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A HOLIDAY FOR THE BANKS

The Banker and His Image

Before the Depression, banks and bankers held an interesting place in the American imagination. On one hand, bankers had been among the most esteemed figures in the United States, especially during the boom of the 1920s. For many, bankers were synonymous with sobriety, thrift, and hardheaded realism. Banking was the institution that could lead right-thinking young men to wealth and a place among the elite. On the other hand, the populist tradition in America had long viewed banking as a sophisticated form of loan-sharking. To such people, investment was akin to gambling; interest similar to usury. Enough people remained suspicious of banks that hundreds of thousands kept their savings in tins beneath their mattresses or buried in backyards rather than deposited in banks. J. P. Morgan and Company, in New York, represented both images. To partisans it was responsible and powerful; to antagonists it was a secret government, a cabal defrauding the public of its wealth. During the Depression the suspicions of Morgan's antagonists moved to the fore, banking fell into disrepute, and by the time of Roosevelt's inauguration in 1933 the entire financial structure of the United States was in danger of collapse.

Bank Runs

Nothing symbolized the lack of public confidence in banking during the Depression more than the bank runs. Bank runs were spurred by fears that banks would go bankrupt, taking the savings of depositors with them. The mere hint of a bank closing often was enough to send depositors scrambling to withdraw their money, and banks, which did not keep enough cash on hand to cover all of their deposits, often then collapsed. Bank runs also reflected unsound banking practices. During the 1920s many banks had not acted in a responsible and hardheaded fashion. Some had lent money for dubious investments; others extended dangerously large credit to financial speculators. When the stock market crashed, many banks saw their assets evaporate; creditors liquidated what remained; depositors were left with nothing. Because few companies in the 1920s provided pensions for workers, many used the banks as a place to deposit a lifetime's worth of earnings in anticipation of retirement. When the banks went under, many of these people, old and unable to work, lost everything. More than fourteen hundred banks collapsed in 1932, taking with them $725 million in deposits. The public scrutinized the remaining banks; at the first sign of trouble, a run on the banks was on, and the banks usually ended up closing, many permanently.

Panic

By the time of Franklin Roosevelt's inauguration in March 1933, banking in the United States was in serious jeopardy. In Detroit the banks were so badly overextended that Michigan governor William A. Comstock closed all the banks temporarily to give the bankers time to set their affairs in order. The "bank holiday" caught the public by surprise and left everyone with the problem of how to extend the money in their pockets for the duration of the eight-day holiday. They were not alone. In the week that followed, a dozen other states followed Michigan's lead and closed the banks. Rather than reassure people, the bank holidays only increased the panic of the public. Bank runs and closings continued to sweep the country. In the week prior to Roosevelt's inauguration, a quarter of a billion dollars in gold vanished from the nation's vaults. The Department of the Treasury estimated that the nation's banks had a mere $7.37 billion in cash reserves against some $40.5 billion of liabilities in deposits. Treasury experts feared that the nation's banks were coming to a point where they might not survive another business day. Experts urged a nationwide bank holiday and sweeping measures to shore up the banks. President Hoover refused to act, believing that the bank problem was a function of Roosevelt's failure to back his own "sound money" policies. Roosevelt, however, had his own plans.

