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monetary crisis by revealing in his opening campaign speech that the government had almost decided to go off the gold standard in the crisis of November, 1931—an assertion heatedly denied by conservative Democratic Senator Carter Glass.

The spirit of the Hoover policy was perhaps best summed up in a public statement made in May, before the campaign began, when he sounded a note that was to become all too familiar to Americans in later years—the military metaphor:

The battle to set our economic machine in motion in this emergency takes new forms and requires new tactics from time to time. We used such emergency powers to win the war; we can use them to fight the depression.

Yet, if New Deal socialism was the logic of Hoover’s policy, he cautiously extended the logic only so far. He warned at St. Paul of the strange and radical ideas prevalent in the Democratic Party: the schemes for currency tinkering, the pension bill, the commodity dollar, the pork-barrel bill, the plans for veterans’ bonuses and over $2 billion of greenback issue, make-work schemes, and an agitation for a vast $9 billion-a-year public works program. It was also to Hoover’s credit that he resisted the pressure of Henry Harriman, who urged Hoover to adopt the Swope Plan for economic fascism during his campaign, a plan which was soon to bear fruit in the National Recovery Administration (NRA).

THE ATTACK ON PROPERTY RIGHTS:

THE FINAL CURRENCY FAILURE

As in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity.

We have noted the Federal drive to weaken the bankruptcy laws.

States also joined in the attack on creditors. Many states adopted compulsory debt moratoria in early 1933, and sales at auction for debt judgments were halted by Wisconsin, Iowa, Minnesota, Nebraska, and South Dakota. Governor Clyde Herring of Iowa asked insurance and mortgage companies to stop foreclosing mortgages. Life insurance companies protested that they were being very
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lenient, yet in many areas the courts would not enforce foreclosures for insurance companies, enabling many borrowers arrogantly to refuse to pay. Minnesota forbade foreclosures on farms or homes for several years.1

Most important of the attacks on creditors’ property occurred during the currency crisis that marked the end of the Hoover term.

After the election, as the new Presidential term approached, people grew more and more apprehensive, and properly so, of the monetary policies of the incoming president. Dark rumors circulated about the radicalism of Roosevelt’s advisers, and of their willingness to go off the gold standard. Consequently, not only did gold “hoarding” by foreigners develop momentum, but even gold hoarding by domestic citizens. For the first time in the depression, American citizens were beginning to lose confidence in the dollar itself. The loss of confidence reached its apogee in February, 1933, the month before the Roosevelt inaugural. In that one month, the monetary gold stock fell by $173 million, and money in circulation increased by the phenomenal amount of $900 million, the reflection of domestic loss of confidence. Money in circulation totaled $5.4 billion at the end of January, and $6.3 billion by the end of February. $700 million of this increase was in Federal Reserve notes, and $140 million in gold coin and gold certificates.

The Federal Reserve did its best to combat this deflationary pull on bank reserves, but its inflationary measures only served to diminish confidence in the dollar still further. Thus, in the month of February alone, Uncontrolled Reserves fell by $1,089 million.

The FRS greatly inflated its Controlled Reserves: bills discounted more than doubled to increase by $308 million, bills bought multiplied tenfold to increase by $305 million, $103 million of U.S.

governments were purchased. All in all, controlled reserves increased by $785 million during this month; net reserves fell by $305 million.

The impact of this fall on the money supply was very strong.

Total currency and deposits fell from $45.4 billion at the end of 1Theodore Saloutos and John D. Hicks,
Agricultural Discontent in the Middle
West, 1900–1939
(Madison: University of Wisconsin Press, 1951), p. 448.

