Making Money By Speculation

The following is an excellent excerpt from the book “THE RICH DON’T ALWAYS WIN: The Forgotten Triumph Over Plutocracy That Created The American Middle Class, 1900-1970” by Sam Pizzigati from Chapter Four on page 119 and I quote: “”In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing,” the Utah banker explained. “When their credit ran out, the game stopped.”
Until that stopping moment, the concentration of America’s income and wealth would have the nation’s economy on a wild roller coaster ride. The problem at the root of that wild ride: The rich simply had too much money sloshing in their pockets. The nation’s richest 0.1 percent—just twenty-four thousand families—held over ta third of the nation’s wealth. They could and did consume some of that. They could and did invest in productive enterprises with some more. But that still left the wealthy with huge stashes of cash looking for profit-making opportunities. These wealthy did what the wealthy always do when the cash in their pockets runneth over. They speculated.
First in real estate. The surge in automobile manufacturing created a booming market for suburban and vacation homes. Developers, notes economic historian Polly Cleveland, rushed to cash in. They bought up and subdivided huge chunks of acreage. Banks greased the way with “shoestring mortgages” that enabled purchasers to pick up property without putting much of their own money down. Property and home prices, amid this growing speculative mania, shot up spectacularly. Around Chicago, land values rose over four times faster than population growth from the end of World War I to 1926. Between n 1920 and 1926, San Diego would see an 80 percent leap in the value of building permits. In Florida, the land boom’s epicenter, an elderly man from Pinellas County found himself committed to a sanitarium—by his sons—after he put his $1,700 life savings into a local land deal. In 1925, the value of that Pinellas parcel hit $350,000. The committed elderly gentleman then won his release and sued his sons.
The land bubble popped in 1926. In Florida, a wave of bankruptcies then hit banks and developers with hurricane force. Creditors settled for tiny fractions of a penny on the dollar. In Boca Raton, one typical bankruptcy settlement left an engineering firm owed $30,764 with just $30.76. But the real estate bust in no way dampened the nation’s speculative spirit. The action merely shifted to Wall Street and the stock market. Americans, had, of course, been trading stocks for generations. But nineteenth-century stock traders, as financial historian Lawrence Mitchell notes, mostly “saw corporate securities as a way to get a steady return while protecting their principal.” By the 1920s, most traders had become speculators, ever ready to pounce and profit off, “the fluctuations of an increasingly volatile market.”
Wall Street bankers fed this growing speculative frenzy. They assembled armies of sales agents who descended on Americans of middle-class means—professionals, shopkeepers, and other small businesspeople—with dreamy promises of substantial and worry-free reward. Few Americans could afford to take the stock market plunge, no more than two million out of a 125 million population. But “margin accounts” would help these two million create an enormous demand for financial product. At the start of 1928, an investor buying “on margin” could pick up an eighty-five dollar share of RCA stock with just ten dollars. By year’s end, that share was selling at $420. The investor could sell, pay off the original seventy-five dollar margin loan, and walk away with a $330 profit off a ten dollar initial investment.
Everyone with a modicum of money seemed to want in on this game, and Wall Street bankers graciously obliged. They gobbled up real-life brick-and-mortar enterprises from their private owners and turned the enterprises into stock certificates suitable for public consumption. But America only had so many real companies. Wall Street bankers would invent new ones. They created “investment trusts” that would have no other purpose than to own shares of stocks in other companies. Each investment trust would then issue its own shares of stock.
“Holding companies” would operate on a similar principle. Their principals would use other people’s money, raised through the stock market, to collect real companies within particular industries, most notably railroads and utilities. They would proceed to loot the companies—and consumers—in these broad holding company empires.
Investment trusts sold $400 million worth of stock in 1927, notes one history of the era by journalist Linda McQuaig and tax law academic Neil Brooks, and $3 billion worth just two years later. One immense railroad holding company organized by movers and shakers at J.P. Morgan would all by itself amass a $3 billion value.
