Rainbow's End: The Crash of 1929by Maury Klein
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Rainbow's End tells the story of the stock market collapse in a colorful, swift-moving narrative that blends a vivid portrait of the 1920s with an intensely gripping account of Wall Street's greatest catastrophe. The book offers a vibrant picture of a world full of plungers, powerful bankers, corporate titans, millionaire brokers, and buoyantly optimistic stock market bulls. We meet Sunshine Charley Mitchell, head of the National City Bank, powerful financiers Jack Morgan and Jacob Schiff, Wall Street manipulators such as the legendary Jesse Livermore, and the lavish-living Billy Durant, founder of General Motors. As Klein follows the careers of these men, he shows us how the financial house of cards gradually grew taller, as the irrational exuberance of an earlier age gripped America and convinced us that the market would continue to rise forever. Then, in October 1929, came a "perfect storm"-like convergence of factors that shook Wall Street to its foundations. We relive Black Thursday, when police lined Wall Street, brokers grew hysterical, customers "bellowed like lunatics," and the ticker tape fell hours behind. This compelling history of the Crash--the first to follow the market closely for the two years leading up to the disaster--illuminates a major turning point in our history.
"Land crooks...delusional bank chairman...high-rolling speculators.... The woes of the local shoe-shine man and Groucho Marx get mentioned, too.... Klein offers a swift survey of the lunatic optimism of Wall Street and how it all turned to dust in the closing days of October.... Each chapter resonates with the follies of today."Wall Street Journal
"A remarkable blend of sharp-eyed business history and keen cultural analysis, Rainbow's End paints the most compelling picture yet of the stock-market crash of 1929. In Maury Klein's able hands, the story of the crash ends up illuminating not just Wall Street in the Jazz Age, but America as well. Boom and bust: Klein gives us both, in all their intoxicating and hysterical glory."James Surowiecki, Business Columnist, The New Yorker
"Well-written, entertaining and detailed.... Klein shows how optimism gradually spawned financial euphoria."Robert J. Samuelson, The New York Times Book Review
"The great crash of 1929 was one of those sharp breaks in the stream of time when all who were living knew immediately that their world had changed. Many, of course, have written of the crash, but few as well or as authoritatively as Maury Klein in Rainbow's End. He brings a historian's perspective to a complex story while retaining the sense of immediacy that made those terrible days some of the most exciting in American history."John Steele Gordon, author of The Great Game: The Emergence of Wall Street As a World Power
"A well-written, comprehensible assessment of the 1929 stock -market crash. Klein is an elegant constructor of business histories, and one can read dire warnings between the lines here. A most timely business narrative." Kirkus
"Klein helps readers better understand the reaction of millions to an event that shook the world.... A timely publication."Library Journal
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America the Bountiful
The state of the world after the Great War ... was ... half-blind, half deaf, and chronically dazed.... It was shell-shocked besides.... Some of what had occurred was fundamental alteration from which we would never go back.
If it is tree, as historian Jacques Barzun once observed, that "whoever wants to know the heart and mind of America had better learn about baseball," the 1920 season serves as a revealing emblem of both the country's past and its future. The game was in disarray and disrepute, wracked by internal bickering and reeling from the infamous Black Sox scandal in which eight members of the Chicago White Sox had been charged with accepting bribes to throw the 1919 World Series to the Cincinnati Reds. It had also been stunned by tragedy that summer when Cleveland Indians shortstop Ray Chapman died after being hit by a pitched bailthe first and only major leaguer killed by an injury on the field.
Yet in the midst of deep gloom there were clear signs of a new era dawning. Babe Ruth had opened the age of the slugger by smacking an astounding 54 home runs; the National League leader, Cy Williams of the Philadelphia Phillies, hit only 15. The dismal Black Sox headlines failed to dampen a thrilling World Series between the Indians and the Brooklyn Dodgers, which included one memorable, almost surrealistic game in which three rare "firsts" were recorded. Outfielder Elmer Smith of the Indians hit the first grand-slam homer in a World Series game, and his teammate Jim Bagby became the first pitcher to hit a Series homer. These impressive feats were dwarfed by that of Indians second baseman Bill Wambsganss, who in the fifth inning pulled off the first unassisted triple play. A month after the Indians won the Series, baseball took a giant step to restore its credibility by appointing Judge Kenesaw Mountain Landis as its first commissioner. Landis displayed his new authority by issuing a controversial order banning the eight White Sox players from baseball for life even though a jury acquitted them of charges.
