America's Great Depression (53 page)

goods which precipitated the crisis.”36

35Speaking at the same conference, Professor John H. Williams admitted that, for the 1920s: “It can be argued that but for credit expansion prices would have fallen, and that they should have done so. It was on such grounds that the Austrian economists predicted the depression.” John H. Williams, “Monetary Stabilization and the Gold Standard,” in ibid.
,
p
.
149. Williams did not sign the general statement either.

36Another expression of sound money sentiment, though hardly as penetrat-ing as Haberler’s, came later in the year, in September. A group of economists issued a statement, attacking inflation or any abandonment of the gold standard, calling for a balanced budget through lower taxes and expenditures rather than through higher taxes, attacking government propping up of unsound corporate positions which should liquidate quickly, and attacking the Hoover experiments in farm price supports. They pointed out that inflation’s benefits are only illusory and that it simply and disruptively benefits one group at the expense of another, and therefore could not help cure the depression. They also urged tariff reduction, and cutting the salaries of government employees, whose pay had unfortunately remained the same while the income of taxpayers had declined. Deviating from soundness, however, were their proposals for a Federal system of employment exchanges, hints of favoring unemployment insurance, and acceptance of a continuing RFC, relief programs, and temporary expedients to check deflation.

Among the signers were financial economists W.W. Cumberland, Lionel D. Edie,
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MR. HOOVER’S WAR ON THE STOCK MARKET

During 1932, President Hoover greatly stepped up his one-man war on the stock market, particularly on shortsellers, whom he naïvely and absurdly persisted in blaming for the fall in stock prices. Hoover forgot that bulls and bears always exist, and that for every bear bet there must be an offsetting bull, and also forgot that speculation smooths fluctuations and facilitates movement toward equilibrium. On February 16, Hoover called in the leaders of the New York Stock Exchange and threatened governmental coercion unless it took firm action against the “bears,” the shortsellers. The Exchange tried to comply, but not aggressively enough for Hoover, who declared himself unsatisfied.

Having warned the Exchange of a Congressional investigation, Hoover induced the Senate to investigate the Stock Exchange, even though he admitted that the Federal Government had no constitutional jurisdiction over a purely New York institution. The President used continual pressure to launch the investigation of what he termed “sinister” “systematic bear raids,” “vicious pools . . .

pounding down” security prices, “deliberately making a profit from the losses of other people.” Beside such demagogic rhetoric, constitutional limitations seemed pale indeed. Secretary of Commerce Lamont protested against the investigation, as did many New York bankers, but Hoover was not to be dissuaded. In answering the New York bankers, Hoover used some unknown crystal ball to assert that present prices of securities did not represent “true values.” The stock market viciously persisted in judging stocks according to their earnings, a useful criterion that Hoover seemed to find vaguely traitorous:

the pounding of prices to a basis of earnings by obvious manipulation of the market and propaganda that values Leland Rex Robinson, Alexander Sachs, Rufus S. Tucker, and Robert B. Warren, and such academic economists as Theodore E. Gregory of the London School of Economics, Edwin W. Kemmerer of Princeton, Dean Roswell C. McCrea of Columbia School of Business, and Dean A. Wellington Taylor of NYU School of Business Administration. “Prosperity Essentials,”
Barrons
(September 26, 1932).

The Hoover New Deal of 1932

317

should be based on earnings at the bottom of a depression is an injury to the country and to the investing public.

Instead, the public should be “willing to invest on the basis of the future of the United States.”

Hoover’s persistent calumniation of the “rottenness” of the stock market finally bore fruit in the Senate investigation which led to the resignation of Albert Wiggin of the Chase National Bank, and blackmailed the stock-exchange generally—with clearcut, negative effects on business confidence. The stock exchange was bullied into restricting short-selling, and Hoover went on to propose further controls of the stock market, in anticipation of the later Securities and Exchange Commission (SEC); including compulsory stock prospectuses, increased liability of promoters, and Congressional rules for security exchanges. It is no wonder that Hoover later had a decidedly benign attitude toward the New Deal’s SEC.

THE HOME LOAN BANK SYSTEM

President Hoover, we remember, had wanted to establish a grandiose mortgage discount bank system to include all financial institutions, but the rejection of the scheme by insurance companies forced him to limit compulsory coverage to the building-and-loan associations. The Federal Home Loan Bank Act was passed in July, 1932, establishing 12 district banks ruled by a Federal Home Loan Bank Board in a manner similar to the Federal Reserve System. $125 million capital was subscribed by the Treasury, and this was subsequently shifted to the RFC. Hoover complained that Congress hamstrung his program by limiting discounted mortgages to 50 percent of value, whereas Hoover had wanted mortgages to be discounted up to 80 percent of value. In August, Hoover set up national business and industrial committees to aid small business and to spur use of the new system. Addressing a conference of these committees on August 26, the President proclaimed the necessity of coordinating individual action with governmental activity to aid recovery, and “to give you the opportunity to organize for action.”

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America’s Great Depression

The new Home Loan Bank System took a while to get started, opening formally on October 15, and not lending at all until December. At the beginning of 1933, total loans were only $838

thousand outstanding, but by March all the district banks were operating, and the total reached almost $94 million by the end of the year.37

THE BANKRUPTCY LAW

Another part of the Hoover New Deal message of 1932 that finally bore fruit was amendment of the Federal bankruptcy law to weaken the property rights of creditors. If there is to be a bankruptcy law at all, with the debtor summarily freed from much of his self-incurred obligation (which in itself is highly dubious, unless creditor and debtor had contracted for such forgiveness before-hand), then certainly minimum justice to the creditor would permit him to take over the debtor’s assets. But President Hoover thought even this excessive, and in his annual messages of 1932

and 1933 urged amendments weakening the rights of the creditor.

