Gordon's chief concern during the war years was to hold the firm together and preserve its capital. And though investment banking did not experience the same wartime boom enjoyed by most other sectors of the economy, the years 1942 through 1945 proved to be considerably less disastrous than some Wall Street leaders had anticipated at the time of the Pearl Harbor attack. Total corporate offerings fell from $2.6 billion in 1941 to $1 billion in 1942, rose slightly to $1.1 billion the next year, then jumped to $3.1 billion in 1944 and to $5.9 billion in 1945; new state and municipal issues declined from $956 million in 1941 to $524 million in 1942, fell to $435 million the next year, and then started upward to $661 million in 1944 and $795 million in 1945. As in World War I, the Treasury requested that new issues be timed not to interfere with its own bond drives. Trading on the New York Stock Exchange followed the trend set by the new issues market, with a drop from 171 million shares in 1941 to 126 million in 1942, then a steady increase to 179 million in 1943, 263 million in 1944, and 378 million in 1945.
Unlike the securities industry generally, which suffered its worst decline in 1942, the first full year of war, Kidder, Peabody ended the twelve months showing a slight improvement over 1941. The firm managed or co-managed three underwriting groups in both 1941 and 1942 with the total dollar value somewhat higher in the latter year ($25.4 million) than in the former one ($23.3 million). The same was true of its private placement record-a single $5 million sale in 1941 as compared with two amounting to almost $6.1 million in 1942. The next year the firm registered a significant recovery that was maintained through the end of the war. The total number and dollar value of issues managed or co-managed rose from seven ($52.7 million) in 1943 to ten ($83.8 million) in 1944, then soared to thirty-two ($290.0 million) in 1945. The number of Kidder, Peabody's managements or co-managements in 1945 represented some 40.5 percent of all those it had headed in the previous fourteen years, and their value constituted about 45 percent of the total since the start of the new firm in 1931. Private placements also peaked in 1945, with eight sales totaling $47.6 million. The marked increase in underwritings, together with a substantial increase in stock exchange transactions that lifted total brokerage commissions from slightly more than $642,000 in 1942 to nearly $1.7 million 1945, boosted the firm's total earnings for the year that the war ended to above 1 million dollars.
Together with other investment houses, Kidder, Peabody also participated actively in selling the Treasury's seven war loans and the 1945 victory drive. Among the 450 or more investment houses selling government bonds the firm stood in first place in every Treasury drive save one, when it dropped to second place, and the Boston office also scored high, being awarded a citation for leading all that city's firms in total individual sales. Kidder, Peabody, like all businesses, also contributed some of its personnel to the war effort. Ames, who had been made a partner in January 1941, served as an administrative officer of the War Shipping Administration in Washington, and seventy-three other employees, almost a fifth of the staff, joined the armed forces.
Like some other Wall Street leaders, Gordon believed investment bankers had more to contribute to the war effort than selling the Treasury's bonds. Speaking before the National Association of Securities Commissioners meeting in St. Louis in September 1942, he called for more effective use of the country's investment houses in helping the government finance the war expansion. He urged that Washington make it easier for corporations who were able to finance themselves by simplifying regulatory practices, thus relieving the government of some of its responsibilities and the taxpayers of some of the cost of new construction. The appeal brought few results. Washington continued to finance most of the industrial expansion, much of it through the Defense Plant Corporation, a subsidiary of the Reconstruction Finance Corporation.
Despite Gordon's failure to convince the government to make greater use of investment houses, his own firm's impressive increase in business led to the first large additions to the partnership. Between 1941 and 1945 Kidder, Peabody admitted eight regular partners, all of whom were recruited from within the firm. Each fulfilled Gordon's chief criterion for a partnership-demonstrated ability and productivity. In January 1945 the firm also added its first limited partner, Randolph P. Compton, a former executive of the Republic Aviation Corporation who had begun his business career in his father's Kansas City investment firm.47 A man of substantial wealth, Compton brought to Kidder, Peabody additional capital and several important corporate accounts. His appointment together with the eight other recent admissions gave Kidder, Peabody a total of fifteen partners, five times as many as there had been in 1931. Kinnicutt, the first new partner to be added, died in December 1943.
Kidder, Peabody's wartime record was marred by the firm's first publicly announced violation of the Securities Exchange Act. The incident occurred on September 23, 1942, and involved a $963,000 secondary distribution of 4 percent first mortgage bonds of the Jamestown, Franklin & Clearfield Railroad Co., a subsidiary of the New York Central System. The bonds, which Kidder, Peabody had purchased from a life insurance company at 49 and reoffered to the public at 50, less a point to dealers, were listed on the New York Stock Exchange and selling at 493 asked and 497 bid. The SEC charged Kidder, Peabody with unlawful "manipulation of the market" ("rigging") which according to the Commission "created active and apparent trading and raised the price of the security." Kidder, Peabody's efforts at stabilizing the price at 504 instead of 493, the one at the last sale, was designed, the SEC charged, to attract buyers at the allegedly rigged price. Kidder, Peabody denied the charge it had willfully violated the rules, saying the difficulty "arose over a net change of a V2 point and revolved around a highly technical interpretation of the stabilization provisions of the Securities Exchange Act... on which there might well be a difference of opinion, but with respect to which the firm believed that it had acted correctly and in entire good faith." After a careful review of the evidence the SEC agreed that Kidder, Peabody had acted in "good faith" and dropped the reportedly stiff penalties it originally had considered imposing on the firm. The violation, the SEC finally determined, had stemmed from the firm's "relative inefficiency in supervising the distribution" which, in turn, was due "in part" to wartime conditions. The Commission concluded the proceedings by ordering the firm suspended for ten days from membership in the National Association of Securities Dealers, the industry's self-regulatory body; and it also ordered Clifford suspended from membership on the New York Stock Exchange for the same period of time, both rulings to take effect beginning May 17, 1945. Kidder, Peabody had erred unknowingly and had to suffer the embarrassment of official censure and the loss of business that came from being denied for a two-week period the privileges of membership in two essential organizations.
Early in June 1945, when the SEC's restrictions on Kidder, Peabody's activities came to an end, the country was celebrating the defeat and occupation of Nazi Germany. And though the war against Japan still raged on, the final outcome of that conflict also ceased to be in doubt. The future looked good both for the country and for Kidder, Peabody. Gordon's concern at the time of Pearl Harbor about the firm's ability to hold together during the war had proved ill-founded. Not only had Kidder, Peabody survived, but it had emerged from four years of war in a stronger financial condition and with greater prestige than it had enjoyed at any time since the reorganization. The firm had established itself as an effective national distributor; it still had to win the financial community's recognition as an undisputed major underwriter, a full-fledged member of that small group of houses at the top of the industry's power structure.
