There are some people whose biographies serve as chronicles of an entire time and place. During the financial bubble in American stocks in the 1920s, one such man was Charles Mitchell. He led one of the world’s largest banks as well as its securities division, the largest such operation in the world. During the boom years of the 1920s, he championed the mass marketing of investments to such an extent that he became something of a personification of the mania underway. When the year of the crash came, he was powerless to stop it, though Mitchell did try to prevent the inevitable, only making the crash worse when it did come.

Sunshine

            Charles Edwin Mitchell was born in Chelsea, Massachusetts in 1877. He graduated from university and became an assistant manager at Western Electric Company in Chicago before moving into New York finance. Mitchell worked at the Trust Company of America as an assistant to the company’s president. He took this job just before the firm only barely survived the Panic of 1907, needing to be rescued by J.P. Morgan.

            In 1911, Mitchell started his own investment bank, Charles E. Mitchell and Company. The firm was successful and this brought Mitchell to larger attention. He was noticed by Frank A. Vanderlip, the president of National City Bank, what is Citibank today.

            Mitchell became president of National City Company, the securities affiliate of National City Bank, in 1916. This was already a large investment banking firm at the time. Mitchell then became the chief executive of the parent company, National City Bank itself, in 1921, a role he held in addition to leading National City Company. Somewhere along the way, Charles Mitchell earned the nickname “Sunshine Charlie”.

From Huertas and Silverman’s “Charles E. Mitchell: Scapegoat of the crash?”

Sales

            Mitchell’s involvement with National City Company came at a time when several banks were forming securities divisions to underwrite securities and distribute them to clients, often to the broad public. This was a product of the First World War, for during the war years, banks were employed by the government to sell war bonds. With the fighting now over, many banks wanted to continue putting their sales teams and distribution infrastructure to use with new securities and issuers. Mitchell foresaw how the war bond drives would introduce millions of Americans to the securities market. National City Company specialized in introducing new issuers and new investors to one another.

            In this, the firm found incredible success. National City Company was an underwriter on over 20% of American bond offerings during the 1920s. The company underwrote municipal and state government bonds and those of foreign companies. It also began selling common stock in 1927.

            Mitchell’s contribution to what was already a leading distributor of securities was his focus on the middle-income retail investor. Tapping into this market was made easier with a growing network of branches, permitted by looser regulation. Populating the branches were the roughly 350 salesmen the firm employed. They were given lists of prospective customers by the headquarters, a list which exceeded 120,000 in 1928.

            National City Company had offices in fifty-eight cities and also sold securities out of National City Bank’s ordinary bank branches. The firm could also sell securities to customers abroad since, even as early as 1916, National City Bank had twenty-six foreign branches across fourteen countries. National City Company’s reach was extended when it acquired one of Canada’s largest investment banks, United Financial Corporation of Montreal, in 1923.

            National City Company also advertised in newspapers and magazines to reach the public. Mitchell may have allegedly said that “We want the public to feel safe with us” and “that as between ourselves and this small investor, the law of caveat emptor cannot apply”. However, the firm still used aggressive marketing tactics which included investment ‘news flashes’ that created a sense of urgency.

            By means of cash bonuses, salesmen would be incentivized to sell some securities over others. Of course, this created a conflict of interest as selling some securities earned the firm more money than others. The company also speculated for its own account as well. Making matters worse, the salesmen marketed the bank’s own stock very heavily. Though occasionally, the bank recommended the opposite trades for its customers as those taken by the firm. Sometimes, National City Company was short-selling shares of National City Bank while recommending the stock to clients.

Successes

            Later in the 1920s, the firm was selling $1.5 billion of securities a year, achieving $6 billion in sales over a 5-year period. Profits at the bank tripled between 1923 and 1929. National City Company was understood to be the largest such firm in the world, melded to a bank which was the largest in the country, if not the world as well. After adding a trust division, National City Bank had become an extensive financial supermarket and a mammoth one at that.

            Mitchell made salary and bonuses of $3.5 million from his roles with National City Bank and the National City Company between 1927 and 1929. His salary was just $25,000 per year but management also received a bonus pool filled with a substantial part of the firm’s profit. He earned $1.1 million in the first half of 1929 alone; nonetheless, he managed to pay no income tax that year. “Sunshine Charlie” Mitchell had become very wealthy and very famous. His words carried weight with the press and the people, particularly a growing populace of middle-class investors. In January 1929, Mitchell even became a director of the Federal Reserve Bank of New York as a result of his leadership of National City Bank.

Great Crash

           The Federal Reserve moved to restrict credit in 1929. Rates on margin loans were therefore rising and this was especially pertinent to a firm like National City Company since much of the securities’ buying in this era was financed with loans. The Federal Reserve was pressuring banks not to extend more credit for speculation, but this could threaten National City Company’s securities business. Events came to a head in March 1929.