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325

1932 to $41.7 billion at mid-1933. Total money supply fell from $64.72 to $61.61 billion over 1933, and all or more of this fall took place in the first half of the year.2 A more sensitive measure of change, net demand deposits and time deposits at weekly reporting member banks in 101 cities, totaled $16.8 billion on February 22, and fell to $14.1 billion by March 8. Bank failures skyrocketed during this period. The number of commercial bank failures increased from 1,453 in 1932 to 4,000 in 1933 (most of which took place in the first quarter), with deposits of failed banks increasing from $706 million to $3.6 billion in the same period.3 Thus, despite the gigantic efforts of the Fed, during early 1933, to inflate the money supply, the people took matters into their own hands, and insisted upon a rigorous deflation (gauged by the increase of money in circulation)—and a rigorous testing of the country’s banking system in which they had placed their trust.

The reaction to this growing insistence of the people on claiming their rightful, legally-owned property, was a series of vigorous attacks on property right by state after state. One by one, states imposed “bank holidays” by fiat, thus permitting the banks to stay in business while refusing to pay virtually all of the just claims of their depositors (a pattern that had unfortunately become almost traditional in America since the Panic of 1819). Nevada had begun the parade as early as October, 1932, but only 9 out of 20 banks 2Total monetary contraction from June, 1929 to the end of 1933 was 16 percent, or 3.6 percent per annum.

3An apt commentary on whether time deposits are money is this statement by two St. Louis bankers:

Actually all of us were treating our savings and time deposits as demand deposits and we still do . . . we still pay our savings depositors on demand.

It is significant that the heavy runs on banks were engineered by savings and time depositors. When the trouble was at its height in January, 1933, practically every bank in St. Louis faced heavy withdrawals from . . . savings depositors and had a minimum of diffculty with the checking depositors. This was true throughout most of the country.

F.R. von Windegger and W.L. Gregory, in Irving Fisher, ed.,
100% Money
(New York: Adelphi Press, 1935), pp. 150–51.

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took advantage of the state holiday, the others remaining open.4

Louisiana declared a brief holiday for the hard-pressed New Orleans banks in early February, but the bank holiday movement began in earnest with the proclamation of an eight-day holiday on February 14, 1933, by Governor William Comstock of Michigan.5

This action precipitated the bank runs and deflation of the latter part of February. For if one state could, with impunity, destroy property right in this manner, then others could—and did—and depositors began an intense scramble to take their money out of the banks.

It is at times like
these
that the speciousness of apologists for our banking system hailing fractional reserves as being as sound as the building of bridges—on estimate that only some inhabitants of the area will cross it at any one time—becomes patently evident. For no one has a legal property ownership in the bridge, as they do in their bank deposits. At times like these, also, it becomes clear that bank deposits are not really money—even on a paper, let alone a gold standard—but mere money-
substitutes
, which serve as money ordinarily, but reveal their true identity when nationwide confidence begins to collapse.

On the request of bankers for government to save them from the consequences of their own mistakes, state after state, beginning 4See Jesse H. Jones and Edward Angly,
Fifty Billion Dollars
(New York: Macmillan, 1951), pp. 17ff.

5Detroit had especially overexpanded during the boom, and frantic efforts by Hoover and his administration, along with Detroit industrialists and New York banks, to save the leading Detroit banks, had foundered on the devotion to private enterprise and true private responsibility of Henry Ford and of Michigan’s Senator Couzens, both of whom refused to agree to subsidize unsound banking.

See ibid.
,
pp. 58–65. Also see Lawrence E. Clark,
Central Banking Under the
Federal Reserve System
(New York: Macmillan, 1935), pp. 226ff.; Benjamin M.

Anderson,
Economics and the Public Welfare
(New York: D. Van Nostrand, 1949), pp. 285ff. Dr. Anderson, supposedly an advocate of
laissez-faire,
sound money, and property right, went so far in the other direction as to chide the states for not going further in declaring bank holidays. He declared that bank moratoria should have applied to 100 percent, not just 95 percent, of bank deposits, and he also attacked the Clearing House for failing to issue large quantities of paper money during the crisis.

