HISTORIANS INESCAPABLY BOTH WRITE with the benefit of hindsight and shape the stories they tell. So history always appears much tidier and more dramatic to the reader than the events depicted seemed to those who lived through them day by day. Human beings have to live with a future that is always unknown while enveloped in the fog of mere existence that can be as hard to penetrate as the far better recognized fog of war. Thus the three-and-a-half-year economic slide from the blue-sky prosperity of late summer 1929 to the black pit of depression in the first, winter months of 1933 seems smooth, perhaps even inevitable to most people today, only a few of whom have personal, adult memories of the time.
As a consequence, many view the story of the Great Depression as something like the story of the Titanic, with the stock market crash serving as the iceberg, and only a change of captains in the nick of time providing a different ending. In reality, the market crash was an effect of the forces moving the American and world economies into depression, not a cause. And Herbert Hoover did all he could—and far more than had any previous president faced with economic adversity—both to reverse the course the economy took in those years and to ameliorate the suffering it caused. It was only when the depression had destroyed the economic and historical limitations that had bound him that a new president could move to new, previously politically impossible remedies.
THE STOCK MARKET RALLIED SHARPLY on Wednesday, October 30, and the exchange announced that the market would open at noon the following day and then stay closed until Monday to give back offices time to cope with the mountains of paperwork that had piled up in the panic. The market also rose in the abbreviated Thursday session, and many thought the worst was over. They were wrong. The market fell sharply on Monday, November 5, and continued falling for two more weeks, by which time the New York Times average had given back all its gains since the summer of 1927.
All markets, however, bear and bull alike, finally run out of steam, and by December stocks were moving upward, although on much reduced volume. By year’s end, while many of the high-flying stocks had been savaged, some market sectors—such as airplane manufacturers, department stores, and steel companies—actually showed gains for the year. It was widely thought the crash had been only a severe correction for a much overbought market. In January 1930 the New York Times thought the biggest news story of 1929 had been Admiral Byrd’s flight over the South Pole.
Although the stock market had been a national obsession in 1929, its crash had not directly affected that many families. The stock exchange had reported that twenty million Americans owned stock in 1928, but in truth the number was not one-tenth that, and less than 2.5 percent of the population had brokerage accounts. While many of those who had been speculating and buying on thin margins had been wiped out, many others had resisted panic and still owned their shares.
One reason most thought the crisis had passed was that the banking system had not been showing signs of unusual stress. To be sure, 659 banks had failed in 1929. But that was slightly below the annual average for the decade, and no major banks had collapsed as a result of the crash. One reason was that the New York Federal Reserve bank and the New York brokers had both moved swiftly. The brokers announced that they would continue to carry accounts that were below margin requirements, thus avoiding additional at-the-market selling that would have further depressed prices.
The New York Federal Reserve helped by lowering its rediscount rate to 3.5 percent by March 1930, helping to lower interest rates generally, and by massive buying of federal securities, greatly improving the banks’ liquidity. It had been buying no more than $25 million a week, but bought $160 million shortly after the crash and more in weeks to come. George Harrison, who had succeeded Benjamin Strong as governor of the New York Federal Reserve, had followed his predecessor’s advice on dealing with such a situation when Strong had noted that “we have the power to deal with such an emergency instantly by flooding the Street with money.”
But George Harrison did not have anything like the influence Strong had had with the other Federal Reserve banks, and he was criticized by the chairman of the Federal Reserve Board in Washington, among others, for overstepping his bounds. The Federal Reserve as a whole did not move decisively to add liquidity to the banking system nationally, a serious mistake.
The winter and early spring of 1930 saw the stock market rebound, regaining about 45 percent of what had been lost in the previous fall’s debacle. Hoover had called a conference of businessmen in November 1929 and had urged them to invest in new construction, which many promised to do. And he telegraphed state governors—state governments at this time funded about 80 percent of government construction projects—to do the same. In the spring he proposed that, to stimulate the economy further, federal construction spending be increased by $140 million. That was no small sum in a federal budget that amounted to only $3.3 billion, or about 3 percent of GNP. Twenty-five percent of the federal budget went to debt service, and most of the rest to fund the 139,000-man army and the 95,000-man navy. This was, in fact, about as much as the federal government could have spent in that fiscal year anyway, as construction projects necessarily have long lead times before they can hire workers in large numbers.
And by spring 1930 it didn’t look as if more would be needed. In May that year President Hoover was able to tell a religious group who had called on him to urge more public works that “You have come sixty days too late. The depression is over.” Unfortunately, the president then made a fateful mistake to add to the earlier one of the Federal Reserve. He signed the Smoot-Hawley Tariff Act.
