Independent Man: The Life of Senator James Couzens

• 36. "A HELL OF A MESS"
• Chapter
• Wayne State University Press
• pp. 235-244
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CHAPTER XXXVI

“A HELL OF A MESS”

The holiday served its major purpose of keeping any depositors, including Ford, from making withdrawals. But getting the banks open again was another matter.

Originally the holiday was supposed to last only eight days. Governor Comstock, however, was forced to extend it indefinitely at the request of the bankers themselves. For the federal bank officials took the position that the Guardian National Bank of Commerce as well as the First National Bank-Detroit, the leading Detroit banks, each head of its group, could not be reopened unless they were reorganized and more capital put into them. Otherwise, the banks would simply collapse under new runs that were bound to develop, they said. Their condition had been perilous, anyway, for months. In fact, the federal officials said, both banks were actually insolvent.¹ Chief Bank Examiner Leyburn summed up the situation: “Gentlemen, we are in a hell of a mess!”²

With its nationwide repercussions, the “mess” was complicated by the attitude adopted by nearly everyone concerned. For the efforts of solving the humpty-dumpty situation that had developed were carried on against a background of the most bitter kind of recrimination and misrepresentation.

Everybody apparently tried to place the blame on everybody else.

President Hoover and those close to him, blamed, at first, Governor Comstock.³ The proclamation of the holiday was unnecessary; Comstock had yielded to panic, they said. As Theodore G. Joslin, one of Hoover’s secretaries, even said later:

“I have always felt that the governor lost his head; if he had not become panicky, that catastrophe would have been averted.”⁴

2

A defense of Hoover in the banking crisis—a book, Prelude to Panic, by Lawrence Sullivan—contained an amazingly inaccurate version.

Secretary Mills . . . had been informed that the Detroit bankers, now in alarmed confusion, had called Governor William A. Comstock into consultation. A few hours later all the RFC plans were brought to an end by the sudden determination of the governor to proclaim a ten-day banking holiday throughout the entire State! This proclamation . . . was issued without consultation between Governor Comstock and the RFC, Treasury, or White House. By this single stroke all the ground was instantly cut from under the Washington rescue plans.⁵

3

Hoover also blamed Roosevelt. Here the argument was that the bank crisis would not have occurred had not Roosevelt undermined “public confidence,” first, by failing to commit himself to Hoover’s economic policies, and second, by failing to disavow certain advisers who suggested that it might be a good thing for the country to go off the gold standard.⁶

As for many of the bankers, they at first placed the blame, generally speaking, on “general conditions,” ignoring evidence that some of them had been making unwise investments or extending unwise loans on the basis of unsound security, or that some bankers also had been motivated by “manipulation, greed, and dishonesty” (Couzens’ words later) as they helped themselves, in the form of loans, to depositors’ money in their custody. Later many bankers also echoed Hoover: “Roosevelt was at fault.”

The Reverend Charles E. Coughlin, the “radio priest” of the Church of the Little Flower at Royal Oak, Michigan, was blamed—because of speeches he had made attacking the banking system in general and the Detroit Bankers Group in particular.

The Detroit Times was blamed—because it had been devoting a good deal of its space to the Coughlin speeches.

The RFC was blamed. Communists were blamed.⁷ The Senate Finance Committee inquiry into Wall Street was blamed.⁸

Henry Ford came in at the outset for some slight criticism, for Governor Comstock issued a statement telling in part, although in a garbled way, the connection Ford had with the holiday. Later Governor Comstock issued a repudiation of his revelation about the Ford role. “I misunderstood the facts,” he said.⁹ Even Couzens elected not to emphasize the part played by Ford in the disaster, not even in his own defense.

4

But of all the scapegoats, Couzens himself became Number One.

“You do not and cannot realize how unanimous the belief is that you are to blame for this bank situation!” Thomas A. Payne, an attorney who had managed Couzens’ 1930 re-election campaign, and one of his most loyal friends, wrote to him. This was all too true.

Instantaneously there grew up a legend:

The Detroit banks could have been saved by an RFC loan, but “Senator Couzens blocked the loan,” first, because he “hated Henry Ford,” and, second, “because he hated all rich men in Detroit.”

