The Underground Economy

callrate03_1929

In the absence of economic freedom, the visible economy rests upon the foundations of an underground economy.

Chapter 44

Call Money Rates

            It was against this background that call money rates jumped to 12% during the first week of March. This happened after Dr. Kenneth Phillips signed an affidavit stating that his patient Al Capone was too ill to answer a March 6 grand jury summons for questioning on January’s Chicago Heights raids. That same day, Arnold Rothstein’s old bodyguard, Thomas “Fatty” Walsh was killed at the Miami Biltmore.[1] Rothstein’s stockbroker friend George Graham Rice, already on trial since January for stock fraud was indicted March 8 for income tax evasion—for which his attorney, former judge Rockwood, was already headed for prison.[2]

President Hoover unexpectedly announced that his planned Commission on Law Enforcement would look at all laws, not just prohibition of narcotics and alcohol.[3] President Hoover enjoyed lunch with Texas’ driest Senator, Morris Sheppard. Also invited was New York Representative Hamilton Fish Jr.—perhaps the most active pusher for Draconian narcotics legislation.

Call rates remained stable at 6% as Hoover announced March 12 that no further oil leases on government land would be forthcoming in the aftermath of the Teapot Dome scandal. This was the day Al Capone had been rescheduled to appear before the grand jury and didn’t.[4] Then a former Ohio State Treasurer was convicted March 13 of conspiracy to bribe a federal officer. Investigation into the murder of Rothstein associate Thomas “Fatty” Walsh, continued, and Rothstein’s good buddy Sidney Stajer was finally true-billed on a narcotics violation. The Stajer arrest had been kept out of the newspapers for eight months, and even now newspapers resorted to misspelling his name. Brewer John J. Dunn, and four others were indicted for income tax evasion, and call rates resumed their steady climb through March 19.[5]

After a meeting with Attorney General William Mitchell, Hoover assured the press he did not plan any dramatic prohibition raids, but did intend to work inexorably “week by week, year by year, as rapidly as possible, to build up the enforcement of the laws of the United States, whether they relate to prohibition or narcotics or any other subject.” Newsmen who had heard the President solemnly assure farm representatives back in January that the special session would be called for the benefit of agriculture, were puzzled when Mr. Hoover added that it was “for this purpose in large degree that I called the extra session of Congress.” Prohibition and narcotics laws were enforced by US Treasury agents, and “any other subject” simply had to include the income tax law.[6]

By now there was a dawning suspicion that by “certain agricultural commodities” Hoover really meant sugar and possibly opium. As Secretary of Commerce Hoover was paid to monitor the recent increases in the domestic corn and beet sugar markets. Of course the former Food Czar of wartime prohibition could certainly guess the purpose of all that yeast. Hoover’s strategy appears to have been twofold: one side of the pincer movement was to enact as prohibitive a tariff on sugar as possible. With supplies from abroad thus curtailed, the job of cracking down on domestic sugar and yeast producers—throttling off moonshine liquor at the source—would be easier. All of this depended on Congress promptly and obediently passing the tariff revisions to Hoover’s specifications. Hoover repeated his intentions in his April 16 message to Congress, again with no hint that he was concerned with the sugar rates and little else.[7]

Hoover had another meeting March 19—this one with Commissioner Doran and Levi G. Nutt of the narcotics section. Article 22 of the League’s Geneva Opium Convention of 1925 required treaty nations to turn in statistics on narcotic and drug production, manufactures, consumption and stocks before the end of March each year. It is a safe bet this information was studied by major participants in narcotics production, traffic and enforcement.

The following day brought the filing of opinions in the Illinois Alcohol case, along with the issuance of 33 subpoenas. That same day Al Capone finally appeared before the federal grand jury at Chicago eight days late. The Federal Reserve Board—by now caught between hostile Congressmen and increasing brokers’ loans—was also in a meeting nervously fretted over by brokers and bankers. Just as nervously fretted over were the additional 17 subpoenas issued March 21 and 22 in connection with the Illinois Alcohol case, bringing the total to 51 in three days.[8] But other meetings on the high seas and in an Aurora, Illinois home carried more explosive portent.

This manuscript is also being readied for publication in Portuguese.

