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To the surprise of many, Americans adapted to life without banks remarkably well—the initial reaction was not chaos but cooperation. Store-keepers 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.
Other places resorted to barter. In Detroit, the Colonial Department Store agreed to accept farm produce in exchange for goods—a dress went for three barrels of Saginaw Bay herring, three pairs of shoes for a 500-pound sow, and other merchandise went for fifty crates of eggs or 180 pounds of honey. In Manhattan, the promoters of the Golden Globe amateur boxing tournament announced that fans would be admitted in return for anything assessed to be worth 50 cents—that night the box office took in hats, shoes, cigars, combs, soap, chisels, kettles, sacks of potatoes, and foot balm.
There were, of course, some disruptions. In Detroit, now in its fourth week without banks, merchants stopped extending credit, food disappeared from the shelves, and the City of Detroit defaulted on its bonds. In Reno, the divorce industry ground to a halt when women could not pay the filing fees. Tourists and traveling salesmen around the country found themselves stranded. In Florida, the American Express office agreed to cash checks up to a limit of $50 and was besieged by five thousand tourists. The first official task for the new secretary of state, Cordell Hull, was to placate the diplomatic corps in Washington, who argued that their money was entitled to immunity from sequestration and should be immediately released. The movie King Kong in its second week played to half-empty theaters—total box office receipts were down almost 50 percent.
The biggest problem was not cash but change. Nickels for use on the subway and on trolley and bus lines were so scarce that an officer of the Irving Trust Company declared that a “nickel famine” was in effect. Suddenly automats, where food was served from coin-operated vending machines and where a lot of coins changed hands, were besieged by women in mink desperate not for a meal, but for loose silver.
On Sunday, March 5, the day after the inauguration, William Woodin, the new secretary of the treasury, began organizing a team of experts to put together a bank rescue package. The diminutive Woodin, who had been the president of the American Car and Foundry Company, was a far cry from the austere Mellon. A Republican who had switched parties to support Roosevelt, he was as multifaceted as Charles Dawes of the Dawes Plan. An accomplished musician, having composed several orchestral pieces, including the Covered Wagon Suite, the Oriental Suite—and in honor of the inauguration, the “Franklin Delano Roosevelt March”—he liked to unwind at the office by playing the mandolin or strumming his guitar.
Woodin quickly recognized that neither he nor his aides had the knowledge or experience to handle the situation alone. He managed to persuade none other than his predecessor as secretary of the treasury, Ogden Mills, and Mills’s deputy, Arthur Ballantine, to lead the bank rescue effort, even though Mills, who owned an estate in the Hudson Valley just five miles north of Roosevelt’s home, Hyde Park, was no admirer of the new president—later he would become a very vocal critic of the New Deal. On the very last day of Hoover’s presidency and his own tenure in office, Mills had prepared a draft, which now became the foundation of the Roosevelt plan. Even Roosevelt’s proclamation closing the banks in the country was based on a draft of a statement that Ballantine had originally prepared for Hoover.
The team’s other principal player was George Harrison, who came down to Washington that Sunday. Realizing that any bank plan would have to pass muster with bankers, Woodin wanted someone who could be a bridge to Wall Street, and as a former outside director of the New York Fed, he knew Harrison well. He also very deliberately kept the group of presidential advisers with a reputation for being left-wing—men such as Adolph Berle, Rex Tugwell, and Raymond Moley—well in the background.
During the next few days, as bankers came and went, the Treasury team, led by the trio of Woodin, Mills, and Harrison, considered and rejected numerous proposals. Some people wanted a nationwide issue of scrip—paper currency backed only by a government pledge. Others recommended that all state banks be incorporated into the Federal Reserve System. Yet others believed a federal government guarantee on all bank deposits was the solution. The president himself came up with the zaniest idea—that all government debt, $21 billion, be immediately convertible into currency, in effect doubling the money supply at a stroke.
By Thursday, March 9, the Emergency Banking Act was ready to be submitted to Congress. Most of it was based on the original Mills proposal. Banks in the country were to be gradually reopened, starting with those known to be sound, and progressively moving to the shakier institutions, which would need government support. A whole class of insolvent banks would never be permitted to reopen. The bill also granted the Fed the right to issue additional currency backed not by gold but by bank assets. And it gave the federal government the authority to direct the Fed to provide support to banks. The legislation was supplemented by a commitment from the Treasury to the Fed that the government would indemnify it for any losses incurred in bailing out the banking system. This unprecedented package finally forced the Fed to fulfill its role as lender of last resort to the banking system. But to achieve this, the government was in effect providing an implicit blanket guarantee of the deposits of every bank allowed to reopen.
