A History of the Federal Reserve, Volume 1
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Hoover next wrote to the Board on February 22, referring to capital flight and to the “hoarding of currency, and to some minor extent of gold, [that] has now risen to unprecedented dimensions,” and asked whether there was a need for some action, or some additional powers (Hoover to the Board, Board of Governors File, box 2158, February 22, 1933). The Board replied on Saturday, February 25, that it was watching the situation develop but “did not desire to make any specific proposals for additional measures or authority” (Meyer to Hoover, Board of Governors File, box 2158, February 25, 1933).
The following Monday the Board met with Ogden Mills present.127 Mills referred to the pressures in the market and on the Treasury arising from the Treasury’s debt sales to finance the Reconstruction Finance Corporation’s assistance to failed banks. He urged the Board to arrange for open market purchases of up to $100 million that week.
Governor Meyer saw no reason for purchases. The rise in bond yields was a “necessary readjustment in a market which has been too high” for current conditions. The proper response was for the New York market to increase money rates and for the Federal Reserve to increase bill rates to protect against higher rates abroad: “Purchases of Government securities at the present time would be inconsistent from a monetary standpoint,” although the Treasury might wish to purchase some long-term securities for the postal savings account. A readjustment of rates was “inevitable,” so it was wrong for the Federal Reserve to try to prevent it (Minutes, Board of Governors File, box 2158, February 27, 1933, 2–3).
126. The reply was not sent for eleven days. Raymond Moley (1939, 142 n. 5) blames an oversight by one of Roosevelt’s secretaries. Hoover’s letter reached Roosevelt when he returned to New York, after an attempted assassination killed Chicago’s Mayor Anton Cermak, who was riding beside Roosevelt. Moley comments on Roosevelt’s calm following the attempted assassination. He spent the evening discussing the financial crisis and his response to Hoover. “I detected nothing but the most complete confidence in his own ability to deal with any situation” (142).
127. Mills had replaced Andrew Mellon as secretary of the treasury and ex officio chairman of the Federal Reserve Board a year earlier.
President Hoover wrote again on February 28. This time the letter was more urgent. He noted that the Board was not an adviser to the president, but he wanted its advice on three proposals in the “emergency”: federal guarantee of bank deposits; issuance of clearinghouse certificates by established clearinghouses in the affected areas; and “allow[ing] the situation to drift along under the sporadic state and community solutions now in progress” (Hoover to Board, Board of Governors File, box 2158, February 28, 1933).
The Board did not reply until March 2, two days later. It was “not at this time prepared to recommend any form of Federal guarantee of banking deposits.”128 Clearinghouse certificates present “a number of complications from the standpoint of practical operation.” The Board discussed the actions under consideration in several cities but made no recommendation. As to Hoover’s third suggestion, “the question is not whether the situation should be allowed to drift along under the sporadic state and community solutions now in progress,” but whether there was something better to be done: “No additional measures or authority have developed in concrete form which. . . the Board feels it would be justified in urging” (Board to Hoover, Board of Governors File, box 2158, February 28, 1933).129
Soon after the letter was delivered, the situation changed. The attorney general had met with the Treasury and Board counsels and now opined that section 5 of the (World War I) Trading with the Enemy Act justified declaring a national bank holiday if the president believed the emergency justified it.130 Secretary Mills told the Board that “the matter was not free from doubt and he did not feel that he should advise the President to do so without the consent and approval of the incoming administration.” Nevertheless the Board voted unanimously that a banking holiday be declared for March 3, 4, and 6 and recommended that Congress be called into session to pass legislation supporting the president’s order. The president had gone to bed by the time the decision was reached, so the meeting adjourned (Board of Governors File, box 2158, March 2, 1933).131
128. Once the banks had closed, Harrison favored deposit guarantees to get them reopened. Roosevelt opposed the plan.
129. At the same meeting, the Board approved an increase in the New York discount rate to 3.5 percent. Miller voted no. On March 2, New York sold $142 million of its portfolio to Boston and $95 million to Chicago to keep its gold reserve ratio above 40 percent (Minutes, New York Directors, March 2, 1933, 142). Meyer reported to the Board meeting that he had talked to all governors except San Francisco. They reported that “the situation on the whole is comparatively quiet” (Board Minutes, February 28, 1933, 1).
