The Inflationary Boom of the 1920s (continued)

0:00Now, one of the things that happens with the lower, first of all, you're pumping more money into the system, there's a lot of money around, alright, so there's money to lend out, the banks have more money to lend out, and secondly, if your lower interest rate is in the United States, you're making foreign lending more attractive. So if the interest rate is only 3% in the United States, you can get 10% in Bulgaria, you might be stimulated to start lending money to Bulgaria. One of the things that happens then is the stimulation of a massive private foreign lending program by American banks and American citizens abroad. Banks were involved as export underwriters, as lenders, underwriters commissions, commissions on loans, etc.

0:47The foreign lending system worked something like a private version of the governmental foreign aid after World War II. There weren't too many U.S. government loans to Europe and the world in the 1920s, but there were a lot of private loans on this basis. There were a lot of loans to German municipalities, for example, so every German city and township could build big city homes and statues or whatever the statues were. So there's an enormous amount of malinvestment in this whole thing. The peculiar thing here is this, the United States wants to stimulate our American exports. There are two ways in which the American export industry can be successful, so to speak. One is to have low tariffs, so that we can sell machinery, automobiles and whatever abroad, and then they can sell food or whatever to us, or Swiss clocks or whatever to us.

1:40and so on. If we have low tariffs, this permits this interchange and our imports can then pay for our exports. But we didn't want that. We wanted a high tariff. Republican policy has always been high tariff because we also want to protect domestic industries from their more efficient competitors abroad. So how can we do this? How can we stimulate American exports and still protect domestic industries by keeping out American imports? This is the old mercantilist bag, of course. We haven't learned anything since 1650 or whatever. So, how are we going to do this? Well, one way of doing it, obviously it can't last forever, but one way of doing it is to lend them the money. Keep the European goods out, and then lend the Europeans the money to buy our products, buy our exports.

2:26It sounds kind of crazy, but the point is, look at who's benefiting from it. The domestic industries are benefiting from the power of protection, and the export industry is benefiting from the fact that the money is rooting back, going from the American investor back to the English or Bulgarian or whatever importer and then back to the American exporter. Now, of course, we've changed that and we have the American taxpayer fueling the whole thing. It's a more permanent kind of process. So this is obviously kind of a shaky system. It rests on continuing to keep lending money, keep one step ahead of recognition in a sense. Because somewhere, somehow, the foreign companies are going to have to earn dollars in some way in order to pay for these exports. I mean, it's impossible to think of these loans going on forever.

3:14I mean, loans are also supposedly based on repayment, how the Europeans are going to repay the loans if they can't earn any dollars by exporting products to the United States. Okay, so we have this other peculiar system then. We have high U.S. tariff law and we have foreign loans to allow the Europeans to buy our exports. The farmers, of course, want a stimulation. The farmers are exporters of the export industry. They were very happy with this whole thing. And Benjamin Strong was trying to rationalize this policy to the masses. He didn't say we have to have bank loans. He said we have to keep up farm prices. The Farmers look back at the parity thing, the average of 1910-1914, when the farmers, because of the impending war in Europe, the farmers are the highest proportionate farm price per other price in the history of the country.

4:19And this is the golden age, looking at everything since then and trying to get back to force all of us to wrench ourselves back into the 19-1914 kind of setup. The first great boom in foreign lending begins with the Federal Reserve inflation of late 21, early 22, and then it falls back again, and then it's stimulated once more by this And also this foreign lending, by the way, was helped along by what's called a deluge of U.S. government and banking propaganda, an enormous amount of propaganda beamed to the public about, quote, the economic necessity to the United States of foreign lending.

5:04It's a peculiar thing, by the way, I haven't got time to go into this, but there were rises In the late 19th century, among the theoreticians, a small lot of apocalyptic theoreticians around Teddy Roosevelt, Brooks Adams and Henry Adams and Captain Man and so forth, sort of Leninism in reverse, here are the guys that come to the conclusion that capitalism has sunk, unless you have foreign markets, unless you can, because there's an enormous surplus plan going on, we can't buy the surplus, we have to open up the other countries by any means necessary, use the current phraseology, and force them to take our products. Capitalism is doomed. This is Lenin's interpretation from the other side. The only difference is these guys say therefore we have to go in and smash everybody and force them to play our exports.

5:50In Manhattan they keep saying this all the time and presumably some of these people believe that when William Appleman and his students look at this situation and think that this reflects the reality. because they think that the Lenin-Dash-Brookes-Adams analysis is correct and therefore capitalism, in order to sustain itself, has to keep being imperialistic and forcing everybody to buy our products, etc. So this, I think, is a completely faulty analysis situation. Obviously, some exporters would like to force the government to force other people to buy their products. This is a very different thing than saying that the health of the capitalist system requires this. Because there have always been, of course, businessmen looking for special privileges as against their competitors, as against the consumer, and so forth.

6:38It's a very different kind of, obviously, analysis. This resumption of U.S. inflation in 1924 picks the foreign lending boom up and it carries In the meantime, while this is going on, Herbert Hoover of the Department of Commerce is trying to stimulate exports in lots of other ways, trying to get export cartels and stimulating foreign loans and so forth. As a matter of fact, Hoover is so enthusiastic about foreign lending, he says that even bad loans are really good, even if the loan will be defaulted eventually because they help And yet, you know, while this was going on, of course, Norman was griping privately. I mean, publicly, the British are fooling all over Benjamin Strong, and saying he's the greatest guy in the history of the world, and so on, and in private, Norman's constantly griping about, Strong isn't doing enough, why isn't he inflicting more, why isn't he being ungrateful, and so forth. For example, by 1919, even as early as 1919, Basil Blackett was urging Strong to let the United

7:47Prices rise a little more, here we are in a fantastic boom in 1920. Prices skyrocketing and Blackout is complaining, he says, keep prices, keep it going up. And Norman is constantly pressing throughout, almost continually in this whole thing. Finally in 1924, of course, Norman is very happy and strong and has this big push, big inflationary push, and he writes The price is strong, he says, you must continue with easy money and foreign loans. It's a great hooray. But finally, he's still right that the United States wasn't inflating enough. Children should still be doing more. Okay, but then I see it's like a sort of a... It's really giving like an injection to a horse. You dope the horse, the horse runs a lot and after a while it collapses.

