FDR | March 4–Inauguration

The Brains Trust with President-elect FDR.
L to R: Cary Grayson, Norman Davies, Raymond
Moley, Redford Tugwell, Will Woodin, FDR.

On this day, March 4, 1933, at a climax of the Great Depression, Franklin Delano Roosevelt was inaugurated as the 32nd U.S. president.

For his rained-on Inaugural Address outside the east wing of the U.S. Capitol, FDR had to ascend the steps to the podium to take the oath of office.

To do this, an elaborate series of wheelchair-accessible ramps was constructed and hidden. FDR walked the last few yards leaning heavily on the arm of his son James.

FDR then outlined his New Deal–an expansion of the federal government to create jobs and improve the quality of life for Americans. He told Americans that “the only thing we have to fear is fear itself.” His Inaugural March, composed for the occasion by FDR's Treasury Secretary, William H. Woodin, was played in the rain. Despite the downpour, FDR delivered a speech that conveyed an upbeat, can-do spirit.

The President then had to face serious the bank panics and gold outflows. He turned that job over entirely to Treasury Secretary Woodin so that he could focus on the message that he wanted to deliver to his country.

Woodin immediately focused on printing more bills, getting them to the banks to solve the liquidity problem, publicizing the generation of liquidity, opening solvent ("sound") banks, and closing down banks that were insolvent. Meanwhile, Woodin worked on the passage of the Banking Act of 1933—the Glass-Steagall Act—and the Securities Exchange Act of 1933. The turnaround in the financial markets was almost immediate and endured.

FDR was born in 1982 to an old Dutch family in Hyde Park, NY, the fifth cousin of Theodore (Teddy) Roosevelt, who served two terms as the 26th U.S. president in 1901-1909. In 1905, FDR, then a student at Columbia University Law School, married Anna Eleanor Roosevelt, Teddy Roosevelt's niece. After three years practicing law, FDR followed his cousin Teddy's lead and campaigned for, and won, election to the NY State Senate in 1910 as a Democrat. He soon earned a reputation as a reform-oriented charismatic politician.

After supporting progressive N.J. Governor Woodrow Wilson in his successful 1912 bid for the Democratic presidential nomination, FDR was appointed assistant secretary of the U.S. Navy, a post that Teddy Roosevelt once held. In 1920, FDR won the Democratic nomination for vice president on a ticket with James Cox. The Democrats to Republicans Warren Harding and Calvin Coolidge, and FDR returned to his law practice and some  business ventures.

In 1921, FDR was stricken with polio and became nearly totally paralyzed. His wife, Eleanor, kept the Roosevelt name alive in Democratic circles. In 1924, partly recovered (although he could never again walk unaided), FDR returned to politics, nominating NY Governor Alfred E. Smith for the presidency with a rousing speech at the Democratic National Convention.

In 1928, he again nominated Smith, and the outgoing New York governor urged Roosevelt to run for Governor. Roosevelt campaigned across the state by automobile and was elected even as the state voted in the presidential election against their favorite son and for Republican Herbert Hoover.

As governor, Roosevelt worked for tax relief for farmers and in 1930 won a resounding electoral victory just as the economic recession brought on by the October 1929 stock market crash brought on the Great Depression. Governor Roosevelt mobilized the state government to play an active role in providing relief and spurring economic recovery. His aggressive and effective approach to the economic crisis won him the Democratic presidential nomination in 1932.

The contrast between FDR's activist response in NY State to the Depression and President Hoover's laissez-faire inaction nationwide couldn't have been greater, and FDR had no trouble defeating Hoover in 1932. Many blamed Hoover for the Depression, and FDR carried all but six states. During the next four months before the inauguration, bank panics increased, the economy continued to decline. When Roosevelt took office on March 4, 1933, most banks were closed, farms were suffering, 13 million workers were unemployed, and industrial production stood at just over half its 1929 level.

FDR's Treasury Secretary, Will Woodin, was a Republican industrialist who had once run for Congress on a hard-money program. He was a fan of Teddy Roosevelt and helped FDR with his Warm Springs Foundation and with fundraising for his runs for Governor and President.

Woodin was a key player during the financial reforms of the first 100 days of FDR's presidency. Aided by a Democratic Congress, Roosevelt took prompt, decisive action, and most of his New Deal proposals were approved during these 100 days. Most important for the financial sector were the Banking Act or Glass-Steagall Act of 1933, a trade of tough bank regulation for a limited deposit insurance program sought by the banks, and the Securities Exchange Act of 1933. Woodin as Treasury Secretary was deeply involved in the passage of these laws.

Job-creating programs also passed in the first 100 days included the Agricultural Adjustment Act, National Industrial Recovery Act, and the Public Works Administration and Tennessee Valley Authority.

