The best way to learn financial ethics is to study the lives of the nine wealthiest financiers of 1923. A quarter-century later, they were all either dead, broke, or in prison.
On Wednesday, January 21, 2009, President Obama’s first day in office, he unveiled ethics rules “to help restore America’s faith in government and business.” Flash back. On Monday, April 4, 1983, my father had a fatal heart attack. I left the hospital with his overcoat, Patek Philippe wristwatch, and his well-worn black leather wallet. Inside was about $70 held by a paper clip, various cards, and a piece of paper cracking at the folds. It read:
Food For Thought
In 1923, a very important meeting was held at the Edgewater Beach Hotel in Chicago. Attending this meeting were nine of the world’s most successful financiers. Those present were:
Charles Schwab, President of the largest independent steel company (Bethlehem Steel).
Samuel Insull, President of the largest utility company (Edison General Electric).
Howard Hobson, President of the largest gas company (Associated Gas & Electric System)
Arthur Cutten, The great wheat speculator.
Richard Whitney, President of the New York Stock Exchange.
Albert Fall, A member of President Hoover’s Cabinet.
Jesse Livermore, The greatest “bear” on Wall Street.
Ivar Kreuger, Financier and head of the world’s greatest monopoly (The “Match King”).
Leon Fraser, President of the First National Bank of New York and the Bank of International Settlements.
Certainly we must admit that here were gathered a group of the world’s most outstanding personages—men who had solved the secret of making money. Twenty-five years later, let’s see what happened to these men.
Charles Schwab went bankrupt. He left as his legacy a syphilitic wife and a cigar smoke-filled mansion at 73rd Street and Riverside Drive.
That’s how the document begins. In 1948, when my father ostensibly tucked this paper into his wallet, financially he was doing well indeed. By dint of will, intelligence, and luck he had risen, Horatio Alger-like, from an impoverished and brutal childhood. I think he kept this paper to remind himself not to be caught up in the temptations of the day. In the post-World War II climate, people around him were once again growing richer, and things were moving faster, but he’d been born with the century and was a mature 29 when the Great Depression had begun. Perhaps as a result of that experience, he refused to let members of his family own a credit card and declared he would never buy a share of stock unless he had some control over this investment (he never did). Although it wasn’t a question of money, as children we were hardly even allowed to turn on the heat in winter (I slept with a sweater on, sometimes two). Not to turn out the lights when we left a room was considered a criminal offense.
Greed vs. Fear has long been the economic equation, and when financial gain becomes too quick and easy, too good to be true, it invariably is. In retrospect, the bandwagon right now is full to the brim with “I told you so” pundits and analysts, who inform us, as if this were the first time, that in the past eight years we came to live above our means, on credit, were manipulated by blind investments we did not understand. Some of us undoubtedly suspected something might be wrong, but what the heck—let the good times roll. History could have pointed to the outcome, which finds its antecedents in the manipulation of the gold market by Fisk and Gould in 1869, the Credit Mobilier Scandal of 1872, the Panic of 1873, the Crash of 1907, and of course the Great Depression, starting on Black Thursday, October 24, 1929, when the stock market crashed.
Although our present condition does not mimic the Great Depression, there are similarities. This period was brilliantly analyzed by Cabell Phillips in his From the Crash to the Blitz 1929-1939. Familiar names and similar investments surface. In the summer of 1929, Goldman Sachs & Co. launched its third blind Investment Trust, which “owned virtually nothing that represented real wealth, it was a ticket in a lottery—a sucker trap.” The Trust gained 66 percent in the following month. It was worthless by November. By then AT&T had dropped 72 percent, GE 80 percent. Margin calls greased the slide as stockholders were unable to deliver.
Early on, big bankers such as J.P. Morgan tried to help failing banks, as did the government with a capitalization of $2 billion (about $50 billion today), to no avail. One of my own first memories was of watching my best friend’s father paper his bathroom with worthless bank certificates. Things got a lot worse before an amiable cripple secured the Democratic nomination on July 2, 1932, and promised a new era for America. “This is...a call to arms,” Franklin Delano Roosevelt said that day. “Give me your help...to win in this crusade to restore America to its own people.” Sound familiar?
Inevitably, as it always does, rage on the part of those who were deceived or deceived themselves manifested itself. Ethical reform trails after excess. So what did happen to the men on my father’s list? An incorruptible former New York assistant district attorney, Ferdinand Pecora, became a national hero by exposing the likes of Ivar Kreuger. Once thought to be the richest man in the world, Kreuger had swindled investors out of $100 million and killed himself in March 1932. Leon Fraser and Jesse Livermore also committed suicide. Arthur Cutten, under indictment for tax evasion and manipulating the market, was indicted on charges of tax evasion but died before being brought to trial. Samuel Insull, who had sold stock to his family and friends below the market, enabling them to reap millions when they sold it, was brought to trial. Three acquittals left him in poor health. He died of a heart attack in a Paris Métro station.
Richard Whitney had used his name, influence, and position to gull many friends into giving him money to support his luxurious lifestyle and then turned to embezzlement. He went to Sing Sing prison. Albert Fall also went to prison but was paroled and died in 1944 at the age of 83. Howard Hopson was committed to an insane asylum. Charles Schwab went bankrupt. He left as his legacy a syphilitic wife and a cigar smoke-filled mansion at 73rd Street and Riverside Drive. Incidentally, Schwab was the great uncle of my late husband, and as a boy he remembered helping smuggle a Botticelli out of that house, which was later sold by Joseph Duveen and said to sustain Schwab in the last years of his life.
Almost every one investigated for being a swindler or for a failed Ponzi or pyramid scheme maintained that if the market had held just a little bit longer they would have paid off all the investments, as if that made it all right. Many enterprises had started out legitimately, but to these men, like alcoholics or drug addicts, the temptations of time and place were irresistible.
As it turns out, that folded paper in my father’s wallet reflects a common urban myth of the day. While listed in 1923, Richard Whitney didn’t become president of the New York Stock Exchange until 1930, for example. But the spirit of the message holds true, since many of these men met unfortunate ends. For my father, what became of these nine men was a cautionary tale, a daily reminder of the fate of those who like Icarus broke or bent the rules and had flown too close to the sun. How steep the fall!
Clearly these men lacked ethics, a subject that for the past two decades has found its way into the curriculum of prestigious universities. But my father and many of his compatriots didn’t need to go to ethics class. My father told me that his most profitable “deal” was written out on the back of an envelope and that was that. He told me he lost a lot of money in this same fashion. He told me that in business dealings a handshake was inviolable. He told me he didn’t mind paying high taxes because this country had been good to him.
We could learn a lot from our past about the consequences of unethical behavior, but as the eminent scholar Bernard Lewis once quipped, “America is the only place in the world where the phrase ‘That’s history’ is a put down.” Now that’s food for thought.
EDITOR'S NOTE: As noted in the text, some of the information in the original document found in Barbara Goldsmith's father's wallet was inaccurate. The information has been updated and corrected in the story.
Barbara Goldsmith is the bestselling author and historian of five notable award-winning books. Also, her articles and essays have appeared in The New York Times, Vanity Fair and The New Yorker. Ms. Goldsmith has been elected to the American Academy of Arts and Sciences and was recently designated a “Living Landmark” by the New York Landmark Conservancy.