Forgotten Man, The

by Amity Shlaes

  Even the very poorest communities, including the blacks, found their own response to joblessness and hunger. In Washington, Solomon Elder Lightfoot Michaux, a radio preacher, reached millions with his “Happy Am I” aphorisms. Michaux fed the hungry and maintained apartment houses for those evicted. Another figure in the black community to respond was Father Divine on Long Island. He began to expand the Sunday banquets served at his Sayville residence. What stood out about Father Divine’s meals was that they were the opposite of apples on the corner or soup kitchen food. Father Divine’s meals were luxurious. The coffee percolated; the roasts—chickens, ducks—were plentiful; the vegetables were splendid. “We charge nothing,” Father Divine ordained. “Anyone, man, woman or child, regardless of race, color or creed can come here naked and we will clothe them, hungry and we will feed them.”

  The playwright Owen Dodson later remembered a wonder he and his brother had seen at Sayville—an unending supply of milk, like a fountain, from a spigot. Studying the setup, the boys eventually discerned that “the source of infinite supply” was two boys pumping at a small machine beneath the table. What was especially striking about Father Divine’s “heaven” were the images of plenty and the clear message that there was to be no shame about hunger.

  Still, Eccles worried. Faith and improvisation alone could not help. Charity work was not enough to feed all those without jobs. And bluffing, Eccles observed, was not saving enough American banks. Eccles was a man with a great sense of responsibility. At night in bed he ran through the assets of the national economy as if they were those of his own household. Even though the Colorado River dam was proceeding, the rest of the country seemed in need of shoring up. In this downturn he had had a sort of revelation: “I saw for the first time that though I’d been active in the world of finance and production for seventeen years and knew its techniques,” he would later remember, “I knew less than nothing about its economic and social effects.” The same year, 1931, would be Eccles’s turn to read the work of William Trufant Foster, one of the two authors who had developed a new theory of the economy. “When business begins to look rotten, more public spending,” Foster and Catchings had prescribed. Maybe government spending—including the new Federal Reserve’s providing cash liquidity for the banks—was the way out. Now he wondered when the nation’s leaders would be able to face the “fundamental facts” of the currency problem.

  The money drought that America was suffering from had a technical name: deflation. Deflation meant that the currency was becoming more valuable every day, rarer and scarcer. Deflations can be good for lenders; the money they are owed in the future is more valuable than it was when they wrote the original contract to lend. But deflation is terrible for borrowers, whether they be countries, banks, businesses, or families. It means they must pay back more than they originally contracted to borrow. Inflation taxes savers. Deflation taxes risk takers and punishes leveragers. It makes paying mortgages, as well as property taxes, especially difficult. It goes against the American sense of promise, punishing those who dare to hope they might move ahead.

  Today we know that the Treasury and the Federal Reserve might have done much to alleviate the deflation problem of the early 1930s. They could have allowed the gold-standard mechanism to function—money would have been created automatically with the gold inflows. Or the Fed could have taken what we call countercyclical action. If the economy is strong, monetary authorities nowadays put on the brakes. If it is weak, they help out by greasing the wheels, pumping money into the economy one way or the other. That was what Fisher believed—he was now writing Hoover about money.

  But in the early 1930s the Fed and its member banks lacked tools and knowledge. They did the opposite of countercyclical action. They acted pro-cyclically—tightening and tightening in the face of a downturn. One of the reasons for the mistake was a rule known as the real bills doctrine. Under the doctrine, the young Fed system favored banks that carried substantial commercial paper—business loans of short term (one year or less)—on their books. Commercial paper was regarded as the best form of hedge against the risk involved in demand deposits. Banks that carried such paper therefore were deemed prudent and worth saving. The more business they had, the more the Fed was ready to lend to them. This was called serving “the needs of the trade.” Mortgages—which tended to have maturities of somewhat longer periods—won less approval from the banking system. This was mainly because their worth was harder to gauge; they were individual contracts, and not traded as they are today.

