Stock markets, prohibition & crashes

Excitement was everywhere on Tuesday, March 15, 1928, when the Chicago Tribune announced that Terry Druggan and Frankie Lake had been indicted on charges of income tax fraud.  Buried on page 15, the story (not shown here) revealed only that Assistant U.S. Attorney Dwight Green had traced some unreported income to the “beer barons” with small amounts of tax on unimpressive incomes unpaid for 1924 through 1926.

 Both men were partners in the Standard Beverage Corporation (a brewery, confiscated), and owned race horses, Cadillacs and Rolls-Royces, plus additional real estate (also confiscated under the Volstead and tax laws).  These were no penny-ante bootleggers.  Theirs was a major federal case.  Standing behind the indictment was Elmer Irey—one of the most powerful and efficient figures in the federal tax enforcement bureaucracy.

The onset of prohibition had plunged the nation into a depression, but there was recovery and rejoicing when the Supreme Court ruled that stock dividends were exempt from federal income taxes.  No better retirement plan had ever been devised.  Bootleggers could invest illegal earnings in stocks and get their dividends tax-free.  Besides, the Fifth Amendment protected them from having to declare illegal income on tax returns—or did it?  A Carolina bootlegger and car dealer named Manly Sullivan was convicted of income tax evasion, but appealed to the Fourth Circuit Court in 1926.  Sullivan claimed that since bootlegging was illegal, filing tax returns for it would amount to self-incrimination prohibited by the Fifth Amendment. Sullivan won on appeal October 19 of 1926, but Assistant Attorney General Mabel Willebrandt appealed the Circuit Court’s decision, and the Supreme Court granted a hearing March 7, 1927.  Their decision nullifying the Bill of Rights in favor of the Income Tax and Prohibition Amendments was the ticking time bomb that would blow up Wall Street in the Fall of 1929. Glucose and yeast corporations, drug operators funded by commercial investment banks, all were all named in indictments. They withdrew their money from banks and brokerages lest looters-by-law come seize them, and the result was The Crash.  Does this have anything to do with the Asset Forfeiture laws passed under the Bush-Clinton-Bush administrations, the Crash of 2007-2008 and the Great Recession? You betcha!

While derivatives markets busily developed mortgage-backed securities, the price of marijuana skyrocketed like beer and sugar prices had in 1921. Cheap mortgages pushed by the Federal National Mortgage Association (est. 1938) made property mortgages available to folks with no income, no jobs and no assets other than a fistful of marijuana seeds. Thus real houses with tinfoil on the windows to block the glare of grow lights replaced the improvised arrangements copied from fallout shelters that had existed when George Bush the First was pushing asset forfeiture and the death sentence for potheads during the Crash and Recession of 1988-1992.  (That was blamed on securities traders in the wake of Draconian prohibition enactments).  George Bush the Second pushed those asset-forfeiture laws to police and prosecutor associations. Soon doors were broken off their hinges and cheap-mortgage housing bulged with sheriffs, deputies, constables, troopers, tax collectors and narcs-with-guns all eager for a fistful of asset-forfeiture dollars and dope.

The result was mapped with help from Fed Boss Bernanke. Here you see a situation in which every area famous for hemp farming and liquor & drug smuggling developed mortgage default problems. Southern Arizona, California, the Great Lakes regions near godless Canada, the Northeast coast off  smuggler havens St. Pierre and Miquelon, and of course Florida–where Al Capone once owned one of the Anheuser-Busch dynasty mansions, suddenly had serious mortgage default problems.

You see that, but Bernanke didn’t. Small wonder, for many of the homebuyers were living in jails and prisons–but still liable for the defaults even though politicians, Federal Reserve banks and lawmen now “owned” those confiscated homes. Others not yet arrested drained their cash from banks and brokerages to preclude its discovery and seizure by looters-by-law.

Naturally, the credit structure contracted and the economy collapsed. So the situation in Bush Administration II was very much like that in the Herbert Hoover Administration. Like Hoover, the Bushes, were deeply religious, altruistic, prohibitionist and as committed to the Christian Prohibition laws as they were to the Communist Manifesto Income Tax Amendment added at about the same time.  All three were haunted by the suspicion that someone, somewhere, might be happy.

But, how do we know these things are not mere coincidence?  If Adam Smith was correct in asserting that only government action could ruin a country, would not the economists in the pay of state and federal governments and teaching in subsidized classrooms admit that Adam Smith had been right?

Find out the juicy details behind the mother of all economic collapses. Prohibition and The Crash–Cause and Effect in 1929 is available in two languages on Amazon Kindle, each at the cost of a pint of craft beer.

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