Forgotten Man, The (13 page)

The medicine ball was in Hoover’s hands, and this time, he dropped it. He announced that it was nationally important to have a tariff, and also important for the executive to play a key strategic role in formulating it. He wanted to stop “congressional logrolling”—the congressional game of setting tariffs on specific industries to please specific constituencies.

The position he therefore ended up adopting was Hooveresque. He would not oppose the new tariff but would battle to make it fairer. He therefore advocated the engineering of a “flexible tariff” that would be controlled by a bipartisan commission made up of a precise fifty-fifty breakdown of commissioners from each party. The commission would achieve an important goal of Hoover’s: they would take tariffs as far away from politicians as he could get them. It would be a “definite rate-making body acting through semi-judicial methods.” The commission would then set tariffs based on a rational review of costs and prices at home and abroad. There was one other thing: the executive would then have the authority “to pro
mulgate or veto the conclusions of the commission.” The progressive and engineer in him triumphed over the international merchant.

Congress gave Hoover what he wanted. Hoover not only signed the legislation; he signed it ceremoniously, in June 1930, using six gold pens, one each for the Republican lawmakers Smoot, Watson, Shortridge, Hawley, Treadway, and Bacharach. But by focusing on winning the battle of flexible tariffs, Hoover lost the more important struggle: to right the ship in a storm.

For the economists proved right: Smoot-Hawley provoked retaliatory protectionist actions by nations all over the globe, depriving the United States of markets and sending the country into a deeper slump. Dozens of nations acted, as it became clear the tariff would become law, or after the formal signature. France imposed an auto tariff; so did Italy. Australia and India legislated new duties. Canada raised tariffs three times. The first tariff, an emergency retaliation, hit 125 classes of U.S. products. The Swiss, furious at a duty on watches, boycotted U.S. imports to their country.

There were indirect international consequences as well. Foreign governments still owed considerable debts to the United States. Some of those debts were denominated in gold. To get the gold to pay those debts, the governments and their people had to be able to sell in the United States. The tariffs made this necessary task more difficult. At a time when the country could have pulled itself out of a slump through trade, Washington was buttressing the walls preventing that trade.

But this was not all. Hoover was also intervening on a third front: markets. What the stock market at that moment needed was clear rules and pricing, Mellon’s “liquidation.” This was what everyone expected in any case, for at that time Washington did not regulate the stock market; the exchange was a New York corporation.

Still, Hoover could scold, and he did. In his first annual message to Congress, delivered in December 1929, Hoover railed against the “wave of uncontrolled speculation” that he saw as a cause of the crash. Over the course of the winter and the next year he would speak out,
too, against short selling. In a short sale, a trader borrows a stock and sells it at a certain price, in the hopes that by the time he must deliver the stock, he can buy it himself even more cheaply. Hoover believed that this was not logic but roulette at its worst. The game was dangerous because it moved away from the value of the underlying asset—shares in a company—and into the racy world of betting. Without short contracts, he reckoned, the stock market would not experience such violence ructions. The shorts, to his mind, put downward pressure on a market that might in some instances otherwise do fine. Now he wanted new rules to limit shorting.

But the argument against shorting had a flaw. For every short seller—the man who was exerting the downward pressure—there was always a long buyer—the man who bet he could get the stock for cheap under the arrangement, and then sell it himself, for more.

One reason this logic did not penetrate was that many of the messengers who carried it were flawed. Wall Street in the 1920s had felt like a gamble, and some of the players had been irresponsible or worse. One was Richard Whitney, the new president of the New York Stock Exchange.

Whitney, a patrician, could make the free-market argument as well as any. At a meeting in October 1930 at the Stevens Hotel in Chicago, Whitney criticized the idea of blanket legislation to restrict short sales and other forms of speculation: “The Exchange is convinced that normal short selling is an essential part of a free market in securities.” How could a market exist if it was not allowed to place such bearish contracts? “Such a contract to deliver something in the future which a person does not own is common to many types of business. When a builder contracts to build a skyscraper he is literally short of every bit of material.” Yet no one, Whitney pointed out, considered that builder a criminal for signing the contract. Whitney was making precisely the same point that Tugwell had made in his introduction to the old book on animal husbandry: everyone engaging in any kind of commerce was placing a bet of some kind.

The trouble was—as many Wall Streeters knew even at the time—Whitney himself was more than flawed, a compulsive gam
bler and a liar. It would later become clear that even as others were losing their homes, Whitney’s Wall Street allies were sustaining him with friendly loans. He would eventually do prison time for covering up illegal loans with the aid of his loyal brother George.