As a presidential candidate in 1928, Hoover had promised the nation’s struggling farmers that he would call a special session of Congress to deal with the agricultural depression, which he did in the summer of 1929. Among his proposals was an increase in agricultural tariffs to protect the American market for American farmers. After the slowing of the economy in 1929, however, and the crash, Hoover’s proposal was hijacked by special interests as nearly every industry in the country (tombstone makers, for instance) paraded before Congress, demanding protection from “unfair” foreign competition. Congressmen and senators, anxious to bring home the bacon for local industries, obliged them in case after case. The result was by far the highest tariff in American history.
This was economic folly. Tariffs are taxes, and taxes, inescapably, are always a drag on the economy. But, far worse, high tariffs breed retaliatory tariffs in foreign countries. A country cannot wall off its market from other countries and expect those countries to keep their own markets open. Professional economists knew this, of course, and a thousand of them signed a petition to President Hoover asking him to veto the tariff bill that had emerged from Congress. Thomas Lamont, second only to J. P. Morgan, Jr., at the Morgan Bank, wrote, “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff. That Act intensified nationalism all over the world.”
The economists’ arguments proved all too true, and world trade began to collapse. Great Britain, the great champion of free trade since the 1840s, and the world’s largest trading nation, established the “imperial preference system”—in other words, a tariff wall—to keep British trade within the British Empire. Other nations adopted similar restrictions. In 1929 total global trade had amounted to $36 billion. In 1932 it was about $12 billion. American exports had been $5.241 billion in 1929. Three years later they were a mere $1.161 billion, a 78 percent drop and below the export level of 1896 if inflation is factored in.
As soon as the Smoot-Hawley tariff had been signed into law, the stock market began to give up its gains of the spring. By the fall, banks were beginning to fail in growing numbers. The rate of failure had been up in 1930 over 1929, but not alarmingly so. But then in the last two months of the year, 600 banks failed, making a yearly total of 1,352, more than twice the number of 1929. To be sure, most were the small, unitary banks that dotted the rural areas of the country and served the poor urban neighborhoods populated by immigrants.
The Bank of United States was another matter, however, being a large, many-branched bank, headquartered in the country’s financial capital, New York City. It had deposits of $268 million, held by 450,000 depositors, most of them small merchants and working-class Jews employed in the city’s vast garment trade. When it began to show signs of stress, New York State banking authorities and the New York Federal Reserve tried hard to rescue it. They wanted to merge it with three other banks, but needed a $30 million loan from the great Wall Street banking houses to make the deal work. Wall Street refused to help. “I warned them,” Joseph A. Broderick, New York State’s chief banking regulator, wrote, that “they were making the most colossal mistake in the banking history of New York.”
The Bank of United States closed its doors on December 11, 1930, and was the biggest bank failure in the history of the country up to that time. Its collapse sent a shiver of fear throughout the American body politic and through Europe as well, where many thought from its name that it had an official connection with the federal government. If a bank this big could fail, many thought, what bank couldn’t?
And it had been unnecessary. The Bank of United States had not been a well-run bank (two of its principals would end up going to jail), and there have always been charges of anti-Semitism leveled against the refusal of the white-shoe Wall Street banks to help. Regardless, if the Smoot-Hawley tariff had been Congress’s biggest contribution to causing the Great Depression, Wall Street’s refusal to help the Bank of United States was the American financial establishment’s contribution.
Still, at the end of 1930, the country, while certainly experiencing hard times, was only in an ordinary depression, not even one as severe as that experienced in 1920–21. Then unemployment had averaged 11.9 percent. In 1930 unemployment did not reach 9 percent. It was in 1931 that the depression would become the Great Depression.
Again, as in 1930, in the early months of the new year it began to look as if a bottom had been reached and, in the phrase of the day (an increasingly ironic one, to be sure) prosperity was “just around the corner.”
Then events in Europe intervened. On May 11, 1931, Credit Ansalt, Austria’s largest bank and one of the most influential in Europe, failed. This was a far greater collapse than the Bank of United States, and a number of banks in Austria and Germany quickly followed it into oblivion. Germany’s economy, already under immense economic stress thanks to the war reparations, began to implode.
Herbert Hoover, at the urging of Thomas Lamont of the Morgan Bank, proposed a one-year suspension of both loan repayments to the United States by the Allied Powers and German reparations to the Allied Powers. It was a very brave act of political leadership. Sophisticated Wall Street bankers like Thomas Lamont could understand what was at stake. The average American saw the suspension of Allied loan repayments simply as a means of transferring more of the cost of the European war to American taxpayers and of safeguarding the interests of Wall Street bankers. More and more, as the 1920s and 1930s progressed, Americans saw Woodrow Wilson’s decision to end American isolation from Europe as a mistake. They wanted nothing to do with Europe or Europe’s problems.
