Notes Introduction to the First Edition

¹The depression of 1873–1879 was a special case. It was, in the first place, a mild recession, and second, it was largely a price decline generated by the monetary contraction attending return to the pre-Civil War gold standard. On the mildness of this depression, particularly in manufacturing, see O.V. Wells, “The Depression of 1873–79,” Agricultural History 11 (1937): 240.

²Even taken by itself, the “contraction” phase of the depression, from 1929–1933, was unusually long and unusually severe, particularly in its degree of unemployment.

³It must be emphasized that Ludwig von Mises is in no way responsible for any of the contents of this book.

⁴This is by no means to deny that the ultimate premises of economic theory, e.g., the fundamental axiom of action, or the variety of resources, are derived from experienced reality. Economic theory, however, is a priori to all other historical facts.

⁵This “praxeological” methodology runs counter to prevailing views. Exposition of this approach, along with references to the literature, may be found in Murray N. Rothbard, “In Defense of ‘Extreme A Priorism’,” Southern Economic Journal (January, 1957): 214–20; idem, “Praxeology: Reply to Mr. Schuller,” American Economic Review (December, 1951): 943–46; and idem, “Toward A Reconstruction of Utility and Welfare Economics,” in Mary Sennholz, ed., On Freedom and Free Enterprise (Princeton, N.J.: D. Van Nostrand, 1956), pp. 224–62. The major methodological works of this school are: Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949); Mises, Theory and History (New Haven, Conn.: Yale University Press, 1957); F.A. Hayek, The Counterrevolution of Science (Glencoe, Ill.: The Free Press, 1952); Lionel Robbins, The Nature and Significance of Economic Science (London: Macmillan, 1935), Mises, Epistemological Problems of Economics (Princeton, N.J.: D. Van Nostrand, 1960); and Mises, The Ultimate Foundation of Economic Science (Princeton, N.J.: D. Van Nostrand, 1962).

⁶Similarly, if the economy had recovered, the advocates would claim success for the theory, while critics would assert that recovery came despite the baleful influence of governmental policy, and more painfully and slowly than would otherwise have been the case. How should we decide between them?

⁷The only really valuable studies of the 1929 depression are: Lionel Robbins, The Great Depression (New York: Macmillan, 1934), which deals with the United States only briefly; C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937); and Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), which does not deal solely with the depression, but covers twentieth-century economic history. Otherwise, Thomas Wilson’s drastically overrated Fluctuations in Income and Employment (3rd ed., New York: Pitman, 1948) provides almost the “official” interpretation of the depression, and recently we have been confronted with John K. Galbraith’s slick, superficial narrative of the pre-crash stock market, The Great Crash, 1929 (Boston: Houghton Mifflin, 1955). This, aside from very brief and unilluminating treatments by Slichter, Schumpeter, and Gordon is just about all. There are many tangential discussions, especially of the alleged “mature economy” of the later 1930s. Also see, on the depression and the Federal Reserve System, the recent brief article of O.K. Burrell, “The Coming Crisis in External Convertibility in U.S. Gold,” Commercial and Financial Chronicle (April 23, 1959): 5, 52–53.

1. The Positive Theory of the Cycle

¹Various neo-Keynesians have advanced cycle theories. They are integrated, however, not with general economic theory, but with holistic Keynesian systems—systems which are very partial indeed.

²There is, for example, not a hint of such knowledge in Haberler’s well-known discussion. See Gottfried Haberler, Prosperity and Depression (2nd ed., Geneva, Switzerland: League of Nations, 1939).

³F.A. Harper, Why Wages Rise (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1957), pp. 118–19.

⁴Siegfried Budge, Grundzüge der Theoretische Nationalökonomie (Jena, 1925), quoted in Simon S. Kuznets, “Monetary Business Cycle Theory in Germany,” Journal of Political Economy (April, 1930): 127–28.

Under conditions of free competition... the market is... dependent upon supply and demand... there could [not] develop a disproportionality in the production of goods, which could draw in the whole economic system... such a disproportionality can arise only when, at some decisive point, the price structure does not base itself upon the play of only free competition, so that some arbitrary influence becomes possible.

Kuznets himself criticizes the Austrian theory from his empiricist, anti-cause and effect-standpoint, and also erroneously considers this theory to be “static.”

⁵This is the “pure time preference theory” of the rate of interest; it can be found in Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949); in Frank A. Fetter, Economic Principles (New York: Century, 1915), and idem, “Interest Theories Old and New, “American Economic Review (March, 1914): 68–92.

⁶“Banks,” for many purposes, include also savings and loan associations, and life insurance companies, both of which create new money via credit expansion to business. See below for further discussion of the money and banking question.

⁷On the structure of production, and its relation to investment and bank credit, see F.A. Hayek, Prices and Production (2nd ed., London: Routledge and Kegan Paul, 1935); Mises, Human Action; and Eugen von Böhm-Bawerk, “Positive Theory of Capital,” in Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), vol. 2.

⁸“Inflation” is here defined as an increase in the money supply not consisting of an increase in the money metal.

⁹This “Austrian” cycle theory settles the ancient economic controversy on whether or not changes in the quantity of money can affect the rate of interest. It supports the “modern” doctrine that an increase in the quantity of money lowers the rate of interest (if it first enters the loan market); on the other hand, it supports the classical view that, in the long run, quantity of money does not affect the interest rate (or can only do so if time preferences change). In fact, the depression-readjustment is the market’s return to the desired free-market rate of interest.

¹⁰It is often maintained that since business firms can find few profitable opportunities in a depression, business demand for loans falls off, and hence loans and money supply will contract. But this argument overlooks the fact that the banks, if they want to, can purchase securities, and thereby sustain the money supply by increasing their investments to compensate for dwindling loans. Contractionist pressure therefore always stems from banks and not from business borrowers.

¹¹Banks are “inherently bankrupt” because they issue far more warehouse receipts to cash (nowadays in the form of “deposits” redeemable in cash on demand) than they have cash available. Hence, they are always vulnerable to bank runs. These runs are not like any other business failures, because they simply consist of depositors claiming their own rightful property, which the banks do not have. “Inherent bankruptcy,” then, is an essential feature of any “fractional reserve” banking system. As Frank Graham stated: The attempt of the banks to realize the inconsistent aims of lending cash, or merely multiplied claims to cash, and still to represent that cash is available on demand is even more preposterous than... eating one’s cake and counting on it for future consumption. ...The alleged convertibility is a delusion dependent upon the right’s not being unduly exercised.

Frank D. Graham, “Partial Reserve Money and the 100% Proposal,” American Economic Review (September, 1936): 436.

¹²In a gold standard country (such as America during the 1929 depression), Austrian economists accepted credit contraction as a perhaps necessary price to pay for remaining on gold. But few saw any remedial virtues in the deflation process itself.

¹³Some readers may ask: why doesn’t credit contraction lead to malinvestment, by causing overinvestment in lower-order goods and underinvestment in higher-order goods, thus reversing the consequences of credit expansion? The answer stems from the Austrian analysis of the structure of production. There is no arbitrary choice of investing in lower or higher-order goods. Any increased investment must be made in the higher-order goods, must lengthen the structure of production. A decreased amount of investment in the economy simply reduces higher-order capital. Thus, credit contraction will cause not excess of investment in the lower orders, but simply a shorter structure than would otherwise have been established.

¹⁴In a gold standard economy, credit contraction is limited by the total size of the gold stock.

¹⁵In recent years, particularly in the literature on the “under-developed countries,” there has been a great deal of discussion of government “investment.” There can be no such investment, however. “Investment” is defined as expenditures made not for the direct satisfaction of those who make it, but for other, ultimate consumers. Machines are produced not to serve the entrepreneur, but to serve the ultimate consumers, who in turn remunerate the entrepreneurs. But government acquires its funds by seizing them from private individuals; the spending of the funds, therefore, gratifies the desires of government officials. Government officials have forcibly shifted production from satisfying private consumers to satisfying themselves; their spending is therefore pure consumption and can by no stretch of the term be called “investment.” (Of course, to the extent that government officials do not realize this, their “consumption” is really waste-spending.)

¹⁶For more on the problems of fractional-reserve banking, see below.

¹⁷See W.H. Hutt, “The Significance of Price Flexibility,” in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton, N.J.: D. Van Nostrand, 1960), pp. 390–92.

¹⁸I am indebted to Mr. Rae C. Heiple, II, for pointing this out to me.

¹⁹Could government increase the investment–consumption ratio by raising taxes in any way? It could not tax only consumption even if it tried; it can be shown (and Prof. Harry Gunnison Brown has gone a long way to show) that any ostensible tax on “consumption” becomes, on the market, a tax on incomes, hurting saving as well as consumption. If we assume that the poor consume a greater proportion of their income than the rich, we might say that a tax on the poor used to subsidize the rich will raise the saving–consumption ratio and thereby help cure a depression. On the other hand, the poor do not necessarily have higher time preferences than the rich, and the rich might well treat government subsidies as special windfalls to be consumed. Furthermore, Harold Lubell has maintained that the effects of a change in income distribution on social consumption would be negligible, even though the absolute proportion of consumption is greater among the poor. See Harry Gunnison Brown, “The Incidence of a General Output or a General Sales Tax,” Journal of Political Economy (April, 1939): 254–62; Harold Lubell, “Effects of Redistribution of Income on Consumers’ Expenditures,” American Economic Review (March, 1947): 157–70.

²⁰Advocacy of any governmental policy must rest, in the final analysis, on a system of ethical principles. We do not attempt to discuss ethics in this book. Those who wish to prolong a depression, for whatever reason, will, of course, enthusiastically support these government interventions, as will those whose prime aim is the accretion of power in the hands of the state.

²¹For the classic treatment of hyperinflation, see Costantino Bresciani–Turroni, The Economics of Inflation (London: George Allen and Unwin, 1937).

²²See Mises, Human Action, pp. 429–45, and Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953).

²³When gold—formerly the banks’ reserves—is transferred to a newly established Central Bank, the latter keeps only a fractional reserve, and thus the total credit base and potential monetary supply are enlarged. See C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 24ff.

²⁴Many “state banks” were induced to join the FRS by patriotic appeals and offers of free services. Even the banks that did not join, however, are effectively controlled by the System, for, in order to obtain paper money, they must keep reserves in some member bank.

²⁵The average reserve requirements of all banks before 1913 was estimated at approximately 21 percent. By mid-1917, when the FRS had fully taken shape, the average required ratio was 10 percent. Phillips et al. estimate that the inherent inflationary impact of the FRS (pointed out in footnote 23) increased the expansive power of the banking system three-fold. Thus, the two factors (the inherent impact, and the deliberate lowering of reserve requirements) combined to inflate the monetary potential of the American banking system six-fold as a result of the inauguration of the FRS. See Phillips, et al., Banking and the Business Cycle, pp. 23ff.

²⁶The horrors of “wildcat banking” in America before the Civil War stemmed from two factors, both due to government rather than free banking: (1) Since the beginnings of banking, in 1814 and then in every ensuing panic, state governments permitted banks to continue operating, making and calling loans, etc. without having to redeem in specie. In short, banks were privileged to operate without paying their obligations. (2) Prohibitions on interstate branch banking (which still exist), coupled with poor transportation, prevented banks from promptly calling on distant banks for redemption of notes.

²⁷Mises, Human Action, p. 440.

²⁸A common analogy states that banks simply count on people not redeeming all their property at once, and that engineers who build bridges operate also on the principle that not everyone in a city will wish to cross the bridge at once. But the cases are entirely different. The people crossing a bridge are simply requesting a service; they are not trying to take possession of their lawful property, as are the bank depositors. A more fitting analogy would defend embezzlers who would never have been caught if someone hadn’t fortuitously inspected the books. The crime comes when the theft or fraud is committed, not when it is finally revealed.

²⁹Perhaps a libertarian legal system would consider “general deposit warrants” (which allow a warehouse to return any homogeneous good to the depositor) as “specific deposit warrants,” which, like bills of lading, pawn tickets, dock-warrants, etc. establish ownership to specific, earmarked objects. As Jevons stated, “It used to be held as a general rule of law, that any present grant or assignment of goods not in existence is without operation.” See W. Stanley Jevons, Money and the Mechanism of Exchange (London: Kegan Paul, 1905), pp. 207–12. For an excellent discussion of the problems of a fractional-reserve money, see Amasa Walker, The Science of Wealth (3rd ed., Boston: Little, Brown, 1867), pp. 126–32, esp. pp. 139–41.

³⁰Some writers make a great to-do over the legal fiction that the Federal Reserve System is “owned” by its member banks. In practice, this simply means that these banks are taxed to help pay for the support of the Federal Reserve. If the private banks really “own” the Fed, then how can its officials be appointed by the government, and the “owners” compelled to “own” the Federal Reserve Board by force of government statute? The Federal Reserve Banks should simply be regarded as governmental agencies.

³¹See Mises, Human Action, pp. 576–78. Professor Hayek, in his well-known (and excellent) exposition of the Austrian theory, had early shown how the theory fully applies to credit expansion amidst unemployed factors. Hayek, Prices and Production, pp. 96–99.

³²Haberler, Prosperity and Depression, chap. 3.

³³Mises, Human Action, pp. 556–57. Mises also refutes the old notion that the boom is characterized by an undue conversion of “circulating capital” into “fixed capital.” If that were true, then the crisis would reveal a shortage of circulating capital, and would greatly drive up the prices of, e.g., industrial raw materials. Yet, these materials are precisely among the ones revealed by the crisis to be overabundant, i.e., resources were malinvested in “circulating” as well as in “fixed” capital in the higher stages of production.

³⁴For a stimulating discussion of some of these processes, see Ludwig M. Lachmann, Capital and Its Structure (London: London School of Economics, 1956).

