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11

The Hoover New Deal of 1932

President Hoover came to the legislative session of 1932 in an atmosphere of crisis, ready for drastic measures. In his annual message to Congress, on December 8, 1931, Hoover first reviewed his own accomplishments of the past two years:

Many undertakings have been organized and forwarded during the past year to meet the new and changing emergencies which have constantly confronted us . . . to cushion the violence of liquidation in industry and commerce, thus giving time for orderly readjustment of costs, inventories, and credits without panic and widespread bankruptcies.

Measures such as Federal and state and local public works, work-sharing, maintaining wage rates ("a large majority have maintained wages at high levels" as before), curtailment of immigration, and the National Credit Corporation, Hoover declared, have served these purposes and fostered recovery. Now, Hoover urged more drastic action, and he presented the following program:

  1. Establish a Reconstruction Finance Corporation, which would use Treasury funds to lend to banks, industries, agricultural credit agencies, and local governments;

  2. Broaden the eligibility requirement for discounting at the Fed;

  3. Create a Home Loan Bank discount system to revive construction and employment measures which had been warmly endorsed by a National Housing Conference recently convened by Hoover for that purpose;

  4. Expand government aid to Federal Land Banks;

  5. Set up a Public Works Administration to coordinate and expand Federal public works;

  6. Legalize Hoover's order restricting immigration;

  7. Do something to weaken "destructive competition" (i.e., competition) in natural resource use;

  8. Grant direct loans of $300 million to States for relief;

  9. Reform the bankruptcy laws (i.e., weaken protection for the creditor).

Hoover also displayed anxiety to "protect railroads from unregulated competition," and to bolster the bankrupt railroad lines. In addition, he called for sharing-the-work programs to save several millions from unemployment.

The Tax Increase

With a $2 billion deficit during annual year 1931, Hoover felt that he had to do something in the next year to combat it. Deficit spending is indeed an evil, but a balanced budget is not necessarily a good, particularly when the "balance" is obtained by increasing revenue and expenditures. If he wanted to balance the budget, Hoover had two choices open to him: to reduce expenditures, and thereby relieve the economy of some of the aggravated burden of government, or to increase that burden further by raising taxes. He chose the latter course. In his swan song as Secretary of Treasury, Andrew Mellon advocated, in December, 1931, drastic increases of taxes, including personal income taxes, estate taxes, sales taxes, and postal rates. Obedient to the lines charted by Mellon and Hoover, Congress passed, in the Revenue Act of 1932, one of the greatest increases in taxation ever enacted in the United States in peacetime. The range of tax increases was enormous. Many wartime excise taxes were revived, sales taxes were imposed on gasoline, tires, autos, electric energy, malt, toiletries, furs, jewelry, and other articles; admission and stock transfer taxes were increased; new taxes were levied on bank checks, bond transfers, telephone, telegraph, and radio messages; and the personal income tax was raised drastically as follows: the normal rate was increased from a range of 1? percent-5 percent, to 4 percent-8 percent; personal exemptions were sharply reduced, and an earned credit of 25 percent eliminated; and surtaxes were raised enormously, from a maximum of 25 percent to 63 percent on the highest incomes. Furthermore, the corporate income tax was increased from 12 percent to l3? percent, and an exemption for small corporations eliminated; the estate tax was doubled, and the exemption floor halved; and the gift tax, which had been eliminated, was restored, and graduated up to 33??percent.[1] Hoover also tried his best to impose on the public a manufacturers' sales tax, but this was successfully opposed by the manufacturers. We might mention here that for Hoover the great increase in the estate tax was moral in itself, in addition to its alleged usefulness as a fiscal measure. The estate tax, he declared, is "one of the most economically and socially desirable—or even necessary of all taxes." He hinted darkly of the "evils of inherited economic power," of "cunning lawyers," and "obnoxious" playboys: there was no hint that he realized that a tax on inherited wealth is a tax on the property of the able or the descendants of the able, who must maintain that ability in order to preserve their fortunes; there was not the slightest understanding that a pure tax on capital such as the estate tax was the worst possible tax from the point of view of getting rid of the depression.

