Chapter Fourteen
ALL CHANGE
IF THE stroke of chance which closed the banks on Inauguration Day was bitterly tragic for Herbert Hoover, it was also staggering for Franklin Roosevelt. The country over which he was to govern was prostrate. The financial machinery had stopped. Most financial institutions were teetering on the edge of insolvency. Business was slumping fast to the low levels reached during the panicky spring of 1932. The farm population and the industrial population were in dire straits; unemployment and destitution were widespread. And who could be sure that the demoralization of the national economy had not only just begun?
Furthermore, Roosevelt’s plans, formulated at leisure, had not contemplated the meeting of any such extraordinary crisis as the collapse of the whole banking system; at the very outset of his administration he must improvise. He and his cabinet officers were new to their jobs, to their staffs, even to each other. At a moment of the gravest danger the command of the Ship of State was being turned over to a group of passengers none of whom had ever been on the bridge before.
Yet in another respect the stroke of chance favored the new President. It gave him, for the moment at least, an almost united country. The closing of the banks had thrown rich and poor, employer and employee, banker and depositor, Republican and Democrat, into a common predicament; and this predicament was so sudden and unprecedented that divergent opinions as to the way out had not had time to crystallize. There was even, for millions of Americans, a curious thrill in the completeness of the breakdown after so many months and years of foreboding: a feeling of Now it has happened: now for action. When Franklin Roosevelt stepped forward on the platform before the Capitol and began his Inaugural Address, not only the throng below him but a vastly greater throng of listeners at millions of radios were ready to listen hopefully, to follow eagerly, to welcome a New Deal.
He did not disappoint those first hopes. Whether or not events make men, certainly the Franklin Roosevelt who assumed the Presidency on that eventful day seemed a wholly different man from the all-things-to-all-men candidate of 1932.
His Inaugural—delivered in a ringing voice—was clear, strong, confident; and citizens innumerable who had longed for action in the days when Hoover seemed to be doing nothing were thrilled as by the note of the fife when the new President pledged himself to ask Congress, if the need arose, for “broad executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”
His promise of action was immediately made good. He met the banking crisis boldly and with a wholly contagious confidence. He at once called Congress to meet in emergency session. He at once issued—with a few changes—the national bank-holiday proclamation which had been prepared for Hoover’s use a few days before. His smiling little Secretary of the Treasury, William H. Woodin, plunged into arduous preparations for the reopening of the banks—providing for a possible expansion of the currency based on the sound assets of the banks, and arranging to consider the condition of every bank and to decide which institutions could be opened, which must be placed under the direction of governmental “conservators,” and which must remain closed. When Congress assembled, Roosevelt asked it for virtually dictatorial power over transactions in credit, currency, gold, and silver. This power was granted him the very day he asked for it. Nine days after the Inauguration the first banks were ready to be opened. And on the evening before the opening, Roosevelt sat before a radio microphone in the White House and talked to the American people as one would talk to a group of friendly neighbors, explaining with admirable clarity and persuasiveness just what he had been doing and what he expected them to do. The address was a triumph of democratic statesmanship. The banks were opened without panic, and stayed open.
To be sure, not all the banks were permitted to resume business. At least a fifth of the deposits of the country were still tied up, and the purchasing power of the country was correspondingly reduced. But Franklin Roosevelt had done his first great task brilliantly—and he still had the whole nation with him.
Even the men of Wall Street, shaken by the experiences of the past few weeks and by the obvious anger and distrust of the general public, had little choice but to go along with the new President who moved through the crisis with so sure a step, and who so obviously held their future fortunes in his hands. They were the more disposed to go along with him when he asked Congress—before the banks were opened—for authority to cut Federal expenses to the bone (yes, even to cut the veterans’ allowances) in order to maintain the national credit. Even when Roosevelt, in April, issued an executive order prohibiting the export of gold, and Woodin formally admitted that the United States was off the gold standard (as in reality it had been ever since March 4) the financiers did not seem unduly dismayed; J. P. Morgan himself smilingly faced a group of reporters at 23 Wall Street and gave his approval to the move.
The country wanted action? Roosevelt gave it action. Throughout the spring of 1933 he showered recommendations and drafts of bills upon an astonished Congress which followed his requests as if in a trance. Bills to bring about financial reforms, bills to stimulate business in one way or another, bills to set up new governmental agencies: Congress passed them all—some of them before the members had even had a chance to read them, much less to ponder over them. There was every reason for the men on the Hill not to balk but to follow blindly. The Democratic majority was huge, the patronage was still undistributed; the country was in the mood for headlong change and was enchanted with Roosevelt; telegrams and letters urging Senators and Representatives to “support the President” were flooding in from all over the country.
The executive departments were in a fury of activity. Conferences were going on at all hours, bills were being drafted and revised and redrafted at breakneck speed, and in the mammoth new government buildings the lights burned late; the very atmosphere of the once placid city of Washington was electric with excitement. Officials and advisers representing the widest divergence of views were being pressed, helter-skelter, into the planning of the recovery program—hard-boiled business men, hard-boiled politicians, deserving Democrats, professors of economics, labor leaders, socialists, sentimental theorists of every hue. What would come of their furious labors was far from clear; but the country liked action, liked its smiling President, and liked to feel once more the sense of hope.
