The Stock Market Crash of 1929 – Part 2: Age of Illusion

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Hello and welcome to Conflicted, the history podcast where we talk about the struggles that shaped us, the tough questions that they pose, and why we should care about any of it.

Conflicted is a member of the Evergreen Podcast Network, and as always, I’m your host Zach Cornwell.

You are listening to Part 2 of a three-part series on the Stock Market Crash of 1929. As always, if you haven’t listened to Part 1, I’d recommend you do that, or you might find yourself a little lost in this next episode. But for those you who are all caught up, let’s take a second to refresh our memories on what happened last time before we jump back into the story.

In Part 1, we started to construct the stage on which this insane drama – the most cataclysmic financial disaster in history - is going to play out. We talked about how in the aftermath of World War One, the economies of both the winners and the losers were absolutely wrecked. The Great War made paupers out of the victors and vanquished alike, as Liaquat Ahamed writes in Lords of Finance: “No other war in history had absorbed so much of the wealth of so many nations at one time.”

But one nation fared comparatively pretty well amidst all the mud, blood and mustard gas: The United States of America. The Allies had borrowed huge sums of money from America to keep depots stocked and stomachs full during the War, and when the guns fell silent in 1918, Uncle Sam wanted his money back – with interest. That sudden and colossal shift of wealth made Wall Street the center of financial gravity for the entire Western world. As a Harvard Law professor named Zachariah Chafee Jr said at the time: “We have long desired to be the richest nation on earth, and now we are…”

We also talked about all the ways that the US was changing during the early 1920s. About the technological tidal wave that was reshaping American life at every social level. How exciting it was to simply walk outside and look around. There were cars zipping down the street – brightly colored automobiles in Easter Egg shades that had replaced the sluggish horse ‘n buggies of yesteryear. There were planes in the sky and radio waves in the ether, bringing information and people and entertainment from every corner of the globe. As one visiting Frenchman noted: “It was the country of Lincoln; it is now the country of Ford.”

The optimism was so thick you could cut it with a knife. Flush with cash, dizzy with post-war positivity, the American public started playing footsie with Wall Street and the stock market. That innocent game of footsie led to a back rub, back rub led to second base, and by the late 1920s the clothes were all over the floor.

If you’ll recall, Wall Street was a mysterious place to most Americans before World War 1, but Liberty Bonds introduced the wider public to the basic concept of investing. Now investing in government bonds – safe, predictable, boring government bonds - was one thing; but investing in stocks was where the real money was at.

Normally, playing with the big boys on Wall Street required a fat wallet and some serious connections. But Wall Street had crafted financial training wheels for any American with a few bucks to spend and a hunch to chase. One of the most important financial concepts we talked about last episode was the practice of “Buying on Margin”.

To review - “Buying on margin” essentially means you only have to put up a fraction of the cash for a stock purchase to enjoy the potential profits. Throw down 10 bucks and you can buy 100 bucks worth of stock. As long as the market keeps going up, you’re raking it in at an exponential rate. But if the stock price dips, and you can’t find more cash to keep your loan afloat, the broker sells your shares and you lose everything.

It was a very seductive proposition. As one neophyte investor marveled at the time: “it was contrary to the moral law of the universe, which prescribes that a man shall earn his bread by the sweat of his brow. But who could pass up such a chance to get something for nothing?”

We didn’t spend all of our time last episode hanging out with starry-eyed amateurs, though. In fact, we followed the early life of one of the most celebrated day-traders to ever prowl the hunting grounds of Wall Street. Last time, we met the principal character and anti-hero of our series:

Jesse Livermore.

Jesse Livermore, as you may remember, was born a corn farmer’s son in Massachusetts. And at 14 years old he snuck off the farm with five bucks in his pocket to pursue a career playing the stock market. Fiendishly intelligent and endowed with a supernatural knack for numbers, the baby-faced “Boy Trader” quickly became a Wall Street legend and a multimillionaire to boot.

But Jesse was a man who had it all and wanted more. His insatiable sex drive and thrill-seeking investment strategies made his personal life a minefield of bankruptcies and broken relationships. As the Stock Market Crash loomed on the horizon in 1929, Jesse was attempting to repair his marriage to his second wife Dorothy, or “Dotsie” as the wedding ring he’d given her said on the band. Trouble had been long brewing in paradise. For years, Jesse’s chronic infidelity had driven Dotsie deeper into the bottle, and their marriage was dangerously close to unraveling beyond repair.

But in the summer of ’29, Jesse and Dotsie tried to fix things. They each agreed to do their best to conjure up those early years of young love and heavy passion. Dots gave up the sauce, Jesse put away his rolodex of mistresses. Would it last? Only time would tell.

Aside from his personal life, the summer of ’29 was crucial to Jesse Livermore for one other very important reason. It was when he realized that the American stock market was going to collapse. He didn’t know when, he didn’t know how bad; But he just knew it. As we discussed last time, Jesse Livermore set his massive research team collecting market data, crunching numbers, and collecting intel from all over the financial world. When the storm hit, he was determined to fashion himself a golden life boat.

But Jesse Livermore was the exception to the rule. Most Americans believed the stock market would never stop soaring, that the good times would never end. Last episode, we talked about the prevailing psychology of the Roaring 20s and how it fueled a nationwide obsession with all things Wall Street. Brokers and bankers were household names, as famous as Cardi B or Gordon Ramsay. The accessibility to the stock market was greater than it had ever been; taxi drivers and bootblacks and mail men and line cooks were all playing the market, swapping tips and following hunches with an almost rabid devotion. It was fun, it was intoxicating, it was lucrative.

Working class Americans, many for the first time, came face to face with the revolutionary idea that they might not have to work until they dropped dead of old age. As one contemporary wrote: “… within this generation, it has become evident that unremitting toil is not necessarily a law of human destiny.”

The question on everyone’s mind was: how long could this last? The answer would come in September of 1929, when the first tremors of doubt and fear began to shudder through the global economy.   

When we left off last time, America was celebrating Labor Day in September 1929. The Dow Jones Industrial Average was the highest it had ever been. The beaches were packed, the shelves were stocked, the skies were blue. Unfortunately for an unsuspecting American public, their collective heads had just bumped against the ceiling. That first week in September of ‘29 was the highest the stock market would climb for the next two decades. The Wall Street bubble was about to rupture under the strain of its own enormous weight.

But before we pop this balloon, we need to take a hard look at some of the underlying problems in the American financial ecosystem that allowed the Crash to happen in the first place. The rats in the walls, the termites in the timber, the unseen frailties that began to buckle and eventually brought the whole house down.

This time, we’re going to be meeting some brand-new characters, high priests of Wall Street who, in their avarice and blind ambition, helped bring about this disaster. We’ll also meet some people who tried to use their position to make the world a little better, only to unleash a torrential downpour of unintended consequences. And of course, we will continue the saga of our imperfect protagonist, the cigar-smoking, flapper-finagling, stock-trading scoundrel, Jesse Livermore. 

So now that we’re all caught up on where we’ve been, lets hop in our Model-T’s and zip on down the road, shall we?  

Welcome to The Stock Market Crash of 1929, Part 2:  Age of Illusion

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There’s a story that’s been passed around the corridors of Wall Street for a very long time.

It’s a bit of an urban legend, actually. An anecdote, lovingly handed down from one generation of bankers to the next. Some people swear this story true. Others dismiss it as a bit of apocryphal cocktail gossip. But one thing is for certain, the person at the center of it was very, very real. And very, very important to our narrative.

This urban legend begins as many urban legends do. With a young man stepping into a scary new situation. The year is 1928. We’re in New York City, street level in the nerve center of the financial district. On Wall Street. As historian Maury Klein described it:

“Along this crooked street that ran downhill a mere eight blocks from the doorstep of Trinity Church on Broadway to South Street and the waters of the East River could be found not only the financial heart of the nation (and soon the world) but also an astounding array of related enterprises. Its buildings housed the offices of 91 major banks and 25 trust companies, the fiscal offices of 130 railroads, 57 life, 209 fire and marine, and more than 100 other types of insurance companies, 15 safe-deposit firms, 20 cable and telegraph companies, 50 coal and iron companies, and hundreds of industrial corporations.”

The wealth and influence of an entire nation, compacted and compressed into a tiny cluster of buildings and byways. Well, into this spider’s web, ventured a young salesman. We don’t know his name. We don’t know his age. We don’t even know what he looked like. All we know is that he was young, hungry, and ready to start his new job at the largest bank in the nation.

This young buck had scored a dream gig at National City Bank.

Now the name ‘National City Bank’ means nothing to most people today. You may have heard of its descendent, Citibank, but for most people, National City Bank sounds like just another bland name in a sea of blandly-named financial organizations. But in 1928, National City Bank was an absolute powerhouse. As historian Michael Perino writes:

“By the mid-1920s, City Bank wasn’t just the largest bank in the country, it was one of the largest corporations, rivaling in size U.S. Steel and American Telephone & Telegraph. Affiliate offices continued to spread across the country—there were sixty-nine in fifty-one cities in 1929—all connected by 11,000 miles of private wire. There were company offices throughout Canada and in London, Amsterdam, Geneva, Tokyo, and Shanghai.”

This young salesman walked up to the address he’d been given – 55 Wall Street – and gazed up at the imposing 8-story headquarters of National City Bank. Occupying an entire city block, decorated with two rows of classical Roman-style columns, it looked more like a palace than a bank, like some kind of ancient temple. And in some ways, it was a place of worship.

The young salesman can barely contain his enthusiasm. He made it. It was the beginning of a life-changing opportunity. He bounds up the steps, passes through the columns and starts his new job at the National City Bank.

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Weeks go by. The nervous energy of new faces and new routines eventually subsides, and the young salesman finds his groove. He likes it here. The energy is palpable, his coworkers are ferocious and motivated. It was like standing at the center of a bee hive.

And one day, as the young salesman is doing paperwork and following leads, he sees someone stride onto the floor out of the corner of his eye. A hush descends over the sales floor as a man parts the crowd of employees like Moses in the Red Sea. This man was in his early 50s, dressed in an immaculate pin-stripe suit. He was, according to Michael Perino:

“Tall and ruggedly good-looking. He had wavy hair, deep-set eyes, an “indomitable jaw,” and an athlete’s muscular body, with thick wrists and the hands of a “worker.” He exuded strength, not only physically, but mentally. He never wasted words and he always locked eyes with whomever he was talking to.”