French opposition delayed acceptance of Hoover’s plan (in fact, payments on both the American loans and German reparations would never resume). On July 13, 1931, Danat Bank, Germany’s largest, suspended operations. The German government had no choice but to close the Berlin stock exchange and the city’s banks. The European financial system was in danger of collapse, and the crisis soon spread to London, the system’s heart, and to sterling, the most important currency in the world after the dollar. With the British budget deep in deficit, thanks to the depression, sterling came increasingly under pressure as banks and traders dumped sterling for gold, which flowed alarmingly out of the Bank of England in consequence.
On September 21, despite loans of 25 million pounds from both the New York Federal Reserve and the Bank of France, Britain went off the gold standard, which Britain itself had first established in 1821. Britain’s days as a financial Great Power were over. Because so much of the world’s trade was conducted in sterling and so many currencies both within and without the British Empire were tied to sterling, the effects were widespread, and more and more central banks had no choice but to abandon the gold standard as well.
In the United States, however, the Federal Reserve moved aggressively to defend the dollar and maintain the gold standard as foreign central banks and investors moved to repatriate gold. It was an utterly disastrous decision, perhaps the greatest of all the mistakes made in these years. Maintaining the gold standard required raising interest rates and cutting the money supply, causing an already severe deflation to become much more severe. Banks called in loans to stay liquid, while customers postponed purchases in expectation of lower prices. In the next year and a half more than half a million mortgages would be foreclosed. Unemployment ballooned. And bank depositors, well aware of the sudden rash of bank failures a year earlier, rushed to withdraw their money from banks while the withdrawing was good. In just the first month after Britain abandoned the gold standard, 522 American banks failed.
By the end of 1931 the United States faced economic circumstances such as it had never faced before. Bank failures had totaled 2,293 that year, each a tragedy for hundreds or thousands of families who saw their one bulwark against the consequences of unemployment vanish. And unemployment spread relentlessly through the American economy. GNP fell by a further 20 percent; automobile production, which had been 4.5 million in 1929, fell to 1.9 million in 1931, causing massive layoffs not only in the automobile companies, but at rubber, glass, and steel companies, auto dealerships, and insurance companies as well.
Unemployment by the end of 1931 rose to 15.9 percent, and the country’s roads began to fill up with men in shabby clothes searching in vain for a job, any job. In rural areas it became not uncommon for people to answer a door and find someone asking for work in exchange for a meal or the right to sleep in the barn. In cities breadlines stretched for blocks and ramshackle communities of huts and lean-tos—dubbed Hoovervilles—spread in parks and open spaces as those who had lost their houses and apartments sought shelter. In some ways the whole economic system of the country seemed to be breaking down. Unsaleable crops rotted in the country, while people in the cities picked through garbage cans looking for something to eat in what was supposed to be the richest country on earth.
With tax receipts plummeting by $900 million while expenses rose by $200 million, the federal budget went into deficit by half a billion dollars in fiscal 1931. That does not seem like much in today’s fiscal lexicon, but it represented a deficit equal to almost 13 percent of revenues, the worst peacetime deficit since the dark days of the early 1890s.
At that time, it was the nearly unquestioned conventional wisdom that balancing the budget was the first priority of the federal government after the defense of the Republic. The idea that governments should spend in deficit in times of economic crisis would not be fully explicated until John Maynard Keynes published his seminal work, The General Theory of Employment, Interest, and Money, in 1936.
But while Keynes’s intellectual underpinnings were not yet available, the idea of deficit spending to provide economic stimulation was not unknown. Indeed, Hoover, who was perhaps the most economically sophisticated man ever to be president, had argued for exactly that in a cabinet meeting as early as May 1931. “The President likened [the situation] to war times,” Henry Stimson, secretary of state, wrote in his diary about one cabinet meeting. “He said in war times no one dreamed of balancing a budget. Fortunately we can borrow.”
Unfortunately, Hoover changed his mind in late 1931 and asked Congress for a huge tax increase to balance the budget. The House had gone Democratic in the election of 1930. The balance had been 267 Republicans, 167 Democrats in the first Hoover Congress, but was 220 Democrats, 214 Republicans in the second. The Senate after 1930 was nearly evenly split, with 48 Republicans and 47 Democrats. But both houses passed Hoover’s tax bill with little opposition. The Democrats in Congress were largely from the South and West, and a balanced budget for them was nearly holy writ. Speaker of the House John Nance Garner of Texas, in addition to Hoover’s income tax increases, had wanted to add a national sales tax as well, a tax that would have fallen most onerously on the poor.