And it liked most of all the fact that a really definite improvement in the condition of the country was taking place.
As we look back upon the events of that spring of 1933, it is clear that to a considerable extent the improvement was due to the expectation of inflation. It did not really begin until after the Administration formally forsook the gold standard in April. It was given a distinct fillip by the action of Congress, in May, in giving the President permission to bring about inflation in any one of four ways. The fall of the dollar in foreign exchange was providing a temporary stimulus to exports; the prospect of higher prices (coupled with the prospect of governmental regulation through the N.R.A.) was causing business men all over the country to stock up with goods.
Nevertheless there was a new feeling in the air. Investors who in 1932 had rushed to sell because they thought there might be inflation now rushed to buy for the same reason. The rise in the price of wheat and other crops was restoring a measure of hope to the men and women of the farm belt. The wheels of industry were actually beginning to turn faster, the unemployed were actually beginning to be put back to work.
The rally had its disquieting features, and perhaps the most disquieting was the terrific outburst of speculation which accompanied it. Despite the public distrust of Wall Street, despite the widespread belief that prosperity on the 1929 pattern was false and dangerous, despite the grim experiences of 1930 and 1931 and 1932, the shorn lambs swarmed into the brokerage houses once more in incredible numbers. Where some of them got the money to speculate with was a mystery. More than a few of them, indeed, were shabbily
clad; one had the feeling, as one watched the customers in a broker’s office, hanging over the chattering ticker or following with eager eyes the moving figures on the trans-lux screen, that perhaps some among them were desperately staking their last savings on the turn of the Wall Street wheel. The behavior of the market as it skyrocketed upward gave plenty of indication that even if the bankers were somewhat humbled by recent events, the pool managers on the Exchange were not. Some of the manipulative operations in which the alcohol stocks (which were supposed to be about to profit by the coming repeal of the Eighteenth Amendment) were pushed up to extravagant prices—and into the hands of the suckers—were as outrageous as the worst pool exploits of 1929.
As for the volume of trading on the Stock Exchange, the amazing fact was that during the two successive months of June and July 1933, this was greater than it had been in any month of 1929 except the panic month of October. On no less than nineteen days during 1933 the daily volume of trading was more than six million shares—a strange phenomenon when one considers that there never had been even a single four-million share day until the bull-market frenzy of 1928. Speculation in the commodity markets was similarly feverish and unashamed.
It is true, of course, that the Administration, by dangling the idea of inflation before the public, was partly to blame for this debauch. Nevertheless the exaggerated form which the speculative campaign took was an ominous sign. The national economy seemed like an engine with a loose part: speed it up just a little, and it began to wrack itself to pieces.
Yet elsewhere the prospect was heartening. Even if the United States was not going back to work so fast as it was going back to speculation, the gain in economic activity in the brief interval since March was remarkable. By July, the index of industrial production had regained about half the ground it had lost since 1929; and while the rise in employment and in payrolls was decidedly less spectacular, it was sharp.
There had taken place, too, another significant change. No one could fail to realize that the economic initiative was now in the hands of Franklin Roosevelt. At scores of points in the economic system of the country the government—with public opinion still overwhelmingly behind it—was intervening or promising to intervene. The economic capital of America had moved from Wall Street to Washington.
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It is not easy to write down briefly the Roosevelt Administration’s prescription for restoring the United States to economic health, for there were many physicians involved in the work of diagnosis and treatment, the clinical procedure was somewhat erratic, and sometimes the medicines which were administered had conflicting effects. President Roosevelt once likened himself to the quarterback of a football team, always ready to try a new play; adopting his figure of speech, one might remark that there were moments when various members of his team appeared to be simultaneously engaged in a line play, an end run, a forward pass, and a fake kick. But at least the recovery plan which was taking shape in Washington may be sketched in rough outline.
1. In the first place, the government was hoping to bring about a certain degree of controlled inflation in order to lessen the weight of debt. The theory was that since the debt burden was intolerably heavy and could not rapidly be lightened through bankruptcies without new damage to banks and other institutions, the best thing to do would be to raise the general level of prices and incomes in order that debts might become relatively lighter. The government also hoped that the prospect of higher prices would cause business men to put in orders and that these orders would act like the push which one gives to a stalled automobile: presently business would proceed under its own power. That the effect of inflation would be only temporary unless the engine began to fire again was clear; that tinkering with the currency was a dangerous business at best was also clear, except to the unduly credulous. But the situation of the country was so very grave that even dangerous medicines seemed worth trying.
