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Charles E. Mitchell: Scapegoat of the Crash?

Published online by Cambridge University Press:  11 June 2012

Thomas F. Huertas  and
Joan L. Silverman
Thomas F. Huertas
Affiliation:
Thomas F. Huertas and Joan L. Silverman are officers of Citibank, N. A.
Joan L. Silverman
Affiliation:
Thomas F. Huertas and Joan L. Silverman are officers of Citibank, N. A.
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Abstract

Extremely successful both as an investment and as a commercial banker, Charles E. Mitchell was identified by contemporaries as the epitome of the unscrupulous “money changers” whose speculative dealings they felt played a major role in the Crash of 1929 and the ensuing economic collapse. This portrayal has been echoed and elaborated by historians and commentators down to the present day. In this article Dr. Huertas and Dr. Silverman demonstrate that Mitchell's activities, while sometimes ill-advised, were motivated by the economic“good sense” of the day and were not attributable to either rampant immorality or ungoverned greed. At the same time, they direct the attention of economic historians to the monetary policies of the Federal Reserve system in the 1920s and 1930s—in which Mitchell also played a role—and suggest that a more potent source of the Great Depression lies therein.

Type
Articles
Information
Business History Review , Volume 60 , Issue 1 , Spring 1986 , pp. 81 - 103
Copyright
Copyright © The President and Fellows of Harvard College 1986

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References

1 As recently as its 19 April 1976 issue, Business Week, 56–57, was still quoting the remarks of Senator Carter Glass (D-Va.) made in November 1929. See also Time, 18 Nov. 1929, 45. For a more complete discussion of some of the issues raised in this paper see Cleveland, Harold van B. and Huertas, Thomas F., Citibank, 1812–1970 (Cambridge, Mass., 1985).Google Scholar This article is based largely on testimony at congressional hearings and trial proceedings, as well as on secondary sources. To our knowledge, the records of the National City Company were destroyed, and no collection of Mitchell correspondence exists.

2 Wilson, Edmund, “Sunshine Charley,” New Republic, 28 June 1933, 176–78Google Scholar, repr. in his The American Earthquake (Garden City, N.Y., 1958), 484–89. Time, 2 Jan. 1933, 27, called Mitchell “the popular scapegoat of the crash.” See also Sherrod, Julian, Scapegoats by One of Them (Dallas, 1931).Google Scholar

3 Franklin D. Roosevelt, First Inaugural Address, 4 March 1933, as reported in New York Times, 5 March 1933.

4 New York Times, 28 Feb. 1933; Time, 6 March 1933; and Literary Digest, 8 April 1933 report Roosevelt's suggestion that Mitchell resign.

5 Cf. U.S. v. Henry S. Morgan et al., “Corrected Opinion of Harold R. Medina,” 4 Feb. 1954, 361. For a discussion of the antitrust case and the antecedent Temporary National Economic Committee (TNEC) hearings of 1939 see Carosso, Vincent P., Investment Banking in America: A History (Cambridge, Mass., 1970), 408–95Google Scholar, and Carosso, , “The Wall Street Money Trust from Pujo to Medina,” Business History Review 47 (Winter 1973); 432.CrossRefGoogle Scholar

The government was convinced that Blyth & Company was a successor to the defunct National City Company and that it maintained “a historic relationship” with National City Company's former clients. Similar charges were made regarding Harriman Ripley and Lazard Freres, which also employed former City Company officials.

Mitchell's testimony concerning his actions at Blyth significantly contributed to the investment bankers' refutation of the government's case. As Arthur H. Dean (a counsel for the investment bankers) noted in an interview (New York, 29 July 1980), “there was a great deal of competition among the investment bankers to get business but generally you were supposed to do it in a polite sort of way, but Charlie decided he was going to do it directly and he went directly to see the head of these corporations who had customarily done their underwriting through other investment banking firms…. Charlie made up his mind that he was going to go after all the business that he could get and he did.” Mitchell testified that he had attempted to win underwriting mandates for Blyth by developing and proposing recapitalization plans to various companies. This helped to disprove the government's contention that Blyth had simply inherited the business of the National City Company. Judge Harold D. Medina found “continuous and uninterrupted competitive efforts by Blyth in derogation of the terms of the alleged conspiracy.” No evidence existed of any practice of “traditional banker” or “conspiratorial inheritance.” Nor did Medina find any succession between National City Company and Harriman Ripley or any other firm either de jure or de facto.

