Economics and The Public Welfare

Chapter 38

The Impact of Politics on the 1932 Revival

The summer of 1932 was the turning point for the world as a whole. It was the turning point for Great Britain, for Canada, and for most of Continental Europe, and for much of Latin America. It proved not to be for the United States. We were to have one more heavy shock. The reasons for this were primarily political.

Publication of Reconstruction Finance Corporation Loans. Men in both parties were to blame. The Democratic Party grew suspicious of the Reconstruction Finance Corporation. There was sharp criticism of the loan made to General Dawes’s bank—unjustified criticism. The thought grew that the Reconstruction Finance Corporation was making loans on a political basis and for political purposes, a wholly unjustifiable belief. It was trying to save banks and to protect depositors. It was making loans where loans were needed, and it was making them with intelligence and discrimination.1

That a bank should be unable to get adequate accommodation in regular course from the Federal Reserve banks because it lacked a sufficient volume of eligible paper was an evidence of weakness, of course, but not of fatal weakness; that a country bank should be unable to get adequate accommodation from its city correspondent in regular course was an evidence of weakness, but not necessarily of fatal weakness. The Reconstruction Finance Corporation was designed to meet precisely this situation. It was not wasting money on hopelessly insolvent banks. It was lending to banks which, given time, could work things out and emerge solvent.

But public knowledge that a bank had borrowed from the Reconstruction Finance Corporation would arouse concern in the minds of depositors, and the Reconstruction Finance Corporation was not publishing the names of its borrowers. It was dealing intelligently with the credit situation as the great city banks did, and as the Federal Reserve banks did, making the loans and saying nothing about them. With the suspicion, however, of its purposes, and the suspicion that it was being made a political instrumentality, the Democratic leaders of the House of Representatives, which was under Democratic control, required that the Reconstruction Finance Corporation make reports to the Clerk of the House of Representatives of new loans made by the Corporation. Speedily these reports were given to the press. This was first done on August 22, 1932.

Democratic bitterness regarding supposed political use of the Reconstruction Finance Corporation was intensified by a campaign speech made by President Hoover on November 2, in which he told the voters of three States, California, Washington, and Oregon, how many loans, and in what amounts, the RFC had made in those States.2 Mr. Walter Lippmann, in his syndicated article, promptly excoriated President Hoover for this speech.

Subsequently, on January 6, 1933, the demand was made that loans made by the RFC in its first five months should also be reported. This involved 5,084 loans. Against the protest of the Reconstruction Finance Corporation, the Clerk of the House of Representatives, acting under instruction from the Speaker, made these reports available to the public, including the press.3

The fears that publication would immediately start runs on the banks which had borrowed from the Reconstruction Finance Corporation were not immediately realized in a wholesale way in August and September, but as further adverse developments came, they were realized. Institutions needing help from the Reconstruction Finance Corporation became afraid to go to it for help. The publication of these loans came in time to mean runs on the institutions whose names were published. One savings and loan association in New Jersey, a strong, well-managed company, came to a great New York bank for help in meeting unusual withdrawals. The New York bank made the suggestion, “Why don’t you get under the umbrella?”—meaning the Reconstruction Finance Corporation. The answer was, “The umbrella leaks!” The New York bank recognized the propriety of the observation, and itself took care of the New Jersey savings and loan association.

The worst of the trouble with the publication of the Reconstruction Finance Corporation loans did not come until after the election, and, indeed, until January and February of 1933.

