandable. Conglomerates, like prostitutes, had from the first a sufficiently shaky moral reputation to call for the use of euphemism. During their most flourishing years (roughly 1966–1969), they were said to represent, variously, a forward-looking form of enterprise characterized by freedom from all that is hidebound in conventional corporate practice; the latest of a long series of means by which “ruthless capitalists practice the black arts of finance to their ends”; and “a kind of business that services industry the way Bonnie and Clyde serviced banks.” Their increasing prevalence, for better or worse, is indicated by the simple fact that in 1968 about forty-five hundred mergers of U.S. corporations were effected—far more than in any previous year, and three times as many as in any given year early in the decade. Also in 1968, twenty-six of the nation’s five hundred biggest companies disappeared, permanently, into the bellies of other corporate whales through conglomerate merger, twelve of the victims being monsters with assets in excess of $250 million, and several of these same leviathans being swallowed by predators far smaller than themselves. By that time, at least ten of the nation’s two hundred biggest industrial corporations were conglomerates, and the enthusiasts were saying that this was only the beginning—eventually all but a tiny fraction of national business would be conducted by about two hundred super-conglomerates.

The movement was new and yet old. In the nineteenth century, few companies diversified their activities very widely by acquiring other companies or by any other means. There is, on the face of it, no basic reason for believing that a man who can successfully run an ice cream business should not be able to successfully run an ice-cream-and-cement business, or even an ice-cream-cement-and-flagpole business. On the other hand, there is no reason for believing that he should be able to do so. In the Puritan and craft ethic that for the most part ruled nineteenth-century America, one of the cardinal precepts was that the shoemaker should stick to his last. American companies were as specialized in their product lines as the vendors of dog collars and nutmeg graters in Victorian London; diversification was considered irresponsible if not a form of outright immorality, and when it occurred it usually did so inadvertently, as when the Western railroads found that the land they had ac quired for settlement and track right of way made them proprietors of mines, oil wells, and forests.

Early in this century, some of the biggest companies took to diversifying from within—adding new products not closely related to their old ones simply because they had the resources and the machinery to do so. General Electric and General Motors were notable examples. The tendency of companies to purchase other companies became prevalent for the first time in the boom of the nineteen twenties when many corporate treasuries were, for the first time, full of spare money. Between 1925 and 1930 du Pont, which had previously pretty well confined itself to making explosives, ate such indigestible-sounding corporate morsels as the Viscoloid Company, National Ammonia, Krebs Pigment and Chemical, and Capes-Viscose. In a limited way, it was a pioneer conglomerate. American Home Products, incorporated in 1926, had become an Ur-conglomerate by 1948, its product line by that time ranging from beauty preparations through foods to ethical and proprietary drugs. It was during a new spell of general affluence in the nineteen fifties that the phenomenon of really uninhibited diversification first appeared. During that decade, National Power and Light, as a result of its purchase of another company, found itself chiefly engaged in peddling soft drinks; Borg-Warner, formerly a maker of automotive parts, got into refrigerators, other consumer products, and electrical wares; and companies like Penn-Texas and Merritt Chapman and Scott, under the leadership of corporate wild men like David Karr and Louis E. Wolfson, took to ingesting whatever companies swam within reach. The results were the first genuine late-model conglomerates—but nobody had yet wrapped up the new packages in a catchy name. Among the first companies to be called conglomerates were Litton, which in 1958 began to augment its established electronics business with office calculators and computers and later branched out into typewriters, cash registers, packaged foods, conveyor belts, oceangoing ships, solder, teaching aids, and aircraft guidance systems, and Textron, once a placid and single-minded New England textile company, and eventually a purveyor of zippers, pens, snowmobiles, eyeglass frames, silverware, golf carts, metalwork machinery, helicopters, rocket engines, ball bearings, and gas meters.

3

Corporate affluence was only one element in the complex chemistry of the conglomerate explosion. Another was a decline of the stick-to-your-last philosophy among businessmen, parallel to a decline of the stick-to-anything philosophy among almost everyone else. Another was the rise in influence of the graduate business schools, led by imperial Harvard, which in the nineteen sixties were trying to enshrine business as a profession, and often taught that management ability was an absolute quality, not limited by the type of business being managed. Still another was the federal antitrust laws, which, as traditionally interpreted over the years, forbade most mergers between large companies in the same line of business and thus forced companies that wanted to merge at all to be, so to speak, exogamous.

But there was one more factor, less reputable and in economic terms more ominous, behind the trend. It was the fact that merging enabled a company to capitalize on its current stock-market value. The crux of the matter was that never before had a company’s reported earnings per share meant so much in terms of its stock-market price. As we have seen, the average investor of the sixties was a comparative novice, interested in just three figures concerning a company whose stock he owned or was considering buying. One was the market price of the stock. The second was the net profit per share—the famous “bottom line” of the quarterly earnings report’s financial summary (which, curiously, seldom actually appears at the bottom). Let the average nineteen-sixties investor be handed the latest annual report of his favorite company; his gaze would slide rapidly over the shiny four-color cover, over the glowing (but perhaps a bit glutinous) prose of the chairman’s report, over the pictures of happy employees and earnest, manly executives, and would fix raptly on that bottom line. (It may come as a surprise to some modern investors to learn that this was not always so. During the boom of the nineteen twenties, the big news for both brokers and investors was more commonly dividends than earnings. High taxes on ordinary income, and favored tax treatment of capital gains, were the principal factors in bringing about an historic postwar shift in public attention from dividends to earnings.)

The third figure that engaged our investor’s interest was, of course, the relationship between the other two. Called the price-to-earnings multiple, or ratio, its function was to give the investor a yardstick with which to judge whether the stock was a bargain or not. A multiple of ten was usually considered a bargain, while a multiple of forty might be (but often wasn’t) thought to be too much. In the absence of his friendly broker, the average investor had to calculate the multiple for himself, a feat he could easily accomplish provided he had the two other figures and a command of short division. Making this calculation marked the outer limit of his investment sophistication.

Unfortunately, in the case of conglomerates this degree of sophistication was inadequate. Where a series of corporate mergers is concerned, the current earnings per share of the surviving company lose much of the yardstick quality that the novice investor so trustingly assumes. The simple mathematical fact is that any time a company with a high multiple buys one with a lower multiple, a kind of magic comes into play. Earnings per share of the new, merged company in the first year of its life come out higher than those of the acquiring company in the previous year, even though neither company does any more business than before. There is an apparent growth in earnings that is entirely an optical illusion. Moreover, under accounting procedures of the late nineteen sixties, a merger could generally be recorded in either of two ways—as a purchase of one company by another, or as a simple pooling of the combined resources. In many cases, the current earnings of the combined company came out quite differently under the two methods, and it was understandable that the company’s accountants were inclined to choose arbitrarily the method that gave the more cheerful result. Indeed, the accountant, through this choice and others at his disposal, was often able to write for the surviving company practically any current earnings figure he chose—a situation that impelled one leading investment-advisory service to issue a derisive bulletin entitled, “Accounting as a Creative Art.” All of which is to say that, without breaking the law or the rules of his profession, the accountant could mislead the naïve investor practically at will.

The conglomerate game tended to become a form of pyramiding, comparable to the public-utility holding company game that flourished in 1928, crashed in 1929, and was belatedly outlawed in the dark hangover days of 1935. The accountant evaluating the results of a conglomerate merger would apply his creative resources by writing an earnings figure that looked good to investors; they, reacting to the artistry, would buy the company’s stock, thereby forcing its market price up to a high multiple again; the company would then make the new merger, write new higher earnings, and so on. The conglomerate need neither toil nor spin—only keep buying companies and writing up earnings. It was magic, until the pyramid became top-heavy and fell.

4

Accounting was and is an honorable profession, whatever its pretensions to creativity. One of the most dismal corners of what Carlyle called the dismal science of economics, accounting is seldom scrutinized by reformers or populist legislators; like a skunk, it acquires immunity against attack from its repellency. But it is of the utmost importance in an economy of affluence, so let us try to put the profession of accountancy into current perspective.

It began long ago—with a Franciscan monk of Renaissance Italy, Fra Luca Pacioli (c. 1445-1523), whose invention of double-entry bookkeeping was later acclaimed by Goethe as “one of the finest discoveries of the human intellect.” It did not become important to substantial numbers of people until the nineteenth century, when public ownership of private companies became common. It rose to eminence as an aristocratic occupation, calling for the qualities usually associated with judges: wisdom, learning, unassailable probity. The pioneer accountants—Turquand, Touche, Cooper, Deloitte, Waterhouse, Griffiths, Peat, Plender—were all gentlemen as well as scholars, above the battle because to the manor born. This tradition of disinterestedness and individual honor was imported, with democratic modifications, into the United States, where accounting first became important in the wave of reform that followed the chicaneries and depredations of the robber barons. Turn-of-the-century American accountants viewed themselves as crusaders and evangelists for the cause of accurate and honest business relationships. The new profession’s first fall from grace came, however, during the boom of the nineteen twenties, when many accountants found devious and misleading ways of writing up companies’ book value to inflate stock-market price. (Not earnings; accountants took little interest in earnings in those days, and indeed, many companies did not bother to report their earnings at all.) Then came the great crash and a new wave of high-mindedness and reform. A key section of the Securities Exchange Act of 1934 gave (and still gives) the S.E.C. all but dictatorial power over the accounting practices of companies under its jurisdiction; but, in line with the S.E.C.’s policy of encouraging Wall Street and industry to regulate themselves, those powers were never exercised. The American Institute of Certified Public Accountants became the instrument of accountancy’s self-regulation. All through the thirties, forties, and fifties, the A.I.C.P.A. chipped away at the old abuses that had grown up in the twenties, and progressively tightened the lax rules that had permitted them. In 1959, it empanelled an Accounting Principles Board, consisting of eighteen members—eight from the leading accounting firms, six from smaller accounting firms, two from corporations, and two from the academy—with effective power to set standards and rules for all accountants. With that step, the reforms were largely accomplished; the accounting profession sat back to congratulate itself on its wisdom and its good works.

The trouble was that, all unknowing, the Institute had built a flimsy lean-to with which to resist a coming hurricane. In the sixties, as Wall Street moved rapidly through the revolution that made it the first genuinely public securities market in the world’s history, the crucial new element in stock trading was the financial and accounting naïveté of the millions of new investors. Naïveté led to a search for simplicity, and simplicity, as we have seen, was found in focusing attention on the bottom line. And this simplified view of business performance soon led accountants, including some of the best, to descend almost unawares from their pedestals of disinterestedness and become at times the willing accomplices of ruthless corporate managements and essentially dishonest promoters. In brief: to sell their souls.

The mechanics of accounting “creativity” did not end with the pooling-versus-purchase option in recording mergers. Indeed, such matters merely began there. To suggest the possibilities, let us review briefly the typical mechanics of a takeover. A conglomerate seeking to swallow another company would make a public bid, or tender offer, for any and all of the target company’s shares. The offer would be at a price above the current market, to the delight and potential profit of the target company’s stockholders. (Such stockholders came to love predatory conglomerates the way old-time New York City voters loved old-time Tammany Hall.) But there was a catch: the payment for the shares was seldom in cash. Instead, it was usually in the form of debt security—debentures or bonds, the famous “funny money” of the conglomerate years, perfectly good the day one accepted it but quite possibly nearly worthless a few years later when the conglomerate house of cards had collapsed. There were endless refinements. Sometimes a conglomerate, by buying a company with debentures, could arrange things so that after the merger had been completed and the new company had settled in, it could transfer the cost of the purchase to the books of the taken-over company—that is, make it pay for its own enslavement. Sometimes, debentures alone were not thought to be sufficient inducement to the stockholders of companies being sought for acquisition, and in such cases conglomerates augmented the tender offer with a variety of extras, of which the principal ones were warrants and convertibility—what Professor Warren Law of Harvard called “the underwear of corporate securities.” A warrant is an option to buy a certain amount of a company’s common stock at a set price anytime within a set period, while a convertible debenture is an IOU that has embedded within it a similar privilege. In both cases, the additional tidbit, or “sweetener,” is included in the tender-offer package in order to give the recipient the alluring prospect of getting his hands, presumably risklessly, on some of the conglomerate’s ever-soaring common stock. The unfortunate effect of such grab-bag tender offers was to dilute the equity of the conglomerate’s pre-existing stockholders—to water their wine. Another effect was to confuse everyone concerned, and it cannot be said that the confusion was always entirely accidental; often enough it was plainly intended to throw dust in the eyes of the average investor with his tunnel vision trained on the bottom line.

By following conservative practices and their consciences, accountants could have prevented most of this jiggery-pokery; they did not.

5

To what extent, then, and for what reasons, did the high and proud profession of accounting fall from grace in the matter of merger accounting? To begin with, those who set the tone were taken by surprise, so encased in the old ways that even in 1960 many accounting mentors still felt that earnings per share were scarcely their concern at all. The profession was preoccupied with the principle of disclosure; it failed to allow for the fact that in the new situation, with a vastly expanded securities market full of novices, truthful disclosure could be made to tell lies to the untutored and the unwary. As early as 1960 the A.I.C.P.A. did decide to commission a University of Illinois professor to do a research project on merger accounting; the professor made stern and stringent recommendations—and they were ignored. The years went by, and the Accounting Principles Board was silent. The great conglomerates waxed; immense sums of money and concomitant power came to be involved; accountants came to think legalistically rather than conscientiously, and to do more or less what they were told to do by corporate management. It was seldom so crass a matter as consciously “selling out” to management to keep a client’s fee. Management kept pressing the accountants in sophisticated ways, mesmerizing them with new and exciting subtleties. Under such abstract and value-free pressure, accountants began to take on the corporate mentality, to think of themselves no longer as independent, critical, perhaps even judicial examiners, but as part of management, members of the corporate “team.” As Lee J. Seidler has said, “it was a question of role definition.” Accountancy was losing its soul, then, the way so many souls are lost—by definition and by degree.

Its backbone weakened. (The S.E.C. was a spine stiffener, but not a sufficiently strong one; its chief accountant, Andrew Barr, was an able and conscientious man but one who harbored obsolete attitudes; he was hung up, like so many of the accountants themselves, on the old notion of disclosure as panacea.) In December 1966, the Accounting Principles Board labored and finally delivered itself of a stiff opinion requiring that convertible debentures be accounted for partly as debt and partly as the equity into which they were, by definition, convertible. This overdue proviso hit directly at conglomerate bottom-line magic; the protests were so loud, so strident, and from such powerful sources that the A.P.B. felt the need to back down and suspend its ruling. Considered morally, was not this as shocking an abdication of responsibility as if a judge, say, who had sentenced a Mafia member then reversed himself after having been threatened?

Not until 1970—when the conglomerates had collapsed, and the public had been shorn—would the A.P.B. muster its courage to take, too late, a strong and responsible line on merger accounting.

This sorrowful digression may appropriately end with a contrast between the current attitudes toward accountants in Great Britain and in the United States. Accountants have long enjoyed higher standing in the British business and social hierarchy than in the American one. In the late sixties, thirteen members of the House of Lords were professionally qualified accountants, as were nine members of the House of Commons, including the Chancellor of the Exchequer himself; on this side of the Atlantic, not a single accountant was to be found among the 535 members of Congress. Moreover, every major British government investigating body customarily includes at least one chartered accountant, while their presence on comparable bodies in the United States is rare. It is lawyers in whom we Americans traditionally invest our hopes for legislative and fiscal leadership; Congress and government commissions swarm with them; the ordinary citizen, finding his aspirations to wisdom falling short in almost any discussion, will often resort to the apologetic phrase, “Well, of course, I’m not a lawyer”—as if a law degree conferred a mantle of authority and expertise over our national life. Seidler, a perceptive scholar and practitioner of accountancy, conducted an informal poll on the subject of relative social status in 1969. On a visit to London, he asked twelve nubile young women, “If you had your choice, which would you prefer to marry, a doctor, a lawyer, or an accountant?” Accountants came out on top, as it were, not only with the young ladies themselves but also as the choice for them of their fathers; lawyers were second, and doctors last. Back home, Seidler carried out a similar survey among a number of unmarried American girls, and the British results were precisely reversed. Accountants, it is true, often make appreciable money in America; but within the democratic frame they are generally thought of, and generally think of themselves, not as hereditary leaders but as bright and ambitious new men taking advantage of a calling celebrated for permitting upward social mobility.

As to performance, or reputation for performance: All through the conglomerate era British accountants seem generally to have preserved their traditional standing as the unassailable consciences of private business management. Seidler asked a number of British stockbrokers, security analysts, and Stock Exchange officials, “Assume that at the conclusion of an audit there was a substantial disagreement between a large firm of accountants and the management of a large corporation over a point of accounting principles … under what circumstances, other than a demonstration of the sheer logic of its stand, might the client influence the auditor to accept its view?” The resounding and unanimous response was, “None.” Asked the same question, a comparable group of American financial men almost all replied that the accountants would, in the majority of cases, yield to the client’s wishes regardless of the accounting principles involved. One respondent put the matter bluntly: “Accountants are unable to bite the hand that feeds them.” It need hardly be emphasized that any accountant thus morally disabled is not just worthless to the public he is supposed to protect, but worse than worthless.

Seidler concluded, “Excluding considerations of social justice, it does appear that the result of the higher social position of the British accountants has been to make them a stronger profession, both relative to other professions and in terms of their relationship with clients.” A faintly snobbish view? Perhaps. Aristocrats can and sometimes do compromise with principle in any country; and, contrariwise, one of the glories of the United States has always been the stubborn conscience of many men who by birth and circumstance could not well afford it. But the conglomerate accountants of the sixties, or too many of them, were not among those men.

6

James Joseph Ling, born in 1922 in Hugo, Oklahoma, of South German ancestry, had a rootless, drifting, poverty-ridden childhood during which he showed no special talent for anything much. After his mother’s death when he was twelve, he was sent to live with an aunt in Louisiana; after two years in Catholic high school there (he liked to beat the nuns at chess) he dropped out and became one more depression-years kid on the bum, wandering aimlessly under the dust-darkened skies of Oklahoma and Texas. At nineteen he arrived in Dallas and went to work as an electrician. In 1944 he joined the Navy and became an electrician’s mate, stringing power lines and recovering equipment from sunken ships in the Philippines. Released from service in 1946, he went back to Dallas and, with $2,000 savings, set himself up in business as an electrical contractor.

Later he would say, in nineteen-sixties jargon, “I don’t know what turned me on”—but assuredly something did. After several ups and downs, his little company grew to have an annual gross of $1.5 million. In 1955 he decided to sell stock in it to the public; when Wall Street underwriters just laughed at him, he and some associates sold the stock themselves, handing out prospectuses from a booth at the Texas State Fair. They peddled 450,000 shares at $2.25 each. The astonishing success of this venture was the turning point of Ling’s life; he learned from it that pieces of paper can be exchanged for cash. Armed with the cash, he made his first corporate acquisition—LM Electronics, a West Coast firm on which his down payment was $27,500—and changed his own company’s name to Ling Electronics. Thus the once and future king of conglomerators was on his way.

His deals over the succeeding decade were so complex, innovative, and ultimately bewildering that to describe them comprehensibly at book length would be a literary tour de force, and to describe them in a few words impossible. In essence, though, they were all geared to the crucial discovery that Ling had made at the Texas fair—that people like to buy stocks and that their overpayments for stock can be capitalized by the issuer to his advantage. His basic tool was leverage—capitalizing with long-term debt to increase current earnings. In 1958 he gained entry to Wall Street when White, Weld and Company undertook a private placement of Ling Electronics convertible bonds. Then the deals came faster and more bewilderingly. In 1959 he took over Altec, University Loudspeakers, and Continental Electronics; in 1960, Temco Electronics and Missiles (government contracts, the big time now); in 1961, Chance Vought Corporation, an aviation pioneer. So overextended personally that at one point he had to sell all but eleven shares of his own company’s stock, Ling nevertheless bulled ahead. By the end of 1962, he controlled an aerospace and electronics complex (by then called Ling-Temco-Vought) capable of competing for contracts with any other in the country. Then, in 1964, he suddenly launched what he whimsically called Project Redeployment, in which he began selling to the public shares in the companies he had acquired. It looked like a stunning reversal of policy, but in fact it was more of the same—all part of Ling’s basic scheme to take advantage of the public’s and the financial institutions’ insatiable appetite for common stocks. He would sell off, say, a quarter of the shares of a Ling-Temco-Vought subsidiary; the magic of Ling’s name would propel the price of the shares well up in the market, and the three-quarters that Ling had retained would be temporarily worth far more than it had been worth a few days or weeks before. A Wall Street man called Project Redeployment “getting something for nothing.”

But it worked. In 1965, Ling-Temco-Vought ranked number 204 on the Fortune directory of the largest U.S. industrial companies; in 1967, 38; finally in 1969, 14. Net income per share—before allowing for dilution by all those convertible shares—nearly tripled in 1966 and then went up some 75 percent more in 1967. As a result, market price of the company’s stock, from the beginning of 1965 to the peak in 1967, multiplied more than ten times. Could there be any wonder that the huge new investing public loved it?

Ling at his peak was a mogul in the nineteenth-century manner, as lordly as a Vanderbilt or a Yerkes. (In that respect, he represented a striking and perhaps rather engaging contrast to his fellow-Texan multimillionares of his own time, the secretive, often penny-pinching oil men.) Ling claimed the German Field Marshal Rommel as “one of my teachers,” and he talked grandly to anyone who would listen in metaphors drawn from sports and physical combat—“let’s three-putt it,” “a karate chop to the neck.” He was short, however, with those who doubted. Once when a leading Wall Street stock analyst presumed to question his free use of debt securities to make acquisitions, Ling summoned the analyst into his presence; finding him to be a man of dignified middle age, Ling dismissed him with a contemptuous “What could I expect from someone over forty?” At a reputed cost of over $3 million, he built himself an imperial mansion in Dallas, with a façade of Roman columns, a portico lined with classic statuary, bathrooms with gold faucets (an Italian marble bathtub worth $14,000 in one of them), and its own golf course. (His address, as listed in Who’s Who—10,300 Gaywood Road—astonishingly conveyed the democratic suggestion that his pleasure dome was merely one of many.) Inside the mansion was a collection of seventeenth-century books that their owner genuinely cherished without, in many cases, having the vaguest notion what was inside them. He was not above deceiving his guests. Once he met Oskar Morgenstern, the famous Princeton econometrician, and invited him to “a small dinner—five or six people.” The dinner was for thirty, and after coffee Morgenstern, unwarned, found himself asked by his host to “say a few words.” One did not refuse Ling in his house—nor did one quibble about the terms under which one was inside it. Morgenstern complied.

In 1968 Ling embarked on his most ambitious venture and the one that, along with other factors, would eventually bring about his downfall. It was nothing less than the acquisition of Jones and Laughlin Steel, an old and solid member of American big business’ traditional pantheon, for a cash tender offer of $425 million, the largest ever made by one company for another. But in 1967 the high school dropout and onetime dustbowl roustabout was a Caesar not only in his own eyes but in those of a majority of his corporate peers as well.

Meshulam Riklis, born in Odessa the same year Ling was born in Hugo, Oklahoma, grew up in pre-Israel Tel Aviv in comfortable circumstances, making such frequent and intricate deals with his playmates that they took to calling him derisively the Minister of Finance. He was no ordinary Jewish boy, but, it was sometimes maintained, an eighth-generation descendant of Baal-Shem-Tov, founder in eighteenth-century Poland of the celebrated ultra-orthodox Jewish sect called Hasidism. Nonreligious like his father—a Palestine businessman who had once been an officer in the Turkish army—Meshulam Riklis showed an early bent toward scholarship, leading his mother to hope fervently that he would get a Ph.D. and become a teacher. He did, for a time, become a teacher. Having served in the British army in wartime and later having lived for a while with his bride in a kibbutz, he came to the United States in 1947, graduated from Ohio State University in 1950, and then moved to Minneapolis, where he taught Hebrew at night and spent his days as a novice stock salesman for a local brokerage firm.

At the daytime occupation he made a quick success. Soon the rich Jews of Minneapolis were willing to finance him in independent ventures, and he began buying and combining small companies on a shoestring. He would line up backers to help him get control of Company A; then he would use the assets of Company A to take over Company B; and so on. In 1955 he took over a firm called Rapid Electrotype; in 1957 he merged it into another called American Colortype; and the combination, which was to be Riklis’ key corporate vehicle thereafter, he named Rapid-American Corporation—a title so inspiriting, so beautifully characteristic of the air of guileless enthusiasm seasoned with amiable larceny of the conglomerate era, that it must endear him to any student of corporate nomenclature.

Naturalized in 1955 and a millionaire before the end of that decade, Riklis was Rapid-American in the flesh. In 1970 he told a reporter, “I am a conglomerate. Me, personally.” He had built one and seen it nearly fall before the term “conglomerate” had come into use. By 1962 his Rapid-American controlled McCrory Corporation, a combine of retail stores, and Glen Alden, a consumer-products company. After the market crash that year the empire found itself in a bad bind, and creditor banks demanded Riklis’ resignation; he refused, the market recovered, the banks relented, and the crisis was weathered. And Rapid-American went on to new heights, adding companies to its holdings at a fast pace through the following years. Eventually Riklis came to control a complex with sales of $1.7 billion, including such well-known companies as International Playtex, B.V.D., Schenley Industries, Lerner Shops, and RKO-Stanley Warner Theatres. In 1966, at the height of this headlong expansion, Riklis did a characteristically unexpected thing—he went back to Ohio State for the summer and took a master’s degree in Business Administration, writing his thesis on his own business career and methods. His mother in Israel, who still regretted that he had become a businessman rather than a professor, must have been somewhat comforted.

Perhaps the most striking thing about Riklis as a conglomerator is the way he exploited his Jewishness rather than suppressing or ignoring it as so many Jewish businessmen in an alien culture had done before him. Once he began a pitch to a prospective lender with the taunt, “I understand you guys are anti-Semitic”—and got the loan. He was always ready with a dialect story, and his most famous saying—that Rapid-American owed its success to “the effective non-use of cash”—is perfectly in the tradition of rueful and realistic Jewish wit. Once, after a luncheon at the Bankers Club in Wall Street with an ex-partner of White, Weld, he described the occasion to a friend by saying, “I’ve never seen so many goyim in my life,” and then went on to tell with what distaste he had eaten his first raw oyster. In making corporate acquisitions, he went almost exclusively for firms that were Jewish-controlled. Other Jews he felt he could deal with; what he prudently avoided was any confrontation with the Protestants. A man making his way, Riklis believed, had enough trouble without that complication. Yet the Jewish-American business world had by Riklis’ time become a commodious one, and his self-imposed limitation scarcely cramped his style. “I will not go into the steel business,” he once pronounced. “Jimmy Ling, he’s entitled. He’s got the right religion.”

Of course, a heavy layer of usefully insulting implication underlay such statements. Meshulam Riklis was hardly one to be popular with the stereotyped old-shoe American executive or underwriter. But, tough and appealing, with a sure instinct for timing and survival, he was the first Borscht-circuit entertainer manqué to rule an American business empire, and as such he has his deserved and reserved place in our current business history.

Charles Bluhdorn, also foreign-born, lacked Riklis’ subtlety, wit, and streak of intellectuality; he was more nearly the traditional brash gambler who will bet with anybody on anything, and yet—like so many brash gamblers—he was a secret conservative, more cautious and calculating than he wanted to seem. Several years younger than Ling and Riklis, he was born in Vienna, the son of a Czech-born importer, and came to the United States at sixteen, a refugee from Nazi anti-Semitism, in 1942. In his middle twenties he made his first million with a series of breathtaking deals in the commodities market. Of this period in his business life he would say twenty years later, when he was the head of a vast empire, “Today I wouldn’t have the nerve.” But he retained plenty of nerve in the sense of chutzpah. In 1957, just past thirty, he bought control of an automobile parts manufacturing company called Michigan Bumper. Bumpers moved slowly, and Bluhdorn’s firm attracted no special attention; it entered the nineteen sixties with sales of $8.4 million and a small annual deficit. Eight years and more than eighty corporate deals later, his enterprise—by then famous to everyone who follows the stock market as Gulf and Western Industries—would have sales of $1.3 billion and net annual income of $70 million; over the same period its stock price multiplied twenty times, and Bluhdorn became known as the enfant terrible of the conglomerate scene—a distinction, from the business-establishment point of view, somewhat comparable to being called the wickedest man in Hell.

Bluhdorn and Gulf and Western came late to conglomeration. In the first part of 1965 his was still essentially a small car-parts firm; but that year he managed to borrow $84 million from the Chase Manhattan Bank with which to buy control of New Jersey Zinc Company, largest zinc producer in the country. After that, acquisitions followed at a dizzying rate: E. W. Bliss, Desilu Productions, South Puerto Rican Sugar, Consolidated Cigar, a mixed bag of others. Bluhdorn’s rationale for diversifying so widely and so wildly was simple; he wanted, he explained, to be in a lot of different lines of business so that when hard times fell on one of them the others would serve as a counterbalance and pull the entire enterprise through. He was at less pains to point out that nearly all of Gulf and Western’s acquisitions were made with debt and convertibles, meaning that this year’s net profit was being inflated at the possible cost of next year’s; or that Gulf and Western, until belatedly prodded by the S.E.C., neglected to point out to its stockholders and the public the potential dilution of their holdings that was inherent in the issuance of all that paper.

Undoubtedly Bluhdorn’s acquisition masterpiece was Paramount Pictures in 1966. The company was in trouble, losing money on feature films, wary of plunging too deeply into large-scale television production, propping up its earnings by selling off its assets. With no prior experience in motion-picture production, Bluhdorn personally took over as president and appointed a new management team charged with instituting new, bolder policies. For the short term, it was a case study of the conglomerate theory triumphant. In less than three years, Paramount became the hottest studio in Hollywood.

Bluhdorn at his most flamboyant was almost a parody of the hyperthyroid business genius—fast-talking, with just enough Viennese accent to make him type-cast for his role: emotional, visionary, impatient, an artist at the work of business. He liked to speak of Gulf and Western as “a sort of youthful disease.” He ran his empire with a tiny, easily manageable headquarters staff of less than one hundred, secretaries included. He hated vacations and he disdained the word “conglomerate.” Doing business on the telephone or face to face, he alternated intimidating roars with conspiratorial whispers, and could modulate at will from either into eloquent or flowery speech suffused with sincerity. He was conscious of his status as an outsider, and not without rancor on the subject—“I’ll show those goddam blue-bloods,” he once exclaimed on encountering the cool hostility of the Establishment—but unlike Riklis, he was not totally shy of direct confrontations with the Protestants. He even made takeover overtures to Armour and to Pan American Airways—only, however, to withdraw prudently in each case when the going showed signs of getting too rough.

Essentially a haggler on a grand scale, Bluhdorn gloried in his reputation as such. He was surely aware that in conservative circles such a reputation was deemed a business liability; indeed, a sympathetic investment banker once told him that his chief weakness was his inability to conduct himself according to accepted canons—his tendency to sputter, fume, and shout when only dispassionate facts were required. Another banker has since made the curious and suggestive criticism that in his corporate acquisitions for Gulf and Western, Bluhdorn frequently showed a lack of taste—not in the way he corralled them, but in his choice of companies to acquire. The concept of taste, as applied to a chief executive’s choice of corporate acquisitions, may well merit some study by business students of the future.

In one important respect, Bluhdorn was constantly maligned. Almost universally considered to be among the wildest and most suspect of the conglomerators, and certainly in truth among the least restrained users of debt and convertible securities, he was guiltless of the principal offense usually alleged against his sand-castle breed, that of “buying” spurious earnings by taking over companies with price-to-earnings ratios lower than his own. The record shows that, on the contrary, Gulf and Western usually bought companies with ratios higher than its own, and thereby temporarily reduced its own earnings through its acquisitions. Even in the Paramount deal, Bluhdorn paid seventy times the movie company’s current earnings; the multiple of Gulf and Western at the time was less than eight. As Arthur M. Louis pointed out in Fortune, during the decade of the sixties Gulf and Western bought high-multiple companies so often that the transactions, in themselves, actually reduced net earnings by almost $1.50 a share. Bluhdorn floated far too much corporate underwear, he often let his accountants play fast and loose, and probably he shouted too much on the telephone; but he bought companies because he believed in them, and through most of the decade Gulf and Western’s “internal” growth—the old kind of growth based on doing more business—averaged almost 20 percent a year.

7

Whether immigrants like Riklis and Bluhdorn, self-made natives like Ling and Eugene Klein, or Harvard Business School products like Roy Ash and Charles (Tex) Thornton, the conglomerators were all uninhibited free enterprisers, anti-organization men, throwbacks to the nineteenth-century age of individualism in American business. The great paradox of the conglomerate era is that it brought back such rampant individualism at the very moment when the received wisdom held that government regulation, suburban living, and the rise of the computer had bred the pawky eccentricity out of American business and turned it into a vast impersonal machine to which a man learned to abase himself, or else failed. Like the old trusts that Theodore Roosevelt set out to bust, the conglomerates were essentially one-man or two-man companies. Like the robber barons, the conglomerators tended to collect art and otherwise flaunt their wealth (in contrast to the organization men of the previous decade, whose goal was not to excel or exceed but to fit in). James Ling’s Dallas palazzo was far from the only conglomerator’s marble showplace. Klein, a onetime used-car salesman who built the great West Coast conglomerate, National General Corporation, bought an old Beverly Hills mansion, spent a million and a half decking it out with Picassos, Modiglianis, and choice European antiques (a Marie Antoinette foot bath, two Lord Nelson mirrors, a desk set once owned by a czarina of Russia), and rode around in a $3-million corporate jet and a Rolls-Royce formerly owned by Queen Elizabeth II. Some were not afraid of appearing to be comically self-serving; the Wall Street Journal reported that at the height of the era the head of a middle-sized firm with conglomerate aspirations called a broker and asked him to find for acquisition “some kind of company that would be located in Florida,” since he liked the climate and wanted an excuse to spend time there. In naming their enterprises, as in decorating their houses, the conglomerators showed a penchant for instant grandeur usually at the risk of bombast (Rapid-American, National General), but sometimes the names went in another direction, and suggested down-home folksiness, which investors also seemed to love. There was Minnie Pearl’s Chicken System, Inc., later more austerely called Performance Systems; its stock rose wildly under the first name and dropped disastrously under the second. Sometimes it seemed as if the company namers deliberately injected just a hint of comic larceny, calculating, perhaps correctly, that the investing public and the money managers had a taste for such things. There was, for example, the Slick Corporation—named for its founder, it is true, but straight out of a W.C. Fields movie all the same. And there was “Automatic” Sprinkler Corporation. Its officers explained that the quotation marks were intended to distinguish its particular automatic sprinklers from everyone else’s; but to the layman the name seemed to imply, in an almost masochistically self-deprecating way, that the company’s sprinklers were not really automatic but were only alleged to be. Whatever is in a name, the suggestion did not deter the stock market from bidding the company’s stock in 1967 up to more than fifty times earnings.

An era of showoffs and shenanigans, then, of American enterprise parodying itself on a grand scale. But the conglomerate movement also had serious and dangerous consequences within the world of corporations. With Litton openly aiming at acquiring fifty companies a year and with dozens of lesser conglomerates eager for entry into the great world of conglomerate colossi, hardly any company anywhere in the country that had its stock on the market could feel safe from a takeover attempt at any time. As a result, executives who should have been devoting themselves to running their businesses found it prudent and often necessary to neglect such duties and spend much thought and energy on the financial maneuvers and the information-gathering necessary to anticipate or repel raids by voracious conglomerates. Some companies became battle-scarred veterans of the conglomerate wars. Allis-Chalmers weathered serious takeover attempts by Ling-Temco-Vought, Gulf and Western, and White Consolidated, one right after the other. After such an experience, how, one may wonder, could a senior Allis-Chalmers seneschal carry out his farm-machinery duties when at any moment some new raider might be secretly buying stock and readying the kind of tender offer that the other equity-holders would find it hard to refuse?

What with the arithmetic of stock multiples making it possible on occasion for smaller companies to take over much larger ones, size alone offered no protection. Every now and again, in the conglomerate era, a company minnow would successfully ingest a corporate whale, and the other monsters would tremble. Not until virtually the whole business community had been aroused in 1969 by the attempts of raffish Resorts International (formerly Mary Carter Paints) to take over Olympian Pan American World Airways, and of brash Leasco Data Processing to forceably marry matronly Chemical Bank, would the temporarily chastened conglomerates lose some of their appetite for prey bigger and more prestigious than themselves.

The defender against a hostile takeover was not without resources, however. On the contrary, a whole array of chesslike countermoves was available to him, and whole subdivisions of law and public relations sprang up overnight to devote themselves entirely to planning and executing such strategy. The defender might, for example, adapt to his own purpose a conglomerate gambit and change his own accounting practices, thereby bringing about an instant and essentially spurious increase in his own reported earnings. Along the same lines, he might make his company harder to swallow by quickly doing a bit of swallowing himself—by taking over some other company. A shrewd variation of this move was to buy up a company that sold products in direct competition with some of those made by the aggressor conglomerate, in hopes of creating an antitrust obstacle to the takeover. Or he might use persuasion, issuing barrages of mailings and newspaper advertisements urging his stockholders not to traduce him by accepting the tender offer. If he had good government connections, he could go straight to Washington and get a legislator or two to introduce a bill specifically designed to forfend his engorgement (as Pan American did when it was purposefully eyed by Resorts International). Of course, his best defense of all was to persuade investors to bid up the price of his stock, thus achieving the same sort of defensive effect that a blowfish achieves in the presence of a hungry striped bass.

What came to be regarded as the classic defense was mounted in 1969 by B. F. Goodrich, the celebrated old-line rubber company, to foil a takeover attempt by Northwest Industries (clothing, pesticides, steel, and for a time the nation’s only profitable commuter railroad, the Chicago and North Western). Goodrich used all of the methods just mentioned and some others besides. It changed its accounting methods so that its 1968 earnings appeared to have increased by $1.28 over 1967’s, whereas under the old methods the increase would have been only forty-three cents. It achieved not one quickly planned merger of its own, but two. It bought newspaper ads to revile Northwest and its tactics. It changed its charter to provide for staggering the terms of its directors, so that regardless of who might own the stock, no aggressor could control the board for several years. Goodrich vigorously—or, in another view, ruthlessly—used its influence to get government intervention in both its home state, Ohio, and in Washington, and it did this so successfully that the Ohio attorney general issued an injunction against the merger, while the Department of Justice brought an antitrust suit to block it. The defense won; B.F. Goodrich, an unexpectedly formidable old monster when aroused, survived unconsumed.

And all the while individual people, as well as corporations, were being profoundly affected. The executives, particularly the top executives, of the captured companies were subjected at worst to summary dismissal and at best to reshuffling and serious loss of morale. Occasionally a takeover was followed swiftly and grimly by mass firings among the victim’s management, but even when, as more often happened, the victim was left to operate as a more or less autonomous division of the merged company with generally the same personnel, the executives were likely to be overtaken by apprehension and anomie. Each man’s place in the company hierarchy, perhaps painfully won over many years, became meaningless if his new super boss, the conglomerator, didn’t see things his way. Robert Metz told in The New York Times about an executive of an acquired company who observed that he and his colleagues had been given what he called the “mushroom treatment”: “Right after the acquisition, we were kept in the dark. Then they covered us with manure. Later they cultivated us. After that, they let us stew for a while. And, finally, they canned us.”

The economy and amour propre of whole communities became disrupted. Conglomerates’ headquarters were mostly on the two coasts, and often enough their corporate victims resided in the cities in between. The result was the repeated reduction of mid-American cities’ oldest established industries from independent ventures to subsidiaries of conglomerate spiderwebs based in New York or Los Angeles. Pittsburgh, for one, lost about a dozen important corporations through conglomerate mergers. To Andrew Carnegie’s city, cradle of the steel industry, the conglomerate phenomenon was like a tornado that left it battered and shaken; it is unlikely to think of itself in quite the old way ever again.

Finally, there is the profound question of the vast social and political power that conglomerates might derive, if they so wished, from their huge concentrations of wealth—and of how they might choose to exercise such power. For the most part, to all appearances, they chose not to try to exercise it at all. Preoccupied with further growth, internal organization, and raising profits, they stuck strictly to business and seldom sought to alter the social order or to usurp the functions of government. The looseness of their structures, just possibly the liberalism of their bosses, certainly their sheer busyness, all seemed to militate against such activity. Or so it appeared until the largest of them all, International Telephone and Telegraph, began to emerge as a monstrous exception.

Founded in 1920 as a communications service company operating outside the United States, I.T.T. in 1960 was still essentially that, its business overwhelmingly overseas, its assets just under the $1-billion mark and its net annual income around $30 million. That year its new president—Harold S. Geneen, flinty, British-born but naturalized an American in childhood, then just fifty and already spoken of as one of the most brilliant executives in the nation—began remolding it into a conglomerate giant. Nine years and more than one hundred mergers later, I.T.T. had amassed assets of $4 billion; its net income, running at an annual rate of $180 million, had gone up for forty-one consecutive quarters; and it had become the eleventh largest American corporation. Because of the breadth and importance of its acquisitions, its hand seemed to be everywhere in the American marketplace. As Time pointed out in 1972, a consumer who became annoyed with I.T.T. would have a hard time boycotting it: “He could not rent an Avis car, buy a Levitt house, sleep in a Sheraton hotel, park in an APCOA garage, use Scott’s fertilizer or seed, eat Wonder Bread or Morton’s frozen foods.… He could not have watched any televised reports of President Nixon’s visit to China. … [He] would have had to refuse listing in Who’s Who: I.T.T. owns that, too.”

Through the years of its growth under Geneen, I.T.T. had been generally thought of in the conservative business community as an atypical “good” conglomerate, its emphasis on real growth, its takeovers nonhostile, its resorts to accounting tricks few. Even its stock-market performance was moderate by conglomerate standards; between the 1962 low and the 1968 high, its price hardly more than tripled. Even the style of its managers appealed to business conservatives. Taking their cue from the hard-driving and colorless Geneen, they refrained from building mansions or amassing art collections and devoted themselves with fierce dedication to unmitigated work. I.T.T. embodied the old Protestant ethic clad in new conglomerate clothes. It was the Establishment’s conglomerate.

Not surprisingly, in view of these attitudes, I.T.T. was also the most Republican-oriented of conglomerates. And when, in 1969, after years of coexisting with Democratic regimes, it found itself with friends in power in Washington, I.T.T.—like so many earlier business enterprises that had found themselves in similar circumstances—seems to have lost its head and its Protestant ethic. Whether or not in 1971 it offered a contribution to the Republicans in exchange for a favorable settlement of a government antitrust suit remains in dispute (although the company’s use of its now-famous paper shredder to destroy documents scarcely suggests a clear conscience). Most persuasive, however, is the clear evidence that in 1970 the company maneuvered—and offered to contribute $1 million—to block the election as president of Chile, where I.T.T. controlled the Chilean Telephone Company, of the Socialist Salvador Allende; or the evidence that, having failed to prevent Allende’s election, I.T.T.’s self-designated proconsuls negotiated with the United States government at the White House level with a detailed plan, involving economic sabotage and the use of the Central Intelligence Agency, to bring about the overthrow of the Allende government.

The plan was turned down, but the damage was done. Here were shades of Manifest Destiny and gunboat diplomacy; here, naked and unashamed, was immense power without a sense of place, proportion, or responsibility, a planned attempt to enlist public officials to tamper with another nation’s affairs in the cause of private profit. With the revelations, made in 1972 and 1973, I.T.T. came, with one stroke, to win the gold from General Motors as the ordinary man’s prize symbol of consummate corporate arrogance and insensitivity. The sinister possibilities of conglomerates, including the multinational ones, for the first time exposed themselves to the public in a manner to cause not-soon-to-be-forgotten comment and concern.

8

Revitalizers of the moribund and modernizers of the obsolescent, or wreckers of lives, plunderers of cities, and meddlers in the affairs of nations, the conglomerates for a time made American boardrooms and executive suites into a takeover jungle where there were only the hunter and the hunted, and where fear and aggression dominated the world’s greatest marketplace. But only for a time. It could not last, because—perhaps happily—the aggressors, sleek beasts of prey during the years of plenty, would in due course be revealed for the most part as stuffed and toothless tigers.

The start of the decline of conglomerates can be dated. By 1967 Litton Industries had become a gray eminence among conglomerates, its reputation impeccable, its stock soaring, its earnings rising steadily as they had been doing for a decade, its self-image so assured that it could decorate its annual report for that year with pictures of medieval stained glass “so that we may signify our respect and responsibility toward the achievements of the past.” No market expert on Litton, whether in Wall Street or in the company itself, seems to have dared dream that profits might not continue to rise in 1968. But that January, when Litton’s top officers met at the company’s Beverly Hills headquarters, a totally unanticipated state of affairs was revealed. Several of the divisions were discovered, apparently for the first time, to be in serious trouble; as a result, profits for the quarter ending January 31 would, it now became clear, fail to rise at all, and in fact were headed substantially down. In simple words, business was decidedly off, and top management—so vast and various was the empire—hadn’t seen it coming. Management control had been lost.

When the public earnings announcement was made—21 cents profit a share against 63 cents for the same quarter the previous year—in the stock market it was, as a Wall Street pundit put it, the day the cake of Ivory soap sank. Litton stock dropped 18 points in a week, and within a month or so it had lost almost half of its peak 1967 value. Gulf and Western and Ling-Temco-Vought slumped in apparent sympathy, and the first tremors of panic shook the whole conglomerate world.

It wasn’t all over by any means; there would be some wild conglomerate maneuvers and some soaring conglomerate shares in the two years ahead. But the era was on its way to its end when, in January of 1968, it was shown for the first time that conglomerate management—even the best of it—could lose track entirely of the progress or regress of the far-flung enterprises it ostensibly controlled and thus fail utterly of its function. In short, the root theory of conglomeration might simply be wrong, its temporary success founded chiefly on the gullibility of the stock-buying public and its professional advisers.

