Nomi’s Note: Today I’m sharing an excerpt from my 2014 book, All the Presidents’ Bankers: The Hidden Alliances That Drive American Power.

The book tells the story of the hidden alliances between Wall Street and the White House. These alliances have driven American power over the last century.

There are several chapters that provide my original archival research on the 1920s and what bankers were doing that led to the Crash of 1929 and the subsequent Great Depression.

For any historians out there, I wholeheartedly recommend that book. I traveled to presidential libraries throughout our country to conduct original research into documents from decades past. I had the best personal experience writing it.

There’s a great section in the book called “Earlier Signs of Impending Problems.” It discusses the period leading up to the Crash of 1929.

That’s the excerpt I’m sharing with you today. Read on…

Even before the bubble of the mid-1920s, there existed signs of trouble brewing in the land of plentiful credit extensions.

In November 1923, the Federal Reserve began increasing its holdings in government securities (such as Treasury bonds) by a factor of six, from $73 million to $477 million, in what could be considered the first instance of “quantitative easing.”

This keeps rates low, not by setting them explicitly but by forcing the price of bonds up, which has the net effect of driving rates down.

The Fed’s move made money cheaper for the banks to borrow at the beginning of the 1920s and paved the way for speculative excess.

The prevailing mentality was that prices would rise forever—a classic bubble mentality. But by the mid-1920s, the amount of deposits backing loans or shaky investments declined significantly as leverage increased, such that any losses would reverberate more than during any prior crisis.

By August 1924, Chase’s chief economist, Benjamin Anderson, expressed concern about a dangerous speculative bubble caused by…

…the present glut in the money markets, with excessively cheap money and its attendant evils and dangers to the credit structure of the country. . . . Both incoming gold and Federal Reserve Bank investments are reflected almost entirely in an increase of member bank balances with immediate and even violent effect upon the money market. The situation is abnormal and dangerous.

But the bankers weren’t thinking about these dangers. They remained focused on seemingly limitless expansion.

On the evening of January 12, 1925, Mitchell and Mellon sat among six hundred of the banking elite at a tribute event for George Baker Sr., one of J. P. Morgan’s inner circle and founder of the First National Bank of New York (which later became part of Citigroup), in the glittering ballroom of the Waldorf Astoria hotel.

It was a grand occasion, not least because it was where Jack Morgan, a notoriously private man, gave his first public speech—calling for a code of ethics for bankers.

“There is, and must be, in every profession, a code of ethics, the result of years of experience,” he said. “Where I am required to state an ethical code for our profession, I think that I would say the first rule should be: never do something that you do not approve of in order to more quickly accomplish something that you do approve of.”

At the event, Mitchell proposed a toast to President Coolidge, his fellow Amherst alum, after which his fellow bankers downed what the Prohibition-era press referred to as “pellucid ice water.”

Money poured just as freely. Mitchell and the other bankers collected it to lend for market speculation and related lending from two sources.

First, as with all banks, money came from deposits—the bigger and more spread out the bank, the more channels for receiving new deposits. Mitchell saw opportunity in extending banking to “smaller individuals.”

The Nation later called this an example of the “socialization of banking,” though the magazine concluded that this was not likely Mitchell’s intent.

With extra deposits, Mitchell could increase his power to provide loans for speculative purposes using other people’s money.

Second, funds came from the Fed, which kept rates relatively low on loans to banks during the speculative period and required little in the way of reserves, or collateral, to be set aside for stormy days.

As a result of both methods, ordinary individuals weren’t really engaged in collective prosperity. They were, rather, engaged in collective debt creation, and would suffer most acutely in the aftermath of its destruction.

For now, crisis was still far in the distance, and bankers raked in cash.

In 1927, the Morgan Bank was the leading syndicate manager of bond issues, with just over $500 million. Postwar foreign bond issues comprised a third of the Morgan managed offerings. National City Bank and Kuhn, Loeb followed close behind.

The rush to extend foreign loans and sell foreign bonds to American investors would prove disastrous.

In a talk before the International Chamber of Commerce in Washington on May 2, 1927, Mitchell’s rival Lamont warned investors of what he saw as a potentially ugly situation, though he was probably also concerned that Morgan was losing its standing as the leading international bond house:

American bankers and firms [are] competing on an almost violent scale for the purpose of obtaining loans in various foreign money markets overseas. . . . That sort of competition tends to insecurity and unsound practice.

The bankers’ reckless underwriting of loans (without any useful regulation from Washington to curtail it) would implode at the public’s expense.

Losses on the Latin American bonds sold to investors to raise money for loans would come from the pockets of investors and take a toll on the American economy, as would the stock market crash.

[Adapted from All the Presidents’ Bankers: The Hidden Alliances That Drive American Power. Copyright © 2014 by Nomi Prins with permission from Bold Type Books, formerly Nation Books, an imprint of Perseus Books.]