Wednesday, August 27, 2014
Brooks, Once in Golconda
The title of Brooks’s 1969 book, Once in Golconda: A True Drama of Wall Street 1920-1938, needs some explanation. “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.”
Brooks is a captivating writer who is adept at both setting the stage and portraying some of the leading actors. He can also step back to poke fun at the entire drama. For instance, in addressing the issue of speculation, he quotes the British sociologist Elias Canetti who “has a rather more engaging and original explanation” for the urge to speculate than the normal reply that “it is rooted in human venturesomeness, acquisitiveness, and love of risk for its own sake.” Canetti suggests that “the essence of trading is the giving of one object in exchange for another. 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.” (p. 69)
Brooks continues: “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, these 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.” Princeton economist Joseph Stagg Lawrence went so far as to make the (fortunately hedged) claim that “it is probable that upon this stage [the NYSE] can be discovered the aristocracy of American intelligence.” (p. 70)
Fed policy was impotent to stem the tide of speculation. In 1928 “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 …; 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.” (p. 98)
“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. … In short, the new Fed policy was an instant and spectacular failure.” (p. 99)
New York bankers thrived in this environment. They could borrow from the Federal Reserve at 5 percent and lend to speculators at 10 or 12 percent. “[B]oth 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.” (p. 100) The Fed might announce 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” (or, as Brooks paraphrases, “please don’t shake the plum tree any more for a while”), but this prohibition was unenforceable. Speculation continued apace.
The central character in Brooks’s book is Richard H. Whitney, who went from Wall Street hero to Sing Sing inmate. He was a hero on October 25, 1929, when the panic was at its height: “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…. 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.” (pp. 123-24)
But Whitney himself sustained considerable speculative losses, and even his vast borrowings (“well in excess of five million dollars” in early 1938) were insufficient to allow him to stay afloat and maintain his extravagant lifestyle. He resorted to embezzlement. In 1926 (although it wasn’t known until more than a decade later) this future president of the NYSE embezzled from the New York Stock Exchange Gratuity Fund, entrusted to his care. He later stole money from the New York Yacht Club and his father-in-law’s estate.
His misdeeds uncovered, he pled guilty, reading a mea culpa “in a firm, clear voice—almost with a certain joy.” Before sentencing, he was examined by the court’s psychiatric clinic and its probation officer. “The psychiatric clinic found his reactions to be ‘urbane and sportsmanlike,’” and the probation officer wrote: “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.” (p. 262)