The extent to which investment banking was not competitive in the 1950s and subsequently was due to the Glass-Steagall Act itself, which barred commercial banks from underwriting corporate securities directly or through certain types of affiliates, Cf. Hayes, Samuel L. III, Spence, A. Michael and Marks, David van Praag, Competition in the Investment Banking Industry (Cambridge, Mass., 1983), 22Google Scholar, and Huertas, Thomas F., “An Economic Brief Against Glass-Steagall,” Journal of Bank Research 15 (1984): 158.Google Scholar

6 Number Eight (an in-house monthly publication of National City Bank), June 1922.

7 Vanderlip, Frank A., From Farm Boy to Financier (New York, 1935), 287.Google Scholar

8 Peach, W. Nelson, The Security Affiliates of National Banks (Baltimore, 1941), 20.Google Scholar The City Company's strategy resembles the backward integration strategy later employed by retail-oriented firms in the 1960s and 1970s. See Hayes, Samuel L. III, “The Transformation of Investment Banking,” Harvard Business Review 79 (1979): 154–55.Google Scholar

9 Time, 6 March 1933, 48.

10 National City Bank, Monthly Economic Letter, March 1933, 33. Mitchell made this statement at the time of his resignation.

11 National City Bank, Executive Committee, Minutes, 1 May 1923, Citibank, New York. The management fund is relevant to recent developments in the theory of the firm which have described the firm as a set of contracts among factors of production, each acting in its own self-interest; see Fama, Eugene, “Agency Problems and the Theory of the Firm,” Journal of Political Economy 88 (1980): 289.CrossRefGoogle Scholar The management fund was just such a contract. Through the management fund, the owners and management agreed to tie the latter's compensation to the firm's profitability by sharing the risk and reward. In terms of this theory, the bank at this stage represents a transition stage between the entrepreneur-partial owner analyzed by Jensen, Michael C. and Meckling, William H. in “Theory of the Firms: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–60CrossRefGoogle Scholar, and the fully modern corporation analyzed by Fama in which managers own no stock.

12 Later Mitchell would observe, “Unless the man of energy and perhaps ability can see within his own organization a point that has great material benefit that he can reach by his own efforts, his ambition becomes dulled.” New York Times, 9 April 1934.

13 See, for example, Literary Digest, “Our Million a Year Men,” 10 May 1930; “Why Million Dollar Insurance Policies Are Popular,” 11 Oct. 1930.

14 The first three adjectives were regularly applied to Mitchell in the New York Times; the fourth occurs in a New York Times article of 13 Oct. 1932.

15 See Isaac Marcosson, “How Is Business?” Saturday Evening Post, 14 April 1928.

16 Pecora, Ferdinand, Wall Street under Oath: The Story of Our Modern Money Changers (New York, 1939), 71.Google Scholar

17 Time, 2 Jan, 1933, 27.

18 Pecora, Wall Street under Oath, 71.

19 Senator Wheeler spoke on national radio on 25 Feb. 1933, repeating what he had said on the Senate floor two days earlier.

20 The formal indictment presented at the trial alleged that Mitchell had evaded payment of $858,000 in taxes on his income for 1929 and 1930 as a result of 1) an improper deduction of a loss of $2.8 million resulting from a sale of National City stock to his wife on 20 Dec. 1929; 2) the failure to report as income an advance of $667,000 from the management fund of the National City Company that he had received in July 1929; and 3) an improper deduction of a loss of $759,000, resulting from the sale of Anaconda Copper stock to W. D. Thornton, president of an Anaconda subsidiary, in 1930. See New York Times, 22 June 1933.

21 New York Times, 18 March 1933.

22 Night letter from Houseman, 25 May 1933 and Franklin Roosevelt's answer, 27 May 1933, Roosevelt Library, Hyde Park, N.Y.

23 According to the Chicago Tribune, 24 Feb. 1933, “The only difference between a bank burglar and a bank president is that one works at night.” The adjectives cited appear in almost every issue of the Nation from 8 March through 5 July 1933, and were echoed in newspapers nationally. See particularly Nation issues of 5 April, 357; 12 April, 399; and 19 April, 437–38.

24 Literary Digest, 1 July 1933, 3.

25 Ibid., 22 July 1933.

26 New York Times, 8 Aug. 1935.

27 Letter to E. S. Greenbaum from Franklin Roosevelt, 9 March 1938, Roosevelt Library.

28 “Troubles of Mitchell,” Time, 18 Nov. 1929, 45. Emphasis added.

