Economics and The Public Welfare

Chapter 37

The Upturn in the Summer of 1932—Five Favorable Developments

Five favorable things came together in June and July of 1932 to reverse the long down trend in industry, in farm prices, in stock prices, and in business and financial confidence.

1. The Second Foreign Run on Our Gold Successfully Met. The first of these was the successful meeting of the second foreign run on our gold.1

When the foreigners had taken all the gold they could take, and the run was over, our Federal Reserve Banks had $959,000,000 of gold in excess of the legal requirements. If we had got down to the legal requirements, we still had just begun to fight; we had an abundance of gold for maintaining the gold standard—that was what the gold was for. If we went below the legal requirements, we would have to raise our interest rates, but we could still pay gold. If any of the foreign countries felt that they wanted more gold, let them come and get it. But the Federal Reserve authorities had full information as to foreign balances subject to withdrawal—information provided them by every bank and every brokerage house that had any foreign customers—and they knew very well that the foreigners could not take substantially more. The Federal Reserve banks aided by the Glass-Steagall Act had done an admirable job in meeting this second foreign run.

2. Defeat of the Soldiers’ Bonus Paper Money Bill. The second favorable development was the Senate vote on the soldiers’ bonus bill. This bill was designed, not primarily to give more money to the veterans of World War I, but rather to make an inflationary increase in the paper money of the country, and it was prepared by its sponsors as a soldiers’ bonus bill in order to get soldier support for the monetary purpose. It provided for the issue of over $2,000,000,000 of new paper money to be used in paying the soldiers. It was regarded as a blow at the gold standard and as a blow at sound money. Its defeat was imperative if we were to maintain the integrity of our dollar and financial confidence. In a mood of irresponsibility the House of Representatives passed the bill, “passing the buck” to the Senate. The Senators met the responsibility. By a vote of 62 to 18 on June 17, 1932, they defeated the bill decisively.

3. The Lausanne Agreement. The third favorable development was the Lausanne Conference. We have seen that the Hoover-Laval agreement of October 26, 1931, had contemplated that the European debtors to the United States, who were also creditors to Germany under reparations, should straighten things out with Germany during the “Hoover year of postponement” and then come back to the United States to discuss their debt position with us.

At Lausanne they had agreed to abolish reparation payments by Germany, but had made a separate agreement that final ratification of this agreement was to wait until adjustments could be made regarding Inter-Allied debts with the United States. This was in full harmony with the Hoover-Laval agreement of October, 1931, but when it came it received adverse comment from Mr. Hoover.2 None the less, it was looked upon as a highly favorable development, paving the way for a real settlement of the appalling problem of intergovernmental debts.

4. Chicago Banking Situation Cleared Up. The fourth favorable development was the clearing up of the Chicago banking situation. There had developed in the spring and early summer of 1932 an extraordinary pressure on Chicago banks. There were a good many failures of smaller independent unit banks in the outlying regions of Chicago, banks in many cases overloaded with real estate mortgage loans. Most of the great banks were adequately strong. Runs on the First National Bank, for example, were grotesque in the light of subsequent developments. But one bank, The Central Republic Bank & Trust Company, an institution of which General Charles G. Dawes had been the head, was very vulnerable. General Dawes had withdrawn from the management of this bank when he was elected Vice-President of the United States in 1924. Finishing his term as Vice-President, he had gone to London as Ambassador. Returning to the United States, he had been made head of the newly created Reconstruction Finance Corporation, designed to rescue banks over the country. Suddenly he learned of the dangerous position of his old bank in Chicago. He resigned as President of the Reconstruction Finance Corporation and went to Chicago to meet what he regarded as his most urgent responsibility, that of conducting a desperate rearguard action to save his old friends and associates, and, at all events, to save his depositors, if he could not save his stockholders, from disaster. The General was no longer young and he met a cruel shock gallantly.

After he had left the Reconstruction Finance Corporation, he found it necessary to appeal to the Reconstruction Finance Corporation for help—a perfectly proper thing, in accordance both with the letter and the spirit of the law creating the Reconstruction Finance Corporation. The Reconstruction Finance Corporation made a loan which made it possible to reorganize the institution, to establish a new, entirely clean bank, fully liquid, that took over all the deposit liabilities of the original institution. The General had saved his depositors, including a large number of country correspondent banks. The Reconstruction Finance Corporation was assisted in this by loans from New York banks and by loans from other Chicago banks.

Most Chicago banks were under very heavy pressure. Deposits were withdrawn from some of the greatest of them. Two other Chicago institutions, on the other hand, were beneficiaries of the situation in that the public had high confidence in them and placed in them deposits withdrawn from the other banks. For a time carloads of currency were being shipped to Chicago to meet this situation. But in July the Chicago trouble ended. The small banks that were going to fail had failed. The great banks stood, and the Chicago situation cleared up.

5. Both Political Parties Adopt Conservative Platforms. Finally, the fifth favorable development came in the political conventions of the two great parties, both of which met in Chicago.3 There had been fears of radical developments and unsound financial proposals in the platforms of these parties. Advocates of such proposals appeared before the platform committees of both parties, but both parties adopted conservative platforms. Fears regarding the Democratic platform, in particular, proved groundless. The two greatest statesmen of either party, Cordell Hull and Carter Glass, came to Chicago for the single purpose of seeing to it that the Democratic party had a sound platform. Their prestige was great, and they dominated the Platform Committee. The platform called for drastic economies in Governmental expenditure, it called for a “competitive tariff for revenue,” striking at the very root of the evil which had precipitated the disaster, and it called for “a sound currency to be maintained at all hazards.” Both parties in their conventions showed real concern for the financial situation and manifested a sense of responsibility for it.

These five favorable developments in combination, and the relief from money market pressure which the Glass-Steagall bill had made possible, made a radical change in the financial and economic atmosphere.

Stocks Rally Briskly in July, 1932. Late May, June, and early July had been times of great gloom in the stock market. Prices of the best stocks had dropped to absurdly low levels. Fine dividend-paying stocks were yielding 10%. Investors seemed to have no confidence. There was virtually no short interest in the market (whose covering operations could have put it up), in view of the rules 4 (adopted in late 1931 and early 1932) restricting short sales. The volume of trading had fallen very low. The total shares sold on the Stock Exchange in a single day moved for only a few million dollars. The time came when purchases of an additional few millions dollars a day could turn the scale decisively, and suddenly, in July, we got these purchases.

From June to September the averages rose (Standard and Poor’s corporation common stocks) from 35.9 to 61.5, a rise of 71%—the rise, incidentally, validating a great body of security loans which had been “under water.”

Farm Prices and Industrial Production Rally. Farm commodity prices, in the same period, moved up very sharply, though not enough to straighten out the farm situation. The curve of industrial production moved up rapidly, the rise beginning very shortly after the rise in securities and continuing into the autumn. It was a modest but a very heartening rise, from about 58 (1923-1925 = 100) on the Federal Reserve Industrial Production chart to about 67. The tide turned.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.