For Harrison the transformation was almost too much to believe, leaving him constantly beset by doubts. Only a week before he had been dealing with a president who seemed incapable of taking action. He now had to contend with a president who would try anything. As a protégé of Benjamin Strong, Harrison believed fervently in what he called the “separation of the central bank from the state”—the financial equivalent of the separation of the powers in the political sphere. The new legislation would give the president unprecedented control over the Fed. Harrison had also been to taught that currency should be backed either by gold or liquid assets readily convertible into cash. The new law expanded the category of assets against which the Fed could lend, compelling it to print money, Harrison agonized, against “all kinds of junk, even the brass spittoons in old-fashioned country banks.” But at least the drift was over and something was finally being done.
At ten o’clock on the evening of Sunday, March 12, Roosevelt gave the first of his fireside chats over the radio. “My friends,” he began in his easy patrician voice, “I want to talk for few minutes with the people of the United States about banking . . . I want to tell you what has been done in the last few days, why it was done, and what the next steps are going to be.” In simple and clear language, he explained to the sixty million people listening in countless homes across the nation, “When you deposit money in a bank, the bank does not put the money in a safe deposit vault. It invests the money, puts it to work.” “I know you are
worried . . . ,” he told them, “I can assure you, my friends, it is safer to keep your money in a reopened bank than under the mattress.” The next day the comedian Will Rogers wrote to the New York Times, “Our President took such a dry subject as banking . . . [and] he made everyone understand it, even the bankers.”
As the first banks prepared to open on Monday, March 13, no one could be sure what would happen. Many feared that after the measures restricting the convertibility of currency into gold, the panic might even continue and indeed become worse. As Harrison put it, “We had closed in the midst of a great bank run, and as far as we knew would reopen under the same conditions.”
That morning, long lines of depositors formed outside the reopened banks. But instead of taking their money out, they were putting it back in. The combination of the bank holiday, the rescue plan, and Roosevelt’s masterful speech—there is no way of distinguishing which was the more important—created one of those dramatic transformative shifts in public sentiment. As on other similar occasions where a new administration has taken charge in the middle of a crisis and introduced a radically new package of policies—for example, in Germany in November 1923 when hyperinflation was ended or in France in July 1926 when Poincaré stabilized the franc—the mood of the nation changed overnight.
On March 15, when the New York Stock Exchange reopened after being closed for ten days, the Dow jumped 15 percent, the largest move in a single day in its history. By the end of the first week, a total of $1 billion in cash—half of everything that had been pulled out in the previous six weeks—had been redeposited in banks. By the end of March, two-thirds of the banks in the country, twelve thousand in total, had been permitted to resume business and the currency hoard in the hands of the public had dropped by $1.5 billion.
This was one more bitter pill for Hoover to swallow. A bank rescue plan introduced by Roosevelt, a man he despised, drafted by Hoover’s own people on principles he had originally proposed, had in the space of a week restored confidence that had eluded poor old Hoover in three years of fighting the Depression.
Raymond Moley would later write of that week, “Capitalism was saved in eight days.” He was only half right. The rescue plan may have saved the banking system. But the tasks of getting the factories across the country producing once again and of putting average Americans back to work still remained.
Over the next three months—the celebrated “first hundred days”—Roosevelt bombarded Congress and the country with new legislation. On March 20, Congress passed the Economy Act, which cut the salaries of public employees by 15 percent, slashed department budgets by 25 percent, and cut almost a billion dollars in public expenditures. At the end of March, it approved the creation of the Civilian Conservation Corps to employ young men in flood control, fire prevention, and the building of fences, roads, and bridges in rural areas. In the middle of May came the Emergency Relief Act and that same day Congress passed the Agricultural Adjustment Act, designed to push agricultural prices higher by controlling production and reducing acreage. The Tennessee Valley Authority was set up to build dams and construct public power plants. The National Industrial Recovery Act was passed in the middle of June to permit price fixing. It also authorized $3.5 billion in public works programs. The Glass-Steagall Act, also passed in the middle of June, divorced commercial and investment banking and guaranteed bank deposits up to a maximum of $2,500, while the Truth-in-Securities Act established disclosure provisions to govern the issue of new securities.
The string of measures was a strange mixture of well-meaning steps at social reform, half-baked schemes for quasi-socialist industrial planning, regulation to protect consumers, welfare programs to help the hardest hit, government support for the cartelization of industry, higher wages for some, lower wages for others, on the one hand government pump priming, on the other public economy. Few elements were well thought out, some were contradictory, large parts were ineffectual. While much of the legislation was very laudable, aimed as it was at improving social justice and bringing a modicum of economic security to people who had none, it had little to do with boosting the economy. Tucked away, however, in this whole motley baggage, as a last-minute amendment to the Agricultural Adjustment Act, was one step that succeeded beyond anyone’s wildest expectations in getting the economy moving again. This was the temporary abandonment of the gold standard and the devaluation of the dollar.
