by Prins, Nomi
The combination of strained lending for productive uses and bankruptcies of small establishments coalesced in widespread financial degradation. Meanwhile, big banks ceased lending to agriculture, industry, and local businesses in order to repay “a substantial amount of their borrowings at the reserve banks.”29 Their first allegiance was to the Fed, which ensured their survival with cheap funds. This strategy would become a time-honored way for the most powerful banks to survive at the expense of their clients.
A few weeks after Britain went off the gold standard, a panicked Hoover held a secret meeting with thirty prominent American financiers at the Massachusetts Avenue apartment of Treasury Secretary Andrew Mellon. As Irving Bernstein wrote in The Lean Years, “The president was overwhelmed with gloom and the fear of impending disaster.” He now saw “imminent danger to the American banking system as a consequence of the events in Europe.”30 Blaming Europe for the woes of the US economy, however, was not looking at the full picture; it indicated a lack of understanding of the US bankers’ culpability in the crisis.
In his memoirs, Hoover remained detached and similarly unreflective of his or the bankers’ role, blaming the Fed and European bankers instead. “To be sure, we were due for some economic readjustment as a result of the orgy of stock speculation in 1928–1929,” he wrote. “This orgy was not a consequence of my administrative policies. In the main it was the result of the Federal Reserve Board’s pre-1928 enormous inflation of credit at the request of European bankers, which, as this narrative shows, I persistently tried to stop, but I was overruled.”31
To be fair, much of the laissez-faire attitude that had festered during the 1920s occurred during the Coolidge administration. Hoover had attempted to steer bankers toward lending restraint, particularly internationally, and tried measures to bolster the economy after the Crash, but by failing to examine the role of the financial community in providing the debt and fabricating the enthusiasm that stoked the speculation—not just in the market but throughout the economy—he failed to hold himself accountable for the frenzy of risky banking activity. There were political opportunities lost in his denials, such as examining whether it was appropriate to have the chairmen of the largest banks in the country seated on the board of the New York Fed, as National City Bank chairman Charles Mitchell was, and had been before the Crash, and as Chase chairman Al Wiggin would be from January 1932 to March 1933. (The alliance between the New York Fed and the financiers remains recklessly codependent to this day.)
Hoover did establish the Reconstruction Finance Corporation in 1932. The government bailout program was tasked with lending $1.5 billion to ailing banks and industries, but its funds were channeled disproportionately to the bigger banks.32 One of those banks was the First National City Bank, whose chairman, New York Fed Class A director Charles Mitchell, had aggressively pushed the Fed to keep rates low after he realized that his bank and the entire financial landscape were in trouble.
The massive bond-buying program that the Fed initiated in May 1932, in which it agreed to buy $26 million worth of bonds a week from its member banks, reached a total of $1.82 billion in Treasury securities holdings.33 The idea was that banks would sell their Treasuries and use the money to pay off their debts. After that, they would use the remaining cash to lend out or buy corporate bonds to help the greater economy. This was in addition to getting the benefit of low rates on their loans from the Fed’s discount window.
But only half of that plan happened. The banks did sell the Fed their government bonds to raise more capital. But they did not lend the money back out. (This tactic would be repeated after the 2008 crisis.) As The Nation put it, “You can lead a horse to water but you can not make him drink, and you can offer the banks limitless Federal Reserve credit, but you cannot make them lend.”34
Discount rates were eventually lowered to 2.5 percent in 1934, 2 percent in 1935, and 1.5 percent in September 1937. But this lowering of rates didn’t inspire an outpouring of lending either. The largest banks sat on their money.
Mellon’s Tax Problems
While presiding over a collapsing economy, President Hoover was faced with another political conundrum that eroded confidence in his leadership abilities. Not only was his power to stop the Depression diminishing, but his Treasury secretary was under attack in Congress. The Democrats were gearing up to return to power; the economy was a mess; and Mellon, who represented the excesses of the wealthy, was an easy target.
On January 6, 1932, Texas Democratic representative Wright Patman told the Speaker of the House that he wanted to impeach Mellon on the charge of “high crimes and misdemeanors.” His claims were based on an old 1789 statute that forbade a Treasury Department head from engaging in trade of commerce while holding that position. Patman noted that Mellon owned voting stock in three hundred corporations with combined assets of $3 billion.35 To Patman, this was clearly an engagement in commerce and a violation of US law.
Since becoming secretary, Mellon had remained “owner in whole or part of many sea vessels competing with other sea vessels in commerce, and was thus personally interested in the importation of goods, wares, and merchandise in large amounts,” Patman alleged.36 Sea vessels, he submitted, were explicitly forbidden in those laws.
In addition, Patman pointed out that Mellon received tax refunds from his ownership in various bank and trust companies, including his Pittsburgh-based Mellon National Bank. He had also been profiting personally from decisions made in his public position, such as appropriation for multimillion-dollar construction projects utilizing aluminum while Mellon was principal owner of the Aluminum Company of America. In Patman’s eyes, these types of conflicts were highly unethical and borderline illegal under the statute.
