reality, the nation's problems were just beginning. Throughout 1930 and 1931 unemployment increased and incomes plummeted. As credit tightened, corporate giants and whole industries stood poised on the brink of failure. To solve the credit crisis, Hoover once again promoted a cooperative approach. In a secret meeting in October 1931, he asked top banking executives to create a private fund of five hundred million dollars to be known as the National Credit Corporation to aid struggling financial institutions. Shocked when the bankers asked for government intervention instead, Hoover soon gave up on this voluntary strategy.10 In his State of the Union address in December, he urged Congress to create the Reconstruction Finance Corporation (RFC) to provide up to two billion dollars in emergency financing to banks, railroads, and insurance companies.11 He also asked Congress to address the growing credit crisis in home ownership.
The Depression threatened to undermine home ownership in America. Across the country, foreclosures rose from an annual rate of 75,000 per year prior to the stock market's collapse in 1929 to 273,000 in 1932.12 Nearly one in six mortgages slipped into foreclosure between 1930 and 1934.13 Since building and loans held roughly a third of the home mortgages in the United States in 1930, these foreclosures put enormous pressure on their working capital.14 Unable to sell many of these properties, they carried them on their balance sheets and paid the taxes, maintenance, and, of course, property insurance.15 As loan payments slowed, the value of the assets in their portfolios declined and creditors made demands. Many building and loans failed.
Hoover organized the White House Conference on Home Building and Homeownership in 1931 to confront the crisis. Addressing the assembled members, Hoover echoed the rhetoric of Seymour Dexter and successive leaders in the U.S. League of Savings and Loans:
Next to food and clothing, the housing of a nation is its most vital social and economic problem. . . . I am confident that the sentiment for homeowner-ship is so embedded in the American heart that millions of people who dwell in tenements, apartments and rented rows of solid brick have the aspiration for wider opportunity in ownership of their own homes. To possess one's own home is the hope and ambition of almost every individual in our country, whether he lives in hotel, apartment or tenement. . . . This aspiration penetrates the heart of our national wellbeing. It makes for happier married life. It makes for better children. It makes for confidence and security, it makes for courage to meet the battle of life, it makes for better citizenship. There can be no fear for a democracy or self-government or for liberty or freedom from homeowners no matter how humble they may be.16
Continuing, Hoover announced that the time had come to consider what role the federal government might play in facilitating home ownership.
Initially, Hoover's call for action seemed to fall on deaf ears. Building and loan leaders hoped Hoover would allow thrifts to become members of the Federal Reserve system, giving them access to credit, but commercial bankers attending the White House conference rejected this idea and failed to support any substantial changes in the mortgage finance system. Congressional leaders also scorned the idea of creating a federal institution to provide a credit facility for mortgage lenders. Even Hoover was reluctant to put the nation's home mortgage system in the hands of the Federal Reserve's governors, whom he saw as a “weak reed for a nation to lean on in time of trouble.”17 So savings and loan officials dusted off an old proposal.
After World War I, the league had proposed the creation of a federal home loan bank to provide credit to the nation's thrift institutions. Congress, focused on shrinking the size of the federal bureaucracy, showed little interest. The league abandoned the effort. With the Depression, however, the league's plan was revived, and Hoover offered it to Congress in November 1931.18
Hoover pointed to three primary constituencies that the Federal Home Loan Bank (FHLB) would address: mortgage lenders facing a liquidity crisis, home owners in danger of losing their property to foreclosure, and workers unemployed because of the drop in demand for construction.19 On Capitol Hill, the building and loans asserted that a federal home loan bank would bring stability to the mortgage credit system and provide liquidity during the economic crisis. The league also suggested that the bank would help standardize lending practices in the building and loan community, which would also strengthen the financial system.20
Opponents asserted that borrowers and inflated real estate prices were to blame for the home ownership crisis. They insisted the system would naturally self-correct. Imprudent buyers and lenders would be disciplined by foreclosures and bank or building and loan failures. If the Federal Home Loan Bank Act passed and building and loans gained access to government resources, thrifts would tend to lend too much, leading to overbuilding and inflated home prices.21
Despite the arguments against the bill, lobbying efforts by the building and loan associations, combined with the pressures of the economic crisis and widely shared support for the ideology of home ownership, convinced Congress to approve the bill.22 Hoover signed it into law on July 22, 1932. Moving quickly, the administration had the FHLB up and running in a matter of weeks. Hoover optimistically declared that the mortgage credit crisis was over.23
The new law reflected an emerging paradigm of financial industry regulation that would be consolidated under Hoover's successor, Franklin Delano Roosevelt. Under the overarching philosophy of this reform, large categories of financial services would be separated from one another by federal rules. In exchange, the government would provide incentives and protections to make these sectors successful.24 This kind of regulatory paradigm reflected the essence of what would become the managed economy, a system in which business adopted the government's public policy goals in exchange for the stability of limited or bounded competition in the marketplace.
During his reelection campaign in 1932, Hoover touted the strength of this vision as a way to preserve the capitalist system. As he crisscrossed the country campaigning that fall, Hoover insisted that everything his administration was doing for the economy was intended to address the needs of ordinary Americans. “We are a nation of 25 million families living in 25 million homes,” he said, “each warmed by the fires of affection and cherishing within it a mutual solicitude for kinfolk and children.” Within the nation's homes, schools, and churches, Hoover continued, the nation's ideals and character were formed. They were part of the promise of America, “and those promises must be fulfilled.”25 Roosevelt echoed this ideology of home ownership. As many Americans worried about whether they could keep a roof over their heads, he asserted that “a nation of homeowners, of people who own a real share in their own land, is unconquerable.”26 Home mortgages, he said, were the “backbone of the American financial system.”27
Unfortunately for Hoover, the country, and America's home owners, the crisis grew worse. Many thrifts failed to take advantage of their new ability to borrow from the FHLB and refused to refinance troubled home loans. Real estate agents in California were furious. Hayden Jones, the president of the California Real Estate Association, blasted the thrift industry for lobbying for the creation of the bank and then failing to use it. “They are not keeping faith with the citizens of their communities,” he said.28 Herbert Hoover undoubtedly agreed.
In November, Hoover was overwhelmingly defeated by Franklin Roosevelt. During the four-month interregnum between the election and Roosevelt's inauguration, Hoover continued to advocate banking reform, urging Congress to take action in his December State of the Union address. He especially wanted to federalize the banking system and override state regulations that promoted the proliferation of small and weak local banks, but Roosevelt refused to cooperate.29
The nation's economy crumpled. Bank failures reached unprecedented levels. By 1933, more than nine thousand banks had collapsed since the stock market crash.30 Trading on Wall Street slowed to a trickle as the number of investment and brokerage firms that had been forced out of business by the crisis rose to two thousand.31 Meanwhile, unemployment skyrocketed