It is doubtful if Roosevelt had any settled opinion as to whether or how to inflate, and it is probable that he was dragged from position to position by changing circumstances and by popular pressure. At first, perhaps, he was sure only that the government could not go back on the gold standard on the old basis without a great danger of a new deflation; then he saw that Congress might force mandatory inflationary legislation upon him, and preferred to have it give him the power to inflate—which he might or might not use; then he was delighted to see the fall of the dollar giving business a push, and feared that if the dollar were stabilized before his other recovery measures could take effect, business might lose its momentum and all the benefit of the push might be lost, and so he dismayed the London economic conference by suddenly deciding that there must be no stabilization agreement; and then, when business did indeed slow up in the autumn of 1933, he thought that another little push might help, and thereupon embarked upon Professor Warren’s gold-buying program—the so-called “rubber-dollar” program, which reduced the value of the dollar in terms of gold to a little less than sixty cents, and yet hardly affected the price-level at all. (This curious program was likened by a New York banker to an attempt to bring about warmer weather by lighting a fire under the thermometer.)
Yet despite the vagaries of Roosevelt’s action, the general philosophy of it is fairly clear. He wanted to lighten the debt burden and also to give the American economy a shot in the arm. Meanwhile his Administration also made direct efforts to relieve the debt burden here and there, by government aid to farmers and householders who were oppressed by mortgages, and by legislation designed to make the processes of bankruptcy less slow and painful.
2. In the second place, the Administration realized that although industrialists, in hard times, managed to sustain prices to some extent by cutting down on production, the farmers had been unable to do so—and thus had suffered grievously. Why not make it possible for the farmers to take a leaf out of the industrialists’ book? If the government were to offer them an inducement to produce less—the money for this inducement to be contributed by the rest of the country, in the form of a slight tax on the farm products which they consumed—farm prices ought to go up. This was the essence of the celebrated AAA program. There has been much ridicule of the principle of paying farmers not to produce—and for the long run the principle is of course preposterous—but no industrialist who has ever shut down a mill or run it three days a week in the hope of keeping the price of his goods from collapsing is in a position to join in the ridicule. The AAA was simply giving the farmers a homeopathic dose of the medicine which industry had consistently taken as a matter of course.
The administration of this agricultural program involved endless difficulties and led to many absurdities, but it seems on the whole to have made things temporarily somewhat easier for the farm population—until nature took over the business of crop limitation in 1934 and 1935 by blowing a good deal of the excess acreage away in dust.
3. Obviously the agricultural program would be futile unless industry and business meanwhile expanded. How, then, to expand industry? One way by which the Administration hoped to do this was by public works—in other words, by spending money (which would put cash into circulation and thus supposedly stimulate private business) and getting, in return for this money, things which would be of future economic benefit to the country. This program had its awkward aspects. One was that it would knock into a cocked hat the Administration’s attempt to balance the budget. Another was that projects valuable enough to be defended as capital expenditures, and agencies solvent enough to undertake the projects, were hard to find. Another was that the chances for graft were terrific if the government did not proceed with great care; yet speed was also necessary—and speed and care do not naturally go together. For these and other reasons the Administration moved slowly with its public works program; so slowly, in fact, that although the total amount of money spent was very large, the push at any given moment was not. A patient can take a considerable amount of medicine in diluted quantities over a period o
f time without visible effect—except, perhaps, the effect of becoming dependent upon the medicine.
4. It was the NRA, however, upon which Roosevelt chiefly relied for industrial and business recovery. Here we confront one of the most curious confusions in the New Deal.
One theory behind the NRA was that since a dismaying phenomenon of the depression had been the tendency of industry and business, by reducing the wage bill, to kill the goose that laid the golden egg, the way out of the depression would therefore be to fatten the goose by raising wages; and that since no concern would do this unless other concerns also did it and thus added to the general buying power, the proper procedure would be to bring the business heads together, industry by industry, and get them to raise wages by agreement, the agreement to have the force of law. (A very difficult policy to put into effect: it ran head on, not only into the historic if unedifying habit of the business man to outwit the government if he could, but also into the cold fact that a wage-raising schedule which a prosperous company could afford might push other companies into bankruptcy—and men do not enjoy going into the red, and least of all at the instance of their government.)
The second theory behind the NRA was that unemployment would be relieved if the working week were shortened by agreement, and the available work were thus spread out among more people. (Wage rates being generally low, this might be described as a share-the-poverty plan.)
The third theory was that much of the trouble in business was caused by drastic cutting of prices (as from the business man’s point of view it was) and that therefore price-cutting ought to be prevented in the agreements; prices ought to be “stabilized.”
It happened that the men who were chiefly responsible for the establishment and guidance of the NRA were not the liberal “brain trusters” of conservative legend but a group of industrialists and business men, some of whom had long hoped to persuade the government to mitigate the Sherman Act; and thus it was this third theory that in practise had the best of things—especially as General Hugh Johnson, for all the picturesque fury with which he threatened to “crack down” on those who did not comply with the NRA codes, was quite unsuccessful in forcing general compliance with the wage-raising agreements, and in fact made only scattered attempts to do so. Thus although in some industries the increase in the wage bill was impressive, in others it was ridiculously small; and meanwhile the business men who had swarmed to Washington and perspired over the drafting of codes during the hot summer of 1933 found the opportunity to “stabilize” prices a godsend. Here, thought some of them, was a lovely chance for combination to run prices up. Hence there were some industries in which prices actually rose much faster than did the wage bill.
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