Charles E. Mitchell: scapegoat of the crash? (investment banker labeled unscrupulous is vindicated)

[paragraph] Extremely successful both as an investment and as a

commercial banker, Charles E. Mitchell was identified by contemporaries as

the epitome of the unscrupulous "money changers" whose speculative dealings

they felt played a major role in the Crash of 1929 and the ensuing

economic collapse. This portrayal has been echoed and elaborated by

historians and commentators down to the present day, In this article

Dr. Huertas and Dr. Silverman demonstrate that Mitchell's activities,

while sometimes ill-advised, were motivated by the economic "good

sense" of the day and were not attributable to either rampant immorality

or ungoverned greed, At the same time, they direct the attention of

economic historians to the monetary policies of the Federal Reserve system

in the 1920s and 1930s--in which Mitchell also played a role--and

suggest that a more potent source of the Greet Depression lies therein.

Called by many the greatest bond salesman who ever lived, Charles E. Mitchell was also singled out during the Depression as the man "more responsible than all the others put together for the excesses that have resulted in this economic disaster." (1) Acclaimed in the 1920s, Mitchell--also known as "Sunshine Charley," "Scapegoat of the Crash"--was despised in the 1930s and prosecuted by the U.S. government into the 1950s." (2)

To his contemporaries and to later historians, Mitchell symbolized the financial practices of the 1920s--practices that allegedly led to the Depression of the 1930s and provoked the financial reforms of the New Deal. When Franklin Roosevelt in his inaugural address vilified the "money changers" who, "stripped of the lure of profit by which to induce our people to follow their false leadership ... have fled from their high seats in the temple of our civilization," he almost certainly had Mitchell in mind. (3) Mitchell was both a commercial banker and an investment banker, and his name will be linked forever with the passage of the Banking Act of 1933, popularly known as the Glass-Steagall Act, which extensively separated these two branches of finance. During the 1920s, Mitchell was the chief executive of National City Bank, then the country's largest bank, and of its security, affiliate, the National City Company, which was reputed to be the world's largest distributor of securities. As such, Mitchell made the perfect foil for the Senate Banking Committee, which set out in February 1933, in the midst of the worst banking panic in the nation's history, to demonstrate that bankers in the 1920s had gambled with the country's future and had lost.

Though that conclusion has gone relatively unchallenged, this article questions the prevailing interpretation. It seeks to reevaluate the career of Charles E. Mitchell and to reinterpret the charges leveled against him in the depths of the Depression and by later historians.

MITCHELL'S CAREER

Charles Edwin Mitchell was born in Chelsea, Massachusetts, in 1877 to middle-class parents. After graduating from Amherst College in 1899, he went to work for the Western Electric Company in Chicago, rising to assistant manager by 1905. He then moved to New York and into the world of finance, becoming assistant to the president of the Trust Company of America shortly before it was rescued by J. P. Morgan and his associates during the panic of 1907. In 1911 Mitchell established his own investment banking firm, Charles E. Mitchell and Company.

The success of this firm brought Mitchell to the attention of Frank A. Vanderlip, president of National City Bank. In 1916 Mitchell became president of its security affiliate, the National City. Company, and in 1921 he became president of the bank as well. He continued in both posts until 1929, when he was named chairman of each organization, as well as chairman of a second bank affiliate, the City Bank Farmers' Trust Company. He remained chairman of the bank and its two affiliates until forced to resign on 26 February 1933, reportedly at the insistence of president-elect Franklin D. Roosevelt. (4) Shortly thereafter he was indicted for income tax evasion.

Disgraced, in debt, and on a federal court docket, Mitchell did not disappear from the banking arena. Instead, he fought his way back to the summit of the financial world, beginning with his successful defense against the tax evasion charge. He then opened his own investment banking firm, C. E. Mitchell, Inc. In 1935 he became chairman of Blyth & Company, a West Coast investment banking house, and proceeded to build that firm into one of the nation's leading underwriters. This prompted new prosecution by the government. In November 1950 Mitchell became a central figure in the government's antitrust suit against seventeen investment banking houses "and especially Blyth"--a case that Judge Harold Medina ultimately dismissed on 19 May 1953 as being based on "ill-founded rumors, conjecture and age-old suspicion." (5) Mitchell died in 1955, again a multimillionaire and once more a respected figure on Wall Street.

It is Mitchell's National City career that gives him a prominent place in the annals of business and economic history. During his tenure at National City Mitchell transformed the company into a modern, diversified financial services corporation. In managerial terms his accomplishments rank alongside those of executives, such as Alfred Sloan of General Motors, who created modern manufacturing enterprises oriented toward the mass market.

As Mitchell put it, National City became the "Bank for All." (6) It provided institutions and individuals around the world with a full range of commercial, investment, and trust banking services. Mitchell's vital contribution was twofold: he added individuals to the customer base, and he separated management from ownership.

Mitchell started from a strong base. When he joined the City Company in 1916 he became a participant in the comprehensive strategy developed by Frank Vanderlip (president, 1909-19) and James Stillman (president, 1891-1908, chairman, 1909-18) to expand the business of National City Bank through product, geographic, and customer diversification. National City's core business had been the provision of commercial banking services to large corporations. Starting in the 1890s, National City expanded from this domestic wholesale banking base into investment banking. By 1912--the year of Arsene Pujo's House subcommittee probe into the "money trust"--National City. Bank had become one of the leading underwriters and distributors of securities in the United States. Geographic diversification became a possibility following the passage of the Federal Reserve Act of 1913, which for the first time permitted national banks to open branches abroad. National City Bank made extensive use of this new power, by the end of 1916 operating twenty-six branches in fourteen countries.

Mitchell's arrival at the National City Company in 1916 signaled the start of a third thrust: extending the customer base to the individual investor. Vanderlip had long felt that middle-class individuals would demand to get involved in the burgeoning securities market. To tap this expanding market the National City Company, the security affiliate of the bank, in 1915 acquired N. W. Halsey and Company, a relatively small investment banking house oriented toward the retail distribution of securities. At the same time the City Company took over from the bank's bond department its traditional, institutionally oriented investment banking activities. Together with the Halsey acquisition, this made the City Company potentially one of the most dynamic factors in investment banking.

To Mitchell fell the task of transforming potential into reality. Blessed with what Vanderlip later called "an astonishing capacity to create energy," Mitchell built a nationwide retail distribution system within three years. (7) By 1919 the National City Company had offices in fifty-one cities across the United States, starting from four in 1916. The new distribution channels these provided added to the National City Company's ability to place securities, enhancing its role as a leading underwriter.

During the 1920s the National City Company participated in or originated nearly one-fourth of all bonds issued in the United States, placing it in the front rank of …