8:32So we have this inflationary injection. And everything is inflating and the interest rates are down. But then what happens, this has been a couple of years, by 1926-27, American prices are falling again, and interest rates are going up, and Britain is in trouble again. Britain is, of course, continuing its inflationary, cheap-money policy, and by this time Britain is going back to the gold standard. They were even worse off than they were in the early 20s, having unemployment and export industries and so forth, and British gold is falling in the United States. And Britain insists on keeping their interest rate low. They don't take the classical 19th century method of raising interest rates in order to keep gold from going up. They have to keep this inflationary policy. That's a given. So what can they do about it? Well, they have to pressure us for another big dose. We built the horse once more. Another big dose of American inflation.

9:23Notice how short-run this whole thing is. I think I may have mentioned this before, but it bears repeating. In the textbooks, they always say, private people are narrow-minded, they're only looking for the next couple of years or whatever. It's the government that's far-sighted, the government that sees clearly, plans for a hundred years in the future, you know, plans for the whole human race. Actually, nobody is shorter-ranged than the government. The government that's babying everything along with the next election till the fall, get past this crisis, get past that, you know, as long as they're in office. And they don't really care what happens in five or ten years, and it's obvious with this thing, nobody looks ahead and says, The World Might Explode, The Martians Might Come Back, The Time Retribution Catches Up With Us And Benjamin Strong is buying sterling to keep the pound rate up.

10:21Once again, the time has come for another big dose of inflation. And as Benjamin Strong tells Charles Reist, who is a French economist, very much opposed to this whole thing, so it was going on. He represented the Bank of France in this situation. They have a four-man conference. A big four-cephal bank conference in New York. Again, secretive force. Nobody's supposed to know about it. in July 1927, consisting of Norman Strong, Reist and Hjalmar Schacht, who was the head of the German Reichsbank. And the idea was that Norman and Strong had agreed what was going to happen beforehand. They were trying to induce the other two guys to go along with a big inflationary push. And Strong gaily tells Reist that, I'm going to give a little coup de whisky to the stock market. A little coup de whisky, a very nice phrase in there.

11:11So Schacht and Ries was a sort of sound money type. Schacht and Ries was very sort of semi-Austrian. He's really something like Willis and Anderson from Analysis. Ries was horrified and Schacht was horrified, and they go home very quickly. And Norman and Strong carry this forward. They're disappointed that Schacht and Ries don't want to fight together, because it would be nice if everybody could fight at once and solve a lot of the problems of losing gold to other countries. But anyway, so that's too bad, and suddenly they held this, I really don't know if this has any significance or not, but I toss it out to future historians to look into it, perhaps. The secret conference was held at the Long Island Estate of Ogden Mills and Mrs. Ruth Pratt of the St. Louis Pratt family, whether they had any significance, whether they just had an empty house available, I don't know.

11:59So, Norman and Norman and Stormery, they're going to keep buying gold, they're going to have another mighty dose of inflation in the United States. They're going to expand credit once again, raise prices again, and lower American interest rates. So, Storm does this. We have another massive purchase by the Federal Reserve of Government Securities in the open market. This was the biggest single inflationary dose in the 1920s, this is the 1927 dose. The British press was the lighter, they were falling all over themselves, fantastic thing. The Banker, the London Magazine, the Banker had already said after the 1924 thing, they already had written that Benjamin Strong, wrote about Benjamin Strong, quote, no better friend of England has existed, and praised, quote, the energy and skillfulness that he This is the English magazine, The Banker, that Strong's name should be associated with that of Mr. Page, as a friend of England and her greatest need, Walter Hines Page, of course, the American ambassador to England, whom Mencken I think justly referred to as Anglo-Maniacal, in his intensity of getting us into the war.

13:21A leading American banker admitted to Ben Anderson, in late 1926, that this cheap money policy, which Strong was putting in effect, would have very bad American consequences in the United States, but he said, that cannot be helped. It is the price we must pay for helping Europe, end quote. One of the problems is that this banker decided that we would have to pay the price, but the rest of us weren't consulted about this, the unemployed and so forth, the guys are going to starve during the depression. We're not consulted on this decision. That's the use of the word we. It's always a key thing in social philosophy. It's like the famous Keynesian phrase, public debt doesn't mean anything, because we owe it to ourselves.

14:07The big question there is, who's the we and who's the ourselves when there's a different set of people?

14:15Okay, so this 1927 push was the largest single rate of increase in bank reserves in the 20s. And Herbert Hoover was critical from 1924 on in this whole thing. He was very critical of the stock market boom. This was linked again to the sort of Hoover-Rockathor thing. Hoover was critical to the inflationary aspect of the whole thing. He called Benjamin Strong, quote, a mental annex to Europe, unquote. But Coolidge and Mellon were very much in favor of this. Coolidge and Mellon did not really snooze his way through the White House. I wish he had. Every once in a while, he'd wake up and he'd endorse the strong policy. Another thing he'd do, he'd wake up and he'd call for increases in the stock market. There's a great article, I think, sometime in 1928 in the Atlantic Monthly by Ralph Roeby, who was a student of Benjamin Beckhart, who was a student of H. Parker Willis.

15:05for Willis, I guess he was a student of Willis himself. He wrote a great article in the Atlantic Monthly entitled The Capiadores of Wall Street, and he referred to Coolidge and Mellon, because every time a stock market would flag a little bit, Coolidge and Mellon would rush into the print and make statements like, you know, the stock market was getting too low again, we have to, it should be higher, and that America's in great shape, and, you know, keep buying stock, and that sort of stuff, and I will buy stock at this level, and all sorts of statements designed to try to boost the stock market every time it showed signs of relaxing a little bit.