If you need a modern-day actor comparison, think a slightly older Bradley Cooper.

Well, after a brief moment, a wave of recognition washes over the young salesman. He had seen this man before. In the newspapers. On the cover of magazines. This was his boss. Well, not his boss. his boss’s boss’s boss’s boss’s boss. This was the Chief Executive of the National City Bank, one of the most powerful titans on Wall Street, Charles E. Mitchell.

The newspapers preferred to call him “Sunshine” Charlie.

Like the name of the bank he ran, Charlie Mitchell has long since passed into historical obscurity. But during the Roaring 20s, he was one of the most powerful men in the world. The newspapers called him “Sunshine” Charlie Mitchell because of his famously optimistic outlook on the state of the American economy. If the stock market boom of the late 20s had a dancing, twirling, cheerleading mascot…it was Sunshine Charlie Mitchell.

Like Jesse Livermore, Charlie Mitchell had come from humble beginnings. According to Michael Perino, he hailed from a “shabby and unfashionable suburb of Boston on the northern bank of the Mystic River”. But ambition and talent had propelled him far beyond those middling origins. He was, according to Gordon Thomas and Max Morgan-Whitts: “a colossus of banking and a living example to every poor boy that America really was the land of opportunity.”

One historian proclaimed that he was “rugged individualism personified”  

It would have shocked his army of loyal employees to learn that as a kid, Charlie Mitchell had suffered from a debilitating stutter. But that speech impediment was long gone now. In its place was the silky-smooth baritone of a master salesman. Sunshine Charlie could sell ice to a penguin, sand to a camel, he could make you feel safe and warm and secure. With his pearly grin and broad shoulders, he looked like the captain of a champion lacrosse team – and talked like it too.

But before we fall too deep under the spell of Charming Charlie Mitchell, let’s not forget about who took us into National City Bank to begin with: the nameless young salesman. And now he is absolutely starstruck; he can’t believe it. THE most powerful banker in the world, THE Charlie Mitchell, is visiting the rank-and-file salesmen on the floor of his own bank. What a guy, what a motivator, what a leader!

But as the young salesman is watching Sunshine Charlie stride around the office. He notices something. Something pretty embarrassing. He notices that Charlie Mitchell’s pants are unbuttoned. His fly is down. The young salesman doesn’t know what to do – should he say something, should he keep his mouth shut?  Surely Mitchell would want to know if his fly was down and surely he would thank the man who discreetly told him. Hell, maybe he’d take a shine to such a thoughtful employee. Or give him a raise. Or a promotion!

So – the young salesman summons his courage and pulls his boss’s boss’s boss’s boss, aside. When he’s sure that other people are out of earshot, the young salesman gulps and whispers: “Sir, your trousers are unbuttoned.” Sunshine Charlie Mitchell’s famous grin hardened into a scowl. And the salesman’s heart sank like an anchor.

“You’re fired”, Mitchell says.

And just like that, the young salesman’s dream gig went up in smoke. He was told to pack up his desk and get the hell out of 55 Wall Street. All because of an unzipped fly. As they say, no good deed goes unpunished.

That story has been told on Wall Street for going on 100 years. Is it true? Did an amateur bond salesman really have the balls to take Charlie Mitchell aside and tell him his pants were unbuttoned? And was Mitchell so heartless and vain that he terminated the kid on the spot? It’s hard to know for sure. But whether it happened or not isn’t really important. What is important, is that Sunshine Charlie Mitchell was very real, his bank was very big, and it was doing very revolutionary things in the 1920s.

Before the 1920s, National City Bank was just another boring commercial bank. It was a place you went to deposit your savings, cash your paychecks, maybe get a short-term loan if you’re feeling really adventurous. It’s safe, it’s stable, and about as exciting as white bread with a glass of milk. The real money - the real margins -  well, that cream was being skimmed at the private investment banks. The invite-only firms like JP Morgan who loaned millions upon millions to governments, corporations, and tycoons alike. Boring old commercial bankers had an invaluable role to play in the national economy, sure, but investment banking was its own, separate world of exclusive clubs and fat profits.  

Sunshine Charlie changed all of that.

Charlie Mitchell had a vision. An idea. What if you could take the broad customer base of a commercial bank like National City and combine it with the huge profit margins of an investment bank like JP Morgan? What if you could get all those hundreds of thousands of people who put their savings in National City Bank to turn around and invest that money in bonds and stocks and securities that the bank’s affiliate offered? That money didn’t have to sit there, safe and boring and useless. It could be earning for both the customer and the bank. Preferably the latter.

All those Average Joes just needed the right push. The right pitch. If any neophyte salesman at National City got cold feet about this end-goal, Mitchell would take them up to the top floor of the building and point a beefy finger down at the bustling streets of New York:

“Look down there! There are six million people with incomes that aggregate thousands of millions of dollars. They are just waiting for someone to come and tell them what to do with their savings. Take a good look, eat a good lunch, and then go down and tell them.”

As the Roaring 20s started purring to life, as the economy boomed and incomes rose, as the middle class expanded and optimism swelled, Sunshine Charlie put his iconoclastic vision into action. Historians Gordon Thomas and Max Morgan-Whitts set the stage:

When he started with the National City Company, its staff consisted of a typist, a clerk, and an errand boy. By 1929 Mitchell had transformed it into an organization with a staff of 1,400—350 of which were salesmen—and branch offices in fifty-eight cities. He was in his element, a financial emperor, dynamic, optimistic, and insolent. Mitchell sent out his salesmen in all directions. He preached at them, bullied them, bribed them. He taught them to lay in wait outside bucket shops, nightclubs, and inside railway terminals, arguing that a good salesman could sales-pitch a customer between the time he bought his ticket and boarded the train. Some salesmen even worked the transcontinental expresses. Mitchell had them knocking on the doors of rural homesteads as if they were selling Fuller brushes or vacuum cleaners. He devised contests that set them at each other’s throats. And above all, he held over their heads the threat of dismissal if they failed to meet their quotas.

Charlie Mitchell was a terrifying person to work for. He was a force of nature; single-minded and cruel and unforgiving. He would not hesitate to insult, to shame, to humiliate his employees in the never-ending quest for leads and results. As one salesman remembered, a motivational speech from Sunshine Charlie “sounded as if Attila the Hun had coupled with one of the Borgias to create their own Nero.”

Mitchell walked six miles to work every day. It’s not like he couldn’t afford a private car or a chauffeur, he just preferred to walk. It kept his body fit, his heart healthy, and his mind sharp.  Didn’t matter if it was raining, sleeting, snowing or shining, he walked to 55 Wall Street every day. It was less of a work ethic, and more of a religious devotion to the altar of productivity. Sunshine Charlie was the stuff LinkedIn wet dreams are made of. The phrase “work-life balance” would’ve have been as foreign to him as a verse of the Quran.

On one of his long six-mile walks, Charlie Mitchell would’ve certainly ruminated over the regrettable limitations of his sales staff. There were only so many bond salesmen he could employ, so many places they could go, so many leads they could follow, so many hours in a day. Thankfully, National City was embracing a powerful new tool of mass communication.

Advertising.

Today, the average person consumes so much advertising in a single day that we are all marketing connoisseurs without even realizing it. From birth, we have been submerged in an omnipresent ecosystem, advertising of every color and code and contour; And because of that, we know instinctively when we are being advertised to. We are equipped with finely-calibrated bullshit detector; an innate cynicism and distrust for the manipulations of modern advertising, one that develops like a muscle after consuming thousands upon thousands of marketing messages every year. In many ways we have been inoculated against some of the more transparent tricks of the trade. Advertising has been forced to constantly evolve to keep up with an increasingly savvy consumer.

People back in the 1920s…did not have that. Most Americans took marketing at face-value. Advertising was education. Copy was fact. Mascots were trusted friends. That gullibility, as fleeting as it was, was exploited to the max by Madison Avenue copywriters and the Wall Street Bankers that contracted their services. It was a new golden age, where advertising first became an art form unto itself. As a radio personality named Helen Cass sermonized in 1923:

“Sell them their dreams…. Sell them what they longed for and hoped for and almost despaired of having. Sell them hats by splashing sunlight across them. Sell them dreams—dreams of country clubs and proms and visions of what might happen if only. After all, people don’t buy things to have things. They buy things to work for them. They buy hope—hope of what your merchandise will do for them. Sell them this hope and you won’t have to worry about selling them goods.”

Like a blinding beam of hallelujah light, Sunshine Charlie saw the massive potential of advertising for National City Bank and its bond-hawking affiliate, National City Company.

After all, Wall Street was a scary place for the average middle-class investor. These were shark-infested waters, and the little fish needed a friend, a helping hand who could guide them through the confusing terminology and incomprehensible jargon. National City Bank was going to be that trusted friend.

All across America, people were flipping through full-color catalogues; and right next to print ads for radios, refrigerators, and soap, were ads for National City Company, the bank’s securities affiliate. These glossy, full-bleed, full-color pitches dangled the prospect of easy wealth in front of millions upon millions of people.

National City Bank was a one-stop shop. Not only could you deposit your checks, get a loan, or build your savings…you could use that money to invest – in bonds, stocks, securities offered by the very same bank. And best of all, you could rest assured that these investments were hand-picked by the most knowledgeable and trustworthy men on Wall Street. You didn’t have do the research. National City would do it all for you.

As one ad for National City read: “National City judgment as to which bonds are best for you is based on both strict investigation of the security and analysis of your own requirements.” These ads went on to encouraged customers to be : “as frank and open in discussing his investment problems as he is in discussing legal problems with his lawyer or his health with a doctor.”

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Historian Michael Perino explains: “Indeed, the National City Company was pitched as a time-saving device, no different from the washing machines and vacuum cleaners then flooding the marketplace.” Slowly but surely, Sunshine Charlie’s vision became reality. The money came rolling in as National City sold securities like, in Mitchell’s words, “so many pounds of coffee.”

As one historian put it: “According to Mitchell, National City Bank’s job was no different than Ford’s. It didn’t manufacture cars; it manufactured another kind of consumer product—investment securities.”