³⁵For the “pro-bank” position on this issue, see F.A. Hayek, Monetary Theory and the Trade Cycle (New York: Harcourt, Brace, 1933), pp. 144–48; Fritz Machlup, Stock Market, Credit, and Capital Formation (New York: Macmillan, 1940), pp. 247–48; Haberler, Prosperity and Depression, pp. 64–67. On the other side, see the brief comments of Mises, Human Action, pp. 570, 789n.; and Phillips et al., Banking and the Business Cycle, pp. 139ff.

³⁶The error of the followers stems from their failure to adopt the pure time-preference theory of interest of Fetter and Mises, and their clinging to eclectic “productivity” elements in their explanation of interest. See the references mentioned in footnote 5 above.

³⁷Mises points out (Human Action, p. 789n.) that if the banks simply lowered the interest charges on their loans without expanding their credit, they would be granting gifts to debtors, and would not be generating a business cycle.

³⁸Walker, The Science of Wealth, pp. 145ff.; also see p. 159.

[B]anks must be constantly desirous of increasing their loans, by issuing their own credit in the shape of circulation and deposits. The more they can get out, the larger the income. This is the motive power that ensures the constant expansion of a mixed [fractional reserve] currency to its highest possible limit. The banks will always increase their indebtedness when they can, and only contract it when they must.

³⁹For a somewhat similar analysis of international gold flows, see F.A. Hayek, Monetary Nationalism and International Stability (New York: Longmans, Green, 1937), pp. 24f. Also see Walker, The Science of Wealth, p. 160.

2. Keynesian Criticisms of the Theory

¹F.A. Hayek subjected J.M. Keynes’s early Treatise on Money (now relatively forgotten amid the glow of his later General Theory) to a sound and searching critique, much of which applies to the later volume. Thus, Hayek pointed out that Keynes simply assumed that zero aggregate profit was just sufficient to maintain capital, whereas profits in the lower stages combined with equal losses in the higher stages would reduce the capital structure; Keynes ignored the various stages of production; ignored changes in capital value and neglected the identity between entrepreneurs and capitalists; took replacement of the capital structure for granted; neglected price differentials in the stages of production as the source of interest; and did not realize that, ultimately, the question faced by businessmen is not whether to invest in consumer goods or capital goods, but whether to invest in capital goods that will yield consumer goods at a nearer or later date. In general, Hayek found Keynes ignorant of capital theory and real-interest theory, particularly that of Böhm-Bawerk, a criticism borne out in Keynes’s remarks on Mises’s theory of interest. See John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), pp. 192–93; F.A. Hayek, “Reflections on the Pure Theory of Money of Mr. J.M. Keynes,” Economica (August, 1931): 270–95; and idem, “A Rejoinder to Mr. Keynes,” Economica (November, 1931): 400–02.

²Dennis H. Robertson, “Mr. Keynes and the Rate of Interest,” in Readings in the Theory of Income Distribution (Philadelphia: Blakiston, 1946), p. 440. Also see the article by Carl Landauer, “A Break in Keynes’s Theory of Interest,” American Economic Review (June, 1937): 260–66.

³For more on the equilibrating effects of wage reductions in a depression see the following section.

⁴Some of the most damaging blows to the Keynesian system have come from friendly, but unsparing, neo-Keynesian sources; e.g., Franco Modigliani, “Liquidity Preference and the Theory of Interest and Money,” in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton, N.J.: D. Van Nostrand, 1960), pp. 131–84; Erik Lindahl, “On Keynes’ Economic System,” Economic Record (May and November, 1954): 19–32, 159–71. As Hutt sums up:

[T]he apparent revolution wrought by Keynes after 1936 has been reversed by a bloodless counterrevolution conducted unwittingly by higher critics who tried very hard to be faithful. Whether some permanent benefit to our science will have made up for the destruction which the revolution left in its train, is a question which economic historians of the future will have to answer.

W.H. Hutt, “The Significance of Price Flexibility,” in Hazlitt, The Critics of Keynesian Economics., p. 402.

⁵Hutt, “The Significance of Price Flexibility,” pp. 397n. and 398.

⁶See Modigliani, “Liquidity Preference and the Theory of Interest and Money,” and Lindahl, “On Keynes’ Economic System,” ibid.

⁷See L. Albert Hahn, The Economics of Illusion (New York: Squier, 1949), pp. 50ff., 166ff.

⁸Actually, zones of indeterminacy are apt to be wide where only two or three people live on a desert island and narrow progressively the greater the population and the more advanced the economic system. No special zone adheres to the labor contract.

⁹It is immaterial to the argument whether or not the present writer believes the mystique to be morally absurd.

¹⁰Maximum wage controls, such as prevailed in earlier centuries and in the Second World War, created artificial shortages of labor throughout the economy—the reverse of the effect of minimum wages.

¹¹See Hutt, “The Significance of Price Flexibility,” pp. 390ff.

¹²Various empirical studies have maintained that the aggregate demand for labor is highly elastic in a depression, but the argument here does not rest upon them. See Benjamin M. Anderson, “The Road Back to Full Employment,” in Paul T. Homan and Fritz Machlup, eds. Financing American Prosperity (New York: Twentieth Century Fund, 1945), pp. 20–21.

¹³See Hutt, “The Significance of Price Flexibility,” p. 400.

¹⁴Note that, in Figure 1, the S_L S_L line stops before reaching the horizontal axis. Actually, the line must stop at the wage yielding the minimum subsistence income. Below that wage rate, no one will work, and therefore, the supply curve of labor will really be horizontal, on the free market, at the minimum subsistence point. Certainly it will not be possible for speculative withholding to reduce wage rates to the subsistence level, for three reasons: (a) this speculative withholding almost always results in hoarding, which reduces prices all-round and which will therefore reduce the equilibrium money wage rate without reducing the equilibrium real wage rate—the relevant rate for the subsistence level, (b) entrepreneurs will realize that their speculation has overshot the mark long before the subsistence level is reached; and (c) this is especially true in an advanced capitalist economy, where the rates are far above subsistence.

¹⁵On the other hand, wage rates maintained above the free-market level will discourage investment and thereby tend to increase hoarding at the expense of saving–investment. This decline in the investment–consumption ratio aggravates the depression further. Freely declining wage rates would permit investments to return to previous proportions, thus adding another important impetus to recovery. See Frederic Benham, British Monetary Policy (London: P.S. King and Son, 1932), p. 77.

¹⁶It has often been maintained that a failing price level injures business firms because it aggravates the burden of fixed monetary debt. However, the creditors of a firm are just as much its owners as are the equity shareholders. The equity shareholders have less equity in the business to the extent of its debts. Bond-holders (long-term creditors) are just different types of owners, very much as preferred and common stock holders exercise their ownership rights differently. Creditors save money and invest it in an enterprise, just as do stockholders. Therefore, no change in price level by itself helps or hampers a business; creditor–owners and debtor–owners may simply divide their gains (or losses) in different proportions. These are mere intra-owner controversies.

3. Some Alternative Explanations of Depression: A Critique

¹See the discussion by Scott in Wesley C. Mitchell, Business Cycles: The Problem and its Setting (New York: National Bureau of Economic Research, 1927), pp. 75ff.

²See C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business-Cycle (New York: Macmillan, 1937), pp. 59–64.

³In the Keynesian theory, “aggregate equilibrium” is reached by two routes: profits and losses, and “unintended” investment or disinvestment in inventory. But there is no unintended investment, since prices could always be cut low enough to sell inventory if so desired.

⁴We often come across the argument that the money supply must be increased “in order to keep up with the increased supply of goods.” But goods and money are not at all commensurate, and the entire injunction is therefore meaningless. There is no way that money can be matched with goods.

⁵For a brilliant critique of underconsumptionism by an Austrian, see F.A. Hayek, “The ‘Paradox’ of Saving,” in Profits, Interest, and Investment (London: Routledge and Kegan Paul, 1939), pp. 199–263. Hayek points out the grave and neglected weaknesses in the capital, interest, and production–structure theory of the underconsumptionists Foster and Catchings. Also see Phillips, et al., Banking and the Business Cycle, pp. 69–76.

⁶The Keynesian approach stresses underspending rather than underconsumption alone; on “hoarding,” the Keynesian dichotomization of saving and investment, and the Keynesian view of wages and unemployment, see above.

⁷Either that, or such an expansion must have occurred in some previous decade, after which the firm—or whole economy—lapsed into a sluggish stationary state.

⁸See his brilliant critique of the acceleration principle in W.H. Hutt, “Coordination and the Price System” (unpublished, but available from the Foundation for Economic Education, Irvington-on-Hudson, New York, 1955) pp. 73–117.

⁹This is not merely the problem of a time lag necessary to produce the new machines; it is the far broader question of the great range of choice of the time period in which to make the investment. But this reminds us of another fallacy made by the accelerationists: that production of the new machines is virtually instantaneous.

¹⁰The accelerationists habitually confuse consumption with production of consumer goods, and talk about one when the other is relevant.

¹¹The “Cobweb Theorem” is another doctrine built on the assumption that all entrepreneurs are dolts, who blindly react rather than speculate and succeed in predicting the future.

¹²Anglo-American economics suffers badly from this deficiency. The Marshallian system rested on a partial theory of the “industry,” while modern economics fragments itself further to discuss the isolated firm. To remedy this defect, Keynesians and later econometric systems discuss the economy in terms of a few holistic aggregates. Only the Misesian and Walrasian systems are truly general, being based themselves on interrelated individual exchanges. The Walrasian scheme is unrealistic, consisting solely of a mathematical analysis of an unrealizable (though important) equilibrium system.

¹³Another defect of the accelerationist explanation of the cycle is its stress on durable capital equipment as the preeminently fluctuating activity. Actually, as we have shown above, the boom is not characterized by an undue stress on durable capital; in fact, such non-durable items as industrial raw materials fluctuate as strongly as fixed capital goods. The fluctuation takes place in producers’ goods industries (the Austrian emphasis) and not just durable producers’ goods (the accelerationist emphasis).

¹⁴See Hutt, “Coordination and the Price System,” p. 109.

¹⁵The acceleration principle also claims to explain the alleged tendency of the downturn in capital goods to lead downturns in consumer goods activity. However, it could only do so, even on its own terms, under the very special—and almost never realized—assumption that the sale of consumer goods describes a sine-shaped curve over the business cycle. Other possible curves give rise to no leads at all.

On the acceleration principle, also see L. Albert Hahn, Common Sense Economics (New York: Abelard–Schuman, 1956), pp. 139–43; Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 581–83; and Simon S. Kuznets, “Relation Between Capital Goods and Finished Products in the Business Cycle,” in Economic Essays in Honor of Wesley C. Mitchell (New York: Columbia University Press, 1935), pp. 209–67.

¹⁶Alvin H. Hansen, “Economic Progress and Declining Population Growth,” in Readings in Business Cycle Theory (Philadelphia: Blakiston, 1944), pp. 366–84.

¹⁷For an example, see George Terborgh, The Bogey of Economic Maturity (Chicago: Machinery and Allied Products Institute, 1945).

¹⁸Curiously, these same worriers did not call upon the federal government to abandon its conservation policies, which led it to close millions of acres of public domain permanently. Nowadays, outer space will presumably provide “frontier” enough.

¹⁹Saving, not monetary expansion. A backward country, for example, could not industrialize itself by issuing unlimited quantities of paper money or bank deposits. That could only bring on runaway inflation.

²⁰The economic fortunes of a small country producing one product for the market will of course be dominated by the course of events in that industry.

²¹Schumpeter’s pure theory was presented in his famous Theory of Economic Development (Cambridge, Mass.: Harvard University Press, 1934), first published in 1911. It later appeared as the “first approximation” in an elaborated approach that really amounted to a confession of failure, and which introduced an abundance of new fallacies into the argument. The later version constituted his Business Cycles, 2 vols. (New York: McGraw–Hill, 1939).

²²To be sure, the Schumpeterian “Pure Model” explicitly postulates perfect knowledge and therefore absence of error by entrepreneurs. But this is a flagrantly self-contradictory assumption within Schumpeter’s own model, since the very reason for depression in the Pure Model is the fact that risks increase, old firms are suddenly driven to the wall, etc., and no one innovates again until the situation clears.

²³Schumpeter wisely saw that voluntary savings could only cause simple economic growth and could not give rise to business cycles.

²⁴See Carolyn Shaw Solo, “Innovation in the Capitalist Process: A Critique of the Schumpeterian Theory,” Quarterly Journal of Economics (August, 1951): 417–28.

²⁵This refutes Clemence and Doody’s defense of Schumpeter against Kuznets’s criticism that the cluster of innovations assumes a cluster of entrepreneurial ability. Clemence and Doody identified such ability solely with the making of innovations and the setting up of new firms. See Richard V. Clemence and Francis S. Doody, The Schumpeterian System (Cambridge, Mass.: Addison Wesley Press, 1950), pp. 52ff; Simon S. Kuznets, “Schumpeter’s Business Cycles,” American Economic Review (June, 1940): 262–63.

²⁶Schumpeter also discusses a “secondary wave” superimposed on his pure model. This wave takes into account general inflation, price speculation, etc., but there is nothing particularly Schumpeterian about this discussion, and if we discard both the pure model and the multicycle approach, the Schumpeterian theory is finished.

²⁷Thus, during the late 1920s, when banks, influenced by qualitative credit doctrines, tried to shut off the flow of credit to the stock market specifically, the market was able to borrow from the swollen funds of non-bankers, funds swollen by years of bank credit inflation.

On the fallacies of the qualitative credit theorists, and of their views on the stock market, see the excellent study by Fritz Machlup, who at that time was a leading Austrian School theorist, The Stock Market, Credit and Capital Formation (New York: Macmillan, 1940).

²⁸On all this, see Machlup, The Stock Market, Credit, and Capital Formation. An individual broker might borrow in order to pay another broker, but in the aggregate, inter-broker transactions cancel out and total brokers’ loans reflect only broker-customer relations.

²⁹Real estate values will often behave similarly, real estate conveying units of title of capital in land.