CHAPTER VIII

The Enormous Back Room

1

It has become a commonplace for social commentators to say that 1968 was the year when the fabric of American life unravelled—when the moral ground shifted and quaked under American feet; when the political far left turned violent and took on ominous fieldmarks of the far right; when the democratic idealism and optimism of the mass of Americans seemed to become a delusion. In January, the U.S.S. Pueblo, on a mission of espionage, was seized in the Sea of Japan with its eighty-three-man crew by North Koreans, and so the mightiest nation in the world was humiliated both morally and physically by one of the smallest and weakest. In February, the Kerner commission on civil disorders, a formally constituted government body, affirmed what many Americans had uneasily come to suspect—that the black violence and riots of the previous year had been caused chiefly by a profound racism on the part of the white majority. In March—although it was not known until much later—American soldiers murdered hundreds of unarmed women and children at My Lai. At the end of that month, the then President made a personal confession of failure by withdrawing from candidacy for re-election. In April, Martin Luther King, Jr., was murdered; in June, Senator Robert Kennedy. In May at Columbia University, students made a public mockery of parental and educational authority while parents and teachers stood by and let them. In August, there was disheartening police violence attending the national convention of the Democratic Party in Chicago. In December, when the United States astronauts Borman, Loveli, and Anders became the first men to see the far side of the moon, there were many of their countrymen too stunned by the year’s events to feel properly proud.

And while this systemic eruption of sores covered the body politic, Wall Street, an organ of barometric sensitivity, had its own convulsions and its own loss of grip and tone. The loss amounted, indeed, to perhaps the single most dramatic technical failure of the free-enterprise system on record anywhere.

2

It was the year Wall Street nearly committed suicide by swallowing too much business, and by compounding its own near-fatal folly by simultaneously encouraging more of the same. The pace of trading had been picking up in the latter months of 1967 as a new speculative binge—the second in the decade—began to take shape. The average daily trading volume for 1967 on the New York Stock Exchange came to 10,080,000 shares, an all-time record by a wide margin. But not one destined to stand. Nineteen sixty-eight was to be the year when speculation spread like a prairie fire—when the nation, sick and disgusted with itself, seemed to try to drown its guilt in a frenetic quest for quick and easy money. “The great garbage market,” Richard Jenrette called it—a market in which the “leaders” were neither old blue chips like General Motors and American Telephone nor newer solid stars like Polaroid and Xerox, but stocks with names like Four Seasons Nursing Centers, Kentucky Fried Chicken, United Convalescent Homes, and Applied Logic. The fad, as in 1961, was for taking short, profitable rides on hot new issues. Charles Plohn, an underwriter known as “Two-a-Week Charlie” for the number of new low-priced issues he brought out, described his philosophy by saying, “I give people the kind of merchandise they want. I sell stock cheap. I bring out risky deals that most firms wouldn’t touch.” The public paid the astronomical amount of $3.9 billion for new stock issues alone during the twelve-month period.

Trading volume was such as had never figured in any broker’s wildest dreams of avarice. During the week after the Johnson withdrawal, which the market considered highly bullish, the Stock Exchange set new volume records almost every day. April 10, 1968, was the first day in history when Exchange trading exceeded 20 million shares; before the year was out there had been five more 20-million-share days, with a peak of 21.35 million on June 13. New investors and new money were coming into the market in torrents. During the first five months of the year, Merrill Lynch opened up over 200,000 new accounts; in other words, that winter and spring one American in every thousand—counting men, women, and children—opened a new brokerage account with a single firm. Brokers, of course, were reaping the harvest in commissions. Some of them had personal commission incomes for the year running to more than $1 million.

One million dollars income in a year, with no capital at risk—merely for writing orders for stock! It was enough to convince anyone that the Stock Exchange had indeed become Golconda revisited, that ancient city within whose portals all, according to legend, became rich, and so desirable was membership in the Exchange that the price of a seat rose from $450,000 in January to reach an all-time record in December of $515,000, topping even the peak prices of 1929.

As early as January, there began to be high cirrus cloud warnings that the back offices, the paper-handling departments of the brokerage firms, were in for a storm of trouble—that, as constituted, they were simply unable to process the new business, and that therefore, as Hurd Baruch of the S.E.C. would put it later, the best of times for Wall Street were in danger of becoming the worst of times. That month, January, the S.E.C. wrote to the two leading exchanges and the National Association of Securities Dealers, guardian of the over-the-counter market, expressing concern about “accounting, record-keeping and back-office problems and their effects on the prompt transfer and delivery of securities.” The main barometric measuring device for the seriousness of back-office trouble was the amount of what Wall Street calls “fails.” A fail, which might more bluntly be called a default, occurs when on the normal settlement date for any stock trade—five days after the transaction itself—the seller’s broker for some reason does not physically deliver the actual sold stock certificates to the buyer’s broker, or the buyer’s broker for some reason fails to receive it. The reasons for fails in most cases are exactly what one might expect: either the selling broker in his confusion can’t find the certificates being sold on the designated date, or the buying broker receives them but in his confusion immediately misplaces them, or someone on one side or the other fouls up the record-keeping so that the certificates appear not to have been delivered when in fact they have been. Of course, not all fails—in 1968 or other years—are the result of innocent mistakes. In a certain number of cases, one brokerage firm or the other intentionally misappropriates the certificates to an improper purpose, or an employee of one firm or the other steals them. There is another problem related to that of the fail. Often, in times of back-office confusion, deliveries of certificates by brokers—particularly deliveries to banks—are rejected by the recipient with the notation, in effect, “I don’t know anything of the transaction.” This confession of nescience is officially and rather charmingly designated a “Don’t Know,” or “D.K.” Incredible as it may seem, a subsequent RAND study indicated that in 1968 between 25 percent and 40 percent of all brokers’ deliveries of stock to banks were thus rejected.

As to fails, which are a more important indicator than D.K.’s of the degree of paperwork chaos in the securities business, the rule of thumb in Wall Street in 1968 held that an acceptable level of fails on New York Stock Exchange transactions at any given time (“acceptable,” the bemused observer must conclude, in relative terms) amounted to one billion dollars’ worth. Let a mere billion dollars of the customers’ money be more or less missing in Wall Street, the conventional wisdom went, and things were still within the ball park. Late in January, the fail level rose well above that figure, and the exchanges took action. Starting January 22, they and the over-the-counter market cut back daily trading hours by an hour and a half; closing time for an indefinite period became 2 P.M. instead of 3:30. The move—in retrospect an extremely timid one—was nevertheless made over loud opposition from a minority of the exchanges’ governors. (The governors were brokers, and brokers, to say it right out, make money on heavy trading.)

In February, the opposition continued. And so did the rise in both trading volume and the level of fails. The early closings appeared to be having little if any effect, and in March they were quietly abandoned, and not replaced by any other restraining action. Would the problem, just possibly, go away? It would not. In April, N.Y.S.E. fails were up to a level of $2.67 billion; in May, to $3.47 billion. All over Wall Street, committees were formed and recommendations made on the back-office problem, but nothing substantive was done. By June, the old, established firm of Lehman Brothers was in such total confusion that its customers’ securities were in clear jeopardy. Back in April, Lehman had converted to a fully automated accounting system, and, as is so often the case, the new system at first simply didn’t work. Stock record discrepancies at the firm, by the end of May, ran into hundreds of millions of dollars. Lehman reacted by eliminating a few accounts, ceasing to make markets in over-the-counter stocks, and refusing further orders for low-priced securities; it did not augment these comparatively mild measures with drastic ones—the institution of a crash program costing half a million dollars to eliminate stock record errors—until August, when the S.E.C. threatened to suspend Lehman’s registration as a broker-dealer and thus effectively put it out of business. Lehman’s reluctance to act promptly to save its customers’ skins, and ultimately its own, was all too characteristic of Wall Street’s attitude toward its troubles in 1968.

At last, when the fails level was up to $3.7 billion, the exchanges finally took a measure of drastic action themselves. Beginning on June 12, the securities markets were closed tight every Wednesday—a measure not used since 1929—in order to give the back offices a regular midweek breather in which to make a stab at catching up. But the order for Wednesday closings was unaccompanied by such logical, if painful, further measures as a prohibition on advertising and promotion designed to bring in still more business, or on the hiring of still more salesmen and the opening of still more branch offices. The lure of new money and additional commissions was irresistible. Brokerage ads continued to fill the financial pages and the airwaves; new salesmen were hired, new offices opened. Wall Street had become a mindless glutton methodically eating itself to paralysis and death.

3

Why? Where were the counsels of restraint, not to say common sense, in both Washington and on Wall Street? The answer seems to lie in the conclusion that in America, with its deeply imprinted business ethic, no inherent stabilizer, moral or practical, is sufficiently strong in and of itself to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short-term money than maintain long-term order and sanity by profiting less. A former high S.E.C. official, talking to me in 1969 about the situation the year before, defended the S.E.C.’s relative passivity by describing its rightful function as that of being “an arbiter between powerful industry groups pulling in different directions.” An arbiter, rather than a conscience? And indeed, did Wall Street that year deserve an S.E.C. that would act vigorously to save it from itself? After all, the Securities Acts, not by chance, were based on self-regulation on the part of Wall Street. Where was self-regulation in 1968?

Essentially, it was in the hands of the leaders of Wall Street’s key institution, the New York Stock Exchange, whose president since the previous September had been Robert W. Haack. Haack was no Keith Funston. He lacked his predecessor’s fire and flair, and also, more happily, Funston’s sometimes fanatical protectiveness of Wall Street and all its self-indulgent ways. Born in 1917 and raised in Milwaukee in modest circumstances, Haack had worked his way steadily and surely to his present eminence: a B.A. from little Hope College, in Holland, Michigan (once famous as the home of Holland rusk); an M.B.A. from Harvard Business School, where he had earned part of his keep by waiting on tables; three wartime years in the Navy; a slow rise, during the nineteen forties, from research assistant to partner in a Milwaukee securities firm; a move to the East, where he joined the bureaucracy of the National Association of Securities Dealers, of which he became a governor in 1961 and full-time paid president in 1964; and then, in 1967, election to what was still the key position in Wall Street. He was the third choice, after Edwin Etherington and Donald Cook had privately made clear that they wanted no part of the job. Funston was a hard act to follow, and Haack, moreover, came to the Stock Exchange with a reputation as a technician, a plodder, a bureaucrat, what the Russians call an apparatchik. Still, he soon showed himself to be something more. He did not hesitate to shake up the entrenched Exchange staff to make it conform to his style rather than to Funston’s; he instituted badly needed long-range planning; he gradually ended Funston’s emphasis on high-pressure promotion of the concept of stock investment for every man; he generally ran a taut ship. Significantly, he kept the home he had bought in Potomac, Maryland, when he had been negotiating constantly with the S.E.C. on behalf of the over-the-counter market, and he commuted from it to Wall Street as often as circumstances allowed. His continued residence near Washington gave evidence of the way in which he conceived of his Stock Exchange role—not as an obdurate defender of Wall Street, but as a mediator between Wall Street and Washington.

An able and conscientious man, then, as even his most disillusioned former employees have conceded. But in the 1968 back-office crisis, Haack was as inadequate as everyone else. “Exchange-imposed restrictions were critical in coping with the paperwork problems of troubled firms,” he observed later. Critical, indeed. Haack might better have used the subjunctive: “would have been critical” might have made more sense. All through the crisis, the Exchange trod on eggs, administering a slap on the wrist here, a pat on the backside there, “urging” and “advising” member firms to take “strong steps” to curtail business, but never itself taking the strong and clearly required step of imposing sanctions to make the members comply. Apart from the ill-fated January and February early closings, the Exchange made no strong positive move until it was confronted with general disaster. In March, for example, it sent member firms a letter pointing out the extent of the problem, and then continuing,

Firms with serious problems may be asked to take steps to limit the growth of business or to reduce business.… In the absence of voluntary action, restraints may be imposed by the Exchange.…

Faced with such pussy-footing, it is small wonder that the member firms did little in the way of compliance. By early June, shortly before the Wednesday closings were instituted, Haack was at it again, pleading with member firms in a new cajoling letter. Now, he said, it was his belief that firms should “seriously consider” adopting “voluntary” restraints on expanding business. Specifically, he suggested that they stop soliciting over-the-counter business; that they “reduce or discontinue” trading for their own accounts; that they disallow commission credit to salesmen on trades in low-priced stocks; and that they take various other steps, including a reduction of advertising and promotion. As Baruch has pointed out, a flat ban on the opening of new offices or the hiring of new salesmen, which would have been legal and proper, was not among the “suggestions.” As to the effectiveness of those that were made: for July, the month after the second Haack letter and the first full month of Wednesday closings, the fail level subsided only fractionally from June’s.

Late in July, the S.E.C. finally began to crack down. It issued a warning to firms that in accepting orders they were unable to handle they were violating the antifraud provisions of the securities laws and were therefore subject to prosecution. During the same month, the S.E.C. began back-office proceedings against two Stock Exchange firms, Estabrook and Company and Schwabacher and Company; in August it took similar action against seven others. The crisis lessened. The Wednesday closings, if they did nothing else, radically upset the normal pattern of trading by introducing a sort of midweek weekend. Whether they or other forces were serving to reduce the trading volume was not clear; but in any case, something was doing so, and in September fails dropped significantly. And how did the Stock Exchange react to this sign of limited progress? Under pressure from its member firms eager to get back to profitable chaos, it announced that the time was imminent for a return to a normal five-day trading week. But by now the S.E.C.’s remarkable patience had come to an end. It forced the exchanges to continue the Wednesday closings and to put special restrictions on no fewer than forty-four firms with back-office problems, compelling them to cut back their business drastically.

The surcease was temporary. In October, the bull-market tide rose strongly again; daily volume moved back up to 15 million shares, equal to the record in June, and there were two 20-million-share days, the second and third busiest days in Exchange history. Of course, the fail level shot up once more. As the autumn continued, and the public reached maniacally for easy money while Wall Street raked in the commissions, the downtown situation took on the quality of a play by Pinter or Beckett. One Wall Streeter told about stock certificates turning up “stuffed behind pipes in ladies’ rooms, at the bottom of trash baskets, in the backs of filing cabinets with old letters.” Another commentator, a Stock Exchange employee, told of a small Pennsylvania investor with an account amounting to a few thousand dollars who wrote to the Exchange explaining that his broker kept mailing him statements crediting him with bonds worth $1 million—and that, despite his repeated efforts, he could not get the statements corrected. (Nor, of course, could he collect the bonds.) Investors who bought one hundred shares of a stock might receive in the mail one share, or a thousand shares, or a hundred shares of some other stock, or, frequently, an empty envelope. Sixty-dollar-a-week backroom employees, tempted by the presence of negotiable securities piled at random on every level surface around them, stole millions of dollars’ worth. In December—when the bull market proceeded majestically to its climax, oblivious of all the cautious efforts of the wise men of Wall Street and the marginally stronger efforts of the scarcely wiser, but certainly more detached, wise men of Washington—the fails level climbed to a record high of over $4 billion. As never before, not in the fabled panics of 1873 or 1907 or even 1929, the American securities industry was in a state of total disarray.

4

It is time that we looked closely at the source of the trouble, the 1968 back office.

Known informally, and suggestively, as “the cage,” the back office was an unlovely and constricting place to work. In its role as the dirty and clanking machinery of Wall Street, unseen and taken for granted by stock salesmen and customers alike, it had no need, from a sales point of view, to be impressive or evenly humanly gracious in its physical appointments. Instead of the thick rugs, leather chairs, shiny desks, and old prints of the reception area and boardroom, it was often sparsely and frugally furnished with dilapidated tables in need of paint, chipped desks with drawer handles loose or missing, malfunctioning typewriters, and creaking swivel chairs with missing casters. In fulfillment of its sole purpose—to keep records and to move physically money and stock certificates in conformity with transactions made in the front office—it was subdivided into a bewildering variety of departments with such discouraging names as “receive and deliver section,” “box and vault section,” “box tickets,” and “update stock record.” Operating this complex machinery required the performance of a wide variety of small jobs, all routine. Merrill Lynch, the biggest broker and therefore the proprietor of the biggest back office, had about five hundred separate clerical titles; “input typist—stock transfer department” was a typically uninspiring job description. So compartmentalized was the responsibility that there were few back-office jobs that could not be mastered by almost any high-school graduate within a matter of days. Pay was low—much below that for unskilled blue-collar work; the back-office worker’s hope for a decent year’s pay lay in the possibility (never a certainty) that the firm would have a good year and hand out big bonuses in December. Opportunity for advancement was slight, and for the most part confined to a few pre-selected favorites who were assumed, under the ancient American business formula, to be serving a term at the bottom in order to “acquire experience.” Everyone else was assumed to be in the back office to stay. Or to leave: annual back-office turnover ran around 50 or 60 percent.

Enter a 1968 Wall Street back office and what kind of atmosphere did a visitor find? A workaday, time-serving atmosphere, as might have been expected, the tedium of routine chores performed under close supervision relieved by a good deal of horseplay, grudgingly tolerated by the supervisors. The jokes revolved around a single theme: “Any idiot could do this job without straining himself.” On a busy day the atmosphere was friendly, but on a slow one it was apt to turn mean—needling, veiled insults, not-so-veiled racial slurs. (By this time, a good number of back-office employees were black.) As a social unit, the back office was much like an army platoon, its morale high when there is a job to do and low when there is time to waste. And the supervision of the back office was often patterned closely on military command. At Merrill Lynch, in the interest of keeping good order, back-office employees were told when to take their lunch breaks, and sometimes even marched to the rest rooms under supervision. Small wonder that they complained about being treated like children.

It is fair to say, then, that Wall Street in 1968, like the sweatshop owners of an earlier time, had cut its own throat through its complacency, greed, and lack of foresight. And yet the solution was easy only in theory. Two clear-cut steps might have prevented the whole mess: automation of back-office operations, and elimination of stock certificates. As to the first, it would have required a degree of planning, and an amount of capital outlay, that Wall Street in 1966 and 1967 clearly had not been able to muster. Even if such foresight and willingness to spend had been present in 1968 all over Wall Street (as it was at Lehman Brothers), the short-term result might have been to worsen the crisis rather than to relieve it. The difficult transition from hand work to machine work might have coincided with the speculative binge and made for an even greater disaster. The second step, elimination of stock certificates, called for something more than planning or expense, and something that perhaps no amount of wisdom could have accomplished—finding a way of persuading the cautious and possession-proud American stockholder that a monthly statement from his broker showing his holdings was an adequate substitute for the embossed stock certificates that he kept locked so lovingly in his bank safe-deposit box. The certificates served no essential purpose in financial terms, and were unquestionably the chief cause of the back-office problem; there was even a precedent for certificateless investment in the mutual-fund industry, which generally did not issue certificates to shareholders except on special request. But direct stock investment was another matter. There, certificates served a symbolic cultural purpose. A century and more of tradition backed up the embossed certificate with its bombastic industrial iconography. The first possession of such a certificate, through gift, inheritance, or purchase, had come to be a milestone in American middle-class life; it marked the moment when the possessor felt himself to be a person of substance and importance—a stockholder; a true capitalist. Rites of passage and symbols of possession are not readily given up, even in times like 1968 when the rites and symbols themselves stand in danger of destroying what they symbolize. Some states made certificates mandatory by law.

So immediate elimination of certificates was, for all practical purposes, a mirage. And, of course, once the back-office crisis had fairly begun it was not even that. Who would suddenly begin to trust in a broker’s records as evidence of ownership at a time when those records were in such a state that the broker could not trust them himself?

In mid-1968, the Stock Exchange made a good, but far too late, effort to ease the situation through automation. For a decade, it had been toying with the notion of establishing a Central Certificate Service, a huge stock depository, with computerized record-keeping on such a scale as most individual firms could not afford, that would make possible the electronic transfer of stock held in brokers’ names, and would thus theoretically reduce the handling of certificates in brokerage-firm back offices by as much as 75 percent. Essentially, the plan was to set up a master back office for the mutual use of all member brokers and thus largely replace the individual back offices. For years the Exchange had been postponing the establishment of C.C.S. on grounds of expense. Now, in the press of crisis, it hastily activated the plan, setting up a vault and a row of computers in the sub-basement of 44 Broad Street, and pronouncing C.C.S. open for deposits. A good try—but one destined in the short run for an ironic fate. Christopher Elias, an Exchange employee at the time, has described how in the first weeks of operation the C.C.S. vault was inundated with certificates in such quantity that they could not be handled by man or machine; how, in sickening imitation of the familiar back-office scene, certificates accumulated in disorderly piles on every flat surface at 44 Broad; how C.C.S. employees, hastily recruited from the scarce labor market or drafted from other Exchange departments, were helpless to create order; how for weeks the C.C.S. computers broke down almost daily. Eventually, C.C.S. would get its bearings and become a useful service. But in the time it was needed most, its first months of operation in early 1969, the facility intended to eliminate brokerage back-office problems became, instead, one more monstrous back-office problem itself.

5

The key Wall Streeters of the 1968 crisis were the back-office employees themselves.

They were young—seventeen to twenty-five in most cases; they were high-school graduates or dropouts. Few had attended college even for a year. They were quite thoroughly mixed as to sex and race; white male supremacy in Wall Street, at the clerk level, had yielded to social change and practical necessity. A solid majority, nevertheless, were white, coming from the near suburbs or the city boroughs other than Manhattan. An important brokerage official later stated his belief that many of them were hired through Mafia-controlled employment agencies. The question of the role of organized crime in the back-office snarl and the accompanying rash of securities thefts remains unanswered. In 1969, a hooded witness created a sensation when he testified before a committee of the New York State legislature as to how easy it was to steal securities. U.S. Attorney Morgenthau, after conducting an investigation, concluded that securities thefts were running at an annual rate of nearly $50 million, but that “the penetration of organized crime in Wall Street is not significant.” Whatever the case, it is hard to believe that very many back-office employees in 1968 were anything more than innocent pawns of organized crime. Most of them brought little ambition to their jobs, or even the intention to remain there for long—a year, perhaps two at the most. They thought of their jobs as something to do until something better, or better paid, presented itself.

Why, then, did they come at all? For a dream of glamour; for the chance to handle or merely to be close to great sums of money; for the chance to be “where the action was”; or simply out of curiosity and the quest for experience, to find out “what Wall Street is like.” Or, indeed, even for prestige: to be able to say, in the local bar or the social club, “Don’t tell me about Wall Street. I work there,” and to watch the heads turn and the eyes widen and be asked for a hot tip on the market. What did they ask for? A living, a sense of doing a job, office companionship, the possibility of meeting a date or a mate—all the things youth asks of routine office jobs everywhere. An ambitious few dreamed the old Wall Street dream of rising from clerk to partner. But what most of them found was tedium, disappointment, long hours, quasimilitary discipline, occasional racial flare-ups, and finally, the nightmarish frustration of being called upon to do what simply could not be done in good order and in good time.

A brilliant and dedicated observer—John W. Faison of the Wall Street Ministry, formerly a sales executive of Allied Chemical—adopted in the latter part of 1968 a classic investigative technique to the study of the goals, problems, and aspirations of back-office people. He, and four students working with him, took clerical jobs in back offices themselves.

Faison’s first conclusion, based on his firsthand back-office experience, was that “we are all playing in a new ball game: this goes for Wall Street as for the universities, the political conventions, the cities, the unions. People in all their associations are calling for new rules and the umpires cannot call ‘safe’ and ‘out’ the way they could a few years ago.” For example, those familiar old forces so long so helpful to business management in getting the most possible work out of low-level employees—company loyalty and personal competitiveness—scarcely seemed to operate on the new breed of back-office employees at all. Faison found that their loyalty was chiefly to themselves, and that it consisted almost entirely in a desire to do the job decently and to appear knowing in their own eyes and in those of their colleagues. There it stopped. They were offended by the thought that they ought to feel commitment of any deeper sort to a job so routine and so intellectually unchallenging. Loyalty to the company? Considering the way it was treating them, they felt that such loyalty would only brand them, in the opinion of their colleagues, as “squares.” Generally, Faison found, the back-office employee “does give a day’s work and that’s as far as loyalty does or should go in his eyes.”

Faison found a pervasive mood of disappointment. The clerks would put up with unlovely and overcrowded working quarters, and even with overwork; such things they could understand and accept. What they could not understand or accept was the sense of not, after all, being where the important things were happening—the sense of being segregated out of sight, brushed under the rug; of never seeing, except indirectly through the ever-mounting work load, the excitement of the floor and the front office in the throes of a memorable and historic bull market. Sometimes, after the markets had closed for the afternoon, floor clerks would come into the back office to help straighten out mismatches—or merely to bask in adulation. These emissaries from the exciting world “outside” would be hungrily greeted by the back-office gnomes as people to be envied and admired, as deities descending to mingle briefly with the groundlings.

Meanwhile the back-office supervisors seem to have had no idea that it was a new ball game, and went on calling “safe” and “out” in the old way. They could not understand why their charges did not feel company loyalty or want to compete for advancement. Nor could they understand why the clerks felt an absolute right to joke and talk while working, or why measured praise for work well done was received with cynicism. Faison told later of a teletype man who was praised by his supervisor for his fast and efficient work on the previous day. “That and a token will get me home on the subway,” the teletypist retorted and turned back to his work. When the supervisor had left, the teletypist turned to Faison, who was working next to him, and said, “Some day I’m going to give him an honest answer. The reason my figures were good was that we were talking the whole day. If you do nothing but this dum-dum job all day you make mistakes out of … out of … well, I don’t know out of what, but you make mistakes.”

And the reverse was true; the loafers, the inevitable gold-bricks and time-servers, played scrupulously by the old rules of the supervisors, and got much of the credit. “Don’t talk,” they advised each other and new recruits, “look busy, and no one will bug you.” Thus back offices became at times the image of a headquarters scene in some satiric movie about the old, preatomic army. Again as in the army, underlings’ attempts to solve problems beyond their stated responsibility were greeted with indifference or hostility. Anyone who tried to find a better way of doing things was quickly labelled a wise guy. Soon would come the warning, friendly but unmistakable, from his supervisor: “Trying to put me out of a job?” Indeed, according to Faison’s report there seem at times to have been positive inducements to make mistakes, which might be a way of attracting attention—even favorable attention if one played it right. Faison remembers Jim, a clerk who made a mistake and whose supervisor later came up and said, “I caught this and it’s been corrected, but for God’s sake, watch it next time.” Jim, following the grapevine wisdom of the back room, acted obedient and penitent; the supervisor grew expansive. It was a small thing, he allowed graciously, a mistake anyone could have made; it surely would not happen again; Jim was a good fellow. The supervisor preened, his self-esteem doubly raised—once because he had caught the error and again because now he was being so magnanimous about it. When the supervisor moved on, Jim’s colleagues were quick to close ranks with him, commenting sarcastically on the supervisor and his lordly manner: “Big deal— the big noise from Nyack.” And Jim, warmed by appreciation, smiled and said, “At least he knows now I’m alive.” So everyone involved felt better than he had before—everyone, that is, but the all unknowing owner of the stock certificates that had nearly been lost.

In their frustration and boredom, back-office employees found satisfaction in asserting their individuality through constantly discussed outside hobbies and eccentricities, through acquiring nicknames like Damon Runyon’s Broadway characters: Surfin’ Sally, Harry the Handicapper, Poolroom Marty. “I have borrowed a word from the hippies, and call these interests ‘things,’” Faison wrote. “When the subject came up for discussion, the final word belonged to the clerk who had this or that as his ‘thing.’ The ‘thing’ was more important than the job, the office, the company. It got the possessor status.… The clerk who attacked a ‘thing’ made an instant enemy. If he wanted to stay inside the gang, he made amends and recognized his colleague’s ‘thing’ at the earliest possible opportunity. But what does this tell us of his job, if his major commitment is to some ‘thing’?”

The back office was an old story, then, told before by Dickens and Charles Chaplin, among others; a story of “young people risking what are to them the golden years,” as Faison put it, and getting their return chiefly in frustration. But the old story now had an entirely new twist. Its characters were different. The young people this time were the new breed of human beings born since World War II: born, that is, as no one had ever been born before, not knowing a world without television, or jet travel, or automation, or nuclear weaponry; and knowing only by hearsay, if at all, of a world with the shared standards, conventions, and assumptions that had been undermined and finally destroyed by too-rapid technological change. Margaret Mead suggested how profoundly different were the postwar young from anyone who had come before when she wrote, “Even very recently the elders could say, ‘You know, I have been young and you never have been old.’ But today’s young people can reply, ‘you never have been young in the world I have been young in, and you never can be.’” This special self-confidence, this belief in having an understanding of the climate of the modern world that their elders could never share, was characteristic of the back-office people. As well expect them to feel loyalty to the company, or be sincerely pious about small errors in accounts, as ask a modern scientist to devote his life to alchemy.

6

Lunch time in 1968 Wall Street: the clerks, typists, and certificate-sorters of the back office pour out for an hour into the gray, mostly sunless canyon bottoms of the area, to eat sandwiches or exchange gossip or just sit and unwind, on the Subtreasury steps or in Chase Manhattan Plaza or in Trinity churchyard.

An extraordinary picture of that summer in those streets has been given by a man who prefers to be known simply as Blackie. He is a smallish man from Staten Island, a householder with a wife and children, who wears black-rimmed spectacles and has an alert, nervous manner. In 1968 he was thirty-six years old, and was a plainclothes detective of the New York Police Department.

Since 1962 Blackie had been an undercover man for the narcotics squad. His assignment was simple and straightforward: posing as an addict, to buy narcotics from sellers on the streets of the city, under observation by fellow members of his police team; after such outlaw sellers had thus been observed in action and arrested by the members of the team, to go to the precinct station and confirm the identification of the suspects (through one-way glass, to preserve Blackie’s cover); to deliver the material he had bought in the street to a police laboratory for analysis to confirm that it was in fact contraband; and, finally, to appear before a county grand jury and give evidence as witness for “the people.” Between 1962 and 1968, Blackie had gone through this monotonous yet hazardous procedure hundreds of times. At different periods, he had worked in Chelsea, in Harlem, in the West Eighties, in other parts of the city. Once, in 1967, working the Lower East Side, he had been mistaken for a seller by a group of men who wanted to steal from him. Unable to convince them that he had no narcotics, he had been badly beaten—a broken nose and a concussion. Another time he had had a narrow escape from death at the hands of an armed pusher who correctly suspected him of being a policeman; only Blackie’s glib tongue had saved him that time. Early in 1968, when his superiors assigned him to work the Wall Street area, he thought he was being given a rest cure in recognition of his years of dangerous duty. He says:

“Narcotics in Wall Street? Some kind of a gag, I thought. Prior to that, they hadn’t assigned a single undercover Narc Squad man to work down there. Nobody dreamed there was any action on Wall Street. Oh, once in a while there’d be a complaint from the Stock Exchange that some of the boys were blowing a little pot in the building. But it was considered an isolated thing, and it was believed that the pot had been bought outside the area.

“Well, in the summer of sixty-eight I began working there, along with an arresting team. As always, my colleagues would make themselves scarce while I worked, posing as an addict, trying to score. When we had evidence against somebody, my colleagues would make the arrest and my cover would be preserved. I was the only undercover man in the area. I thought it was a waste of time, but, what the hell, I’d enjoy myself. I used to eat lunch every day on the Subtreasury steps. It was a pleasure. I’d bring a big hero sandwich and sit there, looking around at the boys and girls. I talked to them. I got myself known—as Blackie. In this game, you wear a costume appropriate to the neighborhood. In a Puerto Rican neighborhood, Puerto Rican clothes. In Harlem, clothes appropriate to Harlem. In Wall Street I wore bellbottoms, a neat shirt, maybe even a jacket—like a securities runner, or a clerk. I’d carry a manila envelope. I’d sit down there on the steps and smoke a cigarette, and look around. It wasn’t long before I realized how wrong I’d been about the area. It was wild. It was like nothing I’d ever seen. Kids were just sitting there and smoking pot openly, as if they were smoking Chesterfields. I couldn’t get over it, at first. I could sit there and look around and say, he’s smoking pot, and so is he, and he, and she. All around me. They were so naïve, it was as if they were living in a dream world. Well, I wasn’t out to arrest pot smokers—only sellers. But that was no problem. The kids hadn’t bought the stuff outside the area. There were sellers right there—plenty of them. They’d get up behind the pillars at the top of the steps, and the kids would go up there to deal.

“We busted some of the sellers. It was our job. But that was only pot. Pot you can survive; I’ve never in all my experience seen anybody badly hurt by pot alone. What really shocked me was the heroin sold all over the place down there. As an undercover man, I bought it that summer in Chase Manhattan Plaza, in Trinity courtyard, even right on the Subtreasury steps. The sellers were everywhere. It even got so the sellers in other areas got the word that Wall Street at noon was a hot area. So they’d come down there to do two hours’ fast business. There was one very popular area for dealing pot or skag or pills. For dealing anything. It was right in Trinity churchyard. Way up in the northeast corner there’s a little spire with steps leading up to its base—a memorial to the patriot prisoners in the American Revolution. It can be reached only by a narrow path bounded by heavy privet hedges. Perfect protection—a cop can’t approach except along that one path. I went up there and got introduced around—as a user, naturally. I was just Blackie to them. Everybody blew smoke there. You could buy hash. A guy who hung out there sold little balls of hash for a dime—ten dollars. I bought from him, and then we busted him. He was a problem though. He knew the ropes, and we finally had to chase him all the way up to City Hall to arrest him.

“I remember some of the other Wall Street pushers from that summer. They were almost local characters. There was one real slick dude, Slick I’ll call him, who always wore a porkpie hat and a trim mustache. He looked like the average office worker. He had one of the best bags in Wall Street—topnotch stuff, I mean, or at least that was his reputation. There was another guy who wore sneakers and green pants—Rudy. He stuck out like a sore thumb down there. He was easy. I bought from him twice, and we busted him. Two weeks later, he’d made bail and was out there again—‘Want to score, Blackie?’ He still had no idea I was a cop. Naturally, I busted him again. Then there were two guys everybody called the Gold Dust Twins, one sold pot and the other heroin. They’d roam all over the area together, up and down Wall, through William down to Hanover Square, back to Trinity, everywhere. They were very square. When I went up to them and said I wanted to score, they’d bring everything out, like it was a candy store—‘Pick whatever you want, Blackie.’ No experienced seller does that. We busted them. The sellers in the area weren’t all addicts, like the sellers in Harlem. Some of them were just businessmen making a buck. Rudy might have been skin-popping, but nothing more. Slick definitely wasn’t strung out on anything. On the other hand, some of the office workers I saw were really strung out, so bad they couldn’t sit down at their adding machines without getting straight first.

“What disturbed me most was seeing young office girls on pills—Tuinal, Seconal, Blue Angels. They didn’t look exactly like average office girls. Not exactly. They looked almost like average office girls. They were just a little more dishevelled, and they’d be scratching at themselves—using pills makes you do that. Once, I saw some of them using pills right in the foyer of Trinity Church. I went to the minister and asked for permission to stay there, with my team, during the noonday service. He said no, he threw us out. Maybe he was right.

“There was a guy on crutches selling heroin in the Street. Can you imagine it—a skag dealer on crutches? I tailed him, and lost him. I actually did. It was incredible. It was at noon and the streets were crowded, and somehow he ducked into the mass of humanity and got lost. It’s been a classic joke in our office ever since, the only cop who ever lost a man on crutches in a chase. And I recall another guy I lost. He had a big black attaché case, which he’d whip out and offer huge bags of smoke. When he offered them to me I was caught short. I didn’t have enough money on me to pay for one of his bags, so I lost him.

“The users, the clerks and office workers, were all naïve. I can hardly believe it, looking back. They weren’t people who were conditioned to the police—they acted as if it was a carnival or something. Mostly the users, even the heroin users, weren’t strung-out hardcore junkies. I’d say many of them came from middle-class families. Maybe it’s different now, I don’t know—I don’t work there any more. One thing I do know. Your average Wall Street security guard who stands around with his finger in his ear, in 1968 he didn’t believe what he saw. He shut his eyes to what was in front of him. He just didn’t believe it, and neither did I, until I came and worked there and found out.”

Could it be, then, that part of the truth about the great Wall Street back-office crisis of 1968 is what no one has suggested above a whisper—that a major factor in it was drugs and the blessed escape into instant euphoria that the hard stuff affords? If so—and surely Blackie’s story is persuasive evidence—then the implication for day-to-day commerce in the world’s greatest commercial nation is large and alarming. It is that a moment arrived in Wall Street in 1968 when the necessary minions of industrial life found their work, or their lives, or both, so unfulfilling as to drive them to chemical escape that, in its turn, made them incapable of performing the necessary work. The life-sustaining cycle of commerce had been broken.

7

When at length the back-office crisis passed, it did so without benefit of the wisdom of either Wall Street or Washington.

During a wild December, the fails level peaked out at the all-time high—$4.12 billion. Nevertheless, beginning on January 2, 1969, the exchanges resumed a five-day trading week with 2 P.M. closings. Haack explained later that the Wednesday closings had been abandoned not because they had accomplished their purpose but because they had failed to do so; too many brokerage firms, rather than using them to catch up, had simply treated them as holidays. “Frankly, I don’t see any end in sight,” a leading brokerage partner said. Wall Street at the turn of the year had tried all such remedial measures as it was willing and able to make, and they had all failed; it was at the end of its rope.

It was saved, not for the first time, by a deus ex machina. The end of the crisis was coming, and coming in its own way in its own time. In January, prices and volume both dropped sharply on the Stock Exchange, average daily trading from 15 million shares to 12 million, the Dow industrials from the December peak of 985 to the 920–930 range. The fails level responded by dropping 20 percent to $3.3 billion. In February, volume dropped to 11 million shares a day, the Dow to below 900, fails to below $3 billion. By the end of March, fails were down below $2.5 billion; in June the Dow sank to 870, in July almost to 800. Starting early in July, the exchanges began lengthening their daily trading hours, in thirty-minute stages, until closing time was back to 3:30.

The back-office crisis was over, ended less by reason and intelligence than by the advent of a bear market destined to bring new and unforeseen crises.

CHAPTER IX

Go-Go at High Noon

1

Not by chance, cultural and social revolution hit Wall Street, New York, at the same time that it hit Wall Street, U.S.A. It was in 1968 that New York City first came to seem ungovernable, out of hand, to large numbers of formerly optimistic citizens. Those who loved the city had clung to the belief that for all its passing anarchies—soot, noise, clogged streets, racial tension, the deadly cycle of drugs and crime, unconscionable strikes against the public, corruption in office—some deep, underlying civic principle of order and good will ruled it with an invisible hand, so that things would come out all right in the end. But in 1968—perhaps chiefly because of the infamous teachers’ strike, as shocking for the shrugging public acceptance of closed schools as for the cynical political maneuvering that caused and perpetuated it—the sinking feeling overtook many citizens that the invisible hand had disappeared, if it had ever existed at all, and that there was no longer any foundation of order.

But of course, it was still a great city, and in time the sinking feeling would pass. The new stridency of minorities was a result of new freedom rather than a response to new oppression, and, as the music critic Harold C. Schonberg pointed out, “around the corner, almost anywhere, is at your disposal the best art, the best music, the best libraries, the best restaurants, the most varied entertainment, that any city in the world can offer.” New York’s brave, hardy flowers of art and culture went on blooming in the ruins of its social order. Breaking must come before rebuilding, and it was possible to look upon New York in 1968 as not a city dying—as so many pundits inside it and out so confidently proclaimed it to be—but as one being reborn.

Almost all of the great cultural centers of history have first been financial centers. This generalization, for which New York City provides a classic example, is one to be used for purposes of point-proving only with the greatest caution. To conclude from it that financial centers naturally engender culture would be to fall into the most celebrated of logical fallacies. It is nonetheless a suggestive fact, and particularly so in the light of 1968 Wall Street, standing as it was on the toe of the same rock that supported Broadway, off-Broadway, Lincoln Center, the Metropolitan Museum, the Museum of Modern Art, and Greenwich Village. At that moment, the revolution in Wall Street standards and mores that we saw emerge in 1965 was rampant: the physical paralysis of the back offices was paralleled by the sort of overthrow of old authority and abrupt disappearance of old norms that is characteristic of social revolution at all times and places. But Wall Street’s revolution, like New York’s, was not entirely bad. There were new flowers budding and even blooming in the ruins.

2

Begin with the old social edifices that survived more or less intact. In many instances they were Wall Street’s worst and most dispensable; for example, its long-held prejudices, mitigated only by tokenism, against women and blacks.

Women in Wall Street (as in the nation) were fighting their way to positions of importance, but not in numbers. By 1968 there were hundreds, perhaps a few thousands, of women brokers handling primarily the business of the rising number of women investors who trusted chiefly other women—a happy case of common interest between social reform and profit. But at the higher levels, women downtown were scarcely pushing the male chauvinist pigs up against the Wall Street. On December 28, 1967, Muriel Siebert, a tough, affable, and ambitious woman broker in her thirties, who had been a stock salesman with several different firms and then decided to go it on her own, became the first woman member of the New York Stock Exchange in modern times; on the day she first went on the floor to make a trade, the Exchange bureaucracy, never noted for its delicate sensibilities, required her to wear a trainee’s badge. In July 1970, Madelon Talley, a New York housewife who had tired of full-time housewifery and taken some courses in finance at Columbia, became co-manager of the Dreyfus Leverage Fund—and Wall Street’s first female fund manager. A couple of long-locked doors opened a crack, then; but only a crack.

As to black men (not to speak of black women) in positions of influence or power, Wall Street had advanced the miniscule distance from the no-tokenism of 1965 to tokenism at the end of the decade. In July 1968, Shearson Hammill and Company began working on plans to open a branch office in the heart of Harlem—the first brokerage branch ever in any black ghetto in the country. It would have been quite unrealistic to assume that the local Harlem community could afford to generate sufficient brokerage business to support a profitable office, and Shearson Hammill made no such quixotic assumption. The hard-nosed notion was that white financial institutions—major foundations, mutual and pension funds, endowments—would be willing, out of charitable or public-relations motives, to channel part of their brokerage business through a Harlem office for the deliberate purpose of feeding commission money into a poor black community, instead of handing such commissions over, routinely, to prosperous Wall Streeters. There were squabbles over terms with various Harlem groups, particuarly the local chapters of CORE. Out of them came a decision by Shearson Hammill to establish a foundation—named for Crispus Attucks, the black man believed to have been the first American killed in the American Revolution—to be “dedicated to helping foster a viable economy in the Harlem community,” and to be financed by pledged contributions of 7½ percent of all gross revenues of Shearson’s Harlem branch. The office opened on Harlem’s main drag, 125th Street, with a largely black staff, in July 1969, under the managership of Russell Goings, Jr., a firm yet amiable black man in his thirties who had once shined shoes in a suburban office of Merrill Lynch, and had briefly been a member of the Buffalo Bills football team. Enough white institutions threw business to the office to make it modestly profitable (from the start, its dealings were over 99 percent institutional), and to bring the Crispus Attucks Foundation significant revenue. Looked at cynically, the Shearson Hammill Harlem operation could be viewed as just one more instance of guilty or frightened whites paying tribute to blacks. Still, in the context of insular Wall Street—surely in most times one of the least guilt-ridden communities on Earth—it was a substantial step forward.

Downtown at the Stock Exchange, there were signs of similar progress, not yet in 1968 but soon thereafter. In February 1970, Joseph Louis Searles III, a thirty-one-year-old black man, would become the first black member in the history of the New York Stock Exchange, as a general partner of and floor broker for Newburger, Loeb and Company. Like so many Stock Exchange members before him, Searles borrowed money to buy his seat; like Russell Goings he was a former star football player—a record of participation in America’s favorite weekend sports entertainment apparently being, at this time, the de facto prerequisite for black men in the brokerage field. But irony intruded; Joseph Searles joined the Exchange at the worst possible moment for any man of whatever color or race. The market itself is coolly impartial and, by November of the same year, Searles had lost his entire personal stake in the general 1970 crash and would soon resign his seat and leave Wall Street for a new career elsewhere.

At the end of 1970, then, the Stock Exchange would be left with a single woman member, and with no black members at all.

3

Hardly anything else on Wall Street had remained the same since 1965. The most conspicuous change was the triumph of youth. The battle of the generations had ended in a rout; living out the Freudian fantasy, Wall Street by now had killed its father. The late sixties became, for a shockingly brief moment, the heyday of the young prodigy, the sideburned gunslinger. What manner of young man was he? He came from a prospering middle-income background and often from a good business school; he was under thirty, often well under; he wore boldly striped shirts and broad, flowing ties; he radiated a confidence, a knowingness, that verged on insolence, and he liberally tossed around the newest clichés, “performance,” “concept,” “innovative,” and “synergy”; he talked fast and dealt hard (but unlike the back-office people he seems to have seldom used drugs, including marijuana); and, if he was lucky, he made 40 or 50 percent a year on the money he managed and was rewarded with personal earnings that often exceeded $50,000 a year.

Indeed, the gunslinger hardly needed to “perform” at all. His youth itself was his stock in trade; he was a winner on board, so to speak, by virtue of an abrupt and scarcely believable reversal in local cultural fashion. The Institutional Investor magazine told of an under-thirty stock analyst with three years’ experience (a good average for young analysts of 1968) and a salary of $25,000, who decided to better his situation by changing jobs. Within two weeks of making known his availability he had fifteen job offers, including one of $30,000 plus bonus and equity in the firm, one of $30,000 with the virtual promise of $50,000 and a partnership in two or three years, and one of $30,000 plus bonus, profit sharing, and deferred compensation. Again, The Institutional Investor reported, a thirty-two-year-old already making $50,000 was approached by an executive recruiter with a package offer from a mutual fund that amounted to something in the vicinity of $150,000 a year. “And you know what this character says?” the dumfounded recruiter reported. “He says he wants to think about it!”

In plain numbers, youth had taken over Wall Street. An old-line Boston investment advisory firm estimated, and reported to its clients with something like horror, that 10 percent of all investment people in 1969 were forty-five or over, 25 percent were twenty-five to thirty-five, and the other 65 percent were under thirty-five. In the new climate, an under-thirty had so much going for him that he sometimes needed to pick only a single stock-market winner to become nationally famous. Martin Sass, twenty-five, of the advisory firm of Argus Research, spotted a knitwear company on the rebound called Duplan, liked its management and its key product—women’s pantyhose—and recommended it in April of 1968; Duplan turned out to be the biggest percentage gainer on the Big Board that year, and when Business Week came around to interview Sass early in 1969, he could afford to lean back and allow that “about ninety-five per cent of the stocks I screen turn out to be pretty dull”—with the off-hand manner of an elder statesman. Then there was Bill Berkley. In 1966, when he was a portly, confident, twenty-year-old second-year student at Harvard Business School, a speaker is said to have proposed to his class that all those students who would be satisfied to make twenty thousand dollars a year stand up. A few students arose. How about fifty thousand? Some more students. Well then, one hundred—two hundred thousand? By then the whole class was standing, except Berkley. Immediately after graduation in June 1968, he and an “older” partner (aged twenty-five) formed Berkley, Dean and Company; by the following January they already managed $15 million in investment accounts and had just launched their own mutual fund.