Although many in the business community stubbornly criticized FDR's regulatory and job-creating programs—both FDR and Secretary Woodin were called traitors to their class—the programs unquestionably improved America’s economic climate and FDR was reelected handily three more times. Woodin became sick from the long hours and stress of his job, and died in May 1934; FDR called him a "martyr to public service."

CHINA | Its Move Today vs. FDR's in 1933-34

FDR's moves to stabilize financial markets and devalue the
dollar paid off.

China's devaluing the renminbi (aka the yuan) appears to be based on the idea that by devaluing in stages, the rest of the world is less likely to care.

Actually, no.

It seems that the Chinese government had in mind loosening the effective peg of the renminbi to the dollar, allowing the currency to fluctuate within a wider band against the dollar.

But markets react fast. Once people in the marketplace think they understand what is happening, they worry about losing money every minute they delay in acting on the knowledge.

FDR and his first Treasury Secretary, Will Woodin, had the brains first to stabilize the financial markets in March-April 1933, and then to buy all private gold in May 1933. They were preparing quietly for a devaluation in order to:

• reduce the foreign (gold) equivalent of U.S. public and private debts
• encourage exports and
• discourage imports.

Gold played a role vis-a-vis the dollar then that the dollar today plays vis-a-vis the renminbi.

FDR in 1933 forced the sale to the government of private gold (other than gold coins in the hands of collectors). Then, at the beginning of 1934, FDR devalued the dollar against gold in one fell swoop, from $20.67 for an ounce of gold, where it had been for a century (except for the Civil War), to $35 an ounce.

His action was meant to be a one-time event, and so it turned out to be.

An example of what appears to be the Chinese program is conveyed by an old Irish joke. A Kerry man in the Dail urges his colleagues to change all the road signs so that vehicles drive on the right, as they do in Continental Europe. He figured that the cost could be spread out over several years. The first year they would move the trucks over to the right lane. Then they would move the buses, and the third year they would move over the private cars.

As Lady Macbeth says in Act 1, Scene 7: "If it were done when 'tis done, then 'twere well / It were done quickly." FDR understood that. The Chinese government, if we understand their moves aright,  does not.

GREECE | The Euro 2015 v. Gold 1933 (Updated Aug. 4, 2015)

At one time, some greenbacks were "gold certificates" that could be
exchanged for gold coins.

(The following adds to a chapter of a biography of Will Woodin, FDR's first Treasury Secretary.)

Greece is still in the Eurozone. However, this outcome may be a case of just kicking the can down the road. Another crisis may await.

That thought is prompted by comparisons with 1933.

Similarities with 1933

Greece today has a similarly high unemployment rate to the one that FDR inherited in 1933 - one out of four people in the labor force being unemployed.

As in 1933, in the absence of action, those able to do so take their money out of the country. That happened in the waning days of the Hoover Administration. Until FDR was inaugurated on March 5, 1933, gold flowed out of Hoover's USA in the same way that euros have been flowing out of Greece.

According to Acting Comptroller of the Currency Francis Gloyd Awalt, p. 359, on the Friday before FDR's inauguration, March 3, 1933, the Federal Reserve Bank of New York saw $200 million of gold and $150 million in dollar currency transferred out of its vaults.  It was $250 million short in reserves and meanwhile the Chicago Fed alone needed $100 million in gold.

Another similarity is that in March 1933 when FDR came in, he declared a bank "holiday" for all banks, national and state. The Greek bank holiday used the same euphemism for a forced suspension of business, in response to depositor panic and the government's need for time to consider its options.

Differences from 1933

The differences between FDR's actions and those of Greece are multiple. In 1933 several essential and coordinated actions were taken to direct the United States toward stability and recovery, starting with devaluation. The Eurozone prevents Greece from taking such actions. FDR's devaluation had a triple benefit - a huge write-down of debt, a subsidy of exports and a tax on imports. The worst day of the Depression was just before FDR took office.

FDR quickly severed the formal connection with gold for American holders of currency. The Emergency Banking Act was brought before the Congress and passed before the banks were reopened. A smart lawyer at the Federal Reserve Board, Milton Elliott, had in 1918 inserted an amendment to the Trading with the Enemy Act giving power to the President to prohibit gold exporting or hoarding (Awalt, p. 365). This provision was invoked to require all private owners of gold (with exclusions for industrial use, dentistry, or numismatic uses) to sell their gold back to the U.S. Government. That meant that the United States could face foreign creditors with a gold standard that was nominally in place for international transactions.

In Greece's case, the banks reopened with another loan from the Eurozone authorities. Few fundamental changes were made within Greece that would strengthen the economy and reduce unemployment. From what I have read, the most significant change was the replacement of the defiant Greek finance minister by a less confrontational Oxford-trained economist.