This revolutionary, quasi-legal, incestuous fusion of commercial and investment banking took Wall Street by storm, and before long, other banks followed Sunshine Charlie Mitchell and National City into the fray. As Thomas and Morgan-Whitts write:

A man-to-man approach was adopted: a bank manager was depicted as a friendly fellow with unlimited cash to alleviate any anxiety; a broker was the middleman, there to “help you make your fortune.” Big business took on human characteristics: friendliness, tolerance, and sympathy—all to attract more investors. It worked; money flowed into Wall Street.”

But the lingering question of course is…were any of these investments solid? Were the good neighbors at National City really keeping their customers best interests at heart like the billboards and magazine ads promised? The answer, courtesy of Thomas and Morgan-Whitts:

Driven ever on by Mitchell, his salesmen sold the American public $15 billion worth of securities in nine years. They sold the stocks of automobile companies which almost immediately went broke; they sold the bonds of South American republics on the verge of insolvency and revolution; of Bavarian community schemes that had no hope of materializing; in companies launching cloud-cuckoo-land plans in Switzerland, Austria, and the Benelux countries. And they sold stock in their parent company, the National City Bank—making a mockery of the law expressly forbidding that.”

In short, National City Bank ads were attracting hundreds of thousands of customers with promises of convenience and expertise. When the tellers were done depositing your cash, they delivered you into the hands of Mitchell’s legion of bond salesmen at the securities affiliate, National City Company, who sucked the suckers dry with dubious investment opportunities.

It was, to quote John Brooks: 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.

Was it unethical? Absolutely. Was it illegal? Not in the slightest. As one businessman scoffed:

“Let the buyer beware. That covers the whole business. You cannot wet-nurse people from the time they are born until the day they die. They have got to wade in and get stuck and that is the way men are educated and cultivated.”

In other words, if you’re stupid enough to get suckered out of your money, you had it coming.

As historian Maury Klein observes: “It was vulgar beyond words; to its practitioners, profitable beyond belief.”

In less than a decade, Sunshine Charlie Mitchell had changed the landscape of American banking. And when an insolent, pimple-faced salesman had the nerve to tell him his pants were unbuttoned one fine day in 1928, he gave less thought to canning that kid than he would have swatting away a mosquito.

People, at the end of the day, were disposable to Charlie Mitchell. Whether they be investors, clientele, even his own sales staff. All these people, these little people, were fuel for the Bull Market. Shovelfuls of human coal to be tossed year after year into a white-hot market boom. Times were good for Wall Street. The 1920s were coming to a close, the market was soaring, and if Sunshine Charlie had anything to do with it, the 1930s would be a perpetual summer, a paradise of fat profits and gullible investors. He wasn’t the only banker who helped sustain an unsustainable bubble, but he was the most famous.

Charlie Mitchell was a bull among bulls. But just as every chess piece has its counterpart, every cobra has its mongoose, every yin has its yang, Sunshine Charlie had his inverse as well. For all his bullish optimism, one very well-informed bear was sitting on the sidelines; a pessimist diligently preparing for a rapidly-approaching winter.

Jesse Livermore.

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It’s early October of 1929.

We’re in Great Neck, New York; in a massive waterfront mansion nestled on the Northern shore of Long Island.

This house is…huge. Eleven sprawling acres of Georgian colonial architecture and neatly manicured gardens, attended by a small army of servants, cooks, butlers and groundskeepers. The place was opulence incarnate, and could’ve easily doubled as the fictional funhouse of one Jay Gatsby.

But this mansion belonged to a much more real, much more influential family. This was the primary residence of Mr. and Mrs. Jesse Livermore and their two small boys. The Livermores had apartments in the city and summer cottages in Palm Beach, but Great Neck was home. Jesse had bought the place back in 1923, and he’d soon christened the estate “Evermore”, as a testament to the undying love and eternal fidelity between he and his pretty young wife.

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‘What a joke’, thought Dotsie Livermore, as she poured herself a third glass of white wine.

Dotsie liked to start most evenings with a bottle of white wine. It was refreshing, delicious, but more importantly, it was strong. After the first bottle was gone, she’d open a second. About halfway through the that bottle, her tastebuds usually started craving something with a little more bite. At which point, she switched over to whiskey. She usually made it halfway through the whiskey before the servants put her to bed in a state of incoherent belligerence.

Prohibition had been the law of the land for almost a decade, but for someone as rich as Dotsie Livermore, it was a minor speed bump on the daily odyssey into the depths of the bottle.  As she liked to say: “Prohibition was a condition for people who did not have connections. ”Dotsie loved her booze so much that she even used a chunk of her husband’s stock market profits to build her own personal distillery, where a small staff concocted bootleg liquor and beer for their very thirsty employer.

Living life pickled in whiskey hadn’t done Dotsie’s health any favors. She was only 33 years old, but she looked much older, a shadow of the vivacious showgirl she had once been. As the white wine in her glass disappeared over the course of the evening, she often found herself thinking back to a different time. A magical time. Before she’d become shackled to the bottle. Back when the world seemed new and the future glittered with possibility.

Back then, in 1918, she’d been a 22-year-old dancer in a famous Broadway act called the Ziegfeld Follies. Only the most gorgeous girls in New York were chosen for the act. Dotsie not only made the cut, she stole the show. Before long, slim young men with big fat wallets were pursuing her after every show. Dotsie would bat her bottle-green eyes at them and disappear into a dressing room.

But one day, in 1917, a different sort of man knocked on her door. He was rich, like all the others. And he wasn’t particularly handsome; he had a weak chin, pale skin, and thick Boston accent. He was twice her age. But when he ran his hand through his slicked-back blonde hair and offered to take her out on the town, Dotsie’s shell cracked. There was something special about this guy.

His name was Jesse Livermore. But all my friends call me “JL”, he said.

The romance between Jesse and Dotsie roared to life like a bonfire, and 18 months later, those green eyes were misty with joy behind a white wedding veil. At this point in her trip down memory lane, Dotsie might’ve poured herself 4^th glass of white wine and suppressed a bitter laugh at her own expense. What a stupid little girl, she thought. That white dress had become her straightjacket.

But for a while, in those early days, life with Jesse seemed like a playground. He was so, so smart, and charming, and funny, and unpretentious. He could spend money like a sultan, but he came from a corn farm in Massachusetts. That was something a work-class stage girl like Dotsie could appreciate. It didn’t take long for the pitter patter of little feet to start echoing through the Livermore residence. Dotsie gave birth to two boys, one after another. The eldest named Jesse Jr, and the younger named Paul– both pint-sized doppelgangers of their blonde, fair-skinned father.

Dotsie may have come up cashing checks as a Broadway showgirl, but she grew very comfortable, very quickly at the helm of her husband’s vast fortune. Her love language was “stuff”, and Jesse enjoyed spoiling his young wife with lavish gifts. When they bought the house at Great Neck, the palatial estate dubbed “Evermore”, Jesse presented Dots with a blank check and told her to fill it with whatever she wanted.

A few years later, Dotsie decided that she wanted her children to learn French. So she fired the entire staff and had them replaced with French-speaking servants. The only problem was, they didn’t speak a lick of English. And Jesse came home from his office in the city to find a staff that he couldn’t communicate with. Eventually, Dotsie realized the impracticality of this arrangement, fired the French staff, and had all the old servants hired back.

Jesse didn’t care all that much. Money was no object. Price was irrelevant. Whatever his young wife wanted to maintain her happiness, raise his boys, and keep the house in order, well that was fine with him. But the Livermores would soon discover that although wealth can make life easier, it can make you a target too.

On a Sunday evening in 1927, May 29^th to be precise, Jesse and Dotsie were fast asleep in the master bedroom at Evermore. The boys were dozing in their rooms.  All was quiet and calm. No one heard the two armed men sneaking through the grounds. No one heard them cut the phone lines, or scale the house with a ladder. No one heard them creep down the hallway to the master bedroom. Jesse and Dotsie bolted awake as the two men burst into their bedroom waving a .45 caliber pistol in front of their faces.

They were burglars, but they didn’t look like burglars. They wore suits and ties. They were…polite. As Jesse remembered: “The burglars seemed not only without fear but in no hurry. They didn’t even modulate their voices.”

The Livermores were still in their PJs when the thieves tied their hands and feet, and went to work looting the house of all its jewels and trinkets. The Livermores were famously, obscenely rich, and these two men had summoned the audacity to rob them blind. Before they left in a getaway car, one of the thieves pulled two sapphire rings off Jesse’s fingers, and then – to everyone’s astonishment – Dotsie stands up and looks the them straight in the eye. She doesn’t cry or scream or beg, she turns on the charm. She asks the burglars to give the rings – worth 70 grand – back to “Pops”, back to Jesse.  As Livermore remembered with a smile:

That was almost funny. My wife, as far as I could remember, never refers to me as ‘Pops,’ but she tried it on with those two burglars: [this is him quoting Dots] ‘Now give “Pops” back his ring and stones. I gave them to him and we think a lot of them’ and, sure enough, they gave them back.”

The polite, smartly dressed burglars then left the house and drove off into the night with $100,000 worth of jewels. The robbery was a national news story. It was on the front page of the New York Times that following Monday. Because of Jesse’s success on the stock market, the Livermores were public figures, and the press was fascinated. The thieves were quickly caught and convicted, but it had been a traumatic experience for Jesse and Dotsie.

In the moment, Dots had been brave and audacious, but being held up at gunpoint and tied up her own home had rattled her deeply. As a result, her wine glasses started to get a little bit fuller in the years that followed. But there was another, far crueler crime being perpetrated in the House of Livermore. And it was happening in plain sight.

Jesse had always loved girls. Always, and all kinds. Blonde girls, brunette girls, red headed girls. Tall girls, short girls, slim girls, curvy girls. He’d slept with half the showgirls in the Ziegfeld Follies before he met Dotsie and decided to put a ring on it. Dotsie’s ultimate mistake, was thinking that he would ever stop. Thinking that his devotion to her could ever overpower his constant, compulsive need for a little slice of strange.

At first, she tried to ignore it. Tried to convince herself it wasn’t happening. She was being paranoid, irrational. The perfume clinging to his suits, the long nights at the office, the strange bills for hotel rooms – all of it had an innocent explanation – surely. This man - this intelligent, unpretentious, devoted man – would never do that to her. But little by little, year by year, the fiction Dotsie clang to began to unravel. The husband that she imagined Jesse to be, was just a mirage.