The Close of the Hoover Term

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with Indiana, declared moratoria and bank holidays. Governor Ritchie of Maryland declared a three-day bank holiday on February 24. On February 27, the member banks of the Cleveland Clearing House Association decided arbitrarily to limit withdrawals from all their branches, and no state officials acted to stop this blatant infringement of property right. They were promptly followed by Akron and Indianapolis banks. On February 27, the Ohio, Pennsylvania, and Delaware legislatures authorized the state banking officials to restrict the right of withdrawal of deposits.

The states adopted this procedure quickly and virtually without debate, the laws being rammed through on the old political excuse that the taxpaying and voting public must be kept in ignorance of the situation in order to prevent panic.6 In such a manner do the

“people’s representatives” characteristically treat their supposed principals.

One of the ironic aspects of this situation was the fact that many national banks, which had worked hard to keep themselves in an at least relatively sound position, did not want to avail themselves of the special privilege of bank holiday, and had to be coerced into doing so. As Willis puts it:

[i]n many cases, the national banks . . . had no wish to join in the holiday provisions of the localities in which they were situated. They had, in such cases, kept themselves in position to meet all claims to which they might be subject, and they desired naturally to demonstrate to depositors and customers their ability to meet and overcome the obstacles of the time, both as a service to such customers and as an evidence of their own trustworthi-ness. There followed what was deemed . . . the necessity or desirability of coercing . . . the sound banks of the community into acceptation of the standard thought 6See H. Parker Willis, “A Crisis in American Banking,” in Willis and John M.

Chapman, eds.,
The Banking Situation
(New York: Columbia University Press, 1934), pp. 9ff. The holiday laws either (a) forbade banks to redeem the funds of depositors, or (b) permitted the banks to choose the proportion of claims that they would pay, or (c) designated the proportion of claims the depositors might redeem.

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essential for the less liquid and less well-managed institutions.7

By March 4, every state in the Union had declared a bank holiday, and the stage was set for President Roosevelt’s dramatic and illegal closing of all the banks. The stage was set, by the way, with the full collaboration of the outgoing administration; in late February, Congress, with the acquiescence of President Hoover, passed a law permitting national banks to cooperate with state bank holidays. And the Comptroller of the Currency obligingly issued a proposed draft of a uniform bank holiday act to aid the various state legislatures in drafting their bills.

President Roosevelt closed down all the banks throughout the nation for an entire week, from March 6 to 13, with many banks remaining closed even longer.8 It was a final stroke of irony that Roosevelt’s only semblance of legal ground for this decree was the Trading with the Enemy Act of World War I! Restrictions against so-called “hoarding” were continued afterward, and much hoarded gold returned to the banks following a Federal Reserve threat to publish a list, for full public scorn, of the leading “gold hoarders.”9

It soon became clear that, with the advent of the Roosevelt administration, the American gold standard was doomed.

There have been a great many recriminations, particularly from the Hoover camp, about Roosevelt’s “failure to cooperate,” when he was President-elect, in solving the banking crisis. Certainly it is true that fear of Roosevelt’s impending monetary radicalism, and Senator Glass’s investigations forcing Charles E. Mitchell to resign as President of the National City Bank, contributed to the banking 7Ibid., p. 11. In New York, the pressure for bank closing came from the upstate, rather than from the Wall Street, banks.

8See ibid
.
Michigan’s Governor Comstock, who had begun the furor, naturally extended his holiday beyond the original eight-day period.

9Lest it be thought that Hoover would never have contemplated going this far, Jesse Jones reports that Hoover, during the banking crisis, was seriously contemplating invoking a forgotten wartime law making hoarding a criminal offense!

Ibid.
,
p. 18.

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panic. But the important fact is that the banking system had arrived at a critical impasse. Usually, in the placid course of events, radical (in the sense of far-reaching) economic reforms, whether needed or not, meet the resistance and inertia of those who drift with the daily tide. But here, in the crisis of 1933, the banks could no longer continue as they were. Something had to be done.