MARKETS: Mr. Chocolate

(See front cover)

Scene: The New York Stock Exchange.

Time: August 1937.

Chief Characters: Slow-moving, heavy-jowled Exchange President Charles R. Gay, a worried broker who means well; arrogant, handsome Richard Whitney, leader of a clique known as the Old Guard; puckish, tart-tongued SEC Chairman William O. Douglas, reputed to be a radical of the deepest dye; Brokers Paul Shields, E. A. Pierce, John Hanes and William McChesney Martin Jr., upstarts all.

As the curtain rises, President Gay is writing his annual report. . . .

Habitués of Sardi’s, Broadway’s theatrical rendezvous, expect some day to attend an opening of a play like this with some such title as The Battle of the Market Place. For frequently to be seen at Sardi’s, where he was long known solely as “Mr. Chocolate” from his penchant for hot chocolate, is a young theatre enthusiast who sees every play that comes to Broadway and has already written three himself (none produced). At present, Mr. Chocolate is too busy to keep up his writing; he happens to be the new president of the New York Stock Exchange.

But eventually, William McChesney Martin Jr. is likely to turn again to playwriting, and if he does he will have no finer subject than Wall Street’s most astonishing year. This week marks the completion of that year, the most crucial in the Stock Exchange’s 146 years.

Kick. In early 1937, security prices reached 194 on the Dow-Jones industrial averages, climax of a two-year bull market, then collapsed with a world-wide break in commodity prices. By July, prices once more had begun a slow rise, although volume of trading was unbelievably thin. It was actually the beginning of Depression II, but almost to a man the brokerage community believed what Charles Gay put into his Exchange report—that too strict regulation by SEC was to blame. Wrote President Gay in his usual mild way: “I am fearful that, in an effort to cure what might be termed sporadic evils, undue restraints are being placed upon normal, proper action, thus creating abnormal market conditions. . . .” Same week that this tempered but widely publicized kick issued from the Exchange, stock prices, having climbed back to 190, again turned down in the beginning of the worst crash since 1929. As the toboggan gathered momentum, President Gay began to seem a seer and SEC was on the spot. SEC chairman then was amiable James McCauley Landis, who was so busy retiring to become dean of Harvard Law School that he scarcely bothered to reply to Broker Gay.

This made things all the tougher for Chairman Landis’ successor, terse, left-wing William O. Douglas. Damned as a radical and faced with the continuing slide of the market, Bill Douglas took over in September, soon let it be known that so far as he was concerned regulation had only begun. After three years on the SEC in lesser jobs, Chairman Douglas was all too familiar with the Exchange’s standard method of passing the buck. Under the influence of Richard Whitney, no longer president but still boss of the board of governors’ Old Guard majority, the Exchange would agree to any reform that was suggested, then evade it on a technicality. With typical boldness, Douglas decided that his best defense against the Exchange’s kick was an offense: he bluntly offered it a choice between self-reform or SEC’s taking over lock, stock & barrel.

The form of the reply was typical—the Exchange offered to publish a letter to Douglas promising to reorganize and admitting that SEC was not to blame for the crash. No less than 15 drafts of this letter were composed, each so phrased that Douglas knew it was just one more runaround. Finally, in mid-November, he blew up, snapped: “The negotiations are off.” “I suppose you’ll go ahead with your own program?” asked the Exchange’s representative.

“You’re damned right I will,” said Douglas.

No Casino. By this time, Douglas had established cordial relations with a group in the Exchange which had long been at odds with Richard Whitney’s Old Guard.

This group was led by three men, Paul Shields, John Hanes and E. A. Pierce. All three represented the big “wire houses” in the Street with large volume of business from all over the U. S., unlike the business of the Old Guard which mostly originated in big cities. All three had lined up against Richard Whitney in his famed 1934 fight to stop the law creating SEC. All three had helped force Dick Whitney out of the presidency to make way for Charles Gay, a middle-of-the-roader with a vague repute for being “New Deal.” Soon after Douglas became SEC chairman, Shields and Pierce called on him in Washington, suggested reorganization of the Exchange.