³⁰See Schumpeter, Business Cycles, vol. 1, chap. 4.

³¹V. Lewis Bassic, “Recent Developments in Short-Term Forecasting,” in Short-Term Forecasting, Studies in Income and Wealth (Princeton, N.J.: National Bureau of Economic Research, 1955), vol. 17, pp. 11–12. Also see pp. 20–21.

4. The Inflationary Factors

¹See Lin Lin, “Are Time Deposits Money?” American Economic Review (March, 1937): 76–86. Lin points out that demand and time deposits are interchangeable at par and in cash, and are so regarded by the public. Also see Gordon W. McKinley, “The Federal Home Loan Bank System and the Control of Credit,” Journal of Finance (September, 1957): 319–32, and idem, “Reply,” Journal of Finance (December, 1958): 545.

²Governor George L. Harrison, head of the Federal Reserve Bank of New York, testified in 1931 that any bank suffering a run must pay both its demand and savings deposits on demand. Any request for a thirty-day notice would probably cause the state or the Comptroller of Currency to close the bank immediately. Harrison concluded: “in effect and in substance these [time] accounts are demanded deposits.” Charles E. Mitchell, head of the National City Bank of New York, agreed that “no commercial bank could afford to invoke the right to delay payment on these deposits.” And, in fact, the heavy bank runs of 1931–1933 took place in time deposits as well as demand deposits. Senate Banking and Currency Committee, Hearings on Operations of National and Federal Reserve Banking Systems, Part I (Washington, D.C., 1931), pp. 36, 321–22; and Lin Lin, “Are Time Deposits Money?”

³Time deposits, furthermore, are often used directly to make payments. Individuals may obtain cashier’s checks from the bank, and use them directly as money. Even D.R. French, who tried to deny that time deposits are money, admitted that some firms used time deposits for “large special payments, such as taxes, after notification to the bank.” D.R. French, “The Significance of Time Deposits in the Expansion of Bank Credit, 1922–1928,” Journal of Political Economy (December, 1931): 763. Also see Senate Banking–Currency Committee, Hearings, pp. 321–22; Committee on Bank Reserves, “Member Bank Reserves” in Federal Reserve Board, 19th Annual Report, 1932 (Washington, D.C., 1933), pp. 27ff; Lin Lin, “Are Time Deposits Money?” and Business Week (November 16, 1957).

⁴See Lin Lin, “Professor Graham on Reserve Money and the One Hundred Percent Proposal,” American Economic Review (March, 1937): 112–13.

⁵As Frank Graham pointed out, the attempt to maintain time deposits as both a fully liquid asset and an interest-bearing investment is trying to eat one’s cake and have it too. This applies to demand deposits, savings-and-loan shares, and cash surrender values of life insurance companies as well. See Frank D. Graham, “One Hundred Percent Reserves: Comment,” American Economic Review (June, 1941): 339.

⁶See McKinley, “The Federal Home Loan Bank System and the Control of Credit,” pp. 323–24. On those economists who do and do not include time deposits as money, see Richard T. Selden, “Monetary Velocity in the United States,” in Milton Friedman, ed., Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1956), pp. 179–257.

⁷In his latest exposition of the subject, McKinley approaches recognition of the cash surrender value of life insurance policies as part of the money supply, in the broader sense. Gordon W. McKinley, “Effects of Federal Reserve Policy on Nonmonetary Financial Institutions,” in Herbert V. Prochnow, ed., The Federal Reserve System (New York: Harper and Bros., 1960), pp. 217n., 222.

In the present day, government savings bonds would have to be included in the money supply. On the other hand, pension funds are not part of the money supply, being simply saved and invested and not redeemable on demand, and neither are mutual funds—even the modern “open-end” variety of funds are redeemable not at par, but at market value of the stock.

⁸Data for savings-and-loan shares and life-insurance reserves are reliable only for the end-of-the-year: mid-year data are estimated by the author by interpolation. Strictly, the country’s money supply is equal to the above data minus the amount of cash and demand deposits held by the savings and loan and life insurance companies. The latter figures are not available, but their absence does not unduly alter the results.

⁹On the reluctance of banks during this era to lend to consumers, see Clyde W. Phelps, The Role of the Sales Finance Companies in the American Economy (Baltimore, Maryland: Commercial Credit, 1952).

¹⁰As McKinley says:

Just as the ultimate source of reserve for commercial banks consists of the deposit liabilities of the Federal Reserve Banks, so the ultimate source of the reserves of non-bank institutions consist of the deposit liabilities of the commercial banks. The money supply [is] … two inverted pyramids one on top of the other. The Federal Reserve stands at the base of the lower pyramid, and … by controlling the volume of their own deposit liabilities, the FRBs influence not only the deposit liabilities of the commercial banks but also the deposit liabilities of all those institutions which use the deposit liabilities of the commercial banks as cash reserves.

“The Federal Home Loan Bank,” p. 326. Also see Donald Shelby, “Some Implications of the Growth of Financial Intermediaries,” Journal of Finance (December, 1958): 527–41.

¹¹It might be asked, despairingly: if the supposedly “savings” institutions (savings banks, insurance companies, saving and loan associations, etc.) are to be subject to a 100 percent requirement, what savings would a libertarian society permit? The answer is: genuine savings, e.g., the issue of shares in an investing firm, or the sale of bonds or other debentures or term notes to savers, which would fall due at a certain date in the future. These genuinely saved funds would in turn be invested in business enterprise.

¹²Banking and Monetary Statistics, pp. 370–71. The excess listed for 1929 averages about forty million dollars, or about two percent of total reserve balances.

¹³Banking and Monetary Statistics, pp. 34 and 75. The deposits reckoned are “demand deposits adjusted” plus U.S. government deposits. A shift from member to non-member bank deposits would tend to reduce effective reserve requirements and increase excess reserves and the money supply, since non-member banks use deposits at member banks as the basis for their reserves. See Lauchlin Currie, The Supply and Control of Money in the United States (2nd ed., Cambridge, Mass.: Harvard University Press, 1935), p. 74.

¹⁴On time deposits in the 1920s, see Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), pp. 128–31; also C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 98–101.

¹⁵The well-known category of “Federal Reserve Credit” consists of Federal Reserve Assets Purchased and Bills Discounted.

¹⁶For the Pittman Act, see Edwin W. Kemmerer, The ABC of the Federal Reserve System (9th ed., Princeton, N.J.: Princeton University Press, 1932), pp. 258–62.

¹⁷H. Parker Willis, “Conclusions,” in H. Parker Willis, et al., “Report of an Inquiry into Contemporary Banking in the United States” (typewritten ms., New York, 1925), vol. 7, pp. 16–18.

¹⁸See Seymour E. Harris, Twenty Years of Federal Reserve Policy (Cambridge, Mass.: Harvard University Press, 1933), vol. 1, pp. 3–10, 39–48.

¹⁹Ibid., pp. 108ff.

²⁰Federal Reserve, Annual Report, 1923, p. 10; cited in ibid., p. 109.

²¹See Phillips, et al., Banking and the Business Cycle, pp. 93–94.

²²Harris, Twenty Years, p. 91.

²³Oliver M.W. Sprague, “Immediate Advances in the Discount Rate Unlikely,” The Annalist (1926): 493.

²⁴See H. Parker Willis, “Politics and the Federal Reserve System,” Banker’s Magazine (January, 1925): 13–20; idem, “Will the Racing Stock Market Become A Juggernaut?” The Annalist (November 24, 1924): 541– 42; and The Annalist (November 10, 1924): 477.

²⁵The War Finance Corporation had been dominant until 1921, when Congress expanded its authorized lending power and reorganized it to grant capital loans to farm cooperatives. In addition, the Federal Land Bank system, set up in 1916 to make mortgage loans to farm associations, resumed lending, and more Treasury funds for capital were authorized. And finally, the farm bloc pushed through the Agricultural Credits Act of 1923, which established twelve governmental Federal Intermediate Credit Banks to lend to farm associations. See Theodore Saloutos and John D. Hicks, Agricultural Discontent in the Middle West, 1900–1939 (Madison: University of Wisconsin Press, 1951), pp. 324–40.

²⁶See Harris, Twenty Years, p. 209.

²⁷Charles E. Mitchell, then head of the National City Bank of New York, has been pilloried for years for allegedly defying the FRB and frustrating the policy of moral suasion, by stepping in to lend to the stock market during the looming market crisis at the end of March. But it now appears that Mitchell and the other leading New York banks acted only upon approval of the Governor of the New York Federal Reserve Bank and of the entire Federal Reserve Board, which thus clearly did not even maintain the courage of its own convictions. See Anderson, Economics and the Public Welfare, p. 206.

²⁸See Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, D.C.: Brookings Institution, 1932), pp. 122–38. Dr. Lawrence E. Clark, a follower of H. Parker Willis, charged that Mr. Gates McGarrah, Chairman of the New York Federal Reserve Bank at the time, opposed moral suasion because he himself was engaged in stock market speculation and in bank borrowing for that purpose. If this were the reason, however, McGarrah would hardly have been—as he was—the main force in urging an increase in the rediscount rate. Instead, he would have been against any check on the inflation. See Lawrence E. Clark, Central Banking Under the Federal Reserve System (New York: Macmillan, 1935), p. 267n.

²⁹The moral suasion policy was searchingly criticized by former FRB Chairman W.P.G. Harding. The policy continued on, however, probably at the insistence of Secretary of the Treasury Mellon, who strongly opposed any increase in the rediscount rate. See Anderson, Economics and the Public Welfare, p. 210.

³⁰See Clark, Central Banking, p. 382. The call rate rarely went above 8 percent in 1928, or above 10 percent in 1929. See Adolph C. Miller, “Responsibility for Federal Reserve Policies: 1927–1929,” American Economic Review (September, 1935).

³¹Ralph W. Robey, “The Capeadores of Wall Street,” Atlantic Monthly (September, 1928).

³²Acceptances are sold by borrowers to acceptance dealers or “acceptance banks,” who in turn sell the bills to ultimate investors—in this case, the Federal Reserve System.

³³Thus, on June 30, 1927, over 26 percent of the nation’s total of bankers’ acceptances outstanding was held by the FRS for its own account, and another 20 percent was held for its foreign accounts (foreign central banks). Thus, 46 percent of all bankers’ acceptances were held by the Federal Reserve, and the same proportion held true in June, 1929. See Hardy, Credit Policies, p. 258.

³⁴See Senate Banking and Currency Committee, Hearings On Operation of National and Federal Reserve Banking Systems (Washington, D.C., 1931), Appendix, Part 6, p. 884.

³⁵See Harris, Twenty Years, p. 324n.

³⁶About half of the acceptances in the Federal Reserve System were held in the Federal Reserve Bank of New York; more important, almost all the purchases of acceptances were made by the New York Bank, and then distributed at definite proportions to the other Reserve Banks. See Clark, Central Banking, p. 168.

³⁷See a presidential address by Warburg before the American Acceptance Council, January 19, 1923, in Paul M. Warburg, The Federal Reserve System (New York: Macmillan, 1930), vol. 2, p. 822. Of course, Warburg would have preferred an even larger subsidy. Even Warburg’s perceptive warning on the developing inflation in March 1929, was marred by his simultaneous deploring of our “inability to develop a country-wide bill market.” Commercial and Financial Chronicle (March 9, 1929): 1443–44; also see Harris, Twenty Years, p. 324.

³⁸See Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), p. 39 and passim. It was only on the insistence of Warburg and Henry Davison of J.P. Morgan and Company, that Strong had accepted this post.

³⁹See H. Parker Willis, “The Banking Problem in the United States,” in Willis, et al., “Report of an Inquiry into Contemporary Banking in the United States,” pp. 1, 31–37.

⁴⁰See A.S.J. Baster, “The International Acceptance Market,” American Economic Review (June, 1937): 298.

⁴¹See Charles Cortez Abbott, The New York Bond Market, 1920–1930 (Cambridge, Mass.: Harvard University Press, 1937), pp. 124ff.

⁴²See Hardy, Credit Policies, pp. 256–57. Also Hearings, Operation of Banking Systems, Appendix, Part C, pp. 852ff.

⁴³Sterling bills were also purchased by the Fed to help Great Britain, e.g., $16 million in late 1929 and $10 million in the summer of 1927. See Hardy, Credit Policies, pp. 100ff.

⁴⁴The boom in loans to Germany began with the 1924 “Dawes loan,” part of the Dawes Plan reparations, with $110 million loaned to Germany by an investment banking syndicate headed by J.P. Morgan and Company.

⁴⁵Schacht personally visited New York in late 1925 to press this course on the banks, and he, Gilbert, and German Treasury officials sent a cable to the New York banks in the same vein. The securities affiliate of the Chase National Bank did comply with these requests. See Anderson, Economics and the Public Welfare, pp. 150ff. See also Garet Garrett, A Bubble That Broke the World (Boston: Little, Brown, 1932), pp. 23–24, and Lionel Robbins, The Great Depression (New York: Macmillan, 1934), p. 64.

⁴⁶“In late 1925, the agents of fourteen different American investment banking houses were in Germany soliciting loans from the German states and municipalities.” Anderson, Economics and the Public Welfare, p. 152. Also see Robert Sammons, “Capital Movements,” in Hal B. Lary and Associates, The United States in the World Economy (Washington, D.C.: U.S. Government Printing Office, 1943), pp. 95–100; and Garrett, A Bubble That Broke the World, pp. 20, 24.

⁴⁷See Clark, Central Banking, p. 333. As early as 1924, the FRB had suggested that American acceptance credits finance the export of cotton to Germany.

⁴⁸See H. Parker Willis, The Theory and Practice of Central Banking (New York: Harper and Bros., 1936), pp. 210–12, 223.

⁴⁹Hearings, Operation of Banking Systems, pp. 852ff.

⁵⁰Clark, Central Banking, pp. 242–48, 376–78; Hardy, Credit Policies, p. 248.

