Monday, Feb. 27, 1933

Michigan Moratorium (Cont'd)

A tall man with a $10 bill in his hand stood surveying an apple vendor's stand on Detroit's Woodward Avenue one day last week. "It's a shame," he said, "that an apple won't fit a pay telephone. I've been trying to call my wife since last night to tell her I wouldn't be home." After he explained that he was unable to get his bill changed anywhere in Detroit, the apple vendor loaned him a nickel. . . .

Citizens in the fourth largest U. S. city and in most of the other Michigan cities & towns last week found themselves in much the same predicament. Governor William A. Comstock's banking moratorium, unprecedented in scope (TIME, Feb. 20), had suddenly cut them off with the cash they had in their pockets. People were chary of giving small bills for big ones. By the time the moratorium was modified after two days to permit withdrawals up to 5% of deposits, the scarcity of money was acute. Even Governor-reject Brucker was forced to borrow $10. Newsboys had to sell on credit. In Midland, big Dow Chemical Co. coined magnesium into "Dowmetal money" with a specified value of 20-c-. The City of Detroit went into technical default, its bonds slumped badly. But Michigan stayed cheerful. It was considered funny to sing to your friends "Brother, Can You Spare a Dime?"

The dearth of money might have brought real suffering had not big employers like General Motors and Chrysler arranged to cash their own pay checks. Utility and insurance companies waived penalties for late payments. The Post Office Department rushed $5,000,000 from Washington to cover withdrawals from postal savings accounts and to honor money orders. Western Union and Postal Telegraph brought in cash from adjoining States to handle a flood of funds telegraphed to Detroiters.

Meantime Michigan buzzed with conflicting reports of what brought its banking situation to a head. About a year ago it was an open secret that many Michigan banks were in deep water, but Wall Street and other financial centres believed that the wave of failures that closed 84 banks last year--third largest number of closings in any State--had washed the situation clean. It was known that big Union Guardian Trust Co. had been weakened by heavy commitments in stricken Detroit real estate, that deposits had been seeping away. And until Governor Comstock retracted his first "unvarnished story" of a disagreement among Union Guardian's three big depositors (of whom two were not depositors) Michigan thought it knew all.

It was true that Henry Ford's $7,500,000 deposit was the largest. In addition Mr. Ford had loaned Union Guardian (of which Edsel Ford and his brother-in-law Ernest C. Kanzler are directors) another $11,000,000 in an earlier attempt to buttress the crumbling institution. The R. F. C. had put up $15.000.000. When Union Guardian approached the R. F. C. for more, Senator James Couzens, Henry Ford's oldtime partner and a bitter critic of the R. F. C., insisted that adequate security must be furnished. This the bank could not do for a loan large enough to permit it to liquidate its business as planned. Wealthy Senator Couzens is said to have proposed then to Henry Ford that together they endorse a $20,000,000 note to be used as R. F. C. collateral. Mr. Ford, maintaining that the R. F. C. should help out banks, not ask others to do so, refused. "Jim was trying to make a sucker out of me," he said. Furthermore he refused to subordinate his deposit to the R. F. C. President Hoover was reported to have telephoned Mr. Ford but failed to budge him from his position. A moratorium was the only way out.

Governor Comstock soon made the holiday optional and many banks outside Detroit reopened with severe restrictions on withdrawals. In Ann Arbor, home of the State University, banks allowed $20 to heads of families. Banks in the northern peninsula across Lake Michigan resumed normal business.

The moratorium was a midriff blow to general business confidence. On the New York Stock Exchange, both shares and bonds were sold down to the lowest prices of the year. A staggering rise of money in circulation to the highest point of the Depression was blamed chiefly on huge cash shipments to the Detroit area. European speculators neatly hitched news of the eight-day moratorium to the attempt on President-elect Roosevelt's life for a quick raid on the dollar. Francs and belgas shot aloft. A brief outflow of U. S. gold followed.

While the Michigan Legislature cooled its heels in Lansing waiting for a program to be submitted by Detroit bankers, the State Senate voted to make Governor Comstock banking dictator.* The House, wary, postponed action. Breezy, baldish, bespectacled Bill Comstock has long headed the State Democratic organization. His election last autumn was his fourth run for Governor. Since the Depression he has lost his personal fortune, made in lumber; his salary ($5,000 reduced voluntarily to $4,000) was garnisheed under an old judgment last fortnight.

As the end of the moratorium (pieced out by Washington's Birthday) approached, a scheme was evolving in Detroit's day & night powwows known as the "Michigan Plan." The suggestion of Chairman George Willets Davison of Central Hanover Bank & Trust Co., attending the conferences with representatives of other Manhattan banks, was to merge the big Guardian and First National groups. At this Detroit balked, seeing a possibility of Eastern dominance. But in the Michigan Plan, calling for segregation of frozen and liquid assets in both State and National banks, bankers believed they had not only a solution for their own troubles but also a modus vivendi for closed banks in other states. Deposits would be divided in approximately the same proportions as assets. The liquid branch would be operated normally, subject to certain restrictions at the start; the frozen branch would await a thaw. With both State and Federal legislation required it seemed certain that the holiday would be extended.

*Missouri's Legislature was considering a bill last week to permit officials of any State bank to suspend payment when threatened with a run. Then the Finance Commissioner will be called in to operate the bank until he decides whether continuation of business, reorganization or liquidation is the most suitable course. The law is aimed to catch the situation before it is hopeless. Legislation to the same end is up before the New York State Senate.

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