Douglas naturally was delighted, and thenceforth Shields, Pierce and Hanes led the revolt from the inside while Douglas stormed the walls.

First onslaught came in late November in an SEC kickback at Charles Gay.

Ticking off the Exchange as a private club, Douglas demanded reorganization from top to bottom, with such reforms as a hired president and democratic control.

“It is essential,” he snarled, “that no element of the casino be allowed. . . .” To President Gay these words carried conviction. That harried broker, whose worries and heavy dewlap had combined to give him the mournful mien of a bloodhound, by this time had alienated almost everybody. Douglas linked him with the Old Guard. Shields, Hanes and Pierce, his original backers, were fed up with him.

Richard Whitney’s Old Guard looked on him as an amiable tool for their campaign.

As usual, this was to take the form of open compliance, actual recalcitrance.

Since Douglas had demanded reorganization, this strategy called for appointment of a committee to study reorganization, then delay on the job long enough for the crisis to blow over. Accordingly, the governors voted for such a committee, gave Gay the right to appoint it. But Gay had seen the light. Viewing the crash (by then the Dow-Jones average had dropped to 113), the depression and Douglas’ determination, Gay decided it was time to play ball. To the fury of the Old Guard, he appointed a genuinely liberal committee headed by a non-Exchange member, Carle Cotter Conway, dynamic chairman of Continental Can. Among the liberals on the Conway Committee was William McChesney Martin Jr.*

Carle Conway immediately trotted off to Washington to see Douglas, surprised him by asking for advice, promised to deliver the goods by January. Douglas promised in turn to hold off until then. So in Manhattan the Conway Committee set to with vim. Chairman Conway supplied the drive; Secretary Martin supplied the expert knowledge of Exchange doings; all were agreed in objective. And on January 27 they produced just such a program as Douglas wanted—complete reorganization, with a paid president, increased technical staff, various safeguards to insure democratic rule. Few days before the Conway plan came out, Douglas gave the Exchange a taste of what it might expect unless it cleaned its own stables: SEC issued a new rule sharply curtailing short sales. Thus spurred, the Exchange endorsed the Conway recommendations at once. Richard Whitney again mobilized his opposition, but early in March came the event which definitely delivered the battle into reform hands—Whitney, so long the White Knight of Wall Street, was a thief.

Symbol. Bill Douglas says that even without the Whitney scandal, the day had been carried. But the Whitney affair washed the slate clean. All resistance broken, the Exchange voted immediately for reorganization and for a new board of governors which included not a single Old Guarder, not even much-maligned Charles Gay.

Yet enough Old Guard resentment still remained to make the elevation of Martin inevitable. Others had played a bigger part in the battle than he, but feelings were still too bitter to allow their choice.

Bill Martin had not been conspicuous enough to irk the Old Guard, had simultaneously earned the warm regard of liberals by his solid good sense, extraordinary knowledge. Obvious choice for chairman of the new board, he soon became the obvious choice for president. At first it was planned to give this vital job to some high-powered bigwig. But as the new management completed the reorganization, it became apparent that no better symbol of the new day in Wall Street could be found than 31-year-old Bill Martin. Six weeks ago he got the job at $48,000 a year. As if in benediction of the choice, the market simultaneously vaulted from its rut, has since soared steadily.

No Froth. About the only objections anyone in Wall Street had to making Bill Martin the first paid president of the Exchange were his extreme youth and the fact that he never wore a hat. Nothing could be done to increase his years, but as a condition of his election he was led aside, told he would have to wear a hat. That he now does as punctiliously as he does everything else.

Martin has so many of the so-called “sterling virtues” that it is something of a surprise to find he is genuinely popular.

He does not smoke, drink, gamble. Nor does he dance on Sundays. His dancing is bad anyway, so no one misses it, but the few girls he has been known to take out have found him too earnest for their taste. Dull he may be to debutantes, but Wall Street finds him vastly interesting.