⁵¹Hearings, Operation of Banking Systems, Appendix, Part 6, pp. 847, 922–23.

⁵²Yet not wholly unexpected, for we find Governor Strong writing in April, 1922 that one of his major reasons for open-market purchases was “to establish a level of interest rates … which would facilitate foreign borrowing in this country … and facilitate business improvement.” Benjamin Strong to Under-Secretary of the Treasury S. Parker Gilbert, April 18, 1922. Chandler, Benjamin Strong, Central Banker, pp. 210–11.

⁵³Harold L. Reed, Federal Reserve Policy, 1921–1930 (New York: McGraw–Hill, 1930), pp. 20, and 14–41. Governor Miller agreed “that though prices were moving upward, so was production and trade, and sooner or later production would overtake the rise of prices.” Ibid., pp. 40–41.

⁵⁴See Chandler, Benjamin Strong, Central Banker, pp. 222–33, esp. p. 233. Also see Hardy, Credit Policies, pp. 38–40; Anderson, Economics and the Public Welfare, pp. 82–85, 144–47.

⁵⁵See H. Parker Willis, “What Caused the Panic of 1929?” North American Review (1930): 178; and Hardy, Credit Policies, p. 287. Tax exemption on income from government bonds also spurred the banks’ purchases. See Esther Rogoff Taus, Central Banking Functions of the United States Treasury, 1789–1941 (New York: Columbia University Press, 1943), pp. 182ff.

5. The Development of the Inflation

¹Seymour E. Harris, Twenty Years of Federal Reserve Policy (Cambridge, Mass.: Harvard University Press, 1933), vol. 1, p. 94.

²Robert L. Sammons, “Capital Movements,” in Hal B. Lary and Associates, The United States in the World Economy (Washington, D.C.: Government Printing Office, 1943), p. 94.

³See Abraham Berglund, “The Tariff Act of 1922,” American Economic Review (March, 1923): 14–33.

⁴See Benjamin H. Beckhart, “The Basis of Money Market Funds,” in Beckhart, et al., The New York Money Market (New York: Columbia University Press, 1931), vol. 2, p. 70.

⁵Frank W. Fetter, “Tariff Policy and Foreign Trade,” in J.G. Smith, ed., Facing the Facts (New York: G.P. Putnam’s Sons, 1932), p. 83. Also see George E. Putnam, “What Shall We Do About Depressions?” Journal of Business (April, 1938): 130–42, and Winthrop W. Aldrich, The Causes of the Present Depression and Possible Remedies (New York, 1933), pp. 7–8.

⁶Jacob Viner, “Political Aspects of International Finance,” Journal of Business (April, 1928): 170. Also see Herbert Hoover, The Memoirs of Herbert Hoover (New York: Macmillan, 1952), vol. 2, pp. 80–86.

⁷Jacob Viner, “Political Aspects of International Finance, Part II,” Journal of Business (July, 1928): 359.

⁸Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), p. 27.

⁹As we have indicated above, a third motive for the 1924 credit expansion was to promote recovery in agriculture and business from the mild 1923 recession.

¹⁰See Lionel Robbins, The Great Depression (New York: Macmillan, 1934), pp. 77–87; Sir William Beveridge, Unemployment, A Problem of Industry (London: Macmillan, 1930), chap. 16; and Frederic Benham, British Monetary Policy (London: P.S. King and Son, 1932).

¹¹Lawrence E. Clark, Central Banking Under the Federal Reserve System (New York: Macmillan, 1935), pp. 310ff.

¹²Charles Rist, “Notice Biographique,” Revue d’Économie Politique (November– December, 1955): 1005. (Translation mine.)

¹³Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), pp. 147–49.

¹⁴Sir Henry Clay, Lord Norman (London: Macmillan, 1957), pp. 140–41.

¹⁵Former Assistant Secretary of the Treasury Oscar T. Crosby perceptively attacked this credit at the time as setting a dangerous precedent for inter-governmental lending. Commercial and Financial Chronicle (May 9, 1925): 2357ff.

¹⁶The Morgan credit was apparently instigated by Strong. See Chandler, Benjamin Strong, Central Banker, pp. 284ff, 308ff, 312ff. Relations between the New York Fed and the House of Morgan were very close throughout this period. Strong had worked closely with the Morgan interests before assuming his post at the Federal Reserve. It is therefore significant that “J.P. Morgan and Company have been the fiscal agents in this country of foreign governments and have had ‘close working agreements’ with the Federal Reserve Bank of New York.” Clark, Central Banking Under the Federal Reserve System, p. 329. In particular, the Morgans were agents of the Bank of England. Also see Rist, “Notice Biographique.” To their credit, however, Morgans refused to go along with a Strong–Norman scheme to lend money to the Belgian government in order to prop up the Belgian exchange rate at an overvalued level, and thus subsidize inflationary Belgian policies.

¹⁷Robbins, The Great Depression, p. 80.

¹⁸Strong to Mellon, May 27, 1924. Quoted in Chandler, Benjamin Strong, Central Banker, pp. 283–84, 293ff.

¹⁹See Benjamin H. Beckhart, “Federal Reserve Policy and the Money Market, 1923–1931,” in The New York Money Market, vol. 4, p. 45.

²⁰Norman to Strong, October 16, 1924. Cited in Chandler, Benjamin Strong, Central Banker, p. 302.

²¹Norman to Hjalmar Schacht, December 28, 1926. Cited in Clay, Lord Norman, p. 224.

²²Melchior Palyi, “The Meaning of the Gold Standard,” Journal of Business (July, 1941): 300–01. Also see Aldrich, The Causes of the Present Depression and Possible Remedies, pp. 10–11.

²³Palyi, “The Meaning of the Gold Standard,” p. 304; Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, D.C.: Brookings Institution, 1932), pp. 113–17.

²⁴“The ease with which the gold exchange standard can be instituted, especially with borrowed money, has led a good many nations during the past decade to ‘stabilize’ … at too high a rate.” H. Parker Willis, “The Breakdown of the Gold Exchange Standard and its Financial Imperialism,” The Annalist (October 16, 1931): 626f. On the gold exchange standard, see also William Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914–1934 (New York: National Bureau of Economic Research, 1940), vol. 2, pp. 732–49.

²⁵William Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914–1934 (New York: National Bureau of Economic Research, 1940), vol. 1, p. 355.

²⁶This is not to endorse the entire Blackett Plan, which also envisioned a £100 million gold loan to India by the U.S. and British governments. See Chandler, Benjamin Strong, Central Banker, pp. 356ff.

²⁷See Beckhart, “The Basis of Money Market Funds,” p. 61.

²⁸Entry of February 6, 1928. Chandler, Benjamin Strong, Central Banker, pp. 379–80. Norman did not insist on League of Nations control, however, when he and Strong agreed, in December 1927, to finance the stabilization of the Italian lira, by jointly extending a $75 million credit to the Bank of Italy ($30 million from the New York Bank), along with a $25 million credit by Morgan’s and an equal loan by other private bankers in London. The Federal Reserve Board, as well as Secretary Mellon, approved of these subsidies. Ibid., p. 388.

²⁹See Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), p. 167.

³⁰During the fall of 1925, Norman had similarly reduced Bank Rate. At that time, Strong had been critical, and was also led by the American boom to raise discount rates at home. By December, Britain’s Bank Rate was raised again to its previous level.

³¹Much of its sterling balances were accumulated as the result of a heavy British credit expansion in 1926.

³²The Bank of France had acquired these balances in a struggle to stabilize the franc at too low a rate, but without yet declaring gold convertibility. The latter step was finally taken in June, 1928.

³³Rist, “Notice Biographique,” pp. 1006ff.

³⁴See Clark, Central Banking Under The Federal Reserve System, p. 315. Paul Warburg’s tribute to Strong was even more lavish. Warburg heralded Strong as the pathfinder and pioneer in “welding the central banks together into an intimate group.” He concluded that “the members of the American Acceptance Council would cherish his memory.” Paul M. Warburg, The Federal Reserve System (New York: Macmillan, 1930), vol. 2, p. 870.

In the autumn of 1926, a leading banker admitted that bad consequences would follow the cheap money policy, but said: “that cannot be helped. It is the price we must pay for helping Europe.” H. Parker Willis, “The Failure of the Federal Reserve,” North American Review (1929): 553.

³⁵See Anderson, Economics and the Public Welfare, pp. 182–83; Beckhart, “Federal Reserve Policy and the Money Market,” pp. 67ff.; and Clark, Central Banking Under the Federal Reserve System, p. 314.

³⁶O. Ernest Moore to Sir Arthur Salter, May 25, 1928. Quoted in Chandler, Benjamin Strong, Central Banker, pp. 280–81.

³⁷Clark, Central Banking Under the Federal Reserve System, p. 198. We have seen that sterling bills were bought in considerable amount in 1927 and 1929.

³⁸See Harold L. Reed, Federal Reserve Policy, 1921–1930 (New York: McGraw–Hill, 1930), p. 32.

³⁹Clark points out that the cheap credit particularly succeeded in aiding the financial, investment banking, and speculative interests with whom Strong and his associates were personally affiliated. Clark, Central Banking Under the Federal Reserve System, p. 344.

⁴⁰Anderson (Economics and the Public Welfare) is surely wrong when he infers that the stock market had by this time run away, and that the authorities could do little further. More vigor would have ended the boom then and there.

⁴¹See Harris, Twenty Years of Federal Reserve Policy, vol. 2, pp. 436ff.; Charles Cortez Abbott, The New York Bond Market, 1920–1930 (Cambridge, Mass.: Harvard University Press, 1937), pp. 117–30.

⁴²See Strong to Walter W. Stewart, August 3, 1928. Chandler, Benjamin Strong, Central Banker, pp. 459–65. For a contrary view, see Carl Snyder, Capitalism, the Creator (New York: Macmillan, 1940), pp. 227–28. Dr. Stewart, we might note, had shifted easily from being head of the Division of Research of the Federal Reserve System to a post of Economic Advisor to the Bank of England a few years later, from which he had written to Strong warning of too tight restriction on American bank credit.

⁴³See Review of Economic Statistics, p. 13.

⁴⁴Real estate is the other large market in titles to capital. On the real estate boom of the 1920s, see Homer Hoyt, “The Effect of Cyclical Fluctuations upon Real Estate Finance,” Journal of Finance (April, 1947): 57.

⁴⁵Significantly, the leading “bull” speculator of the era, William C. Durant, who failed ignominiously in the crash, hailed Coolidge and Mellon as the leading spirits of the cheap money program. Commercial and Financial Chronicle (April 20, 1929): 2557ff.

⁴⁶Hoover, The Memoirs of Herbert Hoover, vol. 2, pp. 16ff.

⁴⁷See Joseph Stagg Lawrence, Wall Street and Washington (Princeton, N.J.: Princeton University Press, 1929), pp. 7ff., and passim.

⁴⁸See Irving Fisher, The Stock Market Crash—And After (New York: Macmillan, 1930), pp. 37ff.

⁴⁹“The policy of ‘moral suasion’ was inaugurated following a visit to this country of Mr. Montagu Norman.” Beckhart, “Federal Reserve Policy and the Money Market,” p. 127.

⁵⁰Ibid., pp. 142ff.

⁵¹A. Wilfred May, “Inflation in Securities,” in H. Parker Willis and John M. Chapman, eds., The Economics of Inflation (New York: Columbia University Press, 1935), pp. 292–93. Also see Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, D.C.: Brookings Institution, 1932) pp. 124–77; and Oskar Morgenstern “Developments in the Federal Reserve System,” Harvard Business Review (October, 1930): 2–3.

⁵²For an excellent contemporary discussion of the Federal Reserve, and of its removal of the natural checks on commercial bank inflation, see Ralph W. Robey, “The Progress of Inflation and ‘Freezing’ of Assets in the National Banks,” The Annalist (February 27, 1931): 427–29. Also see C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 140–42; and C. Reinold Noyes, “The Gold Inflation in the United States,” American Economic Review (June, 1930): 191–97.

6. Theory and Inflation: Economists and the Lure of a Stable Price Level

¹The qualitative aspect of credit is important to the extent that bank loans must be to business, and not to government or to consumers, to put the trade cycle mechanism into motion.

²The National Industrial Conference Board (NICB) consumer price index rose from 102.3 (1923 = 100) in 1921 to 104.3 in 1926, then fell to 100.1 in 1929; the Bureau of Labor Statistics (BLS) consumer good index fell from 127.7 (1935–1939 = 100) in 1921 to 122.5 in 1929. Historical Statistics of the U.S., 1789–1945 (Washington, D.C.: U.S. Department of Commerce, 1949), pp. 226–36, 344.

³C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 176ff.

⁴Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), p. 312. In this view, Strong was, of course, warmly supported by Montagu Norman. Ibid., p. 315.

⁵Also see ibid., pp. 199ff. And Charles Rist recalls that, in his private conversations, “Strong was convinced that he was able to fix the price level, by his interest and credit policy.” Charles Rist, “Notice Biographique,” Revue d’Èconomie Politique (November–December, 1955): 1029.

⁶Strong thus overcame his previous marked skepticism toward any legislative mandate for price stabilization. Before this, he had preferred to leave the matter strictly to Fed discretion. See Chandler, Benjamin Strong, Central Banker, pp. 202ff.

⁷See the account in Irving Fisher, ibid., pp. 170–71. Commons wrote of Governor Strong: “I admired him both for his open-minded help to us on the bill and his reservation that he must go along with his associates.”

⁸See Fisher’s eulogy of Snyder, Stabilised Money, pp. 64–67; and Carl Snyder, “The Stabilization of Gold: A Plan,” American Economic Review (June, 1923): 276–85; idem, Capitalism the Creator (New York: Macmillan, 1940), pp. 226–28.

⁹D.H. Robertson, “The Trade Cycle,” Encyclopaedia Britannica, 14th ed. (1929), vol. 22, p. 354.

