Lords of Creation

by Frederick Lewis Allen

  Hoover also made or encouraged other moves to stop the spread of destruction. He fought hard to balance the Federal budget, believing that a return of confidence in the ability of the government to pay its bills would lead to a return of general confidence in the system which was collapsing; and in the spring of 1932 the Federal Reserve Board, having successfully protected the bulk of American banks from collapse until the Reconstruction Finance Corporation could aid in the work of rescue, did its best to inflate bank credit once more by open-market purchases of securities, hoping thus to prepare the way for a resumption of investments. But the budget could not be surely balanced without heavier taxes than Congress was willing to levy; meanwhile the general distress of the country was intensified by the fact that private charity and state relief could no longer pay the mounting cost of caring for the jobless unless the Federal government would help; and as for the Reserve Board’s open-market policy, though it eased the situation somewhat for the stronger banks, it failed utterly to bring about a resumption of investment. The financial system of the country was still too shaken.

  For Hoover, the struggle was a prolonged nightmare. He was being utterly defeated—not because he was stupid or indecisive or pig-headed so much as because the best devices of orthodox economics were helpless to meet the turn of events.

  5

  By the first day of July, 1932—the day when the Democratic delegates at Chicago, “stupefied,” as Walter Lippmann put it, “by oratory, brass bands, bad air, perspiration, sleeplessness, and soft drinks,” nominated Governor Franklin Delano Roosevelt of New York for the Presidency—the economic condition of the nation had become truly appalling.

  American business as a whole was deep in the red, despite its furious efforts to save itself. The New York Times Index of Business Activity stood at almost exactly 50 per cent of its 1929 high. And the number of people unemployed was variously estimated at 13, 14, or 15 millions. (Cold, impersonal figures, those unemployment estimates; what they represented in frustration, demoralization, hunger, and suffering no statistics could even suggest.)

  Three and a half years before, when the wave of stock-market prosperity had first curled over and broken, it had seemed to the bankers and brokers of Wall Street that—in the phrase of the day—“stocks had fallen all the way to the bottom.” Now it seemed to them, by contrast, as if the avalanche of 1929 had been halted on a plateau far up the mountainside. A few specific quotations will point the contrast.

  Nor was the bond market in better shape. Forced liquidation and panic had reduced the prices of 40 leading bonds listed on the Stock Exchange to an average of 41.39 per cent of par. The newspapers had been accustomed to print graphs to show the trend of bond prices; now these graphs had to be elongated at the bottom to allow the line which represented prices to pursue its jaggedly precipitous downward path.

  The mighty corporate structures of the super-finance of the nineteen-twenties were wobbling. Insull’s pyramid had already fallen. The Van Sweringens were deeply in debt to the House of Morgan, and their Alleghany Corporation was in such shape that the price of its common stock had sunk to thirty-seven and a half cents a share. The Transamerica Corporation, representing the Giannini pyramid of banks and other enterprises, was quoted at a low for the year of 1932 of 2⅛. Most of the investment trusts into which investors had crowded to put their money in 1929 now showed staggering losses. So many banks were in straits that sober bankers were arguing that bank examiners ought to delay their tours of inspection; and the president of Hoover’s Reconstruction Finance Corporation, Charles G. Dawes, had had to resign his position in order that the R.F.C. might authorize the lending of ninety million dollars to prop up his bank.

  Public confidence in the men of the financial world was obviously falling fast, as the values of securities which had been distributed among investors during the boom years approached the vanishing point. The receding tide of business was uncovering corruption in the management of bank after bank, and even banking firms of unquestioned honor were losing their reputation for sagacity: had not Kreuger, the Swedish match king, twisted a group of conservative men round his finger and made them innocent partners in his gigantic frauds?

  The men of Wall Street themselves were bewildered. They did not know whom or what to rely upon. When Andrew Mellon left the Secretaryship of the Treasury early in 1932 to become Ambassador to England, his departure caused hardly a flurry on the troubled waters of the stock-market. A few years before it would have caused a near-panic, but Wall Street was now losing faith even in its own gods. Fear was everywhere: once there had been no more rapturous optimist in the business world than Charles M. Schwab, but now—in April, 1932—he was quoted as saying, “I’m afraid, every man is afraid. I don’t know, we don’t know, whether values we have are going to be real next month or not.”

  One by one, the pet economic theories of the Street had been annihilated. The theory of the business cycle (as most financiers had interpreted it)—the theory that business ebbed and flowed in such a way that the business man who watched the statistical indices carefully could buy at the bottom and prosper—had betrayed its faithful adherents again and again; indeed, one of the things which had helped to defeat this theory was perhaps the very fact that it was so widely believed in. The theory that forecasters could forecast was a wreck. The theory that common stocks were a satisfactory medium for long-term investment was a wreck. Indeed, so general was the intellectual wreckage in the world of conservative economics that it was hardly surprising to hear one of the ablest leaders in the banking world confess, in a news-reel talk, “As for the cause of the depression, or the way out, you know as much as I do.” Thus had the mighty fallen.

