Read The Great Depression Online
Authors: Benjamin Roth,James Ledbetter,Daniel B. Roth
The Great Depression (19 page)
We are greeted by a very dramatic announcement this morning. At 1:30 A.M. this morning as his first official act, President Roosevelt issues a proclamation ordering every bank in the United States to close for four days—including the U.S. Treasury and Federal Reserve Banks. It now appears that during the past two weeks foreign countries and domestic depositors have withdrawn gold from U.S. Treasury at an alarming rate. The proclamation also forbids exportation of gold. As a result of this announcement the U.S. will be technically off the gold standard for four days. I don’t see how the government can resume gold payments at the end of that time because all Europe will be waiting at the Treasury doors to withdraw gold. In Youngstown every bank and loan company is closed to all business and large placards in the windows bear notice of the President’s proclamation. Everybody is fearful of the immediate future. In the meanwhile all over U.S. plans re going forward to issue scrip against bank deposits.
Likewise every stock exchange in the country is closed.
We will close Volume II of this personal description of the economic situation at this time with the inauguration of Franklin D. Roosevelt. I will continue in Volume III to set down the developments from time to time under the “new deal” promised by the new administration. It has been a hectic period which has grown steadily worse for more than 3 1/2 years. The future just now seems more uncertain than ever. Every bank and stock exchange in the U.S.A. is closed—gold cannot be exported—scrip instead of money will be used nationally in a few days—everybody is alarmed. This morning Japan closes all its stock exchanges because of the U.S. situation.
When I started in 1930 to jot down the happenings during this depression I had no idea it would last so long and I did not think I would require more than one small notebook. Now after 3 1/2 years of the worst depression this country has ever seen, the end is not in sight. A very short summary of past events might be of assistance at this time. While the world war raged in Europe from 1914 to 1917 we had unparalleled prosperity in U.S. because of sale of war supplies to the belligerents. Stocks and bonds of “war industries” soared to $400 and $500 per share. Millionaires were made overnight. These securities were called “war babies.” In 1917-1918 the U.S. participated in the war—became the greatest creditor nation in the world by loaning money to finance the war. Today these war debts are still unpaid in the sum of about twenty billion and Europe wants us to cancel them. From 1919 to 1921 we had the greatest real estate boom of all time because 2 million soldiers were released from the army, got married and established homes of their own. In 1921 we had a small scare because strikes came when war-time production of war supplies and war time wages stopped.
For awhile it looked as tho we had too much machinery and had built factories for war supplies that could not be used in peace time. Then suddenly Europe began to buy from U.S. on an unprecedented scale. The war torn countries had been almost completely devastated and had no factories to supply their needs. So from 1922 to 1929 America rebuilt Europe and because of this we had here the longest and wildest period of expansion and speculation ever seen. Everybody became stock-market conscious. Shares were split and re-split, new issues were introduced and gobbled up by the public at fabulous prices, foreign bonds (now worthless) absorbed billions of dollar. The collapse started with the stock market crash in 1929 (Oct.). Thru 1930 and 1931 and 1932 business leaders kept on preaching that nothing was wrong—do business as usual—spend money—and almost daily people expected a return to “normal.” Then in 1932 all Europe seemed to collapse and for the first time people realized that the depression had just started and it would be many years before the “normal” period of 1929 would return. Forty-four European countries went off the gold standard, worthless currency was issued, government obligations went unpaid and even governments were overthrown. Russia tried Communism—Italy and Germany a dictatorship and even in the U.S. the red flag of Communism appeared on the streets. Prices of merchandise continued downward, wage reductions and unemployment followed. Then in November 1932 the people of U.S. showed their unrest by changing from a Republican to a Democratic government in the hope that the “new deal” promised would bring relief. In the meanwhile the banking situation of the U.S. utterly failed of its purpose. In 1931 thousands of banks (including 3 in Youngstown) closed their doors. “Frozen assets” was the reason given. The bank money could not be paid out because it was tied up in long-time mortgages. Liquid assets like bonds were sold by banks at losses of 25% or more. This bank situation was relieved for awhile by government loans but culminated on Feb. 14, 1933 when the governor of Michigan closed every bank in the state on a “bank holiday.” This spread like fever to other states. First came Indiana, then Maryland and finally on March 4, 1933 (date of Roosevelt’s inauguration) the New York State Banks closed and completed a list of 48 states under “bank holiday.” On that same morning the New York and Chicago Stock Exchanges closed. Saturday, March 4, 1933 will be long remembered because almost at the moment of the inauguration of Roosevelt every bank and stock exchange in the U.S. closed its doors. Within 24 hours after his inauguration the new President issued a dramatic proclamation closing every bank and stock exchange in the U.S., forbidding the export of gold and technically removing the U.S. from the gold standard. As I write this every bank in Youngstown and all over the U.S. is closed and newsboys are selling “extras” stating that scrip will be issued soon by the banks. Times are exciting and personally I would not take a great deal for the privilege of participating in these events.
At noon today, the Dollar Bank and City Bank, with permission of the government, opened its doors to make small change and transact routine business. No withdrawals of any kind permitted. New money deposited may be withdrawn on demand. Depositors are wary and distrustful because plans have been changed so often.
