Sunday, January 25, 2009

Lessons of 1932

So, I've been curious lately in what we can learn about the current crisis from the last time we went through something like this, in the early days of the Great Depression. It's interesting how some thing from that era stick in our collective memory while others more or less faded out. For example, we all know about the stock market crash that started things off in 1929, and are familiar with the massive unemployment with its bread lines and soup kitchens and apple-sellers, the dust bowl that drove farmers off their land to become migrants. But we've forgotten about the congressional hearings that established how much of the boom and bust of the 1928-1929 stock market had been the result of corruption and manipulation. And, surprisingly for our current crisis, we've forgotten about the Bank Failures that came at the end of Hoover's term and cemented the country's economic collapse.

Between Hoover's defeat in the November 1932 election and Roosevelt's taking office in March 1933, the nation's entire banking system failed. Hoover, who had been propping up the nation's banks for some time by this point, made frantic and unsuccessful efforts to stem the collapse, mainly through something called the R.E.C. or 'Reconstruction Finance Corp.' -- which turned out to be about as effective as the post-Civil War reconstruction in accomplishing its end. One of the big controversies about the REC is that Hoover and his Secretary of the Treasury, Ogden Mills (and earlier Andrew W. Mellon), insisted on keeping secret what banks they loaned money to, for fear it would undermine public confidence in those banks. John Nance Gardner, the House minority leader and then Speaker of the House (and a longtime Hoover/Mellon foe), managed to get a bill passed calling for a "publicity clause" -- in modern terms, creating transparency and accountability by requiring public disclosure of where the money was going. Hoover and his team, like Bush and Paulson, strongly opposed this because they thought it would cause a run on those banks, which was what they were most trying to avoid. Jonathan Alter more or less takes their position in his discussion of the episode in THE DEFINING MOMENT: FDR'S HUNDRED DAYS AND THE TRIUMPH OF HOPE ("The amendment requiring public disclosure of all RFC loans sounds good, but it was like posting big DON'T TRUST US signs on the marble facades of ailing bands; any institution listed as receiving an RFC bailout was now at serious risk of a run" -- page 150) -- it's rather surprising to find a journalist like Alter, who works for NEWSWEEK, approving of the government's acting in secret or thinking it better the public not find out whether or not their banks are solvent, but so it goes.

By contrast, I think Frederick Lewis Allen in SINCE YESTERDAY, his 'instant history' of the 1930s published in 1939, puts it succinctly: "Perhaps the newspaper publication of the facts about RFC loans was a factor in bringing about this panic -- though to say this is to beg the question whether a banking system dependent upon secret loans from a democratic government is not already in an indefensible position. Probably the banks would have collapsed anyhow, so widely had their funds been invested in questionable bonds and mortgages, so widely had they been mismanaged . . . so lax were the standards imposed upon them . . . and so great was the strain upon the national economy . . ." (Allen, page 98; emphasis mine).

I think not only is Allen's statement frightenly applicable to the way the TARP bailouts were managed by Paulson, but his day-by-day account of the bank collapse during Hoover's lame duck period shows just how much we owe to FDR's reforms.


1 comment:

Nikchick said...

Great post, Dr. John! Very interesting stuff to look back on.