He startled the Exchange first by leaving the door of his tawny-paneled office open to anyone who wanted to see him—a change from the days when Richard Whitney sat there in regal isolation. He irked crusty conservatives by letting photographers attend his first board meeting and also take pictures on the floor during trading hours. But chiefly he astonishes his broker associates by eating at the Automat, living at the Yale Club, spurning an automobile as too expensive, preferring to study or sit in a theatre balcony to splurging at some swank Long Island resort.

All these traits are traceable to William McChesney Martin Sr. That Kentucky-born fundamentalist worked his way through law school by teaching, soon shifted from law to banking, has long been president of the Federal Reserve Bank in St. Louis. This is a high-sounding but not very potent job and the Martins continue to live quietly in the modest three-story house at No. 5055 Waterman Avenue, a nice but not ultra-fashionable district.

They have nine rooms, one maid, a Buick and a Ford, go to church regularly.

Martin Sr. believes in the mens sana in corpore sano. So does Martin Jr., who as a boy had a violent temper, would some times smash his golf clubs. But as his game improved, so did his self-restraint.

He became a crack golf, squash and tennis player. At St. Louis Country Day School, his headmaster remembers him as having “no froth, no social stirrings.” At Yale, where he graduated in 1928, his social stirrings were inadequate to get him into a fraternity, but he did make the tennis team and the editorial staff of the News.

At graduation only three of his classmates thought him “most likely to succeed.” Having majored in English literature, Bill Martin had ideas of teaching, instead became a clerk in his father’s bank at $67.50 a month. Thence he moved to the St. Louis firm of A. G. Edwards & Sons as a statistician, in 1931 was sent to Manhattan as its Exchange member. Immediately intrigued by the machinery of the Exchange, he often stood, mouth agape, watching speculation flow around him on the floor. Soon he was an expert at all phases of the market, could quote the capitalizations of 49 out of 50 firms chosen at random. In 1935 he became a governor, unobtrusively joined the Shields group.

Meanwhile, he studied at the New School for Social Research, was co-founder of a serious little magazine called the Economic Forum. During vacations he played in tennis tournaments, was good enough to enter the Nationals at Forest Hills. He also became “pitch-golf” champion of Broadway, saw every play. In his own plays, he admits sheepishly, he cannot make the women come alive.

Partnership. Distinctly the student in appearance, President Martin is short, ruddy, wears spectacles and double-breasted suits, talks with quiet assurance. No one is more aware than he that he faces a tough job. Last week he remarked: “The honeymoon is over. Now I’ll have to produce.” First items on his agenda are five, the same five that head the list of William O. Douglas. Both Douglas and Martin say they are 100% in agreement. Soon to be broached to the Exchange, therefore, are: 1) a depository for customers’ funds now kept helter-skelter in brokerage houses; 2) a trial segregation of broker-dealer functions; 3) assumption by the Exchange of full policing duties so that SEC will not have to patrol Wall Street; 4) plans for increasing the volume of bond trading on the floor; 5) possible rearrangement of commissions. So long as the market continues to climb, these or any other reforms should not be difficult. If the market crashes, Martin expects to be the goat.

So far, he has pressed steadily along the line he announced as he took office: “Our duty is plain. We must do everything in our power to provide as safe and as efficient a market for the nation’s securities as can be devised. . . .” He ousted the firm of Carter, Ledyard & Milburn as Exchange lawyers, a post they had held for 60 years, because Partner Roland Redmond had been too closely identified in the public mind with Richard Whitney’s fight against reform. He jammed through SEC’s short-selling rule. He inaugurated a series of round-table talks with SEC to affirm publicly the partnership between himself and Douglas.

Whether Martin can continue to deliver the goods, he himself is the last to say. There still remains a large body of opposition. But by this time even the dullest floor trader must realize that even if Bill Martin cannot complete the job, Bill Douglas can.

*The other members: Trowbridge Callaway, A. A. Berle Jr., John A. Coleman, Maurice L. Farrell, Kenneth C. Hogate, Thomas H. McInnerney, John W. Prentiss.