Unwittingly, perhaps, Hoover was in large part responsible for starting this legend. In talks by telephone with various Detroiters at the beginning of the crisis, he had spoken bitterly of Couzens’ “non-cooperation” and mentioned, without proper interpretation, Couzens’ threat of “shouting from the rooftops.”¹⁰ Editor Malcolm Bingay, who admittedly disliked Couzens, obtained Hoover’s version. On the second day of the holiday, he published in the Free Press on its front page a story that set the pattern. The headlines were:

FORD-COUZENS CONFLICT
REVEALED AS A FACTOR
IN FINANCIAL STALEMATE

Senator Opposed RFC Loan to
Trust Firm, Saying Collateral
Was Not Sufficient

Insisted That Motor King Keep $7,100,000
on Deposit as “Frozen Asset”; Magnate
Refused to Sign Joint Note

and the article said:

If it had not been for Senator Couzens’ protests, the loan would have been granted.

The RFC officials and other bankers held to the belief that this loan was necessary. There followed a bitter battle with Senator Couzens, who held that it was not a safe investment for the Government. He insisted that there should be more collateral. He was called to the White House and President Hoover pleaded with him. He vowed he would go on the floor of the Senate and denounce the loan if it were made. . . .¹¹

5

A more garbled version would be hard to imagine. But Couzens largely had himself to blame. For one thing, when it had leaked from the supposedly secret White House conference that he had made his “rooftops” threat, he readily confirmed that he had made the threat, but, like Hoover and Bingay, without making clear the circumstances.¹²

Later in the heat of controversy he voiced sentiments which made it look as if he himself confirmed Bingay’s version or that he would have been glad if he had actually blocked the loan. For example:

“I did not stop the much disputed loan. . . . However, I’m glad to have the public think I stopped it, if the public wants to think that; because as it was presented to Washington, it was an illegal and a wicked loan.”¹³

Moreover, just before the bank holiday, he had given to Jay Hayden a long interview on his views concerning RFC loans in general which made it appear that he was opposed to any kind of assistance to banks. This interview was unfortunately timed. It appeared in the Detroit News on Monday, February 13, the day before the holiday.

Everybody is saying, “Let us ask the RFC for money.” Now that, to my mind, raises the largest single issue facing the new administration. It is whether we shall open the treasury door to everyone or close it to everyone.

I supported the RFC in its present form because I believed that, by aiding the railroads, the banks and other like industries, we would benefit the great body of bank depositors and borrowers, insurance policy holders and the like, and then stimulate recovery generally.

But during the year that has elapsed, I have very carefully watched the operations of the RFC and the financial developments in the country and I have about reached the conclusion that the federal government either has to support the debt structure for all of the citizens or we have got to stop the rescue of any of them.¹⁴

To a good many people, later, as well as at the time, this article appeared to represent corroboration of the story in the Free Press two days later. Besides this, the newspapers then recalled that Couzens had denounced in the Senate an RFC loan of $12,800,000 to the Missouri Pacific Railroad, because, as chairman of the Committee on Interstate Commerce, he was not satisfied that the way to solve the railroads’ financial problems was through that procedure. He had sharply observed that the chief beneficiary would be, not the railroad, but J. P. Morgan and Company.¹⁵ Also, he had raised questions about the Dawes Chicago bank loan in 1932, although in the end he approved that transaction when shown facts proving that if it had not been entered into, probably all of the banks in Chicago would have been forced to close. These protests, together with his sponsorship of a special Senate subcommittee to act as watchdog over all RFC loans, gave him the reputation of being irreconcilably anti-RFC as well as against helping the Detroit banks, although this was not at all his true position.¹⁶ Even careful students of the crisis would be misled by published material about him on this point.

6

But there was still one more reason why the false version crystallized against Couzens. Usually over-quick to defend himself, he now determined that with the banks closed, it would be unpatriotic for him to stir up controversy over why the banks were in such a condition. To tell the facts, he would have to attack the bankers, and also to stress the part played by Ford. He decided not to do this. “Some day the history of all the events and personalities who played their parts, will be written, but now is not the time,” he said.¹⁷

So, instead of devoting time to hitting back at accusations against himself, he concentrated on efforts for getting the Michigan banks reopened. “I am rushed to death with Michigan’s bank troubles, plus all my own legislative work,” he wrote Madeleine on February 20th.

His efforts, in which he was assisted by Vandenberg, bore fruit in the one plan that might have permitted the Guardian National and the First National to reopen. This was a proposal, embodied in a Joint Resolution, soon known as the “Couzens Resolution,” which he presented to the Senate on the 20th. It authorized the Comptroller of the Currency to allow national banks, such as those in Detroit, to reopen and operate along the lines of a plan that already had been worked out in New York and in Iowa for state banks, permitting “frozen” banks to start from scratch after segregation of their non-liquid assets and obligations against them from current deposits and commitments, if state laws permitted. Disbursements would be permitted on a limited basis. In effect, this permitted insolvent banks to act as their own receivers, the while avoiding the stigma and penalties of failure.¹⁸

This resolution was adopted by the Senate in two days. The House concurred on February 25, and Hoover promptly signed the resolution.¹⁹ Then, all that was needed to reopen the old banks—if the bankers so desired—was for the Michigan legislature to pass complementary legislation. Such legislation was introduced at Lansing, at Couzens’ suggestion, with Kanzler acting as principal proponent.