The rescue of the banks had been brought about by one of the oddest partnerships in the history of economic policy making—between a Democratic treasury secretary and his Republican predecessor. Devaluation involved one of the strangest confrontations in that history. On one side stood the top echelon of presidential economic advisers, a brilliant group of young men, most of them new to government, the “hard money” men, as they were colloquially referred to in the press. At Treasury was Woodin’s undersecretary, the polished and urbane forty-year-old Dean Acheson, son of the Protestant Episcopal bishop of Connecticut, a graduate of Groton, Yale, and Harvard Law School, a protégé of Felix Frankfurter and clerk for Justice Louis Brandeis at the Supreme Court. Though he knew little about economics—and with his British colonel’s mustache and his tweed bespoke suits, he looked like an old fogy—Acheson had a reputation as an outstanding corporate lawyer, a pragmatist with an incisive brain and a talent for crafting solutions to complex problems.
The adviser to the president on monetary affairs was the thirty-seven-year-old James Warburg, son of Paul Warburg, the father of the Federal Reserve System. After graduating from Harvard, the debonair Warburg embarked upon a stellar career in banking, becoming the youngest chief executive on Wall Street while still finding time to publish his poetry in the Atlantic Monthly and write the lyrics to a Broadway musical, Fine and Dandy. He had turned down Acheson’s job as undersecretary of the treasury, preferring to exert his influence as an unpaid and untitled adviser to the president, who liked to refer to him as “the white sheep of Wall Street.”
And finally, the hardest-currency man of them all was the thirty-eight-year-old budget director, Lewis W. Douglas. Scion of an Arizona mining family, Douglas had taught at Amherst and since 1927 had been in Congress, where he had championed the cause of government economy and balanced budgets during the Depression.
The spokesman for Wall Street should have been the head of the Federal Reserve Board, Eugene Meyer. But he found himself completely out of sympathy with the new administration and submitted his resignation at the end of March. As a consequence, Harrison of the New York Fed acted as the primary go-between for bankers and the White House.
Every one of Roosevelt’s advisers, including Harrison, believed that having stabilized the banking system, they could rely on the traditional levers—expanding credit, undertaking open market operations—to get the economy moving again. Most important, none of them could see any reason for breaking with gold.
Pitted against this array of economic expertise was one man—the president himself. Roosevelt did not even pretend to grasp fully the subtleties of international finance; but unlike Churchill, he refused to allow himself to be in the least bit intimidated by the subject’s technicalities—when told by one of his advisers that something was impossible, his response was “Poppycock!” Instead, he approached the subject with a sort of casual insouciance that his economic advisers found unnerving but which nevertheless allowed him to cut through the complications and go to the heart of the matter.
His simplistic view was that since the Depression had been associated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward—that rising prices would be the result of recovery, not its cause. They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect. True, in the initial stages of the Depression the collapse in economic activity had driven prices downward. But once in motion, falling prices created their own dynamic. By raising the real cost of borrowing, they had discouraged investment and thus caused economic activity to weaken further. Effect became cause and cause became effect. Roosevelt would have been unable to articulate all the linkages very clearly. But he had an intuitive understanding that the key was to reverse the process of deflation and kept insisting that the solution to the Depression was to get prices moving upward.
There still remained a chicken-and-egg problem. How to get prices up without first having to wait for economic recovery? Several years before when Roosevelt needed help with the trees on his estate in Hyde Park, his Hudson Valley neighbor and friend Henry Morgenthau introduced him to an obscure fifty-nine-year-old economist, George Warren, professor of farm management at Cornell, under whom Morgenthau had studied as an undergraduate.
The short and stocky professor, with his owlish spectacles, Quaker-like earnest demeanor and a bunch of pencils protruding from his top pocket, had none of the earthiness that one might associate with an expert in farming. He had in fact grown up herding sheep on a Nebraska ranch and still lived firmly rooted to the soil on a five-hundred-acre working farm outside Ithaca, New York, where he raised cash crops and a large herd of Holstein cows. He had published a variety of books and pamphlets on agriculture, including a
monograph titled Alfalfa and another, An Apple Orchard Survey of Wayne and Orleans County, New York, which exhaustively documented the various techniques for growing apples in upstate New York, down to which manures worked the best; a standard textbook, Dairy Farming; and two seminal works, The Elements of Agriculture and Farm Management. He had also devised a system for inducing chickens to lay more eggs. As a teacher, he was known to be dismissive of theories and made a point of taking his students out to working farms. His quaint pastoral homilies on these visits had become part of the Cornell folklore—“You paint a barn roof to preserve it. You paint a house to sell it. And you paint the sides of barn to look at”—although none of his students were quite sure what they meant.
