Letters from Vienna #129
The Wall Street Crash of 1929
Sounding Alternative Narratives
It’s difficult for me to write about the Wall Street Crash of 1929 for a number of reasons. I didn’t do very well at Economics at school, I’m not a historian of economic history and the event remains very much veiled in secrecy.
A good place to start seems to be the Pecora Commission Report of 1934[1]. In the course of it Ferdinand Pecora quizzed the president of the New York Stock Exchange, Richard Whitney, about the ability of conspirators to control the market:
“Mr. PECORA…it is possible under the operation of the exchange for a group so to operate in the market as to more or less control prices for the time being?
Mr. WHITNEY. If their stock and if their money holds out; yes.
Mr. PECORA. And it is that sort of thing which the exchange does not like to have done, is it not?
Mr. WHITNEY. If there are no improper transactions connected with such an operation my answer is that the exchange does not object. The exchange has no objection to a man or a pool bidding 40 for 5,000 shares and offering 5,000 shares at 40 1/8. None whatsoever.
Mr. PECORA. Is it easily possible for a group operating through the medium of a pool to exercise temporarily, at least, or for the purpose of the operation, a control of the market price?
Mr. WHITNEY. I will answer yes, sir; on the conditions.
Mr. PECORA. The market price of a given security?
Mr. WHITNEY. As long as the stock and their money hold out; yes.
Mr. PECORA. Yes; and to that extent those persons are enabled to exercise a control, are they not?
Mr. WHITNEY. By bidding and offering; yes.
Mr. PECORA. By bidding and offering. Now, what steps, if any, does the exchange take to prevent that kind of control?
Mr. WHITNEY. I do not know of any, Mr. Pecora.”
“This testimony typified the conception of stock-exchange authorities as to what constitutes free and uncontrolled trading. The testimony before the Senate subcommittee again and again demonstrated that the activity fomented by a pool creates a false and deceptive appearance of genuine demand for the security on the part of the purchasing public and attracts persons relying upon this misleading appearance to make purchases. By this means the pool is enabled to unload its holdings upon an unsuspecting public.”
Another place to look is “Gods of Money – Wall Street and the Death of the American Century” by F. William Engdahl: “In 1929-31, the domino-style failure of those Morgan-initiated credit links to Europe and beyond turned a manageable American stock market crash into the worst deflation crisis in American history, precipitating a global depression.”
“The central reason for the collapse of the world economy was little understood and discussed then or in the decades following the Great Depression and the European crisis of 1931. The true origin of the Great Depression of 1931-1938 lay not in an overvalued New York stock market and its subsequent collapse. Rather, the fundamental cause of the global depression and banking crisis of the early 1930s, and also the driver for the stock bubble in the first place, was the misconceived attempt by the House of Morgan and the Wall Street banking establishment to replace the City of London with New York as the heart of world finance. Gold would play the decisive role in this attempt.”[2]
Not without interest is “Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis” by Mehmet Odekon: “…many Keynesian economists point to stagnant wages and the rapidly growing inequality between rich and poor as a major reason why the Wall Street crash, which directly affected only a small proportion of the population, caused a depression that affected every corner of the American economy. Despite the enormous productivity gains of the 1920s, the vast majority of workers saw their wages rise modestly if at all. According to a study released by the National Bureau of Economic Research (NBER) in 1921, a typical American family of five (the average household was larger than in the twenty-first century) required at least $2,000 a year in income for basic necessities. In 1919, approximately 70 percent of American income earners fell below that mark. By 1929, that figure had only fallen to 60 percent, and the drop occurred mostly among skilled workers, themselves a relatively small portion of the overall working-class population. Among the unskilled, fully 42 percent had household incomes of less than $1,500. At the other end of the income scale, meanwhile, the gains were dramatic. Between 1919 and 1929, the average income for the top 1 percent of American households rose some 75 percent. Their share of total national income rose from 12 to 34 percent, the largest ten-year increase in U.S. history. Likewise, household wealth was being distributed more and more unequally. By 1929, the top 1 percent of Americans held more than 44 percent of the nation’s wealth, while the bottom 87 percent held just 8 percent.”[3]
Most intriguing of all is “Conjuring Hitler: How Britain And America Made the Third Reich” by Guido Giacomo Preparata: “During the last stages of the German inflation, (Montagu) Norman initiated the process that would re-anchor Britain and most industrialized countries to the so-called gold exchange standard. This operation – grossly misunderstood by contemporary scholarship – was by no means a sorry attempt bungled by a few nostalgic gentlemen of leisure to resuscitate the monetary system of yore (pre-World War I). Rather, it was the peculiar creation of the Governor, whereby he enveloped, so to speak, for the length of six years (1925–1931) the banking networks of the West into a single, highly leveraged and palpably unstable web of payments, which was in fact designed to self-disintegrate. This too was a game, in which all participating central banks ‘chipped in’ a given quota in gold. To amass and protect the gold base of his bank, Montagu Norman in 1920 tested two fundamental techniques, which he would employ a decade later to achieve the Empire’s objectives: (1) the pauperization of India by restricting her money supply (that is, deliberate deflation) with a view to attracting Indian gold hoards to London, and (2) the encouragement of massive monetary expansion (that is, inflation) in America as a means to lure gold away from New York, and convey it to sustain a steady flow of investment in Europe. By the mid 1920s, Austria (1922) and Germany (1924) were the first countries bailed out in this fashion, and the infrastructure of the latter was turned into a technological jewel. The modernization of Germany was consummated by unleashing speculative fury in America, whose public rushed to subscribe en masse reams of German securities between 1924 and 1929. Norman interrupted this speculative frenzy with the Great Crash of October 1929 to retain control of the last stages of the German incubation and the anticipated agony of Weimar.”[4]
The term “designed to self-disintegrate” reminds one very much of the crash of 2008-9:
“It is impossible to exaggerate the sheer idiocy of the financial machinery of the 2000s. To start with, leverage is extremely high—in the shadow banking world, often as much as 100 to 1. Moreover, the favored instruments, such as collateralized debt obligations (CDOs), are highly illiquid, or hard to sell in a pinch. Even worse, the preferred method for financing positions is in overnight and other short-term money markets, so there are horrendous asset-liability mismatches. Then those highly leveraged, illiquid, short-term–funded CDOs and similar securities are built from securities that themselves carry a high risk of default, primarily sub-prime and so-called “Alt-A,” or undocumented, mortgages. Finally, a new class of arcane credit derivatives, completely outside the purview of regulators, ensures that almost all bank portfolios are “tightly coupled” as engineers say, so failures in any part of the system will quickly propagate through the rest. An evil genie could not have designed a structure more prone to disaster.”[5]
The sad news is that the banking establishment looks set to ignite a second Great Depression, substantially worse than the one before[6].
[1] https://www.wsj.com/public/resources/documents/SenateReportonPools1934.pdf
[2] p.82 F. William Engdahl. “Gods of Money - Wall Street and the Death of the American Century
[3] pp. 363-365 “Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis
[4] p.139 Conjuring Hitler: How Britain And America Made the Third Reich”, Guido Giacomo Preparata
[5] pp.xvii-xviii The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, Charles R. Morris