The nation, like its favorite sport, was steeped in gloom during 1920 and reeling from a series of shocks that in six short years had turned the world upside down. The outbreak of war in Europe during the summer of 1914 caught nearly all Americans by surprise. The immediate financial turmoil forced the New York Stock Exchange to shut down for the first time in its history and remain closed for more than four months. An already sluggish economy sagged even more from the dislocations wrought by war until a rising tide of orders from the allied nations in need of food, war materials, and other supplies propelled it into a boom from which manufacturers and farmers alike prospered. Then came American entry into the war in 1917, which led to drastic measures that reshaped the American economy, and ultimately society as well, to an unprecedented extent. Only then, as historian Preston Slosson observed, "did mine and factory, farm and home, school and laboratory, become so many cogs in a single war machine."
The wartime mobilization organized, standardized, and centralized American life as never before. Every male in America between the ages of 18 and 45 had to register for the army; the 4.7 million who were called to service learned firsthand the virtues and vices of regimentation. Businessmen were summoned to Washington to take charge of the economy through such new centralizing agencies as the War Industries Board headed by Bernard Baruch. This service enabled them to redeem reputations that had been blackened by attacks from Progressive reformers and muckrakers since the new century opened. A Division of Planning and Statistics introduced Americans to the possibilities not only of statistics but of government planning as well. The Committee on Public Information, which produced propaganda in support of the war effort, trained a generation of bright young minds in techniques that were later applied to politics, business, advertising, and a promising new field called public relations.
The controls placed on American industry exceeded anything known before. The War Industry Board exerted broad powers over manufacturing, priorities, conversion of facilities, price fixing, and other areas. Two other bodies, the National War Labor Board and the War Labor Policies Board, handled labor matters. Another agency, the Food Administration, organized the food industries; its dynamic leader, Herbert Hoover, emerged as the best known of the wartime managers. The War Finance Corporation took charge of financing war industries as one of several government corporations created to handle specific problems. This first extensive use of government-owned corporations, like so many other wartime measures, provided important precedents in later years. When the nation's railroads gridlocked under the pressure of wartime traffic, President Woodrow Wilson nationalized them and created a government agency to run the roads as a coordinated national system.
Drastic measures were imposed to stimulate production, establish priorities, and standardize many types of goods for more efficient output. The variety of automobile tires was slashed from 287 types to 9, steel plows from 312 to 76, and buggy wheels from 232 to 4. Expenditures for new manufacturing plants and equipment rose from $600 million in 1915 to $2.5 billion in 1918. Valuable German patents, especially in dyes and chemicals, were confiscated and became sources of great profit to American firms, many of which emerged as giants during the conflict. "The lesson of the war," noted historian David Noble, "was that large-scale continuous operation and extensive organized research and development were the essentials of financial success in the chemical industry, and that these demanded big companies, corporate organization, and stable markets." Firms in other industries learned the same crucial lesson and applied it vigorously after the war ended.
Wartime demand also generated runaway inflation, an experience unknown since the Civil War. Consumer prices doubled between 1914 and 1920, and wholesale prices shot up 126 percent. Those who lived on fixed incomes or salaries found themselves becoming what Mark Sullivan called the "new poor," while those who owned land, goods, or securities benefited. The rise in land values and commodity prices, along with huge wartime demand, proved a bonanza for long-depressed farmers. As the price of wheat and cotton nearly tripled between 1913 and 1919, farmers eagerly planted record crops and bought more land on credit. Farm mortgage debt increased 79 percent between 1914 and 1920. Overall, this experience implanted a fear of inflation that remained deep within American memories during the postwar years.