 

[1] (Bergreen 1994 325) (CT 3/22/30 2)

[2] (NYT 3/3/29 19; 3/8/29 14:4; 3/26/29 33)

[3] (Hoover 1930 1976 639)

[4] (Myers & Newton 1936, 375-376) (Schoenberg 1992 223)

[5] (NYT 3/12/29 31; 3/15/29 12)

[6] (Hoover 1929 1974 732, 36, 5, 77)

[7] (WSJ 1/21/29) (Hoover 1929 1974 75, 77)

[8] (Docket 11070 4)

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The Valentine’s Day Massacre

Chapter 40

The Valentine’s Day Massacre

The electoral college had barely confirmed the election of the Hoover-Curtis dry fanaticism slate voted in 1928. There were still over two weeks to go until inauguration day which, back then, was on March 4th.

valentinemassacrect29

            Radio newscasters shocked the nation with the story of the Chicago Saint Valentine’s Day massacre in which five gangsters an optician and a mechanic were machine-gunned against a brick wall. The drys fell upon this with whoops of joy and redoubled their lobbying efforts for passage of a draconian enforcement bill introduced a year before by Congressman Gale Hamilton Stalker and Senator Wesley Livsey Jones.[1] What disturbed Chicagoans was the economic reaction; corn dropped 1 & 1/8 cents, and bank stocks likewise fell. All 7,000 saloons, speakeasies and beer flats in the city were immediately shut down, which effectively dried up a major source of income for that convention city. The dry autocracy sprang into action and Congress was besieged with heated demands that something be done immediately to enforce prohibition. Senator Glass, as always, resumed his railing against stock market gambling.[2]

Ferrari’s City Trust depositors, by now sick and tired of obfuscation, organized to demand what New York State feared most: answers.

Investigation of narcotics trial Judge Winslow now went to a House committee, and ailing Hollywood star Alma Rubens was humiliatingly exposed as a morphine addict. As icing on the cake, one John Sergi was arrested for the 14th time and charged with running a mail-order business in heroin.[3] All these stories broke Thursday, February 17, but none were as important as the other white powder connection.

 

[1] (NYT 3/24/29 27)

[2] (CT 2/17/29 1, III-8; 15) (WSJ 2/16/29 1) (NYT 2/17/29 1)

[3] (NYT 2/17/29 24; 2; 23)

 

 

Prohibition and The Crash, 1929

1929electoralvote

Chapter 39

The City Trust Mystery

            The Steinhardt affair dominated New York headlines, even though the accompanying news stories contained no intelligible information whatsoever. On February 1, 1929, Frank M. Ferrari, president of the City Trust Co., died in New York City as the stock market was making broad advances. The Times quietly tucked the story away on page 27 and few took notice. Then came the embarrassing League of Nations revelations regarding European drug manufacturers, which drew attention to other narcotics-related disclosures and generated more news stories.[1] Behind the scenes Mabel Willebrandt wrote Attorney General Mitchell blaming “disorganization” in the office of the United States Attorney for the Eastern Division of New York, on one William A. DeGroot.[2]

The Federal Reserve Board had meanwhile produced the broker’s loan figures and—in the wake of an increase in the Bank of England’s interest rate—issued another warning against “speculation.”[3] At the same time a settlement was reached in the 1922 Big Four case in which the wealthy bootlegging Savannah gentlemen—already in prison for income tax evasion—were finally assessed $140,000.[4] Bearing hard on the issue of tax evasion was a United States Court of Claims ruling that the Commissioner of Internal Revenue had absolute authority to determine what inventories businesses could and could not use in filing tax returns. Judge Nicholas Sinnott wrote the opinion, which was not at all reassuring for preparers of corporate income tax returns.[5] The Federal Reserve Board soon issued another scolding, hinting at danger to the nation’s gold reserves.[6]

On top of this came the Harris amendment calling for another $25 million in prohibition enforcement appropriations. From January 12 to February 8, when it was deadlocked between House and Senate, the proposal had been the focus of constant and acrimonious debate.[1] By February 13, the commotion reached the floor of the House in the form of a pre-impeachment resolution denouncing Federal Judge Winslow, and across the border into Canada in the form of a massive manhunt for fugitive lawyer Steinhardt.[2] These publicized events at home and in Geneva were attended by flurries of stock liquidations which sent prices tumbling. The New York Stock Exchange, Curb Market and Philadelphia Exchange all announced they would be closed Saturday, February 9. In discussing the market nosedive newspapers avoided touching on the Naarden case, prohibition funding, or the backstage struggles in enforcement offices, pointing instead to recent scoldings by the Federal Reserve Board and to England’s interest rate hike. Even the closure was downplayed as due to an outbreak of the flu among brokers.[3]

