Bridge financing in an economically turbulent era

What we learned — and didn’t learn

As we celebrate the Golden Gate Bridge, let us not forget the tenacity of those who raised the money against all odds during the  Great Depression.

Our story starts on January 13, 1923 at the first meeting of the Golden Gate Bridge Convention. It was held at the Santa Rosa Chamber of Commerce and chaired by Frank Doyle, a Sonoma County banker. The Dow Jones Average then stood at about 98.

On March 25, 1923, a special Bridge and Highway District was signed into law. The War Department (we have more politically correct names now) controlled the land on both sides of the Golden Gate and gave permission for the bridge on Dec. 20, 1924. The various counties involved approved the district legislation in 1925. There was much opposition in the courts to the formation of the district, but it was finally approved on Dec. 4, 1928. The Dow Jones now stood at about 300.

There was considerable concern in Congress that the run-up in the stock market was due to speculation rather than market fundamentals. The market continued to rise until the Dow Jones reached a peak of 381 on Sept. 3, 1929.

On Oct. 23, the collapse of the U.S. Stock Market triggered a selling panic. By mid-November, the market had declined 40 percent from its September peak. In the Great Depression that followed, unemployment rose to 25 percent, prices for farm crops fell by 60 percent, and 20 percent of all banks failed.

It was against this backdrop that the local voters went to the polls in November 1930 and approved the issuance of $35 million in bonds to finance the construction of the Golden Gate Bridge. The vote was overwhelmingly in favor, and in those very bad economic times showed either great courage or great naivete.

But opposition continued in the state and federal courts, until in 1932, Bank of America agreed to sell the bonds and purchased $6 million itself. In November 1932, construction contracts were signed and Franklin Roosevelt was elected president. At that point, the Dow Jones had lost 85 percent of its value from September 1929. It was in this atmosphere that construction on the bridge started in January 1933.

In March 1933, the Senate Banking Committee held hearings on the cause of the 1929 crash. Among the facts they discovered were:

  • The president of Chase had sold the stock of his bank short at the height of the bubble and collected $4 million in profits when it crashed.
  • The head of National City Bank, despite earning $1 million per year, had avoided all income tax by selling his bank stock to family members at a loss and then buying it back.
  • J.P. Morgan had not paid a cent of income tax from 1929 to 1931.

Nation magazine captured the popular sentiment at the time: “If you steal $25, you’re a thief. If you steal $250,000, you’re an embezzler. If you steal $2,500,000, you’re a financier.”

People had lost confidence in the banks. During February and early March, about one third of the currency in the country was withdrawn from banks. On March 4, 1933, President Roosevelt’s first action in office was to close all the banks and declare a bank holiday until March 9. On March 12, he gave the first of his fireside chats to try to convince people to put their money back in the re-opened banks. By the end of March, two-thirds of the banks were allowed to reopen and about three-quarters of the money that had been withdrawn was redeposited.

In June 1933, Congress passed the Glass-Steagall Act, which sought to limit conflicts of interest created when commercial banks were permitted to underwrite stocks or bonds. Individual investors had suffered at the hands of banks whose main interest was promoting stocks in which the bank held a position. Glass-Steagall banned commercial banks from underwriting securities. It also established the FDIC to insure individuals’ bank deposits, and it strengthened the Federal Reserve’s control over credit.

You would think that we might have learned something from the unbridled speculation of the 1920s, but the Financial Services Modernization Act passed in November 1999 repealed part of Glass-Steagall by removing barriers to any one institution being a combination of investment bank, commercial bank, and insurance company. That laid the groundwork for the irresponsible speculation that led to the great recession of 2008.

I will leave you with the words of Winston Churchill: “It would be a great reform if wisdom could be spread as easily and as rapidly as folly.”

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