15:35There's a private memorandum written about in 1928 by an assistant in the age of Strong written to an English banker, a very prominent banker, Sir Ace Alexander Salter, and he's trying to explain why Strong couldn't have an open formal conference with all the central banks and have it openly in Washington and New York and have big publicity about it and and have a formal Bretton Woods kind of arrangement. And why you need this secrecy? And he says, Strong has to, quote, consider the viewpoint of the American public. And therefore keep it secret. And because the American public has this prejudice against the League of Nations, against us interfering in other people's affairs, and they're interfering in our affairs, and it's very hampering the whole thing.

16:29And he says, to illustrate how inflamed public or political opinion might easily become when the results of past decisions become evident. He cites the outcry against specific excesses of the stock market. He says, here it is, you know, people are bellyaching with this big stock boom, and that's why we have to keep the thing secret. I like that phrase, how inflamed public opinion might easily become when the results of past decisions become evident. That's a really striking phrase. That means when somebody makes a secret decision to get into Vietnam or something, in five years the results become evident, then the public might become inflamed about it. That's why we have to keep the decision secret.

17:14Strong said that, quote, that very few people indeed realize that we were now paying the In short, if the American people were allowed to know what had been transacted in their name, then the assuming penalties they were forced to pay because of these decisions, The New York Fed in 1927 through 1929 bought very heavily in foreign commercial bills to try to stem any gold flow from Europe and to give the Europeans, again, more money to buy our exports.

18:07We bought sterling bills very heavily. The idea is that we have to keep buying sterling bills to keep the sterling, keep gold flowing back to Britain and pop the sterling up. Because sterling is in a very weak shape here. Obviously, the dollar, the pound is very heavily overvalued. And the French are piling up sterling balances, the British are pleading with them, don't try to redeem and go, we're going to wreck the ecosystem and so forth. Again, this inflationary thing has a temporary success in 27, 28. Gold flows out again, farm prices go up, the pound strengthens a little bit, exports rise. and so forth. British exports rise and so forth. Foreign loans are stimulated in new heights, reaching, being reached in mid-1928. But by mid-1928, the Coup de Whiskey, you know, the Whiskey disappears in the system of the British horse, so to speak, and the pound starts sagging again, and exports fall, farm prices fall, foreign loans are slumping, And for one reason why foreign loans have stopped, I guess it's kind of ironic,

19:05as the stock market begins to really take over in the stratosphere, everybody says, why should we lend money to foreigners? We're going to invest in the stock market. That's what we're really getting, we're tripling our money every week or whatever. So foreign loans begin drawing up. And President Coolidge continues his capitol role until the very last day that he leaves office in March 1929. Coolidge says the U.S. prosperity is absolutely sound and stocks are quote cheap at current prices unquote. It has reached lunar proportions up there. And one interesting thing is, which I'm sure far as we'll be interested in particularly, one of the leading bull market speculators in this period in the late 1920s was William C. Durant, who was one of the early General Motors people who was kicked out by Sloan and Duquan when they reorganized General Motors, and now found his niche in the crash, I mean found his niche in the stock market, and he was constantly calling out, he was constantly

20:14Raising Coolidge and Mellon for cheap money, for their statements and boosting the stock market. He collapsed during the crash. Social Darwinism came to William C. Durant. The stock market crashed. Finally, the way this thing really stops is that Benjamin, as Harry Elmore Warren wrote in a letter about somebody else, finally God snatched Benjamin Strong and he died in late 1928 and then this sort of ended really, the big inflationary push, his assistants tried to continue on with the same thing, they didn't have the charisma of Strong and the control of the Federal Reserve system shifts back to Washington, and they stumble around in a very confused fashion, and by early 1929, The industrial economy turns down around mid-1929, June or July. Industrial production began to fall. The stock market first had a big collapse in October.

21:22There were three basic means by which the Federal Reserve system inflated. There were three basic means by which the Federal Reserve system inflated in the 20s, all of them fairly new, really brand new to the 20s, breakthroughs in monetary policy. One was the open market purchase, as I already mentioned. Two was the re-discount rate. Re-discount rate is not as important as open market purchase, but it has a certain role. Remember Walter Badgett in the 19th century in Britain had defined that the key role of the central bank is to always be the lender of last resort, to bail out any bank that is overexpanded in the danger of collapse.

22:09Well the idea though, the classical 19th century bailer out, lender of last resort theory, was that the central bank should keep its re-discount rate, in other words the rate at which it lends money to the banks, at a so-called penalty level, in other words higher than the market. So if a bank can lend money out at 8%, let's say, and if it gets into trouble, the central bank rate should be higher than 8%, it should be, let's say, 10%, which penalizes the banks and induces them to get into a sound position and get out of debt as quickly as possible. So the classical theory of central bank rediscounting is a penalty rate. In the early 1920s, Strong and the Federal Reserve changed this whole policy and kept the Federal Reserve rate below the market, below everything else. This stimulates bank lending. This increases bank reserves, impairing your pyramid on top of that, and so forth.

23:02This is an extremely inflationary kind of thing. Fortunately, the banks usually don't like to be in debt to the Federal Reserve, so this dislike has to limit the use of this, but it's still important, nevertheless. The idea, again, was to make credit, quote, more elastic, unquote. Yeah, here, in connection with this, I have a statement reminiscing by Secretary of Treasury William Gibbs McAdoo about the purpose of the establishment of the Federal Reserve System. He says, quote, the primary purpose of the Federal Reserve Act was to alter and strengthen our banking system that the enlarged credit resources demanded by the needs of business will come almost automatically into existence, and at rates of interest low enough to stimulate, protect, and prosper all kinds of legitimate business.

23:53They're really saying it's for inflationary purposes, for cheap credit. Okay, so another thing is to keep the discount rate below the market and set up above it. And the third thing is a very peculiar thing, which I've already alluded to, the acceptance capers, the grand acceptance capers, really almost bizarre. I don't want to go into it in great detail. The point is that American credit, the American business system had always been a so-called single-name credit. I lend money from Bill Beech, I write out an IOU and Bill Beech keeps it in any code upon redemption in three months or whatever. In Europe, on the other hand, the so-called acceptance system has become and the development system where you have acceptance dealers, acceptance banks which endorse this paper and then call upon the debtor for redemption.