  The effect of all this was that banks tended to make loans to businesses in periods of expansion. In periods of contraction, the banks made fewer loans. Yet those same bad periods were the very times when the banks most needed an infusion of cash from the Fed. Now, when they could have used help so much, the Fed denied them on the theory that they did not need the money.

  The newness of the Fed—it had only been created in 1913—was a big part of the problem, especially for small banks. Most of these were state-chartered banks that were not part of the first Federal Reserve System. These banks did not have much commercial paper in their portfolios. They served farms. Other banks did not regard them as especially worthy of rescue. And because they were not part of the Fed system, they were not the Fed’s responsibility. So whereas other banks might have rescued them before, now everyone hesitated, and no one did. And when a bank died, money died with it, worsening the deflation.

  One casualty in the banking disaster was turning out to be Rex Tugwell’s father. As Tugwell would write, “His business was paralyzed along with the rest; his chain of small banks discovered that investments of depositors’ funds in railway and public utility bonds, in Peruvian or other foreign issues, could not be recovered. After twice replenishing capital out of their own pockets, the directors themselves were bankrupt.” To Tugwell, it all seemed the confirmation of his suspicions and also, especially, of the perniciousness of the middleman taking his cut. Big business was wrong, too: Of his father and colleagues he concluded, “They had done the honorable thing as small businessmen, but the big businessmen they had trusted had let them down.”

  The banks’ money problem played out everywhere. The market crash itself had not at first hurt Insull, whose brother Martin had completed some crucial financing of various Insull projects after the crash. But the deflation did, for the Insull empire was heavily leveraged. Now Insull’s long-standing philosophy of “Take on debt to grow as fast as you can,” of leaning one’s sail into the wind as far as it would go, was threatening to capsize his business. Insull was confident in his market: he believed that consumption of electricity would continue to grow, even through a downturn. In the first half of 1931, cash was still pouring into his operating companies. But you could not keep buying up your own shares forever. New York banking houses finally had their chance for revenge against their old competitor. They vengefully drove down his shares. By the end of March 1931 Insull’s creditors owned his bank portfolios.

  Banks had loans on their books, but their books did not reflect the families and businesses they turned down as money and credit became scarce. The worst hurt were the most hopeful: “farmers, small firms.”

  For the wage earner, the lengthy deflation also had a peculiarly depressing effect. Since he was more likely to be a borrower than a lender, the deflation made it seem as though life were stacked against him. In inflation, wages rise—though often of course followed by price rises. In deflation, that figure more important to the worker than any other—his wage—does not move for years, or even drops. In Harlan County, Kentucky, wages were below those of a decade prior. A wage cut of 10 percent by a desperate coal company in early 1931 sent workers into a fury—one killed a deputy sheriff, another a worker who chose not to strike. “I’ve orders to shoot to kill,” the sheriff, Johnson Henry Blair, told Time. One of the miners’ wives then wrote a bitter song. “They say in Harlan County, there are no neutrals there,” wrote Florence Reece of the battle between t
he unions and the sheriff. “You’ll either be a union man, or a thug for J. H. Blair.” The title of the song, “Which Side Are You On,” captured not only the worker-employer division but also the division that deflation was causing.

  But by far the most dramatic place that the deflation played out was in American homes. In those days home loans were not traded in bundles; it was hard for a bank to use them as collateral. Mortgages represented smaller shares of home values and carried shorter maturities, five or ten years. Still, most mortgages had a contract with a bank or savings and loan that said if one couldn’t pay, the bank got the house—it was as simple as that. And with the economy declining, house prices were also moving down, so some owners found themselves under water—their loan cost more than what the house was now worth. This experience, the experience of deflation, caused a chain reaction. A grim Senate witness would tell a subcommittee:

  There will be this situation. There will be three mortgages in a block on all equally valued property. One mortgage may be for $3,000 on a house, another for $4,000 and another for $5,000, on houses that sold originally for $7,500, which are cut down in value now to $4,500. The holders of the mortgages buy the properties in. The man who holds the $3,000 mortgage on the first property wants to get his money. Someone comes along and says, “I will give you $2,500 for it.” He replies “Make it $2,750” and the deal is closed on that basis. That fixes the value for the whole row.

