The First Great Reset: Wall St, the Great Depression & the Pecora Commission

Initially many thought the severe Wall Street crash of October 1929 was a temporary phenomenon and like many subsequent crashes (i.e. 1987, 2008) the stock market would recover in a few months or years.

Unfortunately, this did not prove to be the case. After some upward spurts, stocks on the New York Stock Exchange continued to fall for the next three years and economic conditions throughout the country continued to worsen, so that by 1932 the market closed at 41, a drop of 89% over its 1929 high of 381. Employment in Wall Street firms plummeted, as the once heady activity evaporated and the Great Depression took hold.

The response would require a great reset between Wall Street and working Americans.

Herbert Hoover, who had trounced Democrat Al Smith and his progressive social welfare policies in the 1928 Presidential Election, continued to try to assure Americans that things would get better and prosperity was just around the corner. It was soon clear however that the Democratic Party, despite its disastrous defeat in 1928, was down, but not out.

New York State Governor Franklin D. Roosevelt appointed Al Smith’s social welfare advisor Frances Perkins as the inaugural New York state industrial commissioner. Perkins continued Smith’s social welfare policies and, as the Depression deepened, sought to provide relief to the State’s unemployed. She became nationally known as an articulate critic of the Hoover administration’s claims that the economy was improving. She said there was nothing worse for a man who couldn’t find a job to be told by the federal labor department that in fact things were improving if he could only wait.

By 1932 the prospects for a Democratic President were greatly improved. Al Smith (the 1928 candidate) was still interested, as was his successor Governor Franklin Roosevelt. Smith had thought that Roosevelt, because of his physical disability, would not be a serious contender and would be a transitional figure. Roosevelt however, had a number of advantages over Smith — (1) he was an upper class Protestant, (2) partially because of his cousin Theodore Roosevelt he was somewhat better known outside of New York, (3) he was not as closely identified with Tammany Hall and New York City, and (4) he was the incumbent Governor of New York, a major state.

Roosevelt was from a well-to do old-line Dutch New York family and he attended Groton, Harvard (where he was the head of the Harvard Crimson) and Columbia Law School. His first job out of law school had been as an associate at the prestigious Wall Street law firm of Carter Ledyard at 2 Wall Street, but it’s said he soon became bored.

When, at age 28, there was an opportunity to be the Democratic candidate for New York State Senate in Dutchess County, he took it. The district was strongly Republican and had not elected a Democrat since before the Civil War, but he worked hard campaigning full-time and hired a red Maxwell roadster to travel the expansive district. Against the odds he won in what proved to be a big Democratic year.

Once in the state’s legislature he became a maverick reformer like his cousin Theodore had been at his age. In 1911, he led a group in opposition to “Blue-eyed Billy Sheehan” – William F. Sheehan – a regular Democratic Party candidate to succeed Chauncey Depew, which caused considerable consternation to the regular Party leadership. He also met and became friendly with then Democratic Speaker of the State Assembly Al Smith.

At the National Democratic Convention in 1912 FDR allied himself with reformer Woodrow Wilson who defeated the regular party’s front runner candidate Champ Clark to win the nomination. Because of a split between the incumbent Republican William Howard Taft and Theodore Roosevelt running on the Progressive “Bull Moose” Party line, Wilson was elected President. Roosevelt, as a leading New York progressive Democrat, was able to obtain an appointment as the Assistant Secretary of the Navy, a position once held by Theodore.

Like Theodore Roosevelt, Franklin became an energetic advocate for expanding the US Navy and contracted for the construction of a number of major battleships (including the USS Arizona), seeing also that plenty of work went to the Brooklyn Navy Yard. When the First World War broke out he had gained a reputation as a leading national proponent of “preparedness.” The Democratic National Convention in 1920 thus named him as the Democratic Party’s candidate for Vice-President and the running mate for Ohio Governor James Cox. The Democratic ticket was defeated by Republicans Warren Harding and Calvin Coolidge.