Fred Carr of Enterprise Fund was all of thirty-seven by 1968, and the once-redoubtable Fred Alger of Security Equity was going on thirty-five—fast-fading stars. (“Which Fred do you like?” insiders had asked each other a couple of years earlier; but no longer.) Gerald Tsai, at forty, was a man of the past to be revered but no longer to be heeded. It was coming to be believed, in the absence of evidence to the contrary, that almost any man under forty could intuitively understand and foresee the growth of young, fast-moving, unconventional companies better than almost anyone over forty. In the face of this clearly prejudiced new view, age continued to fight a desperate holding action. “Competence and judgment are not the product of age alone,” tradition-oriented David L. Babson and Company grimly wrote its clients, “but there is a high correlation between experience and the ability to assess the risk factor.” One may imagine the chortling of the gunslingers at that.

Among the weaknesses of youth is intolerance, and the youth takeover brought with it a new intolerance toward the very qualities Wall Street had always most revered, age and experience. No imaginable social change could have rocked the traditional Wall Street order more profoundly. How, then, did this sudden reversal of values come about, and was it a good thing? As to the first question, we have already noted the effect of Wall Street’s missing generation, the vacuum left by the disinclination of young men of talent and energy to go there to work between 1930 and 1950. But surely something else was involved—the confluence of great worldwide trends during the late nineteen sixties toward youth-fear and youth-worship; toward allowing and even urging students to set attitudes and fashions for their elders; toward a belief that only the young were equipped to understand and master the new world that the old had created but could not control; and, finally, toward rejection of irrelevant experience and uncritical acceptance of intuition unsullied by fact. Wall Street, which lives on dreams and fashions, was, for all of its pretensions to rational practicality, precisely the milieu within which the new gospel of youth could proliferate.

Wall Street provided a climate that permitted a trend to feed on itself; the quite traditional levers of Wall Street success, personal contacts and the possession of privileged information, now worked in favor of the young money manager or brokerage deal-maker and against the old one. Would the thirty-year-old president of a fast-moving franchising or computer-leasing firm prefer to break bread or close deals with a Wall Streeter of sixty, or with a self-anointed swinger of thirty very much like himself? When it came to the hot stocks that were the darlings of the 1968–1969 market, the Street’s elder statesmen were all out to lunch. They could still get through promptly to GM or to Telephone whenever they wanted to, but that wasn’t where the action was.

And yet, did it work? Did the intuition and kindred spirit of youth, as instruments of security analysts, do well by the broad mass of investors? Not judging by results. In 1970 most of the glamour stocks would fall out of bed and many of the gunslingers who had touted them would leave, or be fired from, the securities business. As John Kenneth Galbraith remarked in the spring of 1970, “Genius is a rising market.” The look of eagles became a vacant stare once the ever-rising market began to plunge. But the revolution in Wall Street faiths and values that the youth binge briefly produced was a necessary corrective to some venerable shibboleths, an antithesis that might later lead to a synthesis. It taught Wall Street that old men make mistakes, too.

4

Meanwhile, the financial community had somehow, for the first time in this century, reversed its tightly held tenet that war is bullish and that peace is for the bears. This pragmatic hawkishness had become firmly established at the time of World War I, which changed the United States from the world’s leading debtor nation to the world’s leading creditor nation, and gave rise to the famous munitions profits so scathingly exposed by the Nye Committee during the time of the New Deal. World War II failed to produce a major bull market in large part due to the excess-profits tax, but it certainly did not produce a bear market, either; the Dow industrials on V-J Day stood some 50 percent higher than they had stood the week before Pearl Harbor. The Korean conflict, in Dow terms, was modestly bullish. The fact is, as Eliot Jane way wrote in The Economics of Crisis, that “America’s wars seem to have paid not only somebody but usually almost everybody.” International conflict was good business-page news because war, or the threat of it, kept people and machinery busy; conversely, international reconciliation or its illusion raised specters of idleness and overcapacity. Just as the Communists were always saying, finance capitalism seemed inherently to thrive on war. Or—if the matter is regarded from a moral rather than a political stance—the reaction of the Dow to peace and war over the years provides the most dramatic possible demonstration of the fact that the market, although a product of human psychology, lacks anything resembling a human soul.

The disheartening attitudes of the late nineteen fifties—those edgy years of Cold War confrontations, competitive nuclear tests, and the stockpiling of unthinkable weapons, when it had become routine for Wall Street to treat the slightest, most transient breath of international reconciliation, not to mention international amity, as a signal for panic—carried over far into the nineteen sixties. The hair-raising Cuban missile crisis in October of 1962 passed with only a momentary stock drop, apparently because investors realized with shock that while war may be good for the market, enjoyment of a good market depends on being around to enjoy it. In 1966, when demonstrations against the Vietnam War first came to Wall Street, it reacted in general with a measure of disdain. That April 12, a group of about a dozen boys and girls calling themselves Youth Against War and Fascism briefly disrupted Stock Exchange trading by throwing antiwar leaflets onto the floor from the visitors’ gallery. They were dragged from the gallery by armed guards, and Exchange officials commented, no doubt justifiably, “We don’t want the gallery used as a political platform.” Needless to say, the stock market averages were unaffected. Two days later there was a small, acrid pitched battle on Broad Street outside the Exchange, in which Y.A.W.F. kids traded punches and insults with members of a right-wing group, American Patriots for Freedom. Official Wall Street took no notice, but open controversy over the war had invaded its precinct at last. Then, a bit more than a year later, Abbie Hoffman and his friends threw their dollar bills on the floor and elicited the response they desired.

At first I thought throwing out money at the Stock Exchange was just a minor bit of theatre [Hoffman wrote later]. … We didn’t even bother to call the press. About eighteen of us showed up. When we went in the guards immediately confronted us. “You are hippies here to have a demonstration and we cannot allow that in the Stock Exchange.” “Who’s a hippie? I’m Jewish and besides we don’t do demonstrations, see we have no picket signs,” I shot back. The guards … agreed we could go in. We stood in line with all the other tourists, exchanging stories. When the line moved around the corner, we saw more newsmen than I’ve ever seen in such a small area. We started clowning. Eating money, kissing and hugging, that sort of stuff. … We were ushered in and immediately started throwing money over the railing. The big tickertape stopped and the brokers let out a mighty cheer. The guards started pushing us and the brokers booed. When I got out, I carried on in front of the press. … We danced in front of the Stock Exchange, celebrating the end of money. I burned a fiver.

The event was entirely without explicit antiwar content; but hippies were associated in Wall Street minds with the antiwar cause, and perhaps the summer day of 1967 when the ticker stopped and the brokers cheered for the hippies marked the moment when Wall Street began to reverse itself on the war. In any case, the change had been fully accomplished by the following spring. The astonishing market of the first two weeks of April 1968, when prices rose wildly on record volume to usher in the manic phase of the go-go era, was manifestly a peace market, in response to President Johnson’s abdication speech of March 31 and the accompanying prospect of Vietnam peace talks in Paris. The portents of peace were to prove false. But to one who happened, as I did, to be inside the Exchange on April 3—a day of all-time record volume, and incidentally a soul-stirring spring afternoon—Wall Street response was heartfelt and very nearly inspiring. By ten minutes before closing, the day’s trading volume had passed the 19-million share mark, easily breaking all previous records, and the Dow was up half a dozen points. The quotation figures were dancing a jig across the lighted screens above the floor. The brokers were giving vent at intervals to shouts and loud whistles. One of them had devised some sort of launcher from which, now and again, he sent a paper airplane rocketing almost to the room’s lofty ceiling. As the last five minutes of trading ticked off, the noise grew louder and more boisterous; in the last thirty seconds all of the brokers moving around the floor speeded up to just short of a run. When the closing gong sounded, the cheering almost drowned it out, and a corona of shredded paper flew up from each trading post to produce a festive semblance of fireworks. Everyone, it seemed, was happy.

If so, it seems fair to assume that the happiness was attributable not just to the prospect of peace but rather more to the fact that everyone was making money hand over fist. To be sure, a strain of genuine pacifist idealism is discernible in Wall Street in 1968. (For one example, a young fund manager named Fred Mates—third and last of the Freds—went so far as to decline to invest in companies making armaments because he did not choose to profit from the war.) But generally speaking, the coming of doveishness to Wall Street does not appear to have been causally related to the triumph of youth. For all of their sartorial flamboyance and other field marks of superficial rebelliousness, the young swingers as a group were apolitical, unsentimental, and unself-consciously single-minded in their devotion to profit. In this sense, as opposed to their investment techniques and their personal style, they were throwbacks to earlier American generations rather than exemplars of their own. Such antiwar idealism as Wall Street mustered came largely from their elders, an idealism that reached its peak on Moratorium Day, October 15, 1969, when Wall Street leaders by turns took part in a daylong reading of the names of forty thousand American soldiers killed in Vietnam from the two stone pulpits in Trinity Church; and the readers, with a few notable exceptions, were not the young Turks but rather the old pillars of respectability like J. Sinclair Armstrong, executive vice president of the U.S. Trust Company of New York and the former chairman of the S.E.C.; Robert V. Roosa, Brown Brothers partner and former Under Secretary of the Treasury; John R. Lehman, of Lehman Brothers; Amyas Ames, of Kidder Peabody; and Roswell Gilpatric, partner in the Cravath law firm and former Deputy Secretary of Defense.

The old cold war establishment had done a flip-flop and was now leading Wall Street toward peace; and the reasons were almost certainly chiefly practical. Just as Britain, back in 1910, led by the eloquent Norman Angell, had suddenly realized that the Empire was no longer a paying proposition, so the Wall Street leadership in 1967 and 1968 suddenly realized that wars like the one in Vietnam were simply no good for business. The practical considerations had changed; mounting labor costs and federal deficits had made government contracting far less profitable than it had formerly been (if profitable at all), and the mounting drain of dollars abroad put the dollar constantly in trouble on the international markets. Foreign wars, it suddenly became clear, were now a national liability.

Hard heads and a soft currency had made Wall Street doveish. Being soulless, the market cannot be congratulated on a spiritual conversion. Still, those wild days in April 1968 were a time and place when human self-interest appeared to be more than customarily enlightened. It was a time when Wall Street accordingly took on a new and unaccustomedly attractive aspect.

5

At a more down-to-earth level, Wall Street’s conscience was, however, as bad as or worse than ever. And by the way this fact was identified hangs a tale.

In 1966, a young, vigorous, handsome clergyman, Francis C. Huntington, who in appearance and manner rather strikingly resembled New York City Mayor Lindsay, was working as a curate at Wall Street’s Trinity Church. He was not happy in his job; he conceived his mission there very specifically, as a means to explore the work-related moral problems of people employed at a professional level in Trinity’s immediate vicinity, the financial district. To this end, he began having discussions with brokers, bankers, financial lawyers, and the like, at which he encouraged them to tell, as Huntington put it, “What was bugging them about their jobs.” The program did not flourish, because Trinity at the time still adhered largely to its traditional policy of tending to its spiritual knitting and leaving the worldly marketplace outside to its own devices—of rendering unto Caesar what was Caesar’s and unto God what was God’s. Frustrated by lack of encouragement from his superiors, Huntington left Trinity and, in January 1967, with only himself and a secretary in a little office on Liberty Street, he set up an interdenominational organization called the Wall Street Ministry, to carry on the programs he had begun at Trinity.

Modest financing came from various financial firms and industrial corporations—and from Trinity itself, which, while unwilling to foster Huntington’s project as an in-house activity, was glad enough to encourage it as an independent project. The Wall Street Ministry immediately began holding regular luncheon seminars of Wall Street professionals at which they were urged to air their problems of conscience. In 1968, having acquired the services of the dropout executive John Faison, it conducted the survey of back-office life that I have described earlier; and in 1969 and 1970 it found itself in a unique position to study the effect on financial workers’ morale and morality of a full-scale market crash. As Huntington described his organization’s purpose, “We are aiming at a value-structure within the securities business.”

The seminars, at first, were disappointing. They did not attract the kind of people who are inclined to bring up what Huntington called the gutsy problems, and when those who came did present problems, the problems always seemed to be someone else’s rather than their own. Apart from this evasiveness, Huntington found anger and disappointment, particularly among the lawyers, when he would decline to give a clearcut moral answer to their questions. Why wouldn’t Huntington lay down God’s law the way the Supreme Court lays down man’s? Thus confronted, Huntington would smilingly deny his identity with God. But the lawyers remained unsatisfied.

It was on the conscientious problems of stockbrokers that the Ministry’s seminars and interviews were most productive. Brokers, unlike lawyers, proved to be quite anxious to unburden, and the picture that emerged from their talks, in 1967 and 1968, was of a brokerage industry ridden with guilt and frustration. The Oxford Dictionary tells us that between the years 1377 and 1694 the word “broker” meant, among other things, “a procurer, pimp, bawd; a pander generally.” To judge from what Huntington and his colleagues heard, many brokers in Wall Street in the late nineteen sixties felt its meaning hadn’t changed very much.

How, for one thing, to answer the eternal question of where to draw the line between investment and speculation? Just when is a broker morally entitled to encourage a customer to buy a frankly risky stock, and when is he not? Is the old argument that speculation serves national goals by providing for economic growth a morally defensible one, or just a piece of hypocritical rationalization? Can the habit of speculation, like that of outright gambling, be morally corrupting for an investor who comes to make a habit of it—or for the broker who encourages him to do so in order to earn commissions? “The evidence,” Huntington reported later, “is that a sensitive and thoughtful salesman will have worked out answers to these questions.” But how many stock salesmen of 1967–1968 were sensitive and thoughtful, or indeed experienced enough to have had time to apply sensitivity or thought to the questions? “Many salesmen,” Huntington went on, “have not given these questions as much thought as they would like to give—and perhaps need to give for their own sanity.”

But the matter on which the Wall Street Ministry found the jumpiest conscience among brokers—and, concomitantly, struck the tenderest nerve among their employers—was that of the overtrading, or churning, of customers’ portfolios by brokers to increase commissions. Illegal though it was under S.E.C. rules, and unethical though it almost always was in terms of service to the customer, churning had become a brokerage way of life by the second half of the sixties. Nowhere in business is the choice between God and Mammon more cruelly evident than in stock brokerage. God’s broker sits at his desk, believing, after careful study, that he has invested his customers’ funds as well as they can be invested for the present. Out of conscience and professional ethics, he allows good portfolios to stand pat—and he thereby earns no commissions for himself or his firm. At the next desk sits Mammon’s man, perpetually on the phone persuading his customers, perhaps against his or their best judgment, that the time has come to switch from Zenith to Motorola, from Pan Am to Chrysler. His customers are persuaded; commissions are continuously generated. Mammon’s broker finishes the year with personal earnings in the $40,000 to $50,000 range and the reputation of being a man to know and cultivate; God’s broker finishes with earnings of $15,000 and the reputation of a decent man who’s a loser.

Put bluntly, Huntington found that many brokers felt they were under pressure to disserve their customers in order to increase their own and their firms’ profits. No amount of formal management caveats against speculation or investment without investigation could paper over the essential conflict of interest; it seemed to be built into the business as practiced. “If you really want to know what bugs me,” a broker told Huntington, “it’s the fact that I take a client out of General Motors and put him in Chrysler—when in my heart I feel that he probably shouldn’t be in any motors at all.”

Another moral, or perhaps psychological, problem of brokers—what Huntington called an occupational hazard of the business—was their susceptibility to drastic overnight changes in financial status. It was in the nature of stock brokerage as practiced in the sixties that a man, without changing either his job or his way of doing it, might earn $25,000 one year, $80,000 or $100,000 the next, and then perhaps only $15,000 the third. Practical considerations aside, these fluctuations often left him confused and unhappy. In a bonanza year he would feel grossly over-rewarded and consequently guilty. Schooled to believe in financial success as the direct and measured reward of hard work, he would find the annual fluctuations profoundly unnerving. The money and status rollercoaster was unsettling to the spiritual stomachs of many of the strongest; the ride, Huntington found, often left the riders with shattered lives and marriages.

So the Wall Street Ministry—fulfilling in its modest way a function that fell to it by default—saw the spiritual malaise behind the general euphoria of the bull market. Its work was by no means universally popular. After distribution of a report that referred to the findings about brokers’ guilt, a senior partner of a firm that had previously backed the enterprise called Huntington to say, “If that’s the kind of thing you’re up to, you can get along without my support.” There were similar complaints from similar sources. Nevertheless, the Wall Street Ministry—its name watered down in 1971 to the Wall Street Center, because the word “ministry” had been found to have too sulphurous a ring in many Wall Street ears—did continue to find enough backers to get along: a still, small voice amid the clamor of the marketplace.

6

Trinity Church itself, which in 1966 had turned its own fishy clerical eye on Huntington’s efforts, was changing with the times. More, it was speeding ahead of the times by seeking to change the outward mood of Wall Street; and it was succeeding to a startling extent.

The change began with a change of administration. The rector since 1952, John Heuss, was a man cast in the old Trinity mold: a pious man by his and his church’s lights, and a social and ecclesiastical conservative, inclined toward the continuance of old ways and values rather than the inauguration of new directions and programs; an Anglophile; a worldly rector out of Trollope, with his port and clubs and love of outdoor life. In his Who’s Who entry, Heuss listed ten different clubs: British Luncheon, Century, Downtown Athletic, Down Town Association, University, Pilgrims of America, Newcomen Society, St. George’s Society, Stage Harbor Yacht, Chatham Beach (Mass.). Trinity in his regime—as, generally, in those that had preceded his—often seemed an all-too-worldly church, conscious of its wealth and rank and prestige, anxious to maintain its position with the secular leaders of society, and only casually interested in the life of the masses of men and women of various faiths, or of no faith, who worked in the shadow of its spire.

Superficially, John V. Butler, the man who succeeded Heuss after his death in March 1966, was cut from the same clerical cloth. True, he was only a four-club man at the time (British Luncheon, Columbia Men’s Faculty, Pilgrims of America, St. George’s Society), but he was straight out of the Episcopal establishment, having graduated from General Theological Seminary and served, since 1960, as dean of the Cathedral of St. John the Divine up on 111th Street. Nor was he any wild-eyed youngster; on assuming the rectorship of Trinity he had turned sixty. He was, however, a man sensitive to social change and to the need for society’s institutions to change. In 1968, he brought in Donald Woodward, the doughty vicar who would stand exposed at the church’s front gate during the riot of May 8, 1970; and with Woodward came John Wallace Moody, a clergyman in his thirties who had spent fourteen years as a pastor in Columbus, Ohio, and had taken time off to get a master’s degree in painting and sculpture at New York University; a man with an air of clean-cut enthusiasm, medium long hair, and an esthetic manner, who was fond of expressing his enthusiasm with the quintessentially square adjective “neat.”

Moody, as Trinity’s curate in charge of “special ministries,” was assigned to set up lunch-hour weekday programs to serve local financial workers, especially at the lower levels, not so much to involve them in the life of the church and thereby make converts of them—that was the traditional approach—as to enrich their lives for the sake of enriching their lives. Moody took it as his premise that Wall Street, for all of its wealth, was a sort of ghetto, a place that, because it was devoted to work to the exclusion of all other aspects of life, was as much in need of cultural enrichment as any other deprived area. Given a free hand by Butler and Woodward—and provided with a liberal supply of Trinity’s treasure from real-estate holdings for the signing up of talent—Moody and his mixed lay and clerical committee on the lunchtime program promptly went wild. What they set out to do was as far as possible from trying to convert the heathen. It was nothing more, and nothing less, than an attempt to change Wall Street’s classic noontime scowl to a smile.

The new program burst on Wall Street at the beginning of June 1969, with the inauguration of the first Trinity summer festival. On the opening day, a rock-and-roll band called the Communication Workshop performed to a large gathering in Trinity’s front yard. During the following noontimes, well-known folksingers sang, there were classical concerts and free juggling lessons, balloons flew from the old church’s soot-blackened turrets, and signs on the surrounding fences proclaimed, “Trinity is alive and celebrating!”

Celebrating what? Why, life itself, the thing least often celebrated along Wall Street. More startlingly, by traditional church standards, the celebrating went on in hardly more subdued form within the church itself. Exhibits were shown, and coffee and sandwiches served, in the clergy vesting room off the south side of the transept. Pamphlets on drug abuse began to appear on the racks at the back of the church formerly reserved for programs on church activities. One day a week, in the narthex of the chapel, there was “informal worship”—featuring someone reading poetry or playing a guitar, in what Moody described as a “prayerful” way. Some days there were distinctly unprayerful music or dance performances in the church proper, following the regular noonday service; and on one of those early days, two scantily clothed professional modern dancers named Lynn Levine and Raymond Johnson performed to an astonished congregation from the sanctuary itself, with the altar moved back from its regular place to allow more room.

The noonday programs’ novelty and visibility alone were enough to attract crowds. Within a week, between four and five hundred Wall Streeters were flocking daily into the church and its graveyard. Determined that participation be active, Moody and his staff set up in the courts at the edge of the graveyard graffiti and mural boards designed to permit Wall Streeters, were the spirit to move them, to express themselves in ways less constricted than are possible through office machines or stock transfer slips.

At first, the mural and graffiti boards were used sparsely and cautiously. Seeking to help break the ice, Trinity staff members took to chalking up provocatively incomplete sentences each morning, to be completed by the noontime visitors: “What are you afraid of?—————” “Life in the city today is—————” It worked; the spaces were filled in at noon, and soon the visitors were going on to chalk up whole sentences of their own. The magazine writer Mary Cole Hanna copied off some of them:

Love is the only power man hasn’t pursued—and the lack of it may cause his downfall.

Peace is the ultimate end of love.

Wall Street, its hands run to the sound of money.

You have a fiend at Chase Manhattan.

Not masterpieces of thought or expression, but something new in tongue-tied, routinized, single-minded Wall Street. Hardly more original but equally heartfelt sentiments were expressed on the mural board through faces, flowers, trees, flags, peace symbols, and boldly painted slogans like “Just live!”

In the first flush of novelty, the program went almost uncriticized, apart from an occasional hard-faced man leaning out of an overlooking building across Broadway and shouting imprecations against the new goings-on. “God would roll over in his grave,” a man told Moody in the first week, after hearing of the modern dancing in the sanctuary; but the man was smiling. By the end of the second week, though, the smiles were fading, and a serious, concerted counterattack was under way. Some noontime visitors were talking loudly about sacrilege; others were complaining quietly to the church authorities. One day, a man walked up to the mural board and, without a word, took a paintbrush from the rack and broke it; on another occasion a young Wall Streeter stood in the courtyard for a while listening to an earnest discussion between two young girls about love, peace, and involvement in human affairs, and then suddenly shouted, “You’re disgusting! If you want my opinion, you should be killed!” Meanwhile, the vestrymen who determined Trinity policy were being deluged with calls from businessmen attacking the new program. Thus under pressure, they yielded somewhat. By July 1, when the program was one month old, church officials had decided that all noontime activities must be previewed before presentation. As the result of this edict, performances by the Yale Theatre Ensemble of a play called “Wall Suite” were cancelled because the dialogue was found to include a four-letter word, and this in turn led one of the leaders of the program staff to resign in protest. As for the graffiti board, it survived under a form of censorship. Hereafter, it was decreed, it would be allowed to operate only with a Trinity staff member constantly nearby, eraser in hand to expunge on the spot any outpourings of the Wall Street psyche that were thought to transcend conventionality or good taste.

In time, the counterattack ran out of steam, and the Trinity noontime program survived to take leadership in the planning of the November 1969 peace demonstrations; to flourish and expand during the next two summers; and in 1971, to add a program of drug counselling and methadone rehabilitation in cooperation with Beekman Downtown Hospital. But more and more, as time went on, it became evident that the sudden introduction in 1969 of two hours a day of joy, color, and fun into the heart of number-benumbed Wall Street had exposed the rawest of raw nerves, and attacked Wall Street’s serious if not sententious way of life head-on. Two hours a day of singing, dancing, writing and drawing, touching and smiling and talking: kindergarten stuff, to be sure. “When I was a child, I liked things like that,” an investment-firm vice president said of the program. “But now that I am a man,” he went on, gravely paraphrasing Scripture, “I have put away childish things.” Indeed he had—but to what purpose?

And so, in a fine American paradox, childlike simplicity had its hour or two a day at the bottom of the canyon of Wall Street, at the very time when in offices far above, people obsessed with adult abstractions and symbols were riding toward general disaster precisely because they had lost touch with the concrete and the simple, with joy and wonder.

CHAPTER X

Confrontation

1

Spring of 1969—a time that now seems in some ways part of another, and a more romantic, era—was in the business world a time of Davids and Goliaths: of threatened takeovers of venerable Pan American World Airways by upstart Resorts International, for example, and of venerable Goodrich Tire and Rubber by upstart Northwest Industries. As we have seen, such brazen challenges to the long-established and mighty by the newly arrived and aggressive were made possible by a vast, if temporary, popularity in the stock market of the shares of young and fast-growing companies; whether the threatened takeovers represented, on the one hand, constructive efforts to bring legitimacy to vested power, or, on the other, irresponsible acts of unprovoked assault by ravenous treasury raiders, is still being debated. Undoubtedly, though, the David-and-Goliath act of early 1969 that most caught the popular imagination was an attempt upon the century-and-a-half-old Chemical Bank New York Trust Company (assets a grand $9 billion) by the eight-year-old Leasco Data Processing Equipment Corporation of Great Neck, Long Island (assets a mere $400 million), a company entirely unknown to almost everyone in the larger business community without a special interest in either computer leasing, Leasco’s principal business until 1968, or in the securities market, in which its stock was a star performer. In that takeover contest, the roles of Goliath and David were played, with exceptional spirit, by William Shryock Renchard of the Chemical and Saul Phillip Steinberg of Leasco. It would be excessive to call their short, intense confrontation the stuff of classic tragedy. But enough of the famous Aristotelian elements of tragedy were there, along with certain elements of farce, to show that Wall Street, in what might prove to have been its last years, could still fill its old role of stage and proscenium for interesting and moving human drama: not just life, but something rather larger than life.

2

William Renchard, the leader of Chemical, grew up in Trenton, New Jersey, where his father served as an agency manager for the New York Life Insurance Company. Trenton in the nineteen twenties, when Renchard was in his teens, was a characteristic old city of the Eastern Seaboard, already dominated in numbers by recent immigrants and light industry, yet in power and influence still controlled by an American squirearchy looking backward with nostalgia and pride to a historic past (Washington’s crossing of the Delaware; the rout of the Hessians at the Battle of Trenton; the march to Princeton). The city’s backward-looking aspect manifested itself in monuments and museums and stately old brick row houses; its forward-looking aspect, in brisk new plants and skyscrapers and freeways. It was a John O’Hara town, its privileged given to the starchy celebrations of country-club life. Above all, perhaps, its quality was provinciality: Trenton was constantly derided for the huge sign on the Delaware River bridge, TRENTON MAKES THE WORLD TAKES—but with stubborn pride it kept the sign in place year after year. Chief among the things it made and the world took were fine china and rubber contraceptives. Even on West State Street, where stood the town houses of the well-to-do and long-established, as well as on Gouverneur Avenue where the Renchards lived in more modest respectability, milk was still delivered every morning by a horse-drawn wagon. After graduating from Trenton High School, Bill Renchard, like most reasonably well-off Trenton boys, aspired to go to Princeton, the famous university lying on the Jersey horizon twelve miles to the northeast; unlike many high-school boys in the days when Princeton still leaned strongly toward preparatory-school graduates, he made it. At Princeton he shared a room on campus with his brother John, quietly did his academic work, joined one of the many eating clubs, and took no part in the extracurricular activities—athletics, the Daily Princetonian, the Triangle Club, the humor magazine The Tiger—that were the recognized pathways to standing on campus. In his senior classbook it was recorded that “Renchard is undecided as to his future occupation.”

Perhaps the Renchard brothers felt somewhat disadvantaged at Princeton and consequently withdrew into themselves. Indeed, they were disadvantaged, in spite of being presentable and Protestant, first by their high-school background and secondly by the fact that they came from nearby Trenton, which in those days was generally regarded by Princeton students as a town good chiefly for getting drunk in. At any rate, by all accounts Renchard at Princeton was the sort of self-contained student whose peers, if they thought about it at all, probably considered him unlikely to amount to much, then or in the future.

If they so thought, they were wrong. However self-contained, Renchard was a tall, alert young man with an emergent air of command, and he was among those late bloomers who in adult life humble the social winnowers and sorters of their undergraduate classes. After graduation in 1928, he went to New York City and landed a job as clerk with the National Bank of Commerce. In 1930, he moved to the Chemical Bank and Trust Company, as it was then called, where he served successively as a clerk, an assistant secretary, and an assistant vice president. By 1946, when he was thirty-eight, he was a full-fledged vice president; in 1955 he became executive vice president; in 1960 he was made president, and in 1966 chairman of the board of the same institution, which was by this time called the Chemical Bank New York Trust Company. Name changes resulting from mergers did not alter the institution’s prestige or venerability; founded in 1824, it had been a national banking leader by the time of the Civil War (and in the years soon after, it was Hetty Green’s bank, where she had a room assigned for her private use in which she liked to sprawl on the floor surrounded by her mortgages and certificates; later she moved on after she became convinced, erroneously, that someone at the Chemical was attempting to poison her). In 1966, when Renchard became Chemical’s chairman, the bank had $9 billion in assets—one of the nation’s largest capital pools—and was the nation’s sixth largest commercial bank.

Renchard’s rise to this pinnacle of American banking had been accompanied by marriage to a pretty and sociable woman; a move to New York banking’s favorite living quarters, the north shore of Long Island; directorships in half a dozen large corporations; trusteeships of various hospitals and civic groups; and membership in a substantial list of metropolitan and country clubs, including the famous Creek Club in Locust Valley, of which he became president. In 1969, at sixty-one, Renchard was a large, handsome, well-set-up man with iron-gray hair, regular features, and candid eyes that suggested both flinty authority and a certain fatherly capacity for kindness. He carried with him a whiff of the outdoors—the scrubbed outdoors of well-kept lawns and clipped privet; he laughed easily and naturally and he had a penchant for brief, rather intimidating jokes. He seemed entirely at peace with himself—not in the least apologetic about enjoying, and joshing complacently about, his wealth and success at a time of violent social change. Once, he not only appeared with his wife at an epitome of the ancien régime, the annual Diamond Ball for a well-chosen four hundred at the Plaza Hotel (a benefit, of course—for the Institute for International Education), but, according to The New York Times, won “the honors in the glitter competition” by wearing as shirt studs three diamond stickpins as big as quarters—all of them obviously fake. A rather heavy joke, perhaps? But if anyone could carry it off, Bill Renchard could. He seemed to have become the prototypical old-style Princetonian, radiating the essence of gentlemanly aggressiveness, of polite personal and professional leverage.

Saul Phillip Steinberg, no relation to the celebrated Roumanian-born American artist Saul Steinberg, came from a background similar to Renchard’s in only one respect—the families of both were firmly entrenched members of the American petit bourgeoisie. To begin with, Steinberg was a full generation Renchard’s junior. Born in Brooklyn in August 1939, the son of Julius Steinberg, proprietor of Ideal Rubber Products, a small-scale manufacturer of such objects as kitchen dishracks, Steinberg, at high school in Lawrence, Long Island, was an unexceptional boy—an average student, an enthusiastic dater of girls, a competent but less than dedicated athlete—who was set apart from his classmates chiefly by the fact that he was a precocious subscriber to and regular reader of the Wall Street Journal. After high school, he went to the Wharton School of Finance and Commerce at the University of Pennsylvania. At Wharton—a senior at nineteen, precocious, brash, with a round babyface—Steinberg experienced a species of commercial epiphany. One of his instructors suggested that he write his senior thesis on “The Decline and Fall of I.B.M.”—about as maverick an idea as might be imagined, because, by 1959, I.B.M. had already become the corporate Apollo of the modern business pantheon, generally regarded by friend and competitor alike as an organizational masterpiece. “My instructor was sure I.B.M. was some kind of fandangle,” Steinberg told the writer Chris Welles a decade and many millions of dollars later. “And he wanted me to go out and prove it. I was the kind of student who was prepared to believe anything was bad, so I accepted the assignment. After I had gotten into it and done a lot of research, I discovered that … I.B.M. was an incredible, fantastic, brilliantly conceived company with a very rosy future. But when I told him this, he wouldn’t believe me. He wouldn’t even look at my research. So I ended up having to write on another subject.”

Steinberg’s scorned and discarded research left him with the conviction that I.B.M.’s method of doing business allowed a shining opportunity for a bright, ambitious young man to make a lot of money, and that he was the young man. The basic question involved was the effective life of industrial computers before they became obsolete, and the opportunity lay somewhere in the fact that nobody precisely knew the answer. I.B.M., which dominated the computer-making business, took the sort of conservative view that is characteristic of giant corporations riding the crest of a wave. Assuming that any given computer would become obsolete sooner rather than later, it offered its customers short-term leases, usually cancellable on short notice, for high rental rates. Steinberg proposed to offer computer-using corporations the opportunity to save money by gambling that I.B.M.’s equipment would have a longer useful life than I.B.M. itself appeared to assume. He would borrow money and buy I.B.M.’s immensely expensive computers outright; he would then lease them out—long-term and uncancellable—at rates that would be substantially below I.B.M.’s own rental charges, but still high enough so that he would recover most or all of the cost of the computer during the longer, uncancellable term of its initial lease. Thus, in the simplest terms, Steinberg would have got his purchase money back and still have the purchased computer itself left over to sell or lease again.

As simple as that, and as ingenious. With his bright idea conceived at Wharton, Steinberg gave birth to a new industry, independent computer leasing—an industry that produced no product; one that I.B.M. could kill at its pleasure by changing its leasing policies; one that the leading investment analyst John Westergaard would later dismiss as mostly “an accounting gimmick”; and one of which its founder himself, Saul Steinberg, would later say only half-jokingly, “Computer leasing? It’s just a way of getting free computers”—yet still an industry that, before the end of the decade, would shake American finance and banking to its foundations.

After graduating from Wharton in 1959, Steinberg spent a couple of years working for his father; meanwhile he put in further study on the computer-leasing idea, and conducted a small side business in streetcorner newsstands. Then in 1961, with $25,000 supplied by his father, he started his computer-leasing business in a Brooklyn loft, with his father and his uncle as nominal partners, and his company name—Ideal Leasing Company—cribbed from his father’s rubber-goods business. Banks, however wary of his extreme youth and his too-bright-schoolboy manner, liked his scheme and were willing to advance him money to buy computers provided he had leasing customers for them. Finding the customers was another matter. It took him three months to get his first lease; he interrupted his honeymoon to come home and sign it. Ideal Leasing was incorporated in 1962; at the end of its first corporate year it had net income of $55,000 on revenues of $1.8 million. In 1964, when earnings were up to $255,00 and revenues to $8 million, Steinberg decided to go public. In June 1965, the company’s name was changed to Leasco Data Processing Equipment Corporation and a public sale of Leasco stock brought in $750,000.

The computer business was booming, I.B.M. continued charging high rates for cancellable leases, and Leasco’s assets leaped from $8 million in 1965 to $21 million in 1966, while profits in 1967 were more than eight times those for 1966. Meanwhile, the stock, traded first over the counter and later on the Amex, soared upward. Leasco began to be talked about in Wall Street as one of those interesting little situations. As might be expected of a young company with ambition, a voracious need for cash, and a high price-to-earnings multiple, Leasco became acquisition-minded. In 1966, Steinberg hired Michael A. Gibbs, a young whiz from the management-consulting firm of Booz, Allen and Hamilton, as vice president for corporate planning, and gave him the specific assignment of hunting up candidates for merger. In 1966 and 1967, Leasco increased its corporate muscle by buying several small companies in fields more or less related to computers or to leasing: Carter Auto Transport and Service Corporation; Documentation, Inc.; and Fox Computer Services. These acquisitions left the company with $74 million in assets, more than eight hundred employees, larger new headquarters in Great Neck, Long Island, and a vast appetite for further growth through mergers.

The events leading to the merger that put Leasco firmly on the national corporate map, and that made the Goliaths of industry begin to take notice of a Brooklyn David with an air of supreme confidence, began in August 1967, when Edward Netter, of the deal-making brokerage firm of Carter, Berlind and Weill, came out with a report entitled “Financial Services Holding Company,” in which he set forth the rosy possibilities available to both sides in mergers between companies engaged in financial services, such as Leasco, and fire-and-casualty insurance companies. The nub of Netter’s argument was that the ultraconservative financial policies of the fire-and-casualty companies had in many cases resulted in cash-heavy reserves far in excess of those required by law to cover policy risks. To these excess reserves, Netter gave the picturesque names “redundant capital” or “surplus surplus.” State regulations restricted the free use of such reserves so long as they belonged to a fire-and-casualty company; but, Netter pointed out, the regulations could be circumvented, and the redundant capital freed for other uses, if the insurance company were to merge with an unregulated holding company. By implication Netter was pointing out—in the hope of earning finder’s fees and brokerage commissions for his own firm—that ambitious diversified companies were missing a chance to better their circumstances by marrying fire-and-casualty companies for their redundant capital—or, more bluntly, for their money. Many diversified companies were to acquire insurance companies over the following years, the greatest such merger (and indeed, the greatest merger in corporate history) being the celebrated and controversial wedding between International Telephone and Telegraph and Hartford Fire in 1970.

One of the numerous desks the Netter report crossed, not by chance, was in the offices of Leasco, and near the end of 1967, Netter met with Gibbs to discuss the views expressed in it. Netter evidently got an enthusiastic reception, because, early in January 1968, Gibbs sent a memo to Steinberg setting forth in detail the considerable advantages to Leasco of acquiring a fire-and-casualty company—no specific company was mentioned—and the same day Arthur Carter of Carter, Berlind and Weill wrote to Leasco setting forth the brokerage firm’s terms for handling the acquisition of such a company (still not named) through a tender offer to the insurance company’s stockholders. The terms stated included a finder’s fee to Carter, Berlind of $750,000, making abundantly clear why Carter, Berlind was going to so much trouble to serve as marriage broker.

It subsequently became equally clear that the unnamed firm Carter, Berlind had in mind was Reliance Insurance Company, a staid old Philadelphia-based fire-and-casualty underwriter with more than five thousand employees, almost $350 million in annual revenues, and a fund of more than $100 million in redundant capital. At the time, though, there was an urgent need for secrecy, to avoid disturbing Reliance’s stock price and thereby stimulating its management to take defensive measures. To preserve this secrecy—and, just possibly, to enjoy some of the fun of cloak-and-dagger proceedings—Leasco men in their interoffice correspondence began referring to Reliance under the code name “Raquel.” (The code name, Steinberg later told a Congressional committee, had been borrowed from the actress Raquel Welch).

In March 1968, preserving security by trading through a numbered bank account at the First National Bank of Jersey City, Leasco began buying Reliance stock on the open market in daily quantities of anywhere from one hundred to more than seven thousand shares. By early April, Leasco held 132,600 Reliance shares, or about 3 percent of all shares outstanding, and had completed Phase One of the takeover. Phase Two consisted of preparing a tender offer to Reliance shareholders, and contriving to overcome any resistance that the Reliance management might mount. In May, Leasco prepared a registration statement for its tender offer—a move that brought matters out into the open: since the statement was necessarily a public document, the public, and Reliance management, now knew at last what Leasco had in mind. Reliance’s first action was to announce that the company was engaged in merger talks with another computer-leasing firm, Data Processing Financial and General—this presumably to let Leasco know that it had competition, and thus induce it either to desist from its takeover attempt or to make a better offer. On June 13, Steinberg and A. Addison Roberts, president of Reliance, met for the first time, and Roberts stated in the clearest possible terms that Reliance would be unreceptive to a Leasco takeover attempt. Nevertheless, on June 21 Leasco went ahead with its tender offer, writing Reliance stockholders and offering them Leasco convertible debentures and warrants—a classic bundle of those often dubious securities that we have heard derogated as “corporate underwear,” but still a bundle that, because of the high price of all Leasco securities, had a current market value well above the current price per share of unswinging Reliance—in exchange for their Reliance stock. Three days later, Roberts, still defiant, wrote to Reliance stockholders strongly urging them “to take no hasty action with respect to your stock,” and a month later he capped that action by filing a lawsuit (later withdrawn) against Leasco and its brokers, charging them with violations of the securities laws.

On the surface, it looked to be total corporate war. In retrospect, however, it appears that Roberts, for all his crustiness toward Leasco, was never entirely averse to a merger, and that what passed for furious self-defense was really something more akin to hard bargaining. Roberts, like Netter and Leasco, seems to have fully grasped the advantages of releasing all that redundant capital from the bondage of legal restrictions through a merger. Indeed, he had met with Netter to discuss that very subject as far back as December 1967, just about the time Netter was making his first contact with Leasco. Then, Netter had informed Roberts that he believed he could get him $45 a share in securities exchange for Reliance stock, which was selling at about $30, through a merger with some other firm—with a conglomerate, perhaps, like Gulf and Western. (Leasco was not mentioned specifically at that meeting.) Despite the tempting 1967 valuation, Roberts was unenthusiastic about the prospect of seeing his solid old company engulfed by some corporate upstart. It was not, then, that he was flatly against any merger; it was just that he thought Reliance ought to be the acquirer rather than the acquired.

Now, with Leasco apparently ready to make a takeover attempt whether its intended partner was willing or not, Roberts realized that the stock market’s overwhelming preference for Leasco’s shares as opposed to Reliance’s made his desire to be the acquirer an idle dream. As to whether or not to be hostile, all through July he wavered. Reliance stockholders who wondered whether or not to accept the Leasco offer got little enough advice from him. Then, on August 1, Roberts declared himself. Leasco, he wrote the stockholders (whose heads must have been spinning by now), had sweetened the terms of its offer greatly, and Reliance management had “agreed to discontinue taking any action to impede.” It was a surrender to force majeure; a majority of Reliance stockholders were in the act of accepting the tender offer anyway, and Leasco was going to gain control of Reliance whatever management decided. By mid-September Leasco had over 80 percent of Reliance; by mid-November it had over 96 percent. The takeover was complete.

Truly—to change the metaphor—it was a case of the minnow swallowing the whale; Reliance was nearly ten times Leasco’s size, and Leasco, as the surviving company, found itself suddenly more than 80 percent in the insurance business and less than 20 percent in the computer-leasing business. Nor did the whale seem to have been hurt by the ingestion; indeed, at first glance everyone concerned seemed to be decidedly better off. Roberts, still boss of Reliance although now under Leasco’s control, came out with a fresh five-year employment contract at his old salary of $80,000 for the first four years and a raise to $100,000 in the fifth, plus a generous portion of potentially lucrative Leasco stock options. Saul Steinberg came out a multimillionaire at twenty-nine, said by Forbes magazine to have made more money on his own—over $50 million, on paper—than any other U.S. citizen under thirty. His father and original backer, Julius, and his uncle, Meyer, were themselves worth millions from their Leasco stockholdings, as was his twenty-six-year-old brother Robert, the company’s secretary. Carter, Berlind and Weill, in addition to its $750,000 finder’s fee, had brokerage fees of almost $50,000 on the purchase of Reliance shares for Leasco, and dealer’s fees of $230,000 on the tender offer, for a total of more than a million dollars on the whole go-round. The Reliance stockholders had their Leasco corporate underwear, which, provided they divested themselves of it immediately, left them (however naked in a corporate-securities sense) well clothed financially. As for Leasco, as a result of its extraordinary feat it suddenly had assets of $400 million instead of $74 million, net annual income of $27 million instead of $1.4 million, and 8,500 employees doing business in fifty countries instead of 800 doing business in only one. In stock-market terms, as of December 31, 1968, the price of Leasco stock had, over the five years preceding, appreciated by 5,410 percent, making it the greatest percentage gainer of all the five hundred largest publicly owned companies during that period: in sum, the undisputed king of all the go-go stocks. But our tale of financial derring-do is not yet ended; rather, it is only begun. Adventurous Leasco was now poised for the decade’s greatest, and to defenders of the status quo most disturbing, venture in corporate conquest.

3

As early as December 1967, Leasco began looking into the possibility of acquiring a large bank. The stocks of banks, like those of insurance companies, often sold at low price-to-earnings multiples, giving a stock-market high-flyer like Leasco the leverage it needed to take over companies larger than itself. Moreover, Steinberg felt, as a business principle, that it would be advantageous to anchor Leasco’s diversified financial services to a New York money-center bank with international connections. It appears that during 1968, at the very time when the Reliance takeover was in process, Gibbs’s corporate planning department at Leasco was picking out a banking target as carefully as a bomber command draws a bead on any enemy ammunition dump. Nor was any particular diffidence being shown about the size and strength of targets. Bankers Trust, Irving Trust, Chase Manhattan, Manufacturers Hanover, Morgan Guaranty—the whole array of national banking power seems to have come under Leasco’s impudent, although secret, scrutiny as possible candidates for assimilation.

By the fall, when the Reliance acquisition was all but wrapped up, the gaze at Great Neck had come to light on Renchard’s $9-billion Chemical Bank. As with Reliance, a code name was assigned for inter-office use—in this case, “Faye,” as in Faye Dunaway. As a first step in Leasco’s campaign, an elaborate dossier on the history and operations of the prospective target was prepared: “Faye was originally the banking arm of New York Faye Manufacturing Company,” and so on. (Any outsider who might have seen the memo and who knew anything about banking could easily have deduced from the context that “Faye” was Chemical—again suggesting that the code names Leasco used in its corporate assaults were at least as much for brio as for concealment.) Who’s Who entries of “Faye” directors were reproduced for ready reference, along with annotations. Among those directors were such eminences of American business as H. I. Romnes, chairman of American Telephone and Telegraph; Lammot du Pont Copeland, president of E.I. du Pont de Nemours; Robert C. Tyson, finance chairman of United States Steel; Augustus C. Long, director and member of the executive committee of Texaco, Inc.; T. Vincent Learson, president of I.B.M.; and Keith Funston, former president of the New York Stock Exchange. It was convenient for Leasco—and it tells something about the two firms—that practically all of Faye’s directors had long entries in Who’s Who, while no directors of Leasco at the time were listed there at all. In a kind of unintended irony, the standard checklist of the American ruling class was proving useful as a kind of sighting device to a band of outside insurgents.

The scenario that had been so effective in the case of Reliance was followed as closely as possible. In November, Leasco began buying Chemical stock—again, through the First Jersey National. Within a few days, 50,000 shares were quietly bought at a cost of more than $3.5 million, without giving rise to untoward rumors or market disruptions. Meanwhile, Reliance, now a Leasco subsidiary, held more than 100,000 additional shares, giving Leasco control of well over 1 percent of all Chemical shares outstanding. In January 1969—still maintaining strict security, and still, of course, with no contact established between the executives of Leasco and those at Chemical—Leasco proceeded to prepare a hypothetical tender offer to Chemical stockholders. As with Reliance, it involved offering warrants and convertible debentures worth at then-current prices substantially more than the market for Chemical stock. What had worked once would, presumably, work again. Still, Leasco had not yet decided to go ahead with the offer when, on the last day of January, Chemical through its regular intelligence channels finally got firm word that Leasco was preparing a takeover attempt.

