1930: Birmingham calls for investigation into investment trusts

In June of 1930, Rep. Birmingham urged Attorney General Joseph E. Warner to investigate investment trusts, which were widely blamed for contributing to the Great Stock Market Crash of the preceding October, according to a report in the Boston Globe (June 6, 1930, p. 42).

Birmingham criticized the lack of supervision of these trusts. “In my opinion these organizations are handling their funds contrary to all the general acceptances of sound investment trust financing and ought to be investigated before another crash and the barn door is locked after the horse is stolen,” he stated.

Investment trusts, which proliferated in the months prior to the Crash, were set up to hold stock in other companies, which then held stock in other companies—a scheme known as pyramiding, according to an article by John Kenneth Galbraith in the January 1987 issue of The Atlantic.

As an example, Goldman, Sachs and Company set up an investment trust, the Goldman Sachs Trading Corporation, in December 1928. That corporation sold preferred and common stocks to the public, but retained enough stock to exercise control, the article explained.

In July 1929, the trading corporation joined with Harrison Williams to set up the Shenandoah Corporation, which sold preferred and common stock to the public. Again, a controlling interest was retained by corporation. Then in the fall of 1929, the Shenandoah Corporation set up the Blue Ridge Corporation. Stock was sold to the public but the corporation retained a controlling interest.  Ultimately, Goldman Sachs retained control of all of the corporations and received revenue and value from them.

This entire structure was based on debt and leverage. When the stock market crashed, the structure collapsed and shareholders in all of the corporations were left with nothing, explained the article.

It was this practice that Birmingham wanted investigated, given the devastating consequences of the crash on his constituents and Massachusetts residents in general. He favored having the Boston Stock Exchange implement a rule forbidding investment trusts from retaining or buying their own shares, a ruling that the New York Stock Exchange had implemented not long before. 

“The Attorney General has assured me that he has already given serious attention to the whole situation of investment trust financing, and intends to seek authority from the Legislature that will enable his department or the State Bank Department to protect the public in these enormous operations of so-called investment trusts,” Birmingham stated.

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