29 This account is based on Mitchell's testimony at the trial and in the Pecora hearings and on the merger agreement between Corn Exchange and National City. See New York Times, 19 Sept. 1929, 24 Feb. 1933, and 6–7 June 1933. Mitchell's statements were corroborated by evidence given by George Whitney, partner in J. P. Morgan & Company, before the Senate Banking Committee and at the trial. The Corn Exchange had an extensive local branch system which made it attractive to National City Bank.

30 Congressional Record, vol. 75, pt. 6, 6052 (15 March 1932). The hearings on which Johnson based his remarks are U.S. Senate, 72d Cong., 1st sess., Sale of Foreign Bonds or Securities in the United States (Washington, D.C., 1932).

31 Morison, Samuel Eliot and Commager, Henry Steele, The Growth of the American Republic (New York, 1962), 650.Google Scholar See also Kilborn, Peter T., “From Binge to Bust: The Legacy of the Crash,” New York Times, 23 Sept. 1979Google Scholar; Seligman, Joel, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston, 1982), 23–37.Google Scholar

32 National City Company, Putting Your Dollars To Work (New York, 1928).Google Scholar

33 National City Company, Putting Your Dollars to Work (New York, 1926).Google Scholar

34 Mitchell, Charles E., “Investing for Independence,” Women's Home Companion, Nov. 1919, 150Google Scholar.

35 Attached to Mitchell's portrait in a 1980 National Portrait Gallery exhibit was the following statement:

When Wall Street's perilous credit structure first began to show signs of tottering in the spring of 1929, it was National City Bank's President Charles E. Mitchell, a director himself of the Federal Reserve Bank of New York, who effectively defied the admonitions of the Federal Reserve Board to desist from making further loans for speculative purposes. Having thus demonstrated the ineffectiveness of the traditional instruments of financial control, the head of the nation's largest commercial bank made it perfectly clear that speculators would not be shaken from their stock market fantasy by anything less than major disaster.

36 Cited in Friedman, Milton J. and Schwartz, Anna J., A Monetary History of the United States, 1867–1960 (Princeton, 1963), 260.Google Scholar According to the New York Times, 29 March 1929, Mitchell's bank would loan this sum “rather than permit a complete demoralization of the money market.”

37 New York Times, 29 and 30 March 1929. Senators George W. Norris and Duncan Fletcher joined Glass's denunciation of Mitchell. The coauthor of the Federal Reserve Act, ex-Senator Robert L. Owen, defended Mitchell, however, for his aid to the market (New York Times, 31 March 1929). The Commercial and Financial Chronicle, 30 March 1929, while agreeing that Mitchell's remarks were “unfortunate” and that “he laid himself open” to Senator Glass's attack, concluded that “his declaration was that of a courageous man and one … alive to the dire disaster that threatened if there should be a complete shutting off of new money supplies. In the circumstances his stand was entirely justified.”

38 Galbraith, John Kenneth, The Great Crash 1929 (50th anniversary ed.; Boston, 1979), 39.Google Scholar See also Seligman, Transformation, 4, 7; Brooks, John, Once in Golconda: A True Drama of Wall Street, 1920–1938 (New York, 1969), 100–104.Google Scholar

39 Conversations, I, memorandum of 29 March 1929, regarding events of 26 March 1929, Harrison MSS, Columbia University, New York.

40 Charles S. Hamlin, Diary, 29 March 1929, Library of Congress, Washington, D.C.

41 Friedman and Schwartz, Monetary History, 299–419. For a survey of alternative theories regarding the causes of the Great Depression, see Aldcroft, Derek H., From Versailles to Wall Street, 1919–1929 (Berkeley, 1977), 268–84.Google Scholar

42 National City Bank, Annual Report (1930).

43 Ibid.

44 For a discussion of the difference between the Federal Reserve Bank of New York and the Federal Reserve Board during the first half of 1929, see Friedman and Schwartz, Monetary History, 254–56; Wicker, Elmus R., Federal Reserve Monetary Policy, 1917–1933 (New York, 1966), 129–43.Google Scholar

45 Harrison MSS; Federal Reserve Bank of New York, Board of Directors, Minutes, 9 Oct. 1930, 23 April 1931, 24 Dec. 1931, Columbia University, New York.

46 Ibid., 11 Sept. 1930; 25 May 1931; 4 Aug. 1931.

47 Ibid., 24 Dec. 1931.