When the Senate Turned Up the Heat on Wall Street

In the summer of 1933, Congress investigated Wall Street's role in causing the Great Depression. 

The U.S. Senate Banking and Currency Committee resumed its investigation of Wall Street financial practices on June 27, 1933, after a few weeks' break. Congress had increased its scrutiny of Wall Street and was looking into its role in causing the Great Depression.

The panel's chief counsel, Ferdinand Pecora, who targeted J.P. Morgan in the first round, opened by questioning Otto Kahn, senior partner at Kuhn, Loeb & Co., "a house that stands next to Morgan in reputation," Time magazine wrote.

Kahn, 67, the public face of the bank and a partner since 1897, provided copious documents and accounts detailing the company's clients, its profit -- about $16.6 million from 1927 to 1931 -- and the partners' incomes. Like J.P. Morgan, Kahn had paid no federal income tax in 1930, 1931 or 1932, quite legally. However, Kahn's sale of a portfolio of shares to his daughter that generated a tax loss of $117,000 raised eyebrows.

Still, Kahn's testimony was surprising. He said he agreed that much change was needed in finance, and that "the time is ripe to have it changed." In addition, the stock-market crash of 1929 had shaken his faith in the capitalist system, and he judged that the years of economic "mania" afterward stemmed from the easy-money policy of the Federal Reserve and the millions who had bought securities.

Kahn argued that bankers weren't the central cause of the crash, nor were they responsible for the bull market that summer. To the financial community's astonishment, share prices had doubled in the four months since President Franklin D. Roosevelt's inauguration. The Dow Jones Industrial Average soared from 50 to almost 110.

Pecora asked Kahn to explain the difference between speculation and gambling in the market. Kahn replied that speculation was unavoidable in business.

"When a man with $100,000 made a $5,000 venture in the market, he was speculating," he said. "But when a man with $5,000 risked his future with a $5,000 purchase, it was gambling."

Kahn also said bear operations were detrimental to the financial community. He pressed for regulation of the New York Stock Exchange to prevent harmful economic events. One senator observed: "You are the first witness who has stated that bears are able to depress the market."

The press's response to Kahn's testimony was crisp. "Well, two times two makes four," the Wall Street Journal wrote. "Of course, the bears have an effect on the market and if the bear goes about seeking whom he can devour, he ought to be restricted."

Overall, the suave and precise Kahn hardly resembled the buccaneering schemers Congress loved to hate. He explained that his company never actively sought new business, but waited, as a proper investment bank should, for clients to come. Ridiculing cut-throat competition for bond issues, he described the efforts by a dozen U.S. banks to secure a 1920s Yugoslav share sale as "an undignified scramble."

At day's end, Pecora announced the hearings' suspension until the fall. Summer break had begun. And, as Kahn told the committee, "a new economic era" was unfolding.

(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog.)

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