To have a Wiggin or a Whitney as their spokesman hurt defenders of the market at a time when their argument was crucial. For it was not wrong that a restriction on short selling would scare the market by depriving it of a vehicle for hedging its risks. That fear alone might even trigger big drops in stock prices. And there would no longer be the countervailing pressure of the short buyer. Mellon’s “liquidate” phrase sounded harsh but was far less constraining than the president’s restrictions on short selling. When a man marked your stocks to the market price and sold, everyone knew what everything was worth. The dread uncertainty of a further decline would diminish, and stocks might begin to move up again. Whitney’s colleagues outdid one another in their efforts to demonstrate to Hoover that they could handle matters without Washington. A week after Whitney spoke in his city, Insull announced that employees and managers at his group of public utilities would each contribute one day’s pay a month to workers idled by the crash.

Hoover had attacked a practice—speculative short selling—not a person. Congress was less conceptual. Legislators took the president’s signal to mean they were free to turn on Wall Streeters. From the winter of 1929, they made short sellers and speculators generally targets for investigations, prosecutions, ridicule, and shame. Hoover believed that the regulation of this problem still remained with the stock exchanges and the states where they were located, but pressured the exchanges into suppressing “illegitimate speculation.” Though no new law on this issue passed, the sense that the market would not be left alone to right itself disturbed investors. After rising early in 1930, the market was drifting downward, passing below 200 in October.

Franklin Roosevelt, who was now running for reelection, also took the ad hominem approach. On the day the Dow hit 193, Roosevelt motored on snowy roads from Elmira to Buffalo to give a
speech assailing Hoover directly, charging that since the market crash twelve months prior, “nothing happened but words.” Roosevelt went on to charge that Hoover had failed to expand public spending sufficiently. On the causes of the crash itself, however, Roosevelt out-Hoovered Hoover: inflation, he insisted, was the problem. Indeed, the governor charged Hoover with presiding over a false prosperity that had actually been an “inflation orgy.” In his own state, New York, Roosevelt had provided millions extra in public works spending. A president should do the same.

Hoover could not stand to think about the troubles mounting across the country. From the beginning of 1930, he had withdrawn repeatedly to the presidential retreat, Rapidan, to fly-fish and contemplate the economy. He organized nursing for his son, who had contracted tuberculosis, at the camp. Ambivalent about his inability to control the national economy, he created his own small world. He built a school at Rapidan, with desks of modern steel, finding that he was, at least in a small corner of Appalachia, the hero. In front of the fire at the “town hall” he had created, he debated the locals. His secretary Theodore Joslin later recalled that Hoover “would reason patiently with an opponent or a recalcitrant. The very force of his arguments would invariably influence them.”

In November 1930 Governor Roosevelt gave one last campaign speech at Brooklyn’s Academy of Music. He reminded voters that he supported Prohibition and touched on the topic of power, noting that the taxpayer suffered “when you pay six dollars a month for electricity instead of two.” But the area he truly scored on was joblessness: “Not only is the dinner pail empty, but millions are eating out of it at home because there is no place of employment to carry it to.” Roosevelt annihilated his opponent, district attorney Charles Tuttle, winning 1.7 million votes to Tuttle’s 1 million. The fact that the victory was so resounding, and that it came in all-important New York, meant that Hoover now knew his likely opponent in 1932—Roosevelt. Across the nation, voters gave more seats to Democrats. In the end, Republicans hung on to their majority in the Senate by a
thread, and lost the leadership of the House. Hoover soured. He kept his distance from the Hill when it was led by his own party; it was even harder to work with the opposition.

That December, the Depression took on a new seriousness. Heretofore, most of the banks to fail had been rural banks. Now an important bank in a big city ran into trouble, one that was a member of the Federal Reserve System. It was the young Bank of United States, the one that served so many immigrants—half a million depositors. The trouble at first did not appear so bad: unlike many others, the bank could count more than $200 million in deposits. Something like half of depositors were small fry—low earners. And the Bank of United States was an important symbol in the city. It was still not in the state club of established banks, the New York Clearing House, but it was making its name. Earlier that year, the Bank of United States basketball team had beaten bankers from the establishment Bank of Manhattan before a crowd of 3,500 to capture the championship of the Bankers Athletic League.

The New York state superintendent of banks, Joseph Broderick, organized various potential rescue mergers with Manufacturers’ Trust and with Public National. But the Clearing House banks killed the mergers. At the time, many observers saw the bank’s problems as a consequence of class differences between the working class and immigrants on the one hand and Anglos on the other. The Establishment believed that the Bank of United States was marginal, and that this was a moment when only the strongest banks, as in Darwin, deserved to survive. But the Bank of United States had relatively strong books—at least as strong as many that were propped up by fellow banks. The problem was not so much individual weakness as bad monetary policy, inconsistent credit policy, and sheer bigotry. The bankers who turned against the Bank of United States were acting like Victorians.

Broderick begged for the bank’s future:

 

I said it had thousands of borrowers, that it financed small merchants, especially Jewish merchants and that its closing might
and probably would result in widespread bankruptcy among those it served. I warned that its closing would result in the closing of at least ten other banks and that it might even affect the savings banks. The influence of the closing might even extend outside the city.