The raising of postal rates burdened the public further and helped swell the revenues of a compulsory governmental monopoly. The letter rates were raised from 2? to 3? despite the fact that the Post Office's own accounting system already showed a large profit on first class mail. Postage on publishers' second class mail was raised by about one-third, and parcel post rates on small parcels were increased by 25 percent (though rates on large parcels were lowered slightly).[2] One of the most cogent critiques of Hoover's astoundingly wrong-headed program was delivered by the St. Louis Chamber of Commerce. Alarmed by the incessant call for higher taxes, the Chamber declared:

When governments seek to maintain the high levels of taxation they reached in good times in these days of seriously impaired income, the impending specter of higher taxes constitutes one of the chief deterrents of business recovery.

The taxpayers, it insisted, should obtain a reduction of both taxes and government expenditures.[3] And the Atlanta Constitution called the 1932 tax act "the most vicious tax bill . . . ever saddled on the country in time of peace."[4]

Expenditures Versus Economy

Despite the drastic increase in tax rates, total Federal revenue for 1932 declined because of the deepened depression—itself partly caused by the increase in tax rates. Total Federal receipts, excluding government enterprises, declined from $2.2 billion in 1931 to $1.9 billion in 1932; including government enterprises, Federal receipts fell from $3.4 billion to $3 billion. Total government receipts fell from $12.4 billion to $11.5 billion including government enterprises, from $10.3 billion to $9.5 billion excluding them. As a result, the huge Federal deficit continued despite a drop in government expenditures in 1932: Federal expenditures falling from $4.4 billion to $3.4 billion (from $5.5 billion to $4.4 billion if we include government enterprises), and aggregate government expenditures falling from $13.3 billion to $11.4 billion (from $15.2 billion to $13.2 billion if we include government enterprises). Of the $1.7 billion in total government deficit, the bulk of it—$1.4 billion—was in the Federal government account.

The decline of $1 billion in Federal expenditures over the year consisted of an $800 million decline in transfer payments (veterans' loans), and a $200 million drop in grants to state and local governments. The drop in state and local government expenditures of $900 million in 1932 consisted largely of an $800 million decline in new construction. The state and local governments, which differ from the Federal government in not being able to print new money or new bank deposits by selling bonds to a controlled banking system, found by 1932 that their financial condition was too grave to permit continued public works on such a large scale. The state and local governments were therefore forced to cut back their expenditures to near the level of their dwindling receipts.

What did all this mean for the fiscal burden of government on the economy? While the absolute amount of Federal depredations fell from $5.5 to $4.4 billion in 1932, and state and local burdens fell from $9.7 to $8.8 billion, GNP, and gross private product, declined far more drastically. GNP fell from $76.3 billion in 1931 to $58.5 billion in 1932, while GPP fell from $70.9 billion to $53.3 billion. Net private product fell from $62.7 to $45.7 billion. Hence, the percentage of Federal depredation on the gross private product rose from 7.8 percent in 1931 to 8.3 percent in 1932, and the percentage depredation of state and local governments rose from 13.7 percent to 16.5 percent. All in all, total fiscal burden of government on the gross private product rose from 21.5 percent to 24.8 percent; total burden on the net private product rose from 24.3 percent to 28.9 percent.

One of the most ominous projects for Federal spending during 1932 was a Congressional move for a huge $2 billion veterans bonus, to be financed by an issue of new currency. It was, indeed, the struggle over, and final defeat of, this program in the Senate in June that did most to defeat a general clamor for much larger government spending. The agitation for a veterans' bonus gave rise to a National Economy Committee, organized by Colonel Archibald R. Roosevelt, to combat the proposal. The Committee later became the National Economy League, which grew active throughout the nation by mid-1932. Chairman of the League was Admiral Richard E. Byrd, who abandoned a polar expedition to take active part, and secretary was Captain Charles M. Mills. Begun by Colonel Roosevelt and Grenville Clark, the League acquired over 60,000 members in forty-five states. The League's objective was to cut the costs of government: "We will not get back again to prosperity until high taxes are reduced." Taxation, it declared, now cripples industry, and hurts rich and poor alike. Unfortunately, the League was not willing to suggest specific areas of reduced spending—aside from veterans' aid. Captain Mills simply assumed that public works could not be reduced, since they were needed to relieve unemployment, and national defense could not be reduced—despite the fact that no country was poised to attack the United Sates.[5]

