Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (64 page)

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
⁷¹²
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
⁷¹³
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
⁷¹⁴
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!
⁷¹⁵
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
⁷¹⁶
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
⁷¹⁷
, 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
⁷¹⁸
in wartime,” wrote Arthur Krock of the
New York Times
.

Meanwhile, the credit and currency machinery of the country had come to a 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.

^fn1
The accusations of tax dodging resurfaced in 1934 when the Justice Department indicted him for having falsified his 1931 tax returns and sought more than $3 million in back taxes and penalties. He was cleared on appeal, but his estate eventually paid some $600,000 as a settlement.

In order to arrive
⁷¹⁹
at what you do not know

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

—T. S. E
LIOT,
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
⁷²⁰
, Americans adapted to life without banks remarkably well—the initial reaction was not chaos but cooperation. Storekeepers 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.