The news did not catch Renchard completely by surprise. As early as December 1967, Chemical had begun following Leasco’s acquisition activities in a wary, if desultory, way, and the following autumn Renchard had begun to hear rumors that “a leasing company” was interested in acquiring the bank. Rather astonishingly, the November purchases of Chemical stock went entirely unnoticed, no one at Chemical caught so much as a whisper of the code name “Faye,” and the rumors seem to have died down. However, on getting the first firm information on January 31, Renchard was in no doubt as to Chemical’s response. He and his bank were going to fight Leasco with all their strength. True enough, a merger, as in the Reliance case, would result in immediate financial benefit to the stockholders of both companies. But it seemed to Renchard and his colleagues that more than immediate stockholder profit was involved. The century-and-a-half-old Chemical Bank a mere division of an unseasoned upstart called Leasco? H. I. Romnes, Lammot du Pont Copeland, Robert C. Tyson, Augustus C. Long, T. Vincent Learson, and Keith Funston as members of a board of directors headed by twenty-nine-year-old Saul P. Steinberg? In established banking circles the thought bordered on sacrilege, and Renchard, on getting the word, reacted predictably by calling a fellow banker, the one most likely to be able to enlighten him further: Thomas J. Stanton, Jr., who besides being president of the First Jersey National was a director of Leasco. What was going on? Renchard wanted to know. “I’ll call you back,” Stanton replied. Presumably he then cleared with Steinberg as to what he should tell Renchard. When he called back, it was to inform the Chemical’s boss, not too cryptically, that one of the items Leasco had on the agenda for its next board meeting, to precede the company’s annual stockholders’ meeting on Febuary 11, was discussion of the possible acquisition of “a major commercial bank.”

Thus alerted, Renchard went into vigorous if belated action. He set up an eleven-man task force to devise strategy for fighting off any such takeover attempt, under the direction of the Chemical’s chief loan officer, J. A. McFadden—“a bright fellow, good at figures,” as Renchard described him later, “not exactly a tough guy, but no pushover, either.” He assigned another bank officer, Robert I. Lipp, to prepare a memo outlining all of the possible defensive strategies available to Chemical, and on February 3 Lipp came through with a list of seven different courses of action. (Out in Great Neck, almost at the same moment, Leasco was putting the finishing touches on its proposed tender offer, and was making further extensive purchases of Chemical stock—to be precise, 19,700 more shares at a cost of $1,422,207.) Renchard said long afterward, “At that time we didn’t know how much of our stock they had, or what kind of a package of wallpaper they were going to throw at our stockholders in their tender offer. We were guessing that they would offer stuff with a market value of around $110 for each share of our stock, which was then selling at 72. So we knew well enough it would be tough going persuading our stockholders not to accept.”

On February 5, Renchard made his move, and a drastic and risky one it was. He decided to force Leasco out into the open by leaking a story to the press. That afternoon, H. Erich Heinemann, banking specialist on The New York Times’ financial reporting staff, telephoned him to say that he had heard rumors of an impending takeover attempt and to inquire whether there was anything in them. Rather than make the routine denial that he would have made under ordinary circumstances, Renchard replied that there was, indeed, something in the rumors. He went on to give a few details and some pointed comments, and the following morning the Times carried a piece, under the by-line of Heinemann’s colleague Robert Metz, that read in part as follows:

Can a Johnny-come-lately on the business scene move in on the Establishment and knock off one of the biggest prizes in sight?

That, it appears, is what the Leasco Data Processing Equipment Corporation hopes to do next in its dynamic acquisition program. The rumored target is one of the nation’s most prestigious banks, the Chemical Bank New York Trust Company, founded in 1824. …

Try and get confirmation that something is going on … and you get nothing. In fact, Leasco’s public relations people called to get a statement from the reporter.

Is Chemical in the bag? Hardly. William S. Renchard, chairman of the Chemical Bank, sounded like a Marine Corps colonel in presenting his battle plan for what he believes may well develop. … He said, “We intend to resist this with all the means at our command, and these might turn out to be considerable.”

Understandably, the article was the talk of the banking world that day. Renchard went on with his planning, holding new strategy sessions at which one of the possibilities discussed, as phrased in a memo prepared for one of the meetings by McFadden, was the following:

There is some question about the breadth of the market on the Leasco stock and it might be possible to attack its value if need be.

Such an “attack”—carried out by making sales or short sales of Leasco stock over an extended period—would hit Leasco where it lived, since its high stock price was the source of its power and, above all, of the possibility of its taking over a firm like Chemical that was many times Leasco’s size. The difficulty lay in the fact that such an attack—a bear raid—would constitute stock manipulation and would be a violation of the securities laws punishable by fines and imprisonment. For obvious reasons, no one has ever been willing to say that at Chemical’s February 6 strategy meeting that particular recommendation was adopted for action. The striking and undeniable fact is, however, that on that very day, Leasco stock, which had been hovering in the stratosphere at around 140, abruptly began to fall in price on large trading volume. By the close the following day Leasco was down almost seven points, and over the following three weeks it would drop inexorably below 100. Rumors of impending mergers, particularly between titans, customarily drive a company’s stock price up, not down. Long afterward, Steinberg said of the curious coincidence in timing as to the proposed Chemical takeover and the beginning of the Leasco slide, “It is odd—so odd that Congressman Wright Patman asked me the same question. But we’ve never been able to pin anything down.” As for Renchard, he later told a Congressional committee that he thought the stock drop was simply the result of institutional holders beginning to lose confidence in Leasco; but still later than that, he pointed out, without elaboration, that one of the defensive techniques discussed in the Chemical strategy meetings had been drawn from a Harvard Business Review article called “multiple flogging.” “Multiple flogging,” in the context, was a fancy new name for an old-fashioned bear raid. By using various concealment devices, it is theoretically possible to carry out a bear raid without detection by the authorities. The evidence suggests, at least, that on February 6 somebody, identity unknown, started lowering a very heavy boom on Leasco.

4

Steinberg reacted to the Times article exactly as Renchard had planned that he should. Although Steinberg was not ready to make his tender offer and, in fact, was considering waiting several months before doing so, he decided that now he had no choice but to go ahead immediately—and from his point of view, prematurely—and, as a first step, he resolved to have an exploratory talk with Renchard early the following week.

On Friday, February 7, the day after the Times article, Steinberg had lunch with Heinemann. By Steinberg’s account the timing was pure coincidence, since the lunch had been arranged weeks before; it was, however, an obvious windfall for Heinemann as a reporter to be seeing Steinberg at the very moment when the meteorically successful boy wonder was at the center of the biggest financial story in the nation. At the lunch, Steinberg insists that it was understood by both sides that everything was off the record; then he proceeded to discuss Leasco’s plans freely, not to say indiscreetly. When he had finished, he asked Heinemann, as a man knowledgeable about banking, for his impressions. According to Steinberg, Heinemann replied that in believing for a moment that he could get away with taking over Chemical Steinberg showed himself to be “an innocent.” At any rate, Steinberg later decided that he had been an innocent about Heinemann. That afternoon, Heinemann called up the Chemical Bank and talked to a public-relations officer there, to whom he reported in detail what he had heard from Steinberg. That same afternoon, the public relations officer sent Renchard a memo that read, in part:

Heinemann just came back from lunch with Steinberg, and passed on the following results.

They said they are beginning to feel the pressure. They knew there would be absolute opposition, and they fully believe that when they come in with their proposal it will be rejected. …

Erich was told that it is a better than 50–50 chance that Leasco will announce their intentions and plan at the annual meeting next week. Steinberg took the position that their offer will be most beneficial for us. … Steinberg said flatly that the way we handle international business … is wrong and will be changed.

(Heinemann’s version of the episode differs from Steinberg’s in several crucial respects. In the first place, he said later that his luncheon with Steinberg had not been arranged weeks previously but only four days before—at the urgent request of Steinberg’s public-relations counsellor. Moreover—and more crucially—Heinemann avows that at the luncheon he was not asked for and did not give any assurance that what was said be held confidential, and that he subsequently called Chemical, as a conscientious reporter, in an attempt to elicit additional information for a possible new story.)

Steinberg said later that the memo gave a generally accurate account of what he had said at the lunch, with the notable exception that he had said nothing about pressure—that, indeed, he had felt no pressure from banks at that time, although he was to feel plenty of it later on. The nearest thing to pressure on Leasco as of February 7 was a conversation Steinberg had that day with Donald M. Graham, chairman of Continental Illinois Bank and Trust Company, a leading Leasco creditor, in which Graham expressed the view that a Leasco attempt to take over Chemical would not be a good thing for banking—and added, most unthreateningly, that his bank highly valued its association with Leasco and expected it to continue. (Renchard, in fact, had talked to Graham and urged him to discourage Steinberg.) The memo seemed to give Chemical a momentary edge; and, seizing the initiative, the bank took the comparatively drastic step of planning a full-scale strategy meeting at 20 Pine Street the following morning, even though the day would be Saturday.

It turned out to be a wild weekend of feints and counterfeints. Steinberg was busy with a semi-annual conference of Leasco district managers, and on that account, he stayed in town at the Regency Hotel. By another coincidence, that same weekend was the occasion of the American Bankers Association’s annual trust conference, and consequently New York City was swarming with hundreds of important bankers from all over the country. At the Chemical strategy meeting—which was attended, this time, not only by Chemical’s in-house task force, but by invitees from other powerful Wall Street institutions sympathetic to the Chemical cause, including First Boston, Kuhn Loeb, and Hornblower Weeks—a whole array of defensive measures were taken up and thrashed out, among them the organizing of telephone teams to contact Chemical stockholders; the retaining of the leading proxy-soliciting firms solely to deny their services to Leasco; the possibility of Chemical’s making a quick merger of its own with some other computer-leasing company, to raise an antitrust obstacle for Leasco; and the possibility of getting state and federal legislation introduced through the bankers’ friends in Albany and Washington in order to make a Leasco takeover of Chemical illegal. Despite the availability of such weapons, the opinion of those present seemed to be that Leasco’s venture had an excellent chance of success. There was a sense of backs to the wall, of the barbarians at the gates, of time running out. Reports of the meeting filtered out that evening to the bankers assembled around town at their cocktail parties, receptions, and dinners. One such report had it that a participant at the session had finally thrown up his hands and said, “Oh, let the kid have the bank. We’ll start a new one!” Levity, it seemed, with an edge of hysteria.

On Sunday, New York City was hit by a fifteen-inch snowstorm, the worst in seven years, and as a result, airports were closed, roads were clogged, rail service was disrupted, and the bankers in town were trapped. There was nothing for them to do but stay and talk—largely about Leasco and Chemical. The bankers, and the subject, were caught in a kind of pressure cooker. That evening, Chemical held a large reception for the visiting bankers at the Plaza. (Steinberg, the subject of all the discussion, stayed at the Regency four blocks away; not being a banker, he wasn’t invited.) At the reception Renchard took considerable kidding; the prevailing attitude among the bankers he talked to seemed to be that the whole thing was ridiculous, an attitude that Renchard felt he had little reason to share. “Don’t joke,” he would say. “If this is successful, the next target may be you.”

On Monday, with the city still snowbound, Renchard and Steinberg, who had previously never so much as talked on the telephone, met at last. That morning Steinberg, carrying out his plan, called Renchard at his office and asked if they could get together. Renchard said, “Sure. I’ll buy you lunch, but I have to go to a meeting right afterward. Do you have transportation?” Steinberg said he hadn’t. “I’ll send my car to get you,” Renchard replied. So Renchard sent his car to the Regency, Steinberg got in and sloshed comfortably downtown, and the lunch that Renchard “bought” him took place that noon in the Chemical Bank’s private dining room. One may imagine the first reactions of the antagonists to each other. One was lean, iron-gray, of distinctly military bearing; a North Shore estate owner, very conscious of the entrenched power of the nation standing behind him, very much a man of few and incisive words. The other was round-faced, easy-smiling, a man of many words who looked preposterously younger than his already preposterous twenty-nine years, and given, as he talked, to making windmill gestures with his arms and suddenly jumping galvanically up from his chair; a South Shore estate owner (twenty-nine rooms, tennis court, two saunas, Picassos and Kandinskys—as Steinberg himself characteristically described it, “a modern mansion just like that of any other successful kid of twenty-nine”); a young man bubbling with energy and joy in living. (Contrary to repeated press reports, he was not fat, only chunky; photographs of his jowly face deceived people.) Now he seemed to be, in the tragicomic fashion of that year, the corporate version of a campus radical informing the university president, with a mixture of amusement and pity, that the times had changed and the freshmen were taking over.

The two men’s accounts of the ensuing meeting, as told to me several years later, differ to some extent as to content, but to a greater and perhaps more interesting extent as to style and emphasis.

Renchard: “Steinberg, at some length, gave his ideas on how commercial banking was going to be revolutionized over the next few years. Mostly I just listened, and so did my colleagues [President Howard] McCall and [Vice Chairman Hulbert] Aldrich, who joined us toward the end of the session. The whole industry was to benefit greatly, Steinberg said. I asked him why he had singled out Chemical. He said he liked our philosophy, that is, we were in the process of forming a one-bank holding company that would enable us to diversify, thereby showing that we believed in the principle of bank diversification. He had evidently ruled out Citibank and Chase as too big. Bankers Trust and Irving were out for technical reasons, and Morgan probably because it was strictly a wholesale business. He seemed to like us better than Manufacturers Hanover.

“I said I wasn’t sure he appreciated what might happen to our business when someone with no banking experience moved in on a takeover basis. Directors and officers might leave. I made it clear that I didn’t think I’d be around. In the trust area, for people to leave their estates with a bank you need confidence built up over many years. Will appointments would leave in droves, I said, not because of anything about him but because it was a takeover. Then there was the worry about somebody acquisition-minded having access to our stockholder lists. The confidential relationship of banker to client might be endangered.

“I think it impressed him a little bit. Steinberg said he had no intention of making an unfriendly takeover—that is, that he didn’t want to, but might. There was the hint of a threat. I said, ‘If you want to get into a fight, I’m a pretty good gutter fighter.’ He said, ‘I’ve already found that out.’ He said he wanted to make a full presentation of Leasco’s plans the next afternoon, after his company’s annual meeting, in the hope that Chemical would change its mind and want to cooperate, after all. I enjoyed the luncheon. There was some kidding around, too.”

Steinberg: “When I got to 20 Pine Street that morning, I got out of Renchard’s car and walked into the bank. It was a day when not many people were there, because of the snowstorm. Renchard’s secretary was very friendly—‘Oh, hello, Mr. Steinberg, I’m so glad to see you.’ Renchard came out and shook my hand and said, ‘Hello, Saul. Call me Bill. Can I take you around and show you the place?’ Well, I wasn’t terribly interested in looking at the real estate right then. So we went and talked, first in his office and later in the bank’s dining room.

“We did some kidding at first. He asked me why I wanted to become a banker and I said, ‘God looks after drunks and bankers, and I don’t want to be a drunk.’ Then I started in giving the facts. I told him how many Chemical shares Leasco had—more than three hundred thousand. I said we weren’t going to accumulate much more because it was getting too expensive. I told him frankly that the Times piece had disrupted Leasco’s plans; we had wanted to wait until the forthcoming new law regulating bank holding companies was passed, and that might be six months or a year. Now our hand was forced, and I volunteered that for us it was premature.

“I went into my philosophy of how Chemical’s management, and all commercial-bank managements, should be more responsive to stockholders and customers, and how I thought we could make it that way. I said I thought that adding a broad range of services to a bank’s regular functions would add to the intrinsic value of its money, and on that he expressed absolute agreement in principle. He began to talk about the possible detriments to the bank’s business from a hostile takeover. He said top management would probably resign. He mentioned losing customers, and I said they would hardly leave in a hurry at a tight-money time like that. He talked about damage to the trust business. I asked, ‘Does it make money?’ He laughed, and said he wasn’t sure. He said if I wanted a fight he was a pretty good gutter fighter, and I said my record as a gutter fighter was considered to be pretty good, too, at least for my age. But then I said I wasn’t planning a hostile takeover, although I wasn’t ruling one out. I told him that in four days I was going to Puerto Rico on vacation with my wife and kids—it was the kids’ winter semester break—and that I was professional enough not to be planning such a thing as that if I were thinking of attempting a hostile takeover. He looked surprised and asked, ‘Are you really going to Puerto Rico?’ I said yes. He was obviously relieved. Everything became very relaxed. I thought it was a rather constructive meeting. Everything was friendly and affable. The atmosphere was dampened at the end, though, when McCall and Aldrich came in—McCall for lunch with us, and Aldrich at the end of lunch. McCall just didn’t seem to want to have anything to do with me one way or the other, and Aldrich seemed downright hostile. But Renchard interrupted them to say, ‘Look, Saul has stated that he has no intention of a hostile takeover.’ McCall’s face lit up, and he said, ‘Well, when can we meet again?’ I suggested after my trip to Puerto Rico, and he and Renchard said, ‘Oh, let’s do it before that,’ and we arranged for the following afternoon, after our stockholders’ meeting. I came out in a positive frame of mind. The only thing was that Aldrich was still cold. But wait—come to think of it, he wasn’t any too cordial to Renchard, either.”

So the first meeting of the rival chieftains was a standoff. That afternoon, Renchard heard from Roberts of Reliance Insurance. The apparently satisfied subject of Leasco’s previous conquest said he thought a merger of Leasco and Chemical would be a fine thing for the bank. “I told him he was off his rocker,” Renchard said later. “I said computer leasing has nothing to do with banking. He said the Leasco-Reliance merger hadn’t hurt Reliance. I was disappointed in him.” Also that afternoon, McCall had someone at Chemical prepare for him a list of Leasco’s creditor banks, and when the list later came to the attention of a Congressional committee, it was found that checkmarks had been made beside the names of certain of the banks; the purpose of the list, and the meaning of the checkmarks, is not known, but the fact is that on that very afternoon Steinberg began to feel “pressure” from the banking business in the form of calls from Leasco’s two investment bankers, White, Weld and Lehman Brothers, informing him that they would refuse to participate in any Leasco tender offer for Chemical.

That evening, there was more socializing among the bankers. Renchard went to a dinner of the Reserve City Bankers Association at which, he said later, he may have spoken to three hundred bankers. “I have no recollection of anything except general conversation about this development,” he recounts, denying that he used the event as an opportunity to spread anti-Leasco propaganda or solicit support for Chemical. (He had not, however, shown such restraint during working hours; the anti-Leasco announcements of White, Weld and Lehman had followed urgent appeals from Chemical.)

At Leasco’s annual stockholders’ meeting, held the following afternoon in the auditorium of the Chase Manhattan Bank Building, matters proceeded smoothly enough, with no mention of the subject that was in everyone’s mind, until Steinberg observed that Leasco’s commitment to becoming a comprehensive financial-services organization included the objective of entering the field of banking. “The realization of so large a plan,” he went on, “requires the exercise of careful and deliberate judgment. At the present time, we have not made a decision as to a particular bank.”

A hush filled the room; Steinberg broke it by asking for questions. A stockholder asked flatly whether Leasco was planning to acquire the Chemical Bank. Steinberg replied that Leasco had made no statement regarding that bank or any other. Then, a bit later, another stockholder asked whether Leasco had already had merger discussions with Chemical.

Steinberg was on the spot; over the weekend he had planned to announce his tender offer on this occasion, but now, with the door still open to possible agreement with Chemical officers at the meeting to be held in only a couple of hours, he had decided to hold off. For diplomatic reasons, it would be best to evade the question, but he rejected that course. “I said to myself, ‘Heck, I’m not going to lie,’” he recounted later. He answered, “Yes, we have met with the Chemical”—thereby publicly confirming for the first time what up to then had been in the realm of rumor and conjecture.

5

But later that afternoon, at the private meeting between Leasco and Chemical officers, the crack in the door that Steinberg had discerned at the previous day’s luncheon seems to have narrowed perceptibly. The defense was gaining confidence. This time, the rival generals were accompanied by their chief aides; Steinberg came with three, including Roberts and Counsel Robert Hodes, and Renchard with four, including McCall, Aldrich, and Task Force Generalissimo McFadden. Steinberg went over much of the ground he had covered in the previous day’s luncheon with Renchard, this time putting more emphasis on his friendly intentions and his disinclination to threaten. (Aldrich’s personal notes on the meeting say: “Tender route loathesome to Leasco—but might have to go it to accomplish ends.”) Steinberg also made a further concession. He said he was prepared not to be chief executive officer of the merged company, and that all of his Leasco colleagues would be willing to put their jobs at risk on the basis of the merged company’s profit record. When Renchard said that he was unwilling to negotiate with “a gun at my head,” Steinberg insisted that no gun was intended, that this “wasn’t war.” Both sides later characterized the meeting as cordial, although Steinberg felt that it had been “not overly friendly.” According to Aldrich’s notes, it concluded with Renchard saying, in effect, “We have lots to consider. Will do so. They will hear from us—maybe end of week, maybe middle of next week.”

In fact, Steinberg would hear from Renchard again that Friday, February 14, but in the meantime the Chemical defense battalion was far from idle; on the contrary, it was now trundling up its big guns, those “resources” that Renchard had described at the outset as “considerable.” Chemical held another full-scale battle meeting at which the discussion centered on the possibility of changing Chemical’s charter in such a way as to make a Leasco takeover legally difficult if not impossible. There was also talk about perhaps buying a fire-and-casualty company to create an antitrust conflict with Leasco’s ownership of Reliance, or even, as a last resort, of arranging to have some giant insurance company take over Chemical—suggesting a positively Oriental preference for suicide rather than surrender.

As it happened, none of these schemes was carried out; certainly, though, the last one reflects the bankers’ mood of grim intransigence. As planned, the bank retained the two leading proxy-soliciting firms, Dudley King and Georgeson, to deny their services to Leasco. Renchard called Chairman Martin of the Federal Reserve Board to apprise him of the situation and, hardly incidentally, to try to persuade him that a Leasco takeover would be bad for banking as a whole. (Martin took no action.) And also meanwhile, from whatever cause, Leasco’s stock kept dropping; by Friday it was down to 123 and in full retreat. Probably the most effective of Chemical’s various salvos was on the legislative front. Beginning on February 14, Richard Simmons of the Cravath law firm, on retainer from Chemical, began devoting full time to the Leasco affair, concentrating his attention on the drafting of laws specifically designed to prevent or make difficult the takeover of banks similar to Chemical by companies that resembled Leasco, and to getting these drafts introduced as bills in the State Legislature in Albany and the Congress in Washington. Does it seem odd that a proposed new law, hand-tailored by a chief party at interest, should be accepted without question by tribunes of the people in a state or federal legislative body? Whatever the answer, Governor Rockefeller chose that very week to urge the New York Legislature to enact a law enabling the state to stop any takeover of a bank by a non-bank, within its boundaries, in a case where “the exercise of control might impair the safe and sound conduct of the bank.” By Friday, precisely such a proposed law, straight from Simmons’ desk, had been dispatched to Albany, and a national one of similar intent to Senator John J. Sparkman, chairman of the Senate Banking and Currency Committee in Washington. Apparently Chemical had reason to believe that in both cases the drafts would be introduced without significant alteration.

Thus it was with a sense of a turning tide of battle that Renchard telephoned Steinberg again on Friday the fourteenth, to make a new appointment. This time there was no further talk of gutter fighters and the like. Doubtless Renchard no longer felt the need for such talk. Was Steinberg still going on that vacation? Steinberg said he was—leaving the next day, and remaining in Puerto Rico until the following Wednesday, the nineteenth, when he had appointments in Washington. Renchard said amiably, “What’s the use of busting up your trip?” and invited Steinberg to come in and see him again on Thursday the twentieth. And so it was agreed.

By the following Monday and Tuesday, the would-be attackers were plainly on the defensive. A Wall Street Journal article published on Monday raised questions as to the future earnings prospects for Leasco. Leasco stock dropped eight points that day, to 115, and two and a half points more the following day. Simmons’ anti-bank-takeover bill was duly introduced in Albany on Tuesday. (It was subsequently passed, and became law in mid-May.) Leasco suffered a further setback when the company got a letter from the Department of Justice saying it had heard of Leasco’s plans to merge with Chemical and commenting, “Although we do not suggest that such a transaction would violate the antitrust laws, questions under these laws are raised thereby, particularly under Section 7 of the Clayton Act.” (Section 7 prohibits combinations that may restrain trade by reducing competition; its applicability to a Leasco-Chemical merger, as it was generally interpreted at that time, would appear to be highly questionable. Just how the Justice Department came to send such a letter at that particular moment has never been explained.) While these things were happening, Steinberg was with his family at the Dorado Beach in Puerto Rico, playing tennis, swimming, and, he insisted later, talking on the phone to his office in Great Neck only twice. It is hard, though, to imagine that he did not learn one way or another about the Journal article, the continuing Leasco stock drop, the bill introduced in Albany, and the ominous letter from Justice. For all of his impulsiveness, Steinberg is a reflective man, and it seems not impossible that, relaxing by the pool at the Dorado Beach, he reflected with irony that, having conducted his company’s annual meeting the previous week at a (David) Rockefeller bank, he was now paying top rates to another (Laurance) Rockefeller hotel for a quick vacation from the battle lines while a third (Nelson) Rockefeller was urging on the State Legislature a law intended specifically to thwart him in what he considered to be a legitimate and even socially beneficial enterprise.

Steinberg’s day in Washington—Wednesday the nineteenth—was a depressing one. All occasions now seemed to inform against him. For one thing, the mysterious decline in Leasco’s stock price was reducing the company’s takeover power day by day. But the situation was not yet hopeless on that front. Steinberg calculated that he could put together a tender offer that would be attractive to Chemical stockholders, and that would not cut Leasco’s earnings, down to a Leasco stock price of 85. As of February 19 the price stood at around 110, so that an interesting offer remained entirely feasible—provided some way could be found to prevent the stock’s downward toboggan ride from continuing. The other pressing concern was the national legislative situation—the matter that had brought Steinberg to Washington—and here he found a bleak picture indeed. The nation’s legislators were in a grimly anticonglomerate, antitakeover mood. During the day Steinberg talked to half the members of the Senate Banking and Currency Committee and to several members of the Federal Reserve Board; without exception, he found his interviewees adamantly opposed to a Leasco takeover of Chemical on grounds that seemed to him to be entirely unreasonable. Time and again, he explained that his object was not the destruction of a bank but its revitalization, and he argued that takeovers of one company by another, far from being automatically bad, are a valuable and necessary part of the free-enterprise system, and in some cases the only way by which backward and outmoded management methods can be replaced by aggressive, forward-looking ones. Time and again, he found his arguments going unanswered, and himself being treated as a sort of business pirate bent on seizing and looting property that did not belong to him. The climax of these brief and sketchy dialogues was one with the key man, Senator Sparkman, part of which went, according to Steinberg’s account, as follows:

SPARKMAN. A couple of weeks ago I had a fellow in here complaining that somebody moved in and took over his bank and then fired him. Now, we can’t have things like that.

STEINBERG. But, Senator, the whole economy runs on profit. If a bank president isn’t delivering, he should be replaced just like anyone else. Unless you want to change the whole system—

SPARKMAN. No, no, I don’t want to do that. By the way, have you seen the bill I’m going to introduce against bank takeovers? (Calling to his secretary) Miss———, where’s that bill the lawyer for Chemical Bank sent in? I want to show it to Mr. Steinberg.

It was thus that Steinberg learned for the first time of the bill Simmons had drafted at Chemical’s behest and, as Senator Sparkman so candidly put it, “sent in.” As it happened, Sparkman introduced the bill in late March; unlike the New York State legislation, it was never passed; but on March 19, the knowledge that a lawyer on Chemical retainer was apparently functioning as a sort of unofficial legislative assistant to the chairman of the Senate Banking and Currency Committee served to deepen Steinberg’s gathering despair. Only much later did he come to see his conversation with Sparkman as a piece of high Washington comedy.

“I came back to New York that night feeling that I had been given a very clear message,” Steinberg said later. In fact, that day, with the realization that the national powers of government as well as those of business were solidly aligned against him, Steinberg decided on surrender. The following morning, he went as scheduled to his third meeting with the Chemical’s top officers, at 20 Pine Street. As things turned out, it was to be his last such meeting. Again let us hear two versions:

Steinberg: “I came into the meeting with a public statement in my pocket—a surrender statement. I told them I’d been in Washington the previous day, and I told them whom I’d met. I said I’d concluded as a result of those conversations that the only way we could proceed with a tender offer was with Chemical’s great enthusiasm for the merger, and I wasn’t sure even that would help. I waited a few moments. To put it mildly, nobody from Chemical expressed great enthusiasm. Then I said that in half an hour I was going to release a statement of withdrawal. I pulled the statement out of my pocket and read it to the Chemical men. You could sense the relief—almost touch it. There was a kind of quiet pandemonium. Everybody shook hands. I haven’t seen any of them since then.”

Renchard: “Steinberg came in with a couple of henchmen. He said he’d decided it wasn’t the time to pursue the matter, and he was going to make an announcement to that effect later that day. It was a very friendly and satisfactory meeting.”

The announcement that Steinberg released later—which, in view of the fact that its last part largely negates a philosophy that he had expressed previously and would reaffirm later, suggests that he had been temporarily brainwashed—read as follows:

GREAT NECK N. Y., February 20, 1969—Saul P. Steinberg, chairman of Leasco Data Processing Equipment Corporation, stated today that he has no plans to acquire control of the Chemical New York Corporation. Without the support and enthusiasm of the management, Leasco has no interest in pressing for an affiliation with Chemical.

Mr. Steinberg observed that hostile takeovers of money-center banks were against the best interest of the economy because of the danger of upsetting the stability and prestige of the banking system and diminishing public confidence in it.

It was presumably with satisfaction that Romnes, Copeland, Tyson, Long, Learson, Funston, and the other Chemical directors that afternoon read the following telegram:

PLEASED TO REPORT LEASCO HAS ANNOUNCED WITHDRAWAL OF PLANS TO PRESS FOR AFFILIATION WITH CHEMICAL

BILL RENCHARD

6

So it was over, just two weeks after it had formally begun. “They”—the Chemical Bank, most of the banking business, the Cravath law firm, a cross section of Wall Street power and influence, the leading proxy solicitors, the governor and legislature of New York State, the members of the Federal Reserve Board and the Senate Banking and Currency Committee, and sundry more or less related forces—had combined to beat Saul Steinberg of Leasco, and apparently to cause him to lose his nerve at the last moment. (He and Leasco came back—gamely, although disastrously from a financial point of view—to take over control that summer of Pergamon Press, a British publishing giant.)

And yet it wasn’t really quite over; for American business and society alike, it had reverberations, some perhaps beneficial, others certainly purgative and self-revelatory. Renchard said later, “I took the whole thing very seriously, although a lot of people I know didn’t. At the bank we’re more on the alert now for that kind of thing. I took a lot of kidding about it. If Steinberg had gone ahead, it could have resulted in quite a fight. I’m not saying we would have been defeated. I still think we could have successfully fought them off. I’m just as glad not to have had to go through the process, though.”

What Steinberg, for his part, chiefly remembers about the whole episode is the aura of hysteria that seemed to pervade so many people’s reactions to it. “Nobody was objective,” he says. “I wanted objective opinions, and I couldn’t get them. All through those two weeks, bankers and businessmen I’d never met kept calling up out of the blue and attacking us for merely thinking about taking over a big bank. Some of the attacks were pretty funny—responsible investment bankers talking as if we were using Mafia tactics. And it went on afterwards. Months after we’d abandoned our plans, executives of major corporations were still calling up and ranting, ‘I feel it was so wrong, what you tried to do—’ And yet they could never say why. We’d touched some kind of a nerve center. I still don’t know exactly what it was. Once, at a party, the head of a huge corporation asked me if there had been any anti-Semitism in the campaign against us. I said, not that I knew of. There are bankers and businessmen who are anti-Semitic, but it was more than that. I think now it would have been a good thing if we’d done a hostile takeover, and then there had been Congressional hearings, to get all those rancid emotions out in the open air.”

Ruefully, Steinberg summed up his emotional reaction when he said, immediately after his surrender, “I always knew there was an Establishment—I just used to think I was a part of it.” As for the Establishment, perhaps its last word on the affair was the apothegm allegedly pronounced on it by an officer of a lordly commercial bank, who is supposed to have said, with a lordly mixture of misinformation, illogic, and sententiousness, “Never trust a fat man.”

CHAPTER XI

Revelry Before Waterloo

1

While Steinberg was finding out that he did not belong to the Establishment, and that in its old age it was neither too gentlemanly nor too toothless to fight, the investment revolution of the nineteen sixties was all but completed, and the era was having its last great speculative fling.

By 1969, institutional investors had effectively taken over the New York Stock Exchange business. At the beginning of the decade their share in it had been less than a third; now they had 54 percent of total public-share volume and 60 percent of total public-dollar volume. The mutual funds, the fastest-growing of the investing institutions, now held assets of some $50 billion, and were moving in and out of the market at a turnover rate of 50 percent, or half of their portfolios per year, as against less than 20 percent as recently at 1962.

The market was beginning to unravel in earnest. The Dow, after peaking out at 970 in May—only a few points below the all-time high of January 1966—went into a steep three-month decline that left it just above the 800 mark late in July. The Federal Reserve, worried about accelerating inflation, kept constricting the money supply, driving interest rates through the roof without apparently accomplishing its purpose, and there came to be the specter—confounding to classical economists—of a recession accompanied by runaway inflation, the worst of two apparently opposing worlds. The failure of the blue-chip Dow to reflect the true situation was becoming more pronounced all the time; the advance guard of the former high flyers were already crashing not 20 percent like the Dow but 50 to 75 percent, and even more. Transitron, which had peaked at 60 early in the decade, could be bought below 10 by June 1969. Early in the year, National General had sunk from a high of 66 to 35, Ling-Temco-Vought from 135 to 62, Litton Industries from 100 to 50. The Stock Exchange, which for some years had used the motto “Own your share in American business,” suddenly dropped it in 1969, without explanation.

A particularly ominous foreshadowing of things to come was to be found in the abrupt decline in brokerage-firm profits. Trading volume, the source of brokerage revenue, was diminishing rapidly; for 1969 it had shrunk from the 1968 figure by about 4 percent on the Big Board, almost 15 percent on the Amex, and considerably more than that in the over-the-counter market. Meanwhile the huge expansion downtown of personnel and facilities to meet the volume rise of the previous year had raised brokerage costs enormously. Unit costs of basic expenses were skyrocketing anyhow; clerical and administrative salaries on Wall Street were up about 60 percent in a decade, and the charges of auditors and lawyers up almost 80 percent. As a result of this squeeze, most Stock Exchange member firms were no longer operating in the black after the first half of 1969.

The omens were everywhere; doom hung in the air, and a tomorrow-we-die, night-before-Waterloo mood was pandemic. The national climate was just right for a binge. The country, tired of riots and crime and liberalism, and with a new conservative Republican administration in Washington, was moving politically to the right, which in economic terms meant toward the newer forms of laissez faire. Mergers went on increasing at a fantastic rate, and so, as a result, did capital concentration: billion-dollar corporations had, in only a decade, enlarged their share of total national assets from 26 to 46 percent. “Creative accounting” continued to flourish, and accounting authorities to shrug; the Accounting Principles Board, notified by the S.E.C. in February 1969 that it should promptly curb abuses of the pooling-of-interest method of merger accounting, shilly-shallied and took no action throughout the year. (Nor did the S.E.C. press the matter further.) Deal-making brokers, meanwhile, had learned how to bring together the two great new forces in the stock market—the conglomerates and the mutual funds—in a way that all but constituted a conspiracy to deceive the public. The deal-maker would propose and promote a merger, in the process salting away for himself large blocks of the stock of the merging companies. Next, he would sell the companies’ stock to funds on the basis of the secret merger plans; then when the merger was announced, the accountants would work their bottom-line magic, the merger-mad, bottom-line-loving public would bid up the stock, the insiders would unload, and the public would be left holding as big and empty a bag as in the more naive market manipulations of the nineteen twenties.

Still, the victims of such schemes were comparatively few. Tens of millions of investors who had been lucky or shrewd enough to avoid the most popular conglomerates, and the other go-go stocks of the most-actively-traded list, were sitting pretty. As late as mid-1969, you did not have to have bought the Dow blue chips to be doing well. If you had bought, say, Fairchild Camera in early 1965, you had tripled your money. If you had bought Boise Cascade at the start of 1967, you had nearly quadrupled it. Even an old warhorse like American Home Products had doubled since late 1966, and any of hundreds of other sound stocks had yielded comparable results. Most of these handsome profits would largely evaporate within the coming year, but nobody knew that, and in mid-1969 the profits were gratifyingly there, on paper, to make the small investor feel confident and rich, and to put him in a spending mood. Private schools and colleges were hand-picking their enrollments from a record flock of applicants; tables were scarce at expensive restaurants; in some areas, a Mercedes was almost as common a sight on the road as a Pontiac; and all that summer and fall, packed airliners departing for or returning from Europe were so numerous at New York City’s Kennedy International that they sometimes had to wait hours for clearance to take off or land. Catching the mood of Wall Street itself, the investing public was living as if there were no tomorrow.

Where was the S.E.C.? It seemed to have caught the night-before-Waterloo spirit itself. Its accounting department, which by statute enjoyed almost dictatorial powers over corporate accounting practices, was going its plodding, old-fashioned, and now apparently inadequate way, continuing to trust to the myopic vigilance and the checkered integrity of the accounting profession itself. And the S.E.C. staff had arrived at a state of demoralization unequalled since the Eisenhower administration. For the moment—and a short moment it would prove to be—almost anything went.

2

The rise of institutional investing had brought into being a new kind of high-risk brokerage operation, the block positioner. A time had come when a large mutual or pension fund might suddenly want to buy or sell at a single stroke a block of 100,000, 500,000, or even a million shares. Traditionally, the responsibility for matching up buyers and sellers in such an order, and rounding it out by using his own capital on one side or the other when necessary, fell on the specialist on the Exchange floor; but now with such huge sums involved in mammoth transactions the specialists’ capital was often ludicrously inadequate to the task. The firm that most spectacularly and successfully moved in to fill this crack in Wall Street’s crumbling edifice of traditional procedure was Salomon Brothers, formerly Salomon Brothers and Hutzler, founded in 1910, a leading institutional trader for years not in stocks but in bonds. Indeed, so great was this firm’s reputation in bond trading that at one time the Wall Street definition of a marketable bond was one on which Salomon would make a bid. In the mid-sixties, when Goldman, Sachs and Bear, Stearns had the lion’s share of the new and expanding business of block positioning of stocks for institutions, the partners of Salomon Brothers, headed by canny, soft-spoken William R. (Billy) Salomon, experienced a revelation. Block positioning in stocks, they mused, was not basically different from doing the same thing in bonds. In both cases, you had to know your customers, the institutional investors. Salomon Brothers knew them already from trading bonds with them for years. You had to have the resources and the nerve to assume huge capital risks. Salomon Brothers for years had been king of the plungers in the bond market; why not, then, move into the wholesale stock business?

Beginning in 1964-1965, they did, and by 1968 were the unquestioned leader in it. Their star stock trader came to be Jay Perry, a fast-talking and fiercely competitive man in his early thirties, from Hot Springs, Arkansas, who had previously been a bond trader. In Salomon Brothers’ noisy trading room at 60 Wall Street, Perry would be asked by a big institution for a price on so many hundred thousand shares of a certain stock—a block worth, say, $30 or $40 million. After consulting the firm’s executive committee, he would shout into the phone a bid a little under the current market, but—and here was the nub of the matter—not nearly so far under it as would be the case if the shares were thrown directly onto the mercy of a capital-weak floor specialist. Then, working at a 120-key telephone console connecting them to all the major funds in the country (an amenity denied to the floor specialist, who was forbidden to deal directly with institutions), Perry and the rest of the Salomon organization would begin trying to round up buyers for parts of the huge block available for sale. Quite often the number of shares they could find bids for would fall short of the offered block by a couple of hundred thousand shares. That was where the positioning came in. Salomon Brothers would obligingly buy those residual shares for its own account, completing the deal, and collecting commissions from both the seller and the various buyers. Then would come the hairy part: unloading the shares Salomon had taken, and didn’t really want to tie up its capital with, over a period that might drag out to as much as a couple of months, with tens of millions of capital at stake. “We’ll bid for almost anything,” said Salomon blandly, “and we take many baths.” The risks his firm took through seat-of-the-pants plunges in stocks of companies it knew little about was balanced, and more than balanced, by the enormous commissions it could count on from both sides of its executed deals. In the first three months of 1969, Salomon Brothers “crossed” almost six hundred blocks, putting its own money continually at risk to the extent of many billions of dollars worth of transactions. One day it traded 374,000 shares of Control Data for $52,360,000, the largest single Stock Exchange common-stock transaction in history.

As for Salomon Brothers’ “baths,” one of the wettest and most prolonged of them occurred over the first three months of 1968, in the stock of Fairchild Camera and Instrument, one of the market’s most spectacular performers of 1965. On December 21, 1967, Salomon Brothers, evidently in a free-spending Yuletide mood, bought from an investing institution 52,000 shares of Fairchild at 88, for a capital commitment of about $4.5 million. Later the same day, the firm sold off 22,500 shares at 90 ⅝, thereby turning a quick profit of $58,000. That left almost 30,000 Fairchild shares in Salomon’s inventory. Eight days later, on December 29, 1967, the firm bought 41,000 more Fairchild shares at 88½ from another investing institution, and on January 22, 1968—by which time the market for Fairchild had gone distinctly sour, and Salomon Brothers had decided it was a real bargain—the firm absorbed another block of 31,000 Fairchild shares at 78, thus raising its inventory to 102,000 shares at an average cost of $85, for a capital commitment of almost $9 million.

Day followed day, and Fairchild did not recover. On the contrary, it continued dropping—quite possibly speeded on its way by hedge funds that, knowing of the huge Salomon block hanging over the market, may have made short sales to take advantage of the situation. The days stretched out to weeks, and Fairchild stock showed no signs of recovery, and at last Billy Salomon and his partners decided that they had simply been wrong. On March 1, they unloaded 2,000 Fairchild shares at 66; on March 2, 17,400 at prices down to 59 ½; on March 6 to 9, 25,500 additional shares at prices down to 55 ⅝; and finally, between March 10 and 31, the rest of the block at prices down to 52—which turned out to be just about Fairchild’s low for the year. Salomon Brothers’ profits on the whole series of transactions, including the December 21 capital gain and commissions, were $105,000; its losses were $2,878,000, leaving a net loss of $2,773,000.

But why worry? Next week, or next month, there would be a new block trade that would result in a profit of $3 million or more, as attested by Salomon Brothers’ consistently gratifying annual results. Hardly a business conducive to the afternoon siesta, block trading embodied the high-rolling spirit of the time; and besides, it allowed the mutual funds and their client, the public, to lay off some of their risks onto steel-nerved professionals like Jay Perry, who always seemed to be in motion, and Billy Salomon, who never seemed to turn a hair.

3

There were other, less salutary, developments. Many of the mutual funds themselves were taking advantage of the permissive climate by indulging in a form of sleight-of-hand—perfectly legal at the time—that gave their asset value the same kind of painless, instant, and essentially bogus boost as merger accounting could give to conglomerate earnings. Asset value was to a mutual fund what earnings per share were to a conglomerate: its advertisement, its bait for new capital, the formal measure of its success or failure. The sleight-of-hand involved the use of what was called “letter stock,” and was, in the later nineteen sixties, freely indulged in by many mutual-fund magicians. The one who had the bad luck to become associated with letter stock in the public mind was Frederick S. Mates.

It may or may not be considered paradoxical that Mates, in 1968, had a well-deserved reputation as one of the most high-minded and socially concerned, as well as one of the most successful, young fund managers in Wall Street. Born in Brooklyn, a graduate of Brooklyn College with the Class of 1954, he had married a Barnard College psychology teacher, been a teacher briefly himself at a Brooklyn yeshiva, and then spent several years with the brokerage firm of Spingarn, Heine before launching his own Mates Investment Fund in August 1967. The fund was an instant success—so great a success that Mates could soon afford to integrate his social ideals into his business operations. For the Mates Fund portfolio he bought no stocks of companies manufacturing armaments, cigarettes, or products that he considered to be pollutants of the environment. He announced his ambition to use his fund to help “make poor people rich,” and to that end, he planned to cut the minimum investment in it down to $50 and to make a special selling effort in disadvantaged areas. As things turned out, his chief contribution to the welfare of the poor would seem to be the fact that he never got around to carrying out these plans, and thus spared the poor from becoming investors in the Mates Fund.

He called his office “the kibbutz on William Street” and his young staff “the flower children.” His seemed to be an operation entirely in tune with his times. Whether despite or because of these policies, objectives, and attitudes, by the summer of 1968 the Mates Fund was the new sensation of the mutual-fund industry, its asset value up almost 100 percent in its first year, and new money coming in at such a rate—a million and a half dollars a day, far exceeding the previous record set by Fred Carr’s Enterprise Fund—that, in June, Mates had to close the sales window temporarily to keep his facilities from being overwhelmed.

It was in September 1968 that Mates made the investment that he, and eventually much of the fund industry, would have cause to regret. A tiny conglomerate called Omega Equities privately sold the Mates Fund 300,000 shares of common stock at $3.25 a share. Omega was then selling on the over-the-counter market at around 24, so the price was apparently an almost unbelievable bargain. But only apparently. The Omega shares that Mates bought were not registered with the S.E.C., and therefore could not legally be resold until they had been through such registration; for practical purposes, they were unmarketable. They had been sold to Mates—legally—through an investment letter (whence the term “letter stock”) in which these terms were set forth and the buyer agreed not to resell pending registration. So now the Mates Fund had in its portfolio 300,000 shares of Omega; the question was, What value were they to be assigned in calculating the fund’s assets? Under the curious rules in force at that time, Mates might technically have carried them at $24 a share, the current market price of registered Omega shares, even though they were unregistered. Or he might, more logically, have valued them at his cost—$3.25 a share. Again, an ultraconservative fund manager might have recognized the fact that they were unmarketable by valuing them at a merely nominal amount. Instead of following any of those courses, Mates did what was the common practice in accounting for letter stock: he took the market price as his base, marked it down by one-third to allow for the shares’ nonregistration, and carried them at $16 a share. It will be noted that this was almost five times as much as he had just paid for them. With no change in the market price of Omega stock, then, and with no particular good news as to Omega’s business prospects, the Mates Fund had made what appeared on the books it displayed proudly to the investing public to be an investment yielding an instant profit of almost 500 percent.