  The money drought also meant that it was harder to borrow to cover one’s losses. Worst of all, however, was that it slowed growth. In good times, the housing industry and the average family buoyed one another up. Now people were seeing the nightmare of the cycle in reverse. Home construction was down, hurting families; families were down, hurting home construction. Home equity, for example, was one of the most important ways that members of the construction trade financed the opening of new businesses. Unable to borrow against their homes, they could not work. “Very often,” a witness testified of a would-be small businessman, “he is absolutely prohibited from going into debt because the banks, speaking generally, will not give him any mortgage accommodation under any circumstances—not even a 20 percent mortgage on his proposed home. That means, to my mind, a throttling of the building trades, the building industry, labor, and everything else that goes into the building game. They are strangling today.” And what good could barter money do the home owner if the bank would not accept it for a mortgage?

  Other components of the downturn worsened the deflation. Each day proved the Cassandra economists right anew: in the two years following Hoover’s Smoot-Hawley legislation, U.S. imports dropped more than 40 percent. Though people were unable to quantify the change at the time, economists later estimated that a share of that decline was due to the tariff. Retaliation by other countries was taking its toll. Unemployment had risen in 1930. Now, by 1931, the guess was that the national figure was something like 16 percent and rising again. In New York alone, there were 14,000 or 15,000 homeless men. Others were not officially homeless but still walked the streets evenings. Wilson’s Canada venture did not play out. He soon found himself back in Brooklyn, wandering about. His wife’s mother died, but he missed the funeral, going on another bender.

  Writing in the New Republic, Bruce Bliven had already noted that every man was different. Some men could bear to spend a night in a shelter without the event bringing them down. “But there are others,” Bliven wrote, “who pay dearly. This winter differs from previous ones in the exceptionally high number of men who have never before had this sort of experience, for whom it is a personal tragedy too deep for words.”

  By far the hardest hit of any urban group were the blacks of the North. Now the unemployment rates between the races diverged. In the cities, something like one in two blacks was unemployed. Women, whose work as domestics often provided the most important family income, were similarly unemployed. In Harlem, a street became known as “the lung block” because its tuberculosis rate was high. Many churches did not know what to do for their parishioners: “God is mad with the people,” one minister in New York summed up. Blacks, the historic stalwarts of the Republican Party, began to feel not only economic but also political desperation. “My friends, go turn Lincoln’s picture to the wall. That debt has been paid in full,” ordered one black newspaper’s editor.

  Hoover still did not entirely understand; the failure he confronted was too great. Coolidge had retreated into his dark moods, and now Hoover retreated into his. He even suggested, improbably, that Americans were profiting by gouging one another, selling apples at high prices: “Many persons,” he would write, “left their jobs for the more profitable one of selling apples.” The attitude came out of his sense of futility, but to citizens it seemed too much. Abroad, all that foreigners knew was that Americans were hungry or worse. That year donors in the Cameroons of Africa shipped over $3.77 to help “the starving.”

  One group was meanwhile becoming emblematic of Americans’ wronged virtue: World War I veterans. In the 1920s, Congress had promised them a bonus pension, to be handed out in 1945. The idea was to provide the equivalent of a federal pension. Now, the veterans were losing their houses, their businesses, and their farms. It seemed reasonable therefore to ask Washington for their money—or at least an advance on the bonus. In Congress, representative Wright Patman of Texas was leading a fight for a new bond issue to raise the bonus money for the veterans. Mellon and his undersecretary at the Treasury, Ogden Mills, opposed it in the name of balancing the budget. It was one of the Hoover administration’s weakest moments: “We loan millions to wealthy shipbuilders at 2 percent but we charge veterans 6 percent,” a congressman pointed out.