What FDR Did after Closing the Banks

FDR's team, led by Treasury Secretary Will Woodin, used the bank holiday period to:

• Ensure liquidity by printing $2 billion worth of greenbacks.  Woodin had first toyed with the idea of printing scrip to pay government bills while the banks were closed, an idea passed on by outgoing Secretary Mills, as noted by Awalt, p. 363. Then Woodin realized that scrip would just be another form of greenbacks. The currency was packed off in trucks to the cities with Federal Reserve Banks, then other cities with clearing houses, and finally other cities.
• Review the solvency of each bank - what we call nowadays a "stress test" - to determine which banks should be allowed to reopen. This is what the Treasury did in 2008 and 2009 after the financial meltdown that put Lehman Brothers out of business. The Treasury's chief economist recollects that the principal reason Lehman was allowed to fail is that the Treasury didn't then have legal authority to lend it money against its assets.
• Raise public confidence by announcing and publicizing government actions to ensure bank solvency and liquidity.
• Map out a plan for addressing the consequences of the financial crisis, notably 25 percent unemployment. FDR said it would be "criminal" to adopt a plan that did nothing for the unemployed.
• Map out a plan for financial reform to avoid a repetition of the crisis, i.e., supporting a plan for deposit insurance (which the banks wanted) and increased regulation (which the banks did not want, but which they were willing to trade for deposit insurance). Rep. Henry B. Steagall of Alabama, Chairman of the House Banking Committee, championed deposit insurance. Sen. Carter Glass of Virginia championed stiffer financial regulation (he had Steagall's position in the House when the Fed was created in 1913).

The tension in the 1929-1933 period and in 2008-2009 in the United States and now for many years in the Eurozone is about the need for national leaders to encourage consumer demand by reducing the burden of debt and creating liquidity, while ensuring confidence in the money supply - confidence that investments today will be repaid in uninflected money. In essence, the government must balance the rights of creditors with the need to encourage investment. With such high unemployment in 1933, FDR was prepared to give borrowers a break as against lenders.

Lessons from the Panic of 1893

The remarkable fact is that the U.S. dollar was pegged to gold for so long, a century between 1834 and 1934, during which an ounce of gold was kept at $20.67, with the exception of the 1860-1879 war years when greenback notes were issued without gold backing. When the price of gold rose, the U.S. Treasury would increase the supply by selling gold. When the price of gold fell, the U.S. Treasury would decrease the supply by buying gold.

The closest that the United States came to going off the gold standard may have been after the Panic of 1893, the worst crisis the United States had hitherto suffered and one that affected Will Woodin's family personally.  As in the previous panic of 1873 it resulted from excessively easy credit, resulting in speculation and overbuilding of homes and railroads. On February 20, 1893 - 13 days before the inauguration of U.S. president Grover Cleveland - the Philadelphia and Reading Railroad went broke.
  A series of bank failures followed, and then the failure of three more railroads. Since Will Woodin's family business was selling to the railroads, his father Clement was deeply troubled by the Panic and his health never fully recovered.

In the Panic of 1893, stock prices plummeted, 500 banks closed, 15,000 businesses failed. Falling prices for export crops such as wheat and cotton pushed numerous farms into foreclosure. The unemployment rate in the country rose as high as 19 percent - Pennsylvania to 25 percent, New York to 35 percent, and Michigan to 43 percent.

Jacob S. Coxey, Sr. led a highly publicized march of unemployed laborers from Ohio, Pennsylvania, and several Western states to Washington, D.C. , demanding a jobs relief program. A wave of strikes in 1894, notably the bituminous coal miners' strike of the spring and the Pullman Strike in July, led to violence in Pennsylvania, Ohio, and Illinoi and a shutdown of railroads in much of the country.

Populists and Democrats responded to poorer cotton and wheat farmers in the South and West who needed easy credit to keep their farms going. The Free Silver movement gained support from farmers who sought to liberate the economy from the straitjacket of the gold standard. President Cleveland borrowed $65 million in gold from Wall Street banker J.P. Morgan and the Rothschild banking family of England to support the gold standard.

In the ensuing 1894 elections, the Democrats were blamed for the Depression and Populists lost heavily. The election marked the largest Republican gains in history, locking the GOP thereafter into defense of the gold standard (in the previous election the party was divided).

The presidential election of 1896 was fought on economic issues and the pro-gold, high-tariff. The pro-silver candidate William Jennings Bryan said:

You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon  cross of gold.

Republicans led by William McKinley won a decisive victory. It was the last major protest of agrarian America against the cities and the industries that were growing in them. Will Woodin decided to join the hard-money Republican movement and ran for Congress in 1898. However, a Civil War veteran advocating easier money defeated him.