7

Meantime the bankers and other businessmen in Detroit were working in other directions. They considered plan after plan. But each came to nothing because something that the First National directors might propose would be vetoed by the Guardian directors, and vice versa. Or cliques within the groups gave vent to expressions of rivalry and mistrust. Moreover, there was still reluctance on the part of the top financiers to put up any money.

The bankers’ solution was to have one more merger, to consolidate the Guardian National and the First National. In this, they were encouraged by New York bankers and by the RFC itself. The theory was that if some $11,000,000 of new capital were subscribed for a consolidated bank, the RFC would extend a sizable loan to the new bank for unfreezing the frozen assets of the old banks. Then the Comptroller would authorize the new bank to take over the two old ones.

But an immediate hitch developed—again in the attitude of Henry Ford. As the leading depositor in both banks, his support was essential regardless of anyone else’s. He was counted on to help supply the new capital—and Ford kept aloof.²⁰

8

Indicative of the hysteria was a hastily written letter from Secretary of Commerce Chapin to Couzens. “I foresee by the first of the week,” Chapin wrote on February 25th, “the possibility of very serious disorders. All sorts of threats are being made by depositors, and what they want—and that quick—is some form of relief. If it is not afforded, we shall have a riotous Detroit and a prostrate Michigan facing us.”²¹

Two days later, the newspapers announced that the crisis was solved. Two new banks were to be established, as the bankers had urged, with Ford cooperation. The difference between this and earlier solutions was that the new institutions would be all Ford.

The Fords would put up, not some capital, but all of the capital, $11,000,000, and they would own all of the stock and designate the directors. The RFC would put up $135,000,000—$100,000,000 on First National assets and $35,000,000 on Guardian National assets. There would be an immediate payoff of 50 per cent to depositors.

At first, even by the bankers who were to be displaced, this Ford plan was greeted with hosannahs. A joint statement by the boards of directors of the First National and the Guardian National banks called it “generous and public-spirited.”²² The application for the $135,000,000 loan was rushed to the RFC. It was widely believed that the new banks would be operating in a few days.

Henry Ford gave out jubilant statements. He told newspaper reporters that he would evolve a new kind of banking system in the world. “Our policy will be an evolution,” he said. Loans would be made only for “productive purposes.” As for interest, it would be reduced or even “eliminated.”²³ In Dearborn, Ford’s town, a civic demonstration was staged, with three thousand persons parading the main street, bearing a banner that said: “BANK WITH HANK!”²⁴

9

In Washington, Couzens was delighted, especially as he had been on the verge of offering to put up the capital himself for a new bank in Detroit, in answer to urgent pleas that “something had to be done” to get some kind of commercial banking going again. He had gone with Attorney Henry Bodman, prominent in the Detroit banking picture, to the office of the Comptroller to set his plan in motion.

He was greeted there by Acting Comptroller F. G. Awalt, who told him excitedly that the problem was settled. In Couzens’ words later, “I, immediately, with considerable enthusiasm, said, ‘Well, that lets me out!’ I was glad to be out.”²⁵

But, almost immediately, came a great cooling off.

The fact was that almost no one, after reflection, was happy over the Ford solution, except those Detroiters whose sole interest was to get the promised 50 per cent payoff as quickly as possible.

The bankers were not happy. They did not look forward to being squeezed out of the banking business, or converted into operators on a new kind of Ford assembly line. They gagged over Ford’s financial ideas.

Ford’s business competitors were not happy.

A large number of outstate Michigan bankers immediately kicked up a rumpus. Under the leadership of Joseph H. Brewer, of Grand Rapids, president of the Michigan Clearinghouse Association, they began to bombard the RFC, the Comptroller, and all of the Michigan delegation in Congress, including Couzens, with telegrams opposing the granting of the $135,000,000 loans to the new Detroit banks. In the main, this was because of a ruling by the Comptroller that deposits of the outstate banks in the two Detroit banks, amounting to some $20,000,000, were not to be given a preferred status.²⁶

10

Then Couzens himself set up some opposition. He took the position that it was against the national interest for the federal government to commit itself to a loan of $135,000,000 to the banks of one city, even his own city, when at that time similar crises were developing in other parts of the nation. Banks in Cleveland, Toledo, and Baltimore had just sent appeals to the RFC for large emergency loans. When this happened, even the RFC officials began to doubt whether they should grant the Detroit request.²⁷ That the federal treasury had the ability to bail out all banks was considered highly doubtful.