¹⁰D.H. Robertson, “How Do We Want Gold to Behave?” in The International Gold Problem (London: Humphrey Milford, 1932), p. 45; quoted in Phillips, et al., Banking and the Business Cycle, pp. 186–87.

¹¹Ralph O. Hawtrey, The Art of Central Banking (London: Longmans, Green, 1932), p. 300.

¹²Leading stabilizationist Norman Lombard also hailed Strong’s alleged achievement: “By applying the principles expounded in this book … he [Strong] maintained in the United States a fairly stable price level and a consequent condition of widespread economic well-being from 1922 to 1928.” Norman Lombard, Monetary Statesmanship (New York: Harpers, 1934), p. 32n. On the influence of stable price ideas on Federal Reserve policy, see also David A. Friedman, “Study of Price Theories Behind Federal Reserve Credit Policy, 1921–29” (unpublished M.A. thesis, Columbia University, 1938).

¹³Fisher, Stabilised Money, p. 282. Our account of the growth of the stable money movement rests heavily upon Fisher’s work.

¹⁴While Hawtrey was the main inspiration for the resolutions, he criticized them for not going far enough.

¹⁵See Paul Einzig, Montagu Norman (London: Kegan Paul, 1932), pp. 67, 78.

¹⁶Sir Henry Clay, Lord Norman (London: Macmillan, 1957), p. 138.

¹⁷Cited in Joseph Stagg Lawrence, Wall Street and Washington (Princeton, N.J.: Princeton University Press, 1929), pp. 437–43.

¹⁸Commercial and Financial Chronicle (April, 1929): 2204–06. Also see Beckhart, “Federal Reserve Policy and the Money Market,” in Beckhart et al., The New York Money Market (New York: Columbia University Press, 1931), vol. 2, pp. 99ff.

¹⁹See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, p. 178.

²⁰Allyn A. Young, “Downward Price Trend Probable, Due to Hoarding of Gold by Central Banks,” The Annalist (January 18, 1929): 96–97. Also see, “Our Reserve Bank Policy as Europe Thinks It Sees It,” The Annalist (September 2, 1927): 374–75.

²¹Seymour Harris, Twenty Years of Federal Reserve Policy (Cambridge, Mass.: Harvard University Press, 1933), vol. 1, 192ff., and Aldrich, The Causes of the Present Depression and Possible Remedies (New York, 1933), pp. 20–21.

7. Prelude to Depression: Mr. Hoover and Laissez-Faire

¹For an appreciation of the importance of this fact for American monetary history, see Vera C. Smith, The Rationale of Central Banking (London: P.S. King and Son, 1936).

²From his acceptance speech on August 11, and his campaign speech at Des Moines on October 4. For full account of the Hoover speeches and anti-depression program, see William Starr Myers and Walter H. Newton, The Hoover Administration (New York: Scholarly Press, 1936), part 1; William Starr Myers, ed., The State Papers of Herbert Hoover, (New York. 1934), vols. 1 and 2. Also see Herbert Hoover, Memoirs of Herbert Hoover (New York: Macmillan, 1937), vol. 3.

³See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 14, p. 27.

⁴Hoover, Memoirs, vol. 2, p. 29. Hoover’s evasive rhetoric is typical: “I insisted that these improvements could be effected without government control, but the government should cooperate by research, intellectual leadership [sic], and prohibitions upon the abuse of power.”

⁵Cf. Arthur M. Schlesinger, Jr., The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin, 1957), pp. 81ff.; Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), pp. 24ff.

⁶Hoover records that the “extreme right” was hostile to these proposals—and understandably so—and notably the Boston Chamber of Commerce. Also see Eugene Lyons, Our Unknown Ex-President (New York: Doubleday, 1948), pp. 213–14.

⁷Hoover to Wesley C. Mitchell, July 29, 1921. Lucy Sprague Mitchell, Two Lives (New York: Simon and Schuster, 1953), p. 364.

⁸Warren, Herbert Hoover and the Great Depression, p. 26.

⁹See Hoover, Memoirs, vol. 2; Warren, Herbert Hoover and the Great Depression; and Lloyd M. Graves, The Great Depression and Beyond (New York: Brookmire Economic Service, 1932), p. 84.

¹⁰Hoover, Memoirs, vol. 2, pp. 41–42.

¹¹See Joseph H. McMullen, “The President’s Unemployment Conference of 1921 and its Results” (unpublished M.A. thesis, Columbia University, 1922), p. 33.

¹²See Graves, The Great Depression and Beyond.

¹³See E. Jay Howenstine, Jr., “Public Works Policy in the Twenties,” Social Research (December, 1946): 479–500.

¹⁴See Lyons, Our Unknown Ex-President, p. 230.

¹⁵In reality, public works only prolong the depression, aggravate the malinvestment problem, and intensify the shortage of savings by wasting more capital. They also prolong unemployment by bolstering wage rates. See Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 792–94.

¹⁶The payment of charity wages as high as market rates began in the depression of 1893; public works as a depression remedy started on a municipal scale in the recession of 1914–1915. The secretary of Mayor John Purroy Mitchell’s New York Committee on Unemployment urged public works in 1916, and Nathan J. Stone, chief statistician of the U.S. Tariff Board, urged a national public works and employment reserve in 1915. Immediately after the war, Governor Alfred E. Smith of New York and Governor Frank O. Lowden of Illinois urged a national public works stabilization program. See Raphael Margolin, “Public Works as a Remedy for Unemployment in the United States” (unpublished M.A. thesis, Columbia University, 1928).

¹⁷McMullen, “The President’s Unemployment Conference of 1921 and its Results,” p. 16.

¹⁸Pennsylvania had established the first public works stabilization program in 1917, largely inspired by Mallery; it was later repealed. Mallery had also been made head of a new Division of Development of Public Works by States and Cities During the Transition Period, in the Wilson administration. See Dorfman, The Economic Mind in American Civilization,” vol. 4, p. 7.

¹⁹See John B. Andrews, “The President’s Unemployment Conference—Success or Failure?” American Labor Legislation Review (December, 1921): 307–10. Also see “Unemployment Survey,” in ibid, pp. 211–12.

²⁰American Labor Legislation Review (March, 1922): 79. Other officials of the AALL included: Jane Addams, Thomas L. Chadbourne, Professor John R. Commons, Professor Irving Fisher, Adolph Lewisohn, Lillian Wald, Felix M. Warburg, Woodrow Wilson, and Rabbi Stephen S. Wise.

²¹Lyons, Our Unknown Ex-President, p. 230.

²²The American Construction Council was formed in response to the hounding of the New York construction industry by state and Federal authorities during the depression of 1920–1921. The governments charged the industry with “price-fixing” and “excessive profits.” Hoover and Roosevelt together formed the Council in the summer of 1922, to stabilize and organize the industry. The aim was to cartelize construction, impose various codes of operation and “ethics,” and to plan the entire industry. Franklin Roosevelt, as President of the Council, took repeated opportunity to denounce profit-seeking and rugged individualism. The “codes of fair practice” were Hoover’s idea. See Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1956), pp. 102ff.

²³Wesley C. Mitchell, “Unemployment and Business Fluctuations,” American Labor Legislation Review (March, 1923): 15–22.

²⁴The following economists, businessmen, and other leaders had by now served as officers of the American Association for Labor Legislation, in addition to those named above: Ray Stannard Baker, Bernard M. Baruch, Mrs. Mary Beard, Joseph P. Chamberlain, Morris Llewellyn Cooke, Fred C. Croxton, Paul H. Douglas, Morris L. Ernst, Herbert Feis, S. Fels, Walton H. Hamilton, William Hard, Ernest M. Hopkins, Royal W. Meeker, Broadus Mitchell, William F. Ogburn, Thomas I. Parkinson, Mrs. George D. Pratt, Roscoe Pound, Mrs. Raymond Robins, Julius Rosenwald, John A. Ryan, Nahum I. Stone, Gerard Swope, Mrs. Frank A. Vanderlip, Joseph H. Willits, and John G. Winant.

²⁵Ralph Owen Brewster, “Footprints on the Road to Plenty—A Three Billion Dollar Fund to Stabilize Business,” Commercial and Financial Chronicle (November 28, 1928): 2527.

²⁶The Foster–Catchings Plan called for an organized public works program of $3 billion to iron out the business cycle and stabilize the price level. Individual initiative, the authors decided, may be well and good, but in a situation of this sort “we must have collective leadership.” William T. Foster and Waddill Catchings, The Road to Plenty (Boston: Houghton Mifflin, 1928), p. 187. For a brilliant critique of the underconsumptionist theories of Foster and Catchings, see F.A. Hayek, “The ‘Paradox’ of Savings,” in Profit, Interest, and Investment (London: Routledge and Kegan Paul, 1939), pp. 199–263.

²⁷See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 349–50.

²⁸“Hoover’s Plan to Keep the Dinner-Pail Full,” Literary Digest (December 8, 1928): 5–7.

²⁹William T. Foster and Waddill Catchings, “Mr. Hoover’s Plan—What It Is and What It Is Not—The New Attack on Poverty,” Review of Reviews (April, 1929): 77–78. For a laudatory survey of Hoover’s pro-public works views in the 1920s, by an official of the AALL, see George H. Trafton, “Hoover and Unemployment,” American Labor Legislation Review (September, 1929): 267ff.; and idem, “Hoover’s Unemployment Policy,” American Labor Legislation Review (December, 1929): 373ff.

³⁰Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), p. 147. As early as 1909, Hoover had called unions “proper antidotes for unlimited capitalistic organizations,” ibid., p. 250.

³¹Warren, Herbert Hoover and the Great Depression, p. 28.

³²Lyons, Our Unknown Ex-President, p. 231.

³³See Marshall Olds, Analysis of the Interchurch World Movement Report on the Steel Strike (New York: G.P. Putnam and Sons, 1922), pp. 417ff.

³⁴Lyons, Our Unknown Ex-President, p. 231.

³⁵Also forgotten was the fact that wages were involved in the struggle, as well as hours. The workers wanted shorter hours with a “living wage,” or as the Inquiry Report put it, “a minimum comfort wage”—in short, they wanted higher hourly wage rates. See Samuel Yellen, American Labor Struggles (New York: S.A. Russell, 1956), pp. 255ff.

³⁶On the twelve-hour day episode, see Frederick W. MacKenzie, “Steel Abandons the 12-Hour Day,” American Labor Legislation Review (September, 1923): 179ff.; Hoover, Memoirs, vol. 2, pp. 103–04; and Robert M. Miller, “American Protestantism and the Twelve-Hour Day,” Southwestern Social Science Quarterly (September, 1956): 137–48. In the same year, Governor Pinchot of Pennsylvania forced the anthracite coal mines of that state to adopt the eight-hour day.

³⁷For a pro-union account of the affair, see Donald R. Richberg, Labor Union Monopoly (Chicago: Henry Regnery, 1957), pp. 3–28; also see Hoover, Memoirs, vol. 2.

³⁸See McMullen, “The President’s Unemployment Conference of 1921 and its Results,” p. 17.

³⁹Hoover, Memoirs, vol. 2, p. 108.

⁴⁰One of these industrialists was the same Charles M. Schwab, head of Bethlehem Steel, who had bitterly fought Hoover in the eight-hour day dispute. Thus, in early 1929, Schwab opined that the way to keep prosperity permanent was to “pay labor the highest possible wages.” Commercial and Financial Chronicle128 (January 5, 1929): 23.

⁴¹National Industrial Conference Board, Salary and Wage Policy in the Depression (New York: Conference Board, 1932), p. 3; Leo Wolman, Wages in Relation to Economic Recovery (Chicago: University of Chicago Press, 1931), p. 1.

⁴²Committee on Recent Economic Changes, Recent Economic Changes in the United States (New York: McGraw–Hill, 1929), vol. 1, p. xi.

⁴³Committee on Recent Economic Changes, Recent Economic Changes in the United States, (New York: McGraw–Hill, 1929), vol. 2; Henry Dennison, “Management,” p. 523.

⁴⁴Another important foretaste of the later National Recovery Act (NRA) was Hoover’s use of the Department of Commerce during the 1920s to help trade associations form “codes,” endorsed by the Federal Trade Commission (FTC), to curtail competition in the name of eliminating “unfair” trade practices.

8. The Depression Begins: President Hoover Takes Command

¹Hoover, Memoirs of Herbert Hoover (New York: MacMillan, 1937), vol. 3, pp. 29ff. For the sake of simplicity, any quotations from, or references based upon the Memoirs, Myers and Newton’s The Hoover Administration, Wilbur and Hyde’s The Hoover Policies, or Hoover’s The State Papers of Herbert Hoover, will not be footnoted from this point on.

²Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), p. 253.

³In addition to the above sources on the Hoover conferences, see Robert P. Lamont, “The White House Conferences,” The Journal of Business (July, 1930): 269.

⁴The American Federationist 37 (March, 1930): 344.

⁵J.M. Clark, “Public Works and Unemployment,” American Economic Review, Papers and Proceedings (May, 1930): 15ff.

⁶See Theodore Saloutos and John D. Hicks, Agricultural Discontents in the Middle West, 1900–1939 (Madison: University of Wisconsin Press, 1951), pp. 321–48; and Murray R. Benedict, Farm Policies of the United States, 1790–1950 (New York: Twentieth Century Fund, 1953), pp. 145–75, for accounts of the farm bloc and farm programs in the 1920s and during the depression. Also see Alice M. Christensen, “Agricultural Pressure and Governmental Response in the United States, 1919–1929,” Agricultural History 11 (1937): 33–42; and V.N. Valgren, “The Agricultural Credits Act of 1923,” American Economic Review (September, 1923): 442–60.

⁷Part of the pressure for this attack on the meat packers came from wholesale grocers, who raised the familiar cry of “unfair competition” against efficient rivals. See Benedict, Farm Policies of the United States, 1790–1950, p. 150n. For similar instances, see Charles F. Phillips, Competition? Yes But… (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1955).