FDR Devalues the Dollar

FDR was determined to jettison the gold standard at home because it would get in the way of his plan for recovery. His Treasury Secretary, Woodin, when the subject of going off the gold standard at home came up, would say: "Oh no, not that again." (Woodin was decidedly in the camp of the creditors rather than debtors, but he was also loyal to both his own workers and to FDR.) FDR greatly reduced the straitjacket of the gold standard in two ways:

• On May 1, 1933 by Executive Order, FDR required that all gold be sold to the Treasury at the existing price. The penalty was a fine of up to $10,000 or up to ten years in prison. This gave ample gold backing to the dollar for international purposes at the same time as it made clear to the U.S. public that backing of currency by gold was no longer on offer. 
• On January 30, 1934, FDR devalued the dollar against gold, pushing the peg up to $35/ounce, where it remained into the decade of the 1960s, when I worked for the Federal Reserve Board. The panic of 2008-2009 created uncertainty that pushed up the price of gold, which peaked at $1,900 an ounce in August 2011 but fell back in July to about $1,100 an ounce despite the problems in Greece. Both numbers are well above FDR's peg - $35/ounce in 1934 would be equivalent to $623 in 2015 based on changes in the cost of living, using the BLS inflation calculator.

BANKS | "Holidays"–Greece-2015 v FDR-1933

Monday morning, March 6, 1933, Day 1 of FDR's administration. The last column notes that FDR
authorized issuance of "scrip" to replace dollars. Instead, Secretary Woodin just printed more dollars.

June 29, 2015–Greece has declared a six-day bank holiday.

It applies to foreign banks operating in Greece. A cap has been imposed on withdrawals of deposits - a personal limit of €60 a day on withdrawals from ATM machines.

This sounds something like the four-day (Monday to Thursday) bank holiday that FDR declared on March 6, 1933, right after his inauguration.

FDR embargoed export of gold in the same way that Greece has put capital controls on transfers of deposits out of the country. Later, he made it illegal for individuals to own gold. Private holdings of gold for non-industrial use (with an exemption for holders of special gold coins in the hands of coin collectors) had to be turned in to be replaced with paper dollars. Months later, he significantly devalued the dollar against gold.

If you think of the U.S. link to gold as comparable to Greece's link to the euro, its imposition of capital controls shows some separation of the Greek financial system from the rest of Europe.

Greece is considering issuance of scrip to pay pensions and other internal obligations. One scenario is that the scrip could be the beginning of the reintroduction of the drachma.

Will Woodin, the incoming U.S. Secretary of the Treasury in March 1933, was authorized to issue scrip to the banks or to pay employees and pensioners when the bank holiday was over. But he said he had a "Eureka!" moment during a night of fitful sleeping when he realized that U.S. scrip would be the equivalent of printing new dollars.

Instead, he embarked on round-the-clock production of $2 billion of new greenbacks at the Bureau of Engraving and Printing. He personally supervised the printing and packing up of the greenbacks on trucks, and had film crews recording the event for the Pathe News shows at cinemas all across the country.

When the solvent banks reopened after having been subjected to stress tests, the panic that began in October 1929 and had intensified in the intervening three-and-a-half years was over. Once the panic stage ended, the Depression era settled into a fiscal and monetary battle over how much to stimulate the economy.

Then as now, sober people looked back on the previous era of profligacy that led to insolvencies, illiquidity and panic and were eager to mete out punishments. FDR had the common sense to see that the punishments would be a new crime against the unemployed who were bearing the brunt of the pain.

The difference between the United States then and Greece today is that the U.S. dollar was printed at the discretion of the Secretary of the Treasury under U.S. laws. Also, a crucial aspect was that the Treasury committed itself to reopening only solvent banks, promising deposit insurance (the Steagall part of the Glass-Steagall Act of 1933) and meanwhile standing behind the banks that were reopened.

The euro, on the other hand, is printed and minted by each national central bank under the control of the European Central Bank. The ECB announced in January its latest QE program, creating liquidity Europe-wide by buying $1.1 trillion of bonds over the next two years, injecting a steady stream of liquidity into the financial system. This has not been enough to stop the Greek panic.

Paul Krugman thinks Greece can't take any more austerity, and that - as in the United States of March 1933 - austerity measures are counter-productive. Today as in 1933, reforming the system needs to take a back seat to calming the panic and making sure that the economy is not further destroyed.

When speculators fail, they take their losses and move on. But when the economy fails, the biggest victims are unemployed people, who are innocent of the past crimes or excesses for which they are being punished.

WOODIN | 15. Intangible Legacies–FDR's Bank Fix Lasted 70 Years (Updated Oct. 3, 2015)

This post has been removed to a private blog in anticipation of publication. To obtain access, contact jtmarlin@post.harvard.edu.