At the time the new Kidder, Peabody started in business, the firm's daily expenses amounted to some $5,000; its income, earned mostly from brokerage commissions, averaged $1,500 a day. Cutting expenses became the first order of business, and the job of doing so fell largely upon Hovey, known in the office as "the east wind" because of his sailing interests. The staff of the Boston office, which had numbered about 170 in September 1929, was reduced to 100, and in New York City more than half of the 300 employees were discharged. Without these and other drastic economies, "Kidder, Peabody would have folded," Hovey observed.
That it did not fail is a tribute to the new partners' determination and skills as business executives. The year 1931 was a grim one, not only on Wall Street but throughout the country. Every economic indicator registered the extent of the decline from the dizzy heights of the boom years. The Dow Jones averages, which had peaked at 354.3 in the third quarter of 1929, were down to 176.3 by the end of the first quarter of 1931 when Gordon and Hovey were struggling to keep Kidder, Peabody afloat. Gross national income had fallen from $87.8 billion in 1929 to $75.7 billion in 1930. Other indexes registered equally frightening declines. Unemployment almost tripled between 1929 and 1930, going from 1.6 million to 4.3 million. Every minor recovery was followed by a steeper decline. This was to be the pattern for another two years.
Some of Kidder, Peabody's most crucial long-term decisions were made during these dismal times. Several of them altered significantly the character of the firm. Before the reorganization Kidder, Peabody had been chiefly a banking and foreign exchange house. By the time the new firm was organized both these functions, as well as the letter of credit business, had been taken over by the large metropolitan banks. The new partners, Gordon especially, concluded that the firm's future lay in the securities business rather than general or foreign banking. The decision to deemphasize these services did not mean abandoning the firm's foreign connections, particularly those with the Barings. These were to be continued and used to strengthen Kidder, Peabody's principal functions: the underwriting and distribution of high-grade securities.
Late in December 1931 the partners made another decision designed to increase Kidder, Peabody's investment banking capabilities. Kissell, Kinnicutt & Co., a New York City banking and brokerage house established in 1906, found itself in financial difficulty. The crash and depression had wiped out many of its assets and its remaining capital was being drained rapidly.
To prevent its liquidation, Whitney, the Morgan partner who had supervised Kidder, Peabody's reorganization, suggested to Gordon and the elder Webster that they absorb Kissell, Kinnicutt into their own firm. Such a merger, Whitney explained, would be advantageous to all concerned. It would prevent Kissell, Kinnicutt's failure, a firm with which Morgan & Co. long had been associated. G. Herman Kinnicutt, the senior partner, had been a Morgan employee for several years, beginning in 1898. He was a mature and experienced, widely known and respected financier, the type of individual Whitney and other Wall Street leaders believed would add prestige and some needed seniority to the new Kidder, Peabody. Gordon agreed and also saw other advantages in Whitney's proposal. The merger would bring Kidder, Peabody additional business which the firm desperately needed to cover its overhead. "From the start through October 15, 1931," Gordon wrote Hovey, "we have lost $233,000" and "this overhead, as you know, does not allow anything for your and my services." The proposed merger, Gordon continued, also would yield Kidder, Peabody "certain connections which should prove valuable and enable us to get positions in sound syndicates"; and the admission of Kinnicutt, who was then in his sixties, would free Gordon from routine office details and allow him to concentrate on developing new business. "To the extent that I am handicapped in building up my outside relations," Gordon explained, "we must of course expect to have our syndicate profits cut down." And lastly, not the least of the advantages to be gained was the capital that Kinnicutt's admission would add to the firm, particularly since the shrinkage in security values between early March and mid-October 1931 had reduced Kidder, Peabody's original $5.35 million to about $3.4 million, a drop of almost 35 percent. Gordon saw in the proposed merger a way to "add $365,000 of net income to our business which will put us in the black instead of in the red," and "with any pick-up in business at all, with Kinnicutt's connections added to our own, we should be in a fair way to make some profits." After considerable discussion the merger was arranged and went into effect on January 2, 1932. Kidder, Peabody agreed to accept some of Kissell, Kinnicutt's brokerage accounts, to employ four of its partners and certain other personnel, and to admit Kinnicutt as a general partner.
By the end of 1931 Kidder, Peabody's reorganization had been completed and the first basic guidelines for its recovery defined. The firm's headquarters were to be on Wall Street with Boston officially becoming the branch late in 1933 when Edwin Webster, Jr. moved permanently to New York City. The primary activity-investment banking-also was clearly fixed, and the partnership agreement specified, more precisely than before, the interests of the individual partners, the assignment of profits or losses, how the business' capital was to be increased, and in the event of a partner's death or retirement, the way the capital was to be distributed so as not to jeopardize the firm's liquidity. The basis had been set for "a strong future under active young men" aided by "older, experienced heads," as one of the firm's employees later recalled the new Kidder, Peabody's beginning. Much had been done to rehabilitate the old house from its "quiet failure," but much more remained to be accomplished to restore Kidder, Peabody to its formerly proud position in the investment banking community.