24:47So, the Federal Reserve after World War I invokes a peculiar policy of trying to create in the United States a whole new acceptance market. And obviously this is connected with foreign trade, the fact that this will ease the idea of buying and selling abroad, and especially lending money abroad, because acceptances were only used in Europe. But the way they did it, the way the Federal Reserve did it, they announced, they stood ready to buy all acceptances that would be offered to it, regardless, irregardless. Provided, well, all acceptances are offered to them at a very cheap rate, in other words, a heavily subsidized rate. So, every time, in 1928, for example, the Fed begins to get a little scared and tries to restrict credit, tries to hold back on buying open market purchases.

25:42Then the market turns to acceptances and they start generating acceptances and they force the Fed to buy them at a cheap rate. This gives reserves, more reserves to the banks. forced because the Fed has announced as one of their great givens that we will buy all acceptances offered to us at a cheap rate but there's another interesting thing about this acceptance policy the Federal Reserve said they would only buy acceptances from acceptance banks and not directly from the banks, they would only buy them from acceptance houses and they would only buy from acceptance houses that are very large, they're worth more than a million dollars in capitalization. This restricts the whole thing to a few pet acceptance houses. And of course, this gives a lot of moolah to the pet acceptance, to these few special acceptance houses.

26:33Now, as I try to indicate, most historians dealing with this policy can't understand, why do the Fed do this? It's crazy, they're tying their own hands in there. And why are they trying to generate a whole acceptance market that doesn't exist, and subsidizing market, and so forth and so on? And really, only a certain dose of conspiracy analysis can explain this whole thing as anything other than pure irrationality in part of the Fed. As I mentioned, Paul Warburg, one of the great founders of the Federal Reserve System, one of the guys who wrote the Jekyll Island Plan, one of the head of the Federal Advisory Council of the Federal Reserve System and a member of the Federal Reserve Board, was also one of the world's top acceptance bankers. He was the chairman of the board of International Acceptance Corporation and a couple of others. He became president of the Trade Association from Acceptance Dealers and he boasted before as president in his presidential address to the acceptance dealers that he was the one who induced Benjamin Strong

27:24to establish his policy of subsidizing all out permanent subsidy acceptance price support so to speak in the acceptance market. After 1929 the whole acceptance thing disappears. They don't try to do this anymore but the damage was done in that sense. Irving Mead, while all of this was going on, strongly had a theoretician, in addition to having Morgan as his practical guide, he had a theoretical arm in Irving Fisher, and the idea of the so-called stable money league, or stable money association, which is The Various Forms Fischer has been pushing since approximately 1908 or something like that, 1911.

28:22Again, the idea was that the business cycle is simply a dance of the dollar. All you have to do is for the government to stabilize the price level, pump money in when the prices are falling, take money out when the prices are rising, have a stable price level. The Austrian view and also the Willis Anderson view was that this is not going to mask a bad situation which is occurring because, first of all, in the free market money, as I mentioned before, when productivity increases, prices are supposed to be falling. I think it's actually a bad situation which is occurring because, first of all, in the free market, as I mentioned before, when productivity increases, prices are supposed to be falling, price levels are supposed to be going down, and if you inject, if you deliberately inflate bank credit, even if the stock prices are going down, even if the price level is stable, which it was basically in the 1920s, the wholesale price level was stable, but still in all that's going on here is this whole process of overinflating in the capital industry and the expenses of the consumers.

29:28is still occurring. Even though prices don't go up, prices are higher than they would have been without this inflationary credit expansion. So Mises in Austria, and Willis and Anders in the United States, and Robbins in England, were constantly saying, you've got to have a depression, you've got to watch out, this thing is going to collapse. And Fischer kept saying, no, no, wholesale prices are constant, there's no problem. One thing about these price-stabilizationists, when push comes to shove, they're always in favor of stabilizing. They're usually only in favor of stabilizing when the danger of price is falling. When prices are rising, you don't hear from them. They're out of town. They lose their enthusiasm for stable money. So really, price stabilization is another subtle form of price increase. Well, Fisher, as I say, begins, he is, if the capital market is overexpanded, this means that the stock market, if something is happening, the stock is on land, and so forth, and we don't want to fight it, particularly.

30:33I mean, Fisher was heavily invested in the stock market himself, using his wife, Carol, his wife's sisters, Carolyn Hazards Millions had plunged in in a big way here in the stock market and he kept urging more credit expansion and higher stock prices. During the boom during the boom of the twenties he kept saying, no, there's no problem, price levels constant, pump more money into the stock market and during the recession, of course, he went ape he was calling it for reflation instead of saying, okay, you know, it's funny, the price stabilization people, they could have said, when prices fell sharply in 29 and 33 It could have said, let's stabilize at the current level. The government should prevent prices falling any further. They didn't say that. It became what was called then reflationists. They called for pushing the price level back up to 1929 and then stabilizing it to the 29 level, which doesn't make any sense really from the, even within the Fisher term and category

31:24of stabilizing the price level. Because you're in favor of a stable price level, you're really saying you don't really care where the price level is, just stabilize it wherever it is. And they say that during the 20s when the price level was stable, but bingo, it suddenly got to the 1929-33 period, the prices have fallen a lot, they're calling for pushing, oh no, don't stabilize now, push the prices up, back to 29, then stabilize, which shows they're really blankety-blank inflationists, rather than stable under the mask of stabilization. OK, so you couldn't imagine the number of big shots who were in the stable money movement. It's true, many of them could have just signed their name. Fisher might have been a pest. I really don't know. And all these guys are getting all right.

32:10I'll sign this so it sounds theoretical enough not to be dangerous. I will concede that. But still, I think there's something involved here. The fact that so many corporate liberal big shots were involved in this price and Stabilization Movement Who were some of these people? Well, for example, there was J.M. Keynes who was cheering it from England. He was involved with us from the very beginning in this whole thing. There was our good friend, our old and good friend, John R. Cummins. He was very big in the stable price level movement. There was President William Howard Taft who was extremely enthusiastic about it. Also, Secretary of War, Henry L. Stimson, another brilliant monetary theorist. And Governor Woodrow Wilson when he was governor and later president. Will these guys sign up as part of the Stable Money League, or Stable Money Association, I forget what he called it then.