Hoover also proposed a far better idea than raising taxes in the teeth of a growing depression, the federal Home Loan Bank Act, which would have created a number of Home Loan banks empowered to lend money on the mortgage portfolios of commercial banks. The Federal Reserve Act of 1913 had forbidden the Federal Reserve to loan money through its discount window on such collateral. The effect of that prohibition was to freeze hundreds of millions of dollars in banking assets that could otherwise have been used to add liquidity to the banking system. Congress, however, dawdled about passing the legislation until July 1932, and—the ghost of Thomas Jefferson still abroad in its halls—raised the collateral requirements Hoover had wanted.
Hoover, although long opposed to direct federal relief to banks, industrial corporations, or individuals, also proposed a radical new means to ameliorate the situation, the Reconstruction Finance Corporation. The “dole” was widely thought by Americans of all political stripes to be a European aberration that would make citizens wards of the state. But Hoover was intellectually flexible enough to realize that desperate times call for desperate measures. The RFC, capitalized at $500 million by Congress and authorized to issue up to $2 billion in tax-exempt bonds, did not provide direct relief for individuals. But it did provide emergency loans to banks, life insurance companies, farm mortgage associations, and railroads that otherwise might have collapsed. The bill was signed into law by Hoover on February 2, 1932.
Because it necessarily saved the stockholders of the companies aided, many, like Fiorello H. La Guardia, called it “a millionaire’s dole.” But it also saved the employees and depositors. And once the barrier to direct federal aid to corporations was broken, could direct federal aid to individuals be far behind? It was not, although it was disguised with a fig leaf. In July 1932 the Relief and Reconstruction Act authorized the RFC to finance public works up to $1.5 billion to generate jobs, and to provide up to $300 million to the states—many of whom were up against constitutional limits on spending and borrowing—so that they could provide direct relief.
Within six months, the RFC had loaned out $1.2 billion, equal to fully a quarter of all federal expenditures that year. And the RFC would prove to be the model for much of the early New Deal. But Hoover would get no credit for it. Instead the first historians of the time would freely use him as a foil against which to set off the glory of his successor. John F. Kennedy once famously remarked that “life is not fair.” He would have been the first to agree that neither is history.
By that time it was far too late to save the political, let alone historical fortune of Herbert Hoover. At the end of May about a thousand men who had served in the First World War came to Washington to demand that a bonus due to be paid them in 1945 be paid immediately. A bill to issue $2.4 billion in fiat money to do so passed the House but was defeated in the Senate. Meanwhile, the “Bonus Expeditionary Force” grew alarmingly in numbers, reaching seventeen thousand by the middle of June, mostly camped on the Anacostia Flats on the outskirts of the District. Some, however, built shacks on government property near the Capitol and occupied several government buildings on Pennsylvania Avenue.
Congress authorized funds to pay for the veterans’ transportation home, and most departed Washington peaceably. But about two thousand refused to go home, and violence erupted when Washington, D.C., police tried to evict them. Two veterans and two policemen were killed. Hoover called on the army, under Chief of Staff Douglas MacArthur, to evict them from government property and limit them to the Anacostia Flats.
On July 28 MacArthur, in full strutting-rooster mode, personally led fully armed and prepared cavalry and infantry, along with six tanks, to clear the government buildings. But then, in flat contradiction of his orders from the president, he also cleared the flats and burned down the shacks that had been erected there, scattering the remnants of the Bonus Army. Hoover should have fired MacArthur on the spot for gross insubordination. Instead he took full responsibility and paid a fearful political price when Americans were profoundly shocked by images of mounted cavalry, sabers unsheathed, chasing the unemployed down the streets of the nation’s capital city.
The president was now routinely depicted in editorials and cartoons as a technocrat who was indifferent to the suffering of the American people, a suffering that could be seen on every streetcorner and country lane. And nothing, it seemed, could stop the descent of the American economy into the bottomless pit of the Great Depression.
