Monday, March 24, 2014

Asheville's Depression Debt Redemption

Asheville, NC is home to the 2nd largest number of Art Deco buildings in the nation. The historic Legal Building traces its roots back to 1909, when downtown Asheville was entering its building heyday.
Asheville's historic Legal Building

On March 24, 1663, King Charles II granted a land charter for the Province of Carolina (named after his father, Charles I, Carolus being the Latin version of 'Charles') to eight Lords Proprietors, a form of repayment for their help in restoring him to the throne.

On another March 24, Samuel Ashe, the ninth governor of North Carolina, was born in 1725. Ashe is the namesake for many parts of the state, including Asheville.

The Miami Beach of the Mountains, Asheville is "the happiest city in America" according to Self Magazine. But it wasn't always so.

On November 20, 1930, eight North Carolina banks failed, including Asheville's largest Central Bank and Trust. Thousands lost their life savings, including the city itself. With $8 million gone in a single day, projects halted, employees lost salaries, the budget was cut in half.

An independent audit of the city's finances found that officials used public funds to try to save the bank. Their efforts were not appreciated. "Even if the city's commissioners pursued the course they thought best," the New York Times reported, "as public officials they have destroyed themselves plunged the city headlong into debt, betrayed their trust and forfeited the right to their possessions."

The bankers took this sudden loss of public confidence particularly hard. On February 17, 1931, the vice president of Central, Arthur R. Rankin, shot himself to death. Later that week, a bank cashier cut his throat but survived. On February 23, four days after bank and public officials were indicted for fraud and conspiracy, Asheville mayor Galatin Roberts went to the fourth floor bathroom of the Legal Building and shot himself in the temple. He left a note.

"My soul is sensitive and I am wounded unto death. God knows I did no wrong during my term in office. My hands are clean and my conscience is clear."

With the largest municipal debt per capita of any American city ever, Asheville experienced four decades of economic stagnation and population decline. Bankruptcy might have been easier, but the community refused. "We owe this money and we ought to pay it," Asheville city employee Weldon Weir explained. Each year as bonds were retired, the Asheville Citizen ran a headline "Bonds Cremated." The last payment was made in 1976.

Though it wasn't easy, the experience is treated as a blessing.  In the go-go 1960s when other cities were destroying buildings to "modernize" (e.g, New York's Pennsylvania Station), depression-era debt payments forced Asheville's skyline to stay beautifully stuck in Art Deco-y 1930, "and is why our historic fabric was not bulldozed," writes Ashevillenow.com.

Today, with debts repaid and conscience cleared, Governor Ashe's namesake town is a downright happy place to be.



Sunday, March 16, 2014

Mississippi's Mixed-up 13th Amendment

Portraits of Blanche Kelso Bruce, Frederick Douglass, and Hiram Rhoades Revels surrounded by scenes of African American life and portraits of Jno. R. Lynch, Abraham Lincoln, James A. Garfield, Ulysses S. Grant, Joseph H. Rainey, Charles E. Nash, John Brown, and Robert Smalls. Crica 1883, from LOC.gov

March 16 marks the anniversary of Mississippi's ratification of the 13th Amendment, the one that proclaims "Neither slavery nor involuntary servitude shall exist within the United States." March 16, 1995, that is.

The 13th Amendment became part of the Constitution in 1865, after three-fourths of the states adopted it, but four took their sweet time: Texas ratified in 1870, Delaware 1901, Kentucky 1976, and Mississippi 1995.

To make matters more delayed, it wasn't until last year that the ratification was official, since the Mississippi legislature forgot (?) to let the US archivist know. After being inspired by the movie "Lincoln," Dr. Ranjan Batra, a professor of Neurobiology at the University of Mississippi, worked with the state archives to fix the clerical oversight, ABCnews reported in February 2013.

Back in 1865, Mississippi's Memphis Daily clarified that their opposition to the amendment was not to the first section outlawing slavery "as the slave states themselves have in convention solemnly decreed emancipation," the newspaper wrote in November. Rather it was the second section that was "amenable to grave objection to every man who is sensible of the high duty of preserving the state sovereignty feature of a mixed government."

The second section states that "Congress shall have power to enforce this article by appropriate legislation."

This encroachment on states rights, the editors declared ironically enough, made its citizens less free. They likened its passage to Napoleon III's 1851 "bloodless coup d'etat that passed France from a Republic to an Empire. The nation went to bed in a polity of freedom and woke up to find masters." (I guess no one likes to be a slave.)

While Mississippi was advocating for laws that disenfranchised its majority black population (just 45% of Mississippians were white at the time), they were also electing 226 black Mississippians to public office, compared to only 46 blacks in Arkansas and 20 in Tennessee, according to the Mississippi Historical Society.

Mississippi also sent the nation's first and second African-Americans to the US Congress, Hiram R. Revels who served an incomplete term 1870-1871, and Blanche Kelso Bruce who served a full term 1874-1881.

Political progress was not enough for the prejudice seared into hearts and minds, concluded Colonel Samuel Thomas, the assistant commissioner of the Freedman's Bureau.  Though white Mississippians “admit that the individual relations of masters and slaves have been destroyed by the war and the President's emancipation proclamation, they still have an ingrained feeling that the blacks at large belong to the whites at large,” Colonel Thomas told lawmakers in 1865.

Between 1881 and 1898, however, America's currency at large belonged to Mississippi Senator and former-slave Blanche K. Bruce. Senator Bruce was appointed by President Garfield to be the Register of the Treasury, making him the first African-American whose signature was represented on U.S. paper currency.

