Copyright Copyright © 2017 by Charles R Morris Published in the United States by PublicAffairs™, an imprint of Perseus Books, a division of PBG Publishing, LLC, a subsidiary of Hachette Book Group, Inc All rights reserved No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews For information, address PublicAffairs, 1290 Avenue of the Americas, New York, NY 10104 PublicAffairs books are available at special discounts for bulk purchases in the U.S by corporations, institutions, and other organizations For more information, please contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street, Suite 200, Philadelphia, PA 19103, call (800) 810-4145, ext 5000, or e-mail special.markets@perseusbooks.com Book Design by Jack Lenzo Library of Congress Control Number: 2016962748 ISBN 978-1-61039-534-2 (HC) ISBN 978-1-61039-535-9 (EB) First Edition E3-20170206-JV-PC CONTENTS Cover Title Page Copyright Dedication List of Figures Foreword Prelude PART ONE: AMERICA DISCOVERS THE MODERN I The Jazz Age II Edison, Tesla, Westinghouse, and Insull III And Then Came Ford IV Transformations: New York City V The View from Below: Muncie, Indiana VI Dislocations PART TWO: “ONE HECKUVA BOOM” I Trickle-down Economics II From War to Prosperity III Electrifying Chicago IV David Buick, Billy Durant, Alfred Sloan, and the Modern Car Industry V What Happened to Ford? VI A Productivity Bonanza VII Spinoffs VIII Laggards: Agriculture IX Laggards: Real Estate X On the Eve of the Crash PART THREE: THE CRASH IN THE UNITED STATES I New York Stock Exchange II The Rise of Herbert Hoover III Charting the Fall IV The Worm’s Eye View V The Banking Crises of the Great Depression VI The Twilight of the Gods I: Insull VII The Twilight of the Gods II: Kreuger PART FOUR: BLOOD, GOLD, AND UNPAID DEBTS I Entanglements II The Gold Standard III Germany, 1919–1925: Vengeance, Reparations, and War Debts IV The Dawes and Young Plans V England, 1919–1925: Churchill (Sort of) Chooses Resumption VI The French Rollercoaster VII The End of Cooperation VIII Germany Unravels IX The Golden Jihad X Getting What You Wish For PART FIVE: ROOSEVELT, REFLATION, AND RECOVERY I World Monetary & Economic Conference II Devaluing the Dollar III Creating the “New Deal” IV The New Deal in Overview V The New Deal in Detail VI The Rest of the New Deal: A Roundup VII Econometric Analyses VIII Catastrophe IX The Unemployment Conundrum X The Great Leap Forward PART SIX: THE GEOLOGY OF THE COLLAPSE I The Legacy of War II The Big Picture III The Details IV A Postscript to the Reader Acknowledgments Photo Credits Appendix: Milking the Insull Structure Notes Index About the Author Also by Charles R Morris With love, to Beverly I was lucky enough to see with my own eyes the recent stock-market crash, where they lost several million dollars, a rabble of dead money that went sliding off into the sea —FEDERICO GARCIA LORCA * Once the gold price was stabilized in January 1934, the Treasury replaced the Federal Reserve as the custodian for American gold Up until then, the Fed had made a practice of “sterilizing” gold inflows by offsetting them with new liabilities so base money would not be increased The Treasury’s practice was to pay for gold inflows with drafts drawn on the Fed, which it replenished with new gold certificates As the Treasury spent down those replenished funds, the monetary base was increased by the same amount as the new gold inflow When the Treasury decided to sterilize the inflows, it paid for the gold with drafts on the Fed as before, but deposited the resultant certificates into an inactive Treasury account and repaid the Fed out of its current balances, thus avoiding net money creation * Despite stated worries about the inflationary potential of large excess reserves, the primary motive for the Fed’s action was to take back monetary controls usurped by the Treasury The conventional Fed monetary tools, controlling the level of reserves through the discount rate and open market operations, were useless if the banks carried large idle balances The Fed was quite circumspect in implementing the reserve rules, and stayed in close contact with the Treasury throughout * In his famous MacMillan Committee testimony, Keynes pointed out that the “Treasury view” following the tenets of classical economics was that “unemployment, except of a merely transitory character of which one need take no serious account, is an impossibility.” * Note that the source data are in index numbers, 1929=100, so they show only relative changes of the two variables, with no information on their absolute values, although business profits were high in the late 1920s, and Figure 5.2 suggests that workers were getting a dwindling share of the pie * I can’t prove this, of course But in the 1980s, I worked as a valuation consultant for buyout firms, with a particular focus on manufacturing It was a period when America’s factories were being decisively outperformed by German and Japanese competitors Few of the companies selling their manufacturing units had any idea how poorly they were run † Roose treats residential and business construction together By 1937, they were less than a third of the peak quarterly rate in the 1920s His text suggests without quite stating that they moved down roughly at the same rate Producer durable equipment, however, enjoyed “a vigorous expansion” bringing them back to the 1929 level by 1936, and almost 20 percent above the 1929 peak by the second quarter of 1937 * Farm productivity varies with the weather, and the outputs of government and many types of service workers don’t lend themselves to productivity measures In the case of a kindergarten