Every year, she noticed changes in the mirror. A wrinkle there. A bit of flab there. She could see the 22-year-old showgirl evaporating in front of her eyes. One gossip columnist had the nerve to write that she was getting “plump”. How could she ever compete with revolving stable of perpetually perky girlfriends that Jesse hid away in his downtown love nests.

Eventually, Dotsie began asking questions. She began confronting Jesse about her suspicions. He’d run a hand through his ash blonde hair and swear, promise, vow to her that nothing was going on. And with every lie, every half-truth, every excuse – the Livermore’s marriage died a little bit at a time.

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For Dotsie, it was humiliating. On some days, she would force her way into Jesse’s office on Fifth Avenue, screaming and shouting about his cheating. One time she had to be physically removed by the Livermore’s driver. And as humiliating as it was, Jesse’s deceptions went far deeper than Dotsie could have ever known. According to biographer Tom Rubython, she was

“only scratching the surface, which, underneath, would reveal a web of girlfriends (maybe as many as half a dozen) who her husband was financially supporting.”

To cope with the infidelity, she threw herself into the warm embrace of the bottle. But being constantly wasted only exacerbated the tensions with Jesse, and he used her alcoholism to rationalize his cheating. In 1929, they’d tried to wipe the slate clean and start over, but like a tall glass of white wine…it was too good to last. By the fall, they were both off the wagon once again. Hurting and hating one another at the lonely Gatsby-esque house at Great Neck. For Dotsie, the Evermore estate was more of a prison than a palace.

But then, sometime in 1929 – She met someone.

In a stunning twist of irony, Dotsie Livermore started an affair of her very own, with a 25-year-old Prohibition agent named Walter Longcope. Agent Longcope didn’t want to bust Dotsie, but he did want to take her out. This new relationship was a like a breath of fresh air for Dotsie Livermore. Walter was everything Jesse was not. He was young, he was affectionate, and he was absolutely devoted to Dotsie. It didn’t hurt that she was able to shower him with gifts paid for with her husband’s stock profits.

The Livermore marriage was not long for this world. Neither Jesse or Dotsie was invested in the union anymore. The kids were still young, and stability would be better for them, but at the end of the day, if it came to divorce, there would be no love lost between either party.

But Jesse Livermore had bigger things on his mind that fall than a doomed marriage.  

By this point, he was almost positive that the Stock Market was about to crash. But that foresight was worthless unless he could predict roughly when it would crash. And to predict when it would crash, he needed lots and lots of information. As mentioned last episode, he had a staff of sixty men and women working around the clock to pull together research and investigate the contours of the bubble he suspected was about to burst. Livermore explained years later:

“Prices kept going up and that meant that the end of the bull market was drawing nearer. I did not look for the end on any fixed date. That was something quite beyond my power to determine. But I needn’t tell you that I was on the watch for the tip-off.

Jesse thought of himself as a doctor. And his patient was the American stock market. In doing all this research, all this probing and digging, he was trying to diagnose the disease that was silently metastasizing inside the country’s financial organs. Not so he could cure it, but so that he could profit from it. As he said:

“The training of a stock trader is like a medical education. The physician had to spend long years learning. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct – and that depends upon the accuracy of his observation – he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull’s-eyes.

One of the sharpest scalpels in Livermore’s metaphorical medical bag, was a relatively new innovation in the world of telephone communications: transatlantic calls.

Beginning in 1927, it was now possible to make a call from New York all the way to London. The service was, as Tom Rubython writes: “hideously expensive. The calls were transmitted by radio and the tariff was $25 a minute with a three-minute ($75) minimum. Livermore’s monthly account for long distance calls was running at $15,000 to $25,000 a month as he continually phoned contacts in San Francisco, Paris, London and Berlin, sometimes twice a day, weaving his way through the time differences.”

But that ridiculous price tag was well worth it. Jesse needed to know what was happening in the wider financial world before anyone else. It was a striking image, as Rubython describes: “Livermore sat in a jungle of telephone wires, his sharp blue eyes glued to the private board, which recorded the minute-by-minute gyrations of his vast paper empire.”

Every night, a telephone rang in London. And every night, Jesse Livermore got a quick and dirty dossier of the latest insider gossip, looking for clues and warning signs. It was significant that Livermore’s keen eyes were so fixed on events in London. Because it was in London that one of the many seeds of the boom had first been planted years earlier.

In the aftermath of World War One, two friends - two bankers - entered into a sacred pact to rebuild Europe and lift it from the ashes of post-war poverty. They thought they were making the world a better place; instead, they built a ticking time bomb that would detonate in October of 1929.

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As we continue to pick through the wreckage of the Roaring 20s, trying to find definitive causes of the Stock Market Crash, it’s very easy to become fixated on the mania. The psychological obsession with stock trading that enticed working-glass guys to dump their entire savings into investments bought on margin, peddled by Bullish cheerleaders like Sunshine Charlie Mitchell and amplified by Madison Avenue dream weavers.

And all of those things are very important links in the chain leading over the cliff, but another important link in that chain was hammered into existence by a much more sober, respectable financial institution.

The Federal Reserve.

Now when I say “Federal Reserve” I can almost hear thousands of thumbs hovering over the pause button. For most people, learning about the history of the Federal Reserve ranks slightly above a trip to the DMV and slightly below a root canal on the appeal scale.

What is it? Who are these people? What do they do and why do they do it? What does a central banking system with all of the entertainment value of fresh wallpaper have to do with our story? Well – a lot actually. But rather than talk about it in broad, impersonal terms, rather than hold you captive on a tour into the catacombs of Federal Reserve history.…we’re going to take a slightly different tack.

To understand the Federal Reserve’s role in the Wall Street Crash of ’29, I’m going to tell you a story about two best friends. The world of international banking is a famously unsentimental place, but somehow, in the early 20^th century, an authentic, warm, and honestly sweet, friendship blossomed between the leaders of two central banks.  

Benjamin Strong of the New York Federal Reserve Bank. And Montague Norman of the Bank of England.

Benjamin and Montague. Ben & Monty. They were two weird, lonely guys who somehow found each other and forged a lifelong correspondence. This friendship, this bond, ended up shaping the trajectory of the entire world economy, eventually culminating in the Stock Market Crash and a global depression. As they say the road to hell is paved with good intentions, and these two BFFs merrily skipped down that road, taking the rest of us along with them.

Let’s begin with Montague Norman.

Imagine you’re walking down the streets of downtown London in the 1920s. You’re walking along, minding your own business, and then you see a man strolling down the sidewalk towards you. He’s an older gentleman, tall and thin as a light pole, with a snow-white goatee and a black top hat. Every step is accompanied by the clickety-clack of a long cane. As he passes you, you feel the gentle swish of the long black cape attached to his shoulders. In short, he looks a little bit like a bizarre cross between the KFC Colonel and a Sherlock Holmes supervillain.

This is Montague Norman. And he was, as historian Liaquat Ahamed writes: “the most prominent and powerful banker in all Europe, if not the world.”

Montague Norman did not have a lot of friends. He was kind of a weird guy; the euphemism at the time would’ve been “unconventional”. Today we might say he was a bit awkward and antisocial. Believe it or not, grown men in capes were considered as silly in 1929 as they are today, but for Montague, being alone was nothing new. He had been a loner for most of his life.

Montague came from an old English banking family. His Dad had been a banker, just like his Dad before him. But from the jump, Monty was an odd duck. As Ahamed writes: “from his early childhood, he had never quite seemed to fit in. He was sickly from birth and as a boy suffered from terrible migraines. His emotional and highly strung mother, herself subject to depressions and imaginary illnesses, fussed over him excessively. [… he goes on] Montagu did not excel in the atmosphere of competition and athleticism, and was a misfit—lonely, isolated, and generally moody.”

So, this lonely boy, heir to an unimpeachable pedigree, spent years trying to find himself. He went to college, dropped out. Traveled around Europe, got bored. Did a stint in with the army in South Africa, got sick and shipped back home. Montague was person who was adrift. He didn’t seem to belong anywhere. His long list of mental illnesses made life even harder for him, according to Ahamed:

“He displayed the classic signs of manic depression: periods of euphoria followed by severe despondency. Normally one of the most charming of companions, when afflicted by one of his black moods, which could last for weeks, he would become extremely irritable, indulging in tantrums and lashing out irrationally at anyone and everyone around him.

Montague searched for meaning and relief in every book and nook he could find. He studied Chinese philophers like Lao Tzu, dabbled in spiritualism, and experimented with obscure meditation techniques. This unique grab-bag of influences gave Monty a sense of peace and calm that he’d been searching for his entire young adulthood. He would always be anxious, nervous and emotional – but at least now he knew how to control it, and he could function in society.

By the time he was in his thirties, Montague’s soul-searching days had to come to an end, and he found himself sucked back into the life that had been laid out for him at birth: a career in banking. But to his pleasant surprise, the structure and heavy workload at the Bank of England allowed him to actually step back and breathe and focus. His colleagues laughed under their breath at his unusual behavior and made fun of his cape, but they couldn’t argue with his work ethic. He rocketed through the ranks. He was a director by 1907, and a few years later he was at the top of the pyramid, Governor of the Bank of England.

In 1916, Montague Norman was 45 years old. Europe was 18 months into World War 1, and it was the single most important preoccupation of every banking official from Belfast to Budapest. Industrialized warfare had transformed the frontier between France and Germany into one gigantic bonfire, and the GDP of England was being shoveled into the flames to sustain the fight against the Reich and her allies. But London and Paris had allies too – powerful benefactors from across the Atlantic – who sent a delegation to discuss the coordination of financial policy.

It was in February of 1916 that Montague Norman first met Benjamin Strong, governor of the New York Federal Reserve Bank.

Montague Norman, with his eccentric long cape, twirly mustache and Chinese meditation techniques, did not look or act like a banker. But Benjamin Strong looked exactly like a banker. Clean-shaven. Perfectly-parted hair. Crisp suit, sharp tie.  

You know those people who make the exact same face in every picture? No matter the angle, no matter the situation, no matter the company – in every photograph, they’re always making the exact same face. Ben Strong was like that. If you look up pictures of Ben Strong, he always looks as if, seconds before the picture was taken, he’d bitten down hard on a lemon.