The Bank Holiday

Roosevelt begged off the inaugural's evening celebrations, meeting with top aides and members of Hoover's Treasury Department throughout the night of Saturday, 4 March, and all the next day. By the dawn of the next business day, Monday, 6 March, Roosevelt had ordered a nationwide bank holiday (violations were punishable by a fine of $10,000 or ten years' imprisonment); soon afterward he embargoed all shipments of gold or silver, called Congress into an emergency session to pass sweeping bank legislation, and ordered leading bankers to Washington to help him deal with the crisis. Rather than provoke public hysteria, as some feared, Roosevelt's actions bolstered public confidence in the banking system. The nation rallied to extend the necessary credit to weather the nine-day holiday. Grocers sold goods on promises, cities paid workers in scrip, movie houses reverted to the barter system. On 9 March Congress passed, virtually unseen, Roosevelt's banking legislation, including a law that made gold hoarding illegal. The next day, reserve banks throughout the United States were filled with people returning their stash of gold. By Saturday night $300 million in gold had been returned, and the Treasury added $750 million in new currency to the nation's vaults. Sunday evening Roosevelt held his first "fireside chat" radio address, designed to bolster the public's confidence in the banks. It worked. When selected banks opened Monday, 13 March, deposits exceeded withdrawals. By the end of the week 75 percent of the banks in the United States were back in business, and the crisis was averted. By the end of the month __BODY__.25 billion in deposits had been made to banks. Two thousand insolvent banks were liquidated or consolidated to more-sound banks. Bank failures fell to less than fifty per year for the remainder of the decade. "Capitalism," New Dealer Raymond Moley later wrote, "was saved in eight days."

Banksters

While the Roosevelt administration was busy resuscitating public confidence in the banks, Congress was punishing bankers for old violations of the public trust. In 1933 and 1934 sensational hearings were held that detailed larceny and fraud on the part of many bankers and other members of the business community, resulting in the introduction of the term bankster to the vocabulary. The Senate Banking and Currency Committee, led by New York jurist Ferdinand Pecora, revealed that the brokerage house of Lee, Higginson, and Company had defrauded the public of $100 million; that National City Bank head Charles E. Mitchell, with a salary of __BODY__.2 million, paid no income tax and had issued $25 million in Peruvian bonds he knew to be worthless; that former secretary of the treasury Andrew Mellon and banker J. P. Morgan had also managed to avoid taxes; that twenty Morgan partners had paid no taxes in 1931 and 1932. The public was introduced to such Wall Street tactics as selling short, pooling agreements, influence peddling, insider trading, and the wash sale, techniques by which traders artificially inflated the worth of their stock or gained financial advantage over others. National City Bank, for example, took bad loans, repackaged them as bonds, and sold them to unwary investors. Although such actions were technically legal, many viewed such bankers as unethical and immoral, and the public reputation of bankers and financial businessmen fell to a new low. "You see, there is a lot of things these old boys have done that are within the law," quipped Will Rogers, "but it's so near the edge you couldn't slip a razor blade between their acts and a prosecution."

New Rules

The Pecora investigations did much to invalidate the political clout of big business and opened the way politically for sweeping changes in the nation's financial structure. Against the objections of many orthodox bankers, Congress established the Federal Deposit Insurance Corporation (FDIC) to insure small depositors against the loss of their savings if a bank went under. The government promised to cover deposits up to twenty-five hundred dollars (later raised to five thousand dollars), an act that did much to bolster confidence in banks. The government also required bankers to separate commercial and investment banking and, in order to monitor investments, created the Securities and Exchange Commission (SEC). The SEC, along with the passage of the Public Utility Holding Company Act, prohibited the types of investor fraud that had been endemic in the 1920s, requiring full disclosure of the financial status of certain investments. The J. P. Morgan Company, once the nation's most powerful financial firm, was forced by banking reform to choose between commercial or investment banking; it chose commercial banking. Other established firms, such as Kuhn, Loeb; Goldman, Sachs; and Lehman Brothers, opted for investing. Each choice meant an end to the undivided influence such firms had over the economy and politics. Congressional acts passed in 1935, which concentrated the power of the Federal Reserve in Washington, D.C., also brought the bankers to heel and forced them to submit to political supervision. A shift in public esteem was complete: where once the banker had been the model of public trust and personal rectitude, now the federal authority assumed this role. Roosevelt, naturally enough, expressed the shift in a message to Congress in 1933, in which he reflected on the mix of responsiblity and ambition that had once been the credo of the banker: "What we seek is a return to a clearer understanding of the ancient truth that those who manage banks, corporations and other agencies handling or using other people's money are trustees acting for others."