Other economizers were more stringent, and urged Hoover to balance the budget by reducing expenditures by $2 billion, rather than by raising taxes. These included the redoubtable Rep. James M. Beck of Pennsylvania, formerly Solicitor General of the United States.[6] But Hoover rejected the pleas of numerous businessmen and bankers, many of them adherents of the Democratic Party. To one protesting businessman who urged him to reduce expenses by $2 billion, Hoover answered with the typical hysteria of the bureaucrat:

Your thesis is that the government expenses can be reduced by $2 billion—the amount of the tax decrease. This is . . . wholly impossible. It would mean we must give up the postal service, the Merchant Marine, protection of life and property and public health. We would have to turn 40,000 prisoners loose in this country; we would have to stop the maintenance of rivers and harbors; we would have to stop all construction work going on in aid of unemployment; it would mean abolishment [sic] of the Army and Navy. In other words it means complete chaos.

Let us waive the important question whether many of these functions are really so vital, or whether they may only be performed by the compulsory monopoly of the Federal Government. Would a $2 billion budget cut have led to these effects? Taking the fiscal year 1932, the Federal expenditures (including government enterprises) of $4.8 billion equaled $59.50 per person in a "real" index based on the wholesale price level of 1926. During the 1920s, the Federal Government spent a real amount of about $25 per person, and from 1890-1916, spent approximately $10 per person. This means that the Federal budget could have been cut by $2.8 billion to maintain the services provided during the 1920s, and by $4.0 billion to maintain the services provided from 1890-1916, not a period that lacked protection, post offices, etc.[7]

While the economizers urged Hoover to cut expenditures and taxation, radicals urged a stepped-up program of government spending. William Trufant Foster, in a speech before the Taylor Society in the spring of 1932, called for "collectively" expanding currency and credit to restore the commodity price level of 1928. Virgil Jordan, economist for Business Week, urged expansion of public spending: "Just as we saved our way into depression, we must squander our way out of it." This piece of advice was delivered before the annual banquet of the Pennsylvania Chamber of Commerce. Also calling for increased spending and "cyclical" rather than annual budget balancing were such economists as Paul H. Douglas, R.M. Haig, Simeon E. Leland, Harry A. Millis, Henry C. Simons, Sumner H. Slichter, and Jacob Viner.[8]

Public Works Agitation

While expenditures were leveling out, agitators for ever-greater public works redoubled their propaganda during the spring of 1932. Virgil Jordan, economist for Business Week, called for expanded public works, deficits, and pump-priming. W.T. Foster, Otto Tod Mallery, and David Cushman Coyle clamored for public works. Senators LaFollette and Wagner each sponsored huge public works bills, and they were supported by numerous economists and engineers. Senator Wagner sent a questionnaire on his $1 billion public works plan to numerous economists, and drew only a few dissents in the chorus of approval.[9]

Felix Frankfurter thought that the program should go even further. Several economists, however, advised caution or expressed outright dissent, thus causing at least a welcome split in what had looked to laymen to be a solid phalanx of economists favoring a huge public works program. John Maurice Clark wrote that he was not sure, and was worried about the effect on public confidence and the weakening of bank credit that would ensue. Also worried about confidence and cautiously opposed were Professors Z.C. Dickinson, Henry B. Gardner, and Alvin H. Hansen. Firmer in opposition was Jacob Hollander of Johns Hopkins, who had signed the adverse report of the President's Committee a few months earlier. Hollander expressed concern over the credit structure and continued deficits. Edwin F. Gay of Harvard believed it imperative to economize and balance the budget.

