Wednesday, April 22, 2015

10. The Elections of 1928 and 1930, and the Crash of 1929

Will Woodin was deeply involved in 1928 in the campaign for Al Smith for President and the campaign for FDR for Governor of NY State. He was also involved in FDR's re-election campaign in 1930. Between these two elections was the Crash of 1929. That made a huge difference.

The Presidential Campaign of 1928

Al Smith and John Raskob, 1928.
Governor Alfred E. Smith, a Catholic and a “wet” with backing from Tammany Hall in 1928 opposed  Herbert Hoover, a Quaker professing belief in traditional American individualism and self-help but who was in fact an admirer of Theodore Roosevelt, and favored a regulated economy including regulation of alcohol.

Will Woodin wrote a letter to the Union League Club in 1928 that while he still considered himself a Republican, he was supporting Al Smith.

This letter was widely distributed by John J. Raskob of General Motors who served as the Chairman of the National Democratic Committee. Raskob set a $3 million target for the election, give or take $500,000, and came close to raising it.

Raskob was the most vocal Wall Streeter in 1928. He was vice president of both Du Pont and of General Motors and a director of the County Trust Co. and Bankers Trust Co. Gov. Smith strong-armed Raskob into becoming Chairman of the Finance Committee of the Democratic Party. Raskob also gave more to the campaign than anyone else, more than $350,000.

Of all of the people close to FDR, Raskob was the strongest advocate of government spending and industrial leadership, along with Bernard Baruch and Pierre Du Pont. They worried about the economy and wanted a program of public investment in infrastructure. That became FDR's National Recovery Act.

Wall Street directors gave $1.9 million to the Al Smith 1928 Presidential campaign, out of a total raised of $2.36 million, short of Raskob’s $3 million goal. Of all Al Smith for President campaign funds, 79 percent came from Wall Street directors.

Within the Wall Street contingent, the County Trust Company directors, of which Al Smith was one, were the source of an extraordinarily large percentage of Democratic primary campaign funds. Note several Irish names on the list below.

Big Gifts to Al Smith in the 1928 Dem Primary by County Trust Directors

Astor, Vincent, Great Northern Railway, U.S. Trust Co.                 $10,000
Cullman, Howard S., VP, Cullman Brothers                                      $6,500
Fitzgerald, William J.                                                                          $6,000
Kelly, Edward J.                                                                                   $6,000
Kenny, William F., Aviation Corp., Chrysler Corp.                           $275,000
Lehman, Arthur, Lehman Bros., American International Corp., RKO $ 14,000
Meehan, M.J., Meehan 61 Broadway [missing]
Mooney, Daniel J.                                                                               $150,000
Raskob, John J., American Intl. Corp., Bankers Trust, Du Pont, GM $360,000
Riordan, James J.                                                                                   $10,000
Total                                                                                                     $842,000

In the general election, the amounts were greater, and Will Woodin chipped in enough to get himself noticed.

Contributors of $25,000+ to Democratic National Committee, 1928 
Lehman, Herbert H., family, Lehman Bros. and Studebaker Corp. $135,000
Raskob, John J., VP of Du Pont and General Motors                     $110,000
Ryan, Thomas F., Bankers Mortgage Co., Houston                         $75,000
Whitney, Harry Payne, Guaranty Trust                                            $50,000
Du Pont, Pierre S., Du Pont Company, General Motors                  $50,000
Baruch, Bernard M. Baruch, Financier                                            $37,590
Clark, Robert Sterling, Singer Sewing Machine Co.                       $35,000
Ryan, John D., National City Bank, Anaconda Copper                  $27,000
Woodin, William H., General Motors Board                                  $25,000

Woodin's entire gift came early. Only a dozen people had given $25,000 or more as of October 6, 1928, and the largest gift was $50,000. The higher amounts must have come from additional gifts to the DNC in the last weeks of the campaign.

Hoover's Campaign

Herbert Hoover was a prominent supporter of Theodore Roosevelt's Progressive Party and was not the laissez-faire advocate that he is remembered as and sometimes portrayed himself. Hoover challenged the laissez-faire view that labor is a commodity, with wages to be governed by laws of supply and demand.” Hoover said:
The economic philosophy of laissez faire, or dog eat dog, died in the United States 40 years ago when Congress passed the Interstate Commerce Commission and the Sherman Anti-Trust Acts.
As Secretary of Commerce, Hoover pushed for government cartelization of business and for trade associations, regulated the radio industry, while the courts were working on a system of private property rights in radio frequencies.

