Lords of Finance

by Liaquat Ahamed

  George Harrison had become convinced as early as mid-February that the only solution to the spreading panic caused by state-by-state bank closures was a nationwide bank holiday. In a visit to the White House, he urged the president to close all banks. Hoover tried to pass the buck back to the Fed, requesting that the Board come up with a set of proposals for saving the banking system short of shutting it down completely. Eugene Meyer had come to a similar conclusion to Harrison. He feared that if the Fed took inadequate measures that then failed, it would only make the situation worse and he would be blamed. So Meyer kicked the ball back to Hoover.

  On the afternoon of Thursday, March 2, two days before the new president was to be inaugurated, Harrison called Meyer to inform him that the New York Fed had fallen below its minimum gold reserve ratio.

  During the next forty-eight hours, as the nation’s banking system unraveled by the hour, the Fed, unwilling to act on its own, tried to find someone else to take responsibility for the situation. But it was caught in the limbo between administrations. That same Thursday afternoon, Harrison called the president, begging him once again to declare a national banking holiday. Hoover replied that he “did not want his last official act in office to be the closing of the banks.” Adolph Miller, Hoover’s old friend and neighbor, also went to the White House to try to persuade the president. Hoover said he would do nothing unless Roosevelt also signed up.

  Roosevelt traveled down to Washington that day, and no sooner had he checked into his suite at the Mayflower Hotel than the phone began ringing. It was Meyer calling to urge him to endorse a national proclamation closing all banks. Roosevelt refused to commit himself to any course of action until he was inaugurated—why box himself in at this stage? he quite justly thought.

  On Friday, March 3, the New York Fed lost a total of $350 million—$200 million in wire transfers out of the country and $150 million in actual physical currency withdrawals from banks in the New York area. Now short some $250 million in reserves, it tried to borrow from the Chicago Fed but was turned down—the risk of the Federal Reserve System balkanizing and falling apart was becoming a reality.

  March 3 was Hoover’s last full day in office, and that afternoon Roosevelt and some of his family—Eleanor, his son James, and his daughter-in-law, Betsy—paid him a courtesy call. After a strained tea party of polite small talk, Hoover asked to see Roosevelt alone. They retired to Hoover’s study where they were joined by Meyer; Secretary of Treasury Mills; and Roosevelt’s aide, Raymond Moley. Meyer and Mills again tried to persuade the president-elect to join the outgoing Republican administration in some sort of bipartisan action. Roosevelt stood his ground. The sitting president should do what he had to—he himself would do nothing until after his inauguration at noon the next day. Eleanor heard snatches of the conversation through the open door. At one point, Hoover asked, “Will you join me in signing a joint proclamation tonight, closing all the banks?” Roosevelt replied, “Like hell, I will! If you haven’t got the guts to do it yourself, I’ll wait until I am President to do it!” It was now very obvious that Roosevelt’s strategy was to withhold his cooperation in the hope that conditions would deteriorate so badly before he took office that he would get all the credit for any subsequent rebound.

  That evening at the Roosevelt suite, the telephone would not stop ringing. Among the callers was Thomas Lamont who was at the New York Fed with sixteen of the most powerful bankers in the city. An old friend of Roosevelt’s, Lamont had sent him a letter two weeks earlier warning him against closing the banks, “Urban populations cannot do without money. . . . It would be like cutting off a city’s water supply. Pestilence and famine would follow. . . .” Lamont now reiterated this view, telling Roosevelt that he was sure that there would be a change in national psychology after the inauguration that would restore confidence.

  The Fed made one last attempt to bridge the gap between Hoover and Roosevelt with Meyer calling Hoover and Miller calling Roosevelt. Hoover and Roosevelt even exchanged several calls, at 8:30 p.m., at 11:30 p.m., and at 1:00 a.m. Neither of them shifted their positions. Finally Roosevelt suggested that they both turn in and get some sleep.

  Meyer, having been repeatedly rebuffed by the White House over the last two days and despite knowing that it was futile, decided to make one last effort—perhaps he wanted to protect himself and the Fed from the verdict of history. At 9:15 p.m. on March 3, he assembled his colleagues on the Board for the third time that day. Charles Hamlin was called out of the inaugural concert he was attending and despite the foul weather—it had been sleeting—George James was dragged from his sickbed. The Board drafted a formal request in writing to the president to proclaim a national bank holiday. It was 2:00 a.m before the letter was sent to the White House. The president had gone to bed. No one wanted to wake him up and the letter was slipped under his door. The next morning, he was furious at this ploy by his erstwhile friend, Meyer, to leave him holding the bag.