I reminded them that only two or three weeks before they had rescued two of the largest private bankers of the city and had willingly put up the money needed…. I warned that they were making the most colossal mistake in the banking history of New York.

 

The bank did suspend payments to depositors, the largest bank in America ever to do so. A leading banker described the attitude that motivated other banks’ decision to abandon Bank of United States: “Let it fail, draw a ring around it, so the infection will not spread.”

On December 11, the sixty offices—sixty emblems of hope—closed their doors. Later in the month, a crowd of 5,000 depositors and protestors gathered at the Freeman Street branch in the Bronx to protest the change: “They Robbed the Poor,” a sign said. Broderick arranged a deal with Clearing House banks whereby depositors at the Bank of United States might borrow cash from the other banks. But that was not the same as the assurance that they would get back their money. The story reminded Jews that Peter Stuyvesant’s old contract was still in force. On December 22 at 4:00 a.m., a line of 400 began to form at a Second Avenue branch. Some 2,000 Bank of United States depositors gathered at its branch on Forty-second Street so that they might begin to collect loans from the other banks. Only a fraction were served. Another Jewish-owned bank, Manufacturers’ Trust, was absorbed by non-Jewish banks.

It shortly became clear that sacrificing immigrants’ banks would not confine American depositors’ demand for currency. The infection that the banker had described was too large to draw a ring around. By 1931, panics at the larger banks began in earnest. The lucky engineer was running out of luck.

September 1931
Unemployment: 17.4 percent
Dow Jones Industrial Average: 140

ONE LATE SUMMER DAY IN
1931 in Salt Lake City, the money ran out. Not just the money in the banks, and not just the money in town coffers—the money that citizens had to spend. Locals reached into their pockets and, finding nothing, began to trade work and objects. Barbers traded shaves and haircuts for onions and Idaho potatoes. From there, the trading spread to other products. Life in Utah had always been a desert when it came to water. Now it was a desert when it came to money, as well. People in Utah knew how to survive in a desert. Maybe they could find a way to manage in the money desert as well.

A short drive north in Ogden, a banker instructed the employees of several family banks in the art of bluffing. The Ogden State Bank had closed its doors. His bank would not go down the way it or Bank of United States had if he could help it. “If you want to keep this bank open, you must do your part,” the banker told his staff. “Go about your business as though nothing unusual was happening.
Smile, be pleasant, talk about the weather, show no signs of panic…. Pay out in fives and singles, and count slowly.” The man’s name was Marriner Stoddard Eccles, and the next week he would turn forty-one. He was a leader in his community, the firstborn from the second marriage of a wealthy Mormon patriarch. He had pushed hard to ensure that a company connected with his bank—Utah Construction—got a part in the Colorado River dam project.

Others in Eccles’s community were also thinking and improvising. A real estate man in Salt Lake City named Benjamin Stringham began to organize the barter trade more formally. He pulled together workers without jobs, then shipped them out to farms to work for the day. They returned with their pay: peaches, eggs, pork.

The improvisation was not confined to Utah. Communities across the country were beginning to find new ways to get through the trouble. Out in California, city people were beginning to think about moving to abandoned farms, taking up plows, and trying to make a life independent of money. Back east, Ralph Borsodi, an author and social thinker, was readying a book titled
Flight from the City
, about his own family’s effort to live on the land an hour and three quarters outside New York. Borsodi concluded that self-sufficiency of the family was the new ideal, that with his poultry yard of fat roasting capons, his self-built swimming pool, and his apiary, he had found the solution to downturns like that of 1921 or 1929. The family ought to be the next factory. He wrote that “domestic production, if only enough people turned to it, would not only annihilate the undesirable and non-essential factory by depriving it of its markets” but also “release men and women from their present thralldom to the factory.” Within a few years the director King Vidor would make a film that offered a similar vision, calling it
Our Daily Bread
. The message in
Our Daily Bread
was not only that the land could provide, but also that moving to the country improved the character of corrupt urbanites.

In Chicago, Paul Douglas would shortly draw on his Russian experience with food cooperatives to create a system for saving money in his own community: a food co-op. Groups in Hyde Park, the neighborhood around the university, began to purchase food in bulk
in order to cut back on prices. But they were so short on cash that even this efficiency did not help them. Douglas advised them to start a co-op retail store for members, or shut down. They opened the store.

In New York, there was a sense of solidarity among the old Wall Streeters. Bill Wilson, drunk, had watched as the price of his favorite stock, Penick & Ford, slid toward nothing. He had taken to sleeping on Livingston and Schermerhorn streets in Brooklyn Heights. Still, he felt a curious sense of excitement; now the whole country was like him, down like an alcoholic. Wilson found a job with a Canadian firm, Greenshields, and taking his wife, Lois, headed north. He joined the country club, rented an apartment on the Côtes des Neiges, and enjoyed the view of the St. Lawrence River from its windows.

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 the 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.