Hoover raised $3.5 million, about 51.4 per cent of which came from within a mile of Wall Street. Contributions to the Republican National Committee in 1928 include the Guggenheim family, Copper smelting, $75,000; and the Mellon and Rockefeller families, $50,000 each. The following gave $25,000 each: Eugene Meyer, Federal Reserve Bank; William Nelson Cromwell, Wall Street attorney; Otto Kahn, Equitable Trust Company; Mortimer Schiff, Banker.

The 1928 Ballot Results

Herbert Hoover won by more than 21 million votes to Smith's 15 million. Despite unenthusiastic Wall Street treatment, Hoover appointed many Wall Streeters to his committees and boards.

Herbert Hoover was elected for two reasons:
  • the United States was prosperous, and
  • the southern and western states feared Al Smith's Catholicism.
The picture changed completely within a year, and Al Smith's successor as Governor of New York would be a more formidable challenger to Hoover than Smith. 

In 1928, Herbert Hoover campaigned on the theme of prosperity and efficiency, and Al Smith was tainted with being from Tammany New York and being Catholic and being a "wet". Hoover won with 58 percent of the vote and a 444-87 majority in the electoral college. However, it was clear that urban voters were growing fast, which meant that being "wet" might mean winning. (A cartoon of the period has Smith after the election calling the Vatican, with the one word comment: "Unpack.")

The 1929 Crash
The Depression of 1929-1933 ended with FDR's
 New Deal. The Recession of 1937-1938, resulted
from a weakening of the New Deal.
Understanding the causes of the Depression is vital to avoid repeating the mistakes the nation made in the 1920s.

The stock market crash of October 29, 1929 ("Black Tuesday") can't be "the cause" of the Great Depression, because the Bureau of Economic Analysis at the U.S. Department of Commerce dates the beginning of the Depression back to August 1929, lasting three years and seven months.

Starting with FDR's term, the economy recovered continually from the 26.7 percent decline in the economy since August 1929, until a recession occurred from May 1937 to June 1938, when the economic decline was 18.2 percent.

The second downturn was precipitated by lower profits, and by misguidedly tight fiscal and monetary policies.

So... the stock market crash occurred two months after the Depression started. Since the Depression started before the crash, something else was at work. The crash of the New York Stock Exchange is not a cause of anything. It is an indicator of the valuations of investors.

The cause of the Depression must be sought in the excessively high valuations placed on stocks in the late 1920s, and the reason for the high level of speculation, i.e., borrowed money. The reliance of investors on debt subject to margin calls increased the riskiness of the stock market and added to the intensity of the revaluation of stock prices.

The $40 billion loss by investors in two months doesn't sound like a lot in today's stock market. It is more meaningful to say that the 1929 high value of all stocks on the New York Stock Exchange was $87 billion and this valuation fell to $19 billion in 1933 - a drop of 78 percent. More than three-fourths of the value of listed stocks was wiped out.

One of the sources of the Great Depression is the instability of the banking system and therefore of the stock market that depended on it and the national economy that depended on both. Some people attribute the Great Depression to bank failures. The problem in making bank failures the cause of the Depression is  the timing. For A to cause B, A must precede B. The Depression is dated 1929-1933. There were no bank failures between 1926 and 1929 (see chart).

Bank failures virtually ended in 1933 with passage of the Glass-
Steagall Act, which created the FDIC and separated banking
 from more speculative financial activities.
The largest number of bank failures were the result of stress tests (bank examinations) by the Treasury's Comptroller of the Currency, in 1933, after the previously cited March 1933 end of the Depression.

There were bank failures in 1925, but that's a long time before the onset of the Depression and a lot of growth occurred in the late 1920s. 

An underlying problem was the belief by depositors that they should be able to convert their deposits into gold or currency without limit. But the attempt to do so made banks illiquid and insolvent.

Printing greenback dollars that were not backed by gold or silver was no longer controversial. It had been problematic when Lincoln did it to pay the Union Army, but by 1929 paper dollars were well established.

However, in the 1920s, depositors were still of the belief that some or all of their deposits were backed by gold or silver. Some of the dollars were marked "gold certificates" with a yellow color on a part of the bill to indicate their special status. Some depositors still believed that if they asked for it they would be entitled to redemption of their money in gold.