  Looking for a scapegoat to blame for what was happening, Wall Street found it in Congress. Every time a Congressman proposed an inflationary program, Wall Street shivered and prices took another tumble. One might have supposed that the prospect of inflation would tend to lift the prices of equities; but no, the fear which possessed the men of property had become wild and unreasoning.

  The rest of the country was bewildered too. Here and there one saw signs of revolt. During the summer of 1932 a bedraggled Bonus Army of war veterans descended upon Washington demanding funds—and were dispersed by the Army in a lamentably misplaced show of firmness. Farmers’ strikes in Iowa bore witness that even staid and conservative citizens might be driven to violence by long-continued and unrelieved deflation. Yet the opposition to the ruling powers of the country was as yet incoherent and scattered. Hundreds of schemes for economic improvement were being advanced by business men, by economists of every school, by laymen, students, and cranks; magazine editors in those days had to spend half their time reading economic plans, most of them quite impossible of practical realization; yet the most striking thing about these plans, perhaps, was the multiplicity of divergent ideas which they represented. (The only radical economic plan which was to gain any large popular following prior to Roosevelt’s inauguration had not yet caught the public attention: it was Howard Scott’s Technocracy, a curious mixture of valid economic theory and exaggerated statistics and utopian proposals.) The Communists were making a great noise and converting many of the intellectuals of the country, but the rank and file of Americans—even among the unemployed—had no use for them. Discontent there was, and no wonder; a vague feeling there was that the government ought to pay more attention to the people at the bottom of the economic scale, and less to those at the top; but on the whole this sentiment was still formless and unorganized.

  It was symptomatic of the temper of the time that when the Democrats met in Chicago to select a candidate to oppose Herbert Hoover, they wrote a platform which could hardly—considering the condition of the country—have been called radical. They called for the “protection of the investing public by requiring to be filed with the government and carried in advertisements of all offerings of foreign and domestic stocks and bonds, true information as to bonuses, commissions, principal inve
sted, and interests of sellers”; they called for federal regulation of holding companies and of stock exchanges; they called for federal aid to the states for unemployment relief, and for expansion of public works; but they also called for a 25 per cent cut in the costs of the federal government, for a balanced budget, and for “a sound currency to be maintained at all costs.”

  The man whom they nominated, furthermore, was certainly no radical. Roosevelt was widely regarded in the West as a foe of Wall Street and a friend of the farmers and little business men and workers upon whom had descended the full weight of economic trouble; but there was nothing revolutionary about his program. It was an indistinctly liberal program, patterned generally after the progressivism of his late cousin and of the late Robert LaFollette. And as for the man himself, what Walter Lippmann had written about him a few months before his nomination expressed the opinion of a great many observers in the East who had watched closely his career as Governor of New York: “Franklin D. Roosevelt is an amiable man with many philanthropic influences, but he is not the dangerous enemy of anything. He is too eager to please. The notion, which seems to prevail in the West and the South, that Wall Street fears him, is preposterous.… Wall Street does not like his vagueness, and the uncertainty as to what he does think, but if any Western progressive thinks that the Governor has challenged directly or indirectly the wealth concentrated in New York City, he is mightily mistaken.”

  Behind Roosevelt, as the campaign of 1932 progressed, was concentrated a great mass of resentment at Hoover, of distrust of the financial chieftains whom Hoover had so often called into consultation, and of blind desire for change. But neither Roosevelt nor the majority of his followers proposed any major alteration in the economic organization of America. So completely had the American people accepted the financial and business order under which the country had grown and prospered that its downfall left them astonished, dazed, and unprepared with rational alternatives.

  Indeed, their very bewilderment brought about a strange apathy, a downhearted quietness of mood. When one reflected that some fourteen million men and women were out of work; that many of them were in desperate want, and most of them faced a future empty of any definite promise of self-respecting self-support; that young people were coming out of school and college into a land which seemed to have no further use for their talents, and which no longer offered them a frontier to exploit; and that the crisis had been steadily becoming more grave for two and a half years, one could only conclude that the American people as a whole were behaving with extraordinary docility. Like a sick man who realizes that his illness may be mortal yet who distrusts strong medicine, the country waited, desperately patient, for recovery or for the end.

  During the summer of 1932, recovery seemed once more to be beginning. Wall Street began to realize that some of its fears had been exaggerated: that Congress had not legislated the country into immediate bankruptcy, that the Reconstruction Finance Corporation was propping up the weaker banks (though at great cost), and that the European financial system had not utterly gone up in smoke. There were signs of decided financial improvement. The gold which had drained out of the country during the latter months of 1931 and the beginning of 1932 was returning in part; by the end of August, 40 per cent of it had come back. Cash was beginning to come out of hoarding. The big banks, especially in New York and Chicago, were in definitely improved condition. The formation of a new banking pool under the leadership of the House of Morgan had helped to bring about a belated upturn in bond prices. Signs of life appeared in the stock market, and prices made a brief but rapid recovery. And business, for a brief interval, definitely improved.

  Had the American economy at last turned that momentous corner?