To pay the enormous cost of the war, the government imposed a graduated income tax along with new forms of taxation and increased rates on existing typesincluding an excess profits tax on both corporations and individuals. But these devices raised only about $10.7 billion of the $31.5 billion spent on the war (including $9.5 billion in loans to the Allies). Between 1917 and 1919 the federal government borrowed about $23 billion, mostly through the sale of bonds conducted through a series of vigorous public campaigns. The national debt, a paltry $1.2 billion in 1916, mushroomed to $25.5 billion by 1919. The four Liberty Loan and one Victory Loan drives combined patriotism, publicity, public spectacle, and peer pressure to goad every citizen into buying as many bonds as possible. This experience, too, would have huge repercussions after the war. As one historian put it, the loan drives "taught people to buy securities. More than 22 million individuals had discovered the magic of coupon-clipping and the desirability of bonds as a form of wealth."
The goal of all these efforts was to place the American economy on the most efficient possible footing for winning the war. However forced and fumbling it sometimes became, the attempt at wholesale organization marked the first time that massive central planning and economic management had been applied to a national purpose. The war also set in motion major changes in American society. It closed the great floodgate that had fed a steady stream of European immigrants into the American population since the 1880s. During six months of 1917 alone it also sent more than 600,000 blacks (and even more southern whites) northward in search of jobsthe first major shift in traditional American racial demography.
Scarcely had this mighty machinery of national mobilization sprung to life than the war came to an end in November 1918, leaving in its wake a ghastly spectacle of ruin. The known world of 1914 had been blasted into oblivion, scattering shards of devastation, chaos, bitterness, and fear of the unfamiliar forces at work amid the debris. Two of the Four Horseman of the Apocalypse, war and death, had already trampled across the face of a prostrate civilization. During the months just before the war's end the other two, famine and pestilence, began to spread their misery across the globe. Hunger stalked the war-ravaged regions of Europe, but its effects were mild compared to those of disease. During 1918 and 1919 a pandemic of influenza, the worst ever known, killed an estimated 21 million people, including 675,000 Americans, in only a few months.
The old world had died, and the new one struggling to be born bore little resemblance to it. The war had lasted 1,563 days, taken the lives of 10 million soldiers, wounded 20 million others, and squandered more than $300 billion of the world's resources. Its outcome hurled empires and dynasties alike into oblivion. Gone were the Hohenzollerns in Germany, the Hapsburgs in Austria, the Romanovs in Russia. Europe entered the war with 17 nations and emerged from it with 26. New regimes claimed power in St. Petersburg, Berlin, Vienna, Warsaw, Budapest, Prague, and Dublin, some of them fueled by revolutionary doctrines. The Bolsheviks in Russia especially disturbed Americans because their alien ideology attacked the three principles dearest to our national credo: private property, freedom of religion, and individual freedom.
The disorder wrought by war went still deeper to the basic structure of the international order. For a century Great Britain had been the center of world finance and had provided nations a system of trade through its currency, its navy, its mercantile fleet, and its enforcement of international law. But Great Britain and its European allies were physically and financially exhausted from a war that proved for them a Pyrrhic victory. The British no longer had the power or the will to rule the waves or even (as the old joke went) to waive the rules. Nor could they maintain the gold standard, which had stabilized international trade for decades. All the major trade routes had been disrupted or paralyzed; every belligerent nation had borrowed heavily to fight the war and was deeply in debt. Our "associates" (we never called them allies) spent some $19.8 billion on American goods and loan servicing during the war. Much of the purchasing had been on borrowed money, and the status of these loans became a raging controversy once the war ended.
Here was a power vacuum begging to be filled. The war had completely transformed America's position in world affairs. Having already emerged as the largest industrial power, the United States in 1918 was the only major power left standing in almost every sense. Americans had suffered little loss of life and treasure compared to that of other countries, and no physical damage. Where other economies lay exhausted from the demands of war, the American productive engine continued to hum at high speed. Most significant of all, the United States had gone from being a debtor to a creditor nation. Throughout the nation's history foreign investment had underwritten its economic development. On the eve of war in July 1914 American debts to foreigners still exceeded those of foreigners to Americans by nearly $3.7 billion. By the end of 1919, however, a stunning reversal had occurred: the balance had shifted in favor of the United States by $12.56 billion.