The layman will have no trouble recognizing this as a form of cheating. The startling thing is not that Mates did it, but that it was being done all the time in 1968, by mutual funds and hedge funds, and that not until late 1969 did the S.E.C. get around to a mild crackdown on mutual funds’ letter-stock investments, and subsequent arbitrary up-valuations of them. What made Mates a scapegoat was some untimely ill fortune that shortly overtook Omega. Early in December 1968, the Mates Fund assets, partly on the basis of the Omega deal, were up an eye-popping 168 percent for the year, making Mates, by a wide margin, the nation’s leading fund performer in the greatest of all fund performance years. Then, on December 20, the S.E.C. abruptly suspended trading in all Omega stock on grounds that it was being traded “on the basis of incomplete and inaccurate information.” The immediate result was as disastrous for Mates as it was predictable. Many Mates Fund shareholders demanded redemption of their shares in cash, and this demand, because of the unmarketability of all Omega shares, was one that the fund could not possibly meet. Technically, it had failed. But the S.E.C. was in no mood to force it out of business and thus damage its 3,300 stockholders. Mates hastily applied to the S.E.C. for permission to suspend redemptions for an indefinite period, and the S.E.C. hastily and meekly complied.

The fund industry shuddered. This was purest heresy; the fundamental right of share redemption without question at any time was the cornerstone of the whole $50-billion business, analogous to the right of a bank depositor to draw from his checking account; now the cornerstone was cracked, the letter-stock deception stood suddenly exposed, and dozens of other funds came under suspicion of having similar concealed weakness. Mates, cornered, acted as bravely and honorably as he could. He immediately valued his Omega holding down to his cost of $3.25 per share, ruining Mates Fund’s preeminent performance record for the year. He vowed to resume redemptions just as soon as possible. That was cold comfort to his shareholders; but a leading Wall Street fund man commented with sympathy and candor, “After all, Fred Mates is only one of many.” In February 1969, an S.E.C. official seemed to be remarkably calm about the whole matter when he said, reflectively, “The Mates situation really puts the problem in bold relief.” That July, Mates finally made good his promise to resume redemptions—with Omega marked down to fifty cents a share. He was hoping eventually to find a way to sell his 300,000 shares for much more; early in 1972, however, the Mates Fund still had them, and was carrying them at a value of one nickel each.

The Mates case is an edifying little modern version of the Faust legend, which is strikingly close to the core of the moral climate of Wall Street in 1969. Pacts with the Devil were being struck all over the Street and its access roads that year; and the clock would strike twelve, signalling the time for fulfillment of the bargain, soon enough. Even the paradox of the original legend was reproduced in the modern version: like Faust, Mates was no conscienceless sharper but a man as good as or better than the next. Perhaps his story may even be seen as raising the arresting dilemma, Which is worse in a time of national crisis: a young swinger who speculates with his investors’ money but pursues high-minded investment policies, or a more conservative codger who keeps his clients in the comfortable blue-chip stocks of corporations that fuel the wars and foul the rivers and the air?

4

And there were other shows playing to paying customers that year Off Wall Street; the further their remove from New York’s financial district, the less they resembled moral drama and the more the repertoire suggested musical comedy or farce.

There was the now-famous Bernie Cornfeld, whose name was just beginning to be recognized by the American public in 1969: Bernie Cornfeld, once a Socialist at Brooklyn College (still another unsuspected hatchery of tycoons) and now king of the offshore fund operators (“offshore” meaning, of course, “beyond the reach of the S.E.C.”); who, back in the late nineteen fifties, had had the inspired idea of uplifting the poor of the whole world, and perhaps getting rich himself, by selling them American mutual-fund shares through something he called the Fund of Funds; who sold so many shares—mostly not to the upliftable poor of the world, it would appear later, but to rich men in poor countries who wanted to evade local currency restrictions—that before the end of 1969 his firm, Investors Overseas Services, had twenty thousand employees and a million customers in over a hundred countries, managed assets of $2.5 billion, and had brought him a personal fortune amounting on paper to $150 million; who had his headquarters on the borderline of France and Switzerland at Ferney-Voltaire (Bernie-Voltaire, the wags called it) and who lived so close to the borderline of legality that his operation was always getting expelled from various countries; who paid large salaries to James Roosevelt and the former vice chairman of the Federal Republic of Germany as investments in respectability; who liked to test new sales applicants with the thought-provoking question, “Do you sincerely want to be rich?”; who, fourteen years after he had started with nothing, had a town house on Lac Leman that Napoleon had built for Josephine, a castle in France with a moat and drawbridge, a pack of Great Danes, a string of racehorses, and squadron of high-powered cars, a Heep of sycophants, a live-in Jewish mother, and wall-to-wall girls.

“Where are the customers’ girls?” John Kenneth Galbraith once asked about I.O.S., during its heyday, adapting the old nineteen-twenties Wall Street joke about the visiting dignitary who, on being shown the yachts belonging to brokers, inquired, “But where are the customers’ yachts?” Sad but true: there were few mini-skirted minions for the customers of I.O.S. Its investment record was mediocre, in part because of lavish overcompensation of its salesmen—at the expense, of course, of the customers. But Cornfeld was only the top of an iceberg. By early 1969, the “offshore” fund arena included about seventy firms, some of them quietly run by outwardly respectable Wall Street houses, with well over $3 billion in the American stock market, all, presumably, for the benefit of underprivileged foreign investors but more palpably for that of a ravenous ratpack of newly overprivileged American entrepreneurs. The biggest such operation, after Cornfeld’s, was Great American Management and Research, or Gramco.

If some farceur with more imagination than restraint had written the story of Gramco as fiction, he would surely have been accused of painting with too broad a brush. Short of a corporation president conducting his enterprise from a baby’s playpen, Gramco’s founder and boss Keith Barish seemed to be the ultimate manifestation of the youth revolution in finance. At eighteen, while a student at the University of Miami, Barish had helped start a bank in Hialeah, of racetrack fame; because he was legally under age, his seat at directors’ meetings had been regularly occupied, on his behalf, by his mother. In 1967, when he was twenty-two and had already amassed a small fortune, he founded Gramco as a mutual fund that would invest chiefly in American real estate, rather than in American stocks. Thus he would bring to his investors the benefits of the apparently endless upward trend in land and property values. The S.E.C. frowned on such funds because of real estate’s inherent lack of liquidity, but no matter; Barish planned to “invent” a new thing called “liquid real estate”; and besides, he proposed to escape the disapproving surveillance of the S.E.C. entirely by setting up his fund in the Bahamas and selling its shares only outside the United States, presumably to non-Americans. And that, briefly, was what he did. Nassau became Gramco’s official domicile, London its operating base, Panama, Curaçao, and the Grand Duchy of Luxembourg its tax shelters, and most of the world ex-U.S.A. its selling territory.

Barish—might not the farceur at least have named him “Bullish”?—took as his partner a dispossessed Cuban just over thirty named Rafael G. Navarro, who had some mutual-fund experience. He took on others, without such experience, to other purpose. One summer, during the administration of John F. Kennedy, Barish as a teen-ager had served as a “summer intern” at the White House and had evidently spent his time well among the authorities he found striding in and around its corridors. To apply the magical Kennedy aura, so powerful in so many distant lands, to the selling of Gramco shares, Barish hired as Gramco officers and directors a group of old New Frontiersmen, among them two former Kennedy ambassadors, two former Kennedy staff assistants, a former Kennedy Undersecretary of Health, Education and Welfare, a former Kennedy Assistant Secretary of Commerce, and—most visibly—the portly, amiable, highly visible former Kennedy press secretary and later U.S. Senator from California, Pierre Salinger.

“Economics have never been my strong point,” Salinger once confessed disarmingly, but no matter; Salinger was made titular head of the Gramco sales organization, which came to comprise some six hundred salesmen in fifty countries, and by May 1969 had brought in investments in Gramco of more than $100 million, a figure that would be doubled before the end of that year. The money was invested in such U.S. real-estate ventures as the Americana Fairfax Apartments outside Washington, the Clermont Towers in New York City, Harbor House in Chicago, the LTV Tower in Dallas, and a shopping center in Oklahoma City. Meanwhile, those within the Gramco organization with more of a penchant for economics were ensuring that Gramco itself got its share of the proceeds. To begin with, the firm charged fund customers the usual stiff mutual-fund sales commissions and management fees; but in Gramco’s case the beginning was only the beginning. Running a real-estate fund gave the managers a golden opportunity to do what the managers of a stock fund legally could not, that is, to serve as their own brokers in their transactions and collect commissions accordingly. Moreover, the fact that real estate could be bought largely on credit, as stocks could not, made it possible for them to take in remarkably high commissions in relation to the amount of money invested. Gramco collected—from its customers, of course—a 5 percent commission on the full price of each transaction; since it bought on mortgages that on occasion amounted to three-quarters of the purchase price, it was sometimes able to pocket for its own account $1 million for every $5 million of its customers’ money that it put into real-estate ventures. In the first three and a half years of Gramco’s operation, its management took out of the fund for its own profits $43 million, or 17 percent of all the money the customers had entrusted to it. The firm’s accountants, meanwhile, were doing their bit to make Gramco’s books look simultaneously bearish to the income-tax authorities and wildly bullish to potential investors. Taking advantage of liberal U.S. depreciation guidelines for real estate, the accountants would report on their U.S. tax returns that the properties Gramco had bought were dropping in value. At the same time, reporting to shareholders and potential shareholders abroad on the fund’s asset value, they would record, on the same properties and at the same time, substantial increases in value. What was going down in Oklahoma City and Chicago, the accountants seemed to be saying, was simultaneously rising and shining in Nassau, Panama, and the Grand Duchy of Luxembourg.

In May 1969, Gramco followed the crowd and went public: a million shares were issued, priced at $10 each. Again, everybody was rich, except, by some oversight, the far-flung investors who had put their trust in the Kennedy aura and a good bit of their money, inadvertently, into the pockets of former Kennedy men. Surely the old New Frontiersmen were finding exciting new frontiers indeed, on a new trail blazed by the stripling they had first taken a liking to that summer at the White House.

Then there was the Off-Wall Street comedy-farce to end them all, the show that had everything—deal-makers, fund managers, gambling stocks, purchased respectability, chicken-wired conglomerates, offshore operations, letter stock, Bernie Cornfeld. Perhaps appropriately, its scene was laid chiefly in Los Angeles; the action took place in 1968 and 1969. The plot may be summarized as follows:

Delbert William Coleman, born in Cleveland, a Harvard graduate whose Who’s Who entry conscientiously stipulated that he was a member of the Harvard Alumni Association, was a playboy plunger who in 1956 had taken over the J.P. Seeburg Corporation, a Chicago jukebox manufacturing concern. Among those he counted as his friends was Sidney R. Korshak, sixty-three, a self-made Chicago millionaire lawyer with the reputation, deserved or not, of having been an adviser to members of the Capone gang; by 1968, however, Korshak had attained a kind of ornate respectability, with plush law offices and an apartment in Chicago, a high-priced spread in Bel Air, California, a suite at the Carlyle in New York, and a certain reputation as a philanthropist. Knowing Coleman as a man on the lookout for fast business action, Korshak brought him to Los Angeles and introduced him to Albert Parvin, who at the age of seventy was ready to retire as boss of Parvin-Dohrmann, the company he had founded. Parvin-Dohrmann owned hotels and gambling casinos in Las Vegas, and had some major stockholders with suspicious credentials; but anyone who on those accounts consigned it to the demimonde of American business could be reminded, and frequently was, that for a time the president of Albert Parvin’s private foundation had been William O. Douglas, Associate Justice of the U.S. Supreme Court, who had accepted a salary of $12,000 a year for his efforts. Exactly how Justice Douglas had been persuaded to take the position was, and remains, unclear.

Korshak’s introduction worked like a charm. Parvin-Dohrmann as a stock speculation brought an instant gleam to Coleman’s eye, partly because Howard Hughes’s recent investments in Nevada had given Las Vegas’s name investment pizazz, partly because the investing public was clearly in a gambling mood, and what better way to gamble in stocks than by buying stocks in gambling casinos? Burt Kleiner—the mod Los Angeles stockbroker and Pop-art collector who had put together deals for just about all of the farthest-out conglomerates, and the man at whose brokerage office on Wilshire Boulevard, called “Wall Street West,” customers in 1968 and 1969 often sat watching the tape and actually chanting, “Go, go, go!”—was called in to find a customer for Coleman’s Seeburg stock so that he could then buy into Parvin-Dohrmann. No problem. Kleiner persuaded Commonwealth United, a small West Coast conglomerate that was an old customer of his, to take Coleman’s interest in Seeburg for $9.8 million, thus giving Coleman some spending money. Coleman promptly used it to buy 300,000 shares of Parvin-Dohrmann—a controlling interest—at $35 per share. Kleiner’s firm, Kleiner, Bell and Company, took a broker’s fee of $768,805 for arranging the deal. Albert Parvin went to Africa on safari. And Coleman prepared triumphantly to wheel and deal with his new vehicle, Parvin-Dohrmann.

His first move was, with Korshak’s help, to sell privately 143,200 of his 300,000 Parvin-Dohrmann shares—they were traded on the Amex—to a group of organizations and individuals including Burt Kleiner (5,000 shares), Cornfeld’s I.O.S. (81,000), two owners of the Atlanta Braves baseball team, and Jill St. John, the actress. He gave them a bargain price ($35 a share, his own cost) in exchange for a letter agreement not to resell their shares, and thus keep them conveniently (for Coleman) off the market. Next, he took the $5 million obtained from these sales and plowed most of it back into strategic purchases of Parvin-Dohrmann. Aimless activity for its own sake? By no means; Coleman’s purpose, or so the S.E.C. would later charge, was standard old-fashioned manipulation, designed artifically to attract attention to Parvin-Dohrmann stock and thus create public buying interest. Meanwhile, Coleman wined and dined mutual-fund managers at Parvin-Dohrmann’s hotels and casinos in Las Vegas; some of the managers responded to this hospitality by buying the stock for their portfolios. To further confuse the investing public, Coleman arranged to have his mother make purchases of Parvin stock on the Amex while he himself was selling a comparable number of shares off it. Parvin-Dohrmann came to look to the uninitiated like the hottest stock of the moment, as it appeared on the most-actively-traded list day after day at ever-rising prices. To focus the spotlight of glamour still more sharply on its company name, Parvin-Dohrmann contrived, through Korshak’s ubiquitous contacts with West Coast characters, to buy for $15 million the Stardust Hotel-Casino on the famous Vegas Strip. (Korshak got a $500,000 fee on that one.) Dazzled, the public took the bait and gobbled up Parvin-Dohrmann stock. By January 10, 1969, the price was up to $68.50, and a few weeks later to 110.

What Coleman and his companions seem to have done was to have pulled off, in the Wall Street era of federal regulation and presumably general enlightenment, a classic stock manipulation remarkably similar in a technical sense to those of the unenlightened nineteen twenties—and given it to an up-to-the-minute flavor by involving gambling casinos, kicky conglomerates, a Pop-art-collecting broker-dealer, and even a Hollywood star. Moreover, everyone seemed to be making money by the potful. Apparently one could now beat the games at Vegas without even going there!

But then one day a computer at the Amex started acting peculiar. The Amex computer was programmed to give off warning signals when there was unorthodox and suspicious movement in any listed stock; and in this case, it really worked. It began giving out frantic warning signals on Parvin-Dohrmann. The Amex started an investigation, and as a result, on March 26, decided to suspend trading in the stock temporarily. The next day, the company disclosed the previously secret deal with the buyers of the 143,200 shares, causing eyebrows to shoot up on Wall Street and Off Wall Street alike. On April 14, 1969, the Nevada Gaming Control delivered Parvin-Dohrmann another blow by decreeing that the company could not operate casinos in Las Vegas any longer unless Cornfeld’s I.O.S. got rid of its 81,000 shares. (Coleman would complain later that I.O.S. not only got rid of the shares, but did so at a fat profit.)

In May, the S.E.C. finally stepped in. Coleman, desperate, got Korshak to assign a fixer named Nathan Voloshen to arrange him an interview with S.E.C. Chairman Hamer Budge. Voloshen came through, and the interview took place (Voloshen apparently got $50,000 for arranging it), but it was hardly a success from Coleman’s point of view, since he failed to persuade Budge to call off his dogs. So Coleman and Korshak hastily began trying to find somebody on whom to unload their Parvin-Dohrmann stock at $140 or $150 a share. They finally hit upon Denny’s Restaurants, a Los Angeles coffee-and-doughnuts chain with expansive notions. Denny’s was eager for the deal—the very rumors of the merger sent the stock of both Parvin and Denny’s skyrocketing. But Denny’s didn’t like the aura of shady influence that by now pervaded Parvin-Dohrmann, mainly because one of its largest stockholders was a sometime target of various Justice Department antimob investigations. On October 13, 1969, the Denny’s merger fell through, and the bottom fell out of Parvin stock. On October 16, the S.E.C. filed a suit charging Coleman, Korshak, and a long list of their associates with having manipulated Parvin stock in violation of the securities laws. Most of them signed consent decrees.

By the spring of 1970, the party was over. Coleman had turned his Parvin stock over to a voting trust and resigned from the management. The stock had sunk to $12.50 a share, so he, and all of his friends and backers, had sharp losses. Korshak poignantly complained to a newspaper reporter that all he had left after taxes on the half-million fee in the Stardust deal was a mere $68,000. Commonwealth United’s stock price was down 97 percent to seventy cents a share. The cry of “go, go, go” was heard no more on sunny days on Wilshire Boulevard, because Kleiner, Bell, with the S.E.C. nipping at its heels about multiple securities violations, had prudently retired from the brokerage business. All the guys and dolls, from Korshak to Jill St. John, were sadder and wiser, but warm with nostalgic memories of the thrills they had had in the days before the electronic cop at the Amex put the arm on them.

5

Finally—to round out this inventory of the various symptoms of dementia that afflicted the 1968-1969 stock market—there were the hot new issues, the “shooters,” that shot up on their first day of trading from 10 to 20 or from 5 to 14, and later went to 75 or 100, oblivious of the fact that the companies they represented were often neither sound nor profitable: the garbage stocks that everyone could make money on just so long as, and no longer than, everyone could contrive to hold his nose and avert his eyes and imagine that the garbage was actually nourishing and palatable.

If one fact is glaringly clear in stock-market history, it is that a new-issues craze is always the last stage of a dangerous boom—a warning of impending disaster almost as infallible as Cheyne-Stokes breathing is a warning of impending death. But not so inexorable; if heads could be cooler and memories longer, investors both large and small, professional and amateur, might ward off danger by reading the signs, eschewing the new issues, and lightening their commitments generally. But investors, like other human beings, tragically repeat their mistakes; when the danger signs are plain, the lure of easy money blanks their memories and dissipates their calm. In 1929 the shooters were jerrybuilt investment trusts like Alleghany, Shenandoah, and United Corporation. In 1961 they were tiny scientific companies put together by little clutches of glittery-eyed young Ph.D.’s, their company names ending in “—onics.” In 1968-1969, what a promoter needed to launch a new stock, apart from a persuasive tongue and a resourceful accountant, was to have a “story”—an easily grasped concept, preferably related to some current national fad or preoccupation, that sounded as if it would lead to profits. Such stories, like most stories, were best told quickly and concisely, and best of all within the name of the company itself. Were the new government Medicare and Medicaid programs pouring millions into the care of elderly persons? A cunning investor could presumably get a piece of that action by buying stocks called Four Seasons Nursing Centers or United Convalescent Homes. Were people’s recreational expenditures soaring? Hardly coincidentally, there turned out to be a stock called International Leisure. Was concern about the environment a popular passion of the moment? Why, look here—a stock called Responsive Environments! Was weight watching in the wind? One might grow rich while growing thin, perhaps, with Weight Watchers International. Finally, it may be assumed that there were some investors who, so far as company names were concerned, didn’t want to be bothered with the suggestion of any particular product or service, and just wanted a stock whose name made it sound like a winner. For them, there was Performance Systems, Inc., not to mention Bonanza International.

And then there was National Student Marketing Corporation, whose “story” was the youth market: half of the nation’s population was now under twenty-five, and that half, the experts contended, was spending $45 billion a year. Students were constantly on the front pages those days, though more often as a threat to business than as its potential customer. Yet at the very moment when the counterculture was having its brief day, while the front-paged students were seizing campus buildings and trashing deans’ offices, there was a campus counter-counterculture, as sedulously entrepreneurial as Andrew Carnegie, vigorously in pursuit of the quick buck. Students and recent graduates who burned not to right the world’s wrongs, but just to get rich in a hurry, were finding that they could possibly accomplish their aim soon after graduation, or even before it, by starting campus businesses or simply by playing the stock market. Such a young man, Andrew Tobias, wrote of Princeton in 1968, “One of the guys … was playing ‘puts and calls.’… Every lunch hour this fellow would walk up Nassau Street to the local office of Tout, Ticker, Dicker and Churn, I think it was, to punch out all his different holdings on the Quotro. … Another fellow got daily phone calls from his broker, and the news was usually good. … Across the hall there was a little company selling a combination life-insurance-mutual-fund package that was about to go public.[*] Sometimes in the evening a Blue Cross salesman would come by to trade stock tips. He had bought a thing called Omega Equities at fifty cents a share.…”

The young man who set out in the biggest way to exploit the youth market, or at least to convince Wall Street that he was doing so, was Cortes Wesley Randell. The son of a Washington, D.C. business consultant, a strapping six-footer with a glib tongue and an easy smile, who had attended the University of Virginia (where his thesis topic had been “How to Start a Small Business”) and then done brief stints with General Electric and I.T.T., Randell was about to turn thirty when, in 1965, he founded National Student Marketing Corporation in Washington as headquarters for a string of part-time student representatives on campuses whose job it was to distribute samples and employment guides, do market research, and sell fad items like posters and paper dresses. The enterprise took off like a bird. Sales for the first fiscal year, ending in August 1966, were $160,000, and for the following year, $723,000. By early 1968—just in time for the great national speculative fever—Randell had nearly six hundred campus reps and was ready to take N.S.M.C. public. And Wall Street was more than ready to receive it. Not Charlie Plohn, but the solid old-line brokerage house of Auchincloss, Parker and Redpath became N.S.M.C.’s underwriter for the stock issue; its lawyers were Covington and Burling, its accountants Arthur Andersen and Company. Buoyed by this parlay of glamour and apparent respectability, the stock, offered to the public on April 24, 1968, at a price of 6, went to 14 the same day and by early June was selling at 30.

Randell, who still held more than half of all the stock, along with several million dollars of cash proceeds from the sales of the other half, was now rich, and not temperamentally inclined to disguise the fact. Soon he had acquired a $600,000 castle on the Potomac, a fifty-five-foot yacht, and a $700,000 Lear jet to buzz around in. He paid himself only a modest presidential salary of $24,000, and for good reason; by denying himself and his colleagues high salaries, he could increase company profits, and that was where the real money was, at least for large stock and option holders. A small event that occurred shortly after the underwriting—the sudden resignation, without explanation, of both Covington and Burling and Arthur Andersen and Company—may be considered, in hindsight, to have been an evil portent for Randell and N.S.M.C. But nobody in Wall Street was looking for evil portents just then, certainly not in connection with a shooter like N.S.M.C.

And so, armed with a red-hot stock appraised by the market at a price-to-earnings multiple of 100, Randell set out to make his company a giant through acquisitions: six of them in 1968 and more in 1969, including three school-bus companies, Arthur Frommer’s low-cost-travel guides, compilers of high-school student lists, publishers of campus telephone directories, even some companies scarcely related to the youth market at all. Since the companies acquired, almost always with N.S.M.C. stock, had comparatively low multiples, N.S.M.C. earnings automatically went up with each acquisition. And Wall Street reacted as it was supposed to do in such situations; as the earnings rose, so did the bids, and before the year was out, N.S.M.C. stock had skyrocketed on the over-the-counter market from the original price of 6 to a 1968 high of 82.

Meanwhile, Randell had moved his headquarters from Washington to New York, to be where the financial action was. Significantly, the corporate style he fostered was anything but countercultural. N.S.M.C. executives, however youth-oriented or youthful themselves (and some of them were scarcely out of their teens), did not affect long hair or mustaches or love beads or jeans, nor did they smoke marijuana; rather, they wore dark suits and narrow ties, and kept their shoes shined. The chief, indeed the sole, gesture that N.S.M.C. seems to have made to the mood of campus revolt was to try to cash in on it by selling special pillows for the use of sit-in demonstrators. In simple truth, N.S.M.C. was not primarily selling goods and services to youth at all—it was primarily selling stock to Wall Street.

Its astonishing success in that particular enterprise is a crucial sign of the times in Wall Street. Randell would impress and flatter security analysts and fund managers by taking them on tours of his castle or calling them on the skyphone from his Lear. It became his standard procedure to predict tripled earnings for each coming year over the previous one, and he was a persuasive young man—particularly when his hearers were people who wanted to believe. Indeed, even if he were not entirely to be believed, did it matter, for the short run? In the market of 1968 and 1969, wasn’t an illusion, so long as it was universally shared, just as good a money maker as a reality? Bankers Trust, Morgan Guaranty, the Continental Illinois of Chicago, and the State Street Fund of Boston bought N.S.M.C. stock; so did the Harvard and Cornell endowment funds, the General Electric pension fund, and the University of Chicago. There seemed to be scarcely any investment citadels left for Randell to conquer.

And the stockbrokers—did they doubt Randell’s glowing accounts of N.S.M.C.’s present and future? He was able to arrange things so that they could hardly afford to; before long a number of them were working for him, beating the bushes to find companies for N.S.M.C. to acquire so that it could keep increasing its earnings, and being paid off handsomely for their efforts with batches of N.S.M.C. stock. Finder’s fees in the form of stock were paid to W.E. Hutton, Halsey, Stuart, and Smith, Barney, among others. Sometimes the brokerage firms apparently found it possible to sweeten up the deal with a recommendation of N.S.M.C. stock to their customers; thus, in 1969, Kidder Peabody gave it a rave review in a seventeen-page report, and hardly more than a week later, Kidder received 4,000 shares of N.S.M.C, then selling above 120, solely for its imagination and resourcefulness in proposing to N.S.M.C. that it acquire a company called Stuckey and Spear that manufactured college rings.

So the money factory was a closed chain, infallible so long, and just so long, as the chain remained unbroken. The weak link was, of course, the disparity between Cort Randell’s promises and his company’s real results, which, closely scrutinized, were unspectacular. After having predicted tripled earnings for a given year, Randell found himself forced to resort to creative accounting to make the prediction come true; then, having written artificially high earnings for that year, he was compelled by his game’s inner dynamics to predict that those earnings would be tripled again in the following year—and then, somehow, goad his accountants to Parnassian heights of accounting genius to fulfill the new promise. The first serious test of his credibility in Wall Street came late in 1969. N.S.M.C.’s report for the fiscal year ended that summer showed net profit of around $3.5 million, duly fulfilling Randell’s projections. But to achieve the figure, the company’s accountants had been obliged, among other strokes of creativity, to defer until a future year product development and start-up costs of $533,000, even though the money had already been spent; to include as income $2.8 million of “unbilled receivables,” which was to say, money that had not been received because it had not even been asked for; and—perhaps most egregiously—to include as net income more than $3 million attributable to the profits of N.S.M.C. subsidiaries that N.S.M.C. had not yet acquired at the close of the year being reported on. With the elimination of that single item, which was explained to investors in a small, mumbled footnote, N.S.M.C.’s 1969 profit would have been all but wiped out.

N.S.M.C. stock dropped briefly after the report appeared—only to rise again to the 100-times-earnings range. But a few Wall Streeters seem to have read the footnotes; stock analysts and investing institutions began asking N.S.M.C. executives pointed questions for the first time late in 1969. Simultaneously, Randell began to be pressed by his colleagues within the company; some of them came to wince whenever he made a public statement, and a few of the more conservative of them went so far as to demand that he resign as president. He can hardly have failed to realize that the game was nearly up—that he had not succeeded in exploiting the youth market, assuming there was one, if only because he had never seriously tried to exploit it in his preoccupation with exploiting the stock market; and that now, at last, investors were catching on. Nevertheless, he bulled ahead until the last. On November 5, 1969, speaking to the New York Society of Security Analysts, he predicted, true to form, that earnings for fiscal 1970 would be almost triple those for 1969. The stock jumped 20 points, causing Randell’s personal worth to rise $6.5 million. That he and his colleagues had somewhat different private notions is suggested by the fact that in December the company and its principal officers suddenly unloaded more than 325,000 shares. In January 1970, Randell—over the frantic objections of his colleagues, some of whom by this time would have liked nothing better than to silence their president with a gag and adhesive tape—made a nationwide speech tour during which he constantly reiterated his 1970 earnings projection.

In early February, N.S.M.C.’s financial vice president gave a dumbstruck group of company executives the jolting news that the actual result for the quarter just ended would be a loss. By February 17, Randell’s ebullience had been dampened at last, at least to the extent that, in a speech to the St. Louis security analysts that day, he said merely that N.S.M.C.’s first 1970 quarter would be “profitable.” His partial concession to reality was too little and too late. The following day, amid panic in the councils of N.S.M.C, Randell resigned as president; a week later, a first-quarter loss of $1.2 million was announced, and two days after that, the company shamefacedly admitted that there had been a “mechanical error in transferring figures from one set of books to another,” and that the actual loss was more like $1.5 million. By this time the market for the stock had understandably caved in; having sold at 140 as recently as late December, it was down to 50 and sinking fast; by July it would stand at 3 1/2, a loss of more than 97 percent from its peak seven months before. By then, it may be assumed, the investing public, including many of its firmly established corporate citizens, would be sadder if not wiser about fast-talking young entrepreneurs selling companies with faddish stories. As for Cort Randell, he would by then have vanished into the obscurity of his Potomac palace, with a few million dollars intact from stock sales made in time—one more stock-market rocket of youth’s short era, rich and burned out at thirty-five.

Well and good. But the question remains, How could he have fooled the Morgan Guaranty, the Bankers Trust, Harvard and Cornell, the whole brains trust of institutional investing, for as long as he did—and, of course, taken the innocent investing public along with them? The answer appears to be painfully simple: that he was plausible and they were gullible as well as greedy; that, in times of speculative madness, the wisdom and experience of the soundest and soberest may yield to a hysteria induced by the glimpse of fool’s gold dished by a young man with a smile on his lips and a gleam in his eye.

6

Late in September 1968, at the height of the Presidential election campaign, the Republican candidate Richard M. Nixon sent a letter to a group of top Wall Street executives in which he attacked the S.E.C. under Democratic leadership for its “heavy-handed bureaucratic regulatory schemes,” expressed the fear that a continuation of such policies “might seriously impair the nation’s ability to continue to raise the capital needed for its future economic growth,” and went on to promise, in effect, that regulation of the securities business under his administration would be relatively passive and permissive.

The free and healthy operation of the market [Nixon wrote] is of utmost importance to the investor. … Our securities laws were designed to protect the investor by insisting on full and complete disclosure.… I believe in the full enforcement of the securities laws to assure absolute protection for the investor. … The philosophy of this [Democratic] administration, however, has been that disclosure alone is not enough and that the Government can make decisions for the investor better than he can make them for himself. This philosophy I reject.

Wall Street was electrified. What the Republican candidate was rejecting, of course, was the now generally accepted view that in an age of stock-market participation by the millions, full disclosure alone is by no means sufficient to protect the general investor; and he was clearly and categorically announcing his intention to undo the activist work at the S.E.C. of Cary and Cohen, and turn the clock back to the old Wall Street era of “Eisenhower prosperity.” Could this really be happening, the thoughtful minds on Wall Street wondered, at the very moment when a new speculative binge was clearly building to its climax, when portfolio-churning brokers, letter-stock-buying mutual funds and law-avoiding offshore trusts were clearly making a mockery of “full disclosure” and taking renewed advantage of unsophisticated investors?

Some in Wall Street could hardly believe their luck—apparently the cookie closet was to be no longer watched or locked. Others were dismayed. “I’m bewildered by it all,” said a senior partner of an investment banking firm. “The S.E.C. has been in the picture now for more than thirty years and it’s doing its job. Regulation is here to stay.” Indeed, many practical Wall Streeters believed that the public confidence in securities promoted by the presence of a vigorous S.E.C. was a positive factor for business, and that any weakening of the S.E.C. or its authority would be concomitantly bad. Such dismay was mitigated in a somewhat equivocal way by a large measure of skepticism as to whether the Republican candidate really meant what he said. It was widely known that much of Nixon’s fund-raising base was in Wall Street—that Bernard J. Lasker, then vice chairman of the New York Stock Exchange, was a leading Nixon fund-raiser as well as a close Nixon friend, and that Peter M. Flanigan of Dillon Read (later a high and controversial White House aide) was a key man in the campaign. Perhaps, it was reasoned, Nixon was just trying to tell Wall Street what he thought it wanted to hear, in the familiar spirit of campaign rhetoric. There were even rumors—given wide currency by disconcerted Nixon supporters—that the letter had been sent out without its having been read by the candidate.

Such speculation was cold comfort to the more dedicated and able members of the S.E.C. and its staff. The prospect they faced, should Nixon win, was apparently that of working under a President who either opposed everything they were trying to do, or who wished to give the appearance that he did. It was scarcely a morale-building pair of alternatives. Cohen’s four year regime as chairman had been strong on enforcement and somewhat less so on policy innovation, but it had been imaginative and aggressive enough to keep most of the best S.E.C. staff men active and happy. It is axiomatic in the S.E.C. that the star performers who stay there for any length of time do so on principle and at personal sacrifice, since much higher-paying jobs on Wall Street or in the law firms are almost always available to them. Now, with Nixon’s letter, the occasion for worthwhile sacrifice seemed to have been removed. Within weeks after publication of the letter, a small ebb tide of talent began to flow out of the S.E.C.; in November, after Nixon’s election, the tide became a torrent.

A hard core of skilled, experienced, and well-motivated staff men hung on into the new year and new administration, doing the day-to-day job of processing new stock registrations, and waiting to see whom Nixon would appoint as Cohen’s successor. The man he appointed in February was hardly one to please a dedicated S.E.C. activist. Hamer H. Budge was a short, bald former Congressman from Idaho and political protégé of Senator Everett Dirksen, who had become an S.E.C. commissioner in 1964 as a Republican appointee of President Johnson. At Commission meetings, Judge Budge—so called in recognition of a brief term he had served as a federal judge back in Idaho, and maybe just because it sounded good, too—had happened to sit on the left of Manny Cohen, and Cohen had had many a good laugh about that. Politically, Judge Budge was by no means to the left of Cohen; rather, he was an amiable Republican with middle-of-Main-Street Republican ideas and, as to the S.E.C.’s role and function, a holder of the philosophy that the best regulation is generally the least regulation.

On his first day in office as S.E.C. chairman, Budge made a surprisingly strong public attack on conglomerates and their involvement with mutual funds in the stock market, signalling the start of a Nixon administration campaign that would eventually have its focus in the office of Richard W. McLaren, Assistant Attorney General. But Judge Budge’s initial burst of activism was short-lived. The S.E.C., unlike the Justice Department, actually did little to curb conglomerate power, and as the summer of 1969 came and the Wall Street bubble of widespread speculation swelled nearer the breaking point, the S.E.C.’s complacency showed signs of becoming somnolence. As promised, “heavy-handed regulatory schemes” were conspicuous by their absence; there was little evidence at the S.E.C. of plans for regulatory schemes of any sort; there were rumors (later confirmed) that the S.E.C.’s great work in progress since 1968, a huge study of the effect of institutional investors on the stock market, was losing steam; and there was some evidence that even basic enforcement activities against stock-market fraud were being relaxed. To top it all off, in July it inconveniently became public knowledge that Judge Budge, while holding office as S.E.C. chairman, had felt free to entertain an $80,000-a-year job offer from Investors Diversified Services, a giant mutual-fund complex emphatically under the regulatory jurisdiction of the S.E.C.

In view of the fact that at about the same time the S.E.C. was actively engaged in negotiations with Investors Diversified Services about its methods of operation, this bordered on scandal, at least to Congressional Democrats. Judge Budge explained himself to a Senate subcommittee to its apparent satisfaction. But even by the most charitable possible interpretation, Budge’s flirtation with a high-paying industry job while he was serving at the S.E.C.—indeed, during his first six months in office—set the worst and most demoralizing possible example for the staff men working under him. Predictably, they followed that example. As early as May, Judge Budge was expressing dismay and apparent bewilderment that so many good S.E.C. men were quitting their jobs.

By the fall of 1969, talent and morale at the S.E.C. had reached rock bottom. Two new Nixon-appointed commissioners, an upstate New York accountant and a conservative Florida Democrat with no background in securities, had consolidated the Commission’s new conservative, hands-off majority. Hearings on stock-brokerage rates that had begun more than a year earlier were still dragging on without results. Judge Budge was cheerfully assuring Wall Street that it could look forward, as promised, to a spell of “self-regulation” with little interference from his office. A disillusioned S.E.C. staff man observed with resigned understatement that “things are slowing down.”

In one sense, they weren’t. In terms of paper-pushing as opposed to enforcement of existing rules and promulgation of new ones, the S.E.C. was busier than ever before, processing the new stock-and-bond registrations that were flowing in so fast—between July 1 and September 30, a thousand of them amounting to about $12 billion—that businessmen bringing their applications to the S.E.C. building were being issued numbers to designate their turns, like customers at a crowded meat counter. And there was a final irony. Like other paper-pushing agencies, the S.E.C. charged fees to the companies whose new securities issues it processed for registration; such fees were intended to cover the costs of the staff and to finance the agency’s other activities in enforcement, surveillance, and planning. In 1969, fee receipts were high and expenses were low. So it came to pass that the S.E.C., which was supposed to be paid for by taxpayers in exchange for its surveillance of profit-making Wall Street, ended the year with its own bottom line showing—a net profit.

*This turned out to be Equity Funding Corporation.

CHAPTER XII

The 1970 Crash

1

In terms of the analogy between the nineteen twenties and the nineteen sixties with which this chronicle began, the beginning of the year 1970 corresponds roughly to the late spring of 1929. In each case, there were warning signals across the land of a coming economic recession, possibly a full-scale depression, and an uneasy Republican administration, only a year or so in office, was wondering what to do for its best friend and principal political client, the business community. In each case a steep decline in second-rank stock issues—a sort of hidden crash, since it didn’t show up in the popular averages—was already under way. In each case speculation continued to flourish, and money was historically tight; and in each case the Federal Reserve, torn between trying to dampen speculation and inflation on the one hand and trying to head off recession on the other, was frantically pressing its various monetary levers to little effect.

But there was at least one big difference. Where in 1929 the stock market became the national craze as it had never been before, and in some senses had never quite been since, and interest in it was actually increased by its disintegration, in 1970 the investor mood was one of fatalism, and the decline in trading volume would become as great a problem for Wall Street as the decline in stock prices.

The Dow started the year at around 800, down about 15 percent from the start of 1969, the year before. During all of January, the market fell slowly but inexorably and, by the twenty-ninth, the Dow was at 768, its lowest point in more than three years. February and March were months of moderate recovery, still, however, on low volume; on the Amex in particular, volume set record lows for the year, day after day, particularly during a postal delivery strike in the New York City area in March. Brokerage firms, finally geared up for multimillion-share trading days that had become common in 1968 and 1969, and running such high expenses that some of them now needed 12-million-share Stock Exchange days to break even on commissions, were losing money so fast that in the first week of April the S.E.C. consented to the imposition of a $15 commission surcharge on all transactions of 1,000 shares or less. Some—like Hans Reinisch, a young man who had set himself up as the Ralph Nader of the securities business—felt that thus punishing the small investor for the unprofitability of brokerage firms, at a time when large institutional investors had recently been granted lower commissions, was both absurd and unfair. But something had to be done quickly, and that was what the Wall Street leadership and the Nixon S.E.C. thought ought to be done.

At about the same time, the pace of the price decline suddenly stepped up. On April 22 came the abrupt and mysterious E.D.S. collapse in which Ross Perot sustained his historic loss. Two days later, the Dow had receded to 750, and about a quarter of all issues traded on the Stock Exchange were at their lows for the year. By April 27, the Dow was at 735, and the economic analyst Eliot Janeway—“Calamity Janeway,” as some had come to call him, in recognition of his reputation as Wall Street’s most assiduous prophet of doom—was saying that it would certainly go below 700, and probably much lower than that. On the twenty-eighth, with the Dow at 724, President Nixon tried to stem the tide by saying for quotation that if he had the spare cash, he would be buying stocks right now.

(Pause to note: on October 25, 1929, the day after the one remembered as Black Thursday, President Hoover said, “The fundamental business of the country … is on a sound and prosperous basis.” Hoover stopped short of saying he wished he had some money to invest in stocks, but five days later, after a further disastrous decline, John D. Rockefeller, Sr., said, “My son and I have for some days been purchasing sound common stocks.”)

2

The chairman of the New York Stock Exchange in 1970, who was fated to be the key man in Wall Street’s near-fatal convulsions that year, was Bernard J. Lasker, always called Bunny, a tall, athletic-looking man of fifty-nine with the semi-distant yet curiously vulnerable air of command of a tough regular-army top sergeant. In character and background, he presents a striking—and, as a reflection of social change, highly interesting—contrast to his 1929 counterpart, the ineffable Richard Whitney. Where Whitney had belonged beyond cavil to such an aristocracy as his country could muster—descendant of seventeenth-century settlers in Massachusetts, son of a Boston bank president, nephew of a former Morgan partner, graduate of Groton and Harvard, son-in-law of a president of the Union League Club—Lasker was the son of a Jewish sponge-and-chamois importer on Beaver Street, a rundown commercial area of ancient redbricks standing in the shadow of imperial Wall Street. Where Whitney’s undoubted ability to lead other men had been rooted in an intimidating aloofness composed of snobbery and disdain for those he considered his terrestrial inferiors, Lasker, an eminently approachable man, derived his comparable ability from the overpowering singlemindedness—surely Whitney would have called it “pushiness”—of an aggressive yet accommodating businessman. Finally, where Whitney with all his physical impressiveness and air of Episcopalian propriety had eventually been exposed as a habitual embezzler, Lasker with his direct manner was by all accounts and evidences a man of iron sense of duty and scrupulous professional rectitude.

Born in New York City in 1910, Lasker grew up on West End Avenue in middle-class circumstances and went to a private day school. But the senior Lasker died when his son was fourteen—the sponge business was in any case to be ruined a few years later by du Pont’s introduction of artificial sponges—and there was not enough money to send the boy to college. So, at seventeen, he went to work as a runner on Wall Street for the firm of Hirsch, Lilienthal and Company. There he made his way upward by the classical steps—the purchase-and-sales department, the order room, customer’s man, assistant manager of a branch office—and in 1939 became a Stock Exchange member himself. Eventually, he settled in as a partner, and eventually senior partner, of Lasker, Stone and Stern, a professional firm—doing arbitrage, specializing, and floor trading, never dealing directly with the public—of the sort whose members have traditionally run the affairs of the New York Stock Exchange. In the natural course of events, Lasker gravitated into Stock Exchange management: membership on the Board of Governors in 1965, the vice chairmanship in 1967, and, in the spring of 1969, election to succeed Gustave Levy as chairman. Unabashedly loving the Exchange and his role within its canonical observances, Lasker considered it to be to all intents and purposes the center of his life, and he immediately threw himself into the unpaid job of chairman with a will, almost totally neglecting his own business affairs (as, indeed, Whitney had done) in the performance of his volunteer duties. But at the time he assumed office, he could hardly know just how onerous those duties would become, or that they would draw on energies and abilities that he may not have known he had—and draw, among other things, on his long-standing personal friendship with Richard M. Nixon.

Like so many self-made men in America, big, bluff Bunny Lasker was a bellicose conservative, ever eager to praise the free-enterprise environment that nourished him so bountifully, and quick to leap to attack or to patient explanation whenever anyone criticized it. Indeed, one is tempted to describe him as a Republican by instinct or even by religion. If someone he met turned out to be a Republican, Lasker tended automatically to think of the man as a friend; if, on the other hand, someone he instinctively liked turned out not to be a Republican, he was genuinely puzzled by the anomaly. Sometimes this rather elementary form of faith led to disillusionment; for example, in 1965, Lasker (albeit with some misgivings) served as finance chairman for the Republican New York City mayoral candidate John Lindsay, but a couple of months after that campaign’s triumphant conclusion, when Mayor Lindsay decided to impose an increased stock transfer tax on Wall Street, Lasker’s regard for Lindsay vanished rather abruptly. On the whole, though, his faith in the Grand Old Party and its members seemed to stand him in good stead. It certainly did in his relations with Nixon, with whom he first became associated as a fund-raiser in the 1960 Presidential campaign. The following year, when the defeated candidate was visiting New York, he called up Lasker to thank him for his efforts in the campaign and to suggest that, since they had never met, they do so now. The two men met at the Plaza and hit it off immediately. Nixon had never seen the Stock Exchange, so Lasker took him there; the ex-candidate was so beguiled by what he saw that he stayed for a long lunch. Then, after Nixon had hit political bottom with his 1962 defeat in the California gubernatorial election and had temporarily abandoned politics to come to New York to practice law, Lasker and his wife more or less took their friends, the tyro New Yorkers, in hand: Lasker helped the Nixons find an apartment, and Mrs. Lasker helped Mrs. Nixon find a dressmaker, and the two couples frequently dined together. It was in 1964, though, that Lasker without conscious intention put the future President most deeply in his debt. Nixon would say later that Lasker, in helping to talk him out of making the Presidential race again in that overwhelmingly Democratic year, had had a large hand in saving his political career.

