Lords of Finance

It was, however, the run on the Guardian Trust Company of Detroit, a bank controlled by Edsel Ford, scion of the Ford motor family, that transformed the new crisis into a national one. The Guardian Trust had done well during the 1920s financing consumer purchases of Ford cars. When auto sales dried up in the early 1930s, the bank found itself in serious trouble and had been forced to borrow from the RFC. In early 1933, the RFC balked at providing more money unless the sponsors, who were, after all, the second richest family in the country after the Rockefellers, put in more capital. Patriarch Henry Ford, now in his seventies and increasingly autocratic and unreasonable, refused to bail out his son. He had a long-standing antipathy to bankers and could not quite grasp why banks should be allowed to use the money he deposited for making risky loans—“It’s just as if I put my car in a garage and when I came to get it, I found somebody else had borrowed it and run it into a tree,” was the way he saw it. Faced with a statewide run on its banking system, on February 14, the governor of Michigan issued a proclamation closing all 550 banks in the state for eight days. The residents of Michigan woke up on Saint Valentine’s Day to find that all that they could draw upon was the cash in their pockets.

Across the country, depositors watching the whole monetary system of a major industrial state shut down began pulling their money out of their banks just in case. Governor after governor was forced to follow Michigan and declare a state bank holiday. Indiana closed its banks on the twenty-third of February, Maryland on the twenty-fifth, Arkansas on the twenty-seventh, and Ohio on the twenty-eighth. In early March, the contagion spread into Kentucky and Pennsylvania. During February and the first few days of March, close to $2 billion, a third of all the currency in the country, was withdrawn from banks.

A banking panic on such a scale raised the specter of Central Europe in the summer of 1931 when the sequence of banking crises had forced country after country off the gold standard. The domestic run on the U.S banks now provoked a similar international run on the dollar.

The flight from the dollar was exacerbated by suspicions over the incoming president’s currency intentions. Ever since he had been elected, Roosevelt had been floating trial balloons about abandoning gold. In January, he told an emissary from William Randolph Hearst, “If the fall in the price of commodities cannot be checked, we may be forced to an inflation of our currency.” On January 31, his secretary-of-agriculture designate, Henry Wallace, was quoted as saying, “England has played us for a bunch of suckers. The smart thing to do would be to go off the gold standard a little further than England has. The British debtor has paid off his debts 50% easier than the U. S. debtor has.”

Roosevelt was not alone in his talk of devaluation. At least six bills were circulating through the halls of Congress that involved the emergency issue of currency or a change in the value of the dollar. The Frazier-Sinclair-Patman bill provided for government financing of farm mortgages by the issue of Federal Reserve notes without gold backing; the Campbell bill would have allowed issue of full legal tender Treasury notes backed by municipal bonds. Congress was considering one bill to devalue the dollar against gold by 50 percent and another o

ne to reinstate silver as a monetary metal. The most extreme of the measures, the McFadden bill, called for the abolition of the gold standard and the Federal Reserve System and their replacement by a new monetary system based on units of “human effort.”

Hoover had meanwhile convinced himself yet again that the economy had been on the verge of recovery before this last panic hit, which he attributed solely to fears over Roosevelt’s inflationary policies. On February 17, Hoover composed a ten-page handwritten letter and had it delivered by Secret Service messenger to Roosevelt. What was needed to restore confidence, he wrote, was a formal statement from the president-elect pledging himself to a balanced budget and eschewing inflation or devaluation. If Hoover was trying to elicit Roosevelt’s support for preemptive bipartisan action, this was a clumsy, inept, and transparently self-serving way to go about it. Hoover himself admitted in a private letter that it would have involved Roosevelt abandoning 90 percent of his “so called New Deal” program. The incoming president dismissed the letter as “cheeky” and chose simply to sit on it for a couple of weeks.

Until then, panics had mainly affected the smallest banks in the nation. But as the run took on an international dimension, the most important financial institution in the country, banker to its largest banks, the New York Fed became the center of the storm. In the last two weeks of February, it lost $250 million, almost a quarter of its gold reserves. Though the Federal Reserve System as a whole had more than ample gold reserves, had the New York Fed run out of gold and been compelled to call in its loans to banks and shrink its balance sheet in a hurry, this would have created a disastrous situation for the banking system not only in New York but across the country. Theoretically, it could always have borrowed from other Federal Reserve banks in the system—but with every bank in every region under threat, there was no guarantee that its sister banks would have cooperated. There was a real fear that if it became a situation of every man for himself, even the Federal Reserve System might fall apart.

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.