  There was something amiss with any country that did that. Was it the money, or the leadership? At a conference of disabled veterans in Wilkes-Barre, Pennsylvania, Patman called for the ouster of the man who was becoming the symbol of all that was wrong: Mellon.

  But what might fix it? Mellon still believed that, however hard things were now, they could rebound. Like Hoover, or Coolidge, he tended to turn inward in the face of onslaughts like 1931. He reverted to his old business self, which knew what to do in a time of downturn: buy. As treasury secretary, he was constrained when it came to investing in companies or bonds for his own profit—indeed, Patman was after him for holding stock in a shipping company. But he could, he believed, buy art for himself. The best moment to buy art, of course, as he had learned at the bitter dissolution of Frick’s estate, was in a distress sale.

  And as it happened the greatest distress sale in the art world was on: the Soviet Union was selling. Stalin needed hard currency badly. He was therefore offering a transaction obvious to both him and Mellon: Mellon would purchase some of the art from the Hermitage. The buying had already begun. Mellon did not talk about it, but in September 1930, the New York Times carried reports that a Mellon representative—Knoedler—was in Paris arranging the purchase of Jan van Eyck’s Annunciation from a Bolshevik regime broker, A. V. Lunacharsky, the former Soviet commissioner of art. The price was rumored to have been $800,000. Both Mellon and the Soviets promptly denied the transaction, the Soviets because, as the Times put it, such a purchase would be “an admission of moral as well as financial weakness from which the Soviet Union is not now suffering.” But the rumors had not died, and the next month, October, saw reports that Frans Hals’s Admiral and Rembrandt’s Portrait of Sobieski had exchanged hands, along with the van Eyck. Now, in 1931, Mellon moved again, making a series of purchases that formed the nucleus of a new collection. From “time to time,” David Finley, then Mellon’s staffer at Treasury, recalled later, “cables would arrive, saying that Botticelli’s Adoration of the Magi, Jan van Eyck’s Annunciation, Perugino’s Crucifixion…could be bought if Mr. Mellon gave his approval.” Mellon gave his approval. He still saw Russia as a wreck, and himself as retrieving some good from what was otherwise a general disaster.

  Now Hoover began to stir. He could see the consequences of the i
nternational debt and the tariff, for both the United States and Europe. In June 1931 he announced a plan that would bring relief to Europe: a moratorium of interest payments on the German debt. Mellon negotiated on his behalf. Keynes of course liked the idea but announced his own, more comprehensive five-year plan. The stock market in Berlin exploded in joy, moving so fast that officials could not track and record the price rises; perhaps the shaky Weimar Republic might have a future after all. In Chicago, wheat climbed five and a half cents per bushel. At home, Hoover set to work creating the Reconstruction Finance Corporation, to help banks that sustained the homeowners and create the very sort of network that Eccles had seen as lacking.

  On other matters, Hoover stayed firm in his old positions. The dam on the Colorado ought to be hurried along, but only because it was constitutional. Not however the government operation of Muscle Shoals, the vast power and nitrate plant built on the Tennessee River at the end of World War I. Washington’s operation of Muscle Shoals was to Hoover’s mind still wrong; government in the power business was still wrong, at least in peacetime. A few months earlier, even as he was mulling over legislation put forward by Senator Robert Wagner to create employment agencies across the states, Hoover spent a day reviewing Muscle Shoals legislation sent to him by Congress. Senator Norris—the Muscle Shoals champion and a fellow Republican—sent emissaries to the White House to try to talk Hoover into going along even as he publicly mocked Hoover as “the great engineer.” But Hoover vetoed the laws on principle, writing that such projects “break down the initiative of the American people.” He summed up: “I am firmly opposed to the Government entering into any business the major purpose of which is competition with our citizens. There are national emergencies which require that the Government should temporarily enter the field of business, but they must be emergency actions and in matters where the cost of the project is secondary to much higher considerations.” Government shouldn’t get into the power business, or any business—“that is not liberalism, it is degeneration.” Traditional federalists marked it as his finest hour.