Every picture of Ben Strong, he is scowling. Glaring. Lips pursed together in a tight, thin line. He looks austere, angry, you might even say grim. Today we would say that Ben had ‘resting bitch face’. But Ben had every reason to be grim and distant with people. That icy mask he showed the world was hiding a lifetime of unimaginable emotional and physical pain. He was, as one historian put it: “wracked with secret sorrows”

Ben was born in 1872 to a middle-class New York family, “endowed with every advantage except wealth” as historian Maury Klein puts it. His parents saved up enough cash to send all his older brothers to Princeton, but the time Ben was shopping for textbooks, the college fund had completely dried up. No fancy degrees for Benjamin Strong.

Ben wasn’t as brilliant as Jesse Livermore, as charming as Sunshine Charlie Michell, or as well-connected as Montague Norman, but he was a hard worker. And he worked his ass off to hammer his way into the blue-blooded boys club of professional banking. He got in good with the right people, and before he knew it, he was on the fast track to prosperity. The cherry on top was his pretty new wife, Margaret.

They were young, in love, and were popping out babies faster than Catholic rabbits. But in May 1905, Ben Strong got a call at his office during the work day. Margaret, unbeknownst to anyone, had been suffering from an extreme case of post-partem depression. That morning, after Ben left for work, she loaded a bullet into the family revolver, put it against her head, and pulled the trigger.

Margaret’s death hit Ben like a freight train. He’d gone to work that day a happily married man. And when he came home that night, he was a single Dad with four little kids. A tragedy like that is more than enough to shatter the average person into a thousand pieces. But Ben Strong’s string of bad luck was only just beginning. Less than a year later, his eldest daughter abruptly caught a bad case of scarlet fever. Now, scarlet fever has a pretty low mortality rate – it’s usually less than 1%. But Ben’s little daughter wasn’t able to pull through, and she died.

With the help of friends and colleagues, Ben successfully navigated the blackest corridors of his grief, and less than two years later, he met someone new. A shy young heiress named Katharine. By 1907, he was married again, with two more kids on the way. Things were good for a while, but like all good things, Ben’s happiness had an expiration date. Nine years after he met Katharine, their marriage fell apart and she left him, taking the two young kids with her.

By 1916, Ben Strong had lost one wife to suicide, another to neglect, and a daughter to disease. Two broken families and five estranged kids. Things didn’t seem like they could get much worse. And then…his doctor called. “Ben, old buddy, are you sitting down? Well, you might want to sit down. We got your tests back…and I hate to tell you this, but you have tuberculosis”

Tuberculosis sounds like a quaint old-timey disease to modern ears, but in the early 1900s it was a death sentence. Basically, tuberculosis attacks the membranes of your lungs and eats away at your ability to breath. At the time, half of all people who contracted tuberculosis, or the “consumption” as it was called, died within five years. It was incurable. You could delay, prolong, keep it at bay, but sooner or later, it would shred your lungs to mulch. Ben Strong got his diagnosis when he was 44. From that moment on, he was living on borrowed time. As Maury Klein writes: “He had lost two families and his health, and was never to regain either of them. His only consolation was work, into which he poured his imposing intellect and the remnants of his energy.”

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And in February of 1916, work was taking Benjamin Strong to London.

Europe was at war, Great Britain was bleeding cash, and the Brits needed a helping hand from their Yankee cousins across the sea. Just before Franz Ferdinand caught a Serbian bullet in Sarajevo, Benjamin Strong had been tapped to run the New York Federal Reserve Bank, the most powerful of twelve regional banks that answered to the newly created Federal Reserve Board in Washington D.C. It was an important, but thankless job, as economist John Galbraith writes: the regulation of economic activity is without doubt the most inelegant and unrewarding of public endeavors.”

As the head of the most powerful branch of America’s central banking system, Benjamin Strong was arguably the most influential financial figure in the country. When he arrived in London, he was greeted by a menagerie of blue-bloods from the Bank of England. He shook their hands one by one, until finally arriving in front of a tall, eccentric guy wearing a cape and sporting a snow-white goatee.

In February of 1916, Ben Strong and Montague Norman shook hands in London for the very first time. They had nothing in common, and yet everything in common. They were two lonely guys, middle-aged bachelors who didn’t have much to live for besides work. And from the get-go, something just clicked. They had the same sense of humor, the same philosophy about financial policy, they even liked the same vacation spots. They got along famously. As historian Scott Nations writes:

“Norman, profoundly troubled of mind, and Strong, profoundly weak in body with tuberculous, became best of friends once they were thrown together by their work at their respective central banks.”

As millions of men died in the trenches of Europe and the Great War came to an ugly conclusion, a friendship that would influence the future of the western hemisphere blossomed into existence.

Monty & Ben wrote letters to each other as often as professional courtesy would allow. They stayed at each other’s houses when visiting on official business. They vacationed together in Maine and the south of France. The letters could be shockingly informal and affectionate for a pair of banking colleagues. Montague addressed Ben as “Dear Strongy”; Ben addressed Montague as “Dear Old Man” or “Dear old Monty”. They exchanged inside jokes and playful correspondence, as Liaquat Ahamed writes:

“At times, they sounded like a couple of harmless old bachelors who took great pleasure in joshing each other.”

But as light-hearted and warm as their interactions could be, Monty & Ben - the banking BFFs – had a very serious task ahead of them in the wake of World War One. We’ve already alluded to this multiple times but Europe’s economy was absolutely wrecked after the war. Rebuilding it would take no small amount of creativity and collaboration between America and Great Britain. As Ben wrote to Montague in 1918:

“There is no doubt, that much of the world’s happiness in the future will depend upon the relations now being established between your country and ours.”

But how to rebuild the world’s happiness after four years of war, millions of lives lost, and billions in capital down the drain? In a word? Gold. Or to be more specific, the gold standard.

Now, what the hell is the “gold standard”?, you might be asking.

Well back in Ben & Monty’s day, the entire world economy – of which London was the “conductor of the orchestra” as one historian put it – was organized around the fundamental principle that gold meant money. And money meant gold. The value of a nation’s economy, and by extension its currency, was directly proportional to the amount of literal, physical gold bullion it had in its vaults.

Basically, every country has a chest full of gold, and the bigger the chest, the more their currency was worth. The value of the dollar, the pound, the mark, the franc – it was all fixed to the amount of gold each nation had. But what happens when you need to spend more money than you have gold in your vaults? What happens when, say, a World War breaks out and you need to buy a looooot of weapons and a loooot of raw materials, really, really fast?

Well, in that situation the gold standard is not a foundation; it’s a pair of handcuffs.

When WW1 broke out, the nations of Europe said bon voyage to the gold standard so they could print money without all those pesky parity issues. Gold gushed out Britain and France, chasing a safe harbor as the Allies struggled to finance the war effort. And all those shiny bars started stacking up in the vaults of the US Federal Reserve. When the war ended, the gold did not come flowing back.

As Maury Klein writes: At the war’s end the gold standard was gone, and with it the old rules of international finance. With London no longer able to exert leadership, the United States found itself in possession of half the world’s gold supply and a new role as its leading monetary power.”

Historian Liaquat Ahamed dramatically illustrates the imbalance: “By the mid-1920s, the United States was the only large country where one could still find gold coins. The concentration of the world’s key precious metal in the United States had left the rest of the world with insufficient reserves to grease the machinery of trade. The world of the international gold standard had become like a poker table at which one player has accumulated all the chips, and the game simply cannot get back into play.”

There were many people, even back then, who believed the world economy had outgrown an antiquated system like the gold standard. Legendary economist John Maynard Keynes called it a “barbarous relic”. Liaquat Ahamed agreed, writing almost 100 years later: “The almost theological belief in gold as the foundation for money was so embedded in their thinking, so much a part of their mental equipment for framing the world, that few could see any other way to organize the international monetary system. […he continues] “It was one of the pillars of a free society, like property rights or habeas corpus.”

Montague Norman, by this time Governor of the Bank of England, and Benjamin Strong, de facto leader of the Federal Reserve, were devoted acolytes of the gold standard. And they believed that returning to it was the only way to save the world economy; to restore prosperity, normalcy and happiness to Europe - and by extension the world. As one historian wrote: “the past appeared to offer tranquility.”

Ben Strong’s tuberculosis-weary shoulders were loaded down with a staggering amount of responsibility and influence. According to one historian: The Fed, which barely existed in 1914, now sat on the largest reservoir of gold bullion in the world, making it potentially the dominant player if and when the international gold standard was restored. […he goes on…] the Federal Reserve was so flush with gold that it had gone from being the central bank of the United States to being the central bank of the entire industrial world.”

So - Monty & Ben – banker BFFs - took it upon themselves to work together to redistribute the poker chips to the rest of the table. And the player first in line to be cashed back in, was Great Britain. Montague Norman was desperate to get his country back on the gold standard. He believed that it was the only way to restore the British pound to its pre-war value and help kickstart the world economy. To do that, he needed gold to flow back into British vaults, which would in turn proportionally raise the value of the pound. He needed to make Great Britain an attractive place to deposit gold.

Well - how do you do that?

Ladies and gentlemen, fasten your seatbelts for the moment you’ve all been waiting for - because we’re about to talk about….INTEREST RATES. [air horn]

We’ll make this quick and painless as possible, but we can’t understand how Benjamin Strong and Montague Norman helped cause the Stock Market Crash of 1929 without understanding the fundamental concept of interest rates.

As we all know, it costs money to borrow money. Lenders charge borrowers an extra percentage for the access to money. That’s interest. It’s as old as the hills. Well, central banks with vast reserves of money, like the Federal Reserve, they lend money to smaller commercial banks, so that those banks can in turn loan money to regular schmucks like you and me.

At each link in that chain, interest is charged. The Fed charges interest on the commercial banks and the commercial banks charge interest on us. Now this is important - the Fed can influence the economy by raising or lowering that interest rate. If it charges the commercial banks more to borrow, then those banks are going to charge us more to borrow. They have to make a profit, after all.

When the Fed’s rates are low, it’s cheaper to borrow money. For everyone. When credit is cheap, more people borrow and buy stuff, and the economy heats up. If the economy gets too hot, the Fed can raise interest rates, which means it’s more expensive to borrow money. Less people borrow, less stuff is bought, the economy cools and contracts. The metaphor you will often hear is that the Fed controls a spigot, or a faucet of credit. By raising or lowering the rate, it can affect the fundamental currents that influence the economy.