  Having failed with the president, the Federal Reserve Board now focused on getting the governors of the two most important states to close their banks. Governor Horner of Illinois could not be found at first. When tracked down, he refused to move unless New York governor Herbert Lehman of the eponymous banking family acted first. In the middle of the night, Harrison, Lamont, and a group of bankers trooped over to Lehman’s Park Avenue apartment. Lamont and the private banks tried to persuade Lehman to hold off doing anything while Harrison kept insisting that they had no choice—gold withdrawals had become unbearable, and if they did nothing, on Monday morning the New York Fed would run completely out of reserves. Finally at 2.30 a.m. Lehman relented and proclaimed a three-day bank holiday in New York. An hour later Governor Horner followed his lead. The governors of Massachusetts and New Jersey moved to close their banks early the next morning. Fed officials tried to contact Governor Gifford Pinchot of Pennsylvania, who was in Washington for the inauguration and staying at a private residence, but no one would pick up the telephone. Finally a Fed official volunteered to go by his house to rouse him. He finally issued his proclamation to close the banks in his state as dawn was breaking, noting ruefully that he was only carrying 95 cents in his pocket.

  That day as a hundred thousand people stood on the Mall to witness Roosevelt being sworn in on the steps of the Capitol, they were watched over by army machine guns. It was like “a beleaguered capital in wartime,” wrote Arthur Krock of the New York Times.

  Meanwhile, the credit and currency machinery of the country had come to grinding halt. The banking systems in twenty-eight states of the union were completely closed and in the remaining twenty partially closed. In three years, commercial bank credit had shrunk from $50 billion to $30 billion and a quarter of the country’s banks had collapsed. House prices had gone down by 30 percent, leaving almost half of all mortgages in default. With the contraction in credit, mines and factories across the country had to shut down. Steel mills operated at less than 12 percent of their full capacity. Automobile plants, which had once churned out twenty thousand cars a day, were now producing less than two thousand. Industrial output had fallen in half, prices had tumbled 30 percent, and national income had contracted from over $100 billion to $55 billion. A quarter of the workforce—13 million men in all—were without jobs. In the richest nation in the world, 34 million men, women, and children out of a total population of 120 million had no apparent source of income.

  More than half a century before, Karl Marx had predicted that as the boom and bust cycles of capitalism became progressively worse, it would eventually destroy itself. That day, it seemed that the back of the system had finally broken in one last stupendous crisis.

  PART FIVE

  AFTERMATH

  1933-44

  21. GOLD STANDARD ON THE BOOZE

  1933

  In order to arrive at what you do not know

  You must go by a way which is the way of ignorance.

  —T. S. ELIOT, Four Quartets, “East Coker”

 
ONE DAY into office, the very first action that Roosevelt took was to close every bank in the country. Invoking an obscure provision of the 1917 Trading with the Enemy Act, designed to prevent gold shipments to hostile powers, he imposed a bank holiday until Thursday, March 9. Simultaneously, he suspended the export or private hoarding of all gold in the United States.

  To the surprise of many, Americans adapted to life without banks remarkably well—the initial reaction was not chaos but cooperation. Store-keepers liberally extended credit, while doctors, lawyers, and pharmacists continued to provide services in return for personal IOUs. Harvard University allowed its students to obtain meals on credit. Across the country in El Paso, Texas, the First Baptist Church announced that personal promissory notes would be welcome in the Sunday collection plate instead of silver. Even taxi dancers at Manhattan’s Roseland dance hall on Broadway agreed to take IOUs for the 11 cents that they charged per dance—provided their customers could produce bankbooks showing evidence of funds.

  More than a hundred cities and towns, including Atlanta, Richmond, Knoxville, Nashville, and Philadelphia, issued their own scrip. The Dow Chemical Company coined magnesium into alternative coins. That prominent undergraduate newspaper, the Daily Princetonian rose to the occasion by assuming the role of central bank of Princeton and issuing $500 of its own currency, in denominations of 25 cents, which local merchants agreed to accept—a reflection of how adaptable and elastic the notion of money can be.

  Other places resorted to barter. In Detroit, the Colonial Department Store agreed to accept farm produce in exchange for goods—a dress went for three barrels of Saginaw Bay herring, three pairs of shoes for a 500-pound sow, and other merchandise went for fifty crates of eggs or 180 pounds of honey. In Manhattan, the promoters of the Golden Globe amateur boxing tournament announced that fans would be admitted in return for anything assessed to be worth 50 cents—that night the box office took in hats, shoes, cigars, combs, soap, chisels, kettles, sacks of potatoes, and foot balm.

  There were, of course, some disruptions. In Detroit, now in its fourth week without banks, merchants stopped extending credit, food disappeared from the shelves, and the City of Detroit defaulted on its bonds. In Reno, the divorce industry ground to a halt when women could not pay the filing fees. Tourists and traveling salesmen around the country found themselves stranded. In Florida, the American Express office agreed to cash checks up to a limit of $50 and was besieged by five thousand tourists. The first official task for the new secretary of state, Cordell Hull, was to placate the diplomatic corps in Washington, who argued that their money was entitled to immunity from sequestration and should be immediately released. The movie King Kong in its second week played to half-empty theaters—total box office receipts were down almost 50 percent.

  The biggest problem was not cash but change. Nickels for use on the subway and on trolley and bus lines were so scarce that an officer of the Irving Trust Company declared that a “nickel famine” was in effect. Suddenly automats, where food was served from coin-operated vending machines and where a lot of coins changed hands, were besieged by women in mink desperate not for a meal, but for loose silver.