By decade’s end, the corporate pillars of America’s real economy—General Motors, Chrysler, General Foods, Standard Oil—had tossed their chips into the Wall Street frenzy too. These corporate giants could make more money supplying money for margin loans than they could investing in their own operations. Speculators would pay dearly and willingly for that money. Interest rates on margin loans would rise up to 10 and 12, then even 20 percent. No matter. If investments continued to rise at RCA-like rates, the speculators could till make a killing.
Not as much, naturally, as the Wall Street insiders who were nurturing the speculation. These fabulously rich insiders chafed at the income taxes the federal government still expected them to pay. At 25 percent on income over $100,000, the top federal rate was still running more than triple the 7 percent top rate in effect as recently as 1915.
The savviest of Wall Street’s rich saw the Republican Party at this point as something of a dead-end. Republicans in Congress had tried and failed—with their national sales tax proposal—to come up with an alternative source of revenue to the income tax. But an easier alternative beckoned: the repeal of Prohibition. But Republicans could never push that repeal. They remained too culturally beholden to Midwest Protestant temperance values and votes. The big-city Democrats, on the other hand, could go after Prohibition. The obvious strategy for Wall Street’s savviest: take control of the Democratic Party and make repealing Prohibition the party’s top platform plank. With repeal, alcohol would be legal and taxable once again. The revenues from resuming federal excise taxes on alcohol would be enough to offset halving the income tax. The rich, notes historian Robert McElvaine, would give America’s workers beer. America’s workers would give the rich a tax cut.
The scheme almost worked. Deep pockets around Pierre du Pont, president of the DuPont empire, lined up behind New York governor Al Smith, a Wall Street pal with the common touch, and Smith, once he had the1928 Democratic nomination in hand, named Wall Street financier Jakob Raskob chairman of the Democratic national committee. Smith would campaign as a “wet”–and fiscally to the right of Republican Herbert Hoover.
But Hoover had the momentum of the Roaring Twenties behind him and romped to an easy victory. The DuPont backroom maneuvering may have even reawakened Hoover’s inner Populist. Newly inaugurated, in March 1929 Hoover wold pronounce that “excessive fortunes are a menace to true liberty by the accumulation and inheritance of economic power.” He then retired from service the presidential yacht.
That symbolic gesture may have momentarily raised some worried eyebrows on Wall Street and Park Avenue. Still, the nation’s rich had no real reason to fear Hoover, or anyone for that matter. The nation’s two major parties had now both become cheerleaders for a national economic order that championed the pursuit of grand fortune. “Everybody Ought to be Rich,” as the headline over a 1929 Ladies Home Journal article by Democratic National Party Chairman Jakob Raskob put it.
The rich, to be sure, still had worries. Yacht owners had a devil of a time convincing their fellow rich to join them on yachting excursions. No one wanted to be stuck on board a two-hundred-foot yacht, trapped with boring company for days on end. “The problem of getting a yacht full of congenial guests for a cruise of any length” has become such a headache, Samuel Blythe, an upstate New York editor and Rochester Yacht Club member, would write, “that most yacht owners give up in despair after a few tries.” Their yachts would sit forlornly, unused, for years at a time.
Not all vessels of the wealthy would suffer this fate. First National Bank of New York president George F. Baker Jr. used his lovely boat nearly every day. He commuted via speed cruiser to Wall Street from his home on Long Island, shaving and dressing on board. In the fall of 1929, Baker’s sun-drenched commutes would suddenly darken. The Wall Street house of cards, the endless pyramiding of investment trusts, had begun to topple. Baker and a half-dozen fellow Wall Street bankers would raise a quarter-billion dollars to calm the markets, but the markets would raise a quarter-billion dollars to calm the markets, but the markets would have no calming. America’s greatest speculative bubble had now burst. Americans with money ran scared. They began yanking savings out of their bank accounts. Banks failed, businesses went bankrupt, workers lost jobs. America no longer roared. American plutocracy had failed.
Chester Bowles, a young Yale grad and a successful Madison Avenue advertising executive when the crash hit, would later mull over that failure. The decade of the 1920s had demonstrated, he would write, that prosperity cannot continue unless enough income is being distributed to all of us—farmers and workers as well as businessmen.”