So when Lasker came to the Stock Exchange chairmanship in 1969, the Stock Exchange had a friend at court, as duly attested by a telegram from the President, on the occasion of Lasker’s election, that Lasker subsequently had framed and mounted on the wall of his office: “Dear Bunny: As I mentioned yesterday, I am highly pleased that you have been chosen as head of the New York Stock Exchange. Your abilities and qualities of leadership make you exactly the right man taking the job at the right time. Pat joins me in sending our congratulations and affectionate regards. Richard Nixon.” Meanwhile, his religious Republicanism began creating new anomalies. Robert Haack, the Exchange’s paid president and therefore the man Lasker had to work with most closely in its management, was a liberal Democrat as well as a man whose personal chemistry often conflicted with Lasker’s. On the other hand, the amiable Judge Budge, Nixon’s S.E.C. chairman, was a Republican and as such a man for whom Lasker felt a great affinity—an affinity that is said to have had a lot to do with the S.E.C.’s granting of the $15 brokerage commission surcharge in April 1970. So the chairman of the Stock Exchange didn’t get along very well with his logical friend, his own organization’s administrative head, but got along beautifully with his logical enemy, the head of the regulating body that was supposed to ride herd on Wall Street. To further complicate things—and complete the irony—Haack and Budge didn’t hit it off, for the curious reason, among others, that the Wall Streeter considered the S.E.C. head too far to the right and the S.E.C. head considered the Wall Streeter too far to the left.

One hesitates to imagine what Stock Exchange-government relations in the great crisis of 1970 would have been had Lasker been Stock Exchange chairman and had the Washington administration been Democratic. As things stood, Nixon had been right: Lasker was indeed the right man at the right time, from a Wall Street point of view—for the very reason that he had the ear and the confidence of the President, whose telegraphed assurance to the Stock Exchange chairman would turn out to be its own proof. Lasker began drawing on his Washington connections on April 29—the day of the Cambodia invasion, and another day of steadily declining stock prices—when, at Lasker’s suggestion and with Nixon’s approval, he and a group of other Wall Street leaders met at the White House with a group of top government officials including Economic Advisers Council Chairman Paul McCracken. Each side reassured the other that everything was under control; but nevertheless, as Donald Regan, chairman of Merrill Lynch, reported later, “the tone of the meeting was dejected.” Still, it served to open a wire between Wall Street and Washington that would be crucially useful in the weeks to come.

In early May, matters on Wall Street went from bad to worse. On the third, Galbraith, one of whose well-known books is a study of the 1929 crash, came out with a newspaper article drawing a series of striking parallels between the current situation and that of 1929: excessive speculation, overly leveraged holding companies, inflated investment funds, funds that invested solely in other funds, and so on. On the fourth, the Dow suffered its greatest one-day drop in seven years and finished at 714. The following day, government took its first positive action when the Federal Reserve reduced the margin requirement on stock purchases from 80 percent cash down to 65 percent cash; but the tide was running too strongly now to be stemmed by a moderate relaxation of credit requirements, and on May 13 the Dow broke through 700, closing at 694. Trading volume was still relatively low. It was not a panic but a funk—“a kind of neurosis,” as George Shultz, then Nixon’s Bureau of Management and Budget chief, said. Shultz did not add that the funk, or neurosis, seemed to have been brought about in good part by the actions of the Nixon administration in noneconomic fields. Cambodia and Kent State, on top of everything else, had stunned the nation. Nothing could be discerned ahead but more futile overseas war and domestic violence. The last thing people felt like doing was buying stocks.

The vast securities ant hills, and the immense credit spiderwebs, were crumbling now, and with them the network builders themselves. The stock of Cornfeld’s fast-collapsing I.O.S., which had managed in six months to send some $75 million down the drain with bad investments and ill-considered loans, had sold in the 20s late in 1969 and was now selling at 2; on May 8, in an acrimonious board meeting at Geneva, Cornfeld’s fellow directors forced him to step down as their head. And on May 17, in Dallas, James Ling—whose Ling-Temco-Vought was suffering from a government antitrust suit and from debts so large that it could not even keep up the interest payments, as well as a stock price that had plummeted from a peak of 170 to around 16—quietly resigned as chairman and chief executive, under pressure from the company’s creditors. Thus, in hardly more than a week, the king of the conglomerators and the king of the mutual-fund operators were both forced from their thrones.

3

Lasker, having decided that the time had come to play his ace, now sought a personal interview with Nixon, who, he felt, was simply neglecting the stock market and its consequences in his preoccupation with foreign affairs and inflation. On the afternoon of May 20, he was notified that the President would see him the following morning at eleven o’clock. Lasker stayed up most of the night making notes on what he would say, and made further notes en route to Washington on an early-morning plane. Arriving at the White House at eight-fifteen, he went to the office of the President’s secretary, Rose Woods, where he spent more than an hour putting the finishing touches on his notes; then he crossed the street to the Executive Office Building, where he dropped in on his friend Vice President Agnew. In the course of this visit, he found himself listening to an urgent appeal for help from the Vice President’s secretary, Mrs. Alice Fringer, who told him that she had tied up most of her savings in a mutual fund only to see its price fall far below what she had paid. “Tell me what to do,” she pleaded. “I can’t afford to lose the money.” Taken aback, Lasker gave no immediate answer.

“Soft like with Budge!” was Lasker’s admonition to himself at the top of the first page of the five-page sheaf of notes that he carried with him into his meeting with Nixon. “Market break worst since 1929—no present sign of abating. Confidence is the big problem.” What followed in Lasker’s notes was mostly economic analysis and specific suggestions for the President about wage and price controls, government borrowing policies, and the impact that another 1929-style crash would have on the whole economy. Upon at last being ushered into the President’s office, Lasker, after greetings and family inquiries, opened his briefcase and brought out his sheaf of notes. “What have you got there?” Nixon asked. Lasker replied with Stock Exchange-style humor that he had brought his lunch, since he could no longer afford to eat in restaurants. He was rewarded with a broad Presidential smile. He went on to say that the country was “five minutes till midnight of another 1929,” and that Presidential action was urgently needed to avert such a catastrophe. Then it suddenly occurred to Lasker that he could best dramatize the seriousness of the situation by forgetting most of the facts and figures he had prepared and bringing things down to personalities. Accordingly, he threw aside his elaborate notes and repeated, with dramatic emphasis, what had passed between him and Agnew’s secretary, concerning her worry about her mutual-fund investment.

“Tell her not to sell her shares,” Nixon said immediately.

“You tell her, Mr. President,” Lasker shot back in his best top-sergeant tones.

Nixon seems to have got the message. What the two men decided on, as an immediate step, was the scheduling, with due fanfare, of a large White House dinner for top officials of government, Wall Street, and business, to be tailored specifically to show the nation that the government was indeed concerned about the stock-market situation and was prepared to do what could be done to remedy it. (In March 1929, at the leading edge of that year’s crash, Richard Whitney went to the White House to confer with President Hoover about the stock-market situation. A temporary improvement in investor confidence followed.)

Lasker went back to Wall Street the same day, well satisfied with his White House audience. That afternoon he talked with Billy Salomon, who, with his finger on the pulse of the bond market, reported that the Federal Reserve had that day abruptly started pumping money into the economy through purchases of government paper—the first fruit, Lasker was entitled to suppose, of the alarm that he had succeeded in implanting in Nixon. Plans for the White House dinner—still unannounced to the public—went forward. The stock market went on dropping; the clock was still ticking out on Lasker’s five minutes. On May 22, the averages hit a new low since early 1963, and Merrill Lynch had to call for $11.5 million in new margin money from its customers who had bought stock partially on credit. The weekend break brought no surcease, and on Monday, May 25, the Dow dropped 20.81 points—the biggest one-day drop since the Kennedy assassination in 1963—to finish just above 640. Janeway had begun talking about a bottom of 500.

Midnight seemed to be at hand. Panic lurked in the wings. On Monday afternoon, after the market close, the brokerage and investment community learned of the planned White House dinner from an announcement carried on the Dow news tape. The dinner was to be held that Wednesday the twenty-seventh and was to be attended by sixty or more leading figures from business and finance. But the studied implication of Presidential concern for the fortunes of Wall Street had disappointingly little immediate effect. The next day, Tuesday, the Dow dropped nine more points, to 631. Then on Tuesday evening through television news reports, and on Wednesday morning through newspaper coverage and comment, the significance of the coming event seemed to sink in. In one of the great pre-prandial celebrations of American history, a cocktail hour of staggering economic importance, the Dow on Wednesday the twenty-seventh leaped upward 32.04 points for the biggest one-day gain in Stock Exchange history.

The dinner itself, taking place when the announcement of it had already largely fulfilled its purpose, was something of an anticlimax, with certain overtones of farce. (No reporters were present, and no official report of the proceedings was ever issued; but we have, as evidence of what happened, the accounts of various participants, and in particular that of Donald Regan of Merrill Lynch, who took careful notes.) In the White House’s State Dining Room the full panoply of government, business, and financial power was duly arrayed. From the government, besides the President, there were Arthur Burns, chairman of the Fed; Chairman McCracken of the Council of Economic Advisers; Secretary of the Treasury David Kennedy; Secretary of Commerce Maurice Stans; Attorney General John Mitchell; and such special Presidential aides as Peter Flanigan, Charles Colson, and William Safire. From business there were, among others, Chairmen James Roche of General Motors, H. I. Romnes of American Telephone, Harold Geneen of I.T.T., Donald MacNaughton of Prudential Insurance, and Robert Anderson of Atlantic Richfield. The Wall Street contingent included, besides Regan and Lasker, President Haack of the New York Stock Exchange and President Saul of the Amex, as well as the top bosses of a half-dozen of the leading brokerage firms.

Lobster cocktails, beef Wellington, Chateau Lafite-Rothschild 1962—what but a Rothschild wine on stock-market night at the White House? The proceedings that followed seem to have been solemn, portentous, and in some ways rather horrifying. The President spoke first. Referring to a huge map of Southeast Asia that had been set up behind him, he characterized the three-weeks-old Cambodian invasion as the best-executed American military coup since MacArthur’s landings at Inchon in Korea in 1950. Why, the President wanted to know, did Wall Street look upon such a national triumph as an occasion for selling stocks? On the contrary, he said, it ought to be considered highly bullish. On the domestic front, he predicted resumed economic growth and a cooling of inflation in the second half of the year. Lasker, speaking next, urgently insisted that a substantial stock recovery was dependent on three government actions: strict adherence to the announced plans for withdrawal of American troops from Cambodia, clear evidence that the Fed would support the price of government bonds, and further steps by the Fed to increase the money supply. Chairman Burns of the Fed, arising next, assured those present that his institution was fully aware of the magnitude and significance of the Wall Street crisis, and declared flatly, and most satisfactorily, that the Fed was prepared to fulfill its responsibilities as a lender of last resort. This, as it happened, was the only concrete reassurance of constructive economic action to be uttered by a government official all evening.

Following Burns’s remarks, Nixon called for questions. There was a question as to how the President proposed to deal with the nation’s young people and their campus revolts, to which the President replied, apparently to everyone’s satisfaction, that junior faculty members at universities ought to show “more guts” in dealing with student protesters. According to Regan’s account, “he added that he had not become President of the United States to witness the liquidation of all of our alliances and to see us lose our place of primacy in the hierarchy of nations.”

The dinner, to judge from the available accounts, was getting to be a kind of Mad Tea Party, various participants giving voice to their own preoccupations without regard to anyone else’s, and none of those present touching more than remotely on reality as it was perceived by most of their fellow citizens outside the State Dining Room. And then came the bombshell. A guest named Isidore Cohen, who was entirely unknown to almost everybody present, arose with a “question” that swiftly evolved into a slashing ten-minute attack on the administration’s policies—its vacillation on economic matters, the badness (as the speaker thought) of Dr. Burns’s economic advice to the President, and, in Regan’s words, “a large helping of recommendations in a wide range of fields.” As Cohen went on, heatedly and implacably, and it became clear that there was a cuckoo in this nest of the business-financial-government complex, there was general consternation and dismay. Regan, who happened to be seated next to Cohen, kept trying to pull him from his feet by yanking at the tail of his coat, but in vain; Cohen remained stubbornly standing, and talking. When at last Cohen had finished his tirade and resumed his seat, the President coolly picked up where he had left off, almost as if nothing had happened; and a few minutes later the meeting broke up to general applause.

What had happened? Who was Izzy Cohen and what was he doing there? “What was he doing there?” Bunny Lasker asked later, with rhetorical indignation. “Why, he’s a Democrat!” At least as much to the point, Cohen was by no means a businessman of comparable stature to the others present. In fact, he was a principal of Joseph Cohen and Sons, a men’s clothing manufacturer based in New York and Philadelphia that had recently merged with Rapid-American, which the reader will recall as the conglomerate headed by the one-time Israeli Meshulam Riklis—who had not been favored by a Presidential invitation. Cohen was there, in a word, because someone involved in the planning of the dinner had blundered. We may be grateful to the anonymous blunderer, and to Cohen himself, for making the President’s dinner into something both more human and more representative of the nation than anyone had intended.

History is full of ironies, and it is just barely possible that the United States was saved from “another 1929” by this White House non-event, which is comparable in many respects to Richard Whitney’s celebrated staged bid for Steel at 205 at the height of the panic on Black Thursday. (“If that market had gone through 600, it might have gone through 400,” Lasker would insist later.) The reports of the dinner that circulated in Wall Street the next day emphasized Burns’s reassurances rather than Cohen’s contrariety, and the market rose. It bounded up 21 more points that day, and on the following day, a Friday, it climbed above 700. Early in June a fresh decline began, and threatened to turn into a rout when, on the twenty-first, the supposedly unshakable Penn Central Railroad Company, suffering from management that in retrospect would appear to have been inept beyond belief, suddenly collapsed into bankruptcy. This time, something more economically palpable was at stake than general loss of confidence in the nation’s policies. What was at stake was the survival of the “commercial paper market,” a revolving credit system among corporations in which they borrow money short-term and unsecured, usually from each other, and in which in June 1970 there was involved the vast sum of $40 billion. With the Penn Central’s paper in default, the danger was that the unfortunate companies that had lent tens of millions to the Penn Central might themselves be unable to meet their obligations, and that other commercial-paper lenders might suddenly refuse to renew their loans, leading to a chain reaction ending in a classic national money panic and, of course, a stock-market collapse. But the Federal Reserve, this time, was on its toes; warned in advance of impending danger, it applied the classic remedy to the classic dilemma, opening wide its usually carefully restricted loan window and suspending the banks’ usual interest-rate ceilings, thereby releasing a flood of money into the market and preventing the chain reaction from starting. Fast footwork by the often heavy-footed Fed kept the Penn Central failure an isolated tragedy instead of a national disaster; early in July, the Dow began a long, fairly steady rise that would carry it by the end of the year to above 840.

4

Having compared 1929 and 1970 as to sequence of events and attitudes toward events and found the similarities at least as striking as the differences, we will do well to compare the hard figures. From the September 1929 peak to the nadir of the Great Depression in the summer of 1932, the Dow industrial average dropped from 381 to 36, or just over 90 percent. From the December 1968 peak to the May 1970 bottom, the same index dropped from 985 to 631, or about 36 percent. By that standard, a pistol shot as against a mortar barrage. But, as we have had occasion to note before, that standard really will not do; the Dow accurately reflected the 1929-1932 market when house painters and office girls were making their plunges in Dow stocks like General Motors and Standard Oil of New Jersey, and woefully failed to reflect the 1969-1970 market when similar plunges were far more likely to be made in Control Data or Ling-Temco-Vought. A financial consultant named Max Shapiro, writing in the January 1971 issue of Dun’s Review, tried to construct a new yardstick more appropriate to the new situation. As a rough modern counterpart to what the Dow represented in the old days, Shapiro made a list of thirty leading glamour stocks of the nineteen sixties—ten leading conglomerates including Litton, Gulf and Western, and Ling-Temco-Vought, ten computer stocks including I.B.M., Leasco, and Sperry Rand, and ten technology stocks including Polaroid, Xerox, and Fairchild Camera. The average 1969-1970 decline of the ten conglomerates, Shapiro found, had been 86 percent; of the computer stocks, 80 percent; of the technology stocks, 77 percent. The average decline of all thirty stocks in this handmade neo-Dow had been 81 percent. Even allowing for the fact that the advantage of hindsight gave Shapiro the opportunity to choose for inclusion in his list particular stocks that would help prove his point, his analysis strongly suggests that, as measured by the performance of the stocks in which the novice investor was most likely to make his first plunges, the 1969-1970 crash was fully comparable to that of 1929.

And again, measured by the number of people affected and the gross sums of money they lost, 1969–1970 was strikingly worse than 1929-1932. In 1929 there were, at the most, four or five million Americans who owned stock; in 1970, by the New York Stock Exchange’s own proud count, there were about 31 million. As to the sums of money lost, between September and November 1929 around $30 billion eroded from the paper value of stocks listed on the New York Stock Exchange, and a few billion more from that of stocks traded elsewhere; the 1969-1970 loss, including issues listed on the two leading exchanges and those traded over-the-counter, totalled in excess of $300 billion, ten times the former amount.

Losses, then, of $300 billion in a year and a half, spread over more than 30 million investors—such were the bitter fruits of the go-go years: of the conglomerates and their promoters’ talk of synergism and of two and two making five; of the portfolio wizards who wheeled and dealt with their customers’ money; of the works of bottom-line fiction written by the creative accountants; of the garbage stock dumped on the market by two-a-week underwriters; of the stock salesmen who acted as go-betweens for quick commissions; of the mutual funds that got instant performance by writing up the indeterminate value of unregistered letter stock. But the fact remains that the human and social damage that resulted from the more recent crash was immeasurably less. In a nation far richer in real terms than it had been in 1929, the market losers of 1969-1970 could better absorb their losses, and moreover, more intelligent and conscientious federal regulation in the later era shielded the losers from the worst consequences of their gullibility and greed. With no government restrictions at all on borrowing for the purpose of buying stock in 1929, people had been free to invest their savings in stocks on 10 percent or 20 percent margin, thus assuming the suicidal risk of being wiped out on a 10 percent or 20 percent market decline. The Federal Reserve margin requirement—amounting to 80 percent through most of the 1969-1970 crisis—made it necessary for investors, except for a few who found highly sophisticated ways of circumventing the rules, to put up far more cash in relation to their risk exposure, and thereby became the key factor in preventing a repetition of the wholesale personal tragedies of 1929. Indeed, the margin requirement made it quite difficult in 1969-1970 for a stock investor to be wiped out entirely. What resulted, in fact, was a middle-class crash, productive of severe discomfort rather than disaster. If one heard of investor hardship in 1970, but not of lost homes, shattered lives, and suicides, much of the credit must go to that key piece of New Deal reform legislation, the Securities Exchange Act of 1934, which (among many other things) gave the Federal Reserve its power to regulate stock-market credit. At the very time when old-style liberalism was being widely reviled and ridiculed, a key measure of old-style liberalism, little noticed or honored, was serving as a small but significant piece of evidence that in forty years the country had learned something, after all.

And of course—not so much because of more enlightened government policies as because of the enormous industrial strength of the nation—the 1970 crash, unlike that of 1929, was not followed by a catastrophic depression. It was, however, followed by a serious one. Unemployment, which had amounted to about a quarter of the civilian labor force in 1932, never got more than slightly above 6 percent in the worst days of 1971, but that was bad enough, especially since (unlike 1932) it was concentrated in the black-minority areas of large cities—and in some of those areas, indeed, it did reach or exceed 25 percent. The Economic Report of the President for 1970 equivocated: it spoke of “slowdown,” of “decline of output,” of economic performance that “disappointed many expectations,” but never of “recession,” far less of “depression.” One prominent economist went so far in his efforts to put matters in a cheerful light that he came up with the apparently self-cancelling phrase “growth recession.”

But to the layman, the signs of recession late in 1970 were everywhere plain to see. In October, the Bureau of Labor Statistics reported that, with national unemployment at 5.2 percent of the work force, the figure for male black teen-agers in urban areas stood at 34.9 percent. At about the same time the tide of recession began spreading upward in the economic spectrum. It never did soak, or even dampen, the rich—corporate chieftains went right on drawing astronomical salaries, and banks in particular actually flourished because of continuing tight money—but in the autumn of 1970 the recession wave swamped the middle class. An organizer of the United Steelworkers told Studs Terkel, chronicler of the Great Depression of the nineteen thirties, “When a guy is cashing his biweekly check at the neighborhood bar, every check for the last few years has been $300, $400. Now he brings home $150 to $170.” A twenty-two-year-old described the effect of recession on the youth counterculture: “Most people with long hair have to work for dog wages. There aren’t many places that hire them, so they work at rip-off joints. You know, $1.75 an hour. It’s like being black.”

In October, the airlines, anticipating collective losses of at least $100 million on the year’s operations, were cutting back luxury services: sandwich meals now instead of steaks, fewer in-flight movies, paper towels instead of cloth ones, no more snacks of expensive macadamia nuts. The same month, the Department of Labor identified thirty-five separate major labor areas with “substantial or persistent” unemployment; the Council of Better Business Bureaus estimated that there were 400,000 currently unemployed executives; and large companies began making across-the-board cuts of executive and white-collar paychecks. The Norton Company of Massachusetts, to name one, shaved 15 percent from the salaries of 5,000 managers and white-collar workers, which for a person earning $25,000 meant a cut of about $72 a week. By November, in New York City, it was clear that the welfare rolls were being swelled faster by new applications from non-Puerto Rican whites than by those from blacks and Puerto Ricans. At the Professional Placement Center of the New York State Employment Service, the number of professional and managerial claimants for unemployment benefits had risen by more than 100 percent in a year, and there was talk of stockbrokers working as cab drivers, art directors taking jobs as layout artists, and accountants accepting sharp salary cuts and for the first time in their lives paying agency fees. That winter in Manhattan, for-hire limousines were in supply rather than in demand; for the first time in the memory of many opera patrons, there were empty seats at almost every Metropolitan Opera performance; many former Saks Fifth Avenue customers were patronizing Klein’s or Alexander’s, and many former taxi riders were riding buses and subways. In December, placement counsellors at colleges began telling seniors of a sharp drop in job offers, and warning them that the days when they could take their pick of starting jobs were over. Most large industrial companies began cutting their campus recruiting visits sharply, some cutting them in half. The advanced-degree job market became a small disaster area, with new Ph.D. holders taking jobs, when they could find them, at half the going rates of the year before. Urban private schools, used to watching affluent parents agonize over berths for their offspring, suddenly were competing among themselves for scarce applicants.

And so it went. There were no breadlines or applesellers, but bread was being eaten instead of cake, apples instead of baked Alaska. And the reaction of worried politicians to the deteriorating situation called forth more sardonic echoes of the past. As the year 1970 ran out with the gross national product down for the first time since 1958, and with industry limping along at three-quarters of capacity, the President, with the concurrence of Congress, began applying that old Herbert Hoover standby, the trickle-down theory of trying to save old jobs and create new ones through federal handouts to business. By the end of the year, Congress had voted the Lockheed Aircraft Corporation a $250-million loan guarantee in a financial rescue operation intended principally to save the jobs of 60,000 employees by saving the company from bankruptcy; the bankrupt Penn Central was on the way to a $125-million federal loan guarantee to keep its passenger trains running, and their employees working; a new governmental corporation, Amtrak, was being established to operate all of the nation’s intercity trains; and government shipbuilding subsidies were in the process of being greatly increased. It all looked like Hoover’s famous breadline for business, the Reconstruction Finance Corporation, all over again, with the difference that the R.F.C. had usually driven a harder bargain with its petitioners than the Nixon administration did now.

Week by week and month by month, new parallels kept appearing. In 1971, Nixon repeatedly rejected the idea of direct federally sponsored job programs, just as Hoover had done in 1930 and 1931. Week by week and month by month, the dollar grew weaker in the international markets. When the United States had finally been forced to abandon its pledge to redeem dollars with gold on April 18, 1933, it had been three and a half years after the beginning of the 1929 stock-market crash. This time, the triumph of political necessity over national honor came sooner. When the gold default of 1933 was repeated down to all but the smallest details in August 1971, it was hardly more than a year after the height of the 1970 crash.

History, in its economic aspect, seemed to have become a recurring nightmare from which the United States could not awake. But for Wall Street, the nightmare this time had a new dimension. In the second half of 1970, Wall Street itself, as distinguished from its hapless customers, came within a hair of plunging into irretrievable bankruptcy, and the American securities market into full-fledged socialism.

CHAPTER XIII

Saving Graces

1

If Wall Street can lay claim to special expertise in any particular field, that field is the raising and management of capital. Bringing together, presumably in an orderly and mutually beneficial way, companies that need new money to run their businesses and investors who wish to hire out some of their money at reasonable risk, is Wall Street’s work—the social justification of its existence. By and large, over the years, it has performed this function well. Yet in the latter nineteen sixties the capital structure of Wall Street itself became unsafe and unsound to a degree that, when hard times struck, was revealed as nothing less than a scandal. It was more than a case of a physician being unable to heal himself; it was a case of a physician habitually and systematically flouting everything he had learned at medical school, including the simplest rules of personal daily hygiene.

Matters had not always been thus. The celebrated post-1929 suicide victims had been for the most part customers rather than brokers. The brokers’ yachts were scarce by 1932, but their firms had come through that crisis still solvent, partly because most of them had been conservatively financed with the personal resources of careful Puritanical partners, partly because the brokerage business in those days had been of manageable size, and not least because the terrible drop in stock prices had occurred on such unprecedentedly high trading volume as to enable brokers to recoup on commissions much of their losses on stocks they owned. When brokerage failures did occur back in those days, it was usually a matter of outright fraud, as in the famous case of Richard Whitney and Company. But in the nineteen sixties, when the securities business had broadened to become mass business for the first time, brokerage houses financed themselves not by adopting the mass-business methods they understood so well and so often urged on others, but by merely adding new and dubious twists to the traditional methods of what had been, by the standards of American Telephone or General Motors, a cottage industry. Not until 1970, for example, did the first Wall Street firm raise money for its operations from outside by selling its own stock to the public, and it took a change in the New York Stock Exchange’s constitution to make such a sale possible. Like most bad business practices, Wall Street’s obsolete and unsound capital-raising methods worked well enough in good times; it required only a little misfortune to expose them as the jerrybuilt mechanisms they were.

That misfortune, utterly unanticipated, consisted of the simultaneous drop in stock prices and trading volume in 1969 and the first half of 1970.

Let us look, in brief and simplified form, at a brokerage firm’s typical capital structure in 1969-1970, as administered by the New York Stock Exchange and grudgingly but nonetheless leniently approved by the S.E.C.

The Stock Exchange rules imposed on such firms the requirement that the ratio between their aggregate indebtedness and their “net capital” be at no time higher than twenty to one, and the Stock Exchange through a system of surprise audits undertook to see that its members complied with this rule. And what was the nature and source of the “net capital” required under the rules? Its basic and soundest forms were the traditional ones—the cash investments of general partners, entitling them to stated shares in the profits, and the cash loans of other backers, entitling them to interest. But that was only the beginning, and, by the end of the nineteen sixties, only a small percentage of the capital of many firms consisted of such unassailable assets. There were other less substantial but still permissible forms of “capital” that, after the great expansion of 1967-1968, came to predominate over the traditional ones. One of these consisted of the loan of securities by an investor to a broker—a fair enough form of capital except that, unlike cash, the securities might abruptly decline in dollar value, thus abruptly reducing the amount of capital that they represented. Also qualified for inclusion as capital were a firm’s accounts receivable, which sometimes consisted of such birds-in-the-bush as anticipated tax refunds and possibly uncollectable cash debts from customers. Then there were secured demand notes. Anyone owning a batch of securities—no matter how volatile and speculative—could pledge them as backing for a paper loan to a brokerage firm and thus technically contribute to the firm’s capital. No money would actually change hands, nor would the investor actually give up the benefits of his loaned securities; there would merely be, for the firm, a cheering new capital entry on its balance sheet, and for the lender, the pleasure of regularly collecting interest on money he had never parted with and at the same time collecting dividends, were any paid, on his stocks. As if this were not a pleasant enough arrangement, under the terms of some such notes it was explicitly agreed that the lender would not have to part with any money or any securities, except in the all but unthinkable event that the brokerage firm should become insolvent, unable to meet its day-to-day obligations, or not in compliance with the net capital rule.

Shakiest of all, there were subordinated loans. Any securities-holding customer of a brokerage firm in need of additional capital could simply sign a paper headed “Event of Subordination Agreement.” In this magic instrument, the customer did no more than agree, in the event of the firm’s liquidation, to subordinate his claims to those of other customers and creditors; in exchange, he was allowed to go on collecting dividends on his stocks and simultaneously collecting interest on his “loan”—which, of course, had involved no actual money—while the brokerage firm was allowed to enter on its books the market value of the securities, less a reasonable discount, as new capital. Here, then, was “capital” that the beneficiary could never lay his hands on—unless he went broke, and even in that case the hands laid on it would be not his but those of his creditors.

The net of these perhaps rather abstruse ground rules is that the S.E.C. and the Stock Exchange allowed Wall Street firms to comply with the net capital rule—imposed for the protection of the firms themselves as well as that of their customers—with capital that was essentially a mirage. It was money that could not be seen, or rubbed together, or jangled in the hand, or, more to the point, used in the operation of a brokerage business; essentially, it was money that would become available, if at all, too late to do any good. Finally, contributors of the palpable and useful forms of brokerage capital, equity cash and debt cash, were entitled to withdraw any and all of their money at any time on only ninety days’ notice, whenever for some reason they didn’t like the way things were going. In 1969 and 1970 few investors in brokerage houses liked the way things were going, with the quite logical and rational consequence that there was an enormous and nearly catastrophic outflow of working capital from the nerve center of world capitalism.

Madness! the reader might understandably exclaim. And yet the reasons for such dangerous official permissiveness are not hard to find, and follow a certain logic of their own. As we have seen, the S.E.C. in 1969 wished chiefly to serve Wall Street—to avoid rocking the boat at a moment when almost everyone was happily making money. As to the Stock Exchange, it had logical reasons to treat its Rule 325, the one requiring a 1:20 ratio of capital to indebtedness, as a rule that was in effect at all times except when someone violated it. For the Exchange to stiffen the enforcement in 1967 and 1968 when things were going well, and brokerage capital was seldom a problem, would have been to play the role of spoilsport. Who, after all, was the Stock Exchange? The governors who made its key decisions were brokers. Conversely, when things began to go badly, a different reason, or excuse, for inaction came into play. If a member firm were found to be in violation of the capital rules and accordingly suspended from the privilege of doing business, the money and securities of the firm’s customers would automatically become frozen and unavailable until such time as the firm was restored to capital compliance. Widows and orphans by the thousands or tens of thousands would suddenly be separated, temporarily but firmly, from their stocks or cash—hardly an eventuality calculated to enhance Wall Street’s public popularity or leverage in Washington. So, when a member firm was found to be in capital violation, the Exchange was inclined to turn its back on its own rules, wink at the violation, and allow the firm to continue doing business while frantic efforts were made to find it more capital. Save the broker in order to save the customer: it was Wall Street’s version of the trickle-down theory. (Where were the customer’s yachts? Where, indeed, were the customers’ subordinated lenders?) And whether the real objective was in fact to save the customers or, as some suspected, to protect members of the club from embarrassment and loss, the situation illustrates very vividly what is wrong with the principle of self-regulation in a business that serves the public.

2

Capital troubles began to crop up in the backlash of the 1968 paperwork crisis, and one small firm, Pickard and Company, actually failed that year as a result of too much business too inefficiently handled. The Exchange, to its credit, was ready to deal with the plight of Pickard’s customers. In 1964, following the collapse of Ira Haupt and Company resulting from the infamous salad-oil swindle, it had set up a $25 million Special Trust Fund, paid for by subscription of Stock Exchange member firms, and reserved specifically for restoring the lost holdings of the unlucky customers of any member firm that should go broke. Pickard’s being the first member-firm failure since Haupt, the trust fund had never been drawn upon; now it was tapped for some $400,000, and Pickard’s 3,500 customers were reimbursed—or, in the rather attractive legal expression, “made whole.”

Well and good: an isolated case, everyone supposed, in which the machinery had worked exactly as planned. But in the late spring of 1969, when stock prices and trading volume began to sink in unison, the squeeze on brokerage profits was on in earnest, leaving the firms’ rickety capital structures increasingly exposed. Partners and backers, reacting to the bleak prospects, made things worse by availing themselves of the convenient ninety-day rule to pull out their money while the pulling was still good. (It may be noted that for a firm operating on the borderline of capital compliance, every dollar thus withdrawn meant that a debt reduction of twenty dollars was required.) In September, W. H. Donaldson—a principal in the powerful maverick firm of Donaldson, Lufkin and Jenrette that was about to force the change in time-honored Exchange rules that would enable it to raise money from outside Wall Street by selling its stock to the public—made some prophetic comments on the impermanence of Wall Street capital, and mentioned the arresting fact that probably more than 90 percent of all such capital was owned by men over sixty. In mid-October 1969, a certain Gregory and Sons went under. The Exchange promptly authorized the use of $5 million more from its Special Trust Fund to save the Gregory customers. At almost the same time, another firm—middle-sized Dempsey-Tegeler, which back in April had been fined $150,000 for record-keeping shortcomings—was forced by the Exchange to restrict its operations; it appears in retrospect that the Exchange knew the firm was not financially sound and was engaged in a furious effort to find it new capital to save it from bankruptcy—which is the terminus Dempsey-Tegeler would arrive at, in any event, the following August.

The trickle-down theory, then, was now in operation. But it was not working. That December, most brokerage firms omitted their often-lavish Christmas bonuses. Depression had come to Wall Street. A cheerless pall of nameless doom hung over the financial district through the 1969 holiday season; secretaries and clerks who knew nothing of subordinated lenders or secured demand notes were being affected along with officers and partners.

Early in 1970, as the continuing decline in prices and volume made the situation for brokers progressively worse, a wave of brokerage mergers arose—frantic, hastily arranged shotgun marriages dictated not by love but by the need for survival. During a dreadful March, there were two more member-firm failures and a quasi-failure: McDonnell and Company, in spite of high social prestige and close ties with the Ford family of Detroit, closed its doors (cost to the Special Trust Fund: $8.4 million); Baerwald and DeBoer went into liquidation (cost to the fund: about $1 million); and out in Los Angeles, the former hottest deal-maker of them all, Kleiner, Bell, where customers had chanted “Go, go, go!” as they watched the ticker, found the going so rocky that it simply withdrew from the brokerage business. And now for the first time it began to be evident that not just marginal firms but some of the conservative, well-established giants of brokerage were in bad trouble as well. On March 16, Bache and Company reported that for fiscal 1969 it had incurred the largest annual operating loss in the annals of American brokerage, $8,741,000. Shock waves followed the announcement; investors began to experience the chills of panic, and on March 23, Haack felt called upon to refute wayward rumors by stating that all of the twenty-five largest Stock Exchange firms were in compliance with the capital rules.

Whether or not Haack knew it at the time, this was quite wide of the truth, as subsequent events would more than demonstrate. Facts were only spottily available; Wall Street was swept by confused alarms, and many firms in trouble were bald-facedly concealing the truth from the Stock Exchange. Perhaps Haack’s statement should be taken as an expression of hope. His job, he clearly felt, was to spread reassurance and to ward off panic reactions. Again, in mid-April 1970, answering an urgent query from Senator Edmund Muskie, Haack wired from Wall Street: “THE EXCHANGE’S SPECIAL TRUST FUND IS NOT NEAR DEPLETION… SITUATION WITH RESPECT TO OPERATIONAL AND FINANCIAL PROBLEMS OF NYSE MEMBER FIRMS HAS VASTLY IMPROVED.” In fact, five Stock Exchange firms were at that moment in liquidations that would end up costing the Special Trust Fund $17 million of its $25 million total; another member firm, Dempsey-Tegeler, was in its death throes, and its liquidation would eventually cost the trust fund over $20 million; and, worst of all, Hayden, Stone and Company, an eighty-four-year-old giant not far from the core of the Wall Street Establishment, with some 90,000 brokerage customers and a major share of the underwriting business, had lost nearly $11 million the previous year and was now losing money at a rate in excess of a million dollars a month. Hayden, Stone’s affairs were shortly to erupt into the first phase of the crisis that almost brought Wall Street low for good.

3

At the end of May—at just about the time of the White House dinner that got credit for turning the market around—Lasker and some of his fellow governors of the Stock Exchange decided that the time had come to form a special committee to maintain surveillance over member firms’ financial affairs. This was normally the work of the Exchange staff, and in particular of the Member Firms Department; but the governors were dissatisfied with the way that work was being done. The situation had become chaotic. It was increasingly evident that some firms were exaggerating, if not actually falsifying, their capital figures in their reports to the Exchange; at governors’ meetings there would be talk of $40 or $45 million being required from the trust fund in liquidations already under way, but nobody was sure. The figures were guesses. It was Robert L. Stott, Jr., a well-known floor specialist, who came to Lasker and suggested that a committee of governors be formed forthwith. Responding enthusiastically, Lasker appointed to the new committee—formally named the Surveillance Committee, but usually thereafter called the Crisis Committee—himself; Ralph DeNunzio, executive vice president of Kidder, Peabody and vice chairman of the Exchange; Stott; Stephen M. Peck, senior partner in Weiss, Peck and Greer; Solomon Litt, senior partner in Asiel and Company; and Felix George Rohatyn, a partner in Lazard FFelix Rohatyn réres and Company.

The chairman of the committee was Rohatyn, and it was he and Lasker, working in tandem, who would bear the brunt of its work over the months ahead. Rohatyn had been born in Vienna in 1928, and he and his Polish-Jewish parents had arrived in the United States as refugees from Hitler in 1942, after an interim stay in France. He had graduated in 1948 from Middlebury College, in Vermont, with a B.A. in physics, gone directly to Lazard, and never left again except for a spell of military service during the Korean war. As a young acolyte making the transition from natural science to the intricate and unnatural science of corporate finance, Rohatyn at Lazard had had the good luck to become a protégé of one of the leading masters of corporate deal-making, the French-born, publicity-shy, tough old wizard of Wall Street, André Meyer. Under such Cordon Bleu tutelage, sous-chef Rohatyn flourished. A compactly built man with a pug nose, heavy brows, full lips, and a slightly receding chin, he had an eager face and easy smile that made him at forty-two seem more like a student. But his appearance was deceptive. “Nobody has a record quite as spectacular as Felix’s,” a partner in a rival investment-banking house said of him in 1970. The record consisted of having become one of Wall Street’s most ingenious experts in corporate acquisition and reorganization. That is to say, Rohatyn had become, like his mentor, a master merger-maker, and one of the firms for which he arranged intricate, multimillion-dollar acquisitions was the Lazard client International Telephone and Telegraph, on whose board of directors he sat.

In 1972, Rohatyn would come to national prominence, of a sort, as the banker for I.T.T. who the previous year had had a series of private meetings with then Acting Attorney General Richard G. Kleindienst to argue, on public-policy grounds, for a favorable settlement of the Justice Department’s antitrust suit against I.T.T. Disclosure of those meetings involved Rohatyn in considerable controversy, since Kleindienst would later deny, for a time, that he had had anything to do with the settlement. (It was never alleged that Rohatyn had any knowledge of or involvement in the famous I.T.T. financial commitment to the Republicans for their 1972 national convention.) Whatever the facts of that matter, Rohatyn in 1970 was quite possibly the most brilliant, and certainly among the most dedicated and energetic, men in Wall Street at a time when Wall Street badly needed brains, talent, and energy to save it from its own folly. Rich enough at forty-two, married to a daughter of the well-known author and Union-with-Britain advocate Clarence Streit, beginning to be spoken of as heir apparent to Meyer as boss of Lazard Fréres, Felix Rohatyn in 1970 was riding the crest.

The Surveillance Committee started out by meeting once a week, for lunch on Thursdays, in a committee room on the sixth floor of the Stock Exchange building. Always present, besides Rohatyn, Lasker, and their committee colleagues, were two representatives of the Exchange staff, President Haack and Executive Vice President John Cunningham. According to Rohatyn and Lasker—both of whom later talked to me at length about the committee and its work—its first job consisted chiefly of trying to exercise due diligence as to use of the trust fund in current liquidations, and of trying to set up an early warning system as to other firms that were heading for trouble. It quickly became clear that the Exchange staff men really knew remarkably little about those other firms’ financial condition. To their horror, the committee members began to see that weakness was the rule rather than the exception. Brokerage firms that the Exchange had supposed to be above reproach were revealed, under even superficial investigation, to be walking zombies, carrying assets on their books that did not exist and never had existed. “It was like a nightmare,” Rohatyn said later. “You pushed here, you pushed there, at random, and wherever you pushed, you found softness.”

The committee revised its schedule, and began meeting formally twice a week—Tuesdays and Thursdays at eight-thirty in the morning—and putting in so many additional hours that some of its members were soon devoting most of their time to its work rather than to the affairs of their own companies. Early in June, when the committee had been in existence for only a few weeks, it faced the first of three heroic challenges: the impending collapse of Hayden, Stone and Company.

That venerable firm had been in serious trouble since 1968, as the Exchange had ample occasion to know; in that year—a banner business year in which Hayden, Stone’s gross income was at an all-time high of $ 113 million—its record-keeping situation had become so bad that it had literally called on the Coast Guard for help, hiring members of that service to moonlight in the back office. As early as the spring of 1969, investors in Hayden, Stone were getting the message that the good days were gone, and accordingly they began withdrawing their capital in huge amounts. The firm’s attitude toward its problems at that time was vividly shown in its treatment of its treasurer, Walter Isaacson, who in the summer of 1969 began protesting that, with revenues going down, costs going up, and the capital base eroding, operations ought to be cut back drastically. Isaacson’s unpleasant warnings ceased when he was summarily fired.

In September 1969, matters were hardly improved when the Stock Exchange backed restrictions on Hayden, Stone’s operations by fining the firm $150,000 for rule infractions during the previous year. But, shortly thereafter, the Exchange suddenly turned soft on its erring member. In October, it removed all restrictions on Hayden, Stone’s operations, and in November it made no objections to an offering circular to prospective investors in which Hayden, Stone made some extravagant and dubious claims as to its future. While no explanation was offered, it may logically be assumed that the Exchange’s sudden blandness was motivated by fear that Hayden, Stone’s capital situation had become so precarious that those 90,000 customer accounts were imminently threatened. At all events, the firm started out 1970 in technical capital compliance only on the basis of such gossamer assets as a tax refund claim that, far from having been approved by the Internal Revenue Service, had not yet even been filed.

By late May, when the Crisis Committee came into existence, Hayden, Stone was a huge black cloud on Wall Street’s horizon, a storm latent but brewing. Its roster of branch offices had shrunk from eighty at the beginning of the year to sixty-two, and its back-office expenses had been drastically curtailed through mass firings, but, even so, it continued to lose approximately $1 million a month on current operations. Meanwhile, though, its capital problems had apparently been solved, at least temporarily and technically, at a single stroke. On Friday, March 13—of all dates—a group of Oklahoma businessmen signed demand notes lending Hayden, Stone $12.4 million, pledging stock in their own companies as collateral. They included Bill Swisher of CMI corporation, who pledged 165,000 shares then worth $4,372,500; Jack E. Golsen of LSB Industries, who pledged 200,000 of his firm’s shares worth $1.2 million; and—most unfortunately, as it turned out—Jack L. Clark of Four Seasons Nursing Centers, who pledged 120,000 shares of his firm’s high-flying stock with a March market value just short of $5 million. All told, the collateral added up to $17.5 million, apparently an ample sum to cover the $12.4 million demand note and give Hayden, Stone a rosy capital future. A rosy present income for the Oklahomans was assured by an interest rate on their “money” of around 7 percent.

However, as the reader will have no trouble discerning, something was wrong here. For one thing, Wall Street was not supposed to go knocking on the doors of little-known, unseasoned firms in Oklahoma for capital; it was supposed to be the other way around. More to the immediate point, the demand-note capital was insubstantial; the terms of the notes were such that Hayden, Stone, which so desperately needed capital to cover current operating losses, could not get its hands on a cent, unless the firm were either insolvent or in violation of Rule 325. Finally, were market fluctuations to cause the value of the loaned stock to drop below $12.4 million, the amount of Hayden, Stone’s available credit would diminish accordingly. In sum, it was a classic case of phantom capital, created by a shuffle of papers and used to maintain formal compliance with a rule of the Stock Exchange’s that the Exchange had no stomach for enforcing.

Then the shaky structure cracked. In mid-May, the S.E.C. suddenly suspended trading in Four Seasons Nursing Centers, which shortly thereafter expired in bankruptcy. Down the drain went $5 million in Oklahoma stock value on $3.3 million of Hayden, Stone capital. And the prices of the other Oklahoma stocks were dropping—20, 30, 40 percent—along with the rest of the market. By the beginning of June, when the Crisis Committee was hardly a week old, the market value of the Oklahoma stock had declined from $17.5 million to around $9 million, and as a result Hayden, Stone was plainly in violation of the capital rule, as a routine surprise audit would confirm a few days later. Things were in a worsening mess now; but what, the committee members asked themselves, could the Stock Exchange do? Blow the whistle on Hayden, Stone and let its customers fend for themselves? The Special Trust Fund, almost gone anyway, was ludicrously inadequate to handle such a giant liquidation. On the other hand, if the Exchange looked the other way and did nothing, apparently Hayden, Stone would be unable to meet its obligations and would sooner or later be forced into bankruptcy by its creditors. As Lasker and Rohatyn saw the matter, the Exchange had only one course—to find new capital to save Hayden, Stone, or to admit to the public that Wall Street could no longer be relied upon.

As a first step, the Exchange found some capital in a curious place. The Special Trust Fund was more than doubled by transferring into it $30 million that the Exchange had squirreled away as a building fund. No time to be thinking about new buildings now! The fund, as we have seen, was clearly intended for the single purpose of rescuing the customers of bankrupt member firms. But these were parlous times, and the language of the Special Trust Fund provisions was conveniently vague. So the Exchange’s governors, on recommendation of the Crisis Committee, now voted to lend $5 million of their constituents’ money, entrusted to them specifically to save the customers of failed firms, to Hayden, Stone to keep it in business. It was just a matter of saving the broker in order to save the customers, they rationalized. More fancifully described, it was a matter of strapped parents tapping the children’s piggy bank to prevent foreclosure of the mortgage on the homestead. Thus, on July 2, Hayden, Stone was restored to capital compliance—this time with real money, albeit money obtained in a most peculiar way.

But the reprieve was short-lived. By now, houses were crumbling from one end of Wall Street to the other. Day after day, time and again, the Exchange’s staff would bring the Crisis Committee news of more firms that were on the brink of capital violation because of diminished business and consequent capital withdrawals. Time and again the committee would begin to probe in a new place, and find the same softness, the same imaginary assets shoring up a top-heavy facade. Several more firms, the largest of them Blair and Company, went under in June and July. In mid-August, the Exchange, through President Haack, announced for the first time the names of ten brokerage firms that were in bankruptcy or liquidation, and gave soothing reassurances that the augmented trust fund, now theoretically amounting to $55 million, was adequate to make their customers whole. Nevertheless, by the last week of August it was generally known in the Street that the fund was again depleted. And, at about the same time, there was an ominous new turn. Three more firms with in excess of ten thousand accounts among them—Robinson and Company, First Devonshire Corporation, and Charles Plohn and Company, the vehicle of our old acquaintance Two-a-Week Charlie, the garbage-stock king—were suspended for capital deficiencies and went into liquidation. For the first time, the Exchange pointedly did not commit the trust fund to the help of the customers—in the case of Robinson, on the technicality that the firm had resigned its Exchange membership back in July and was therefore not eligible for help; in the case of Plohn, because it did not believe that such help was needed; and in the case of First Devonshire, without any clear explanation. In retrospect the explanation is clear. The trust fund had been spent.