teacher, for example, would larger class sizes be an index of productivity? * When Great Britain returned to the gold standard in 1925, most of the smaller European countries followed, but most of them did so at devalued exchange rates, some at just a tiny fraction of the prewar parity The point of their “resumption,” however, was just to peg the value of a currency to a strong outside standard as a point of stability Small-country currencies were rarely accepted in international trade * Total private mortgage debt was $41.3 billion; the number above strips out farm mortgages and residential mortgages held in corporate names The ratio of household mortgage debt to GDP today is 53 percent Given the fact that the home mortgage finance industry had been a major factor in the economy for barely a decade, the growth is impressive The day’s economic managers likely had little idea of the time bomb they were sitting on * The layered utility holding companies of the 1920s and 1930s resemble in many ways the collateralized debt obligations (CDOs) that played such a prominent role in the 2008 financial crash Holdings were highly stratified, with very high returns and very high risk accruing to the most junior tranches In both cases, basically sound financing concepts were stretched to the breaking point in pursuit of profits and control—and inevitably they broke * The depreciation reserve is not a cash reserve but is an accounting charge to reflect the wear-and-tear cost to an asset When the electrical utility industry was in its rapid-growth mode, the thirty-year-depreciation standard was probably far too long, since a plant had to be constantly upgraded to keep up with the growth in demand photo © Andrew Popper A Rabble of Dead Money is Charles R Morris’s fifteenth book Other books include The Cost of Good Intentions, a New York Times selection as an “Editor’s Choice for 1980”; The Tycoons, a Barron’s Best Book of 2005; The Trillion Dollar Meltdown, winner of the 2008 Gerald Loeb Award and a New York Times bestseller; and The Dawn of Innovation, a Wall Street Journal Best Business Book of 2012 A lawyer and former banker, Mr Morris’s articles and reviews have appeared in many publications, including the Atlantic Monthly, the New York Times, and the Wall Street Journal, and his books have been translated into eighteen languages He is a fellow of the Century Foundation and a member of the Council on Foreign Relations ALSO BY CHARLES R MORRIS Comeback: America’s New Economic Boom The Dawn of Innovation: The First American Industrial Revolution The Sages: Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash The Surgeons: Life and Death in a Top Heart Center The Tycoons: How Andrew Carnegie, John D Rockefeller, Jay Gould, and J P Morgan Invented the American Supereconomy Money, Greed, and Risk: Why Financial Crises and Crashes Happen American Catholic: The Saints and Sinners Who Built America’s Most Powerful Church The AARP: America’s Most Powerful Lobby and the Clash of Generations Computer Wars: The Fall of IBM and the Future of Global Technology The Coming Global Boom: How to Benefit Now from Tomorrow’s Dynamic World Economy Iron Destinies, Lost Opportunities: The Arms Race Between the United States and the Soviet Union, 1945–1987 A Time of Passion: America, 1960–1980 The Cost of Good Intentions: New York City and the Liberal Experiment, 1960–1975 PublicAffairs is a publishing house founded in 1997 It is a tribute to the standards, values, and flair of three persons who have served as mentors to countless reporters, writers, editors, and book people of all kinds, including me I F STONE, proprietor of I F Stone’s Weekly , combined a commitment to the First Amendment with entrepreneurial zeal and reporting skill and became one of the great independent journalists in American history At the age of eighty, Izzy published The Trial of Socrates, which was a national bestseller He wrote the book after he taught himself ancient Greek BENJAMIN C BRADLEE was for nearly thirty years the charismatic editorial leader of The Washington Post It was Ben who gave the Post the range and courage to pursue such historic issues as Watergate He supported his reporters with a tenacity that made them fearless and it is no accident that so many became authors of influential, best-selling books ROBERT L BERNSTEIN, the chief executive of Random House for more than a quarter century, guided one of the nation’s premier publishing houses Bob was personally responsible for many books of political dissent and argument that challenged tyranny around the globe He is also the founder and longtime chair of Human Rights Watch, one of the most respected human rights organizations in the world For fifty years, the banner of Public Affairs Press was carried by its owner Morris B Schnapper, who published Gandhi, Nasser, Toynbee, Truman, and about 1,500 other authors In 1983, Schnapper was described by The Washington Post as “a redoubtable gadfly.” His legacy will endure in the books to come Peter Osnos, Founder and Editor-at-Large ... audacity.”5 The spark that set off the war was the June 28 assassination of the Grand Duke Franz Ferdinand, the heir to the throne of the Austrian-Hungarian empire and his wife, in Sarajevo The. .. imposed on France at the end of the 1870–1871 war—in addition to the annexation of the rich coal district of Alsace-Lorraine Germany finally paid about half of the reparations, the great part of it... dishonesty that was the heritage of the war and the Treaty of Versailles The major powers the United States, Great Britain, France, and Germany—each had quite different views on issues of war debts and