⁸President Wilson had suspended and then vainly vetoed renewal of the WFC at the behest of Secretary of Treasury David Houston, who was opposed in principle to any continuation of war intervention in the peacetime economy. Even after Congress overrode the veto, Houston was able to keep a checkrein on WFC activities. When Harding became President, he reappointed Eugene Meyer as head of the WFC and, under Meyer’s inspiration, supported the subsequent expansion. See Gerald D. Nash, “Herbert Hoover and the Origins of the RFC,” Mississippi Valley Historical Review (December, 1959): 459–60.

⁹Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, p. 40.

¹⁰See James H. Shideler, Farm Crisis 1919–1923 (Berkeley: University of California Press, 1957), pp. 50–51, 55–56.

¹¹It may surprise many to learn that much of the cartel agitation came not from cotton farmers. It came from the merchants and bankers with large inventories of cotton on hand, and who would not suffer from reductions in acreage. Ibid., p. 85.

¹²The Iowa Farm Bureau Federation resolved in January, 1922 to present the facts on reduction of corn acreage to its membership, but added that “we entrust each farmer to adjust his acreage in accordance with his own judgment.” Ibid., p. 87.

¹³See Benedict, Farm Policies of the Unitd States 1790–1950, pp. 186n. and 194ff.

¹⁴In 1924, Gray Silver, powerful Washington lobbyist for the farm bloc, attempted another national grain cooperative, setting up the Grain Marketing Company (GMC). The GMC aimed at becoming a holding company of the major private grain marketing firms, but farmers failed to support the plan, and the company died a year later.

¹⁵See Shideler, Farm Crisis 1919–1923, p. 21.

¹⁶By 1924, in addition to Peek, Johnson, the two Henry Wallaces—father and son—and Bernard Baruch, in support of McNary–Haugen there were the Illinois Agricultural Association, most Western farm journals, the American Farm Bureau Federation, the National Grange, the National Board of Farm Organizations, the American Wheat Growers’ Association, and the prominent banker Otto H. Kahn.

¹⁷See Saloutos and Hicks, Agricultural Discontents in the Middle West, 1900–1939, pp. 286–91; and John D. Black, Agricultural Reform in the United States (New York: McGraw–Hill, 1929), pp. 337, 351ff.

¹⁸Behind the scenes, Bernard Baruch had also been advocating a Federal Farm Board to raise farm prices by organizing agriculture under government aegis, starting with wheat and cotton. He was also active in urging Commerce and the National Industrial Conference Board, Commission on Agriculture, jointly established by the U.S. Chamber of Commerce and the National Industrial Conference Board. The Commission was sure that “laissez-faire is of the past.” See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 79–80.

¹⁹“Hoover chose the Board members from men proposed by farm organizations, as requested by the administration.” See Edgar E. Robinson, “The Hoover Leadership, 1929–1933” (unpublished manuscript), pp. 128ff. After the first year of operations, Legge retired and Stone became chairman. Teague and McKelvie were replaced by two former high officials in the American Farm Bureau Federation, Frank Evans and the aggressive Sam H. Thompson.

²⁰This was to become a permanent question for logical people, with no sign yet that anyone is willing to answer. From the point of view of the general public, of course, the policies are contradictory and irrational. From the point of view of the government bureaucracy, however, both measures add to its power and swell its number.

²¹The FFB forced the Chicago Board of Trade to prohibit short selling by foreign governments, notably by Russia.

²²Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), p. 175.

²³To their great credit, some organizations bitterly opposed the FFB throughout these years. These included the Nebraska Farmers’ Union, which attacked the FFB as a great exploitative bureaucracy, the Corn Belt Committee, and the Minnesota Farm Bureau.

²⁴Murray R. Benedict and Oscar C. Stine, The Agricultural Commodity Programs (New York: Twentieth Century Fund, 1956), pp. 235–36.

²⁵At the end of 1931, Secretary of Agriculture Hyde was advocating the replacement of our traditional “planless” agriculture by a program of government purchase and reforestation of submarginal lands. “Hyde, however, had rejected as incompatible with American liberty the proposal of Senator Arthur H. Vandenberg (R., Michigan) to compel farmers to curtail their production.” Gilbert N. Fite, “Farmer Opinion and the Agricultural Adjustment Act, 1933,” Mississippi Valley Historical Review (March, 1962): 663.

²⁶There were also “milk strikes” in some areas, with milk trucks seized on the roads, and their contents dumped upon the ground. Wisconsin and California, in 1932, pioneered in setting up state milk controls, amounting to compulsory milk cartellization on a state-wide level. See Benedict and Stine, The Agricultural Commodity Programs, p. 444.

²⁷See Fred A. Shannon, American Farmers’ Movements (Princeton, N.J.: D. Van Nostrand, 1957), pp. 88–91, 178–82.

9. 1930

¹Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), pp. 222–23.

²The New York Federal Reserve also continued to lead in collaborating with foreign central banks, often against the wishes of the administration. Thus, the Bank of International Settlements, an attempt at an inter-central banks’ central bank, instigated by Montagu Norman, treated the New York Bank as America’s central bank. Chairman of the BIS’s first organizing committee was Jackson E. Reynolds, a director of the New York Federal Reserve, and its first president was Gates W. McGarrah, who resigned as Governor of the New York Reserve Bank in February, 1930, to assume the post. J.P. Morgan and Company supplied much of the American capital in the new Bank. In November, Governor Harrison made a “regular business trip” abroad to confer with other central bankers, and discuss loans to foreign governments. In 1931, the New York Federal Reserve extended loans to the BIS. Yet there was no legislative sanction for our participation in the Bank.

³Business Week (October 22, 1930). Dr. Virgil Jordan was the chief economist for Business Week—then as now, a leading spokesman for “enlightened” business opinion.

⁴Herbert Hoover, Memoirs of Herbert Hoover (New York: Macmillan, 1952), vol. 2, pp. 291ff. See John H. Fahey, “Tariff Barriers and Business Depressions,” Proceedings of the Academy of Political Science (June, 1931): 41ff.

⁵See Frank W. Taussig, “The Tariff Act of 1930,” Quarterly Journal of Economics (November, 1930): 1–21; and idem, “The Tariff, 1929–1930,” Quarterly Journal of Economics (February, 1930): 175–204.

⁶Robert A. Divine, American Immigration Policy, 1924–1952 (New Haven, Conn.: Yale University Press, 1957), p. 78.

⁷The labor union movement applauded the program, with William Green urging increased Congressional appropriations for the Federal border patrol to keep out immigrants. In California, Filipino field hands were beaten and shot to keep them from employment in the agricultural valleys. Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), p. 305.

⁸In the same month, October, however, Hoover’s aide Edward Eyre Hunt, writing to Colonel Woods, was critical of whatever wage cuts had occurred. Bernstein, The Lean Years: A History of The American Worker, 1920–1933, p. 259.

⁹Bernays’s major contribution was insistence on the public-relations superiority of the word “employment,” rather than “unemployment,” in the name of the organization. Ibid., pp. 302–03.

¹⁰Hoover’s interest in governmental dams by no means began with the depression, as witness his proud launching of the Boulder Dam in December, 1928. That private business is not always a reliable champion of free private enterprise, is shown by the approval of the dam by such utility companies as the Southern California Edison Company, which hoped to benefit by purchasing cheap, subsidized government power. In addition, private power companies saw Boulder Dam as a risky, submarginal project plagued by grave engineering difficulties, and were content to have the taxpayers assume the risk.

On the other hand, it must be admitted that Hoover staunchly resisted Congressional attempts during 1931 and 1932 to launch into socialized electric power production and distribution at Muscle Shoals, a project strongly opposed by private power companies and later enlarged by the New Deal into the Tennessee Valley Authority (TVA). See Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), pp. 64, 77–80.

¹¹Commercial and Financial Chronicle 131 (August 2, 1930): 690–91.

¹²Joseph Stagg Lawrence, “The Attack on Thrift,” Journal of the American Bankers’ Association (January, 1931): 597ff.

¹³Commercial and Financial Chronicle 132 (January 17, 1931): 428–29.

¹⁴See U.S. Senate, Committee on Banking and Currency, History of the Employment Stabilization Act of 1931 (Washington, D.C.: U.S. Government Printing Office, 1945); Joseph E. Reeve, Monetary Reform Movements (Washington, D.C.: American Council on Public Affairs, 1943), pp. 1ff.; U.S. Senate, Committee on Judiciary, 71st Congress, 2nd Session, Hearings on S. 3059 (Washington, D.C., 1930).

¹⁵The economists and others who signed these petitions included the following:

Edith Abbott

Asher Achinstein

Emily Green Balch

Bruce Bliven

Sophinisba P. Breckenridge

Paul F. Brissenden

William Adams Brown, Jr.

Edward C. Carter

Ralph Cassady, Jr.

Waddill Catchings

Zechariah Chafee, Jr.

Joseph P. Chamberlain

John Bates Clark

John Maurice Clark

Victor S. Clark

Joanna C. Colcord

John R. Commons

Morris L. Cooke

Morris A. Copeland

Malcolm Cowley

Donald Cowling

Jerome Davis

Davis F. Dewey

Paul H. Douglas

Stephen P. Duggan

Seba Eldridge

Henry Pratt Fairchild

John M. Ferguson

Frank A. Fetter

Edward A. Filene

Irving Fisher

Elisha M. Friedman

A. Anton Friedrich

S. Colum Gilfillan

Meredith B. Givens

Carter Goodrich

Henry F. Grady

Robert L. Hale

Walton Hamilton

Mason B. Hammond

Charles O. Hardy

Sidney Hillman

Arthur N. Holcombe

Paul T. Homan

B.W. Huebsch

Alvin S. Johnson

H.V. Kaltenborn

Edwin W. Kemmerer

Willford I. King

Alfred Knopf

Hazel Kyrk

Harry W. Laidler

Corliss Lamont

Kenneth S. Latourette

William Leiserson

J.E. LeRossignol

Roswell C. McCrea

Otto Tod Mallery

Harry A. Millis

Broadus Mitchell

Harold G. Moulton

Paul M. O’Leary

Thomas I. Parkinson

S. Howard Patterson

Harold L. Reed

Father John A. Ryan

Francis B. Sayre

G.T. Schwenning

Henry R. Seager

Thorsten Sellin

Mary K. Simkhovitch

Nahum I. Stone

Frank Tannenbaum

Frank W. Taussig

Ordway Tead

Willard Thorp

Mary Van Kleeck

Oswald G. Villard

Lillian Wald

J.P. Warbasse

Colston E. Warne

Gordon S. Watkins

William O. Weyforth

Joseph H. Willits

Chase Going Woodhouse

Matthew Woll

Also involved in the agitation, by virtue of their being officers and members of the American Association for Labor Legislation during this period, were the following economists and other intellectual leaders:

Willard E. Atkins

C.C. Burlingham

Stuart Chase

Dorothy W. Douglas

Richard T. Ely

Felix Frankfurter

Arthur D. Gayer

Harold M. Groves

Luther Gulick

Mrs. Thomas W. Lamont

Eduard C. Lindeman

William N. Loucks

Wesley C. Mitchell

Jessica Peixotto

Donald Richberg

Bernard L. Shientag

Sumner H. Slichter

Edwin S. Smith

George Soule

William F. Willoughby

Edwin E. Witte

¹⁶Bernstein, The Lean Years: A History of The American Worker, 1920–1933, p. 304.

¹⁷See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 5, pp. 674–75.

¹⁸The following month, five Progressive Senators called a conference to agitate for a gigantic $5 billion public works program; the conference was addressed by Detroit’s progressive Mayor, Frank Murphy, Professor Leo Wolman, and Father John A. Ryan. Senator LaFollette and William Randolph Hearst also called for a similar measure.

¹⁹See David Loth, Swope of GE (New York: Simon and Schuster, 1958), pp. 198–200.

²⁰Bernstein, The Lean Years: A History of The American Worker, 1920–1933, p. 304.

²¹Generally, government expenditures are compared with Gross National Product (GNP) in weighing the fiscal extent of government activity in the economy. But since government expenditure is more depredation than production, it is first necessary to deduct “product originating in government and in government enterprises” from GNP to arrive at Gross Private Product. It might be thought that total government expenditures should not be deducted from GPP, because this involves double counting of government expenditures on bureaucrats’ salaries (“product originating in government”). But this is not double counting, for the great bulk of money spent on bureaucratic salaries is gathered by means of taxation of the private sector, and, therefore, it too involves depredation upon the private economy. Our method involves a slight amount of overcounting of depredation, however, insofar as funds for government spending come from taxation of the bureaucrats themselves, and are therefore not deducted from private product. This amount, particularly in the 1929–1932 period, may safely be ignored, however, as there is no accurate way of estimating it and no better way of estimating government depredation on the private sector.

If government expenditures and receipts are just balanced, then obviously each is a measure of depredation, as funds are acquired by taxation and channelled into expenditures. If expenditures are larger, then the deficit is either financed by issuing new money or by borrowing private savings. In either case, the deficit constitutes a drain of resources from the private sector. If there is a surplus of receipts over expenditures then the surplus taxes are drains on the private sector. For a more extended discussion, and a tabulation of estimates of these figures for the 1929–1932 period, see the Appendix.

²²While the data in the Appendix below list the rise in Federal expenditure to be $200 million, this is the effect of rounding. The actual increase was $133 million.

²³See Sidney Ratner, American Taxation (New York: W.W. Norton, 1942), p. 443.

10. 1931—“The Tragic Year”

¹Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), pp. 232ff.

²The secret relations between Governor Norman and the head of the Federal Reserve Bank of New York continued during the depression. In August, 1932, Norman landed at Boston, and traveled to New York under the alias of “Professor Clarence Skinner.” We do not know what transpired at this conference with Reserve Bank leaders, but the Bank of England congratulated Norman upon his return for having “sowed a seed.” See Lawrence E. Clark, Central Banking Under the Federal Reserve System (New York: Macmillan, 1935), p. 312.