32:56There were several names to this.

33:03Also involved was Gifford Pinchot, the famous progressive conservationist, Assistant Secretary of State, Huntington Wilson, Secretary of War Newton D. Baker under the Wilson administration, Professor James Harvey Rogers of Cornell, who was very big in the state of the nation, Wesley C. Mitchell of the National Bureau of Economic Research, John E. Rovinsky of the Bank of America, Jeremiah W. Jenks, Henry A. Wallace, John C. Winant, John C. Winant, John C. Winant, John C. Winant, John C. Winant, John C. Winant, John C. Winant, John C. Wine, the belovedness of John C. Wine throughout his whole corporates, yeah, yeah, right.

33:52Also, George Eastman of Eastman Kodak, who I already said was heavily involved in progressive reform in Rochester, Samuel Gumpers, naturally. John W. Davis, Morgan Lawyer, ran for the Democratic nomination for president in 1924 Charles Dawes, who was vice president of the Republican administration William Greene of the American Federation of Labor Otto Kahn, investment banker, L.A. Hugh Root James H. Rand Jr., Remington Rand Frederick C. Delano, who was faculty Roosevelt's uncle Westbrook Peckler, who he was referred to as Uncle Delano Paul M. Warburg, Owen D. Young of General Electric and the presidents, and also Norman Thomas, the final, the final Lan Yappi, several people here have complained, they don't know him, what is this Lan Yappi thing?

34:50Lan Yappi is an Italian word, L-A-G-N-I-A-P-P-E, which essentially means the icing on the cake, you know, the final cherry on the birthday cake or something, or adding install to injury, the install that's added to injury or whatever. And the final line, Hoppe and this whole thing, Norman Thomas was also involved in this with all the other spiritual colleagues that I mentioned up until now. And in addition, all these people, and Max Lazar of Lazar Frere in France and Louis Rothschild, the great Rothschild banking family in Europe, also were involved in this. And the presidents of all the following associations were members of the Stable Money League, the Stable Money Association. Association, the American Association of Labor Legislation, which I mentioned already, the American Bar Association, the American Farm Bureau Federation, the Brotherhood of Railroad Trainmen, 43 chairmen of 43 state bankers associations, the National Assembly of Credit Men, the National Education Association, this brings in our progressive educationists in the picture, the United Mine Workers, the National Range, the Merchants Association of New York, and the Chicago Association of Commerce. Also very big, and this is Frank Vanderlip,

36:03of the National City Bank, and two big theoreticians for this have become important, they're Hoover's big theoreticians in the late 20s, was the famous inflationary economic writing team of Foster and Catchings. Foster and Catchings wrote various inflationist works in the 20s in favor of public works to stabilize recession, etc. This team is rather interesting. Foster was a theoretician, he's the guy who put out all this stuff about giving X amount of dollars Catchings formed the Pollock Foundation for Economic Research. Waddell Catchings was more interesting than Foster. He was a partner of Goldman Sachs Investment Banking Company. He was also an iron and steel magnate who got heavily involved in inflationary theory.

36:50The Total Money Supply from June 30, 1921 to June 30, 1929 during these eight inflationary years increased by approximately 62% over this year period, period, including defining money in a very broad sense of anything, either bank deposits or demand deposits or anything redeemable at par in bank deposits, which is an average annual increase of something like less than 8%. During, as I say, the first half of 1929, the money supply stops increasing and the whole thing collapses.

37:38Okay, what I'm going to do now, I was going to be rearranging things a bit. I'm going to press on with a monetary picture, at least during the early New Deal. I think I'm going to drop Hoover, because I think you all know what I have to say about Hoover, since it's in the readings. Press on. There's a certain undercurrent here in this conference, which is calling for two more weeks of conference. Barring that taking place, I'll cut a bit here and go on to the domestic, the thirties. Okay, I have a thing here, which is written. First I began, this is a paper I delivered in other places, not yet published.

38:29And I begin by sort of summing up the 20s as a background, things I've been saying, and then press on to the 30s.

38:55I'll start reading this and see what happens. The international monetary framework of the 1920s collapsed in the storm of the Great Depression, or rather a collapse of its own inner contradictions in the Depression which it had helped to bring about. For one of the most calamitous features of the Depression was the international wave of banking failures, and the banks failed from the inflation and over-expansion which were the fruits of the managed international gold exchange standard. Once the jerry-built pyramid of bank credit had collapsed, it brought down the banking system of nation after nation, as inflation led to a piling up of currency claims abroad, the cashing in of the claims led to well-founded suspicions of the solvency of other banks, and so the failure spread and intensified. The failures in weak currency countries led to the accumulation of strains in other weak currency nations, and ultimately on the basis of the shaky pyramid in Britain and the United States.

39:42The major banking crisis began with the near bankruptcy in 1929 of the Bodenkreditanstalt of Vienna, the major bank in Austria which had never recovered from its dismemberment of Versailles. Desperate attempts by J.P. Morgan and the House of Rothschild and later the New York Fed to shore up the bank only succeeded in a temporary rescue, which committed more factual resources to an unsound bank and thereby made its ultimate failure in May 1931 all the more catastrophic. Rather than permit the outright liquidation of their banking systems, Austria, followed by Germany and other European countries, went off the gold standard during 1931. So there were really faces, as we were faced in 1933, because we had, in 1933 we had glorious opportunity to wipe out the entire banking system. I mean, it was being wiped out. Those of us who are, in contrast to for us, who are Arden Jacksonian types, saw the great vision, or would have seen if I were allowed in 1933, if I were an economist then, would have seen the fantastic opportunity, I mean, the entire banking system was toppling, we could have gone over to a very sound, non-fractional reserve of money very easily then.

