How Ferdinand Pecora helped destroy our markets

As astounding as it is that anyone would accede to statutes criminalizing the raising of crops on one’s own land for personal consumption or invoking mythical creatures to justify the destruction of the free market, the brazen ease with which Leviathan’s handmaidens seduced the American people to acquiesce in such degradations is even more astonishing.

But apparently, second-hand exposure to phony spectacle can work wonders in making people feel better about government control of their markets or other interventions in the natural order. And so to promote public acceptance of the subversive Exchange Act and fulfill the progressive goal of destroying private control of the New York Stock Exchange, Ferdinand Pecora entered the U.S. political stage.

Pecora, a Sicilian-born, New York lawyer, began his professional career as a Wall Street clerk. After completing law school, he worked as a competition suppressor for big Wall Street firms (that is, a local prosecutor of smaller “bucket shop” operations) and gained national fame in 1933 as fourth and final counsel to the U.S. Senate’s Committee on Banking and Currency for its investigation of stock exchange practices.

The Senate retained Pecora initially to write a report of the evidence, so called, that three prior inquisitors had gathered in hearings begun in April 1932, during the final months of the Hoover administration. But Pecora persuaded committee chairman Duncan U. Fletcher that the record was incomplete and additional hearings were necessary. Pecora proved so captivating as impresario and leading actor in the ensuing charade that newspapers adopted “Pecora Investigation” as shorthand notation for the entire affair.

Recall that in Hill v. Wallace, 259 U.S. 44 (1922), the Supreme Court gave Congress a formula for promulgating exchange regulations immune to constitutional challenge. The court prescribed in pertinent part that Congress conduct public hearings to elicit evidence in support of its usurpations.

The court presumably intended that Congress hold the show trial before executing the prisoner. But Congress had no time for such formalities. Leaders in all three branches of government, in both major parties – progressives all – had decided to scrap laissez faire in favor of the fascist or corporatist arrangement of economic relations. The Roosevelt administration preferred to act while its electoral mandate was fresh. And so, while a purported investigation of exchange practices played out on the public stage under Pecora’s direction, New Deal lawyers James Landis, Benjamin Cohen, and Thomas Corcoran wrote the Exchange Act backstage.

Pecora excelled at fallacious argumentation. His style of witness interrogation would be familiar to modern-day fans of Jon Lovitz skits on Saturday Night Live. Assuming a dramatic, accusatory tone, Pecora would ask ridiculous questions having obvious answers in the vein of “So, Mr. Jones, is it fair to say that when people trade on the New York Stock Exchange, they seek to profit from these activities?”

When Mr. Jones would affirm innocently the obvious, a cigar-chomping Pecora would respond in the manner of a homicide detective who had just tricked his suspect into making a confession. “Aha! You admit, then, that people trade on the exchange to make money!”

Pecora conducted hearings not as an impartial inquiry but to adduce “facts” in support of the legislation that Landis, Cohen, and Corcoran were drafting behind the scenes. No matter what witnesses said – no matter how contrary was their testimony to the need for or wisdom of the Exchange Act – Pecora spun their answers into confirmation of the righteousness of the progressive cause.

[To see an example of such deceitful conduct, read Pecora’s questioning of NYSE President Richard Whitney and the accompanying analysis, beginning at page 30 of Stock Exchange Practices, the Report of the Committee on Banking and Currency Pursuant to S.Res. 84 (72d Congress) and S.Res. 56 and S.Res. 97 (73d Congress) (the “Pecora Report“) [PDF, 43 MB]. Nothing in Whitney’s answers affirmed the points that Pecora sought to make. Yet Pecora declared victory nonetheless.]

Fortunately for progressives, many Americans were no longer inclined to suffer the terrible burdens of independence.

As the Pecora show enjoyed its run in Senate chambers amid rave reviews in establishment papers, the United States suffered under a widespread depression, the third since the turn of the century. The Federal Reserve System, federal income tax, and federal deposit insurance were as yet new creatures. A credit-fueled boom in stock markets cracked up in September 1929, leaving at least twenty-eight exchanges to compete for a trickle of the pre-crash volume of order flow.

Further, an influx of enterprising Irish, Italian, and Jewish immigrants in the nineteenth and early twentieth centuries had yielded many successful merchant and trading operations, as well as banking businesses to support them. They resented limits on their opportunities borne of ethnic or religious bigotry. With immigrant populations now large enough to act as powerful political blocs, some of these institutions developed the capacity to use government power to overcome their market frustrations and chose to do so, quaint notions of freedom of association be damned.

Investment and commercial banks, particularly those headed by recent European immigrants or associated with Rockefeller interests, chafed under the domination of the New York Stock Exchange and Federal Reserve Bank of New York by their arch-rival, the waspy Morgan firm.

Under these conditions, the Pecora investigation played well to the public, no matter how farcical it was. People throughout the country followed news accounts of the hearings closely. As such no one seemed to notice, much less complain, that the Exchange Act became law two days before Pecora even concluded his scandal mongering.

Aside from the factors frustrating the public at large, the New York Stock Exchange’s natural monopoly on securities trading galled progressives. Their irritation with the exchange’s freedom dated to the late nineteenth century.

Monopolies that derive their competitive advantages from network effects – such as the New York exchange prior to the Exchange Act or Microsoft in the 1990s – have little use for politicians. Unlike the state, they enjoy voluntary patronage and refute the statist argument that economic goods such as security and communications cannot be trusted to market forces.

Not surprisingly, statists loathe natural monopolies and seek inevitably to destroy them and to erect state-dependent oligopolies (or “cartels”) in their stead.

The hearings fueled jealousy and hatred of wealthy “banksters,” as Pecora called them, but revealed nothing about the commercial interests pushing for regulation. Masterfully, the demagogic Pecora left Americans both thirsty for revenge and ignorant of the Exchange Act’s dangers. He set the stage for power lust and ethnic rivalry to join forces in replacing the free market with a government-imposed cartel.

Suggestions that markets were lawless dens of iniquity in the 1920s and early 1930s were false. Governments already regulated stock markets. All states had “blue sky” laws and agencies for their enforcement. What progressives sought was not the regulation of markets, but their nationalization.

Acting as fascist revolutionaries out to destroy centuries-old traditions of economic freedom and rule of law, Pecora and his co-conspirators gave Congress the institutional, political, and constitutional cover it required in order to effect the nationalization of our markets under the Exchange Act – the true purpose of the act all along.

Pecora admitted in his 1939 memoir that the New York Stock Exchange had been a battlefield for the progressive agenda – the “real center of warfare” – and confessed to the dirty, underhanded tactics he and his cohorts had employed to destroy the exchange as a private institution.

“When open mass resistance fails,” Pecora crowed, “there is still the opportunity for traps, stratagems, intrigues, undermining – all the resources of guerilla warfare.”

TabbForum published a version of this essay today, with only modest differences in content and formatting, under the heading The Nationalization of Our Markets: Welcome to the Pecora Theater(free registration required). I am grateful to Marc Beauchamp, Les Kovach, and Robert Zorn for their helpful suggestions concerning this essay.

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