In fact, what started to happen in the 1920s and especially in the early 1930s, is that banks could not redeem demand deposits even with paper money. They were out of cash. Relatively few were insolvent, but many were illiquid. The fear that a bank could fail and depositors could lose their money was a basic underlying flaw in the banking system, leading to "runs on banks". So...
  • Bank failures were not the cause of the Depression - they were a symptom of problems in the banking system that contributed to the Depression. As Warren Buffett has said: "Only when the tide goes out do you find out who is not wearing a bathing suit.”
  • Bank failures occurred mostly before FDR was inaugurated in March 1933. The banks that were closed following the March "bank holiday" by the Treasury's Comptroller of the Currency were already insolvent.
  • Bank deposits were uninsured only until 1933. Starting in 1933, the Glass-Steagall law created the Federal Deposit Insurance Corporation, insuring most deposits and virtually ending bank closings. In 1934, only 57 banks closed, and after that the FDIC's guarantee and oversight was enough.
Fundamental Speculation: Real Estate Speculation

Friedman and Schwartz, Monetary 
History of the United States, 1963
In the 1950s, the cause of the Great Depression was attributed simply to 1920s over-speculation in real estate, with Florida as the poster state.

 Subsequently, monetarist economists have put the blame on blunders by the Federal Reserve System, which was adrift after the death in 1928 of its able New York Bank President, Benjamin Strong.

Milton Friedman and Anna Schwartz demonstrated that the Fed was selling government securities instead of buying them, taking liquidity out of the financial system and keeping interest rates too high in the 1930s.

However, making the Fed the culprit may have contributed to a complacent feeling that the Fed knows so much now that the Depression couldn't happen again. The problems of the Japanese financial system since 1990 have been brushed off (e.g., by former Fed Governor Larry Meyer) as indicators that the Japanese response to a downturn was just too slow and too timid.

Polly Cleveland has recently reasserted the older version of the story, namely that the Depression was primarily a reaction to the 1920's real estate bubble. Speculation began with the production of cars in 1899, which grew exponentially (with just a two-year interruption for World War I) until a peak of 4 million cars in 1929. The improved transportation system opened up real estate for home-building, as did the building of subways and commuter railroads.
The auto suddenly opened up vast suburban and rural areas to housing. Developers—legitimate and bogus—leapt at the opportunity. Banks jumped in too, creating so-called "shoestring mortgages", effectively allowing property purchases on margin. Within a few years, tens of thousands of acres around major cities had been subdivided and sold. In rural areas, developers bought up farms, dug a pond, built a "clubhouse" and sold cheap "vacation" lots. As reported in Homer Hoyt's classic One Hundred Years of Land Values in Chicago, from 1918 to 1926, Chicago’s population increased 35 percent and land values rose 150 percent, or about 12 percent a year.
Land values tapered off in 1926, then fell. After 1929, home construction and car production collapsed. In Chicago, by 1933 land values had fallen some 70 percent overall; peripheral areas fell even more. U.S. auto production did not regain the 4 million level until 1949. Housing production did not pass the 1926 peak until 1950. Cleveland continues:
Around Detroit, more than 95 percent of recorded lots were vacant as of 1938. Nationally, the number of vacant lots rose to 20-30 million, compared with about 30 million occupied housing units. According to economic historian Alex Field, the barren subdivisions ringing the cities hindered the recovery of construction: Missing titles of defaulted owners and poor physical layout created de facto brownfields. The real estate bubble helped set off and then worsen the Depression. Collapsing land values left people suddenly much poorer, so they cut spending. They also defaulted on mortgages, sticking the banks with "toxic" assets: liens on near-worthless property. The struggling banks in turn cut off lending even to good customers. Bank runs—panicky depositors withdrawing cash—further crippled the banking system.
Cleveland compares the innovation of the automobile with the innovation of collateralized debt obligations. Both started off innocently enough (securitization of housing debt was a good idea when properly monitored), but ended up setting off destructive real estate bubbles. What we have found out is that because of a watering down of the Glass-Steagall Act, the downside of the business cycle became in the early 21st century no more under control than it was in the 1920s.

The New York State Campaign of 1930

As is usual, in 1930 corporate money went to the incumbent, FDR. Hugh Johnson, later the Administrator of Roosevelt's NRA, went through a training program in the 1920s under Bernard Baruch's tutelage and persuaded FDR to propose greater investment in infrastructure. The Raskob speeches of September and October 1928 in the Al Smith campaign were the start of Roosevelt's NRA, which was essentially a plan for a greater government role in industrial planning and a partnership with business for the purpose of investment.

Bernard Baruch outlined the NRA plan on May 1, 1930 in a speech at Boston. It included the regulatory framework, codes, enforcement, and the carrot of welfare for the workers. Baruch's speech contains the core of his proposals. His reference point was the War Industries Board of 1918.

The first phase was financing the costs related to the New York State Democratic Convention.

