This week, we continue our series on 1929 and the Great Depression (you can find the first part here).
One of the features of a financial crash is that it’s very rarely possible to pinpoint the exact moment at which things went pear-shaped.
Things that no one notices at the time are ferreted out in the future by academics keen to make a name for themselves (give it a few months, and there will be revisionist screeds claiming that the US subprime mortgage market was entirely efficient and rational and that in fact, 2008 was merely a case of the market pricing in the Brexit vote a few years early).
Meanwhile, things that seem important at the time go on to be almost forgotten.
Today I want to take a look at one such red herring – a tale of a man whose downfall was sometimes deemed to be the trigger for the Great Depression…
The rise and fall of Clarence Charles Hatry
In late 1929, Clarence Charles Hatry and several of his associates admitted to fraud. The event rattled markets across the globe, particularly in London. Indeed, when shares in the Hatry group of companies were suspended on September 20 1929, it sparked a crash in London share prices, just over a month before the far better-known Wall Street crash.
So who was Hatry, and what did he do? In The Great Crash (1955), JK Galbraith described Hatry as “one of those curiously un-English figures with whom the English periodically find themselves unable to cope”.
He was the son of a successful silk merchant, and had taken over his father’s business after leaving school. He had a varied and somewhat rollercoaster early career (both bankruptcy and speculative fortunes featured), but, basically, he bought and sold businesses, often building then selling conglomerates.
Companies he ended up owning or having a stake in included Leyland Motors, Debenhams, and one of the first photobooth chains, Photomaton. He also ran a stockbroking business, which apparently ended up getting him on the wrong side of the then-governor of the Bank of England, Montagu Norman (more on that in a moment).
As Liaquat Ahamed notes in Lords of Finance (2009), Hatry was an outsider whose flamboyance did not go down terribly well with the establishment. He had a rooftop swimming pool at his house (which had once been the home of the economist David Ricardo) in London’s Mayfair district, and owned a massive yacht, several racehorses, and a country house in Sussex. In some ways – including his use of financial engineering – he was a ‘barbarian at the gate’ well before that was a term.
Anyway, Hatry had decided to have a tilt at the British steel industry. In 1929, he bought United Steel for $40m, with the plan to use it as a base from which to snap up and consolidate the steel business.
However, he struggled to raise the money. Then, in June, the bankers who were meant to be backing him, pulled out at the last minute. There’s an enjoyable account of Hatry in the memoirs of literary agent George Greenfield (A Smattering of Monsters – Hatry was Greenfield’s first boss, and he encountered him well after his release from prison).
Hatry argued that his backers had been unnerved by the election of a Labour government the previous month. He scrambled around for backers, and apparently even approached the Bank of England for help.
The Bank’s governor, Montagu Norman, was something of a snob by all accounts, and probably didn’t need an excuse to knock back Hatry. But Hatry also reckoned that Norman bore a grudge against him because his stockbroking business had undercut Norman’s own.
In any case, he couldn’t raise the money, and that’s when he over-reached himself. He issued fake securities in his existing companies, with the aim of using them as collateral to raise the money.
But the plan failed. By early September, rumours were circulating that he had over-extended himself. His remaining backers called in their loans, and on September 18th, he confessed all to his accountant. His accountant contacted the authorities, and Hatry and three of his associates were taken into custody on Friday September 20th.
By Monday, The Times was reporting on the “Hatry Crisis” and warning that “the total losses involved in the collapse will be very heavy.” Indeed, relative to the size of the UK economy at the time, notes Ahamed, the scale of the fraud was equivalent to the Enron scandal.
The Hatry Crisis
It was messy. Many of those who had lost money with Hatry, had to pull money out of the US market to settle their losses elsewhere. That wasn’t enough to trigger the crash, but it certainly gave the bears more ammunition.
It wasn’t just about the money – it was about confidence too, particularly among newly-fledged small investors. Here’s a comment posted in The Spectator, the week after the scandal hit:
“We shall best appreciate the true gravity of the collapse in the Hatry group of companies if we consider it less from the point of view of money losses – which are undoubtedly reparable – than from that of future relations between the stock exchange and the new type of investors. Nothing has been more remarkable in commercial and industrial finance since the War than the vast expansion of the investing public. The ‘small man’ has discovered the stock exchange. The shilling share is not beyond his purse.”
Now that confidence was gone. On October 3rd, Philip Snowden, then UK chancellor, warned that the Wall Street boom was nothing but a “speculative orgy”. And by the end of the month, Black Thursday, Monday and Tuesday had all come and gone, and the US market wouldn’t recover properly until the 1950s. (We’ll look at the collapse in more detail next week).
As for Hatry – he was not a Madoff or a Maxwell – men who deliberately set out to systematically prey on others financially. Rather – like many leveraged speculators – he was someone who grew accustomed to sailing rather too close to the wind and then inevitably, capsized.
But fraud is fraud, and in 1930, he was sentenced to 14 years in prison (he ended up serving nine). By that time, of course, the Depression was already setting in.
What we can learn from the Hatry Crisis
So did Hatry cause the Great Depression? Of course not.
There are scenarios in which Hatry could have been bailed out, or in which his scheme might have worked. And you could almost argue that the Hatry collapse was a Lehman Brothers moment, if on a smaller scale.
But even if he hadn’t gone bust, something else would have rattled markets before too long, given that the economy had already turned down and markets were already pricing in too much future prosperity.
For me, the story of Hatry is just yet another example of why Hyman Minsky’s way of thinking about markets and economies is the most useful for investors.
The important thing to understand is that you never know exactly what’s going to go wrong. But a stockmarket crash is a process. It doesn’t come out of nowhere. There are times when the market is more vulnerable, and times when it’s less so.
The big danger is that human nature is such that, when things are as good as it gets, we only expect them to get better. And when they’ve hit rock bottom, we expect the next stop to be somewhere in the bowels of the earth. So we’re primed to be optimistic and credulous, just when we should be harshly sceptical, and pessimistic just when we should be scouring the market for opportunities.
The more overvalued markets grow, and the more fixated on gains investors become, the more you know that imbalances are building up beneath the surface. There’s no way to time the crash precisely. But you can note the imbalances building, and you can keep an eye out for warning signs, and you can make your portfolio as defensive as possible by increasing the amount of cash you hold, and quite possibly your gold allocation too.
As a postscript, Hatry ended up being released from prison in 1939. He’d worked in the prison library for a time, and shortly after his release, he bought Hatchards the booksellers for £6,000, and proceeded to turn around the ailing business.
Apparently, the problem was that its many upper class customers were running up large bills without paying them, and treating the place like a library rather than a shop. Hatry wrote to them all and threatened to replace the display of books laid out in the shop window, with a detailed list of its creditors’ name and the size of the bills they’d racked up.
Needless to say, his debt collection methods worked, and he went on to have a successful (and, it seems, scandal-free) business career. He died in 1965.