40:47At any rate, so faced with this choice, they all opt out and they go off with the gold standard. But the key to the international monetary situation was Great Britain, the nub and the base for the world's gold exchange standard. British inflation and cheap money and the standard which had made Britain the base of the world's money put enormous pressure on the pound sterling as foreign holders of sterling balances became increasingly panicky and cool when the British redeemed their sterling in either gold or dollars. The heavy loans by British banks to Germany during the 1920s made the pressure after the German monetary collapse feel more severe. But Britain could have saved the day by using the classical gold standard medicine in such crisis, by raising back interest rates sharply, thereby attracting funds to Britain from other countries. In such monetary crises, furthermore, Such temporary, tight money and checks to inflation gives foreigners confidence that the pound will be sustained and they then continue to hold sterling without calling on the country for redemption.

41:56In earlier crises, for example, Britain had raised its bank rate as high as 10% early in the proceedings and temporarily contracted the money supply to put a stringent check to inflation. By 1931, deflation and hard money had become unthinkable in the British political climate. So Britain stunned the financial world by keeping its bank rate very low, never raising it above 4.5%, and in fact continued to inflate sterling still further to offset gold losses abroad. As the run on sterling inevitably intensified, Great Britain cynically repudiated its own gold exchange standard, the very monetary standard that had forced and cajoled Europe by Cooley going off the gold standard on September 1931, saying, tough fellows, we ain't playing this game anymore, we're not going to redeem in gold or dollars.

42:47Its own international monetary system was sacrificed on the altar of continued domestic inflation. Benjamin Anderson's book, Economics of Public Welfare, gives a poignant little story of the head of the Dutch Central Bank, I forget his name, He calls up the Montague Norman about a day before the Treasury, the British Treasury, I forget which, about a day before the Britain goes off with the gold standard. It's very secret of course, you don't go off with the gold standard except in deepest secrecy. He calls up and says, look fellas, you owe me a lot of money and so far I've been a great friend of yours and please tell me if you intend to go off with the gold standard or otherwise I'll pull out. Give me just one little break. Don't worry, we'll never go off the gold standard. We're your old friend. We can assure you of this. The next day, we go off the gold standard.

43:33This is typical. As bad as governments are in general, they're worse than they're scurviest on the international monetary devaluation front. They lie constantly. They double-deal on a grand scale. It's all done for the public interest. Don't worry, folks. The European monetary system was thereby broken up into separate and even warring currency blocks. One of the things that Karen asked me yesterday about the freemenite freely fluctuating exchange rate system, and one of the problems, I don't want to go into the economic theoretical critique of this, but one of the practical political problems of this thing is that it will never happen in a million years. You'll never have a situation where every government is given total power over its fiat currency, over its own banks and its own currency, and then stay back and permit the precious currency to fluctuate freely.

44:26It'll never happen. So what you have is, if this starts happening, you'll very quickly have currency blocks, exchange control, bilateral deals, and all the monstrous stuff we had in the 30s, which is the consequence of everybody going off the gold standard. The European Monetary System was thereby broken up into separate and even warring currency blocks replete with fluctuating exchange rates, exchange control, and trade restrictions. The major countries followed Britain off the gold standard, with the exception of Belgium, Holland, France, Italy, Switzerland, and the United States.

45:15See blocks formed with the British Empire forming a sterling block with parodies mutually fixed in relation to the pounds. They're floating but they're fixed in relation to each other. Something like the common market. It's particularly ironic that one of the earliest effects of Britain's going off gold was of the overvalued pound, which Britain had assisted and put everybody else through the wringer to keep at 486. Now when they got off the gold standard, now the pound was free to fluctuate. The pound shot right down at its genuine economic And so Britain's grand experiment of returning to a form of gold at an overvalued par had ended in disaster for herself as well as for the rest of the world.

46:01In the last weeks of the Hoover administration, a desperate attempt was made by the United States to restore an international monetary system. At this time, the offer was made to Britain to return to the gold standard at the current, eminently more sensible par, means 3.50, 3.40, in exchange for a substantial reduction of the British war debt. No longer would Britain be forced by over-evaluation to be in a chronic state of depression of its export industry. See, by this time, the British would realize they did something wrong back there, and it's better to have the British pound low and stimulate their exports, because of the Marxist school National Education Through Struggle No longer would Britain be forced by over-evaluation to be in a chronic state of depression in its export industries, but Britain now has a nationalist bid in its teeth and an insistent on outright reflation of prices back to the pre-depression 1929 levels.

46:58Now we have this reflation bid. It has become increasingly clear that the powerful price-stabilizationists, the Fisher-Commons group, were interested not so much in stabilization as in high prices, and now that they would only be satisfied with an inflationary return to the 0.221 levels. Britain's rejection of the American Warfare proved to be fatal for any hopes of international monetary stability. The world's monetary fate finally rested with the United States, the major gold standard country still remaining. The Federal Reserve attempts to inflate the money supply at a lower interest rate during the Depression, further weaken confidence of the Dollar, and gold outflows combined with runs and failures of the banks to put increasing pressure on the American banking system. See, Hoover tried desperately to fight Milton Friedman in his book, Monetary History of the United States, denounces Hoover for lowering the money supply from 1929 to 1933, thereby precipitating a depression, supposedly.

47:48Actually, Hoover is trying to dam this increase in money supply. He's trying everything possible. Buying the Federal Reserve is buying securities like matter, pushing out interest rates. The The problem was that the depression set in, and the confidence was weakened, and the public was cashing in their money, cashing in their bank accounts for getting hard cash and even gold, and redemption was being demanded from abroad and suffering. So this overweighed the desperate attempts by who were to inflate. Finally, during the interregnum between the Hoover and Roosevelt administrations, the nation's banks began to collapse in earnest. The general bank collapse meant that the banking system, always unsound and incapable of paying more than a fraction of its liabilities on demand, could only go in either or two opposite directions.

48:34A truly laissez-faire policy would have allowed the failing banks to collapse and thereby to engage in a swift, sharp, surgical operation. It would have transformed the nation's monetary system from an unsound inflationary one to a truly hard and stable currency. The other poll was for the government to declare massive bank holidays, i.e. to relieve the banks of the obligation to pay off their debts, which they had done, of course, in every previous financial crisis from 1814 on, and then move on to the repudiation of the gold standard and its replacement by inflated fiat paper issued by the government. It is important to realize that neither the Hoover nor the Roosevelt administration had any intention of taking the first route, While there was a considerable split on whether or not to stay on the gold standard, no one endorsed the rigorous laissez-faire route.