The second day of the National Bank Holiday passes quietly. All Youngstown banks are open to make small change and to transact routine business but no withdrawals are permitted. Plans are being made to issue scrip against bank collateral such as notes, bonds and other liquid assets. It is not known yet whether this scrip will be issued by the government or by local bank clearing houses. I hope it will be issued by the government because then it will be received everywhere in payment of obligations.
It is pretty generally agreed that the U.S. is now off the gold standard and will not be able to go back on next Friday when the holiday ends. Banks have already been ordered to turn in all gold in exchange for paper currency. It is also pretty generally agreed that we are in for a period of currency inflation.
In the long run I am not sure that Roosevelt did the right thing in going off the gold standard. The American dollar has long been recognized as the standard of the world. For three years Pres. Hoover kept us on the gold standard and fought bitterly against inflation. This work is now undone. We may find ourselves competing with Europe on the basis of depreciated currency. One thing is certain—if bank depositors are permitted to draw out a portion of their deposits in the form of scrip—then we are in for a brief spending spree and rising prices. People need almost everything and also they will not consider the scrip seriously as money. If I get any surplus scrip I will use it to reduce fixed obligations such as loans on insurance policies, mortgage loan, etc.
Scrip was issued yesterday by Truscon Steel Co. and General Fireproofing Co. in payment for wages. I saw today some of the General Fireproofing scrip. Legally it is a promissory note to bearer payable on or before 6 months. It is issued in $1 and $5 denominations. The Truscon is also a promissory note payable against frozen bank assets. This scrip is being refused in many cases because circulation is limited. Plans to issue scrip on a national scale are awaiting the President’s message to Congress this noon. In the meanwhile the U.S. takes action against gold hoarders by demanding from each Federal Reserve Bank the names of persons who withdrew gold after Feb. 1, 1933. These persons will be shamed by publicity into returning the gold or will be taxed or punished.
Yesterday saw legislation passed to reform the U.S. banking system. At noon the President delivered a short message to Congress asking full power to deal with the banking situation. At 7:30 last night both houses of Congress in record time passed legislation:
1. Giving President war-time powers.
2. Providing for opening of solvent banks and reorganization or closing of insolvent banks.
3. Permitting issue of U.S. currency based on notes, bank drafts, etc. Wide powers to pass this currency to members of Federal Reserve.
4. At 10:30 P.M. the President issued a new proclamation extending indefinitely the bank holiday and embargo on export of gold.
It is hoped that by tomorrow the sound banks will be selected and permitted to open.
In the meanwhile, gold hoarders have been alarmed by threats of publicity and punishment and are exchanging gold for paper currency.
Are we now going to have inflation and if so to what extent? Will prices rise? Will people rush to convert their money into real estate or other property? Fear of depreciation of money and rising prices may have many results. Locally the banks are still observing the legal holiday and the stock exchange is still closed.
The national bank holiday continues and all banks and stock exchanges are still closed. Promise is made that “sound” banks will open next week. It must prove its soundness to the Secretary of U.S. Treasury and get a permit to open.
Hoarded gold flows back into banks on threat of exposure and arrest. Over $100,000,000 has returned this way in past two days. Mostly in large cities. One man in New York City is reported to have returned two million in gold.
Ohio and other states now pass a law to restrict withdrawals from life insurance companies. Loans cannot be made now on policies except to pay premiums. In case of necessity loans are limited to $100. Nothing is said about payment of death claims or trust funds.
Los Angeles district in California experiences 13 quakes yesterday. Almost as bad as San Francisco affair! Early reports indicate 150 dead; 2500 hurt; tremendous property loss.
In connection with inflated currency I heard an interesting story told today by Mr. Vasu, a real estate dealer. When the world war broke out his father owned real estate in Europe subject to mortgages of $50,000. After the war he paid off this indebtedness with inflated money actually worth about $18.
President Roosevelt again breaks precedent by talking on radio last night and explaining the bank situation to the people in detail.
Banks will be re-opened all over nation in following order: Today (Monday) all “sound” banks in the 12 Federal Reserve cities; Tuesday all sound banks in cities with clearing houses; Wednesday all other sound banks in smaller communities.
Question: What is a sound bank? In Cleveland this morning only 3 banks were permitted to open. Two of the largest—Union Trust and Guardian Trust—are closed and will be reorganized. What will happen in Youngstown tomorrow?
I am again confused by “gold standard.” Are we off because currency can no longer be redeemed? Are we having inflation when government issues two billion in new money, not backed by or redeemable in gold but backed by bank assets such as notes, drafts, etc.? The better economists say no—but I can’t follow their argument. My own opinion would be otherwise.
The problem is simple—total gold supply of U.S. is now about $4 billion—total currency of all kind (including gold) is about $8 billion—total bank deposits $46 billion. Problem: how can all depositors be given the currency they demand? Also will only $2 billion of new money be enough? If more is issued, is it inflation?
All of Youngstown banks open this morning with government permission for “normal business.” City Bank and Dollar Bank do not permit withdrawals made prior to closing in October 1931. Same applies to Union National Bank. Also only withdrawals for “normal” requirements are permitted. No hoarding is permitted—an affidavit can be required to this effect. The largest bank in Akron must be re-organized. Same in other cities. Youngstown is fortunate in having had the house-cleaning experience in 1931.
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