The government deficit in 1932, despite Hoover’s tax increases, was $2.7 billion. Revenues had been a mere $1.9 billion. It was the worst peacetime deficit in the nation’s history. Gross national product that year was $58 billion, a mere 56 percent of what it had been three years earlier. Unemployment stood at an entirely unprecedented 23.6 percent. But that did not tell the whole story, for millions more were working part-time or at much reduced wages. The number of hours of labor worked in 1932 was fully 40 percent below the level of 1929. Another 1,453 banks had failed, bringing the depression total to a staggering 5,096. In 1929 Americans had held about $11 in bank deposits for every dollar in currency and coin in circulation. By 1932 the ratio was five to one, because so many banks had failed and so many more were distrusted. The Dow-Jones Industrial Average fell as low as 41.22, down 90 percent from its high of three years earlier and less than a point above where it had stood the first day it had been calculated in 1896.
It is a measure of how desperate the situation had become by the fall of that year that the interest rate of Treasury bills went negative. Treasury bills, which have maturities of less than one year, are sold at a discount and mature at par. But by the fall of 1932, so many people who still had investable assets wanted to invest in what is by definition the safest of all possible investments—the short-term obligations of a sovereign government—that the price rose above par.
THE MAN WHO OPPOSED HOOVER for the presidency that year, Franklin Roosevelt, was his opposite in more ways than politics. Hoover had been born into a family of modest means and had been soon orphaned. Roosevelt had been born rich into a family that lavished affection on their only child. Hoover was shy, sometimes dour, at his best in small groups; Roosevelt was outgoing to a fault, chronically ebullient, and utterly certain of himself. Hoover was both highly intelligent and an intellectual (by no means necessarily the same thing), with an engineer’s logical and tidy mind. Roosevelt seldom read a book as an adult, and was highly intuitive.
But if Roosevelt had only a second-class intellect, as Justice Oliver Wendell Holmes is supposed to have observed, he had a first-class temperament. His charm was both undeniable and irresistible. And his unfeigned optimism was highly infectious.
The election of 1932 was not determined by the issues—the two men actually differed little in what they called for to meet the emergency, and Roosevelt hammered Hoover for having failed to balance the budget. It was determined instead by personality, and Hoover, burdened by four years of ever-deepening economic disaster, didn’t stand a chance. In 1928 he had carried forty states against Al Smith. In 1932 he carried six against Roosevelt. The nation, in its agony, had placed all its fast-dwindling store of hope upon one man, whose greatest asset was the fact that he never once doubted that he was the right man for the job.
In the long interregnum between the election on November 8, and the inauguration on March 4 (the last before the date changed to January 20), the economic situation continued to deteriorate alarmingly. Raymond Moley, one of Roosevelt’s closest advisers, wondered if they might be facing revolution by the time the new administration was sworn in.
But the American people, especially compared with Europeans, were surprisingly unprotesting of the situation in which they found themselves. Socialism—with its promises of equality and security—had long been an important political force in all the major European countries. But even in November 1932, as the American economy seemed to be on the verge of collapse, Norman Thomas, the Socialist candidate, could not get more than 2.2 percent of the vote.
As they lived through the most desperate winter the country had known since the Continental Army had camped at Valley Forge, the American people waited for the end of the Hoover presidency and the accession to the White House of the Hudson River aristocrat they had elected overwhelmingly. Things only got worse while they waited.
The index of industrial production between December and March dropped 12.5 percent, from 64 to 56, an all-time low. Gold continued to move abroad in large amounts, sometimes at the rate of $100 million a week. Farm mortgages were being foreclosed at the rate of twenty thousand a month. On February 14, 1933, the governor of Michigan ordered all his state’s banks closed for eight days to prevent a fast-spreading panic there from destroying what was left of the state banking system.
The next day even the last, best hope of the American people was very nearly dashed. Roosevelt had spent several days cruising in Florida waters on the vast yacht of his Dutchess County neighbor Vincent Astor, and on his return he drove in an open touring car to a Miami park. There he made a short speech from the backseat of the car. When he had finished, Anton Cermak, the mayor of Chicago, came up to talk with him for a few seconds. Shots rang out and Mayor Cermak crumpled over from the bullets that had been meant for the president-elect. Roosevelt, who counted great personal courage and coolness among his attributes, had the mortally wounded mayor put in the seat beside him and sped to a hospital. He himself was unharmed.
The banking panic that had started in Michigan, one of the most important industrial states, meanwhile spread like wildfire throughout the country. Banks were besieged everywhere by frantic depositors shouting for their money. State after state followed Michigan in ordering its banks to close. By March 4 they were entirely closed in thirty-two states and nearly all closed in six others. Governors had sharply limited withdrawals in the ten states where banks continued to function. In Texas no more than $10 a day could be withdrawn. On inauguration day itself, the New York Stock Exchange announced that it would not open that morning and did not state when it would open again.
With most of the nation’s banks and its premier stock exchange closed, the very heart of the American capitalist economy had nearly ceased to beat.