Back in the days of the gold standard, a person could deposit their gold in a central bank, and earn interest from the rate that the Fed charged commercial banks. So basically, the higher the rate, the more gold a central bank accumulated. The downside was that it could strange economic growth because it was so expensive to borrow.

It was a tricky, delicate dance.

Montague Norman, our cape-wearing, Lao Tzu-reciting British banker wanted gold to come back to Great Britain. And to do that, he needed a favor from an old friend. The Federal Reserve’s rates were too high; gold was sitting there, earning interest, not moving. Like a dragon’s treasure hoard. Montague needed America’s rates to be lower than Great Britain’s. That way, gold would come back home.

So – he asked his best friend for a favor.

Monty asked Ben to keep the Federal Reserve’s interest rates low. And Ben agreed.

Now to be fair, this was much more than personal favor. Ben Strong believed that helping Great Britain return to the gold standard would get Europe back on its feet after the most apocalyptic war it had ever experienced. America’s losses had been negligible, microscopic compared to what the British and French had endured in the Great War. Ben and the Fed had the opportunity to help millions of people by nudging the river of gold back to where it came from.

It wasn’t just a personal favor, but a different man, a man not so intimately tied to his British counterpart, might’ve maintained a more independent view. As historian John Brooks describes Ben’s mindset: “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.”

So - starting in about 1924, Ben Strong slashed the Fed’s interest rates. He believed he was helping his good friend Monty in the short term, and the entire European continent in the long-term. But as we said earlier, the road to hell is paved with good intentions.

Those low, low, rock-bottom rates, made credit very cheap in the United States. It was cheap to borrow money. And when borrowed money is cheap, people buy buy buy and invest invest invest. Ben Strong and Montague Norman didn’t create the Stock Market bubble in America, but they create the conditions in which it would become unstoppable. And by extension, unsustainable. As historian Charles R Geisst writes:

“Low American interest rates meant cheap consumer credit and equally cheap margin money, which was loaned to speculators in the stock market. The horse was out of the barn.”

Scott Nations penned a particularly withering indictment of Ben Strong:

“The Fed ignored the danger and lowered rates in the United States, even though money was plentiful and the economy was robust; they did so to help Strong’s friend in London, knowing that they risked creating a speculative bubble.”

Historian John Brooks described the Fed policy in colorful terms:  “It was something like the police issuing guns to people on the streets during a riot.”

Even in 1929, the Fed’s role in the Stock Market boom was self-evident. As a contemporary named Russell Leffingwell fretted:

“Monty and Ben sowed the wind. I expect we shall have to reap the whirlwind. . . . I think we are going to have a world credit crisis.”

It was, according to Liaquat Ahamed: “the spark that lit the forest fire.”

But as America’s obsession with the stock market, fueled by cheap credit, sprang to life in the late 1920s, Ben Strong’s physical condition was rapidly deteriorating. By 1928, the tuberculosis had spread from his lungs to his throat. His hair was falling out. A bout of shingles had left him blind on one eye, and overuse of morphine for the pain had destroyed his digestive system.

The change was especially shocking to Montague Norman. The tall, strapping banker that he’d shaken hands with in 1916 was gone. His friend, his best friend, was dying. Montague had always fussed over Ben’s health. As early as 1921, he’d written in a letter: “Let me beg you to care for yourself more than you seem to be doing. You belong to others quite as much as to yourself.” In other words, take care of yourself, if not for yourself, then for me. But no amount of fussing or convalescing could help Ben now. He could barely walk to the mailbox, much less run the most powerful central bank in the world.

It was time to resign.

Ben Strong was dying. It might’ve given him some comfort to know that his manipulation of interest rates, had worked; that the British economy had recovered, the Europe was prospering – but that was not the case. His policies at the Fed had not had their desired effect. Worse, it had created an unintended consequence of a rip-roaring stock market that seemed destined to burst.

Monty tried to lift his friend’s spirits, to assure him, even lie, that it had all been worth it. That their project, their partnership had been a success: “How hard and how cruel life is. “But what a stage ours has been over these ten or twelve years. . . . Your early dreams set a goal before a world, which was then so distracted as to be blind and incredulous. Now your dreams have come true.”

On October 15^th, 1928 – almost one year exactly before the crash, Ben Strong died from an intestinal hemorrhage. He was fifty-five years old. Montague was devastated. As he wrote to a friend: “I am desolate and lonesome at Ben’s sudden death.”

But before he died, Ben Strong had one last act. He knew he had to resign, to relinquish his post as the chief authority at the Federal Reserve. The New York Fed would need new blood. Someone energetic, someone visionary, someone positive. Luckily, he had a promising person mind. A man who had revolutionized commercial banking and came with an impeccable reputation.

Ben Strong decided that one of the next directors of the New York Federal Reserve bank should be none other than “Sunshine” Charlie Mitchell.

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It’s January 1st, 1929. New Year’s Day.

We’re at 60 Wall Street, just a couple blocks away from the New York Stock Exchange.

It’s about 9 o’clock in the morning, and we’re at a tiny, one-man shoe-shine stand. There were many shoe-shine stands on Wall Street. After all, there was no shortage of expensive footwear in need of buffing in the financial district, and like remoras on a very big shark, shoe-shine boys flocked to the curbs, hoping to score hefty tips from high rollers.

But this was a very special shoe-shine stand. Because it was the only one where you could get your shoes buffed by Pat Bologna.

Pat Bologna was a 19-year-old Italian-American bootblack. He was a short, hairy guy who came from a poor immigrant family. He made ten cents per shine. 25 cents if he did a good job. He was also one of the most well-informed people on Wall Street. As Thomas Gordon and Max Morgan-Whitts write, Bologna: “not only restored shoes to mirrorlike perfection but also passed on a nonstop barrage of stock market tips and astonishingly well-informed gossip.”

Bologna was more charming than the average shoe-shine boy; he knew how to work people, relax them, make them laugh. His clientele included big names like Joseph Kennedy and automobile tycoon Billy Durant. In recent months, Bologna had become a bit of a local celebrity. Long lines began to form at his shoe-shine stand, filled with aspiring investors hoping to score lucrative advice from the bootblack with all the famous clients. As Gordon and Morgan-Whitts write: “Bologna could make as much in an hour from talking as he earned during a day shining shoes.

And Pat Bologna was an investor himself.

Every nickel and dime he earned polishing shoes went straight back into the Exchange. By 1929, he’d invested something like $5000. Bologna’s go-to zinger to tell his clients was: “My money never leaves the Street. It’s the best place in the world for it to be.”

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And there was no better witness to the mania that had gripped the country than Pat Bologna. Every day he listened to the brokers and bankers talk about the massive profits they were reaping both for and at the expense of their clients. The market was going to the moon. It was an unstoppable force. As one observer wrote at the time:

“We had entered a fourth-dimensional economic world. The wonderful feature of this new world was that all possibilities of increase were infinite. There was no longer any limit upon the rise of common stocks. Since this was so obvious to everyone, it followed that common stocks could not fall. How could they fall? There was no reason for people ever to sell them.”

As historian Karen Blumenthal talks about the sheer scale of potential profits in her book: “Someone who had the foresight to buy $10,000 of General Motors stock in 1920 would have seen the investment grow to more than $1.5 million by 1929.” And as Pat Bologna was shining shoes on New Year’s Day, 1929, an article ran in the Baltimore Sun, trumpeting that: “The market is now its own law. The forces behind its advance are irresistible.”

The forces were indeed irresistible. But one of those forces had a face. And a name. And a pair of shoes. A pair of shoes that needed shining. One of Pat Bologna’s top clients just happened to be the one and only “Sunshine” Charlie Mitchell, chief executive of the National City Bank and the greatest bond salesman of all time.

But on New Year’s Day 1929, Sunshine Charlie added a new position to his very long resume. It was on January 1^st that he became a director of the Federal Reserve Bank of New York. The wolf was officially in the hen house.

Ben Strong had been dead for three months. But before the tuberculosis and morphine addiction had punched his ticket, he’d tapped Charlie Mitchell to help run the NY branch of the Fed. In his opinion, the man who had taken National City Company from a two-bit bond operation to an international leviathan was “truly one our ablest bankers.”

But asking Sunshine Charlie to responsibly lead the most important branch of a semi-regulatory financial entity was like asking a starving dog to refrain from eating an unguarded T-bone steak. Charlie despised big government of any kind. As historian Michael Perino writes:

“Mostly, Mitchell thought the government did more harm than good. Taxes were damming “the natural flow of wealth,” and he advised the government to simply stay out of the way. “[E]very experiment in Government management,” he lectured, “demonstrates its disqualification in that field.”

Sunshine Charlie had no interest in introducing any restraint or caution into this bull market. Not when, as one historian writes: “all bankers had to do was borrow from the Fed at 5 percent and lend in the call money market at 10 or 12 percent. No effort or initiative or even risk was involved. “Bankers,” noted John Brooks, “like royalty in a constitutional monarchy, were in the position of being handsomely paid simply for existing.”

Technically, Charlie and counterparts at the other Federal Reserve Banks across the country answered to the Federal Reserve Board in Washington D.C. But that gaggle of bureaucrats was, according to economist John Galbraith: “a body of startling incompetence.”. Mostly political hacks and toothless appointees, they were not a match for the formidable charm of Charlie Mitchell.  

The death of Ben Strong had been a shock. And sudden vacancies like that tend to cause people to look around, rub their eyes, and re-assess the situation. The Federal Reserve Board in D.C started to re-assess its view of the low interest rates Ben Strong had championed to help his friend in London, Montague Norman – and they started to get extremely nervous. A huge proportion of the money the Fed was lending to commercial banks was being used to finance stock speculation. As Karen Blumenthal writes: “In 1929, nearly $4 of every $10 in bank loans was loaned for stocks.”

To their credit – pardon the pun - The Fed had raised its rate slightly by 1.5% in 1928, but it was much too little, much too late. All the tepid hike did was hurt construction and small businesses. As John Brooks writes: “Stock speculation–the chief target of the policy–went on its merry way as if harassed by nothing more than a persistent mosquito. Traditional monetary restraints were useless because they had come too late. The speculative virus was past being checked by that medicine.”

The Stock Market was like a runaway speed boat with the throttle pushed all the way forward, and the keys were at the bottom of the lake. Either the market would keep rising infinitely until the heat death of the universe – and many believed it would – OR, it would crash on the rocks in spectacular fashion under the weight of all this make-believe money.