This historic change required rethinking of the American role not only in trade but in the broader realm of world affairs. With all the major European powers physically, economically, and morally spent by the Great War, the United States was the logical choice to assume a leadership role in rebuilding fractured world relationships. President Wilson recognized this when he made the bold decision to lead the American delegation to the peace negotiations. Sailing to France in December 1918, he became the first American president to cross the Atlantic while still in office. Wilson hoped to use his influence to create a new world order based on his Fourteen Points and embodied in the League of Nations. But his mission turned to ashes. The Versailles Treaty that emerged in the spring of 1919 did contain provisions for the League, but it was a harsh, bitter, punitive document that perpetuated rather than solved the problems underlying the war and its outcome. In David Kennedy's words, it "sowed the wind that would eventually lash the world with gale fury."
In 1917 Wilson had sold the conflict to Americans as a great national crusade, the war to end all wars and make the world safe for democracy. That vision turned sour in 1919 as the treaty became a political football. When opposition in the Senate threatened its defeat, Wilson undertook a speaking tour to rally public support. The effort strained his already fragile health; a severe stroke in October immobilized him for two months. The treaty died in the Senate, leaving the United States out of the League and technically still at war. Instead of exerting leadership in a new world community, a distracted and disillusioned nation retreated from the world stage to tend its own affairs. The crippled, embittered Wilson yielded his office to Warren G. Harding, who had proclaimed in May 1920 that "America's need is not heroics but healing; not nostrums but normalcy; not revolution but restoration ... not surgery but serenity."
Normalcy may have been urgently needed, but it was hard to come by. The momentum built up by the national mobilization crusade could not be slowed or shifted as quickly as the war had ended. The conversion effort produced serious dislocations. Government agencies canceled $2.5 billion in outstanding contracts at a time when a quarter of the civilian labor force was engaged in making war-related goods. Within six months after the Armistice 2 million discharged servicemen were thrown onto the job market of a contracting economy. The elaborate system of government controls and agencies created to push the war effort was dismantled as quickly as it had been put together in a zealous effort to restore the "normalcy" of as little government control over business as possible.
Despite these moves, economic conditions remained deceptively calm until the spring of 1919, when consumer and business spending increased sharply along with demand for exports. Sparked by a brief worldwide boom, the economy seemed back in high gear again by autumn, and a speculative mania seized the stock market. This brief euphoria sent wholesale prices up 25 percent by May 1920; then the economic roller coaster suddenly plunged downward as the demand for both manufactured and farm products withered after the initial postwar surge to replace depleted inventories. Within a year the wholesale price index dropped 45 percent, with farm products and raw materials taking the hardest hit. While manufacturers quickly cut production to keep their prices from falling as severely, farmers could not control their output and depended on high prices to pay the mortgages they had incurred during the war.
"What happened," recalled Alexander Noyes, "was simply that demand for goods by the larger consuming public suddenly stopped ... at the moment when the extraordinarily high prices had greatly stimulated supply." He had watched inflation send prices of clothing, fuel, and household goods in 1920 soaring 40 to 70 percent above November 1918 levels. The impact literally hit home for Noyes; in September 1920 the lease on his New York apartment expired and the rent of $2,500 a year, which he had paid for six years, was hiked to $4,500. Throughout the nation consumers reacted to what they called HCL (high cost of living) by boycotting purchases and organizing "old-clothes clubs." Noyes believed the organized resistance helped "put a stop very soon to rising prices."