Willford I. King, of New York University, warned that wages must fall in proportion to the decline of commodity prices, in order to eliminate unemployment. He cogently pointed out that government employment at existing high wage rates would perpetuate the unemployment problem. Unfortunately, however, King suggested monetary inflation to restore the price level to 1926 levels. M.B. Hammond, of Ohio State University, delivered an excellent critique of the Wagner Bill. The proper course, he pointed out, was to economize, balance the budget, preserve the gold standard, and allow the needed price readjustments to take place:

conditions will be stabilized as soon as prices in certain lines have become adjusted to price reductions which have already taken place in other lines. Large appropriations for public works would hinder such an adjustment and consequently would be unfavorable to efforts which private industry will otherwise make to resume operations.

One of the best comments on the proposal was delivered by William A. Berridge, economist for the Metropolitan Life Insurance Company. The bond issue for public works, he wrote, "would encroach seriously, and perhaps dangerously upon the supply of capital funds that private enterprise will need in order to help the country climb out of depression again." The public works projects, he added, "would undoubtedly freeze up the country's labor and capital in projects that would not contribute correspondingly to the productiveness and welfare of society in general."

Further agitation for public works was carried on by the magazine American City, which called for a six-year program of low-interest loans to public works, and by Colonel John P. Hogan, who proposed a Productive Research Work Corporation, to be worth $1.5 billion, for loans to local governments for public works.[10]

Hogan's scheme was endorsed by the Construction League of America, and by the Associated General Contractors of America, both naturally eager for government subsidies to the construction industry. In June, the construction industry sponsored a National Committee for Trade Recovery, to promote public works. Other zealots were J. Cheever Cowden, a New York investment banker, who proposed an annual $4-5 billion public-works program, Colonel Malcolm C. Rorty, who wanted $1 billion spent per year, Owen D. Young, Alfred E. Smith, and Franklin D. Roosevelt. William Randolph Hearst suggested a $5.5 billion Property Bond issue for a Federal public-works program, and this was endorsed, in January, 1932, by thirty-one economists, including Thomas Nixon Carver, Paul H. Douglas, William Trufant Foster, Robert M. Maclver, and J. E. LeRossignol.[11]

By the summer of 1932, three books had appeared that would form the bellwether of the Roosevelt New Deal. These called for heavy government spending, especially on public works, as well as for central planning of the economy; they were Stuart Chase's The New Deal, David Cushman Coyle's The Irrepressible Conflict: Business vs. Finance, and George Soule's A Planned Society. Their public works suggestions were endorsed by the New Republic and the American Federation of Labor. The U.S. Conference of Mayors urged a $5 billion public-works program, and the avowed Socialists Norman Thomas and Morris Hillquit topped everyone with a suggested $12 billion bond issue, one half to go for public works, and the other half for direct relief.

In the meanwhile, however, President Hoover himself was beginning to have doubts about one of his favorite policies: public works. In a conference at the end of February, Hoover admitted that his public works program, which had nearly doubled Federal construction since the start of the depression, had failed. It was very expensive, costing over $1200 per family aided, it was unavailable to the needy in remote regions and to those who were unable to perform such labor, which was, after all, unskilled make-work. Hoover now was coming to favor more Federal grants-in-aid to states in lieu of more Federal public works. By May, Hoover had openly reversed his earlier position, and now opposed any further extension of non-self-liquidating public works. As a result, Federal public works only increased by $60 million in 1932, to reach the $333 million mark. Experience had led the President to curtail his public works experiment, and partially to renounce views that he had championed for over a decade. Public works was not to come really to the fore again until the Roosevelt administration.[12] Despite this reversal, Hoover continued to insist on the merits of "self-liquidating" public works, and induced the Reconstruction Finance Corporation (RFC) to lend abundantly for public dams, toll bridges, and slum clearance. In fact, Hoover still recalls with pride that he personally induced state and local governments to expand their public-works programs by $1.5 billion during the depression. He still points out proudly that the aggregate public works of the four years of his administration was greater than the public works in the entire previous 30 years, and he still takes credit for launching, in this period, Jones Beach, the San Francisco Bay Bridge, the Los Angeles Aqueduct, and Boulder Dam. He also signed a treaty with Canada, in July, 1932, to build a joint governmental St. Lawrence Seaway, but the Senate of that era wisely refused to approve this boondoggle and subsidy to one form of water transportation.