President Hoover’s Incorrect Statement Regarding the Federal Reserve Banks and the Gold Standard. The second political development of an extremely unfortunate character was the statement of President Hoover in his campaign speech in Des Moines on October 4, 1932, that the Federal Reserve banks had been within two weeks of going off the gold standard earlier in the year. The statement was, in the first place, untrue. In the second place, if it had been true, the President of the United States was the last man to have made it. The father of the house does not make public announcement of a scandal in his family. But the statement was untrue. It was promptly challenged, October 7, by Senator Carter Glass; October 10, by former Senator James A. Reed; and October 11, by Senator Cordell Hull.4 Senator Reed bluntly charged President Hoover with being “willing to spread false rumors about the Federal Reserve banks in the effort to win an election.” The President’s statement was demonstrated to be untrue by Senator Carter Glass in his devastating reply on November 1 in the campaign.5

The President’s statement regarding the gold standard renewed foreign fears regarding our position. The foreigners were not in a place to hurt us much. Gold had come in from abroad during the late summer and autumn, and some gold could be withdrawn, but not enough to do us serious damage. But the statement also aroused in the minds of the American public fears which had not previously existed.

The Failure of Coöperation between Roosevelt and Hoover. A third political factor which served to pull down the delicate fabric of reviving financial confidence was the failure of coöperation between President Hoover and Presidentelect Roosevelt in the interval between the election November 8, 1932, and the inauguration on March 4, 1933. Coöperation between the two in so critical a state of the country’s affairs was absolutely essential. Both men knew it, and both men made efforts in that direction. The first overture looking toward coöperation probably came from the side of Governor Roosevelt. A message was sent by Colonel House, in Governor Roosevelt’s name, informing President Hoover that Governor Roosevelt would welcome an invitation to discuss with President Hoover the impending December 15 payments of British and French debts to the United States.6

When President Hoover’s telegram (dated November 12) came to Governor Roosevelt, however, it did not seem to be a telegram which paved the way for coöperation. It was a very lengthy telegram given to the public as well as to President-elect Roosevelt.7 It reviewed the debt question at length. It stated the position which the President had taken. It stated the position which the Congress had taken—a very uncompromising position. It included an invitation to Governor Roosevelt to confer with President Hoover about the matter.

Had the telegram been a brief telegram which included no discussion of policy, and which merely asked Governor Roosevelt to share in the formulation of a policy, it is possible that the two men might have got together and that constructive results might have come from their conference. Taking the telegram as it stood, it seemed to put Governor Roosevelt “on the spot.” If he had gone, advising President Hoover to recommend that the position already taken by President Hoover and the Congress should be reversed and the debt payments of December 15 should not be required, he might easily have found himself in a politically embarrassing situation.

It was doubtless the intention of Governor Roosevelt to cooperate when the suggestion was made that he be invited to the conference. It was doubtless the intention of President Hoover to cooperate when he sent the invitation. But the form of the invitation went far to preclude coöperation between the men, both of whom were so largely motivated by political considerations.

They did meet, however, on November 22—Governor Roosevelt accompanied by Professor Raymond Moley, and President Hoover accompanied by the Secretary of the Treasury, Ogden L. Mills. No constructive results were achieved.

Subsequent efforts of President Hoover to enlist the coöperation of Presidentelect Roosevelt were still less successful. The President-elect shortly went to Warm Springs, Georgia. The press in this period does not contain a great deal of information as to what happened there. It was supposed that he took with him a group of New Deal advisers. It is certain that in January and February the Congressional leaders of the Democratic party were in the dark as to the President-elect’s wishes and purposes. They were angry and troubled. There was growing concern in their minds as to the kind of advice he was getting, and as to the people he was getting advice from.8

Rumors Regarding Roosevelt’s Gold Policy, Undenied, Start Domestic Gold Hoarding. Rumors that the President-elect was going to take the country off the gold standard began late in December and grew in January and in February. Efforts to persuade the President-elect to deny these rumors were unsuccessful. A new factor came into the banking situation—domestic hoarding was resumed on the part of men who were distrustful, not of the banks in which they kept their deposits, but of the currency. Deposits were withdrawn from strong banks by men who knew that the banks would be able to pay out dollars, but who doubted that the dollars would be redeemable in gold. Depositors were asking the banks to pay them their deposits in gold, and depositors were withdrawing paper money from the banks and going to the Federal Reserve banks to get gold which they put in bank safe deposit vaults, or which they put in less secure places in their own homes. For the first time in the whole of this trouble we had domestic hoarding of gold on a great scale.