  On Sunday, March 5, the day after the inauguration, William Woodin, the new secretary of the treasury, began organizing a team of experts to put together a bank rescue package. The diminutive Woodin, who had been the president of the American Car and Foundry Company, was a far cry from the austere Mellon. A Republican who had switched parties to support Roosevelt, he was as multifaceted as Charles Dawes of the Dawes Plan. An accomplished musician, having composed several orchestral pieces, including the Covered Wagon Suite, the Oriental Suite—and in honor of the inauguration, the “Franklin Delano Roosevelt March”—he liked to unwind at the office by playing the mandolin or strumming his guitar.

  Woodin quickly recognized that neither he nor his aides had the knowledge or experience to handle the situation alone. He managed to persuade none other than his predecessor as secretary of the treasury, Ogden Mills, and Mills’s deputy, Arthur Ballantine, to lead the bank rescue effort, even though Mills, who owned an estate in the Hudson Valley just five miles north of Roosevelt’s home, Hyde Park, was no admirer of the new president—later he would become a very vocal critic of the New Deal. On the very last day of Hoover’s presidency and his own tenure in office, Mills had prepared a draft, which now became the foundation of the Roosevelt plan. Even Roosevelt’s proclamation closing the banks in the country was based on a draft of a statement that Ballantine had originally prepared for Hoover.

  The team’s other principal player was George Harrison, who came down to Washington that Sunday. Realizing that any bank plan would have to pass muster with bankers, Woodin wanted someone who could be a bridge to Wall Street, and as a former outside director of the New York Fed, he knew Harrison well. He also very deliberately kept the group of presidential advisers with a reputation for being left-wing—men such as Adolph Berle, Rex Tugwell, and Raymond Moley—well in the background.

  During the next few days, as bankers came and went, the Treasury team, led by the trio of Woodin, Mills, and Harrison, considered and rejected numerous proposals. Some people wanted a nationwide issue of scrip—paper currency backed only by a government pledge. Others recommended that all state banks be incorporated into the Federal Reserve System. Yet others believed a federal government guarantee on all bank deposits was the solution. The president himself came up with the zaniest idea—that all government debt, $21 billion, be immediately convertible into currency, in effect doubling the money supply at a stroke.

  By Thursday, March 9, the Emergency Banking Act was ready to be submitted to Congress. Most of it was based on the original Mills proposal. Banks in the country were to be gradually reopened, starting with those known to be sound, and progressively moving to the shakier institutions, which would need government support. A whole class of insolvent banks would never be permitted to reopen. The bill also granted the Fed the right to issue additional currency backed not by gold but by bank assets. And it gave the federal government the authority to direct the Fed to provide support to banks. The legislation was supplemented by a commitment from the Treasury to the Fed that the government would indemnify it for any losses incurred in bailing out the banking system. This unprecedented package finally forced the Fed to fulfill its role as lender of last resort to the banking system. But to achieve this, the government was in effect providing an implicit blanket guarantee of the deposits of every bank allowed to reopen.

  For Harrison the transformation was almost too much to believe, leaving him constantly beset by doubts. Only a week before he had been dealing with a president who seemed incapable of taking action. He now had to contend with a president who would try anything. As a protégé of Benjamin Strong, Harrison believed fervently in what he called the “separation of the central bank from the state”—the financial equivalent of the separation of the powers in the political sphere. The new legislation would give the president unprecedented control over the Fed. Harrison had also been to taught that currency should be backed either by gold or liquid assets readily convertible into cash. The new law expanded the category of assets against which the Fed could lend, compelling it to print money, Harrison agonized, against “all kinds of junk, even the brass spittoons in old-fashioned country banks.” But at least the drift was over and something was finally being done.

  At ten o’clock on the evening of Sunday, March 12, Roosevelt gave the first of his fireside chats over the radio. “My friends,” he began in his easy patrician voice, “I want to talk for few minutes with the people of the United States about banking . . . I want to tell you what has been done in the last few days, why it was done, and what the next steps are going to be.” In simple and clear language, he explained to the sixty million people listening in countless homes across the nation, “When you deposit money in a bank, the bank does not put the money in a safe deposit vault. It invests the money, puts it to work.” “I know you are
worried . . . ,” he told them, “I can assure you, my friends, it is safer to keep your money in a reopened bank than under the mattress.” The next day the comedian Will Rogers wrote to the New York Times, “Our President took such a dry subject as banking . . . [and] he made everyone understand it, even the bankers.”

  As the first banks prepared to open on Monday, March 13, no one could be sure what would happen. Many feared that after the measures restricting the convertibility of currency into gold, the panic might even continue and indeed become worse. As Harrison put it, “We had closed in the midst of a great bank run, and as far as we knew would reopen under the same conditions.”

  That morning, long lines of depositors formed outside the reopened banks. But instead of taking their money out, they were putting it back in. The combination of the bank holiday, the rescue plan, and Roosevelt’s masterful speech—there is no way of distinguishing which was the more important—created one of those dramatic transformative shifts in public sentiment. As on other similar occasions where a new administration has taken charge in the middle of a crisis and introduced a radically new package of policies—for example, in Germany in November 1923 when hyperinflation was ended or in France in July 1926 when Poincaré stabilized the franc—the mood of the nation changed overnight.