The depression that followed lasted well over a year. During 1920-21 the gross national product fell 6 percent, stocks lost a quarter of their value, manufacturers cut their workforce by 25 percent, unemployment soared to 4 million, half a million farmers lost their homesteads, and 100,000 businesses went bankrupt. The purchasing power of farmers fell about 25 percent and never recovered. Although the price of manufactured goods remained 66 percent above the levels of 1913, the drop was severe enough that even giant corporations struggled to survive. General Motors wrote off an appalling $85 million in inventory losses, while Henry Ford averted disaster by forcing his dealers to buy cars they could not sell. Montgomery Ward took a loss of nearly $7.9 million for 1920 and in 1921 wrote off S5.6 million as "loss on inventory, loss on accounts receivable, and depreciation." Julius Rosenwald of Sears kept that company from default only by dipping into his personal fortune.
Society was no less out of joint. The froth of hatred and intolerance whipped up by wartime propaganda could not be turned off like water from a spigot. The rabid campaign against all things German fanned other forms of prejudice against people and things foreign or different. The volatile new racial mix in northern cities unaccustomed to large black populations triggered a series of bloody race riots during the summer of 1919. The Ku Klux Klan rose from the grave of history with a more ecumenical message of bigotry. Centered more in the lower Midwest than in the deep South, the "new" Klan denounced not only blacks but Jews, immigrants, Catholics, radicals, and anyone or anything it deemed not "100 percent American."
Labor unrest gripped the nation as workers, hurt by prices that had risen faster than wages, demanded pay increases and went on strike in record numbers. A series of unexplained bombings in the spring of 1919, coupled with a record number of strikes, escalated existing fears over bolshevism into an ugly bout of public hysteria that swept the nation like the flu during 1919-20. The "Red Scare" turned into a sweeping assault on labor militants, radicals, and foreigners, who were an easy target as the source of all things and ideas considered un-American. Then, like the flu pandemic, the Red Scare departed as abruptly as it had come, leaving in its wake a bitter legacy of bigotry.
Ironically, the bloodiest single event came after the hysteria had subsided. At noontime on September 16, 1920, amid the lunchtime crowds, a wagon filled with iron sash weights pulled up outside the offices of J. P. Morgan & Company at 23 Wall Street. Suddenly it exploded, hurling iron like shrapnel in all directions and blowing out windows within a half-mile radius. Thirty-eight people were killed and 300 wounded. Inside the House of Morgan one employee lay dead, another fatally injured, and dozens more seriously hurt. On Wall Street the blast knocked to the ground a young passerby named Joseph P. Kennedy. At the New York Stock Exchange shards of glass burst through the heavy silk curtains, sending traders into an unfamiliar kind of panic. The New York Curb Exchange, which still operated outdoors on Broad Street only a couple of hundred feet from the site of the blast, found its place of business transformed into a battlefield strewn with stunned and wounded brokers.
In later years the fortress-like exterior of the House of Morgan wore its blast scars like battle ribbons. The source of the explosion remains a mystery, though many suspected then and later that it was the work of an anarchist sending a message to the inner circle of Wall Street. None of the Morgan partners was hurt. Four of themThomas W. Lamont, Dwight Morrow, George Whitney, and Elliott Baconwere in conference on the second floor away from the blast. With them was a French general who happened to be there as Morrow's guest. As the blast died away and smoke billowed skyward in the street amid the tinkle of still falling glass, the general asked his hosts politely, "Does this happen often?"
Mercifully it did not. Nevertheless, the war to make the world safe for democracy had failed even to make the United States safe for democracy. Victory had brought not elation but relief tinged with bitterness at having wasted so much time and energy on a fool's errand that most Americans vowed never to repeat. "The average man," observed Mark Sullivan, "felt ... a discontent with the post-war commotion ... a wish for settled ways ... for routine that remained set, for a world that 'stayed put.'" Small wonder, then, that so many people embraced Harding's siren call for normalcy. The problem was that so much had changed in the postwar world that no one knew what was normal anymore. By any measure it could be labeled a new era, even if no one could figure out exactly what that meant.
* * *
To most eyes the tensions and hysteria of 1920 and the depression of 1921 showed few signs of brighter times ahead. Yet the change came with unexpected swiftness. From the depths of gloom and depression Americans moved into what Frederick Lewis Allen called "the seven fat years," a golden age of business prosperity that in many ways marked the beginning of the modern era. With only brief interruptions in 1924 and 1927, the economy performed at unprecedented levels, bringing a new standard of livingand a new lifestyleto more Americans than ever before.