³Clark plausibly maintains that the true motive of the New York Federal Reserve for these salvage operations was to bail out favored New York banks holding large quantities of frozen foreign assets, e.g., German acceptances. Ibid., pp. 343f.

⁴See Winthrop W. Aldrich, The Causes of the Present Depression and Possible Remedies (New York, 1933), p. 12.

⁵Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 5, p. 675.

⁶See Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960) and Dorfman, The Economic Mind in American Civilization, vol. 5, p. 7n. However, Hoover did veto a Woods-supported bill, passed in March, to strengthen the U.S. Employment Service. See Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), pp. 24ff.

⁷E.P. Hayes, Activities of the President’s Emergency Committee for Employment, October 17, 1930–August 19, 1931 (printed by the author, 1936).

⁸The director of the new Federal Employment Stabilization Board, D.H. Sawyer, was critical of the time lag inherent in public works programs, and preferred to leave public works to the localities. In addition, J.S. Taylor, head of the Division of Public Construction, opposed public works in principle. Bernstein, The Lean Years: A History of The American Worker, 1920–1933, pp. 273–74.

⁹Congressional Record 75 (January 11, 1932), pp. 1655–57.

¹⁰Monthly Labor Review 32 (1931): 834ff.

¹¹The truth is precisely the opposite; consuming power is wholly dependent upon production.

¹²Leo Wolman, Wages in Relation to Economic Recovery (Chicago: University of Chicago Press, 1931).

¹³Secretary of Commerce Lamont declared in April, 1931, that “I have canvassed the principal industries, and I find no movement to reduce the rate of wages. On the contrary, there is a desire to support the situation in every way.” Quoted in Edward Angly, comp., Oh Yeah? (New York: Viking Press, 1931), p. 26.

¹⁴National Industrial Conference Board, Salary and Wage Policy in the Depression (New York: Conference Board, 1933), p. 6.

¹⁵Angly, Oh Yeah?, p. 22.

¹⁶We might also note that Keynes found the attitude of the Federal Reserve authorities “thoroughly satisfactory,” i.e., satisfactorily inflationist. Roy F. Harrod, The Life of John Maynard Keynes (New York: Harcourt, Brace, 1951), pp. 437–48.

¹⁷See John Oakwood, “Wage Cuts and Economic Realities,” Barron’s (June 29, 1931); and “How High Wages Destroy Buying Power,” Barron’s (February 29, 1932); Hugh Bancroft, “Wage Cuts a Cure for Depression,” Barron’s (October 19,1931) and “Fighting Economic Law—Wage Scales and Purchasing Power,” Barron’s (January 25, 1932). Also see George Putnam, “Is Wage Maintenance a Fallacy?” Journal of the American Bankers’ Association (January, 1932): 429ff.

¹⁸See Fred R. Fairchild, “Government Saves Us From Depression,” Yale Review (Summer, 1932): 667ff; and Dorfman, The Economic Mind in American Civlization, vol. 5, p. 620.

¹⁹Stimson also added a racist note, fearing that permitting relatives would allow the bringing in of too many of the “southern” as against the “Northern” and “Nordic” races. See Robert A. Divine, American Immigration Policy, 1924–1932 (New Haven, Conn.: Yale University Press, 1957), p. 78.

²⁰On the vigorous attempts of the President’s Emergency Committee for Employment to pressure the Red Cross into giving relief to coal miners, see Bernstein, The Lean Years: A History of the American Worker, 1920–1933, pp. 308ff.

²¹By June, however, the American Association of Public Welfare Relief was calling for a federal relief program.

²²Edith Abbott, Public Assistance (Chicago: University of Chicago Press, 1940), vol. 1, pp. 657–58, and 509–70. Even voluntary relief, if given indiscriminately, will prolong unemployment by preventing downward pressure on wage rates from clearing the labor market.

²³See Arthur M. Schlesinger, Jr., The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin, 1957), pp. 169, 507.

²⁴Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1956), p. 267.

²⁵Monthly Labor Review 33 (1931): 1341–42.

²⁶See Paul F. Wendt, The Role of the Federal Government in Housing (Washington, D.C.: American Enterprise Association, 1956), pp. 8–9.

²⁷Nash maintains that it was Meyer who made the promise to the bankers after Hoover and Mellon had left. Meyer and Senator Joseph Robinson, Democratic Senate leader, urged a special session to enact a new WFC, but Hoover still held back. At this point, Meyer secretly put a staff together, headed by Walter Wyatt, counsel of the FRB, to draft what was later to become the RFC. Gerald D. Nash, “Herbert Hoover and the Origins of the RFC,” Mississippi Valley Historical Review (December, 1959): 461ff.

²⁸Nash, “Herbert Hoover and the Origins of the RFC”; and Warren, Herbert Hoover and the Great Depression, pp.140ff.

²⁹See Monthly Labor Review 33 (1931): 1049–57.

³⁰Quoted in Schlesinger, The Crisis of the Old Order, 1919–1933, pp. 182–83.

³¹J. George Frederick, Readings in Economic Planning (New York: The Business Bourse, 1932), pp. 332ff. Frederick was a leading Swope disciple.

³²Ibid.

³³See Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal, pp. 311ff.; David Loth, Swope of GE (New York: Simon and Schuster, 1958), pp. 201ff.; Schlesinger, The Crisis of the Old Order, 1919–1933, p. 200.

³⁴Wallace B. Donham, Business Adrift (1931), cited in ibid., p. 181. Nicholas Murray Butler also considered the Soviet Union to have the “vast advantage” of “a plan.” See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 631–32.

³⁵Later, the Swope idea took form in the NRA, with Swope himself helping to write the final draft, and staying in Washington to help run it. Swope thus became perhaps the leading industrialist among the “Brain Trust.” Henry I. Harriman, another contributor to the drafting of the NRA, also turned up as a leader in the agricultural Brain Trust of the New Deal. Another Baruch disciple, and a friend of Swope’s, General Hugh S. Johnson, was chosen head of the NRA (with old colleague George Peek as head of the AAA). When Johnson was relieved, Baruch himself was offered the post. See Margaret Coit, Mr. Baruch (Boston: Houghton Mifflin, 1957), pp. 220–21, 440–42; Loth, Swope of GE, pp. 223ff.

³⁶Theodore M. Knappen, “Business Rallies to the Standard of Permanent Prosperity,” The Magazine of Wall Street (December 14, 1929): 265.

³⁷The report, “Long-Range Planning for the Regularization of Industry,” was prepared by Professor John Maurice Clark of Columbia University, and concurred in by George Soule, Edwin S. Smith, and J. Russell Smith. See Dorfman, The Economic Mind in American Civilization, vol. 5, pp. 758–61.

³⁸Rexford Guy Tugwell, The Democratic Roosevelt (New York: Doubleday, 1957), p. 283.

³⁹Hoover relates that Henry I. Harriman warned him that if he persisted in opposing the Swope Plan, the business world would support Roosevelt for President, because the latter had agreed to enact the plan. He also reports that leading businessmen carried out this threat.

⁴⁰Monthly Labor Review 33 (1931): 1049–57.

⁴¹Schlesinger, The Crisis of the Old Order, 1919–1933, p. 186.

⁴²See George W. Stocking, “Stabilization of the Oil Industry: Its Economic and Legal Aspects,” American Economic Review, Papers and Proceedings (May, 1933): 59–70.

⁴³If the coal industry was not as successful as the oil in becoming cartellized, it was not for lack of trying. C.E. Bockus, president of the National Coal Association, wrote in an article, “The Menace of Overproduction,” of the need of the coal industry

to secure, by cooperative action, the continuous adjustment of the production of bituminous coal to the existing demand for it, thereby discouraging wasteful methods of production and consumption. … The European method of meeting this situation is through the establishment of cartels.

Quoted in Ralph J. Watkins, A Planned Economy Through Coordinated Control of Basic Industries (mimeographed manuscript, submitted to American Philanthropic Association, October, 1931), pp. 54ff.

Hoover also reduced production in other fields by adding over two million acres to the virtually useless national forests during his regime, as well as increasing the area of the totally useless national parks and monuments by forty percent. If Congress had not balked, he would have permanently sequestered much more usable land. See Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), pp. 64, 77–80.

11. The Hoover New Deal of 1932

¹See Sidney Ratner, American Taxation (New York: W.W. Norton, 1942), pp. 447–49.

²See Jane Kennedy, “Development of Postal Rates: 1845–1955,” Land Economics (May, 1957): 93–112; and idem, “Structure and Policy in Postal Rates,” Journal of Political Economy (June, 1957): 185–208. Hoover also deliberately used a system of airmail subsidies effectively to bring the air transport industry under government dictation. To Hoover, this was a device for “orderly development” of the airline industry. See Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), p. 70.

³Congressional Record 75 (January 12, 1932), p. 1763. Also see Russell C. Leffingwell, “Causes of Depression,” Proceedings of the Academy of Political Science (June, 1931): 1.

⁴Randolph Paul, Taxation in the United States (Boston: Little, Brown, 1954), p. 162.

⁵It was undoubtedly this vagueness that drew declarations of support for the League from such disparate figures as President Hoover, Governor Franklin D. Roosevelt, William Green, farm leader Louis Taber, Calvin Coolidge, chairman of the Advisory Council of the League, Alfred E. Smith, Newton D. Baker, Elihu Root, and General Pershing. See Bank of the Manhattan Company, Chapters in Business and Finance (New York, 1932), pp. 59–68. Also see National Economy League, Brief in Support of Petition of May 4, 1932. On this Committee and on the similar National Action Committee, see Warren, Herbert Hoover and the Great Depression, p. 162.

⁶See James M. Beck, Our Wonderland of Bureaucracy (New York: Macmillan, 1932); Mauritz A. Haligren, Seeds of Revolt (New York: Alfred A. Knopf, 1933), pp. 274ff.

⁷Cf. M. Slade Kendrick, A Century and a Half of Federal Expenditures (New York: National Bureau of Economic Research, 1955), pp. 77ff.

⁸See Lewis H. Kimmel, Federal Budget and Fiscal Policy, 1789–1958 (Washington, D.C.: Brookings Institution, 1959), pp. 155ff.

⁹Congressional Record (May 16, 1932), pp. 10309–39. Among the supporters were such economists as:

Edwin W. Borchard

Paul W. Brissenden

Morris L. Cooke

Richard T. Ely

Ralph C. Epstein

Irving Fisher

Felix Frankfurter

Walton Hamilton

Horace M. Kallen

Frank H. Knight

William M. Leiserson

W.N. Loucks

Broadus Mitchell

Harold G. Moulton

E.M. Patterson

Selig Perlman

E.R.A. Seligman

Sumner H. Slichter

George Soule

Frank W. Taussig

Ordway Tead

Gordon S. Watkins

Myron W. Watkins

W.F. Willcox

E.E. Witte

¹⁰See Joseph E. Reeve, Monetary Reform Movements (Washington, D.C.: American Council on Public Affairs, 1943), p. 19.

¹¹On the economists’ petition, see Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 5, p. 675.

¹²See Vladimir D. Kazakévich, “Inflation and Public Works,” in H. Parker Willis and John M. Chapman, eds., The Economics of Inflation (New York: Columbia University Press, 1935), pp. 344–49.

¹³Dr. Anderson’s account of the 1932 measures is unaccountably weak, since he does an about-face to favor the Hoover program—including the NCC, the RFC, and the Glass–Steagall Act—after opposing similarly statist and inflationary measures of earlier Hoover years. See Anderson, Economics and the Public Welfare, pp. 266–78.

¹⁴Senator Robinson had obtained Hoover’s promise to name Meyer as head of RFC in return for Democratic support in Congress. Gerald D. Nash, “Herbert Hoover and the Origins of the RFC,” Mississippi Valley Historical Review (December, 1959): 461ff.

¹⁵See John T. Flynn, “Inside the RFC,” Harper’s Magazine 166 (1933): 161–69. The Hoover group maintains, however, that General Dawes didn’t want the RFC loan, which was rather insisted upon by Democratic bankers in Chicago, and by the Democratic members of the Board of the RFC.

¹⁶The Missouri Pacific had apparently falsified its balance sheet prior to asking for the RFC loan, to claim more cash on hand than it really had. Ferdinand Lundberg, America’s Sixty Families (New York: Citadel Press, 1946), p. 233.

¹⁷Flynn, Inside the RFC. Another consequence of RFC loans to railroads was an approach toward direct socialization from the creditor interest of the RFC in bankrupt roads, and the consequent placing of government directors on the reorganized railroads. Dewing maintains that “the government through the power of its loans was in a position to dominate the policy of the reorganized road.” Arthur Stone Dewing, The Financial Policy of Corporations (5th ed., New York: Ronald Press, 1953), vol. 2, p. 1263.

¹⁸J. Franklin Ebersole, “One Year of the Reconstruction Finance Corporation,” Quarterly Journal of Economics (May, 1933): 464–87.

¹⁹See Edith Abbott, Public Assistance (Chicago: University of Chicago Press, 1940).

²⁰Costigan and LaFollette obtained the material for their bill from the newly formed Social Work Conference on Federal Action on Unemployment, headed by Linton B. Swift of the Family Welfare Association. The new organization symbolized the recent shift among professional social workers in favor of federal relief. The May, 1932 meeting of the National Conference of Social Work reversed the 1931 opposition to federal relief. Irving Bernstein, The Lean Years: A History of the American Worker, 1920–1933 (Boston: Houghton Mifflin, 1960), pp. 462ff.