130. Awalt (1969, 357) was present at the meeting after 10 p.m. on March 2. Hoover asked the Board whether he should declare a bank holiday and, if so, requested it to draft a proclamation. Mills and Meyer favored a three-day holiday, from March 3 to 5, followed by congressional approval of emergency legislation. Miller and Hamlin opposed the holiday (357–58).
At its March 3 meeting the Federal Reserve Board discussed the growing number of states with bank holidays. Miller advocated the use of clearinghouse certificates, but he opposed any plan to guarantee bank deposits.132 Others proposed legislation. No one suggested additional open market purchases to provide reserves that banks could exchange for currency. The only decision was that Governor Meyer should talk to the president and recommend a nationwide bank holiday.
Earlier in the evening, Hoover actively considered plans for a holiday. Meyer reported to the Board that Hoover agreed to the holiday provided Roosevelt would approve the action (Board of Governors File, box 2158, March 3, 1933, afternoon meeting).133
131. Mills’s desire to have Roosevelt agree to the bank holiday was not a new idea and was not likely to succeed. Governor Harrison had approached Roosevelt’s adviser, William Woodin, in mid-February with an offer to brief the president-elect on the banking and monetary situation. Roosevelt declined to meet Harrison. Woodin became secretary of the treasury at the start of the Roosevelt administration. He had been president of American Locomotive Company. He had served as a director of the New York bank, so he was acquainted with Harrison. Harrison also met with Raymond Moley, one of Roosevelt’s advisers from Columbia University, to urge a balanced budget. Woodin urged Harrison to persuade Carter Glass to accept appointment as treasury secretary, a position he held after World War I. Glass wanted Roosevelt to commit to a balanced budget and the gold standard. Roosevelt had campaigned on both issues, but he would not commit to either for the long term (Harrison Papers, New York Federal Reserve Bank, file 2010.2. Moley (1939, 118–21) handled the negotiations with Glass after Roosevelt offered the appointment. When Glass asked for assurance about Roosevelt’s policy on the gold standard, Moley delivered Roosevelt’s reply: “We’re not going to throw ideas out of the window simply because they’re labeled inflation.” Glass then mentioned his health problems and, after a few days, declined. Moley believed it was unlikely that Roosevelt and Glass would have gotten along. He did not know Roosevelt’s monetary plans at the time, but he described Roosevelt as “experimental, tentative, and unorthodox,” the very opposite of Glass (1939, 121). Moley served as an assistant secretary of state early in the administration, with principal duties as presidential policy adviser. He resigned within a few months.
132. The New York Clearinghouse also considered issuing clearinghouse certificates, as it had done in 1907. Leslie Rounds, a deputy governor of the New York reserve bank, dismissed the proposal because it was impossible to substitute clearinghouse certificates for the entire stock of bank deposits. The earlier use of certificates to substitute for banknotes required many fewer certificates. This argument presumes that most of the stock of deposits would be exchanged for certificates. No further discussion is reported (Minutes, New York Directors, March 4, 1
933, 154).
133. Moley’s account (1939, 145–47) of the March 3 meeting with Hoover, at which Meyer and Mills were present, is somewhat different. Roosevelt came to pay a courtesy call on President Hoover but was warned at the last minute by a White House staff member that substance would be discussed. He sent for Moley. Hoover proposed a proclamation giving government control of foreign exchange withdrawals but leaving the banks open. Hoover reported that his attorney general doubted the legality of closing banks, so he was concerned that Congress would challenge the closure. He wanted Roosevelt’s assurance to prevent this challenge. Roosevelt replied that his designated attorney general believed the president had adequate authority. He told Hoover to declare a holiday for his remaining term if he wished. Roosevelt would decide once he was in office (Awalt 1969, 359). That was as far as Roosevelt would go. The meeting ended with Roosevelt telling Hoover: “I shall be waiting at my hotel, Mr. President, to learn what you decide” (Moley 1939, 146). The source of the problem was doubt about whether the 1917 act expired at the end of World War I.