Yet there had been signs of uncertainty surrounding the City Trust Company since before January 8, when vice-president Frederico Ferrari signed a report denying the bank had excessive loans. Unbeknownst to newspapers and the public, New York Bank Examiner Frank L. Warder had, on January 15, received a $20,000 payoff to overlook the insolvency of the City Trust Company and forego shutting it down.[4] The market break occurred one week after City Trust president Francesco Ferrari’s death and four days before the closing of the bank’s five locations by the State Department of Banking. The International Radiotelegraph Convention proclaimed January 1 contained the signature of one Frn. Ferrari binding the Republic of San Marino to the treaty. San Marino—barely two miles wide—lay wholly inside Italy nor far from the Ferrari automobile plant. Folks began to wonder just how important this Ferrari fellow had been.[1] The investigation would continue to yield unsavory surprises for another three years. No mention was made of the Bank of United States money which National City Bank placed on deposit at the Petrograd branch of City Trust.[2]

Rioting was rampant in Bombay, with another 28 deaths reported February 11. New outbreaks of political turmoil in Afghanistan already had Great Britain in a stir. And policy recommendations from the League Opium Advisory Committee were extremely unpopular among ruling officials yet popular with the native masses in British India. Ordinary citizens there, as in China, felt themselves exploited by the British opium and salt revenue monopolies. For years now “holy” pictures of Mahatma Gandhi had sold briskly at every market and bazaar in India. People everywhere wore Gandhi caps and picketed and boycotted liquor stores to starve the government of revenue.

Gandhi was imprisoned for “sedition” in 1922 but released in 1924 after an appendectomy out of fear he might die in prison. The Indian Congress had recently resolved in favor of independence if Dominion status were not granted India by the end of 1929. Britain’s very sovereignty had thus been called into question, and the clock set ticking for a showdown over the Empire’s hegemony in British India. British newspapers were still having a field day with the Naarden drug conspiracy case, doubtless overjoyed to have Europeans share some blame. Yet such publicity could only worsen matters in India—where the body count from the latest riots stood at 113—and make a poor impression on the incoming Hoover Administration.[1]

In Williamson county, Illinois, three city officials—a district attorney, coroner, and chief of police—were on trial for liquor conspiracy with the Mayor of Herrin. Chicago Alderman Titus Haffa was also on trial as a kingpin in a liquor conspiracy implicating three prohibition agents.[2] Nor was the situation very comfortable in New York, where officials were busy making sure no “startling evidence” involving public figures with Arnold Rothstein’s drug ring saw daylight. With the grand jury closing in on Judge Winslow, whose narcotics cases included the Unger trial and involved agent Kerrigan’s death, this was no small task. In Miami, Dade County Solicitor Robert Taylor questioned Al Capone, who indignantly declared: “I never was a bootlegger in my life.”[3]

Em português no meu outro blog.

Next: The Valentine’s Day Massacre

[1] (NYT 1/19/29 3) (Taylor 1969 204-5) (Van Tyne 1923 111, 120)

[2] (Pasley 1930 206) (CT 2/16/29 5; 2/17/29 25) (NYT 2/16/29 5:5) (Irey and Slocum 1948 22)

[3] (NYT 2/14/29 1) (CT 2/15/29 3) (Schoenberg 1992 216-217)

[1] (Treaties, Etc. 1938/1968 5031; 5095)

[2] (NY World Almanac 1930 98, 99) (NYT 5/15/28 36)

[1] (NYT 1/12/29 1:2; 1/13 1:7; 1/14 4:4… 2/8 1:4)

[2] (NYT 2/13/29 1, 2)

[3] (WSJ 2/8/29 1)

[4] (NYT 7/3/29 25) (CT 9/7/29 4)

[1] (Taylor 1969 231)

[2] (Hoover 1929 1974 131-2)

[3] (WSJ 2/8/29 1) (Lawrence 1929 437)

[4] (Brown 1984 62, 274)

[5] (CT 2/6/29 1 Commerce)

[6] (Lawrence 1929 437)

Need a translator or interpreter familiar with the links between political economy, prohibitionism, tax law and financial disaster?