Couzens still did not at this time oppose all RFC help to the Detroit banks. A loan should be made, he said, but he suggested that it be limited to about $50,000,000. This would have enabled the banks to reopen, but would have reduced the amount of the initial payoff.²⁸ Couzens later explained:

I thought it would establish a precedent for every city, county, and hamlet in the United States to call upon the federal government for its financial needs. The federal government must stand, regardless of what happens to states or their political sub-divisions. When the national credit is gone, there will be chaos, and regardless of what my constituents may think of my actions concerning their particular affairs, I am here to use every ounce of energy and effort to protect the federal government.²⁹

11

In the end, it was the RFC itself, regardless of Couzens’ position, which scaled down the Detroit loan. For, in the meantime, RFC appraisers had been burrowing into the records of both banks, and now came up with reports that neither bank had assets to justify the $135,000,000 loan. All that could be granted was $78,000,000. The RFC proceeded on that basis.³⁰

Couzens raised no objections to the $78,000,000 figure; it represented, in his view, a reasonable compromise. He did ask that he be given the right to “represent” the RFC in the ultimate negotiations with the Detroiters, but this request was refused.

President Hoover ordered that he be “ignored,” and the $78,000,000 loan be extended without delay in order to get the new Ford banks opened.³¹ Again it was announced that the crisis was over.

12

Suddenly, all was confusion again. Two things had happened.

The Ford plan, also the RFC commitment, had been predicated on the willingness of the Central Hanover Bank in New York to renew loans totaling $20,000,000 made earlier to the First National Bank. It had been thought that the New York banks would agree, as a matter of course, to the renewals. Now came the news that legal objections had been raised by the bank’s lawyers, objections supported by Stanley Reed, then counselor of the RFC, later an Associate Justice of the Supreme Court.³² The $20,000,000 renewal was out.³³

Then a revolt against the Ford plan developed in the ranks of the officers and shareholders of the First National Bank. At 11:45 P.M., Tuesday, February 28, McKee was handed a letter from Mills of the First National Bank, which read:

At the conclusion of the board meeting today, I was instructed to telephone Mr. Edsel B. Ford and to state to him that the general opinion of the board is that it is inadvisable to go ahead under the proposed plan in which he and his father are interested. I might add, for your information, that this action of our board was unanimous. . . .

Faithfully yours,                 
WILSON W. MILLS,       
Chairman.³⁴             

As RFC President Miller remarked to Couzens, this was a “peculiar situation.” For on the same day that James T. MacMillan, a prominent director of the First National, telephoned to him to ask that an additional $20,000,000 be granted to cover the New York bank item, Wilson Mills, the chairman of the board of the same bank, telephoned to ask that this $20,000,000 not be granted.³⁵

In explanation, Mills later said that while he did not “block the Ford plan,” he definitely was against it. “The bank was a profitable business and Ford’s plan meant keeping all the profits for Ford, as Ford would not let anyone else hold any stock. . . . We felt that the depositors were entitled to [the profits]—not the stockholders and not any special interests, not Dearborn or New York, or anybody.”³⁶

What this “peculiar situation” added up to was that the bankers, in particular those of the First National, had by then decided that they wanted to operate on the basis of the proposal sponsored in the Senate by Couzens. As stated by Mills to the RFC on February 28, “If the $20,000,000 is not forthcoming, the bank will seek to operate under the Couzens Joint Resolution.”³⁷

13

Suddenly everyone concerned, in Washington as well as in Detroit, looked for salvation to the plan that Couzens had embodied in his resolution. Eugene Meyer, then Governor of the Federal Reserve Board, had written to Hoover on February 25th:

Recently the Board, after giving the matter careful thought with these considerations in mind, approved the joint resolution regarding the powers of the Comptroller of the Currency introduced by Senator Couzens. . . . It felt that such a measure would be helpful in facilitating the working out of existing situations in various communities without creating undue disturbance.³⁸

So, despite all the curses heaped upon him, Couzens now became the man of the hour. Requests poured in on him that he leave Washington immediately for Detroit to take the lead in putting the plan into effect there. Even Ford begged him to come.³⁹ So did Stair of the Free Press, who telegraphed: “Your presence in Detroit and your help on this banking situation greatly needed.”⁴⁰ Mills of the First National twice telephoned him. Senator Vandenberg, whose responsibility to Michigan was equal to Couzens’, but who cautiously stayed in the background, also urged him to go. Couzens went.