The RFC

On all other aspects of the Hoover New Deal, the President blossomed rather than faltered. The most important plank in his program—the RFC—was passed hurriedly in January by the Congress.[13] The RFC was provided with government capital totaling $500 million, and was empowered to issue further debentures up to $1.5 billion. Hoover asked none other than Bernard Baruch to head the RFC, but Baruch declined. At that point, Hoover turned to name as Chairman one of his most socialistic advisers, the one who originally suggested the RFC to Hoover, Eugene Meyer, Jr., an old friend of Baruch's.[14] For the first five months of its life, the lending activities of the RFC lay shrouded in secrecy, and only determined action by the Democratic Congress finally forced the agency to make periodic public reports, beginning at the end of August. The bureaucratic excuse was that RFC loans should, like bank loans or previous National Credit Corporation (NCC) loans, remain confidential, lest public confidence in the aided bank or business firm be weakened. But the point is that, since the RFC was designed to lend money to unsound organizations about to fail, they were weak and the public deserved to lose confidence, and the sooner the better. Furthermore, since the taxpayers pay for government and are supposed to be its "owners," there is no excuse for governmental representatives to keep secrets from their own principals. In a democracy, secrecy is particularly culpable: for how can the people possibly make intelligent decisions if the facts are withheld from them by the government?

During the first five months of operation, from February to June, the RFC made $1 billion worth of loans, of which 80 percent was lent to banks and railroads, and about 60 percent to banks. The Republican claim that the RFC loans were not at all political rings pretty hollow in light of the facts. Thus, General Charles Dawes resigned as President of the RFC on June 7. Less than three weeks later, the Chicago bank which he headed, the Central Republic Bank and Trust Company, received an RFC loan of $90 million even though the bank's total deposits were only $95 million. That General Dawes resigned and then promptly asked for and received a huge loan for his own bank, certainly appears to be mulcting of the taxpayers by political collusion.[15] In addition, the RFC granted a $14 million loan to the Union Trust Company of Cleveland; chairman of the board of this bank was none other than Joseph R. Nutt, treasurer of the Republican National Committee.

The successor to Dawes as head of the RFC was the Hon. Atlee Pomerene, whose great contribution to economic wisdom was his pronouncement that he would like to compel all merchants to increase their purchases by 33 percent. There was the road to recovery! Under Pomerene's aegis, the FRC promptly authorized a $12.3 million loan to the Guardian Trust Company, of Cleveland, of which Pomerene was a director. Another loan of $7.4 million was made to the Baltimore Trust Company, the vice-chairman of which was the influential Republican Senator Phillips L. Goldsborough. A loan of $13 million was granted to the Union Guardian Trust Company of Detroit, a director of which was the Secretary of Commerce, Roy D. Chapin.

Some $264 million were loaned to railroads during the five months of secrecy. The theory was that railroad securities must be protected, since many were held by savings banks and insurance companies, alleged agents of the small investor. Of the $187 million of loans that have been traced, $37 million were for the purpose of making improvements, and $150 million to repay debts. One of the first loans, for example, was a $5.75 million grant to the Missouri Pacific to repay its debt to J.P. Morgan and Company. A total of $11 million was loaned to the Van Sweringen railroads (including the Missouri Pacific) to repay bank loans. $8 million were loaned to the Baltimore and Ohio to repay a debt to Kuhn, Loeb and Company. All in all, $44 million were granted to the railroads by the RFC in order to repay bank loans. One of the main enthusiasts for this policy was Eugene Meyer, on the grounds of "promoting recovery," and, frankly, "putting more money into the banks." But this "promotion of recovery" really meant that the taxpayers were expropriated, and their money transferred by coercion to a few banks, notably J.P. Morgan and Company, and Kuhn, Loeb and Company. The extent of Meyer's humanitarianism in this affair may be gauged from the fact that his brother-in-law, George Blumenthal, was a member of J.P. Morgan and Company, and that Meyer had also served as a liaison officer between the Morgan firm and the French government. In the case of the Missouri Pacific, the RFC granted the loan despite an adverse warning by a minority of the Interstate Commerce Commission, and, as soon as the line had repaid its debt to Morgan, the Missouri Pacific was gently allowed to go into bankruptcy.[16]

John T. Flynn, in a caustic article on the RFC, pointed out correctly that such loans could only prolong the depression:

Prices must come down to bring goods closer to the size of the available income . . . income itself must be freed for purchasing by the extinguishment of excessive debts. . . . Any attempt to hold up prices or to save the weaker debtors necessarily prolongs the depression.