So, in February of 1929, the guys in DC say, “Whoa whoa whoa, let’s everyone calm down. We don’t want to raise interest rates and ice the economy, but we are in a very dangerous situation with this stock market. Maybe – just maybe – this Bull Market has gone too far.”

Now - any time government regulation looms, then and now, the stock market tends to wig out a bit. As one contemporary joked: “There are two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve Bank.”

So - Wall Street held its breath, bracing for an unprofitable rate hike from the Fed. But the Fed doesn’t raise the interest rate yet, instead…it issues a statement. As economist John Kenneth Galbraith scoffs: “It is impossible to imagine a milder, more tentative, more palpably panic-stricken communiqué than that issued by the Board.”

In place of a roar, the Fed gave a whimper. As Galbraith goes on to explain:

“The Board decided to write a letter and issue a press release. It could do no less. On February 2, it addressed the individual Reserve Banks as follows: A member [commercial bank] is not within its reasonable claims for re-discount facilities at its reserve bank when it borrows either for the purpose of making speculative loans or for the purpose of maintaining speculative loans.”

In other words, the guys in DC were telling the regional Fed banks to please, please STOP lending money to commercial bank for stock market investments. We are not okay with this. You’re doling out so much imaginary money on margin– if the market takes a sharp downturn, can the people you lent money to even pay you back? Because if they don’t, you won’t be able to pay us back. And you don’t pay us back…well then, Jesus. This house of cards might actually tumble.  

It was a weak gesture. As John Brooks writes, The Fed was” merely trying to save its face and its conscience, to wash its hands like Pilate.” But still – investors were spooked by the Fed’s buzzkill lack of confidence, and prices actually started to dip and drop. The hot air balloon was sputtering and sinking, and by March, people were beginning to wonder if this was the end of the Bull market.

And it might have been. The boom could’ve ended right then and there. A sell-off might’ve occurred, a correction, a return to normalcy. But what the Fed did not count on, was the swift and forceful intervention of “Sunshine” Charlie Mitchell.

Charlie stuck out his big-barrel chest in defiance of the Fed Board. He huffed and puffed and blew a hurricane of hot air back into the balloon. He, and every other banker on Wall Street, did not want this money train to slow down, consequences be damned. The Fed was trying to spoon-feed bitter medicine to a rambunctious market. And Sunshine Charlie promptly spit that medicine directly back into their faces.

In late March of 1929, Mitchell told the press: “We feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert any dangerous crisis in the money market.”

He went on to say that as a director of the New York Federal Reserve Bank, he would make $25 million of its funds available for loans to be used in stock speculation. Sunshine Charlie had defied the Federal Reserve Board in one of the most blatant and shocking “eff-you’s” in financial history. You’re not the law, he saying, I am the law. And I say, this Bull market is gonna keep going.  

DC had completely lost control.

To the financial community, Charlie Mitchell was seen as a hero, a savior. And with confidence restored, the party started roaring again into the summer of 1929. Mitchell’s words were, according to one historian, “like magic.” Now that the Fed authorities were beaten and humiliated, their silence was literally golden.

In the months that followed, the Fed tried hiking the rates by half a percent here and there, but it did nothing to crimp the flow of money into the stock market. Investors, believing that share prices would rise indefinitely, did not worry about borrowing money for stocks at rates as high as 20%. A gob-smacked President Herbert Hoover observed later:

“People who dreamed of 100 percent profit in a week were not deterred by an interest rate of 20 percent a year. When the public becomes mad with greed and is rubbing the Aladdin’s lamp of sudden fortune, no little matter of interest rates is effective.”

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To make matters worse, loan money was pouring in from other sources outside the banking system. In what historian Maury Klein called a “ominous pattern”, huge corporations like RCA, Standard Oil and General Motors were taking their surplus cash and injecting it into the lending market, hoping to make glowing returns off all that sweet, sweet interest. As Klein continues:

Fresh funds for the feeding frenzy on Wall Street flowed in not from banks but from corporations, which withdrew or withheld funds from their bank accounts to put them into the call loan market, and from other outside sources. This trend gave the Fed another serious problem apart from its internal ones: it had no control or authority over the flow of these funds coming from sources outside the banking system.

Karen Blumenthal expands on the phenomenon: “Companies saw that they could make nice profits on the money they lent for buying stocks, maybe more than the profits they could make selling cars or steel.

This system-wide solidarity reinforced a sense of confidence in the investing public. Any time the market dipped or dragged or went down a few points, it would shoot right back up. Historian John Brooks compared it to an engine that sputters for a moment, and then resumes its “former smooth purr”. Maury Klein compared it to a staggered boxer fighting his way back, or a cat with nine lives.

Years later, a heavy portion of blame for the Crash was placed at the Fed’s doorstep. If they had been more decisive, more forward-thinking, more forceful, all this could have been avoided. The reality is more nuanced than that, as Liaquat Ahamed writes:

“One is led to the inescapable but unsatisfying conclusion that the bull market of 1929 was so violent and intense and driven by passions so strong that the Fed could do nothing about it. Every official had tried to talk it down. The president was against it, Congress too; even the normally reticent secretary of the treasury had spoken out. But it was remarkable how difficult it was to kill it.”

After the Fed had been so publicly bitch-slapped by Sunshine Charlie, nothing seemed capable of putting a dent in the upward trajectory of the stock market. It was as much a problem of psychology than anything else, as Scott Nations writes:

“Investors would learn the wrong lesson: rather than investing sensibly and occasionally taking profits or selling stocks when they showed a bit of weakness, they had learned to hold on, that the market would always come back.”

The sad truth was, according to historian Frederick Lewis Allen: “The public simply would not be shaken out of the market by anything short of a major disaster.”

Well, in the early fall of 1929, they got one. Right after the Dow’s all-time high just after Labor Day, the first tremors of disaster started to crack the façade of optimism that Charlie Mitchell and the Wall Street cohorts had so brazenly upheld. In a natural disaster movie, this is the moment when the animals start to run for the trees and the birds start to fly south. But for most people, it was easier to just shout down the naysayers and ignore the warning signs.

As Maury Klein writes: “the future looked much brighter to those who didn’t peer too closely at it.”

--- MUSIC BREAK ----

It’s September 4^th, 1929.

We’re in New York City, on the 18^th floor of the Heckscher Building off Fifth Avenue.

It’s about 4 o’clock in the afternoon, and Jesse Livermore is clicking his fingers together anxiously. It was one of his nervous ticks; whenever he got impatient or irritated, he’d start rubbing his thumb and middle finger together – almost like a rapid-fire snapping sound.

It made sense that Jesse was anxious. He had a lot on his mind. At home, things were a mess. His marriage to Dotsie was falling apart, she was drinking heavily again, and he’d heard rumors that now she was having an affair of her own with a young Prohibition agent. After all these years, all the fights, all the terrible things they’d said and done to each other – it might be time to throw in the towel.

He loved Dotsie. He really did. But the woman drinking herself to death at the mansion in Long Island was not Dotsie. Not anymore. The vivacious showgirl with bottle-green eyes and auburn curls was gone. All that was left was a mean drunk who spent his money and spoiled his children.

Jesse couldn’t absolve himself of all the blame, of course. He’d been cheating on Dotsie since they first met. He’d tried to stop – more than once. But when the cigar smoke filled the air and the whiskey hit his blood stream, all it took was the flash of a skirt and a seductive wink to crumble his resolve.

But there was no point in dwelling on all of that. He couldn’t correct past mistakes. He couldn’t uncarve his failures out of the stone. The future was where he should put his energy. So, Jesse pushed thoughts of Dotsie out of his mind, and picked up the phone. It was just after 4 o’clock, and it was time to make his daily call across the Atlantic.

Every day at 4pm, Jesse placed a call to a secret source inside the Bank of England. An informant who told him anything and everything he wanted to know about the financial situation in London. And every day at 4pm, that person picked up the phone. Because when a man with a reputation like Jesse Livermore calls, you answer. As John Brooks writes: “Livermore was an invisible genie of the market, feared, envied, his wires sometimes tapped, his name often invoked, his face seldom seen.”

For weeks, Livermore had been paying $150 per call, every day, just to get a sense for what was going on in London. And on September 4^th, his informant passed along some very interesting, and puzzling, information. Earlier that day, at a luncheon, the eccentric, cape-wearing governor of the Bank of England, Montague Norman”, told his colleagues that he feared that the American bubble was about to burst.

People had been saying that for weeks now, but for the most powerful central banker in the world say it, even in private, that was significant. The second piece of information Livermore received also concerned old Monty. Word on the street was, the Bank of England was about to hike its interest rates, which meant that gold and capital would start flowing out of American markets. The third piece of information involved a wealthy British industrialist named Clarence Hatry. Hatry ran a huge financial group, and apparently, he had been defrauding his investors and the entire enterprise was about to collapse.

If that happened, a contagion of uncertainty might begin to spread throughout the stock market. The problem was psychological, as Scott Nations writes: “If Hatry could so easily defraud banks and brokerages in London, they wondered, who was doing so in New York?”

In other words, fear was in the air, and Jesse Livermore could smell it. He had three more jigsaw pieces for his puzzle, and a clear picture was beginning to emerge. This could be it. Like the tide starting to go out before a tsunami blots out the sun, this might be the beginning of the Crash he’d been expecting for months.

The next day, Jesse received another juicy tip, not from London, but from home in the states – in Boston. A famous economist by the name of Roger Babson was going to deliver a keynote speech at the National Business Conference in Boston, and his remarks were going to be covered by every major paper in the region.

Just four hours before Roger Babson was set to deliver his speech, Jesse Livermore flipped through a dossier on Babson that had been compiled for him by his secretary. In the larger currents of the financial world, Babson was a little fish, a small-fry – but he was famously pessimistic. For years, Babson had been predicting a Crash, and for years, the stock market had continued to climb. Every year he was wrong, and yet every year, he predicted the same calamity.

Jesse knew that even broken clocks were right twice a day, and Babson’s pessimistic prediction, delivered at this exact moment, in this exact climate, when fear was in the air and markets were dangerously, stratospherically high…this might be the tipping point. Just hours before Babson stepped up to the podium, Jesse Livermore scrambled thirty of his best traders and went short on as much stock as he could, as fast as he could.  

