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Lift your lamp beside the golden door, Break not the golden rule, avoid well the golden calf, know; not all that glitters is gold, and laissez faire et laissez passer [let do and let pass] but as a shining sentinel, hesitate not to ring the bell, defend the gates, and man the wall

Sunday, April 11, 2010

The Forgotten Man by Amity Shlaes

As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X... What I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. perhaps the appellation is not strictly correct. He is the man who never is thought of...
     He works, he votes, generally he prays--but he always pays.... -William Graham Sumner, Yale University, 1883

|introduction page 1

ONE NOVEMBER EVENING LONG AGO in Greenpoint, Brooklyn, a thirteen-year-old named William Troeller hanged himself from the transom in his bedroom. The boy had watched his family slide into an increasingly desperate situation. The gas for their five-room apartment on Driggs Avenue had been shut off since April. His father, Harold, had lost his job at Brooklyn Edison after suffering a "rupture"--a worker's hernia, probably. While the father waited for surgery in Kings County Hospital, Mrs. Troeller and six children waited too. Ruth, eighteen, wanted to work as a waitress, but she was unemployed. Harold Jr., twenty-one, had work in a government program. Harold told a newspaper reporter that his brother "was sensitive and always felt embarrassed" about asking for his share at mealtime. The Herbert Street police station near the Troeller home helped to arrange the funeral. Burial would be in a Catholic cemetery. "He Was Reluctant about Asking for Food," read the headline in the New York Times. New York that year had a Dickensian feel--an un-American feel.
   William Troeller was just one story, in a city of troubled stories.

The Forgotten Man by Amity Shlaes, Excerpt, Page 99-100

[Hoover] In his first annual message to Congress, delivered 1929, Hoover railed against the “wave of uncontrolled speculation” that he saw as a cause of the crash. Over the course of the winter and the next year he would speak out, too, against short selling. In a short sale, a trader borrows a stock and sells it at a certain price, in the hopes that by the time he must deliver the stock, he can buy it himself even more cheaply. Hoover believed that this was not logic but roulette at its worst. The game was dangerous because it moved away from the value of the underlying asset—shares in a company—and into the racy world of betting. Without short contracts, he reckoned, the stock market would not experience such violence ructions. The shorts, to his mind, put downward pressure on a market that might in some instances otherwise do fine. Now he wanted new rules to limit shorting.
But the argument against shorting had a flaw. For every short was always a long buyer—the man who bet he could get the stock for cheap under the arrangement, and then sell it himself, for more.
One reason this logic did not penetrate was that many of the messengers who carried it were flawed. Wall Street in the 1920s had felt like a gamble, and some of the players had been irresponsible or worse. One was Richard Whitney, the new president of the New York Stock Exchange.
Whitney, a patrician, could make the free-market argument as well as any. At a meeting in October 1930 at the Stevens Hotel in Chicago, Whitney criticized the idea of blanket legislation to restrict short sales and other forms of speculation: “The Exchange is convinced that normal short selling is an essential part of a free market in securities.” How could a market exist if it was not allowed to place such bearish contracts? “Such a contract to deliver something in the future which a person does not own is common to many types of business. When a builder contracts to build a skyscraper he is literally short of every bit of material.” Yet no one, Whitney pointed out, considered that builder a criminal for signing the contract. Whitney was making precisely the same point that Tugwell had made in his introduction to the old book on animal husbandry: everyone engaging in any kind of commerce was placing a bet of some kind.
The trouble was—as many Wall Streeters knew even at the time--Whitney himself was more than flawed, a compulsive gambler and a liar. It would later become clear that even as others were losing their homes, Whitney’s Wall Street allies were sustaining him with friendly loans. He would eventually do prison time for covering up illegal loans with the aid of his loyal brother George.