When he was re-appointed by President William McKinley in 1897, editors at the Washington Bee were unequivocal.

"Newspapers of all shades of politics agree that in the appointment of exSenator Bruce to the Register of the Treasury, President McKinley has made an admirable selection."  Editors from the Herald in Rochester, NY concluded, "Blanche K. Bruce, the new Register of the Treasury, is of African decent, but the name on a greenback is not to be sneezed at."

Senator Bruce died one year later, on March 17, 1898.







Tuesday, March 11, 2014

In Fed We Trust

President Herbert Hoover escorting Franklin Delano Roosevelt from the White House to the Capitol to take the oath of office as President, March 4, 1933. From LOC.gov

Trust is a funny thing. It can build empires and be broken by a promise. It is gained slowly but lost quickly. While not essential for life, we can't live without it. And in March 1933 it was in short supply.

The root of the bank crisis that led to the Great Depression can be traced to a promise broken by the Federal Reserve, so argued Milton Friedman and Anna Schwartz in their seminal book "Monetary History of the United States."

Established in 1913, in the wake of the 1907 panic, the Federal Reserve was designed to prevent major bank failures by acting as the lender of last resort. Prior to the Fed's creation, as Ben Bernanke explained in a 2002 speech, bank panics were typically handled by banks or bankers themselves. Large, solvent banks had an incentive to act because they knew that an unchecked panic would ultimately threaten their own finances.

But there was always a fear that "men may not be found in an emergency with the patriotism, courage and capacity" necessary to prevent a catastrophe. This was one of the arguments for central banking put forth by Senator Nelson Aldrich in the wake of 1907 crisis.

That isn't to say that Americans feared bank failures. Liquidationist believed that by weeding out "weak" banks, failure was a harsh but necessary component of a healthy banking system. Between 1921-1929, an average of 600 banks failed every year, according to FDIC data. Treasury Secretary Andrew Mellon advised President Hoover that it was not the Fed's job to rescue poorly managed, failing institutions.

So they didn't. In December 1930 (a year after the market crash) the Fed refused to bailout New York's Bank of the United States.* But it was not managerial weakness, per se, that caused the BUS to fail. In November, the announcement that merger negotiations between the BUS and three other banks broke down "aroused distrust in the general public," according to the New York Times. In December, a false rumor that a shareholder had not been paid for his shares sparked a run that eventually forced the bank into a liquidity crises.

When the Fed refused to insure the bank's liabilities, Americans felt duped. Unlike the small bank failures that occurred during the 1920s, the BUS was a member of the Federal Reserve System. It was also the largest ever to suspend payments, "possibly the largest in the world to close its doors." Letting it fail caused thousands to lose their life savings, and severely diminished America's faith in the Fed's ability to prevent major bank failures.

In October 1931, after Great Britain's abandonment of the gold standard sparked a run on banks, a consortium of private bankers attempted to fill the gap by organizing the National Credit Corporation. But with the existence of the Fed--the purported lender of last resort--not enough felt the need to step-up, and the organization failed within weeks.

Business leaders then appealed to the federal government. In January 1932, the Hoover Administration created the Reconstruction Finance Corporation (RFC) whose primary function was to make advances to banks, and failures subsided. By the end of 1932, the RFC had assisted over 4,000 banks and authorized almost $900 million in loans. But the appearance of a bank's name on the RFC list was interpreted as a sign of weakness,  ultimately discouraging banks from accepting its assistance.

In the winter of 1933, faith in the nation's banking system reached a nadir. The fear contagion started in Michigan on Valentine's Day. Trying to prevent the failure of Detroit's large banks, Michigan Governor William A. Comstock declared a statewide banking holiday. This succeeded in preventing bank failures, but also confirmed the public’s worst fears—that the banks needed to be closed.

As depositors in every state lined up outside bank branches, failure became a self-fulfilling prophecy. On March 5 (barely a day in office), FDR shut down all of the nation's banks, proclaiming what is known today as the Bank Holiday (a misnomer if ever there was one).

On March 9, he signed the Emergency Bank Act, declaring a sort of Martial Law on the nation's economy. The Act gave the President control of the entire banking system, and nearly unlimited resources to resolve its problems. This hasty legislation (only one copy was made and Congressmen cast their vote after having it read to them aloud) was the first bold move the President made to restore confidence.

The second occurred on March 12 (a Sunday) with the first-ever "fire side chat." At 10 PM, radios nation-wide broadcast his avuncular assurances. Using understandable language,  FDR clarified the state of America's banks. Fear abated. On Monday, depositors stood in line to re-deposit their cash.

In November 2002, at Milton Friedman's 90th birthday, Ben Bernanke thanked the Nobel-prize winning economist for his insights. "Regarding the Great Depression," Bernanke gushed, "You're right, we did it. We're very sorry. But thanks to you, we won't do it again." 

In 2008,  Ben Bernanke's Federal Reserve kept his promise. Many agree his bold and decisive actions prevented another Great Depression, though those actions were deeply unpopular.

There's no denying that by shifting the responsibility of providing liquidity in financial crises from the banks (who for the most part created the problems) to the people via government guarantees, the existence of the Fed creates a moral hazard. This is an unsavory reality. What central bankers learned from 1933, however, is that as long as the Fed exists it must keep its promises or be destroyed by them.

Watch Milton Friedman discuss the failure of the Bank of the United States and the anatomy of bank runs on YouTube.



*Things might have been less severe if the Bank of the United States had a different name. "Though an ordinary commercial bank," Friedman wrote, "its name had led many at home and abroad to regard it as somehow the official bank."

Flannery O'Connor

You shall know the truth and the truth shall make you odd.