At a special meeting of the New York directors in the afternoon and evening of March 3, Harrison reported that the overall gold reserve ratio for the system remained above 40 percent, but the New York reserve bank’s ratio had fallen to about 24 percent.134 Normally the deficiency could be covered by rediscounting with other reserve banks, but an internal drain of gold now supplemented the external drain.135 Harrison told Governor Meyer that “he would not take the responsibility of running this bank with deficient reserves” (Special Meeting, Minutes, New York Directors, March 3, 1933, 2).
134. The estimates are from Burgess’s statements to the New York directors (March 7, 1933, 160). Awalt (1969, 358) reports that New York sold $200 million of gold on March 3. It was short about $250 million. Chicago also faced a run. It had orders for $100 million of gold from banks in its district. Awalt claims that part of the demand in Chicago was an effort to prevent the New York reserve bank from borrowing in Chicago.
The New York directors met for about ten hours between 3:00 p.m. and 2:40 a.m.on the morning of March 4. Herbert Lehman, who replaced Roosevelt as governor, considered declaring a bank holiday for New York. As usual, Harrison was indecisive. A holiday “would not solve the problem in other parts of the country nor with respect to foreign countries where the Federal Reserve Bank of New York acts . . . for the whole Federal Reserve System” (Minutes, New York Directors, March 3, 1933, 146). Deputy Governor Case informed them that the Chicago board had voted that a national holiday should be called but, failing that, holidays should be declared in New York and Illinois. Harrison explained that New York could not declare an embargo on gold. That would be a “usurpation of a government function” (147). The directors agreed. The directors then voted in favor of immediate passage by Congress of legislation remedying banking problems; if that could not be done, they favored a national holiday and suspension of specie payments if a holiday was not declared. Harrison telephoned this decision to the Board. The Board explained that banking legislation was impossible.
135. Most of the speculation against the dollar in London and Paris came from London and included the Bank of England. The bank sold sterling and bought francs in New York, sold francs for dollars in Paris “in fairly substantial amounts,” and used the dollars to buy gold in London. Harrison learned about these transactions from bankers in New York who executed some of them (Harrison Papers, Memo Crane to files, file 2610.1, February 28, 1933). He mentioned these operations to Montagu Norman of the Bank of England in late February and urged him to let the pound rise (from about 3.4 to the dollar). Norman was noncommittal about his purchase and sale operations but “emphatically . . . said that it was their intention to continue their present policy and to keep the sterling rate about its present level” (Harrison Papers, Conversations with Norman, file 3115.4, March 1, 1933, 1–2). (From December to March the pound appreciated about 4.5 percent against the dollar.) Norman also did not respond to Harrison’s suggestion that he seek to lower the rate London banks were offering for dollar deposits. Robbins (1934, 221) shows the Bank of England’s gold reserve rising from a low of £120.6 million in December 1932 to £172.7 million in March 1933, a 43 percent increase, somewhat less than the £253 million reported in Board of Governors of the Federal Reserve System (1943, 551). The December value is the lowest since the early 1920s; the March value is exceeded only by values for a few months in 1928. France and Germany show modest reductions in official holdings from December to March.
The Board suspended the gold reserve requirement. That action removed the legal issue, but the bank was open, so the gold drain continued. Harrison told Meyer and Mills that at current rates of loss the gold reserve would be depleted. There were three courses of action: declare a bank holiday; suspend specie payments; or suspend reserve requirements for the entire System.136 Harrison considered suspension of reserve requirements least attractive, since it would continue payments to speculators and hoarders. Suspension of specie payments was “almost equally unattractive . . . [H]ysteria and panic might result, and there probably would be a run on the banks” (ibid., 3).