²¹Particularly influential in inducing Hoover’s surrender was a plea for federal relief, at the beginning of June, by leading industrialists of Chicago. Having been refused further relief funds by the Illinois legislature, these Chicagoans turned to the federal government. They included the chief executives of Armour, Wilson, Cudahy, International Harvester, Santa Fe Railroad, Marshall Field, Colgate–Palmolive–Peet, Inland Steel, Bendix, U.S. Gypsum, A.B. Dick, Illinois Bell Telephone, and the First National Bank. Bernstein, The Lean Years: A History of the American Worker, 1920–1933, p. 467.

²²See A.E. Geddes, Trends in Relief Expenditures, 1910–1935 (Washington, D.C.: U.S. Government Printing Office, 1937), p. 31.

²³The defenders of the Glass–Steagall Act might protest that the Act fitted the quantitativist policy of considering total quantity rather than quality of assets, and therefore that an “Austrian” economist should defend the measure. But the point is that any further permission for government to lend to banks, whether quantitative or qualitative, is an inflationary addition to the quantity of money, and therefore to be criticized by the “Austrian” economist.

²⁴Lauchlin Currie, The Supply and Control of Money in the United States (2nd ed., Cambridge Mass.: Harvard University Press, 1935), p. 116.

²⁵To keep our perspective on the monetary contraction of the 1929–1932 period, which has often been pointed at with alarm, we should remember that the total money supply fell from $73.3 billion in June 1929, to $64.7 billion at the end of 1932, a fall of only 11.6 percent, or 3.3 percent per annum. Compare this rate to the inflationary rise of 7.7 percent per annum during the boom of the 1920s.

²⁶Seymour E. Harris, Twenty Years of Federal Reserve Policy (Cambridge, Mass.: Harvard University Press, 1933), vol. 2, p. 700. Dorfman, The Economic Mind in American Civilization, vol. 5, pp. 720–21.

²⁷See Frank D. Graham, The Abolition of Unemployment (1932), and Dorfman, The Economic Mind in American Civilization, vol. 5, pp. 720–21.

²⁸It is instructive to record the names and affiliations of the more prominent signers of this monumental inanity. They were:

Willard E. Atkins, New York University

Frank Aydelotte, President of Swarthmore College

C. Canby Balderston, University of Pennsylvania

George E. Barnett, Johns Hopkins, President of the American Economic Association

John Bates Clark, Columbia University

Miss Joanna C. Colcord, The Russell Sage Foundation

Morris A. Copeland, University of Michigan

Paul H. Douglas, University of Chicago

Howard O. Eaton, University of Oklahoma

Frank Albert Fetter, Princeton University

Frank Whitson Fetter, Princeton University

Irving Fisher, Yale University

Walton H. Hamilton, Yale University

Paul U. Kellogg, Editor of Survey Graphic

Willford I. King, New York University

William M. Leiserson, Antioch College

Richard A. Lester, Princeton University

Harley Leist Lutz, Princeton University

James D. Magee, New York University

Otto Tod Mallery

Broadus Mitchell, Johns Hopkins University

Sumner H. Slichter, Harvard University

Charles T. Tippetts, University of Buffalo

Jacob Viner, University of Chicago

Charles R. Whittlesey, Princeton University

Joseph H. Willits, Dean of Wharton School, University of Pennsylvania

Leo Wolman, Columbia University

²⁹New York Times (January 16, 1933): 23. The barter movement had previously been tried voluntarily on local levels, and had, of course, failed ignominiously, a fact which almost always spurs ideologues to urge that the same scheme be imposed coercively by the federal government. The barter movement as local cooperative had begun with the Unemployed Citizens’ League of Seattle in July, 1931, and soon spread to more than half the states. They all failed quickly. Similar local “scrip exchanges” failed rapidly, after each issuance of the supposedly miraculous scrip. The most prominent scrip exchange was the Emergency Exchange Association of New York, flamboyantly organized by Stuart Chase and other intellectuals and professional men. See Dorfman, The Economic Mind in American Civilization, vol. 5, pp. 624–25, 677.

³⁰Ibid., pp. 675–76.

³¹See Quincy Wright, ed., Gold and Monetary Stabilization (Chicago: University of Chicago Press, 1932).

³²The group of economists included:

James W. Angell

Garfield V. Cox

Aaron Director

Irving Fisher

Harold D. Gideonse

Alvin H. Hansen

Charles O. Hardy

Frank H. Knight

Arthur W. Marget

Harry A. Millis

Lloyd W. Mints

Harold G. Moulton

Ernest M. Patterson

C.A. Phillips

Henry Schultz

Henry C. Simons

Charles S. Tippetts

Jacob Viner

C.W. Wright

Ivan Wright

Theodore O. Yntema

³³H. Parker Willis, “Federal Reserve Policy in Depression,” in Wright, ed., Gold and Monetary Stabilization, pp. 77–108.

³⁴Gottfried von Haberler, “Money and the Business Cycle,” in ibid., pp. 43–74.

³⁵Speaking at the same conference, Professor John H. Williams admitted that, for the 1920s: “It can be argued that but for credit expansion prices would have fallen, and that they should have done so. It was on such grounds that the Austrian economists predicted the depression.” John H. Williams, “Monetary Stabilization and the Gold Standard,” in ibid., p. 149. Williams did not sign the general statement either.

³⁶Another expression of sound money sentiment, though hardly as penetrating as Haberler’s, came later in the year, in September. A group of economists issued a statement, attacking inflation or any abandonment of the gold standard, calling for a balanced budget through lower taxes and expenditures rather than through higher taxes, attacking government propping up of unsound corporate positions which should liquidate quickly, and attacking the Hoover experiments in farm price supports. They pointed out that inflation’s benefits are only illusory and that it simply and disruptively benefits one group at the expense of another, and therefore could not help cure the depression. They also urged tariff reduction, and cutting the salaries of government employees, whose pay had unfortunately remained the same while the income of taxpayers had declined. Deviating from soundness, however, were their proposals for a Federal system of employment exchanges, hints of favoring unemployment insurance, and acceptance of a continuing RFC, relief programs, and temporary expedients to check deflation. Among the signers were financial economists W.W. Cumberland, Lionel D. Edie, Leland Rex Robinson, Alexander Sachs, Rufus S. Tucker, and Robert B. Warren, and such academic economists as Theodore E. Gregory of the London School of Economics, Edwin W. Kemmerer of Princeton, Dean Roswell C. McCrea of Columbia School of Business, and Dean A. Wellington Taylor of NYU School of Business Administration. “Prosperity Essentials,” Barrons (September 26, 1932).

³⁷See J.E. McDonough, “The Federal Home Loan Bank System,” American Economic Review (December, 1934): 668–85.

³⁸The 1933 amendments similarly weakened the property rights of railroad creditors. On the bankruptcy changes, see Charles C. Rohlfing, Edward W. Carter, Bradford W. West, and John G. Hervey, Business and Government (Chicago: Foundation Press, 1934), pp. 402–30.

³⁹On the opposition, see Warren, Herbert Hoover and the Great Depression, p. 69.

⁴⁰Robert A. Divine, American Immigration Policy, 1924–1952 (New Haven, Conn.: Yale University Press, 1957), pp. 84–89.

12. The Close of the Hoover Term

¹Theodore Saloutos and John D. Hicks, Agricultural Discontent in the Middle West, 1900–1939 (Madison: University of Wisconsin Press, 1951), p. 448.

²Total monetary contraction from June, 1929 to the end of 1933 was 16 percent, or 3.6 percent per annum.

³An apt commentary on whether time deposits are money is this statement by two St. Louis bankers:

Actually all of us were treating our savings and time deposits as demand deposits and we still do … we still pay our savings depositors on demand. It is significant that the heavy runs on banks were engineered by savings and time depositors. When the trouble was at its height in January, 1933, practically every bank in St. Louis faced heavy withdrawals from … savings depositors and had a minimum of diffculty with the checking depositors. This was true throughout most of the country.

F.R. von Windegger and W.L. Gregory, in Irving Fisher, ed., 100% Money (New York: Adelphi Press, 1935), pp. 150–51.

⁴See Jesse H. Jones and Edward Angly, Fifty Billion Dollars (New York: Macmillan, 1951), pp. 17ff.

⁵Detroit had especially overexpanded during the boom, and frantic efforts by Hoover and his administration, along with Detroit industrialists and New York banks, to save the leading Detroit banks, had foundered on the devotion to private enterprise and true private responsibility of Henry Ford and of Michigan’s Senator Couzens, both of whom refused to agree to subsidize unsound banking. See ibid., pp. 58–65. Also see Lawrence E. Clark, Central Banking Under the Federal Reserve System (New York: Macmillan, 1935), pp. 226ff.; Benjamin M. Anderson, Economics and the Public Welfare (New York: D. Van Nostrand, 1949), pp. 285ff. Dr. Anderson, supposedly an advocate of laissez-faire, sound money, and property right, went so far in the other direction as to chide the states for not going further in declaring bank holidays. He declared that bank moratoria should have applied to 100 percent, not just 95 percent, of bank deposits, and he also attacked the Clearing House for failing to issue large quantities of paper money during the crisis.

⁶See H. Parker Willis, “A Crisis in American Banking,” in Willis and John M. Chapman, eds., The Banking Situation (New York: Columbia University Press, 1934), pp. 9ff. The holiday laws either (a) forbade banks to redeem the funds of depositors, or (b) permitted the banks to choose the proportion of claims that they would pay, or (c) designated the proportion of claims the depositors might redeem.

⁷Ibid., p. 11. In New York, the pressure for bank closing came from the upstate, rather than from the Wall Street, banks.

⁸See ibid. Michigan’s Governor Comstock, who had begun the furor, naturally extended his holiday beyond the original eight-day period.

⁹Lest it be thought that Hoover would never have contemplated going this far, Jesse Jones reports that Hoover, during the banking crisis, was seriously contemplating invoking a forgotten wartime law making hoarding a criminal offense! Ibid., p. 18.

¹⁰There was a recurring tendency on the part of Hoover and his colleagues to blame the whole depression on a plot by Hoover’s political enemies.

Hoover attributed part of the currency crisis to Communists spreading distrust of the American monetary system (it is remarkable that Communists were needed for distrust to arise!); and Simeon D. Fess, Chairman of the Republican National Committee, said quite seriously in the fall of 1930:

Persons high in Republican circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the administration. Every time an administration official gives out an optimistic statement about business conditions, the market immediately drops.

Edward Angly, comp., Oh Yeah? (New York: Viking Press, 1931), p. 27.

¹¹Another Hoover contribution to these times was a secret attempt to stop the press from printing the full truth about the banking crisis, and about views hostile to his administration. See Kent Cooper, Kent Cooper and the Associated Press (New York: Random House, 1959), p. 157.

¹²In fact, Ballantine recently wrote, rather proudly: “the going off [gold] cannot be laid to Franklin Roosevelt. It had been determined to be necessary by Ogden Mills, Secretary of the Treasury, and myself as his Undersecretary, long before Franklin Roosevelt took office.” New York Herald-Tribune (May 5, 1958): 18.

¹³Leonard P. Ayres, The Chief Cause of This and Other Depressions (Cleveland, Ohio: Cleveland Trust, 1935), pp. 26ff.

¹⁴Sol Shaviro, “Wages and Payroll in the Depression, 1929–1933,” (Unpub. M.A. thesis, Columbia University, 1947).

¹⁵See C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 231–32.

¹⁶“Maintenance of higher wage rates caused many firms to discharge workers rather than appear as slackers by cutting wages, although they might have been able to continue operations if they had made such reductions.” Dale Yoder and George R. Davies, Depression and Recovery (New York: McGraw-Hill, 1934), p. 89.

¹⁷National Industrial Conference Board, Salary and Wage Policy in the Depression (New York: Conference Board, 1933), pp. 31–38.

¹⁸Harold M. Levinson, “Unionism, Wage Trends, and Income Distribution: 1914–1947,” Michigan Business Studies (June, 1951): 34–47. Hoover and Secretary Lamont tried to induce the nation’s industrialists to be more favorable to unions, by urging them, during 1930 and 1931, to meet at a formal conference with leaders of organized labor. See James O. Morris, “The A.F. of L. in the 1920s: A Strategy of Defense,” Industrial and Labor Relations Review (July, 1958): 577–78.

¹⁹Monthly Labor Review 35 (1932): 489ff. and 790ff.

Appendix: Government and The National Product, 1929–1932

¹It is conventionally argued, e.g., by Professor Due, that we should not include government transfer payments, e.g., relief payments, in any such expenditures deducted because transfer payments are not included in the original GNP figure. But the important consideration is that taxes (or deficits) to finance transfer payments do act as a drain on the national product, and therefore must be subtracted from GPP to yield PPR. Due claims that, in gauging the relative size of governmental and private activity, transfer payments should not be included because they “merely shift purchasing power” from one set of private hands to another, without the government’s using up resources. But this “mere shift” is just as much a burden upon the private producers, just as much a shift from voluntary production to state-created privilege, as any other governmental expenditure. It is a government-induced using of resources. John F. Due, Government Finance (Homewood, Ill.: Richard D. Irwin, 1954), pp. 64, 76–77.

²A surplus slightly overestimates the extent of depredation if it is used to deflate the money supply, and government expenditures slightly overstate the extent of depredation by counting in the amount of government taxes levied on government bureaucrats themselves. The amount of distortion is slight, however, particularly for the 1929–1932 period, and is less than the distortion of using GNP instead of GPP, and thus counting governmental payment of salaries as equivalent to the “product” of government.

³Of course, official figures are not always accurate estimates of true depreciation. For a cogent discussion of the advantages and disadvantages of using net or gross measures of the governmental burden on the economy, see The Tax Burden In Relation To National Income and Product (New York: Tax Foundation, 1957).

⁴Solomon Fabricant and Robert E. Lipsey, The Trend of Government Activity in the United States Since 1900 (New York: National Bureau of Economic Research, 1952), pp. 222–34.

⁵Because, in our figures, state and local governments are already lumped together, our estimates will, from this standpoint, considerably underestimate the fiscal burden of government on the private sector.