Despite his loss in 1920, Franklin Roosevelt (then 38) had streaked a meteoric rise in politics. In 1921 however, he was struck with a severe case of polio which paralyzed him from the waist down and many believed his political career was over. Nevertheless, FDR determined to continue to pursue his political ambitions and his use of crutches and wheelchairs were not highlighted by the press.

A watershed event occurred at the 1928 Democratic National Convention when Al Smith, the presumptive nominee, asked Franklin D. Roosevelt to give the nominating speech. Roosevelt’s speech, in which he called Al Smith “the happy warrior,” boosted his reputation as a national political figure and he was elected as Smith’s successor in a very close race for New York Governor that fall.

By 1932, many outside of New York felt the Democratic Party would be better served with a candidate other than Catholic Al Smith, who was not expected to carry the South or Midwest. Franklin Roosevelt had a number of supporters in New York State, including Joseph P. Kennedy. Some said Kennedy attached himself to Roosevelt because he hoped to someday be President himself.  Another important FDR supporter in New York was James Farley, a formidable Tammany politico.

At the 1932 Democratic Convention it was clear that Roosevelt would be nominated when William Randolph Hearst, who had been backing Texas Governor John Nance Garner, threw his support to Roosevelt. Garner became the party’s candidate for Vice-President.

Roosevelt won the Presidency handily with 89% of the electoral vote, though only 57.1 % of the popular vote.

The New Deal Transition

The Presidential transition period proved difficult. Roosevelt selected a number of diverse individuals to form his cabinet, among them were civil rights activist and attorney Harold Ickes as Secretary of the Interior; notable progressive Henry Wallace as Agriculture Secretary (he was son of the Coolidge’s Agriculture Secretary); Henry Morgenthau, from a Jewish Wall Street firm, as Treasury Secretary; and Frances Perkins as Secretary of Labor, the first female cabinet member in history.

Although a Protestant social welfare reformer, Perkins had come up in government through the help of Al Smith who appointed her NYS Labor Commissioner. Roosevelt kept her on during his time as Governor and asked her to join his presidential administration. Perkins presented Roosevelt with an ambitious list of social welfare programs, including Social Security.

President Hoover asked that he meet with Roosevelt shortly after the election to discuss the Nation’s problems. Of particular concern were immediate demands for debt relief from for England and France’s First World War debts. Hoover proposed the formation of a debt commission, but Roosevelt declined his suggestion.

The country’s economy continued to deteriorate during the transition so that be Inauguration Day, March 4, 1933, a quarter of the nation’s banks had closed. Taking over in one of the worst crises in the nation’s history, Roosevelt sought quick and decisive action. Although his inaugural address is best remembered for one of its opening lines:

“So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life, a leadership of frankness and of vigor has met with that understanding and support of the people themselves which is essential to victory. And I am convinced that you will again give that support to leadership in these critical days.”

Roosevelt went on to outline the problems the country was facing:  “Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.”

FDR placed blame squarely on corporate greed:

“…rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

“The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

“Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.

“Restoration calls, however, not for changes in ethics alone. This Nation is asking for action, and action now.”

In his first one hundred days FDR’s administration, under the pretense of creating a “New Deal” for working Americans, created a series of new federal agencies such as the Civilian Conservation Corp (CCC), the Works Progress Administration (WPA) and the National Recovery Agency (NRA, later held unconstitutional), which were designed to provide employment (the unemployment rate was then near 25%) and regulate the economy.  The Social Security Act of 1935 would also include Frances Perkins’ pet projects, Unemployment Insurance and the Social Security program, which provides older Americans security in their old age.

Gold Standard and Inflation

These New Deal policies would not take effect immediately, but Roosevelt also pressed for immediate action, including temporarily suspending the convertibility of currency into gold, which had been the basis for the “hard money” policies Wall Street operators had advocated for years.