Patman went on to present evidence that Mellon had spent $7 million in 1930 on artwork from the Hermitage Museum in Leningrad. Not only did Mellon deny purchasing those paintings; on his 1931 tax return he deducted the purchase price as a charitable donation.37
With those commerce and tax evasion charges in the hands of a Senate subcommittee, Hoover accepted Mellon’s resignation from his Treasury post on February 12, 1932. President Hoover appointed him ambassador to Great Britain instead.38 Ogden Mills, undersecretary of the Treasury, took over Mellon’s post for the rest of the Hoover administration.
Mellon’s tax problems didn’t end there. On March 19, 1934, Attorney General Homer Cummings launched a federal income tax evasion suit against him, Thomas S. Lamont (Thomas Lamont’s son, also an executive at Morgan), and several others.
In response, Mellon commented, “For many months now a campaign of character wrecking and abuse has been conducted against me. . . . I know there has been no evasion of taxes on my part.”39 Cummings didn’t get very far. He launched his investigation in Pittsburgh, where Mellon, a generous philanthropist, was popular among the political elite. The grand jury denied the government’s request to prosecute.40 The matter was dropped.
Still, the administration that followed Hoover’s was determined to make an example of Mellon, an old-money titan who represented the perceived excesses of the 1920s. The extent of Mellon’s tax “creativity” would be tried in front of the US Board of Tax Appeals in early 1935. Though Mellon avoided the fraud charges, he was found to be on the hook for some $800,000 in unpaid taxes.41
The First Glass Bill
On February 27, 1932, Hoover signed into law the first banking bill championed by Virginia Democratic senator Carter Glass and Alabama Democratic representative Henry Steagall.42 The primary purpose of the Glass-Steagall Act of 1932 was to protect the country’s depleting gold reserves by permitting government securities to be used to back Federal Reserve notes in excess of the prevailing 40 percent minimum threshold.43 The act reduced the collateral required for Fed member banks to post at its discount window. It was a godsend for the bankers, giving them easier money in a tight credit market.
Thanks to the bill, banks no longer had to set aside gold to use as collateral for Federal R
eserve notes. With the extra money, they could reduce their own debt burdens rather than liquidate investments and loans, or sell them at bargain basement prices, to raise money. Bankers could also place more Treasuries on reserve at the Fed, so in a way the Fed was funding itself. But actually, bankers, the Fed, and the Treasury (which issued the government securities instead of depleting gold) were all benefiting.
By the second week of May 1932 (when the act went into effect), member banks had pledged more than $98 million in new reserves to the Fed, more than half of which came from New York banks. (In 2009, long after gold ceased being necessary as collateral for banks to raise cash at the Fed’s discount window, the same process of buying Treasury bonds to pledge to the Fed as bank collateral came back into play, but to a far more extensive degree than Depression-era bankers could have imagined.)
Franklin Delano Roosevelt and the Man from Goldman
President Hoover was increasingly overwhelmed by the Depression, and the population was increasingly tired of him. Conversely, New York governor Franklin Delano Roosevelt saw the situation as a second opportunity for him to become president (he had missed the first opening when he ran unsuccessfully as James Cox’s vice presidential running mate in 1920).
Roosevelt won the 1932 election by a margin of seven million votes, coincidentally the same number by which Harding had beaten Cox twelve years earlier. He secured the White House on the strength of his promises to a beleaguered nation and with help from a bevy of rich supporters. One of his main campaign money raisers was Sidney Weinberg, head of a relatively small, boutique investment bank named Goldman Sachs, which had launched the Goldman Sachs Trading Corporation in December 1928. That fund had subsequently invested in a host of shady enterprises, pumping its shares to a high of $326 before the Crash, collapsing to $1 in 1932, and bankrupting many of its investors in the process. At the time, Goldman Sachs didn’t have anywhere near the clout of the elite Wall Street banking firms. It couldn’t touch the Big Six, let alone the Big Three. That would come later, in spades.
Weinberg positioned himself behind FDR as a key member of the Democratic National Campaign Executive Committee.44 This helped divert attention from the negative feelings toward his firm. For FDR, it was the beginning of a close alliance, not just with Weinberg but with all the business leaders Weinberg would make accessible to the president over the coming years.
Weinberg excelled at building relationships with people at all levels of wealth and position. He began his career the year of the bank panic of 1907, working as a janitor’s assistant at Goldman at the tender age of sixteen. By 1930, he had risen to become head of the firm.
FDR, himself a master politician, used the moniker “The Politician” to describe Weinberg.45 In return for Weinberg’s help financing the election, FDR later appointed him to the Business Advisory Council of the Department of Commerce on June 26, 1933. The council was created to enable corporate executives to get their views heard in Washington.46 In that position, Weinberg was able to meet with key business heads and leverage those relationships into business for Goldman. He could simultaneously grow his influence in Washington and on Wall Street: two birds, one stone. The council remained one of the main channels of communication between business and FDR during the New Deal period. The alliance with FDR provided Weinberg with a position of influence in Washington for decades, and also thrust Goldman Sachs into the political-financial power sphere.