Congressional Bank Investigation—Senator Glass and Charles E. Mitchell. A fourth political factor of an ominous character began to manifest itself with the assembling of Congress on December 4, 1932, and grew in intensity. The Congress was very angry at the banks. The Congress blamed the banks for the troubles in which the country found itself. This factor had shown itself with the assembling of Congress on the fourth of December, 1931, but a year later it was greatly intensified.

Senator Glass in particular was outraged at the behavior of Charles E. Mitchell, head of the National City Bank. The Senator had been outraged at the unfortunate statement of Mr. Mitchell on March 26, 1929, that his institution had an obligation paramount to any Federal Reserve warning to avert any dangerous crisis in the money market. An account of this is given in an earlier chapter. Mr. Mitchell, far from having defied the Federal Reserve System, had worked in harmony with it in this particular episode. But Senator Glass had been angered and outraged by the statement, and subsequently had watched the actions of Mitchell closely. He had been angered by the manipulation of National City Bank stock in late 1929, and the subsequent losses to purchasers of that stock, and was determined to bring Mitchell to book. The Senate investigating committee had Mitchell and certain of his associates before it for a number of days. The disclosures were startling, and Mitchell shortly resigned from the bank, the statement being made in the press that his withdrawal was in accordance with the judgment of President-elect Roosevelt, as conveyed through Mr. Woodin, who was to be the new Secretary of the Treasury.9

These disclosures ought to have been made. But the timing of the investigation was exceedingly unfortunate. Banks all over the country were discredited and banking troubles intensified by the investigation in a very critical and tense time. Let it be made a matter of record here, however, that the National City Bank itself held strong through these troubles; that it continued to pay, to make loans to customers, and to help the general situation in an impressive way. The officers and staff of that great institution held up their heads and did their work despite the humiliation of their chief.

One cannot blame Senator Glass or his angry associates for what they did in this investigation. The historian can say only that part of the ensuing bank troubles was due to the timing of the investigation. If the investigation could have been deferred to, say, the time of the investigation of the Chase National Bank in late 1933, after the banking crisis was over, the disclosures would have been equally effective for purposes of legislation, and the harm to the country could have been avoided.

Government Largely Paralyzed from November, 1932, to March 4, 1933. The situation was difficult at best, with the Government largely paralyzed so far as effective action was concerned. Congressional committees could investigate, but the Government could do little else. The Congress was a “lame duck” Congress. A very large number of the sitting members of Congress in both houses were slated for retirement on March 4. There was anguish and despair among the personnel of the Government departments, as virtually everybody whose tenure was not absolutely protected by Civil Service rules knew that he would have to find a new job shortly after March 4 in the midst of a great depression. Responsible public officials, notably Ogden L. Mills, Secretary of the Treasury, were doing their best. President Hoover did all that he could. But policy could not be defined unless the newly elected President would cooperate, and coöperation after November, 1932, despite sincere and earnest efforts of President Hoover to secure it, was virtually nil. In November the newly elected President had conferred with President Hoover inconclusively regarding the settlement of Inter-Allied debts, and subsequently in Warm Springs, Georgia, had, on January 29, 1933, received the British Ambassador in an interview arranged by the State Department, with the approval of President Hoover. A joint communiqué of Roosevelt and the Ambassador, Sir Ronald Lindsay, described their conference regarding the British debt as “very satisfactory,” but later developments made it appear that this was on overly optimistic statement.10

Dangerous schemes were afloat in the Congress, especially schemes for the devaluation of the dollar, and other “inflationary” money measures. There were steady and responsible men in the Congress who succeeded in holding such measures down. One able New York Congressman had organized a Congressional group which met at frequent intervals with the distinguished economist, Professor E. W. Kemmerer, who outlined the principles and history of money to them, providing them with ammunition with which to ward off the wild schemes.

