What Is Capital?

Feilan fixed his gaze on William. "Last November, I was reading the Federal Reserve Bulletin and the Commercial Paper Daily. At the same time, I was studying the data from 1807, 1873, 1893, and 1907. The shape of the crises in those years, their paths of contagion, their psychological breaking points—they were almost identical. The only difference was that our leverage was higher this time, globalization ran deeper, and the gold standard was more fragile."

"So, Mr. William, if you had seen the same things then and believed that history did not lie, you could have reached the same conclusion I did."

Feilan stopped speaking.

The conference room fell deathly silent as well.

William's lips moved, but for a long time, no sound emerged.

On that face which had weathered countless Congressional hearings, Wall Street negotiations, and international financial conferences, an expression difficult to define appeared for the first time.

It was not anger. It was the awkwardness of being cornered with his own most familiar knowledge by someone more than forty years his junior, and struggling to digest it.

Helen stared hard at Feilan's profile, as though she were meeting him for the first time.

All along the way, she had been preparing herself—preparing how to gracefully smooth things over for Feilan and preserve her uncle's dignity if he was stumped by the cabinet ministers.

But now, Feilan was not the one being stumped.

Instead, William Woodin, the United States' soon-to-be Treasury Secretary, had been thoroughly taught a lesson in financial history, data, and logic by a Harvard dropout born out of wedlock.

Helen felt a wave of dizziness.

Was this really the Feilan she knew?

At the conference table, Roosevelt gave a light cough. "Child, since you foresaw this disaster, do you also have some solutions?"

"Yes. The moment the new administration takes office, we must push through emergency banking legislation at the fastest possible speed."

"Go on."

"First, after the President's inauguration, he should immediately declare a nationwide Bank Holiday. Not individual states shutting down however they please, but a mandatory suspension issued uniformly by the federal government and carried out across the country simultaneously. I recommend four days, no more than a week at the longest..."

"Wait!"

William interrupted almost instinctively. "Have you considered the current situation? You have already seen how the public reacted after the states declared Bank Holidays. We have not taken office yet, so the public can still curse Hoover. But if we take office and the federal government itself announces that banks are closing, every spearhead will turn on us. It will become a grave crisis of confidence for the new administration."

"Mr. William, I fully agree with your concern, but allow me to ask a question. Under what circumstances were the current state Bank Holidays declared?"

William did not answer, because he knew Feilan would explain.

"After bank runs had already begun!"

"Michigan, Maryland, Ohio... Every state closure was a forced surrender after depositors had stormed the gates. What the public saw was not the government protecting their deposits, but the government frantically shutting the doors after a run began, not even giving them one last chance to look at their savings."

"But if we do it, its nature is completely different. We are not being chased by bank runs. We are proactively declaring a national shutdown after the runs have begun. This is not surrender. It is a strategic freeze."

"The public panics because of uncertainty. But if the new President personally tells them, 'Give me four days. Let me sort out which money in your banks is safe and which is dangerous. Four days later, I will personally tell you...'"

"Then that panic can be soothed."

"So what do you think, Mr. William?"

William fell silent.

"Continue," Roosevelt said.

"After taking office, immediately organize sufficient personnel to conduct lightning inspections of every bank in the country. No detailed audits are needed; they only need to be divided into three categories."

"The first category: adequately capitalized and soundly managed, able to reopen immediately after four days. The second category: troubled to some extent but salvageable, to receive emergency loans or capital injections from the Reconstruction Finance Corporation. The third category: utterly insolvent, and must be liquidated or placed into receivership..."

Over the next dozen or so minutes.

Framework after framework flowed from Feilan's mouth. This was not a scattering of inspiration, but a complete emergency governance plan—clear, coherent, and logical in its own right.

William's pen raced across his notebook. At first, it was merely professional habit, but gradually, his pace slowed.

Because he realized that he did not seem to be recording a young man's suggestions.

He was copying down the outline of a mature bill.

And what sent a chill down his spine was that many of the specific provisions in that outline were things even he, the soon-to-be Treasury Secretary, had not yet fully figured out how to put into practice.

Until Feilan came to one particular point.

"At the same time, the bill should authorize the Treasury Department to restructure the equity of banks applying to reopen. For institutions that are severely undercapitalized but systemically important, the Treasury Department should have the authority to inject capital by purchasing preferred shares, thereby acquiring corresponding board seats and the right to oversee compensation."

"Wait, do you know what you're saying?"

William's pen stopped abruptly. "The government takes stakes in banks and obtains board seats? Wall Street will never accept that!"

"Morgan, Rockefeller, DuPont... They may accept the government providing liquidity, and they may accept short-term oversight, but you are having the government walk straight into their boardrooms!"

"This touches the bottom line of private property rights. If even they stand in opposition and resist the new administration—"

"Then the United States is truly finished!"

Feilan did not yield. "Mr. William, what is capital?"

William froze.

"Capital is water. It always flows downhill, toward wherever profits are richest. This is not a question of morality. It is a law of physics."

"But if the entire watershed has dried up—factories closing, workers unemployed, shops going bankrupt, farmers ruined—where can the water still flow?"

No one answered.

"Capital pursues profit, but profit depends on transactions, and transactions depend on people still having money to spend and needs to fulfill. If tens of millions of unemployed people cannot even afford bread, who will buy the cars Ford produces?"

"If forty thousand companies go bankrupt, who will buy Morgan's bonds?"

"If farmers burn corn they cannot sell, what will Rockefeller's refineries use to start operating?"

He paused. "The Great Depression was not divine punishment sent down by God. Over the past thirty years, capital flowed to the highest mountaintops and built the most magnificent palaces there, while the vast lands at the foot of the mountains, where the overwhelming majority lived, had already cracked into desert."

"Now, the desert is spreading toward the mountaintops, and Wall Street's palaces have begun to tremble. So do you think they are truly willing to collapse along with those palaces, or would they rather accept reforms they dislike, but which can preserve the foundations, before the ground beneath their feet completely gives way?"