One month before his inauguration, FDR survived an assassination attempt in Miami by an unemployed bricklayer named Giuseppe Zangara. The bullets missed FDR thanks to the quick thinking of a nearby woman, who grabbed Zangara and “tried to strangle him.”47 But the assassin’s bullet struck Chicago mayor Anton Cermak, who died from his wounds.
The incident further galvanized the nation in support of FDR. It also brought forth an expression of relief from, among others, Morgan partner Russell Leffingwell, a Democrat who would engage in respectful policy arguments with FDR for the duration of his presidency. Leffingwell’s relationship with FDR snaked back to the Wilson years, when he had served under Wilson’s Treasury secretary, William McAdoo, and his successor, Carter Glass, during World War I, while Roosevelt was assistant secretary of the Navy. It was Leffingwell’s work on postwar policies and war-debt management with Lamont that led to his eventual recruitment into the Morgan Bank in 1923.48
After the assassination attempt Leffingwell wrote to FDR that he was “filled with relief” that his old buddy had survived.49 And how different the trajectory of American history might have been had he not escaped the assassin’s bullet.
The Pecora Hearings, Part I
While FDR waited to begin his first term, a congressional investigation into bankers’ practices initiated by the Republicans was under way that would pave the way for a major reconstruction of the very landscape of US banking and restrain the type of speculation that had led to the Crash and Great Depression.
Though the hearings officially began in April 1932, not much happened during the first eleven months. There was no cooperation from the bankers, no help from Hoover, and criticism from the Democrats, who thought it was all a Republican sideshow anyway.
Just as the Pujo hearings hadn’t gotten much attention until Wilson took office, and even then had little lasting impact, neither did these hearings gain momentum until FDR was set to take office. But in early 1933, with FDR about to take the presidential oath and a Democratic majority coming into the Senate, outgoing Senate Banking and Currency Committee chairman Peter Norbeck, a Republican from South Dakota, hired the brash and ambitious former New York deputy district attorney, Ferdinand Pecora, to lead a set of new investigations.
The Pecora hearings provided America with an awareness of how bankers operated for the first time in twenty years. They also provided solid reasoning for the legislation that would curtail those activities. The public again saw the bankers as predatory, creating the illusion of value through fraudulent information and parceling out shares to their inner circle at lower prices than were available to the public. The hearings shed light on the financial manipulations that led to the Depression. As they uncovered these unsavory practices, the hearings provided Roosevelt with the political capital to enact some of the most sweeping financial reforms in the history of the country. What the public did not know was that he was collaborating with the bankers who were closest to him in the process.
As Pecora called financiers before Congress, he ripped the lid off the unethical and fraudulent activities of the Big Three. Two of the financiers would resign as a result, but their banks would thrive under new leadership more aligned with FDR and his policies, which would also benefit those incoming leaders.
In February 1933 Charles Mitchell was the first to undergo examination for his role in the multimillion-dollar losses that took place during the Crash. He strode into the hearings indignant, a man with no remorse and nothing to hide. But after a grilling from Pecora that covered everything from shady Cuban sugar deals to shaming customers into keeping plummeting stocks, he left with a pending indictment. The indictment was not for stuffing bum Latin American bonds down investors’ throats or financially strangling small investors, but for tax evasion. Mitchell had sold National City stock to members of his family at a loss in order to avoid paying income tax.
Humiliated before Congress; the press, which had once adored him for his vision; and the public, Mitchell resigned as chairman of National City Bank on February 26, 1933. James Perkins, a Harvard alum and friend of FDR, replaced the disgraced banker. Perkins heralded a new era for National City Bank, in which a more prudent, socially minded banker aligned strongly with a progressive and politically aggressive president.
FDR Takes Office
On March 4, 1933, a cold, bleak, and cloudy Saturday, Hoover rode with Roosevelt to the Capitol. In his final moments as president, he said wearily to FDR, “We are at the end of our strength, there’s nothing more we can do.”50
For FDR, the challenge
was just beginning. During his inaugural address, he famously pronounced, “The only thing we have to fear is fear itself.” There were fourteen million people out of work; nine million had lost their savings. Fear didn’t begin to describe the hopelessness. Yet FDR spoke with the confidence of a man who would figure it out. To the millions of unemployed Americans he vowed, “Our greatest primary task is to put people to work.” And speaking to the growing antibanker sentiment, he promised, “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.”
Toward the end of his speech Roosevelt vowed to install “two safeguards against a return of the evils of the old order.” The first would be “a strict supervision of all banking and credits and investments” in order to end speculation with other people’s money. The second would be “an adequate but sound currency.” FDR was no isolationist; like the bankers, he realized that a strong dollar would promote American power in the world and help fix problems at home.
It had been a rough few years. In 1930, 1,350 banks had failed, followed by 2,293 in 1931 and 1,453 in 1932. The smaller banks fared the worst. Even the great Morgan Bank had seen its assets decline from $118.7 million in 1929 to $53.2 million by 1933, though in general the big New York banks did much better than others. Things got worse as 1933 opened, with 273 banks closing in January alone, bringing about another rush of citizens extracting whatever deposits they had left, fearing the worst. On February 14, the state of Michigan declared a bank holiday to stop the drainage; another twenty-one states had followed suit by March. By the time FDR took office, the situation had reached its lowest point.