Excerpted from Rainbow's End by Maury Klein. Copyright © 2001 by Oxford University Press, Inc.. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Meet the Author
Maury Klein is Professor of History at the University of Rhode Island and one of the most acclaimed historians of American business at work today. He is the author of many books, including The Life and Legend of Jay Gould, Unfinished Business: The Railroad in American Life, and Days of Defiance: Sumter, Secession, and the Coming of the Civil War.
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Shifts in American Psychology during 1918-30 As someone who is interested in economics, financial markets, and business, the stock market crash of 1929-1932 has always grabbed my attention in those terms. As a result, my favorite book on the events leading up to the stock market melt down is John Kenneth Galbraith¿s famous book, The Great Crash 1929. Having recently reread that book to contemplate the stock market melt down of 1999-?, I was interested to see what lessons could be drawn from that experience to this one from reading this book. As a work of psychological history, Professor Klein was hampered by the lack of survey and sentiment indices. As a result, he relies a great deal on what prominent people had to say and what they did. As a result, the bulk of the material repeats what Galbraith covered. To this material are added thoughtful observations about trends in popular expenditures for automobiles, interest in sports (especially baseball), fads (such as flag-pole sitting), modern marketing (including advertising through movies and radio), and the acceptance of installment purchasing. He picks up a number of individuals who represent different ¿types¿ who experienced the stock market crash, to help us see how the effects varied from person to person. Groucho Marx saw himself lose money he could regain through future earnings, while others saw themselves wiped out for all time. Both Charley Mitchell (no relation) of National City Bank and Jesse Livermore provide cautionary tales. I was fascinated by Professor Klein¿s thoughts about how Herbert Hoover was caught in a dilemma between his desire to help and his strong feeling that government should be kept small. This notion of focusing on the psychological change though would apply much better to the Great Depression itself than to the stock market crash. Since I was a child, many people have told me about how the Depression changed their outlook on life. Whenever I asked them about the stock market crash as a cause of a changed perspective, they said it had no impact. As Professor Galbraith points out, the number of stock investors was less than 2 million in those days. The stock market crash was a background event for most people, albeit an important one since a very high percentage of consumer spending was done by the wealthiest people, as Professor Galbraith points out. Ultimately, this history has too little economic, financial, and business perspective to fully capture what this event means. I suspect that it will not be widely read, even though the information and the analysis are perfectly fine as far as they go. How can we modulate the swings in investment emotion that cause markets to rise too high . . . and fall too low? What will we lose if we do? Donald Mitchell, co-author of The 2,000 Percent Solution and The Irresistible Growth Enterprise
I am not a specialist in finance or financial history, just interested in the 1920s. I was pleasantly surprised to find that Rainbow's End actually covered much more than the Crash; it amounts to a financial and cultural history of the US over the decade leading up to 1929. The author does a great job explaining in simple terms enough of the complicated financial transactions involved in creating the (apparent) prosperity of the 1920s to make the story fully intelligible. I was most struck by how similar the situation by the late 1920s is to the post-Enron situation today: dubious accounting practices involving holding companies and subsidiaries, banks pushing investments they were underwriting, insider trading, brokers knowingly hawking overvalued or even worthless stocks and securities, politicians refusing to act on the principle of laissez--faire, other politicians holding forth on subjects on which they had no expertise, media hype, backroom deals, extremely complicated deals, corporate takeovers, extension of excessive credit used both for investment and for boosting purchases of consumer goods, bail-outs, embezzlement, media collusion, exploitation of the most up-to-date technologies to sustain stock-buying frenzies, a few bigwigs getting rich on the backs of lots of little people, etc., need I go on? A number of the quotations that make the text vivid can be found repeated almost verbatim by politicians and pundits in today's news media. Although this book will probably not satisfy the specialist historian, it is likely to fascinate anyone interested in modern history or finance. If you have money invested these days in stocks, bonds, or real estate, this book is a 'must-read.'