Meanwhile, Hayden, Stone went on losing money. The Oklahomans were screaming bloody murder at what was happening to their investment, and the loudest screamer was Jack Golsen. He, like the others, had little practical reason to raise a fuss; he believed now that, because of his subordination agreement, most or all of his investment was gone whether Hayden, Stone was rescued or not. He was screaming to relieve his outraged feelings—and, moreover, on principle. The conduct of Hayden, Stone’s affairs, as it was now being gradually revealed, seemed to Golsen to be a public scandal. “In my business, if we are missing inventory, we stop everything and look for it,” he complained. “In Wall Street, if they’re missing seven million dollars, they just accept it as part of the game.” This was a double standard, he insisted: Hayden, Stone would never dream of underwriting the stock of another company that operated as it did itself. The representations that the officers of the firm had made to him, in asking for the loan, now appeared to him to have been false; it seemed to him that Hayden, Stone’s talk about its capital assets represented “dealings not in realities but in the abstract.”

Early in August there was an attempt, prompted by the Exchange, to save Hayden, Stone through a merger with Walston and Company; but the deal fell through. The next merger candidate was Cogan, Berlind, Weill and Levitt (the same firm, with a name change, that had so profitably brokered the Leasco-Reliance merger in 1968). C.B.W.L., still doing well, was a small firm eager to expand, and the merger with Hayden, Stone would be a quick path to expansion. Unfortunately, it might also be a quick path to financial and operational chaos. Even apart from the difficulty attendant upon taking on a virtually bankrupt partner, one problem was that a merger would mean too much expansion; Hayden, Stone still had forty-five operating branch offices, and C.B.W.L. wanted no more than twenty of them. Knowing full well that it would have to sweeten the deal, the Stock Exchange offered $7.6 million to C.B.W.L. in exchange for its assuming the Hayden, Stone mess—a $7.6 million that the Exchange didn’t have just then, in its trust fund or anywhere else, but that it believed it could raise from its membership. And that did it. At last agreement was reached that the Hayden, Stone offices would be divided between C.B.W.L. and Walston. The surviving firm was to be named CBWL-Hayden, Stone, Inc.

The whole thing almost fell through in what for the Crisis Committee was a hair-raising sequence of events on September 2 and 3. On the afternoon of the second, the Chicago Board of Trade, the nation’s largest commodity exchange, suddenly announced that it planned to suspend Hayden, Stone for insolvency. Such a suspension would force the New York Stock Exchange to take similar action the next day, and that would be the ball game. Haack, Rohatyn, and Lasker pleaded with the Chicago authorities by telephone late into the night, and again early in the morning; at the last miniute, the suspension order was revoked in consideration of Hayden, Stone’s putting up a half a million dollars in escrow. And that crisis was surmounted. But there remained a single crucial detail to be carried out—that of getting approval of the merger from every last one of Hayden, Stone’s 108 subordinated lenders. It was, indeed, a delicate situation. Since they all apparently stood to lose most of their money anyway, their egos could have free play, unfettered by financial considerations. Meanwhile, they found themselves in the satisfying position of being able to hold up the Wall Street Establishment—for revenge, for publicity, or for principle—by simply refusing to sign and thus forcing Hayden, Stone out of business.

All the persuasive powers of the Stock Exchange authorities were brought to bear. Haack flew to London to get one lender’s signature, and got it. Others at first refused to sign, then allowed themselves to be persuaded. But time was running out; the Exchange could not go on ignoring its capital rule forever, and at last, under S.E.C. pressure, a deadline had to be set: the deal would be consummated by 10:00 A.M. on Friday, September 11 or Hayden, Stone would go into suspension, its 90,000 customers would be left out in the cold, and public confidence in Wall Street would end, possibly forever. By the morning of September 10, all of the subordinated lenders had signed except Golsen.

He stood firmly on principle. Why, he wanted to know, should he sign and thus help preserve the hopelessly and shamefully inefficient and slipshod business methods of the city slickers in Wall Street? “I’m interested in justice being done,” he said. “I want an example made. The only way to make it is to go to a liquidation and let the Exchange lose twenty-five million or so. I want this crime to be brought to the attention of the public.”

So for a day Golsen, in Oklahoma, held Hayden, Stone’s and perhaps Wall Street’s fate in his hand, while Lasker, from his office at the Exchange and his suite uptown at the Carlyle, pleaded repeatedly by phone. Lasker finally, at almost literally the last minute, won. It has been said that his clincher, delivered in the middle of the night of September 10, was a suggestion—or a threat—to have Richard Nixon himself call Golsen. Lasker vehemently denies that he went any further than to tell Golsen in general terms that he knew the President was very much concerned about the Wall Street situation and its effect on the national economy. Rather, Lasker attributes his success with Golsen to a homely coincidence. On the evening of September 10, Lasker says, an old friend and Wall Street colleague of his—Alan C. Greenberg, of Bear, Stearns and Company—called him unexpectedly and said, “Bunny, I hear you want a favor from Jack Golsen. I’ve known Golsen all my life. We were kids together in Oklahoma and, before we were both married, I used to date his wife and he used to date mine. You want me to call him?”

Reflecting that God must be on the side of the Stock Exchange, Lasker said yes. Greenberg called Golsen and said, “Bunny Lasker is an honest man and a good friend of mine, and I want you to do what he wants because I ask you.”

Not to save Wall Street or the economy, then, or to obey the President of the United States, but for the sake of friendship. Whatever the case, something prevailed on Golsen, the Oklahoma outsider with a loaded gun pointed directly at Wall Street’s head. After waiting melodramatically until ten minutes before deadline time on Friday the eleventh, Golsen signed; at ten o’clock sharp the CBWL-Hayden, Stone merger was announced, and the Hayden, Stone crisis was over. Golsen telegraphed his friend Greenberg that afternoon,

YOUR TELEPHONE CALL WAS INSTRUMENTAL IN MY AGREEING TO GO ALONG WITH BUNNY LASKER’S REQUEST THIS MORNING YOU MAY AS WELL GET ALL THE BROWNIE POINTS YOU CAN BECAUSE THAT’S ALL THAT WILL EVER COME OUT OF THIS DEAL. …

4

“Hayden, Stone blooded us,” Rohatyn says. “After that, the Crisis Committee had some idea what it was up against.” The case accomplished something else, perhaps more important: it welded Rohatyn and Lasker, both of whom would spend the rest of 1970 devoting themselves virtually full-time to Crisis Committee work, into a team. An odd team, to be sure. The two men, who had had no more than a nodding boardroom acquaintance before the formation of the committee, were a study in contrasts. Where Lasker was tall, tough, aggressive of manner, Rohatyn was small, wiry, and soft-spoken. Where Lasker was a bluff man of action if there ever was one, Rohatyn had the style of an intellectual. Where Lasker was, as we have seen, a fanatical Republican, Rohatyn was a middle-of-the-road or even slightly-left-of-center Democrat, an active supporter of the Presidential candidacy of Senator Muskie. Yet, on the Wall Street crisis, they closed ranks. Not without occasional difficulties. “But he’s a Democrat!” Lasker would sometimes howl, when Rohatyn mentioned the name of someone he thought might be helpful in one crisis or another. “Well, so am I!” Rohatyn would shout back. Lasker would simply pretend not to hear, and the dialogue about the matter at hand would resume. In fact, Rohatyn’s professional background in corporate reorganization made him far better qualified than Lasker to deal with the specifics of the situation. Nothing about Lasker’s lifelong work—as an arbitrageur, making a living out of trading stocks with other professionals—prepared him for dealing with the gigantic problems of brokerage firms collapsing en masse as if struck down by a plague. So all through the crisis, Lasker was traveling a good deal on Rohatyn’s professional judgment; and Rohatyn, for his part, on Lasker’s brash leadership and government contacts. Sometimes, between them, they made two hundred telephone calls a day. It is easy to imagine that, if they had been lesser or less dedicated men, the collaboration might have foundered on political ideology alone. But Lasker, for all his Republican solemnity, possessed a quality on which liberals often think they have a patent, that is, the willingness to throw oneself into causes larger than and not necessarily consistent with one’s own material benefit; as such, he was a living reproach to those who see all conservatives as one-dimensional monsters or single-minded clowns. And Rohatyn, happily for Wall Street, was not that kind of liberal.

Thus these two highly diverse, imperfect men made common cause. They were together, for example, in being highly dissatisfied with the Exchange’s staff work on member-firm finances. Right after the resolution of the Hayden, Stone crisis, Cunningham, as the Exchange’s executive vice president, assured a meeting of the board of governors that this was the end—no more such problems with member firms’ finances could be expected. Rohatyn, appalled, jumped up to say that Cunningham was crazy—it was nowhere near the end. And in fact, only about a week later the next problem, long smoldering, burst into flame.

The new crisis involved Goodbody and Company, for decades a pillar of the brokerage community—its co-founder in 1891 had been the legendary Charles H. Dow himself—far larger than Hayden, Stone with 225,000 customer accounts, and ranking as the nation’s fifth largest investment enterprise. Like almost all of the firms that were now falling apart, Goodbody had been in capital trouble for more than a year. A September 1969 audit on behalf of the Stock Exchange had revealed the frightening facts that the company had (presumably by accident) pledged $34 million of its customers’ fully owned securities, which were legally required to be carefully segregated, as collateral for loans, and had simply lost track of not less than $18 million worth of other securities. Nevertheless, Goodbody at that time had apparently been in technical capital compliance, it was said to be operating profitably, and 225,000 customers reposed their financial hopes in it; as of September 1969, both the Stock Exchange and the S.E.C. had apparently chosen to look the other way and hope for the best.

The best was not to be. In July and August 1970, the Crisis Committee was getting what Rohatyn called “the numbers” on the affairs of Goodbody. These “numbers”—unaudited and un-checkable figures emanating from within Goodbody itself—were, in Rohatyn’s later judgment, “worthless.” With hindsight it can be seen that the firm, by August, was suffering from a monumental snarl in its extensive commodity accounts, and that, moreover, so many of its investors had prudently withdrawn their money that the company was in flagrant violation of the 1:20 net capital rule. However, this information could not be known for certain at the time, since Goodbody’s routine annual audit would not begin until the end of that month. In mid-September, when the audit was in progress, the accountants’ preliminary report showed conclusively that the firm was in violation and had been for many months. The Crisis Committee had its work cut out for it once again.

What to do? It was a dilemma, of a sort now becoming familiar, for both the Exchange and the S.E.C. Where did the public interest lie—in imposing justice on a firm that clearly deserved liquidation, or in letting such a firm get away with managerial murder in order to preserve justice for its innocent and unwary customers? After shilly-shallying for weeks, the S.E.C. finally took action. On October 26, it ruled that Good body must come up with substantial new capital by November 5 or be suspended. The Crisis Committee, which for a month had been devoting itself chiefly to a frantic search for new capital for Goodbody, now intensified its efforts. But exactly how much outside capital was needed? Despite the audit, some of the figures were still what Rohatyn euphemistically called “soft.”

The Crisis Committee called Goodbody’s partners on the carpet, one by one. The climax of this interrogation came in a dramatic confrontation between Rohatyn and James Hogle, a Salt Lake City investment banker who was Goodbody’s largest investor. Hogle was a Goodbody man in the classic mold: dignified and respected at sixty; adorned with honorary degrees and directorships, trusteeships of private schools and chairmanships of charity fund drives—clearly a man, as Americans judge these things, of character and probity. But he was also a man, like others of character and probity before him, exposed by a market crash as a full participant in greedy and slipshod practices; a man caught, presumably as a result of negligence, in a web of self-serving deceptions.

Rohatyn said to Hogle, “We understand that your own auditors have given a preliminary estimate of the amount of your capital shortage. We’d like to know that number.”

Hogle hesitated. Rohatyn was right about the auditors, and Hogle knew the figure. However, he evidently believed that if he were to give it over, the Stock Exchange would shut down Goodbody on the spot. In desperation, he stalled for time “Give me twenty-four hours,” he pleaded.

Rohatyn did not feel that he could comply. “We’re not trying to crucify you, but I have a fiduciary responsibility in this matter,” he said. “I can’t let you leave the room until you’ve given me the number.”

After a brief pause, Hogle replied, “Eighteen million dollars”—and tears rolled down his cheeks.

“I felt great sympathy for him,” Rohatyn said later; presumably his sympathy lessened after Hogle mounted a huge lawsuit against the Stock Exchange in 1972. In any case, the Exchange did not shut down Goodbody. With the key figure in hand, the committee moved forward; a tentative arrangement was soon made whereby the necessary capital would be put up by a group of investors headed by Utilities and Industries Corporation, a financial holding company. The deal was ready to be closed on an evening the week before the S.E.C.’s deadline. On that evening, Lasker called the offices of Utilities and Industries to get reaffirmation that all was ready for the signing. Instead, he got a rude shock. Not only had Utilities and Industries decided to walk away from the transaction, but its executives had walked away from their offices. They were, Lasker was informed, at the fights at Madison Square Garden.

Back to the drawing board again. The next day, Lasker called an emergency meeting of the top officials of the thirty leading Exchange member firms. There was a single-item agenda: how to bail out Goodbody? It was a tense and depressing session at which everyone agreed to what they might have been expected to agree to—that Goodbody had to be rescued, and that someone else had to do it. After much haggling, a generally satisfactory understanding was reached: the biggest brokerage firm was Merrill Lynch, so Merrill Lynch ought to take on Goodbody. Lasker was authorized to approach Merrill Lynch privately to ask how they felt about it, and everyone left the meeting satisfied. The only trouble was, Merrill Lynch might say no.

It was Lasker’s job to see that Merrill Lynch didn’t. “I walked across the street and saw Don Regan,” he says. With extreme reluctance, the Merrill Lynch chairman told Lasker that he agreed the rescue of Goodbody was necessary, and that he would discuss the matter with his board of directors. Subsequently, Regan reported that his directors were amenable—provided the terms were right. Merrill Lynch, after all, held most of the cards. The Stock Exchange was going to have to buy itself another accommodation. Two days of virtually round-the-clock negotiations followed, and finally—on Thursday, October 29, with the S.E.C. deadline seven days off—Regan called Lasker to say that Merrill Lynch was satisfied and ready to proceed. A look at the terms suggests why. Merrill Lynch would supply $15 million to Goodbody, in exchange for which it would subsequently acquire all Goodbody assets and would be indemnified by the Stock Exchange to the extent of $20 million on possible securities losses and another $10 million to cover possible litigation coming out of the arrangement. Of course, the Exchange didn’t have the $30 million. So that very afternoon the board of governors met and, with as much gravity as haste permitted, voted an amendment to the Exchange constitution authorizing the board to impose charges on the membership, as necessary, for special assessments—that is, to make the Special Trust Fund open-ended with the sky the limit. The money to save Goodbody, then, would probably end up coming from not just Merrill Lynch but the member firms as a group, after all.

One more detail had to be wrapped up. Lasker got on the phone to Washington to seek assurance from the Justice Department, headed by his friend John Mitchell, that it did not plan to throw a wrench in the machinery by taking the view that a merger of the largest brokerage firm with the fifth-largest would constitute a violation of the antitrust laws. The Justice Department obligingly indicated that, in consideration of the failing-firm doctrine that permits antitrust leniency in cases where one firm’s survival is at stake, it did not expect to take such a view.

5

When would it end? Was it, possibly, over now? Lasker and Rohatyn were pushed to the edge of their physical and mental endurance. Later, Rohatyn would say that he felt that autumn as if he and Lasker had lived in a foxhole together, and that, different as the two were in so many ways, he had come out of the experience thinking of Lasker as “a true friend, a man who reached beyond himself when he was under pressure.” Emphatically, it was not over; and the last and in some respects most harrowing phase of the crisis was to be complicated by an acrimonious controversy within the ranks of the Stock Exchange itself.

The last act concerned the Wall Street investment firm of Francis I. du Pont and Company, and it marked the point when the crisis involved not just the New York financial Establishment but the national one. F. I. du Pont was a part of the fief of America’s oldest and perhaps most powerful business barony. More than a century and a half had passed since Eleuthère Irénée du Pont had come with his family to America from France on an erratically wandering clipper ship and had begun setting up a gunpowder works on the Brandywine near Wilmington, Delaware. In the early years of the twentieth century, Eleuthére du Pont’s great grandson, Francis I. du Pont, had been a brilliant maverick within the family, generally regarded as the most talented chemist the company had ever had, and, more surprisingly, also well known at one time as a single-tax radical. But Francis I. was restless in Wilmington and environs. Fascinated by the gyrations of the stock market during and after the 1929 crash, he embarked in middle life on a whole new career. In 1931, at the age of fifty-eight, he started his own Stock Exchange firm, first handling the investments of a few relatives, and then branching out to deal with the public as well. By the early nineteen sixties—by which time Francis I. du Pont was dead, but his firm was still solidly controlled by members of his family and was managed by his son, Edmond—F. I. du Pont and Company was, as to retail business, the second-largest brokerage house in the country.

By 1969 it had dropped to third, after Merrill Lynch and Bache; it operated ninety-five branch offices. Like other such ventures, it had fallen upon a time of trouble. Its 1968 audit had shown that its capital-to-debt ratio was somewhere between 1:15 and 1:24, depending on how you calculated (and, incidentally, showing very graphically the imprecise nature of such calculations). The Stock Exchange had chosen 1:19 as the approved figure, thereby conveniently keeping F.I. du Pont within the bounds of Rule 325. The 1969 audit, completed in September of that year, disclosed an undeniably impermissible ratio of 1:32, representing a capital shortage of some $6.8 million. But the Exchange was prevailed upon by the du Pont partners to take no precipitate action and, by the time the report reached the S.E.C. in December, the partners had found enough new capital to restore the firm to compliance. So F. I. du Pont staggered through the year 1969, but not without incurring an operating deficit, before tax recoveries, of $7.7 million.

Knowing that the firm was sick and probably getting sicker, the Stock Exchange early in 1970 urged it to strengthen itself through a merger. It did, at least, make a merger. On July 1, it joined forces with two other brokerage houses, Glore, Forgan and Staats and Hirsch and Company, to form a new organization to be called F. I. du Pont-Glore, Forgan and Company. Making the announcement, Edmond du Pont commented ebulliently, “This is what I would call a true case of synergism in which the resulting entity should add up to a lot more than the sum of the parts.” Or so he hoped. In truth, it was a case of the drowning trying to rescue the drowning, since at the time of the merger Glore, Forgan and Staats was itself out of control. Some members of the Crisis Committee, Rohatyn among them, were appalled that the merger was effected without an accompanying audit. By mid-summer, Haack went to Wilmington to plead with various members of the du Pont clan—among them Lammot du Pont Copeland, then chairman of the board of E. I. du Pont de Nemours, but soon to resign in the aftermath of his son’s spectacular personal bankruptcy—that they buttress their floundering brokerage firm with an infusion of $15 million in new capital. Haack’s request was refused; moreover, by some later accounts, the du Ponts seemed to be affronted that the request had even been made.

Through the Hayden, Stone and Goodbody crises, the du Pont situation simmered. It could not simmer forever, and it began to boil, by coincidence, at the start of November. Lasker would say later that the Crisis Committee did not have a single day to breathe between the resolution of the Goodbody mess and the full-scale appearance of this new and even larger one. Early in November, the du Ponts realized not only that a time had come when their brokerage firm definitely needed new capital to stay in business, but that they were no longer able to raise that capital within the family. They further realized that they had on their payroll a man with both the motive and the ready cash to be the new investor they so desperately needed. In July, in a resolute attempt to straighten out their tangled back office, they had commissioned Electronic Data Systems, of Dallas, to handle all of their electronic data processing requirements at a cost that was expected to average around $8 million a year. The head of E.D.S., as the reader will recall, was the quixotic Texan, Henry Ross Perot, whose well-publicized financial situation was such that a few million dollars would apparently be hardly more than a drop in the bucket.

By taking on the du Pont computer contract, Perot had put E.D.S. into the Wall Street crisis perhaps more deeply than he realized or intended. The contract made du Pont one of E.D.S.’s largest customers; a du Pont failure now would mean not only lost revenue to E.D.S. but a severe blow to its reputation, and possibly a severe drop in the price of its stock, the source of Perot’s immense wealth. So to some extent the du Ponts had already tangled Perot in their web; it might be cheaper for him to lend them a few millions than for him not to do so. Realizing the leverage that this handed them, the du Ponts went to Perot in early November and asked him for a $5 million loan to keep F. I. du Pont-Glore, Forgan and Company afloat.

Broadly speaking, it was Hayden, Stone all over again: another faltering old-line Wall Street firm going to the back country to find a rough and ready rescuer, with the Stock Exchange doing what it could to make the rescue possible in the interest of the innocent investors and, ultimately, of its own skin. But this time, there was a new element that changed the human equation. That factor was the du Ponts, and the fact that they were du Ponts: no parochial Wall Street bigwigs like the partners of Hayden, Stone and Goodbody, but—du Ponts! Why, after all, should they, wearers of the Wilmington purple, give quarter to a moralizing Texan or to the minions of the Stock Exchange? Used to getting their way, accustomed to living and having their business in a state that they ruled like a barony, these worthies seemed on occasion to the Stock Exchange representatives during the negotiations to treat the securities industry itself as a far-flung part of their personal preserve.

Dozens of du Ponts were investors in F.I. du Pont—some of them female relatives who had never seen Wall Street and never would see it—but two of the most august and imperturbable conducted most of the negotiations with Perot’s group and with the Stock Exchange. The chief representative in the early stages was Edmond du Pont. In his middle sixties, a Princeton and Oxford man, a yachtsman and leading Episcopal layman, he was of commanding bearing, often spoken of as the handsome du Pont, just as his cousin Henry Francis, founder of the Winterthur Museum, was spoken of as the artistic one. Later on, Edmond would fade out entirely, and actually disappear quite mysteriously for several months, to be supplanted in the negotiations by his son Anthony, thirty years younger but no more compromising when it came to making terms with Perot. Time after time over the months ahead, the du Ponts would meet with Rohatyn, Lasker, and DeNunzio of the Crisis Committee, along with Perot and his group of Texas associates. Sometimes the meetings would be at the Stock Exchange; sometimes in Lasker’s fifth-floor suite at the Carlyle, overlooking Madison Avenue and Parke-Bernet, where Anthony du Pont and his lawyer would invariably plant themselves in the same corner, opposite a chair that contained a pillow decorated with a picture of a rabbit and bearing the legend “Bunny”; and, on one occasion, at Rohatyn’s country place in Mount Kisco. Whatever the venue, Rohatyn and Lasker would say later, they generally found the du Pont family representatives inclined to be hard to deal with. Perot, horse trader that he was by training and instinct, strove to drive a hard bargain for his money; in exchange for a loan to F. I. du Pont he wanted the guarantee of as large an equity in the brokerage firm as he could obtain. The du Ponts, in turn, seemed to regard Perot as a hip-shooting high-binder with his eye on the main chance, attempting to get the best of them by threatening to let their firm fail and its customers lose their money—using Wall Street itself as a hostage. Seeing Perot as the prototypical nouveau riche—and accurately, since he was certainly one of the newest-richest persons in all history—the du Ponts père et fils bitterly resented the necessity of being rescued by him at all. But there it was; perhaps they could hold their noses and take his money. Perot, for his part, regarded the du Ponts as pompous ingrates. The Stock Exchange men were in the middle. When they would point out to the du Ponts that their firm was all but insolvent, they would talk about its “going concern value” and yield little or nothing to Perot. To hear Rohatyn tell it, all through the negotiations the du Pont representatives were inclined to be cocky and intransigent, apparently unwilling to acknowledge any responsibility for the welfare of Wall Street, the national economy, or even the customers of their firm. He said later, “The du Ponts are a great and public-minded family, but most of them seem to have been essentially in the dark as to what was at stake in the troubles of their brokerage firm. We had to sort of rap their representatives’ knuckles all the time. The representatives seemed to be arrogant without having much to be arrogant about. There was an air of sullen defiance, in marked contrast to the Goodbody people, who had obviously had a genuine feeling of letting down the Stock Exchange and their own customers. I never felt that with the du Pont representatives. They seemed to have no conception of what it meant, in terms of responsibility, to have over three hundred thousand customers’ money in your hands. As a result, some of the meetings were nightmarish. Of course, Tony du Pont had a hard problem—he had been the firm’s chief capital-raiser for the past couple of years, scraping up additional funds from the various relatives. And now he was faced with the distasteful prospect of having to tell his relatives that the money he had wheedled out of them was down the drain.”

6

Three highly diverse factions, then: a hard-trading Texan motivated by goodwill, or the hope of profit, or perhaps something of each; bred-in-the-bone Wall Streeters struggling to save the club; and a group of Delaware aristocrats whose noblesse seemed unwilling to oblige. And while they thrashed things out and Wall Street’s fate hung, once again, in the balance, Robert Haack very nearly blew everything apart.

Later he would say that his timing had been bad; there is little question that his motives were good. At all events, he chose November 17, at the height of the du Pont crisis, to make a speech at a dinner of the Economic Club of New York in which he called for prompt abolition of the Stock Exchange’s age-old system of fixed commissions on brokerage transactions and its replacement with a system of freely negotiated rates. He added, as if to be certain to enrage all Stock Exchange conservatives, “Whatever vestiges of a private-club atmosphere remain at the New York Stock Exchange must be discarded.” “Private club”: the classic red cape to the old bulls (and for that matter the old bears) of Wall Street, the expression used previously to goad them by William Douglas in 1937 and William Cary in 1962. But this time there was a crucial difference; while Douglas and Cary had been chairmen of Wall Street’s official antagonist, the S.E.C., the speaker now was president of the New York Stock Exchange itself. Most unforgivable, in the view of traditionalists, Haack made his remarks without first clearing them with any member of the board of governors whose paid employee he was. If rage was what Haack had wanted, he got it. A few key Wall Streeters like Regan and Salomon appeared to take his side, but the overwhelming reaction was one of shock and outrage. “I’m for fixed commissions,” said Gustave Levy, speaking as a former Exchange chairman and a present governor. “Bob is a close friend of mine. He’s entitled to his opinion, but I happen to disagree with him,” he went on, in the gentle and measured tones of the irritated if not outraged Olympian. Lasker issued a tight-lipped public statement: “Under the constitution of the New York Stock Exchange, policy is made by the board of governors and not by the president, who is responsible for the administration.” Rohatyn pointedly criticized Haack for speaking without first consulting the governors.

The long-simmering differences between Lasker and Haack were now out in the open. Lasker has since said that Haack might have been summarily dismissed as president but for the fact that such an action, at a time when the Exchange badly needed public and government support, would surely have been interpreted as meaning that the governors were against reform. Much later, in 1972, Lasker and Haack would shake hands and make their peace. “I’ll say this for Bob Haack,” Lasker would comment, in retrospect. “He wasn’t trying to sell us down the river. In his own way, he was fighting for the Stock Exchange.” But in the dark days of November 1970, what Haack’s speech and the reactions to it meant was that in the midst of storm the Exchange’s captain and its first mate were all but sworn enemies.

It also meant that the du Pont-Perot accommodation was in trouble. Freely negotiated commissions, if they meant anything, meant lower commissions and thus meant that investment in brokerage firms would be less attractive; so Haack seemed to be attacking Wall Street’s profitability at the very moment when it was dying for lack of profits. The Crisis Committee was terrified that Perot would be so upset by the reduced prospects for brokerage profits, and disgusted by this unseemly squabbling within Wall Street, that he would simply pull out and leave F.I. du Pont to fail.

Then, on November 23, came further reason for Perot to be upset. Distressing new information was forthcoming as to the state of F. I. du Pont’s finances. The figures on the annual outside audit were coming through, and what they showed was that the sum needed to keep the firm operating was apparently $10 million—double the $5 million over which the dickering had been conducted. Perot was furious, and understandably so. Having been asked for one sum with protestations that it was needed, in effect, to save Wall Street and the national economy from disaster, he was now being told that there had been a small, regrettable error in the figures and that, ah, twice as much was, you might say, required. For many men it would have been the last straw. But not Perot. Patriot that he was, he saw that development as a new call to arms; horse-trader that he was, he saw the greater weakness on the other side as a chance to strike a better bargain. As he put the matter in his best country-boy manner, “My father always used to say, ‘If you can’t give me cash, give me chickens.’” And so, after recovering from his initial fit of anger at the apparently casual treatment Wall Street was giving him, he coolly set about seeing how many chickens he could get out of F.I. du Pont and the Stock Exchange for $10 million.

It was in this particular endeavor that he fell afoul not only of the du Ponts but of much of Wall Street as well. By the end of November, when news of the du Pont negotiations had begun leaking out in Wall Street, Perot had replaced Haack as the chief center of controversy. What was the true character of the Texan? Was he a ruthless bounty hunter and scalper taking advantage of well-mannered gentlefolk in temporary distress, as he was now regarded by the du Ponts, many of the Stock Exchange staff, and perhaps a majority of the investment community at large? Or was he an almost unbelievably long-suffering and public-spirited citizen willing to endure appalling financial sloppiness, and to put huge sums of his own money at risk for the good of the country? In truth, it was a perfect Perot moral situation, of precisely the sort he had been drawn into, or perhaps created for himself, for years, in which he could make what he did a virtue and a virtue of what he did. He was characteristically outraged when people suggested that he was interested in the du Pont deal chiefly for what it might bring him. “From a businessman’s point of view, I just don’t want to invest!” he raged, complaining bitterly that the ungrateful du Ponts, facing the prospect of annihilation, were accusing him of trying to “steal” their firm. “I’m being treated like a raider when I’m trying to help!”

Raider and helper both, perhaps; in Wall Street, as elsewhere, Perot—true to the utilitarian philosophers who conceived the nation he loved so much and identified with so closely—most likely wanted to have it both ways, to be rich and right at the same time, with a little extra thrown in: to become, in the bargain, the proprietor of a key piece of Wall Street formerly occupied by, and still named after, the most celebrated commercial family in the land.

7

At the start of December, Wall Street hung by its fingertips. Roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. Forty thousand customer accounts were involved in the thirteen cases of liquidation, and most of them were still tied up, the customers unable to get their cash or securities. Commitments to the Stock Exchange’s trust fund from its member firms were approaching the $100-million mark, and some member firms had had about enough; a sauve qui peut sentiment was beginning to spread. Legislation to create a federal Securities Investor Protection Corporation, on the model of the Federal Deposit Insurance Corporation to protect bank depositors, was before Congress; it had no chance of passage until the present mess in Wall Street was cleared up, and thus, while it might help in future crises, it was powerless in this one. Worst of all, the Goodbody and du Pont deals were interrelated. In its contract to take over Goodbody, Merrill Lynch had insisted on a provision to the effect that, should any other major firm fail before the Merrill Lynch-Goodbody merger became final several months later, then the Merrill Lynch-Goodbody merger would automatically be cancelled.

So a du Pont failure would mean a Goodbody failure; the arch deprived of its keystone would fall, more than half a million customer accounts would be tied up, many perhaps never to be redeemed, and public confidence in Wall Street would end for years to come, if not forever. In the retrospective opinion of those best situated to know, the fall of the arch would have meant much more than that. Haack said at the time that the consequence of Goodbody’s failure alone would be “a panic the likes of which we have never seen.” Lasker said later: “If du Pont and Goodbody had gone down, a market crash would have occurred, but that would have been only the beginning. There would have been a run on the resources of brokerage firms—partners wanting their capital, customers wanting their cash and securities—causing many new failures. There would have been no federal investor-protection legislation. Mutual fund redemptions would have been suspended, putting fund investors in the same situation as customers of bankrupt brokerage houses. Undoubtedly the Stock Exchange would have been forced to close. All in all, millions of investors would have been wiped out, and as for Wall Street, it would have marked the end of self-regulation. The government would have moved in and taken over.”

It did not happen. Three times round—Hayden, Stone; Goodbody; du Pont—went the more or less gallant, more or less decrepit ship of Wall Street, and it did not sink to the bottom of the sea. Through the early days of December the negotiations continued, and at last, on December 16, a deal was announced. Two of Perot’s associates hand-carried to Lasker a certified check for $10 million, payable to F.I. du Pont and Company; in exchange, the Perot group would get the right to convert part of their loan into 51 percent of du Pont stock, thus taking control out of du Pont hands for the first time in the company’s history. Edmond du Pont would resign as managing partner, and the firm’s remaining partners would undertake to raise promptly an additional $15 million in capital.

Wall Street seemed to be saved. It wasn’t, really, because the arrangement soon came apart, and the last phase of the rescue stands as a kind of gigantic, grotesque footnote. Far from putting up or raising more capital, in the early months of 1971 the F.I. du Pont partners and investors took millions more of their previously committed capital out. A group of the firm’s investors, led by Anthony du Pont, showed that they had no taste for the original accommodation in any case, and set about trying to salvage what they could for themselves, whether at the cost of the firm’s liquidation or not. Meanwhile, further errors in the du Pont books were found. By February 1, 1971, it appeared that the amount needed from the Perot group was not $5 million, or $10 million, but considerably more. At last, on April 23, the appalling fact came to light: the rescue would require somewhat in excess of $50 million.

“I want out!” Perot shouted over the telephone from Dallas; now he had been pushed too far. But the Crisis Committee would not let him out; all through the two previous months, with Rohatyn placating the Perot group, Ralph DeNunzio hand-holding the du Ponts, and Lasker serving as go-between, the negotiations had somehow been kept alive. Rohatyn would later call it a game of chicken, with each side, the du Ponts and the Perot group, using the threat of the firm’s failure and the terrible social and economic consequences as a lever to improve its bargaining position. Through it all, despite the gravity of the matter, humor of a sort, in the form of the slicker-and-bumpkin joke, seems to have survived. Once, after many hours of hot-and-heavy negotiations, Lasker took Perot to dinner at the posh Côte Basque restaurant.

“I’ll bet you want a big drink, after all that,” Lasker said to the Texan.

“You bet I do!” Perot replied, in heartfelt tones; and commanded the hovering proprietor, “Bring me the biggest ginger ale in the house!”

Matters came to a head in mid-April; there were daily and nightly sessions in Dallas, at the Stock Exchange, at Lasker’s suite, finally at the S.E.C. offices in Washington. Perot did not carry out his threat to withdraw; the negotiations succeeded. In the last week of April an agreement was reached that would stick: Perot and his colleagues to lend $55 million, in exchange this time for at least 80 percent control of F. I. du Pont; and the Stock Exchange, through assessment of its members, to indemnify Perot against resulting losses up to the sum of $15 million.

For the reader who has been numbed by the size of the sums tossed around, and the surrealistic ease with which they escalated, let a single figure serve as summary and conclusion: over two years, it would eventually appear, the errors and miscalculations in the account books of F. I. du Pont had amounted to somewhere in the neighborhood of $100 million.

8

How had it all come about? Why hadn’t it been prevented? Why, for example, had the required capital-to-debt ratio not been set lower than 1:20, and why was the ruinous ninety-day capital withdrawal rule allowed to stand? As a matter of fact, the Stock Exchange had required 1:15 until 1953, and had relaxed the requirement that year to ease the need for new capital brought about by vast postwar expansion of the national securities business. When the 1970 crisis came, it was too late for reform. Tightening the requirement then was out of the question because such a move would simply have thrown many additional firms into violation. As to the ninety-day withdrawal rule, it was there because it had always been there—because it had the powerful sanction of tradition, backed by the shared assumption that the gentlemen who provided the money for Wall Street’s passage would not, in a crisis, choose to play the role of rats leaving a fleet of sinking ships. (The term for withdrawal notice was finally changed to six months in October 1970; in 1972, it was made eighteen months.) In sum, the problem was that the spirit abroad in the land at the time, the spirit that allowed conglomerates to buy profits with convenient mergers and mutual funds to write false assets with letter stock, spread to the core institutions of Wall Street, the huge old brokerage houses; and so the old rules that had been intended to govern men of caution, probity, and responsibility were suddenly failing to govern men caught in an obsession with greed.

But Wall Street was saved now, and the go-go years were about over. The Perot deal went through, and F.I. du Pont continued operations under the briskly competent management of Morton H. Meyerson, a young Perot lieutenant. “My objective is for du Pont to become the most respected firm in the securities business,” said Perot, in the sober pear-shaped tones of many Wall Streeters before him, and it was at least possible that he would reach his objective. Lasker, Rohatyn, and their colleagues could begin to catch up on their sleep, and on their private business affairs. Albert H. Gordon, chairman of Kidder, Peabody, wrote to Lasker, “If you had once lost your nerve, we would have gone down with all hands lost.” Surely no one could deny that Lasker had kept his nerve, done what of all things in the world he could do best: as a conservative, he had superbly filled the role of conservator.

Perot had come out probably the largest single investor in Wall Street and certainly the biggest man in its looming automated future; for all his outback ways a man of complexity and paradox: an idealist and yet a pragmatist, a passionate believer and yet conceivably a bit of a faker, and in Wall Street an Early American—such a leader as Wall Street might have had in 1870—called to answer a Late American problem in 1970. In the nineteen sixties, finance capitalism as practiced in America had once again, through its own folly, dug itself an almost inescapable grave and then dug itself right out—had once again survived, but just barely. The architects of its survival, men like Lasker, Rohatyn, and Perot, had shown courage, persistence, and self-sacrifice amounting almost to heroism. The question remained, Was the heroism in a good cause? Was the old system that could produce “creative” accounting, manipulation of stock prices, victimization of naive investors, and mind-boggling messes in brokerage firms really worth saving? There are those, a few of them in Wall Street itself, who thought and still think not—who believe that Hayden, Stone, Goodbody, and du Pont should have been allowed to go under so that the resulting bloodbath would cleanse Wall Street and bring about a government takeover to humble Wall Street’s pride and set it on the path of righteousness. It goes without saying that those people do not include Lasker, Rohatyn, or Perot—and that, when all was said and done, in the 1970 crisis it was they rather than their opponents who had the vitality and the faith to win the day. How long the day would remain won was another matter.

And so this chronicle ends, as it began, with Henry Ross Perot, the extraordinary man who, metaphorically speaking, won the money game and used his winnings to buy Wall Street.

CHAPTER XIV

The Go-Go Years

1

Some epitaphs for the go-go years:

In mid-October 1970, the week before Gramco Management suspended redemptions and sales of its collapsed offshore-fund, Director Pierre Salinger sat perched on the desk in his London office and said amiably to a reporter, “The offshore business is a dead duck.” Gramco stock, which had once sold at 38, was then available for 1½.

In June 1972, a block of preferred shares of Bernie Cornfeld’s (more properly, formerly Bernie Cornfeld’s) Investors Overseas Services changed hands in Geneva at one cent a share.

Between the end of 1968 and October 1, 1970, the assets of the twenty-eight largest hedge funds declined by 70 percent, or about $750 million. (Theoretically, hedge funds alone among financial institutions were ideally structured to survive a market crash or even to profit from one. But only theoretically. Structure is not genius; even for the exclusive hedge funds, genius turned out to have been a rising market. In practice, their managers, as carried away by the go-go spirit as anyone else, had simply forgotten to hedge in time. One of the most heralded of them had had the spectacular bad luck—or bad judgment—to begin large-scale short selling on May 27, 1970, the very day the market turned around and made a record gain.) Among the heavy losers in one such fund, which closed down in 1971, were Laurence Tisch, head of Loews Corporation; Leon Levy, partner in Oppenheimer and Company; Eliot Hyman, former boss of Warner Brothers Seven Arts; and Dan Lufkin, co-founder of Donaldson, Lufkin and Jenrette. The dumb money could take bitter comfort in the company it had among the smartest of the smart money—or former money.

A study of mutual funds by Irwin Friend, Jean Crockett, and Marshall Blume of the faculty of the Wharton School of Finance and Commerce, published in August 1970 by the Twentieth Century Fund, resulted in the startling conclusion that “equally weighted or unweighted investment in New York Stock Exchange stocks would have resulted in a higher rate of return than that achieved by mutual funds in the 1960-1968 period as a whole.” More simply stated, the pin-the-tail-on-the-donkey system of stock selection would, according to the authors’ figures, have worked better than the system of putting one’s trust in expert portfolio management.

If that conclusion suggested that gunslinger performance had been a fantasy born of mass hysteria, an item in Forbes magazine in early 1971 suggested that corporate profit performance—presumably the bedrock beneath the boom—had been another. By Forbes’s method of reckoning, Saul Steinberg’s Leasco, the king of all the go-go stocks, over the years of its stock-market glory had not earned any aggregate net profit at all.

2

Reform follows public crises as remorse follows private ones. Before the dust had settled on the 1969-1970 Wall Street crisis—indeed, before its last phase was over—reform began. In December 1970, Congress passed and President Nixon signed into law a bill creating a Securities Investor Protection Corporation, “Sipic” for short—a federally chartered membership corporation, its funds provided by the securities business, which would henceforth protect customers against losses when their brokers went broke, up to $50,000 per customer. Every customer hurt by a brokerage failure over the years 1969-1970 was eventually going to end up whole again, the Stock Exchange now announced—even the unlucky clients of Plohn, First Devonshire, and Robinson, apparently left to their fate back in August. The Exchange’s temporary abandonment of them now appeared to have been part of the bargaining to get the Sipic bill passed. But what with lawsuits and the law’s delays, it would take time. In midsummer, 1971, some eighteen thousand customers of liquidated firms were still waiting for their securities and money. By the end of 1972, virtually everyone had been made whole.

Just as in the nineteen thirties, the Stock Exchange set about reforming itself internally. In March 1972, its members voted to reorganize its governing structure along more democratic lines by replacing the old thirty-three-man heavily insider-dominated board with a new board comprising twenty-one members, ten of them from outside Wall Street, and a new salaried chairman to supercede the traditionally unpaid, nominally part-time chairman of the past, such as Lasker. In the spirit of reform, the new board, at its maiden meeting in July, selected as its first paid chairman James J. Needham, not a Wall Streeter but an accountant and S.E.C. man. The first new “public” representatives to be elected to the board were mostly rich industrialists scarcely likely to share the point of view of the small investor, suggesting that the job of reform was not done yet. Still, the change unmistakably represented progress.

And whose recommendations served as model for the new, more democratic structure at 11 Wall Street? None other than those of William McChesney Martin, Jr., the very same man who in 1937, as a precocious, serious-minded young broker just past thirty, had served as secretary of the committee proposing democratizing reform of the Stock Exchange structure, and the following year had become the Exchange’s first president under the new structure, in the wake of the Whitney scandal. It must have been with a weird sense of experiencing a recurring dream that Martin, called out of retirement at Lasker’s urgent request in December 1970, for the second time in his life spent half a year studying the question of how to transform the New York Stock Exchange from a club serving its members to a marketplace serving the public.

The final irony, then: history repeating itself not only as to pattern of events but, in one crucial instance, as to identity of protagonist. But if Wall Street’s nineteen sixties were in many ways a replay of its nineteen twenties—refuting the optimism of those who believe that reform can make social history into a permanent growth situation rather than a cyclical stock—its go-go years were also utterly characteristic of the larger trends of their own time, reflecting and projecting all the lights and shadows of a troubled, confused, frightening decade the precise like of which had never been seen before and surely will not be seen again. Consider, for example, the subtle shift in the aspirations of the moneymakers who have dominated the various stages of this chronicle. Edward M. Gilbert, at the beginning of the decade, was a throwback to the vanished American style, originally canonized in the nineteen twenties, of personal and social irresponsibility elevated to the status of principle. Gerald Tsai—reaching his apogee in 1964 and 1965, the period of calm between the storms of John Kennedy’s assassination and the upheavals of 1967 and after—aspired to and largely achieved a more rational American dream dating back to more stable times, that of the poor immigrant using his wits to make good in the land of the free. Saul Steinberg in 1968 and 1969 was the financial world’s version of a figure familiar in the larger national scene at that moment, the young and brash outsider setting out to join the insiders by overthrowing them—and, like other contemporaneous American rebels, ending up largely gaining his objective by the ironical means of being defeated and then admitting his mistake. Bernard Cornfeld, typifying a conflicting and simultaneous national tendency, wrote satire with his life instead of his pen, made his life an exaggerated version of the manners and morals of his society; not deigning to aspire to join the Establishment, he aspired to thumb his nose at it as conspicuously as possible—as indeed he did. Finally, the two figures who dominated Wall Street at the decade’s end, Lasker and Perot, dutifully reflected a national turn toward the more conservative and conventional forms of social responsibility. Unabashedly loving their country because it had provided such a complaisant arena for their personal ambitions, they set out to do what they could to reciprocate—Lasker by throwing his heart and soul and mind into the saving of the New York Stock Exchange, Perot by throwing huge sums of his own money into the same enterprise, and, in his futile attempt to rescue American prisoners in North Vietnam, riding off in all directions like a modern Don Quixote with a Boeing 707 as his Rosinante.

Manners and fashions change, but the wish to become rich remains constant; and the styles and motives of the greatest money-seekers reflect those changes as delicately as do those of great lovers.

3

What of the customer, the little investor, Wall Street’s “consumer”? Was he fleeced as calculatedly and ruthlessly in the nineteen sixties as he had been in the nineteen twenties? Did the conglomerates and the performance funds treat him with no more consideration than had the market pools and investment trusts of old? Or did he, like the victim of a confidence game, have largely himself to blame?

To begin with, there can be little question that, by and large, he was a big loser in the nineteen sixties market. The Stock Exchange had the bad luck to release the results of its latest national stockholder census in July 1970, right at the bottom of the market collapse. As we have seen, the count came to about 31 million, more than one in every four of the nation’s adults. This represented a 53.3 percent increase since 1965, when the census figure had been just over 20 million. The conclusion is inescapable that almost 11 million persons invested in the stock market for the first time between 1965, when the Dow stood just under 1,000, and mid-1970, when it stood at around 650. Exactly how much of the $300 billion overall paper loss in the 1969-1970 crash was suffered by those 11 million new investors is incalculable, but it may safely be assumed that as of July 1970, when the Exchange distributed its newest evidence of the arrival of people’s capitalism, people’s capitalism had left at least 10 million American investors, or one-third of all American investors, poorer than it had found them, and poorer by an aggregate sum of many billions of dollars.