The plutocrats had had their opportunity, and they had blown it. American had given them everything they desired. The freedom to do whatever they wanted. The power to bend others to their will. And ever-grander fortunes as both incentive and reward. America choked on those fortunes. A maldistribution of income and wealth that severe the American economy simply could not swallow.
“Even with the most business-minded administration in our history, even with falling taxes and a government surplus, even with everything that businessmen thought they needed to insure continued prosperity,” Bowles reflected, “we could not duck that basic issue for more than a few tinsel-decorated years.””

(DO ANY OF THESE COMMENTS IN THE 1920s REMIND YOU OF WHAT TOOK PLACE RIGHT AFTER PRESIDENT BILL CLINTON GOT RID OF THE GLASS-STEAGALL ACT AND GEORGE W. BUSH GOT ELECTED? IN THE 1920s, THE RICH HAD SO MUCH MONEY THAT THEY BEGAN SPECULATING AND “THE BANKS GREASED THE WAY WITH “SHOESTRING MORTGAGES” THAT ENABLED PURCHASERS TO PICK UP PROPERTY WITHOUT PUTTING MUCH OF their OWN MONEY DOWN.” JUST LIKE COUNTRYWIDE DID. I QUOTE FROM PAGE 120:
Wall Street bankers fed its growing speculative frenzy. They assembled armies of sales agents who descended on Americans of middle-class means—professionals, shopkeepers, and other small businesspeople—with dreamy promises of substantial and worry-free reward. Few Americans could afford to take the stock market plunge, no more than two million out of a 125 million population. But “margin accounts” would help these two million create an enormous demand for financial product. At the start of 1928, an investor buying “on margin” could pick up an eighty-five dollar share of RCA stock with just ten dollars. By year’s end, that share was selling at $420. The investor could sell, pay off the original seventy-five-dollar margin loan, ans walk away with a $330 profit off a ten dollar initial investment.”
THEY USED MARGINS AND WE CALL IT LEVERAGE TODAY. THIS IS WHY I HOPE THE IRS FOLLOWS UP ON HOW THE INVESTMENT BANKS ARE CONDUCTING THEIR BUSINESS BECAUSE IT SOUNDS LIKE THYE ARE DOING THE SAME THING TODAY THEY WERE DOING IN THE ROARING 1920s. GIANT CORPORATIONS SUCH AS GENERAL MOTORS, CHRYSLER, GENERAL FOODS AND STANDARD OIL COULD MAKE MORE MONEY SUPPLYING MONEY FOR MARGIN LOANS THAN INVESTING IN THEIR OWN COMPANIES. THIS IS THE SAME THING THAT’S HAPPENED IN THE LAST 30 YEARS AND THAT EVEN GOT IN TROUBLE BECAUSE THEY WERE SO INEFFICIENT. THEN AFTER THEY WERE CLOSE TO BANKRUPTCY OR BANKRUPT, THEY ROBBED THEIR PENSION FUNDS. A LOT OF THESE PROBLEMS ARE THE STOCKHOLDERS OWN FAULT BECAUSE THEY WEREN’T REALLY QUESTIOING THEIR SLICK-TALKING CEO’s. JUST LIKE, UP TO NOW, WE TAXPAYERS, HAVEN’T BEEN DOING OUR JOB SUFFICIENTLY, CONCERNING THE HEDGE FUNDS AND THE TOXIC DERIVATIVE MARKET. BOTH THE LEFT WING AND THE RIGHT WING AND WHOEVER IS BEING GOUGED MORE, I HOPE THE IRS CAN COME UP WITH AN HONEST APPRAISAL, SIMPLIFYING THE JOB OF THE RATINGS AGENCIES AND HELPING US MIDDLE CLASS TAXPAYERS AT THE SAME TIME BECAUSE IF WE GET A BIGGER BUBBLE THAN WE DID IN 2008, WHICH I’VE PUT EXCERPTS FROM VARIOUS BOOKS ON MY BLOG SITES (WORDPRESS AND THE NATION BUILDERS), I SHUDDER TO THINK WHAT KIND OF EXPLOSION THAT WOULD MAKE WORLDWIDE.

LaVern Isely, Overtaxed Independent Middle Class Taxpayer & Public Citizen & AARP Members

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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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