The Banker Blamed for the 1929 Stock Market Crash

At the dawn of the Great Depression, Charles Mitchell was America's most notorious banker, yet today his name has faded from memory.

Mark Dent at The Hustle deserves credit for much of the information this article sources. 3Commas is adding commentary related to the cryptocurrency industry. 

On October 24, 1929, one of Wall Street's darkest days, Charles E. Mitchell hurried to the House of Morgan, a stately gray building across from the New York Stock Exchange. The market had opened in chaos, with stocks plummeting so fast that the ticker tape couldn't keep up.

Mitchell, celebrated as the "ideal modern banking executive" and head of National City Bank, had been instrumental in the 1920s bull market, now on the brink of collapse. Inside the House of Morgan, he and fellow bankers J.P. Morgan Jr., Thomas Lamont, and Albert Wiggin embarked on a frantic stock-buying spree to restore investor confidence. Their efforts briefly stabilized the market.

Confident the worst was over, Mitchell declared to reporters, "I still see nothing to worry about." Yet, Black Thursday was merely a prelude to the catastrophic Black Monday and Black Tuesday, marking the beginning of the Great Depression.

The Rise of a New Banking Titan

During the Roaring '20s, Charles Mitchell was a familiar sight in Manhattan, walking nearly five miles from his Fifth Avenue mansion to work for the fresh air his doctor recommended. This disciplined routine reflected his childhood in Chelsea, Massachusetts, where his father made him care for a pony he was given, instilling a sense of responsibility. 

In 1916, National City Bank, now Citigroup, hired Mitchell to lead its new investment banking affiliate. The bank expanded rapidly under his leadership, opening branches nationwide and turning banking into an accessible, consumer-friendly industry.

Fueling the 1920s Bull Market

Mitchell's strategies revolutionized banking. By combining commercial and investment banking, National City Bank encouraged customers to move money from savings into securities. The bank sold around $20 billion worth of securities in the 1920s, becoming the nation's largest bank. Mitchell's fortune grew, and he lived lavishly in a 5-story mansion bordering Central Park.

The Cracks in the Foundation

However, the soaring market was built on shaky practices. Margin loans allowed traders to buy stocks with only 10% down, borrowing the rest. Investment pools, similar to pump-and-dump schemes, inflated stock prices before selling to the public. These strategies fueled speculative frenzy, but when stocks began to slip, the market collapsed. On Black Tuesday alone, $14 billion was lost.

Similarity to Crypto ICO Craze of 2016-2018

I’m going to let you in on a little secret. Almost every single ICO from 2016-2018 had an investment pool they didn’t tell the public about. Known whales would be contacted and offered a spot in a confidential pre-sale, where they could buy $20,000-$100,000+ of coins at typically 50-75% of the cost listed for the public sale.

While some of these presale investors genuinely believed in the projects, for most of them it was simply an opportunity to immediately resale the coins for a quick profit. Given the number of projects that had cool ideas but poor business plans, it’s no surprise so many investors were eager to unload these coins as soon as they could. For the investors who bought during the official public sale though, they were often left holding coins that only went down over time.

When it came to ICOs, the crypto industry unfortunately very much resembled the unregulated and underhanded tactics Charles Mitchell and his proteges created in the 1920s. 

The Fall and Scrutiny

After the crash, Mitchell faced intense scrutiny. In 1933, during a Senate hearing led by Ferdinand Pecora, Mitchell admitted to practices that contributed to the market's instability. Pecora's investigation revealed that banks like National City had sold unvetted securities, misleading investors.

Legacy and Reforms

Mitchell's actions led to significant reforms. The Glass-Steagall Act of 1933 separated commercial and investment banking, and the Securities Act of 1933 required more transparency in the securities market. Despite his controversial legacy, Mitchell continued his career in finance, though he never regained his former stature.

The Aftermath

You’re not going to believe this, but nothing happened to Charles Mitchell. Other than being embarrassed, he faced two tax evasion trials that he won. In 1935 he went to work for another financial firm in New York City and rebuilt his fortune.

Okay, you’re probably not surprised in the slightest that he encouraged business practices that defrauded millions of people and he faced zero penalties for doing so. This is a time-honored story at this point when it comes to the behavior of Wall Street financial titans. 

Will Crypto be Regulated Like Securities?

Only time will tell, but it is this writer’s opinion that it would be a mistake to wield such a heavy hand and put so much power into the hands of bureaucrats who have a distinctly poor track record of protecting consumers from financial fraud. You may remember that almost no one went to jail for the 2008 financial crisis where almost 6 million homes were lost to foreclosure, despite several investment banks being fully aware the market was heading full speed into a brick wall. Ex: Goldman Sachs knowingly sold their customers securities they knew were junk. The $5B fine they paid was simply a cost of doing business, given that Goldman Sachs made a $13.39B profit in 2009. 

Moreover, one of the best parts about crypto is the agility and nimbleness companies can operate with when they don’t have to devote significant early resources to meet regulatory burdens. In the wake of the Dodd-Frank bill of 2010, the creation of new banks in the U.S. has come to a virtual standstill, because the barrier to entry is incredibly high. This has allowed the four biggest banks in the U.S. to become even bigger while smaller banks are disappearing.

What we don’t want to see is a situation where new crypto projects are difficult to create because they have to meet rather arbitrary regulatory requirements originally designed to curtail the bad behavior of giant financial institutions. With regulatory capture a significant danger in the U.S., and to a lesser extent in Europe, it’s quite likely that regulation of the crypto industry will be written by giant companies whose offerings compete with existing crypto companies. It’s very likely that the regulations will favor the large financial institutions.