49:26One thing is that even though Hoover, of course, was still in favor of keeping on the gold standard, his secretary of treasury, Ogden Mills, and his undersecretary, Arthur Ballantyne, by the time March 33 came around, they were in favor of going off the gold standard. They were anticipating the Roosevelt policy. The new Roosevelt administration was now faced with a choice of retaining or going off the gold standard. While almost everyone supported the temporary bank holidays, even Anderson and Willis, these people over here, we have to say, the banks, that's a key thing, might have been helpful to chase back connections, I suppose. While almost everyone supported temporary bank holidays, there was a severe split on the longer run question of the monetary standard. While the bulk of the nation's academic economists are staunchly behind the gold standard, it's hard to imagine now, but they did. I think 5,000 economists or 1,200 or something wrote a big letter, a big public statement, endorsing, you know, sticking in the gold standard.

50:16The indefatigable Irving Fisher redoubled his agitation for inflation, spurred onward by his personal desire to reinflate stock prices. Since the Stable Money Association had been supposedly dedicated to price stabilization, that was Fisher's room, and what Fisher and the inflationists wanted now was a drastic raising of prices, the association liquidated its assets and changed its name. The Committee for the Nation, founded in January 1933, stood squarely for quote, reflation The Committee for the Nation, which was crucially influential on Roosevelt's decision, was composed largely of prominent businessmen. The Committee was originated by Vincent Bendix, president from the Bendix Aviation, and General Robert E. Wood, head of Sears Roadbugger Company.

51:34They were soon joined in the fall of 1932 by Frank Vanderlip, long close to the Fisher and formerly President of the National City of New York, by James H. Rand Jr., Remington Rand and by Magnus W. Alexander, head of the National Industrial Conference Board. Other members of the Committee for the Nation included Fred H. Sexsauer, President of the Dairy Men's League Cooperative Association, Frederic H. Frazier, Chairman of the Board of the General and Banking Company, Automobile, Magnet, E.L. Kord, Leslie J. Rosenwald, Chairman of Sears Roebuck, Samuel S. Fells of Fells and Company, Philip K. Wrigley, President of William Wrigley Company, John Henry Hammond, Chairman of the Board of Bangor and Aristoc Railroad, Edward A. O'Neill, Head of the American Farm Bureau Federation, L.J. Tabor, Head of the National and Grange, F.R. Wurlitzer, Vice President Rudolf Wurlitzer Manufacturing Company, William J. McAveenie, President of Hudson Motor Company, that's the old Coffin connection, somehow Hudson's always deeply involved in the state apparatus, Frankie Gannetta, the Gannett Newspaper

52:37is an Indiana banker, William A. Wirt. Interestingly enough, yeah, I'm kidding, that's right, Gannett Interesting enough, this same group of highly conservative industrialists were later to become the Committee for Constitutional Government, the major anti-New Deal propaganda group of the late 30s and 40s. When I was growing up in the movement, so to speak, the Committee for Constitutional Government was the big, mass, right-wing anti-New Deal organization that would send out many of the teeny leaflets, the so-called opinion movers across the country. Yet this committee was the major proponent of the inflationist policy of the early New Deal on reflating and abandoning the gold standard.

53:31Also associated with the Committee for the Nation was another leading influence of Franklin Roosevelt's decision, agricultural economist George F. Warren of Cornell, who along with The inspiration for the reflectionist Roosevelt program continually raising the buying price of gold. A very funny thing happened. In the 1954 recession, I think it was, this old group, the Committee for the Nation had become the Committee for Constitutional Government, but their hearts still lay in this raising the price of gold policy. They downed deep under all the free market rhetoric and all that, still lay this hard core of raising the price They imported Colin Clark to speak to them about how to solve the 1954 recession. I happen to be at this dinner as one of my first dinner functions in the movement.

54:21The movement is a conservative, widely conservative movement. And Colin Clark doesn't know who these people are. He's a very distinguished English economist, extremely conservative, fanatically pro-population, which might be connected with his very conservative Catholic views, and also very Keynesian. He was a favorite of the free market and everything, but a very, very Keynesian. Okay, so he gives his speech on the 54 recession, and the first half is a weird speech. He's very distinguished, of course, cultured, Oxford-type, to who all these Englishmen are, And he gives us this whole, he gives us the first half of his speech, as I say, he doesn't know who these people are. He gives us the first half of his committee for the nation-type group. The first half of his speech is attacking the state. The state is evil, the state is parasite, and all the rest is the same stuff I've been saying here.

55:09And the last half of the thing is completely shifted around, and he calls for a $50 billion deficit immediately. He says, the only way to cure, there's only one way to cure this recession, I've studied this whole American recession, the only way to cure it is an immediate, massive, fantastic Deficit, to lift the economy up. So that's because he's extreme right-wing Keynesian. So that comes the question period, comments. Every one of these guys sitting around the table, these old banker types, these old guys, what was his name, Norman Lombard and these other characters from the Ambrose Bunker and all these guys, and each one of them starts giving us big reflating gold. Reflating gold, a quirk, I've never heard of this stuff. It's It's not part of the academic mainstream, and one of these guys is shaking his finger at Clark's face and saying, you say the price of gold, and Clark says, well, I don't see how the price of gold is very important or something, and the guy is shaking his finger

56:05at Clark's face and saying, supposing we raise the price of gold at $20,000 an ounce, wouldn't that have an effect on them? The Committee for the Nation at first included several hundred industrial and agricultural leaders and within a year its membership reached over 2,000. Its recommendations beginning with going off gold and embargoing gold exports and continuing through devaluing the dollar and raising the price of gold were fairly closely followed by the Roosevelt administration. For his part, Irving Fisher, in response to a request for advice by President-elect Roosevelt asking Fisher from Rice. It's the wrong thing to do, boy. Anyway, I strongly urge at the end of February, frankly, inflationist policy, reflation, devaluation, and leaving the gold standard without delay. By April 19, 1933, when Roosevelt cast a die for this policy, Fisher exulted in one of his letters, quote, Now I am sure, as far as we ever can be sure I am now one of the happiest men in the world. In the same letter to his wife, an heiress

57:21of the substantial Hazard family fortune, Fisher added, quote, My next big job is to raise money for ourselves. Probably we'll have to go to sister again. That's his wife's sister, Caroline. I mean, most things are these millions. I have defaulted payments the last few weeks because I did not think it was fair to ask sister for money when there I mean, if FDR had followed Glass, the Carter Glass of Virginia was being influenced by H. Parker Wallace, the hard-money man, if FDR had followed Glass, we would have been pretty surely ruined. That's we, meaning his wife and sister. So would Allied Chemical, in which much of his wife's family fortune was invested, and the U.S. government. Now I can go to Sister with a clean conscience. I don't know who Allied Chemical linked up here on the Morgan Rockefeller thing.