Now all he had to do was listen to Babson’s speech, and wait.

At 12:30 PM, a news flash came over the Associated Press wires: “ECONOMIST PREDICTS 60 TO 80 POINTS STOCK MARKET CRASH”.

Just as Jesse had predicted, Roger Babson had stepped up to the mic and delivered his message of doom. His words echoed through the crowded hall, onto the journalists’ notepads and over the wires out into America. He said:

“Fair weather cannot always continue. . . . More people are borrowing and speculating today than ever in our history. Someday the time is coming when the market will begin to slide off, sellers will exceed buyers, and paper profits will begin to disappear. Then there will be an immediate stampede to save what paper profits exist. I repeat what I said at this time last year and the year before; sooner or later a crash is coming.”

Babson’s words, according to one broker, “went off like a bomb.” Wall Street was flooded with an avalanche of sell orders from panicked investors - a “blizzard of paper” as one broker remembered. In two hours, 5.6 million shares had been traded and the market had lost five percent of its value. Babson’s words had the predictable effect of making people panic, but they also provoked a strong contrarian response. Market cheerleaders clutched their pearls - How dare you suggest that the American economy is in any danger whatsoever, how dare you rain on this parade? You don’t know what you’re talking about, Babson.

Sunshine Charlie Mitchell was vacationing in Europe at the time, and he rolled his eyes at Babson’s bleak forecasts, saying that the market was “absolutely sound and our credit situation is in no way critical.”

A respected economics professor at Yale named Irving Fisher went even further in his rebuttals, waving his pom poms and saying: “Stocks have reached what looks like a permanently high plateau…. I expect to see the stock market a good deal higher than it is today within a few months.”

Even as his short positions showed returns, Jesse Livermore seethed at the arrogance and recklessness of men like Fisher:

“What can a professor know about speculation or stock markets? Did he ever trade on margin? Does he have a single cent in any of these bubbles he talks are cheap? How can the public possibly rely on information coming from a classroom? I tell you the market never stands still. It acts like the ocean. There are waves of accumulation and distribution. The market always tells you when you are wrong. So let’s leave it to the market to tell its own story—with or without help from college professors.”

The Babson Break – as it came to be known to history – had a chilling effect. It showed the world just how fragile the collective nerve of the investing public was. Like a large herd of skittish wildebeests, a few carefully chosen words could send investors straight off a cliff.

On the 18^th floor of his Fifth Avenue office, Jesse Livermore puffed on one of his Cuban cigars. Fortune tellers like Evangeline Adams claimed to know the market’s future, but it was Jesse Livermore who seemed to have a crystal ball. He had read the situation perfectly; The thousands of dollars in transatlantic calls, countless hours of research and dozens of well-placed sources had paid off lavishly.

The day of the Babson Break, Jesse made $20 million dollars by strategically shorting vulnerable stocks.

The office on Fifth Avenue was filled with cheers and toasts as the Livermore staff calculated their massive profits. It had been a very good day. But the jubilation took on a darker mood as everyone realized what was actually happening. The stock market was beginning to slide. The bull market was over, and only time would tell just how far and how fast things would continue to fall. There was more money to be made – much more – but to get it, Livermore and his staff would have to dance on the grave of the American economy.

But in the first week of September, most people chalked up the whole Babson Break drama to a temporary dip. A brief lapse in the ever-ascending curve of American prosperity. But as autumn fell and the leaves began to change, the market seemed to have a harder time recovering than usual. The boxer who had always managed to stagger up, couldn’t quite regain his footing.

Over the next several weeks, the stock market limped back up the hill as best it could, but the vibe had changed. People were nervous. For the first time in a long time, average investors were starting to question the wisdom of buying thousands upon thousands of shares with borrowed money. Buying stock on margin wasn’t a problem as long as the market kept going up, but if things reversed, and those margin calls started to come in, demanding more money to cover the loans…many people just didn’t have the funds. As one investor observed at the time: “fear was in the saddle.”

Sunshine Charlie Mitchell, ever the optimist, did his best to instill the market with some of his trademark positivity: "Although in some cases speculation has gone too far in the United States, the markets generally are now in a healthy condition. The last six weeks have done an immense amount of good by shaking down prices. ..... The market values have a sound basis in the general prosperity of our country.”

Charlie wasn’t the only banker trying to keep the bullish vibes going. Thomas Lamont of JP Morgan personally wrote a letter to President Herbert Hoover assuring him that: “There is a great deal of exaggeration in current gossip about speculation. The future appears brilliant.”

To paraphrase one historian, prosperity is a state of mind. And high rollers like Charlie Mitchell believed that if they could just tell the public over and over and over again that things would turn out okay, it would be so. John Kenneth Galbraith called this kind of gaslighting writes: “Preventive incantation required that as many important people as possible repeat as firmly as they could that it (a crash) wouldn’t happen.”

And so, people watched and waited, hoping and praying that the stock market would get its groove back. But things did not get better. On October 11^th, faith in the stock market took another hard kick to the teeth.

In Boston, Massachusetts, there was a utility company called Edison Electric. The company was doing very, very well in 1929. A single share of Edison Electric was worth about $400. So, the board of the company decides that they want to enact a 4-to-1 stock split. A stock split usually happens when a company’s stock prices rises so high that it becomes too expensive for the average investor. By splitting the stock, you’re issuing more shares at a lower price point, which increases the affordability of the stock. People get excited, buy more shares, price goes up.

It’s a pretty simple maneuver, but if you’re a utility company and you want to split your stock, you have to ask permission from the regional utilities board. Everyone at Edison expected this to approval process to be a mere formality. But then they get their answer back. No. We do not approve the stock split.

The guys at Edison Electric said, Well, why the hell not?

And the utilities board gave an answer that shocked the country. Your stock, they said, is not worth $400 a share. It’s not even worth $300 a share. Your company’s stock is inflated far, far beyond its actual value. They go on to say: “Due to the action of speculators or other interests, the price of its stock has risen . . . to such a point that no one, in our judgment, viewing it from the standpoint of an investment on the basis of its earnings, would find it to his advantage to buy it.”

The board dropped jaws all over the country when it valued Edison Electric’s stock at just $215. In the words of John Kenneth Galbraith: ”the refusal was unprecedented.” The significance was clear: For the first time, an official government entity had acknowledged the existence of a speculative bubble.

All of these things we’ve talked about – all of these warning signs – taken separately, no one event was important or drastic enough to trigger a Crash. But cumulatively, delivered in exactly the right order at exactly the right time…well, it essentially amounted to multiple people yelling “fire!” in a packed theatre. Financial historian Scott Nations breaks down the sequence of events for us:

Benjamin Strong had inflated an enormous stock market bubble. Roger Babson had pointed out the danger and was heeded only through happenstance. Charles Hatry led investors to question the basic soundness of the market, and now utility regulators in Massachusetts were finishing the job of undermining the market by stating plainly that it was too high. The crash was now inevitable.”

Economist John Kenneth Galbraith agreed that the coming Crash was just a matter of time. It was always going to be something. On a long enough timeline, something would’ve eventually broken the spell of the Bull Market:

“It is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”

The time had come. As Maury Klein puts very poetically:

“Americans had chased the rainbow of riches, aware deep down that one day it must end, but not knowing when, and unwilling in their hearts to face that fact or believe that this day might be the one.”

On October 15^th, 1929 – about one week before the Great Crash – Charlie Mitchell was soaking up sunshine on the top deck of a luxury ocean liner, which was leaving Germany and heading back home to New York City. As always he cut the dashing figure – tall frame, expressive eyes, warm smile. Captain of the football team of the American banking class.

Wherever he went on planet earth, whether it down the street in New York or halfway across the world in Germany, reporters always wanted to talk to Sunshine Charlie. And the waxed deck of this plush ocean liner was no exception. As the ship prepared to disembark, Mitchell was swarmed by a crowd of reporters, all looking for a choice quote or tidbit of insight.

Charlie had always good with people. He didn’t like them or respect them very much, but he was good with people. They were his clay, the raw material of his trade. He had been a salesmen all his life – he’d sold good bonds, bad bonds, solid stocks and garbage stocks. He’d turned a comatose commercial bank into one of the biggest financial entities in the most powerful country on earth. And that success had come loaded with rewards, as Gordon Thomas and Max-Morgan Whitts write:

“These past two years had been good for National City—and for Mitchell. In 1927 his cut from the fund was $1,056,000. In 1928 it went up to $1,316,000. But 1929 looked like being the best year yet; he had already received $1,108,000—and that was only for the first half of the year.

But Charlie’s doctorate in spin had been feeling the strain the last few weeks.

Something weird was definitely happening in the American stock market. But when a crowd of German reporters asked him for his thoughts on the situation as he sat lounging on a deck chair, Sunshine Charlie flashed his big, comforting grin and said:

“The markets generally are now in a healthy condition.”

If he had flicker of a doubt about the longevity of the eternal Bull Market, he kept it to himself. One week later, he’d be back home in New York, sitting in a front row seat to witness just how wrong he really was.

---- OUTRO ----

Well guys that is all we have time for today.

Next time, we’re going to finally – at long last – push past the table-setting and get to the actual climax of our story. We’re going to cover – in gory, glorious detail - the worst financial disaster of the 20^th century.

This episode was important, though. To understand what’s about to happen, we had to assemble our giant Jenga tower. We had to pull each block out, one by one. We had to see the weaknesses and hollow spaces in the system so that when the stiff breeze finally topples the whole thing, we understand why.

In historian Scott Nations’ book about American financial crises, he says that “every crash has a catalyst”. And as we have seen, the Wall Street Crash of 1929 had many, many catalysts. In the third and final episode of this series, we will see the consequences of those catalysts. We will see the fallout of all this mania and manipulation and avarice.

Not only that, we will see some people in our story held accountable for their role in this disaster. Villains don’t always get their day in court, but in the case of the ’29 Crash, there was most definitely an attempt to hold people responsible. And after walking step-by-step through the crash, we will end with an explosive courtroom drama that changed the way we regulate Wall Street in America forever.

So, goodbye for now. I know this episode was a little behind schedule, so thank you for your patience. I’m hoping to have the finale of this series out very soon. Or at least – on schedule. As always, thanks for spending your valuable time with me, and have an awesome day.

This has been Conflicted. Thanks for listening.

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