Hearings Before Senate Finance Committee. The Senate Finance Committee provided a forum for the discussion of crisis remedies, and had long hearings which attracted a great deal of attention in the country. Various points of view were presented and many distinguished men appeared before the Committee. To the sorrow of Senator Reed Smoot, who presided over these hearings, the demand was made by many important witnesses for radically lower tariffs—Mr. Winthrop W. Aldrich, of the Chase National Bank, and Mr. Henry J. Haskell, of the Kansas City Star, being particularly effective in presenting this demand. These hearings were primarily for the purpose of getting all the light that could be had upon the situation, but a very important incidental purpose appears to have been to defer action of a fundamental sort until the new Administration should make its purposes known.

See Chase Economic Bulletin, Nov. 10, 1932. I may say for the record that I was prepared to deliver this speech a few days after President Hoover’s statement was made. The foreign exchanges had been disturbed by President Hoover’s speech. I did not desire to make a political speech in the campaign, but I did wish to correct, as far as I could, the harm which President Hoover had done by this statement. The foreign exchange market corrected itself, however, and I therefore withheld my statement until after the election.

The Colonel, when I saw him just after the election, said to me in substance: “When Lincoln thought that he was going to be beaten by McClellan in 1864, he wrote a letter in which he stated his intention of turning the Government over immediately to McClellan if McClellan should be elected, so that there should be no delay at that critical time in the adoption of whatever policy the new President saw fit to introduce. I know that President Wilson had the same purpose in 1916. It was his intention, in the event of Hughes’s election in that critical time, immediately to make Mr. Hughes Secretary of State and to follow that appointment by his own resignation and by the resignation of Vice-President Marshall—a course in which Vice-President Marshall was prepared to acquiesce. Governor Roosevelt has no intention of making such a suggestion to President Hoover.”

Colonel House added: “Both the British and French Ambassadors have been to see Governor Roosevelt and me, since the election, to tell us that making the December 15 payment on the intergovernmental debts to the United States would have grave consequences both for Europe and for America.”

The Colonel asked my opinion as to whether that view were correct, and I assured him that it was, telling him for one thing that the magnitude of the payments, in comparison with the volume of European exports to the United States for the whole of the calendar year to date was such that the payments could only be made in gold, and that delay in this payment and readjustment of the whole debt relationship was absolutely essential.

The Colonel then said that Governor Roosevelt would welcome an invitation from President Hoover to a conference regarding the intergovernmental debts before the Congress assembled, and before the President made up his mind as to what should be done about the December payments. “Can you get that message to President Hoover?”

I said that I was the last man to take a message to President Hoover, particularly in view of the fact that I was almost immediately to make a speech refuting the President’s misstatement about our gold position in the spring. We decided, however, upon an appropriate channel for conveying the message, and I have every reason to believe that the message was conveyed. Shortly thereafter the word came back that President Hoover, who was then either in California where he had gone to vote, or returning from California, would send the invitation. It looked as if the stage were set for coöperation between the incoming and outgoing Presidents.

• 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.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
• 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.
• 7Mr. Herbert Hoover, in particular, did a superb job in bringing the grain and milling interests into the service of the country. I shall later find occasion to criticize his policies as President, but I wish to pay high tribute to his work in feeding the Belgians before we entered the war, to his work in food control at home during the war, to his postwar work in feeding stricken countries, and to his work under President Truman along similar lines after World War II.
• 8See my “Value and Price Theory in Relation to Price-fixing and War Finance,” an address before the American Economic Association, printed in papers and proceedings, American Economic Review Supplement, March, 1918. Reprinted in the Economic Bulletin issued by the Capital Research Company of Los Angeles, Vol. II, No. 2, Dec. 6, 1940, and reprinted in the hearings of the Senate Committee on Banking and Currency on the Price Control Bill Dec. 16, 1941. See also my testimony of Dec. 16, 1941, before this Committee.
• 9“An Index Number of Production,” American Economic Association, Dec., 1920, published in Papers and Proceedings the following March.
• 10See Federal Reserve Charts on Bank Credit, Money Rates and Business, Feb., 1941, p. 32.