  For a little while it seemed so. Yet while the political campaign was still in full cry, with Roosevelt promising to come to the aid of the Forgotten Man, and Hoover prophesying that a Democratic triumph would cause the grass to grow in the streets of America—the indices turned down again; not far down, but enough to check the country’s half-despairing hope. The resiliency of the financial markets—even of the commodity markets—had not communicated itself to the general business structure. During the last months of the year 1932 business just about held its own. Roosevelt was overwhelmingly elected; the year 1933 began. And then suddenly, while the President-elect was engaged in chosing the members of his Cabinet, the economic system broke utterly at its weakest point.

  6

  It was the banks which gave way.

  The final abrupt collapse might have begun in any one of a score of places. But there was perhaps a certain poetic justice in the fact that it actually began in Detroit, where the skyscraper-building boom in the nineteen-twenties had been especially grandiose and the subsequent difficulties of the banks had been correspondingly severe; that the specific bank which was in trouble in February, 1933—the Union Guardian Trust Company—was dominated by a holding company, a characteristic flower of the financial exuberance of 1929; that this holding company controlled also not only nineteen other banks but also seven security companies and a variety of other financial enterprises, and had thus been tempted, as had innumerable other financial institutions, to serve more than one master; and that one of the things which now made the weakness of the Union Guardian Trust Company a matter of general concern was the very existence of this holding company: the fear that if the Union Guardian Trust Company went under, there would at once be a run upon the other banks under the same management, and that such a run would precipitate a general panic.

  The Union Guardian had been sorely pressed for some time. It had already borrowed again and again from the Reconstruction Finance Corporation, its net borrowings amounting to some twelve and a half million dollars. Now, in February, 1933, it was slipping once more. It wanted more aid from the taxpayers’ funds—much more, and quickly. There were frantic negotiations with the Federal officials. These negotiations—involving the Detroit bankers, the R.F.C., the Treasury Department, Henry Ford, and Senator Couzens of Michigan—have been the subject of much angry dispute, but they need not be discussed here. The significant fact was that the negotiations failed, and that in the early hours of February 14 Governor Comstock of Michigan, after conferring at length in Detroit with bankers and State and Federal officials, motored through the night to Lansing and issued a proclamation closing all the banks in Michigan for a “holiday” period of eight days.

  This proclamation not merely paralyzed the financial machinery of Michigan; it also immediately set in motion the forces of panic elsewhere. Already the banks of the country had begun preparations to meet the probable storm. These preparations were now redoubled. Banks withdrew reserves from the Reserve Banks, and also withdrew money which they had on deposit in other banks: during February more than a billion dollars which had been deposited in New York by out-of-town banks left the city. They sold bonds; the bond market suffered fresh attacks of liquidation. Meanwhile corporations and individuals, all over the country, uneasy lest the panic spread, began withdrawing their deposits from the banks, and thus hastened the storm. In places hundreds and thousands of miles apart, there were bank runs of increasing seriousness. Hoarding began anew, to the extent of hundreds of millions of dollars. Gold began once more to leave the country in quantity.

  For some ten days these phenomena were largely hidden from the eye of the casual observer. Newspapers gave them as little publicity as possible; indeed, even as late as March 2, when the panic had acquired terrific momentum, the New York Times still kept it off the front page, and its chronicle of bank holidays on page eight was topped by the gentle headline, BANKS PROTECTED IN 5 MORE STATES. But on February 24 Governor Ritchie had to declare a three-day holiday in Maryland, and from that moment onward the progress of the collapse was very rapid. The Federal Reserve System, admirably as it had been devised to meet localized emergencies, could not withstand the simultaneous onslaught of panics on every front. State after state was driven to pass emergency l
aws permitting banks to limit withdrawals if not to close their doors entirely.

  By March 3, the ability of even the big financial citadels of New York and Chicago to hold out was becoming hourly more doubtful. In Washington, President Hoover’s financial advisers were urging him to declare a national banking holiday and to put an embargo upon gold, but he could not be induced to act unless the incoming president would join with him, and Roosevelt refused to take administrative responsibility until he entered the White House; so nothing was done.

  At last, at 4:30 in the morning of March 4, Governor Lehman issued a proclamation closing the New York banks, and almost simultaneously Governor Horner of Illinois took similar action for his state. With the issuing of these two proclamations, the financial paralysis of the country became virtually complete.

  History does not often time its climaxes with precision. But in this instance the timing was diabolically perfect. No drama written to throw into bold relief the defeat of the financiers and the failure of Hoover’s measures for recovery could have hurried to a more effective curtain. During the days when the bank-holiday epidemic was spreading, Charles E. Mitchell and his colleagues of the National City Bank had been on the witness stand before a Senate investigating committee in Washington; their shocking testimony—which had forced Mitchell to resign on February 26—seemed to point the moral of the events that were taking place. And now on the very morning when the doors of the great New York and Chicago banks at last stood closed to the public, Herbert Hoover was preparing to ride to the Capitol to relinquish the Presidency of the United States. His term of office had come to an end, and with it the financial order which he had labored so long to sustain.