The man or woman of the nineteen sixties who—in quest of a third car or a Caribbean vacation, or to pay a private-school bill, or merely to try to stay even with inflation—invested in Ling-Temco-Vought, or Leasco, or the Mates Fund, or even National Student Marketing Corporation, had one measurable advantage over the unfortunate who in 1929 had taken an equally disastrous flyer in Radio or Shenandoah or Alleghany. Thanks to the Securities Acts and the S.E.C., the nineteen sixties investor was technically protected from corporate deception by federal requirements of full disclosure. But the key word, of course, is “technically.” If he had fully understood the abstruse implications of merger accounting, he might not have invested in Ling-Temco-Vought or Leasco; if he had grasped the significance of up-valuation of letter stock in a fund portfolio, he would probably not have invested in the Mates Fund; if he had read and understood the footnotes to the 1969 annual report of National Student Marketing, he would almost certainly not have entrusted his savings to that particular venture. The question, then, is whether or not an amateur investor, with affairs of his own to attend to and limited time and attention to give to the ins and outs of the stock market, might reasonably be expected to have had such understanding. Was he not entitled to rely on the investment skill and integrity of his broker and his mutual-fund manager—especially when their judgment was so often confirmed by that of the greatest professional investing institutions, the national banks, the huge mutual and pension funds, the insurance companies and foundations? In sum, had the game of stock investing really been made fair for the amateur as against the professional?

Indeed it had not—not when the nation’s most sophisticated corporate financiers and their accountants were constantly at work finding new instruments of deception barely within the law; not when supposedly cool-headed fund managers had become fanatical votaries at the altar of instant performance; not when brokers’ devotion to their customers’ interest was constantly being compromised by private professional deals or the pressure to produce commissions; and not when the style-setting leaders of professional investing were plunging as greedily and recklessly as any amateur. Full disclosure in the nineteen sixties market was largely a failure, giving the small investor the semblance of protection without the substance. And that failure raised the question of just how much full disclosure can ever accomplish. Rules can be tightened, as many were during the decade and more will be in the future; but as surely as night follows day, the tricksters of Wall Street and its financial tributaries will be ever busy topping the new rules with new tricks, and there is no reason to doubt that the respectable institutions will again play Pied Piper by catching the quick-money fever the next time it is epidemic. As Lasker said in 1972, “I can feel it coming, S.E.C. or not, a whole new round of disastrous speculation, with all the familiar stages in order—blue-chip boom, then a fad for secondary issues, then an over-the-counter play, then another garbage market in new issues, and finally the inevitable crash. I don’t know when it will come, but I can feel it coming, and, damn it, I don’t know what to do about it.”

Thus, in the nature of things, the amateur investor remains and probably will remain at a certain disadvantage in relation to the professional. Perhaps his best protection lies in knowledge of that fact itself.

4

All that notwithstanding, Wall Street is changing in a democratic direction, and will surely change more: the public will be better represented in the councils of the New York Stock Exchange (perhaps tied in with the Amex and the smaller regional exchanges), the commissions on more and more trades will be determined by free-market negotiation rather than by fiat of the securities industry, mutual-fund charges and operations will be better regulated. But perhaps the biggest change currently in the wind is not strictly financial, but rather social and cultural.

After it graduated, around the beginning of this century, from being chiefly an arena for the depredations of robber barons and the manipulations of sharp traders in railroad bonds, Wall Street became not only the most important financial center in the world but also a national institution. In the nineteen twenties it was in a real sense what Wall Streeters always cringed to hear it called, a private club—and not just any private club but probably the most important and interesting one in the country, a creator and reflector of national manners and a school for national leaders. In the nineteen sixties, despite declining aristocratic character and political influence, it was still those things, playing out week by week and month by month its concentrated and heightened version of the larger national drama. But after the convulsion with which the decade and that particular act in the drama ended, its days in the old role seemed to be numbered. Wall Street as a social context is apparently doomed not by reform but by mechanization. Already in the early nineteen seventies, a significant proportion of stock trading is being conducted not face to face on a floor under a skylight but between men sitting in front of closed-circuit television screens in offices hundreds or thousands of miles apart. There is a growing movement, forced by Wall Street’s increasingly obvious inability to handle a vastly expanded national securities business, to abolish stock certificates and replace them with entries in computer memory units. The head of the nation’s biggest brokerage firm—Regan of Merrill Lynch—predicted in 1972 that “by 1980 Wall Street will have lost lots of its distinctive flavor. … The Street will be the scene of a lot less colorful action than we have witnessed in the past few years. … Early to go, I imagine, will be that decorative piece of paper [the stock certificate]. … When all the electronic gear is in place, will we still need a New York Stock Exchange? Probably not in its present form.”

Good-bye, then, to the private club. The twin forces that hold Wall Street together as a social unit are the stock certificate, the use of which calls for geographical unity because it must be quickly and easily conveyed from seller to buyer, and the stock-exchange floor, which gives stock trading a visible focal point. If the certificate and the floor go, Wall Street will have moved a long way toward transforming itself into an impersonal national slot machine—presumably fairer to the investor but of much less interest as a microcosm of America. The private-club aspect, however deplorable from the standpoint of equity and democracy, is necessary to the social ambiance; the wishes of a reformer and those of a social historian must be at odds. If the private club goes, with it, perhaps, will go that tendency of Wall Street’s of which I have spoken: to be a stage for high, pure moral melodrama on the themes of possession, domination, and belonging. This may be, conceivably, one of the last books to be written about “Wall Street” in its own time.

Notes on Sources

Since little formal history has yet been written about United States financial life in the nineteen sixties, I have necessarily relied chiefly on business and government publications, contemporaneous newspaper and magazine articles, and, above all, the personal accounts of those involved either as observers or as participants, among them: Louis S. Auchincloss, William L. Cary, Manuel F. Cohen, Orval DuBois, Russell Goings, Jr., Walter Guzzardi, Jr., H. Erich Heinemann, the Rev. Francis C. Huntington, David S. Jackson, Eliot Janeway, Edward C. Johnson II, Edward C. Johnson III, Alfred Winslow Jones, Gilbert E. Kaplan, Kenneth Langone, Bernard J. Lasker, Thomas Marquez, the Rev. John W. Moody, Osgood Nichols, Henry Ross Perot, William S. Renchard, Felix G. Rohatyn, M. J. Rossant, Eugene H. Rotberg, William R. Salomon, Ralph S. Saul, Andrew Segal, Lee J. Seidler, Saul P. Steinberg, Gerald Tsai, Jr., Thomas O. Waage, and John Westergaard.

I owe thanks to all of these persons, and to others who wished not to be identified.

Chapter I

Surprisingly little has been published about Henry Ross Perot’s career prior to his 1970 involvement in Wall Street affairs. See Arthur M. Louis, “The Fastest Richest Texan Ever,” Fortune, November 1968; and “H. Ross Perot: America’s First Welfare Billionaire,” Ramparts, November 1971.

The story of Trinity Church’s role in the May 1970 riot is well told in The Trinity Parish Newsletter, May-June 1970.

Chapter II

The reform of the American Stock Exchange is reconstructed (apart from interviews) largely from Amex and S.E.C. documents, along with newspaper accounts in The New York Times, The New York Herald-Tribune, and The Wall Street Journal. See especially the Herald-Tribune, June 25, 1961; “Interim Report of the Special Committee for Study of American Stock Exchange,” December 21, 1961; and the S.E.C. Staff Report on the American Stock Exchange, January 1962.

On Birrell and Guterma: T. A. Wise, The Insiders (New York, 1962).

Chapter III

On Edward M. Gilbert: Time, June 22, 1962; Life, June 29, 1962; The Saturday Evening Post, October 19, 1963. A remarkable and detailed account of Gilbert in Nevada in May 1962, and subsequently in Rio, is contained in an article by M. J. Rossant, The New York Times, June 24, 1962. I am grateful to several other persons who provided information on Gilbert’s career and personality.

Chapter IV

Cary tells his own story of his S.E.C. chairmanship, and gives his views on federal regulation, in William L. Cary, Politics and the Regulatory Agencies (New York, 1967). See also Louis M. Kohlmeier, Jr., The Regulators (New York, 1969), and American Bar Association Journal, March 1963, in which Cary’s “private club” speech is reprinted.

The basic document is Report of Special Study of the Securities Markets of the S.E.C. (Washington, 1963).

Chapter V

On Zeckendorf’s downtown real-estate operations: William Zeckendorf with Edward McCreary, Zeckendorf (New York, 1970).

On the early feminist brokerage firm of Woodhull, Claflin and Company: Johanna Johnston, Mrs. Satan (New York, 1967).

On Bart Lytton: The New York Times, June 30, 1969.

On Atlantic Acceptance Corporation, Ltd.: the complete story is told in Report of the Royal Commission Appointed to Inquire into the Failure of Atlantic Acceptance Corporation (four volumes; Toronto, 1969). A brief and sound early account, by M. J. Rossant, appeared in The New York Times, November 14, 1965.

Chapter VI

The rise of Gerald Tsai is described in Gilbert Edmund Kaplan and Chris Welles, The Money Managers (New York, 1969). See also Business Week, February 2, 1965, and Newsweek, May 9, 1966 and May 13, 1968.

An account of Alfred Winslow Jones and the hedge-fund business appears in The Money Managers.

Chapter VII

The literature on conglomerates, unlike that on most aspects of nineteen sixties finance, is already voluminous. The basic source, up to now, is Investigation of Conglomerate Corporations: Hearings Before the Antitrust Subcommittee of the Committee on the Judiciary, House of Representatives, Ninety-first Congress (seven volumes; Washington, 1970), along with a summary volume, Investigation of Conglomerate Corporations: A Report by the Staff of the Antitrust Subcommittee (Washington, 1971). A useful book for the general reader is The Conglomerate Commotion, by the editors of Fortune (New York, 1970). A detailed account of the career of James Ling is to be found in Stanley H. Brown, Ling: The Rise, Fall, and Return of a Texas Titan (New York, 1972). Among particularly enlightening magazine and newspaper articles are “Litton’s Shattered Image,” Forbes, December 1, 1969; “Meshulam Riklis: What Makes Rapid Run,” Forbes, March 15, 1971; and “Affinity for Tennis Turned a Mansion Into a Showplace” (on Eugene V. Klein), The New York Times, September 6, 1971.

On accountants and accounting: The Insiders (cited under Chapter II); “The Accountants Are Changing the Rules,” by Arthur M. Louis, Fortune, June 1968; and “A Comparison of the Economic and Social Status of the Accounting Profession in Great Britain and the United States of America,” by Lee J. Seidler, The Accountant’s Magazine, September 1969.

Chapter VIII

On back-office snarls: Hurd Baruch, Wall Street: Security Risk (Washington, 1971), a sound and thorough study by an S.E.C. official; Christopher Elias, Fleecing the Lambs (Chicago, 1971), which is biased and unreliable but nevertheless useful and suggestive; “The Back Office: An Inside View of Wall Street’s New Ball Game,” by John W. Faison (The Wall Street Ministry, New York; pamphlet); The New York Times, 1968 and 1969, especially an article by Marilyn Bender, January 9, 1972. The question of Mafia connections in Wall Street is dealt with in the Times, November 26, 1969.

Chapter IX

On the youth boom in money management, see The Institutional Investor, October 1968; Business Week, March 15 and May 3, 1969; Forbes, January 15, 1969.

Abbie Hoffman’s 1967 exploit at the Stock Exchange is described in his Revolution for the Hell of It (New York, 1968).

Trinity Church’s community programs are described in “New Hope for the Wall Street Ghetto,” by Mary Cole Hanna, Sign magazine, August 1969, and The New York Times, June 5, 1969.

Chapter X

Extensive documentation of the Leasco-Reliance merger and the Leasco-Chemical encounter are contained in Investigation of Conglomerate Corporations, Volume 2, and in the Report by the Staff. Among the more enlightening of many articles that have been published about Saul P. Steinberg are “Fast Money Power,” by Chris Welles, in Clay Felker, ed., The Power Game (New York, 1969), and “Steinberg’s Complaint,” Forbes, May 15, 1969.

Chapter XI

On the offshore business as a whole, see Business Week, March 22, 1969, and The New York Times, October 12, 1970; on Gramco in particular, The Sunday Times of London, October 11, 1970.

On Cornfeld and I.O.S.: Godfrey Hodgson, Bruce Page, and Charles Raw, “Do You Sincerely Want to Be Rich?” (New York, 1971), in which the story is told in exhaustive detail; and Bert Cantor, The Bernie Cornfeld Story (New York, 1970), in which it is told with gossip and brio.

On Parvin-Dohrmann: S.E.C. vs. Parvin-Dorhmann et. al., initiated October 16, 1969, in the U.S. District Court for the Southern District of New York. A good popular account is contained in John F. Lawrence and Paul E. Steiger, The Seventies Crash and How to Survive It (New York, 1970).

National Student Marketing Corporation: Andrew Tobias, The Funny Money Game (Chicago, 1971), and “How Cortes Randell Drained the Fountain of Youth,” by Rush Loving, Jr., Fortune, April 1970.

On institutional investing and its effect on the securities markets, with comments on offshore funds, hedge funds, and letter stock: Institutional Investor Study Report of the Securities and Exchange Commission: Summary Volume (Washington, 1971). However, this long-awaited study must be rated a disappointment.

The full text of the famous Nixon letter on the securities industry is reprinted in The New York Times, October 2, 1968.

Statistics on concentration of capital are derived from Investigation of Conglomerate Corporations: A Report by the Staff.

Chapter XII

The allusions to the events of 1929 are drawn from J. K. Galbraith, The Great Crash, 1929 (Boston, 1961), and from John Brooks, Once in Golconda: a True Drama of Wall Street 1920–1938 (New York, 1969).

Donald T. Regan’s account of the White House dinner of May 27, 1970, is contained in his A View from the Street (New York, 1972). The menu on that occasion, and other engaging details, come from an article by Terry Robards in The New York Times, May 31, 1970. Galbraith’s article drawing parallels between 1929 and 1970 appeared in the Times on May 3, 1970.

On the economic dimension of the 1969-1970 crash, relative to that of 1929, see “The Great Crash in Growth Stocks,” by Max Shapiro, Dun’s Review, January 1971.

The action of the Federal Reserve in the Penn Central bankruptcy is described in Perspective ’70: Economic Highlights of the Year (pamphlet; the Federal Reserve Bank of New York, 1971), and in Business Week, October 24, 1970.

Chapter XIII

There are a number of well-researched early accounts of various aspects of the 1970 Wall Street capital crisis. These include “Wall Street on the Ropes,” by Carol J. Loomis, Fortune, December 1970; “The Unbelievable Last Months of Hayden Stone,” by Mrs. Loomis, Fortune, January 1971; “Ross Perot Moves in on Wall Street,” by Arthur M. Louis, Fortune, July 1971; and articles by Terry Robards in The New York Times, December 17, 23, and 31, 1970, and March 28, 1971. See also Baruch, Wall Street: Security Risk.

Background material on the du Pont family is drawn from William H. A. Carr, The du Ponts of Delaware (New York, 1964).

The November 1970 dispute over Haack’s Economics Club speech is described in The New York Times, November 22, 1970.

Chapter XIV

Irwin Friend, Marshall Blume, and Jean Crockett, Mutual Funds and Other Institutional Investors (New York, 1970).

Collapse of the hedge funds: Fortune, May 1971, and Robert Metz in The New York Times, March 16, 1972.

Leasco’s unprovability: Forbes, January 15, 1971.

William McChesney Martin, Jr., “The Securities Markets: A Report, With Recommendations, Submitted to the Board of Governors of the New York Stock Exchange, August 5, 1971.”

Index

Accounting, 158–64, 262, 283–84

Accounting Principles Board, 159–60, 162–63, 262

A.I.C.P.A., 159–60, 162

Albano, Vincent F., Jr., 33

Alcoa, 42

Aldrich, Hulbert, 248, 250, 252

Alger, Fred, 140, 212

Allende, Salvador, 179

Allis-Chalmers, 175

Altec, 166

American Colortype, 168

American Home Products, 155, 262

American Institute of Certified Public Accountants, 159–60, 162

American Motors, 96

American Patriots for Freedom, 215

American Photocopy, 96

American Stock Exchange, 29–54, 87, 261, 292

American Telephone and Telegraph, 139, 183, 213, 239, 301, 312

Americana Fairfax Apartments, 273

Ames, Amyas, 85, 93, 217

Amex, see American Stock Exchange

Ampex, 27

Amtrak, 309

Andersen (Arthur) and Company, 281

Anderson, Robert, 301

Angell, Norman, 217

Antiwar demonstrations on Wall Street, 6–10, 214–15, 217, 226

Applied Logic, 184

Argus Research, 211

Armour, 42, 172

Armstrong, J. Sinclair, 217

Ash, Roy, 153, 173

Asiel and Company, 319

Atlantic Acceptance Corporation, Ltd., 119–25

Atlantic Richfield, 301

A.T.T., see American Telephone and Telegraph Auchincloss, Louis, 114

Auchincloss, Parker and Redpath, 281

“Automatic” Sprinkler Corporation, 174

Automation, stock trading and, 193, 194–95

Babson (David L.) and Company, 212

Bache and Company, 132, 317, 334

Bache, Harold L., 146

Back offices, 185–87, 191–200

Baerwald and DeBoer, 317

Bangor Punta, 153

Bank of Canada, 124

Bankers Trust, 239, 248, 282, 285

Barish, Keith, 272–73

Barr, Andrew, 162

Baruch, Hurd, 185, 190

Bauman, Arnold, 77

Bay Street (Toronto, Canada), 97, 118, 125

Bear raid, 243–44

Bear, Stearns and Company, 264, 327

Bedingfield, Robert E., 46–47

Beekman-Downtown Hospital (New York, N.Y.), 9, 226

Belle, Earle, 75

Berkley, Bill, 211

Berkley, Dean and Company, 211

Bernhard, Robert, 9

Birrell, Lowell McAfee, 30–31, 32, 33, 75, 97

Black Thursday (Oct. 24, 1929), 25, 293, 303

“Blackie,” 200–4

Blacks on Wall Street, 110–11, 208–10

Blair and Company, 324

Bliss (E. W.), 171

Block positioning, 263–66

Blough, Roger M., 56

Blue Monday (May 28, 1962), 56–58, 72

Bluhdorn, Charles, 170–73

Blume, Marshall, 349

Bocklet, Charles, 34, 35, 41

Boise Cascade, 262

Bon Ami Company, 51

Bonanza International, 280

Bond trading, 264

Booz, Allen and Hamilton, 233–34

Borg-Warner, 155

“Bottom-line,” 156–57;, 160, 262

Brokerage firms: back offices of, 185–87, 191–200; capital structure of, 311–18; collapse of, 318–47; commissions of, 261, 339–40; mergers of, 317, 325–28, 329–33, 335–45

Brokers: earnings of, 221, 355; ethics of, 219–21

Bronfman, Phyllis, 119

Brown Brothers, 217

Bruce (E. L.) and Company, 61, 63, 68–77

Brunswick, 27

Buckley, William F., Sr., 38

Budge, Hamer H., 277, 288–89, 296

Burns, Arthur, 301, 302, 303

Butler, John V., 222

B.V.D., 169

Cadwalader, Wickersham and Taft, 30

Cady, Roberts and Company, 85–86

Cage, BenJack, 75

Callas, Maria, 66

Canada, U.S. investments in, 118–25

Capes-Viscose, 155

Carr, Fred, 140, 211, 267

Carter, Arthur, 235

Carter Auto Transport, 234

Carter, Berlind and Weill, 234, 235, 238

Cary, William Lucius, 82–98, 286, 339

Cassini, Igor, 65, 77

C.C.S. (Central Certificate Service), 194–95

Celotex Corporation, 68–74, 76

Certain-teed, 29

Chance Vought Corporation, 166

Chase Manhattan Bank, 107, 171, 239, 248

Chase National Bank, 5

Chemical Bank New York Trust Company, 146, 175, 227, 228, 238–59

Chesapeake and Ohio Railway, 121

Chicago and North Western Railroad, 176

Chicago Board of Trade, 326

Chilean Telephone Company, 179

Christie, Alan T., 119–20

Chrysler, 220, 221

Chrysler, Walter P., 141

Churning, 220–21

Cities Service, 42

City Associates, 143

City Investing, 152

Claflin, Tennessee, 110

Clark, Jack L., 322

Clayton Act, 254

Clermont Towers, 273

Clews, Henry, 109

CMI Corporation, 322

C.N.A. Financial Corporation, 148–49

Cogan, Berlind, Weill and Levitt, 325

Cohen, Isidore, 302–3

Cohen (Joseph) and Sons, 303

Cohen, Manuel F., 98, 99, 150, 286–87, 288

Cohen, Milton H., 88

Coleman, Delbert William, 274–78

Collins, Henry, 68, 70, 76

Colson, Charles, 301 “Commercial paper market,” 304

Commonwealth United, 275, 278

Communication Workshop (band), 223

Communism on Wall Street, 111–12

Computer leasing, 232–33

Conglomerates: 4, 152–56, 175–77, 180–81; causes of, 156–58; individualism and, 173–74; power of, 177–80. See also Mergers

Connecticut General Life Insurance, 124

Consolidated Cigar, 171

Consolidated Foods, 136

Continental Electronics, 166

Continental Illinois Bank and Trust Company, 245, 282

Control Data, 265, 305

Cony, Ed, 42 Cook, Donald, 188

Copeland, Lammot du Pont, 239, 241, 257, 335

Cornell University Endowment Fund, 282, 285

Corners, 63–64

Cornfeld, Bernie, 140, 270–71, 276, 277, 298, 348, 352

Covington and Burling, 281

Cowdin, J. Cheever, 85

Cravath law firm, 253, 258

Cresap, McCormick and Paget, 94–95

Crispus Attucks Foundation, 209

Crockett, Jean, 349

Cummings, Nathan, 135–36

Cunningham, John, 320, 329

Curb Market, 29

Curtiss-Wright Corporation, 85–86

Data Processing Financing and General, 24, 236

Debentures, 160–61, 162

Deemer, Walter, 147

Dempsey-Tegeler, 316, 318

Denny’s Restaurants, 277–78

DeNunzio, Ralph, 319, 337, 346

Desilu Productions, 171

Dewey, Thomas E., Jr., 123

Dillon Read, 287

Dingell, John, 93

Diversification, 154–56. See also Conglomerates D.K.’s, 185

Documentation, Inc., 234

Doeskin Products, 30

Donaldson, Lufkin and Jenrette, 316, 349

Donaldson, W. H., 316

Douglas, William O., 89–90, 275, 339

Dow, Charles H., 329

Dow Jones industrial averages, 101, 102–3, 214; 1929 304–5; 1962, 55, 56–57; 1965, 98, 100–1, 139, 353; 1966, 152; 1968 305; 1969, 205, 260, 261; 1969 3, 4; 1970, 3, 292–93, 297, 300–1, 303, 304, 353

Dowd, James, 95

Dressen, Chuck, 33

Drew, Daniel, 13

Dreyfus, Jack, 140

Dreyfus Leverage Fund, 208

Drugs on Wall Street, 200–4, 226

Du Pont, Anthony, 337, 338–45

Du Pont (E. I.) de Nemours, 239, 335

Du Pont, Edmond, 334, 335, 337–45

Du Pont, Eleuthère Irénée, 334

Du Pont (F. I.) and Company, 155, 334–45, 346

Du Pont (F. I.)-Glore, Forgan and

Company, 335, 336–45

Du Pont, Francis I., 334

Dudley King and Georgeson, 253 Dun’s Review, 305

Duplan, 211

Dyer, Jim, 34, 35

Eberstadt, Ferdinand, 105

Economics of Crisis, The (Janeway), 214

E.D.S. (Electronic Data Systems Corp.), 17–24, 292, 336

Eisenhower, Dwight, 83

Elias, Christopher, 194

Empire Hardwood Flooring, 71, 73

Empire Millwork Company, 58, 60, 61

Empire National, 64–65, 67

Enterprise Fund, 140, 211, 267

Estabrook and Company, 190

Etherington, Edwin D., 53, 188

Ethics, 5, 219–21

Eversharp, 42

Executives: take-overs and, 177; unemployment of, 308

Fails, 185–87, 190, 191, 204–5

Fairchild Camera, 145, 262, 265–66, 305

Fairfield Partners, 143

Faison, John W., 196–99, 218–19

Farr, Francis, 65

Fidelity Capital Fund, 135–36, 146

Fidelity Fund, 130–36, 145, 149

Fidelity Management and Research, 136

“Financial Services Holding Company” (Netter), 234, 235

Finkelstein, Jerry, 67, 77

Finletter, Thomas, 105

Fire-and-casualty companies, 234–35

First Boston Corporation, 85, 246

First Devonshire Corporation, 324, 325, 350

First National Bank of Jersey City, 235, 240

First National City Bank, 106, 121, 124, 248

Fischer, Louis, 142

Flanigan, Peter M., 287, 301

Floor traders, 91, 94, 95–96 Forbes, 349

Ford Foundation, 120, 121, 124, 125

Four Seasons Nursing Centers, 24, 184, 279, 322, 323

Fox Computer Services, 234

Friend, Irwin, 349

Friendly, Henry J., 149

Fringer, Alice, 298–99

Fund of Funds, 271 “Funny money,” 160

Funston, Keith, 93, 96, 97, 188; Cary on, 89; Chemical Bank and, 239, 241, 257; on new issues, 27; as N.Y. Stock Exchange president, 85, 86, 151, 152

Galbraith, John Kenneth, 83, 213, 271, 297

Gellinoff, Abraham J., 33

Geneen, Harold S., 135, 179–79, 301

General Council of Congregational Churches, 121

General Electric, 139, 155

General Electric Pension Fund, 282

General Motors, 5, 155, 180, 213, 221, 301; as Dow indicator, 139, 183, 305, 312

Gibbs, Michael A., 233, 235, 239

Gilbert, Edward M., 58–80, 351

Gilbert, Harry, 58, 60–61, 67, 75

Gilpatric, Roswell, 217

Gintel, Robert M., 85–86

“Give-ups,” 150–51

Glen Alden, 169

Glore, Forgan and Staats, 335

Go-go trading, 128

Goings, Russell, Jr., 209

Goldman, Sachs, 264

Golsen, Jack E., 322, 325, 327–28

Goodbody and Company, 329–33, 342–43

Goodrich Tire and Rubber, 176–77, 227

Gordon, Albert H., 346

Graf, Lya, 89

Graham, Donald M., 245

Gramco, 272–74, 348

Grande, Charles A., 33, 42

Green, Hetty, 109–10, 230

Greenberg, Alan C., 327–28

Gregory and Sons, 316

Gulf and Western Industries, 152, 170–73, 175, 181, 237, 305

Gulf Oil, 42

Guterma, Alexander, 30, 31, 51–52

Haack, Robert, 188–90, 296, 301, 317–18, 320, 335, 339–40

Haff, Joe, 35

Halsey, Stuart, 283

Hanna, Mary Cole, 224

Harriman, Averell, 105

Harriman, E. H., 65

Hart, Milledge A., III, 16, 17

Hartford Fire, 235

Harvard University Endowment Fund, 282, 285

Haupt (Ira) and Company, 140, 151, 315, 316

Hayden, Stone and Company, 318, 321–24, 325–28, 330

Heaton, Edward, see Gilbert, Edward M.

Hedge funds, 141–44, 268, 348–49. See also Mutual funds

Heinemann, H. Erich, 242, 244–45

Heuss, John, 222

Hirsch and Company, 335

Hodes, Robert, 252

Hoffman, Abbie, 11, 215

Hogle, James, 331

Holding companies, 4. See also Conglomerates

Hoover, Herbert, 293, 300, 309

Hornblower Weeks, 246

Hubby (C. F.) Company, 129

Hughes, Howard, 275

Huntington, Collis P., 109, 110

Huntington, Francis C., 218–21

Hupp, 27

Hutton (W. E.), 283

Hyman, Eliot, 349

I.B.M., 231–32, 233, 239, 305

Ideal Leasing Company, 233

Ideal Rubber Products, 231

Incorporated Investors, 130

Insider trading, 5, 85–86, 115–16

Institutional investing, 260, 263–66

Institutional Investor, The (journal), 146–47, 210–11

Interest rates, 3, 152, 261

International Leisure, 279

International Playtex, 169

International Telephone and Telegraph, see I.T.T.

Interstate Department Stores, 29

Investment, ethics of, 219–21

Investment Company Institute, 89

Investment pools, 141, 143

Investment trusts, 4. See also Conglomerates

Investors Diversified Services, 289

Investors Overseas Services (I.O.S.), 271, 276, 277, 298, 348

Irving Trust, 239, 248

Isaacson, Walter, 321

I.T.T., 96, 135, 152, 178–80, 235, 301, 320

Jackson, David S., 37, 38–54

Jacobs (F. L.) Company, 51

Jaegerman, Edward, 43

Janeway, Eliot, 214, 292, 300

Jenrette, Richard, 183

Jews: as conglomerateurs, 169–70; on Wall Street, 116–18

Johnson, Edward Crosby, II, 129–139, 145, 149

Johnson, Edward Crosby, III, 134, 138–39, 145

Johnson, Lyndon B., 97, 98–99, 216

Johnson, Raymond, 224

Jones, Alfred Winslow, 142–44

Jones (A. W.) and Company, 142–43

Jones and Laughlin Steel, 168

Kahn, Otto, 105

Karr, David, 155

Kennedy, David, 301

Kennedy, John F., 26–29, 56, 82–84, 96–97, 98, 215

Kennedy, Joseph P., 83

Kentucky Fried Chicken, 184

Kickbacks, 150–51

Kidder, Peabody and Company, 85, 217, 283, 319, 346

Klein, Eugene, 173, 174

Kleindienst, Richard G., 320

Kleiner, Bell and Company, 140, 276, 278, 317

Kleiner, Burt, 275–78

Kohlmeier, Louis M., Jr., 84

Korshak, Sidney R., 274–76, 277, 278

Korvette, 29, 96

Krebs Pigment and Chemical, 155

Kreuger, Ivar, 122

Kuhn, Loeb and Company, 116, 121, 123, 246

Lambert and Company, 119–24

Lambert, Jean, 119–20

Lamont, Thomas S., 115–16

Lamont, Thomas W., 105, 115

Landis, James M., 84

Langone, Kenneth, 17–18, 19, 23

Lasker, Bernard J., 287, 293–95, 301, 302, 303, 352; brokerage finances and, 318–47; Nixon and, 295–97, 298–300

Lasker, Stone and Stern, 294

Law, Warren, 161

Lazard Frères and Company, 61, 76, 77, 319

Learson, T. Vincent, 239, 241, 257

Leasco Data Processing Equipment Corporation, 175, 227, 305, 349, 353, 354; Chemical Bank and, 238–59; Reliance Insurance and, 233–38, 325

Lefèvre, Edwin, 130

Legislation, 93–94, 253–54, 255–56, 342, 350

Lehman Brothers, 9, 186–87, 193, 217, 250, 251

Lehman, Herbert, 105

Lehman, John R., 217

Lerner Shops, 169

Letter Stock, 267–70

Levine, Lynn, 224

Levy, Gustave, 46, 294, 339

Levy, Leon, 349

Liberty League, 111

Lindsay, John V., 295

Ling Electronics, 165, 166

Ling, James Joseph, 165–68, 170, 174, 298

Ling-Temco-Vought, 24, 261, 353, 354; as conglomerate, 152, 166–67, 175, 181, 298, 305

Lipp, Robert I., 241

“Liquid real estate,” 272

Litt, Solomon, 319

Litton Industries, 27, 135, 153, 261; as conglomerate, 152, 155, 175, 180–81, 305

Livermore, Jesse L., 5, 130, 137

Livingston, Elsie, 129

LM Electronics, 165

Lockheed Aircraft Corporation, 10, 309

Loeb, Gerald M., 27

Loeb, John, Sr., 61, 76, 77

Loews Corporation, 136, 349

Long, Augustus C., 239, 241, 257

Louis, Arthur M., 173

Lovett, Robert, 105

LSB Industries, 322

LTV Tower, 273

Lucayan Beach (hotel), 122

Lufkin, Dan, 349

Lytton, Bart, 112

Lytton Financial Corporation, 112

McCall, Howard, 248, 250, 252

McCarthy, Eugene, 93, 111

McCormick, Edward T., 29, 33–54

McCracken, Paul, 297, 301

McCrory Corporation, 169

McDonnell and Company, 317

McFadden, J. A., 241, 243, 252

McLaren, Richard W., 288

MacNaughton, Donald, 301

McSande, Sandy, see Guterma, Alexander

Madison Fund, 123

Manhattan Fund, 145–49

Mann, Johnny, 34, 35

Manufacturers Hanover Trust Company, 106, 239, 248

Manufacturers Trust, 106

Margin requirement, 306

Market operators, 4–5

Marquez, Thomas, 16, 17, 20–21

Martial and Company, 65

Martin, William McChesney, Jr., 81–82, 99–100, 102, 253, 351

Mary Carter Paints, 175

Massachusetts Investors Trust, 129

Massachusetts Mutual Life, 124

Mates, Frederick S., 216, 267–70

Mates Investment Fund, 267–70, 353, 354

Maxwell, Elsa, 65

Meehan, Mike, 35

Mergers, 154, 157–58, 227–40, 262–63; of brokerage firms, 317, 325–28, 329–33, 335–45; mechanics of, 160–61; resistance to, 175–77, 240–59. See also Conglomerates

Merrill Lynch, 184, 297, 300, 301, 334, 356; back office of, 192, 193; Goodbody merger with, 332–33, 342–43

Merritt Chapman and Scott, 155

Metz, Robert, 177, 242

Meyer, André, 61, 319, 320

Meyerson, Morton H., 346

Michigan Bumper, 170

Minnie Pearl’s Chicken System, Inc., 174

Mitchell, John, 301, 333

Molé, Harvey E., Jr., 120, 121

Montreal Trust Company, 124

Moody, John Wallace, 223–25

Moody’s Investors Service, 121

Mooney, Michael E., 41

Morgan, Campbell Powell, 119, 121–22, 125

Morgan (J.P.) and Company, 5

Morgan, J. Pierpont, 2, 65, 89, 105, 111, 116

Morgan Guaranty Trust Company, 5, 115, 121, 239, 248, 282, 285

Morgenstern, Oskar, 167

Morgenthau, Robert M., 82, 195

Motorola, 220

“Multiple flogging,” 243–44

Mutual Broadcasting Company, 31

Mutual-fund management companies, 149

Mutual funds, 58, 101–2, 131, 139–40, 260, 349; letter stock and, 266–70; S.E.C. and, 91–92, 151. See also Hedge funds; Names of specific funds

NASDAQ(computer system), 21

National Ammonia, 155

National Association of Securities Dealers, 89, 185

National General Corporation, 174, 261

National Power and Light, 155

National Student Marketing Corporation, 280–85, 353, 354

Navarro, Rafael G., 272

Needham, James J., 350

Netter, Edward, 234–35, 236–37

New issues, 27–28, 184, 278–85

New Jersey Zinc Company, 171

New York Hanseatic Corporation, 122

New York Stock Exchange, 89, 188–90, 350–51, 356; blacks and, 209–10; C.C.S. and, 194–95; Rule 325 of, 312, 314–15, 323, 345; Rule 394 of, 150, 151; Special Trust Fund of, 315–18, 320, 323, 324–25, 333, 342; Surveillance Committee of, 319–47; volume on, 56–57, 97, 183–84, 190, 205, 216, 261; women and, 208, 210

Newburger, Loeb and Company, 209

Nixon, Richard M.: Lasker and, 295–97, 298–300, 327; S.E.C. and, 286–90, 292; Wall Street and, 300–4

Northerlin Company, 78

Northern Miner, The (journal), 118

Northern Pacific, 64, 116

Northwest Industries, 176–77, 227

Norton Company, 308

Nye Committee, 214

Offshore funds, 270–74, 348

Omega Equities, 268–70, 280

Onassis, Aristotle, 66

Onassis, Jacqueline Kennedy, 61

Oppenheimer and Company, 349

Organized crime, stock theft and, 195

Over-the-counter market, 21–22

Overtrading, 220–21

Pacioli, Fra Luca, 159

Pan American Airways, 172, 175, 176, 220, 227

Pantepec Oil, 38, 44

Paramount Pictures, 171, 173

Parvin, Albert, 275

Parvin-Dohrmann, 24, 275–78

Patman, Wright, 243

Patterson, Belknap and Webb, 82

Peace, Wall Street and, 10–11, 213–17

Peck, Stephen, 319

Penn Central Railroad Company, 304, 309

Penn-Texas, 155

Pennsylvania, University of, 121

“People’s capitalism,” 12–13, 101, 353

Performance funds, see Mutual funds

Performance Systems, Inc., 174, 280

Pergamon Press, 258

Perot, Henry Ross, 1–2, 14–25, 292, 336–47, 352

Perry, Jay, 264, 266

Pickard and Company, 315–16

Piggly Wiggly Stores, 64

Pittsburgh Plate Glass, 42

Plohn, Charles, 184, 281

Plohn (Charles) and Company, 324, 325, 350

Polaroid, 27, 135, 139, 145, 184, 305

Politics: I.T.T. and, 178–80; Wall Street and, 111–12

Pool operators, 5. See also Portfolio managers

Portfolio managers, 5, 102, 113

Pressprich (R. W.) and Company, 17, 18, 19, 23

Price-to-earnings ratio, 157, 172–73

Princeton University, 121

Privileged information, see Insider trading

Project Redeployment, 166

Protestants on Wall Street, 114–16

Prudential Insurance, 301

Putnam, Samuel, 128–29

Quaker Oats, 42

Randell, Cortes Wesley, 280–85

Rapid-American Corporation, 168, 169, 174, 303

Rapid Electrotype, 168

Raskob, John, 141

Re, Gerard A., 31, 32–33, 35–37

Re, Gerard F., 31, 32–33, 35–37

Real estate investing, 272–74

Redemption: of mutual funds, 102; of shares, 269

“Redundant capital,” 234

Regan, Donald, 297, 301, 302, 303, 332, 339, 356

Reilly, Joe, 34, 35, 41–42, 46–50

Reinisch, Hans, 292

Reliance Insurance Company, 235–38, 325

“Reminiscences of a Stock Market Operator” (Lefevre), 130

Renchard, William Shryock, 228–31, 238–59

Report on Regulatory Agencies to the President-Elect (Landis), 84

Resorts International, 175, 176, 227

Responsive Environments, 279

Rhodes Enterprises, 71, 73

Riklis, Meshulam, 168–70, 303

RKO-Stanley Warner Theatres, 169

Roberts, A. Addison, 236–38, 250, 252

Robinson and Company, 324–25, 350

Roche, James, 301

Rockefeller, David, 107, 225

Rockefeller, John D., Sr., 293

Rockefeller, Laurance, 255

Rockefeller, Nelson, 253, 255

Rockefeller, Percy, 141

Rohatyn, Felix George, 319–47

Romnes, H. I., 239, 241, 257, 301

Roosa, Robert V., 217

Roosevelt, Franklin D., 83, 105, 111

Roosevelt, James, 271

Ropes and Gray, 129–30

Rossant, M. J., 71, 76

Rubenstein, Serge, 30

Ruberoid, 72–73, 74

Safire, William, 301

St. John, Jill, 276, 278

Salgo, Nicolas, 153

Salinger, Pierre, 273, 348

Salomon Brothers, 263–66

Salomon, William R., 264, 266, 300, 339

Sass, Martin, 211

Sassoon’s Far Eastern Trust, Ltd., 123

Saul, Ralph, 33, 43, 44, 53, 88, 151, 301

Schenley Industries, 169

Schwab, Charles M., 141

Schwabacher and Company, 190

Scudder, Stevens and Clark, 132

Searles, Joseph Louis, III, 209

S.E.C. (Securities and Exchange Commission), 83–84, 162, 187–88, 263; actions of, 32–33, 85–86, 87, 115–16, 269, 276–78; brokerage firms and, 190, 312, 314, 331; Cary and, 82–98; Nixon and, 286–90, 292; reports of, 53, 88, 90–92, 151

Secured demand notes, 313

Securities Acts Amendments of 1964 93–94, 98

Securities Exchange Act of 1934 85–86, 159, 307

Securities Investor Protection Corporation, 342, 350

Security Equity Fund, 140, 212

Seeburg (J. P.) Corporation, 274, 275

Segal, Andrew, 37, 40–54

Seidler, Lee J., 162, 163–64

Sexism on Wall Street, 108–10, 207–8

Shapiro, Max, 305

Shawano Development Corporation, 51

Shearman and Sterling, 73

Shearson Hammill and Company, 208–9

Shooters, see New issues

Shor, Toots, 33

Short sales, 141, 142, 243

Shultz, George, 297

Siebert, Muriel, 208

Silver, David, 43, 45

Simmons, Richard, 253, 254, 256

Sinaiko, A. Arlie, 142

Sipic, 342, 350

Slick Corporation, 174

Smith, Barney, 283

Smith, Ben, 35

South Puerto Rican Sugar, 171

Sparkman, John, 253, 256

Speculation, ethics of, 219–21

Sperry-Rand, 27, 305

Spingarn, Heine, 267

Standard Oil of New Jersey, 305

Stans, Maurice, 301

Stanton, Thomas J., Jr., 241

Stardust Hotel-Casino, 276, 278

State Street Fund, 282

State Street Investing Company, 129

Stayman, Sam, 142

Stein, Howard, 111, 140

Steinberg, Saul Phillip, 228, 231–59, 349, 352

Stock certificates, 193–94, 356

Stock Exchange, see American Stock Exchange; Curb Market; New York Stock Exchange; Toronto Stock Exchange

Stock manipulation, 5, 141, 243, 262, 276–78

Stock market: 1929 crash, 4–6, 291–92, 297, 305–7, 311–12; 1962 collapse, 55–57; 1970 crash, 4–6, 291–310

Stock specialists, 31–32, 38, 93, 96, 263–64

Stock theft, 185, 191, 195

Stock transfer tax, 151

Stockholders, 12–13, 305, 353–55

Stott, Robert L., Jr., 319

Streit, Clarence, 320

Stuckey and Spear, 283

Subordinated loans, 313–14

“Surplus surplus,” 234

Swan-Finch Oil Corporation, 30, 33

Swift, 42

Swisher, Bill, 322

Swope, Herbert Bayard, 141

Syntex, 145

Take-overs, see Mergers

Talley, Madelon, 208

Temco Electronics and Missiles, 166

Tender offers, 160–61

Texaco, Inc., 139, 239

Texas Gulf Sulphur Company, 5, 86, 97, 115, 118

Textron, 152, 153, 155–56

Thompson, Rupert, 153

Thornton, Charles (Tex), 173

Tisch, Laurence, 136, 349

Tobias, Andrew, 280

Toronto-Dominion Bank, 122, 123

Toronto Stock Exchange, 118

Transitron, 27, 261

Trinity Church (New York, N.Y.), 6–9, 218, 222–26

Trujillo, Rafael, 31

Truman, Harry S., 83

Trusts, 128–29, 131

Tsai, Gerald, Jr., 5, 102, 132–40, 145–49, 212, 351–52

Tsai Management and Research, 146–49

Tyson, Robert C., 239, 241, 257

Understanding the Securities Act and the S.E.C. (McCormick), 36

Unemployment, 307–9

United Convalescent Homes, 184, 279

United Dye and Chemical Corporation, 51

University Loudspeakers, 166

University of Chicago, 283

U.S. Steel, 56, 145, 239

U.S. Steel Pension Fund, 120, 121, 124, 125

U.S. Trust Company of New York, 217

Utilities and Industries Corporation, 332

Vanderbilt, Cornelius, 64, 110

Viscoloid Company, 155

Voloshen, Nathan, 277

Wall Street (New York, N.Y.), 5, 9, 11, 106–8; antiwar demonstrations on, 6–10, 214–15, 217, 226; blacks on, 110–11, 208–10; changes on, 355–57; communism on, 111–12; drugs on, 200–4, 226; greening of, 222–26; over-extension of, 183–87; political ideology of, 111–12; social conscience of, 10–11, 12–13; as a social context, 104–6; social revolution on, 206–26; women on, 108–10, 207–8; youth on, 112–13, 195–204, 210–13

Wall Street Ministry, 218–21

“Wall Suite” (play), 225

Walston and Company, 325

War, Wall Street and, 10–11, 213–17

Warburg, Paul M., 117

Warner Brothers Seven Arts, 349

Warrants, 161

WASPs on Wall Street, 114–16

Weight Watchers International, 279

Weiss, Peck and Greer, 319

Welch Scientific Company, 28

Welles, Chris, 231

Westergaard, John, 232–33

White Consolidated, 175

White, Weld and Company, 166, 169, 250, 251

Whitney, Richard, 25, 30, 93, 151, 303; as Exchange chairman, 53, 81, 293–94, 300

Whitney (Richard) and Company, 312

Winchell, Walter, 38

Windels, Paul, Jr., 83

Winthrop, Stimson, Putnam and Roberts, 18

Wolfson, Louis E., 155

Women on Wall Street, 108–10, 207–8

Woodhull, Claflin and Company, 110

Woodhull, Victoria Claflin, 110

Woods, George, 85

Woods, Rose, 298

Woodward, Donald R., 6, 8–9, 223

Xerox, 27, 135, 139, 184, 305

Yale Theatre Ensemble, 225

Youth Against War and Fascism, 214–15

Youth on Wall Street, 112–13, 195–204, 210–13

Zeckendorf, William, 106, 107

Zenith, 220

About the Author

John Brooks (1920–1993) was an award-winning writer best known for his contributions to the New Yorker as a financial journalist. He was also the author of ten nonfiction books on business and finance, a number of which were critically acclaimed works examining Wall Street and the corporate world. His books Once in Golconda, The Go-Go Years, and Business Adventures have endured as classics. Although he is remembered primarily for his writings on financial topics, Brooks published three novels and wrote book reviews for Harper’s Magazine and the New York Times Book Review.

All rights reserved, including without limitation the right to reproduce this ebook or any portion thereof in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of the publisher.

Business Adventures Copyright © 1959, 1960, 1961, 1962, 1963, 1964, 1965, 1966, 1967, 1968, 1969 by John Brooks

Once in Golconda Copyright © 1969, 1999 by John Brooks

The Go-Go Years Copyright © 1973, 1999 by John Brooks

Cover design by Andrea Worthington

ISBN: 978-1-5040-5762-2

This edition published in 2018 by Open Road Integrated Media, Inc.

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