As Roosevelt took office one of the most depressed sectors of the economy was Midwestern agriculture, where the Great Depression hadn’t begun with the Crash of 1929, but in 1926 when prices for farm commodities dropped by more than 40%.  This made it almost impossible for farmers to pay their loans and damaged the position of local banks. In 1932 in Le Mars, Iowa an armed mob attacked a courthouse to prevent local judges from issuing writs of foreclosure to repossess farms and many conservatives said it was the beginning of an armed insurrection against capitalism inspired by Roosevelt’s “socialist” policies.

Roosevelt felt (as had William Jennings Bryan fifty years earlier) that the key to relieving farmers was to boost inflation to raise farm prices. This, however, was contrary to the “hard money” policies advocated by the bakers on Wall Street for the prior fifty years. An international conference led by “hard money” advocates on currency stabilization was underway in 1933, which Roosevelt effectively torpedoed and instead, he embarked on one of the most unusual monetary policy experiments in American history.

Roosevelt was mistrustful of Wall Street supposed monetary experts. Instead, he turned to his Treasury Secretary Henry Morgenthau, whose family owned an estate near Roosevelt’s in Dutchess County, where he had been experimenting with methods of improving his farm’s crops, and had been consulting with Cornell University from which he had graduated.

Morgenthau introduced Roosevelt to George F. Warren, a Cornell agricultural economy professor. Warren’s theories on commodity currency argued that agricultural prices would rise and fall with the price of gold. Much to the horror of Roosevelt’s more established Wall Street-connected financial advisers (men like James Warburg), Roosevelt ordered that the United States Government begin to implement Warren’s theory.

Every day for several weeks Roosevelt or an aide would instruct George Harrison, the head of the New York Federal Reserve Bank, to purchase gold at a price above the market price. This had the effect of raising the market price of gold and  –  if Warren was correct  – would raise the price of agricultural products. In effect, the United States was attacking undermining its own currency in a way that Jay Gould had attempted in his corner of the gold market fifty years earlier. Roosevelt’s detractors called Warren the “financial dictator of the United States.”

Although it was not clear that agricultural prices moved exactly in the way that Warren predicted, they did rise on the various commodity exchanges over several months. The result was that farmers in the Midwest began to feel that after almost fifty years of “hard money” policies dictated by Wall Street, someone in Washington might be trying to help them out. Many traditional Wall Street interests were horrified however, and there were large rallies in Manhattan (led by, among others, Al Smith of all people) and Roosevelt was forced to abandon the policy.

It’s unclear to this day whether Warren’s theory (which had never been tried before or since) worked in the way he predicted. However, there is no question that in the midterm elections the usually staunchly Republican Midwest voted for the Democratic New Deal policies of Franklin Roosevelt.

As the New Deal began to take shape, the position of Wall Street as a center of the American economy was already greatly diminished by the Crash of 1929.

At first, most of the Wall Street firms which were private partnerships had been able to evade serious scrutiny. Then the Chair of the Senate Banking Committee hired Ferdinand Pecora, a 50-year-old Italian-American who had 12 years of experience as a District Attorney in New York County, and had served as the County’s chief counsel, with the mandate to investigate the causes of the the crash.

The Pecora Commission methodically showed the extent of fraud and malfeasance by the leaders of Wall Street institutions. For example, it showed that National City Bank, one of the most notorious promoters of individual investment, paid cash bonuses to traders to dispose of stocks it knew to be the riskiest.  Pecors also showed that Jack Morgan, J.P. Morgan’s son, paid virtually no taxes and had encouraged the insider trading of his political friends.

As a result of the Pecora Commission the leaders of Wall Street were significantly disgraced in the eyes of most Americans. There was a new wave of regulatory laws and agencies such as the Securities and Exchange Commission, of which Roosevelt ironically would appoint Joseph P. Kennedy to be the first Chairman.

It would be almost a generation however, before Wall Street would regain anything close to the glorified position it had held in the 1920s.