Contributors to the Pre-Convention Expenses of FDR ($3,500+ ), 1930
Edward Flynn, Director of Bronx County Safe Deposit Co.                           $21,500
W.H. Woodin, Federal Reserve Bank of New York, Remington Arms Co.    $20,000
Frank C. Walker, Boston Financier                                                                  $15,000
Joseph Kennedy                                                                                               $10,000
Lawrence A. Steinhardt, Guggenheim, Untermeyer & Marshall                    $8,500
Henry Morgenthau                                                                                           $8,000
F.J. Matchette                                                                                                 $6,000
Lehman family, Lehman Brothers                                                                  $6,000
Dave H. Morris                                                                                                 $5,000
Sara Roosevelt                                                                                                 $5,000
Guy P. Helvering                                                                                                 $4,500
H.M. Warner,  Director, Motion Picture Producers & Distributors of America $4,500
James W. Gerard,  Financier                                                                               $3,500
Total                                                                                                                 $117,500

Once FDR was the nominee again of his party, the State Democratic Party swung into action.

The chief fundraiser in FDR's 1930 gubernatorial reelection campaign was Howard Cullman, Commissioner of the Port of New York and a director of the County Trust Company, which had an extraordinarily large interest in FDR's reelection. Besides Howard Cullman, the major contributors to FDR's campaign who were also directors of the County Trust Company included Alfred Lehman, Alfred  E. (Al) E. Smith, Vincent Astor, John Raskob, Dan Riordan, William F. Kenny.

Other prominent business leaders, mostly Wall Streeters, financing FDR's 1930 campaign were the Morgenthau family (with the Lehmans, the heaviest contributors); Gordon Rentschler, president of the National City Bank and director of the International Banking Corporation; Cleveland Dodge, director of the National City Bank and the Bank of New York; Caspar Whitney; August Heckscher of the Empire Trust Company; Nathan S. Jones of Manufacturers Trust Company; William Woodin of Remington Arms Company; Ralph Pulitzer; and the Warburg family.

U.S. Mid-Term Election Returns, 1930

The 1930 United States midterm elections were held on November 4, 1930. Hoover and the Republican Party suffered substantial losses. It was the first time since 1918 that Democrats controlled either chamber of Congress.

In the House, the Republicans lost 52 seats to the Democratic Party. The Republicans still maintained a one-seat majority, but after losing a few special elections because of the death of Republican members before the start of the new Congress, the Democrats took control with a one-seat majority.

In the Senate, the Republicans lost eight seats to the Democrats, but were able to maintain a one-seat majority.


Woodin Wrote a Letter to the Union League Club: AP Story, as printed in Port Arthur News (Tex.), July 26, 1928.

Contributions to Smith and Hoover Campaigns: Louise Overacker, Money in Elections (New York: Macmillan, 1932), p. 155. Directory of Directors in the City of New York 1929-1930. The Steiwer Committee - United States Congress, Senate Special Committee investigating Presidential campaign expenditures, Presidential Campaign Expenditures, Report Pursuant to S. Res. 234, February 25 (Calendar Day, February 28), 1929, 70th Congress, 2nd session, Senate Rept. 2024 (Washington: Government Printing Office, 1929). Freidel, The Ordeal. AP Story, "$1,570,628 in Party Chest," October 6, 1928 (as printed in the Syracuse Herald, p. 1). Steven Lomazow, M.D. and Eric Fettman, FDR’s Deadly Secret, Public Affairs, 2009.

Hoover's Views: The Memoirs of Herbert Hoover: The Cabinet and the Presidency 1920-1923 (London: Hollis and Carter, 1952), p. 300. Book by Murray Rothbard.

The Crash of 1929, Causes of the Depression. Martin Kelly in his  "Causes of the Great Depression" makes the Crash of 1929 the cause of the Depression; but what caused the Crash, and why is the beginning of the Depression dated before the Crash?

Dating of the Depression: The Great Depression is dated by the beginning of negative growth in U.S. Gross Domestic Product (GDP), which is a measure of all goods and services produced during a year. Business cycles are dated by an independent Business Cycle Dating Committee, also known as the "Wise Men", though not in recent years composed solely of men. It reports through the National Bureau of Economic Research. The Committee is generally considered to date the Great Depression by two quarterly declines in GDP, although it is on record as preferring to keep its daing options open.

NRA: John T. Flynn, "Whose Child is the NRA?" Harper's Magazine, Sept. 1932, pp. 84-5. Hugh S. Johnson, The Blue Eagle from Egg to Earth (New York: Doubleday, Doran, 1935), pp. 116, 140-41, 156-57. The Public Papers and Addresses of Franklin D. Roosevelt; Vol. 1, The Genesis of the New Deal, 1928-1932 (New York: Random House, 1938), p. 632.