           Mitchell declared that “we have an obligation which is paramount to any Federal Reserve warning” and his National City Bank announced it would lend up to $25 million in margin loans, $5 million once the rate on such loans reached 16% and $5 million per 1% thereafter. This lending came as the bank was borrowing from the Federal Reserve which, for the moment at least, was making some effort to deflate the bubble.

           Mitchell’s decision may have helped delay the crash but could not soften it. Stock prices rose still higher in the meantime but eventually, the crash came. Even in October 1929 though, in a late fleeting moment of broad optimism, Mitchell was saying that “nothing can arrest the upward movement”. On Tuesday, October 22, he said that “the decline had gone too far”. The next day, the New York Times industrial average fell 7.5%.

           Many of the securities National City Company had underwritten were losing value. So, to support the market, on Thursday, October 24, Mitchell and National City Bank participated in a consortium to pool resources to stop the crash underway. The pool included Chase National Bank, Guaranty Trust Company, Bankers Trust Company, and J.P. Morgan. The consortium would buy certain stocks to support their prices. On news of the effort, the panic did seem to reverse for a brief moment.

           Mitchell had lots of reasons to support prices, even if for just a moment. National City Bank was then pursuing a merger with Corn Exchange Bank for which selling shareholders of the latter could receive, at their choice, to be paid either in cash or National City Bank stock. If National City Bank stock fell too much then they would choose to be paid in cash and National City Bank did not have enough cash on hand to pay all these investors. The bank intervened to support the stock price but this put stress on the bank’s resources. The endeavor ultimately failed and the merger was altogether cancelled.

           Now National City Bank was stuck with shares it had repurchased. If the bank sold these shares acquired defending the merger in the open market, the share price would have fallen, perhaps sharply. If it failed to sell the entire inventory, then it might cause the unrealized loss to grow by so much that selling some to recover cash would have had mixed effect. To prevent this, Mitchell borrowed $12 million from J.P. Morgan to personally buy these shares from the firm. National City Bank shares had fallen by three-fifths, from $500 to $200 per share by year-end 1929.

           During the onset of the Great Depression, Mitchell continued to serve his term as a director of the Federal Reserve Bank of New York. He was considered a contributor to the Federal Reserve’s inaction as the economy slid into the Depression, rather curiously considering his propensity for supporting the financial system, even against all prudence, earlier in the crisis. Mitchell resigned from National City Bank in February 1933, near the Depression’s nadir.

           It perhaps was not the nadir for Mitchell. Shortly thereafter, Mitchell was indicted by the federal government and tried for tax evasion. He was acquitted but lost a civil claim to the government and was forced to pay $1.1 million in taxes and penalties. Mitchell was now nearly bankrupt and stuck in legal predicaments into the 1950s. Nonetheless, he did return to banking, becoming chairman of Blyth & Company, another investment bank, in 1935. His role at National City, leading what was simultaneously a commercial bank and an investment bank, encouraged the legislation that became the Banking Act of 1933, also known as Glass-Steagall, which prohibited such combinations in the United States.

Lesson

            Charles Mitchell may have become a well-known figure driving the boom and bust of the 1920s but this is obviously far from a story about one man. Even in his own career, the role of larger factors in bringing about financial exuberance, from war bond drives to deregulation to monetary policy, are obvious. Mitchell did become something of a scapegoat after the panic even if there were many like him and still many more believed he was right during the bubble years and even though factors far more important explain what happened. True, the signs of trouble may seem more vivid in the life of one man and his firm but it’s a mistake to personify the hallmarks of an era too much and miss the truer reasons for the course of financial history.

More from the Tontine Coffee-House

           Read about Amadeo Peter Giannini, a contemporary of Charles Mitchell and another American banker appealing to the common man, as well as another bubble underway in 1920s America, in Florida real estate. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Galbraith, John Kenneth. The Great Crash, 1929. Houghton Mifflin Harcourt, 2009.

2.      Huertas, Thomas F., and Joan L. Silverman. “Charles E. Mitchell: Scapegoat of the crash?” Business History Review, vol. 60, no. 1, spring 1986, pp. 81–103.

3.      Markham, Jerry W. “Volume II From J.P. Morgan to the Institutional Investor (1900 -1970).” A Financial History of the United States, Sharpe, Armonk, NY, 2002.

4.      Wilmarth, Arthur E. “Did Universal Banks Play a Significant Role in the U.S. Economy’s Boom-and-Bust Cycle of 1921-33? A Preliminary Assessment.” Current Developments in Monetary and Financial Law, vol. 4, 2005, pp. 559–645.

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