58:08If Irving Fischer's interest was personal as well as ideological, economic interests also underlay the concern of the Committee for the Nation. The farm groups wanted farm prices driven up, including farm export prices, which necessarily increased in terms of other currencies whenever currencies devalued. As for the rest of the Committee and the other inflationists, Herbert Feist notes, I'm not By the spring of 1933, diverse organizations and groups were crying a laugh at some kind of monetary inflation or devaluation or both. Most effective, probably, was the Committee for the Nation.

58:54Among its members were prominent merchants such as the head of Sears Roebuck, some journalists, some Wall Street operators, and some foreign exchange speculators. Their purpose was to get the United States off the gold standard and to bring about the evaluation of the dollar from which they would profit, either as speculators in foreign exchange or as businessmen. Another group, more conservative, who stood the game by devaluation were those who had already exported gold or otherwise acquired liquid deposits in foreign banks. They conceded that they were merely protecting the value of their capital. Then there were the exporters, especially of foreign products, who had been at a disadvantage ever since Great Britain had gone off the gold standard and the value was sterling and falling much below its previous parity with the dollar. Also advocating and endorsing the decision to inflate and leave the gold standard were such conservative bankers as James P. Warburg of Kim Lowe & Company, one of Roosevelt's leading monetary advisors, former Vice President and Chicago banker Charles G. Dawes, Melvin

59:51A. Traylor, President of the First National Bank of Chicago, Frank Olchal of the International from the Banking House of Mozart, Frere, and Russell C. Leffingwell, partner of J.P. Morgan and Company. Leffingwell told Roosevelt that his action, quote, was vitally necessary and most important of all the helpful things you have done, unquote. Morgan himself hailed Roosevelt's decision to leave the gold standard. Note how this contrasts with the usual sort of beauty and thing that conservative bankers always play with the gold standard. Welcome the reported action of the President and the Secretary of the Treasury in placing an embargo on gold exports. It has become evident that the effort to maintain the exchange value of the dollar and a premium as against depreciated foreign currencies is having a deflationary effect upon an already severely deflated American prices and wages and employment.

1:00:47It seems to me clear that the way out of the depression is to combat and overcome the deflationary forces. Therefore, I regard the action now taken as being the best possible course under the circumstances, J.P. Morgan. Other prominent advocates of going off the gold standard were publishers J. David Stern and William Randolph Hearst, financier James H.R. Cromwell of the Great Sullivan Cromwell Banking House, and Dean Wallace Dunham of the Harvard Business School. Dunham is one of the big corporate ideologues in this whole thing. During the 1931-32, when the Swope Plan comes up, Dahlem says, well, you know, some really good things about the Soviet Union, even though he's not really a comedy, as a part of business school. They have a five-year plan, a plan industry. We should follow this.

1:01:33Conservative Republican Senators such as David A. Reid of Pennsylvania and Minority Leader Charles O. McNary of Oregon also approved the decision, and Senator Arthur Vandenberg, Republican of Michigan, happily declared that Americans could now compete in the export Trade, quote, for the first time in many, many months. Vandenberg concluded that, quote, abandonment of the dollar externally may prove to be a complete answer to our problems so far as the currency factor is concerned. Typical badly written quote by Vandenberg. Amidst this chorus of approval from leading financiers and industrialists, there's still a determined opposition to going off gold. Aside from the bulk of the nation's economists, the lead in opposition was again taken by two economists with close ties to the banking Community, who had been major opponents of the strong Morgan policies during the 1920s, Benjamin Anderson of the Rockefeller-oriented Chase National Bank and Dr. H. Parker Willis, editor of the Journal of Commerce and chief advisor to Senator Carter Glass, the whole of the Secretary of Treasury and the Wilson. The Chamber of Commerce of the United States

1:02:29also vigorously attacked the abandonment of gold as well as price level stabilization, and Chamber of Commerce in New York State also called for a prompt return to gold. From In the financial community, leading opponents of Roosevelt's decision were Winthrop W. Aldrich, Rockefeller Kinsman, head of the Chase National Bank, and Roosevelt's budget director Louis W. Douglas of the Arizona money family, who was related to the J. Henry Schroeder International Bankers and was eventually to become head of mutual life insurance company in the bastard of England. Douglas fought valiantly but in vain within the administration against going off gold and against the remainder of the New Deal program. He later leaves the administration and writes a blistering book attacking the New Deal for liberal tradition. By the end of April 1933, the United States was clearly off the gold standard and the dollar quickly began to depreciate relative to gold and the gold standard currencies.

1:03:19Britain, which a few weeks earlier unlawfully rejected the idea of international stabilization, had now become frightened after what we're devaluing now, you know, their exports are being hurt, you know, do something about this. Currency blocks and depreciating pound-a-weight British exports was one thing. The depreciation of a dollar to spur American exports and injure British exports was quite another. The British had a presumption to scold the United States for going off gold, that was really cute, I mean, here they go off gold, we go off gold two years later and they're griping. and now the rest of that final hope for a restored international monetary system on the World Economic Conference, scheduled for London in June 1933.

1:03:59Well, I think that's a good note to stop, sort of a teaser for tomorrow night. We'll go on to the World Economic Conference and the New Deal.