That left a national bank holiday. He gave this recommendation to Meyer and Mills. They had suggested instead that Governor Herbert Lehman of New York declare a holiday for the state, but Harrison was not sure a state bank holiday was sufficient basis for refusing to pay out gold to foreigners. He was reluctant to continue losing gold, but he saw no alternative without a holiday.137 After further discussion, the directors learned that both Hoover and Roosevelt had retired for the night. Secretary Mills called to say that President Hoover would not declare a national holiday. Harrison went to meet with Governor Lehman to discuss a state holiday.138 Later he phoned the meeting to report that the clearinghouse banks and the state superintendent had asked for a state holiday. Governor Lehman wanted a request by the Federal Reserve also. The directors voted the recommendation, and the governor declared the holiday.139 Illinois, Pennsylvania, Massachusetts, and New Jersey also declared holidays.
136. Although one of the main purposes of the Federal Reserve Act was to permit gold reserves to be pooled in an emergency, New York had difficulty borrowing from Chicago. On March 3, Chicago refused to purchase $410 million of government securities from New York in exchange for gold. On March 4, Harrison asked Governor Meyer for help, specifically to use the interdistrict settlement fund to transfer gold to New York against securities. Under section 11a, this required the votes of five Board members and, Meyer later reported, the Board did not agree. The transfer was finally agreed to on March 7, after the New York directors adopted a resolution requesting the Board to require other reserve banks to rediscount for New York (Minutes, New York Directors, March 7, 1933, 160–62). The same day, the Board instructed Boston, Cleveland, Richmond, Chicago, and St. Louis to rediscount for New York at 3.5 percent. This was the first time since 1922 that the System used interbank rediscounts. In all, New York made $210 million in rediscounts, $150 million with Chicago. New York raised an additional $230 million by selling government securities and acceptances to the five banks plus San Francisco. Philadelphia also required assistance. New York paid a $10,000 tax for its reserve deficiencies. Data are from McCalmont 1963, 76–77. On March 9 the reserve banks reopened. New York’s gold reserve ratio was 41.3 percent, including $245 million obtained from other reserve banks (Minutes, New York Directors, March 9, 1933, 168). The Board later waived penalties on member banks that were unable to meet reserve requirements on deposits, but it collected the penalty from the reserve banks (Board Minutes, April 1, 1933,4).
137. At this point in the meeting, Deputy Governor Case told the meeting that the Chicago bank directors had voted to ask the Board to recommend a national holiday. The New York banking superintendent announced a sixty-day notice of withdrawal at savings banks.
138. Governor Lehman wanted the Clearinghouse Association or the Federal Reserve or both to request the bank holiday. The clearinghou
se bankers did not want to request the holiday, because they were solvent and still liquid. They told the governor they would cooperate if he acted. Harrison was also reluctant to ask for the holiday without a request by the banks.
Finally, after midnight the Federal Reserve Board voted to recommend a three-day banking holiday. Aides woke Hoover, but he did not act. One of his last acts in office was an angry letter to the Board, on March 4, stating that he had received their letter at half past one in the morning. He was “at a loss to understand why such a communication should have been sent to me in the last few hours of this administration.” The Board’s letter, Hoover said, had been written after the Board was aware that Roosevelt “did not wish such a proclamation issued” and while the states of New York and Illinois were in process of declaring state holidays, “thus accomplishing the major purpose which the Board apparently had in mind” (Hoover to Meyer, Board of Governors File, box 2158, March 4, 1933).140
The Board remained in session until after 3:00 a.m. Before adjourning, it received word of the decisions by the governors of Illinois and New York to close banks in those states. The Board could not decide whether to order Federal Reserve banks to close, so in a final lack of decision, it voted not to object if the directors voted to close.
On his first day in office, Sunday, March 5, President Roosevelt declared an emergency to meet “heavy and unwarranted withdrawals of gold and currency” and “increasingly extensive speculative activity.” His proclamation used the recommendation the Board had made to President Hoover the day before, citing the 1917 Trading with the Enemy Act as authority to prevent the export, hoarding, or earmarking of gold or silver.141 The proclamation closed all banks first from March 6 to March 9, then later for two additional days. On March 9 Congress approved the holiday, and strengthened its legal foundation, by passing the Emergency Banking Act.142