These important innovations were debated in Congress, and only approved for
individuals
on March 1, 1933, and signed by Hoover in one of his last acts as President. Congress did not approve similar changes for corporations until the advent of the Roosevelt New Deal.

The amendments now permitted a majority of creditors, in amount and in number, to accept deals preferred by the insolvent debtor for extending the time for payment without parting with

“his” assets. As a result, a minority of creditors who would want instant redemption of their own rightful property were now robbed of their proper claims. If there must be majority-rule voting among creditors at all (and this seems odd since the individual creditors had no say originally on how much credit was to be borrowed or from whom), then surely the only proper course is to go immediately into bankruptcy, with each creditor quickly obtaining his 37See J.E. McDonough, “The Federal Home Loan Bank System,”
American
Economic Review
(December, 1934): 668–85.

The Hoover New Deal of 1932

319

proper individual share of the debtor’s assets. Otherwise, the minority creditor has been despoiled, and now owns virtually nothing.

Debtor sentiment was typified by the Cleveland Trust Company’s
Business Bulletin
, which called for a bill to “prevent dissenting members from successfully opposing” “orderly reorganization” of corporations. President Hoover’s 1933 message called for the measure as “a matter of the most vital importance.” It was necessary, apparently, to crush “the obstruction of minority creditors who oppose such settlements in the hope that fear of ruinous liquidation will induce the immediate settlement of their claims”—

apparently a vaguely traitorous position to hold.38The bankruptcy changes were opposed vigorously by the nation’s bankruptcy lawyers, who particularly attacked the creation of a large bureaucracy of bankruptcy administrators and examiners in the Department of Justice, as well as the unwarranted governmental interference in the relations of debtors and creditors.39

THE FIGHT AGAINST IMMIGRATION

Undaunted by his failure of the year before, Hoover again pressed for legal suspension of immigration in the 1932 session, and the 90 percent reduction bill was introduced again. This time the reduction was to be permanent, not just temporary; the chief argument was economic. The A.F. of L., the American Legion, and various patriotic societies supported the bill, but Representative Dickstein (D., N.Y.) managed to bottle up the bill in the House Committee. On the other hand, bills by Dickstein to admit more relatives than the administration was allowing, underwent attack by the State Department, and no action was taken in Congress, one Dickstein bill passing the House but failing in the Senate.

38The 1933 amendments similarly weakened the property rights of railroad creditors. On the bankruptcy changes, see Charles C. Rohlfing, Edward W.

Carter, Bradford W. West, and John G. Hervey,
Business and Government
(Chicago: Foundation Press, 1934), pp. 402–30.

39On the opposition, see Warren,
Herbert Hoover and the Great Depression,
p. 69.

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Thus, Hoover failed to get suspension of immigration into law, but he accomplished practically the same end by administrative fiat, and, in his fall campaign for reelection, he pointed with pride to his achievement, and prepared to continue his anti-immigration policy until the depression was over.40

40Robert A. Divine,
American Immigration Policy, 1924–1952
(New Haven, Conn.: Yale University Press, 1957), pp. 84–89.

12

The Close of the Hoover Term

The fact that Hoover sought reelection in the midst of the deepest and worst depression in American history, and in the face of unprecedented unemployment did not lower his satisfaction as he looked back upon his record. After all, as he said in his acceptance speech for the Presidential renomination:

[W]e might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.

No one could accuse him of being slack in inaugurating the vast interventionist program:

No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living have been reduced before wages have suffered.

At St. Paul, at the end of his campaign, Hoover summarized the measures he had taken to combat the depression: higher tariffs, which had protected agriculture and prevented much unemployment, expansion of credit by the Federal Reserve, which Hoover somehow identified with “protection of the gold standard”; the Home Loan Bank system, providing long-term capital to building-and-loan
321

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associations and savings banks, and enabling them to expand credit and suspend foreclosures; agricultural credit banks which loaned to farmers; Reconstruction Finance Corporation (RFC) loans to banks, states, agriculture, and public works; spreading of work to prevent unemployment; the extension of construction and public works; strengthening Federal Land Banks; and, especially, inducing employers to maintain wage rates. Wage rates “were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.” But was there any causal link between this fact and the highest unemployment rate in American history? This question Hoover ignored.

Hoover had, indeed, “placed humanity before money, through the sacrifice of profits and dividends before wages,” but people found it difficult to subsist or prosper on “humanity.” Hoover noted that he had made work for the unemployed, prevented foreclosures, saved banks, and “fought to retard falling prices.” It is true that “for the first time” Hoover had prevented an “immediate attack upon wages as a basis of maintaining profits,” but the result of wiping out profits and maintaining artificial wage rates was chronic, unprecedented depression. On the RFC, Hoover proclaimed, as he did for the rest of his program, “Nothing has ever been devised in our history which has done more for those whom Mr. Coolidge has aptly called the ‘common run of men and women.’” Yet, after three years of this benevolent care, the common man was worse off than ever.

Hoover staunchly upheld a protective tariff during his campaign, and declared that his administration had successfully kept American farm prices above world prices, aided by tariffs on agricultural products. He did not seem to see that this price-raising reduced foreign demand for American farm products. He hailed work-sharing without seeing that it perpetuated unemployment, and spoke proudly of the artificial expansion by business of construction “beyond present needs” at his request in 1929–30, without seeing the resulting malinvestment and business losses.

While claiming to defend the gold standard, Hoover greatly shook public confidence in the dollar and helped foster the ensuing
The Close of the Hoover Term