Flynn also firmly pointed out that the best way to relieve the railroads, shaky and hobbled by debt, was to go into the "inevitable curative process" of receivership:

The quicker the correction comes, the quicker the regeneration of the road will come. . . . Instead of permitting the correction of the fatal flaw [the heavy bond load], the RFC has actually added to the bond load [of the railroads].[17]

Despite the speedy enactment of the RFC, Hoover complained that the Democratic Congress had delayed its passage by six weeks, allowing securities to be depressed for this length of time below their "true worth"—whatever that may be. Hoover's chief complaint was that Congress did not permit the RFC to lend directly to industry, to agriculture, or to government for public works. Congress, in short, did not permit the RFC to loan widely and recklessly enough.

At last, however, Hoover had his way, and Congress agreed to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold "positive" institution, making capital loans for new construction. This amendment, of July 21—the Emergency Relief and Construction Act of 1932—increased the RFC's authorized total capital from $2 billion to $3.8 billion, and permitted loans to states or cities for relief and work relief, for self-liquidating construction projects, and for financing sales of agricultural surpluses abroad, orderly marketing in agriculture, and agricultural credit corporations.[18] In a retrospective slap at General Dawes, loans were now forbidden to any bank of which a director or officer was a member of the RFC board. In a later amendment, the RFC was ordered to allocate $25 million of its funds to the Treasury to buy the stock of the 12 newly created Federal Home Loan Banks.

Over the entire year 1932, the RFC extended credits totaling $2.3 billion, and advanced an actual $1.6 billion in cash. Of the year's advances, 52 percent were loaned to banks, 17 percent to railroads (of which over half went to repay debts to banks), and 9 percent to agriculture. In the agricultural field, the RFC established regional agricultural credit corporations, and advanced them $1.4 million, which authorizing credits of $55 million by the end of the year. The RFC was particularly active in cotton loans. And although the American Engineering Council hopefully suggested a shelf of self-liquidating public works projects totaling $1 billion (mainly water-supply and irrigation systems), the RFC only authorized $147 million, and advanced $16 million, for such projects during 1932.

Governmental Relief

If Hoover eagerly embraced the statism of the RFC, he gave ground but grudgingly on one issue where he had championed the voluntary approach: direct relief. Governor Franklin D. Roosevelt of New York led the way for state relief programs in the winter of 1931-1932, and he induced New York to establish the first state relief authority: the Temporary Emergency Relief Administration, equipped with $25 million.[19] Other states followed this lead, and Senators Costigan and LaFollette introduced a bill for a $500 million federal relief program.[20] The bill was defeated, but, with depression deepening and a Presidential election approaching, the administration all but surrendered, passing the Emergency Relief and Construction Act of July, 1932—the nation's first Federal relief legislation.[21] The bill did not go nearly as far as the agitators desired, extending loans for state relief rather than direct grants to states, but this was a trivial difference. The loans to the states were to be made by the RFC at 3 percent on the basis of "need" as requested by the respective governors. The RFC was authorized to lend up to $300 million for this purpose. Grants were quickly made to Alabama, Georgia, Illinois, Montana, North Dakota, Ohio, Utah, Louisiana, and Oregon. The RFC hired a staff of social workers, headed by Fred Croxton, to administer the program.

The states, too, expanded their relief programs. While total state expenditures for emergency relief was $547 thousand in 1930-1931, they totaled $57 million in 1931-1932, and $90 million in fiscal year 1933. New York, New Jersey, and Pennsylvania led in relief expenditures, Pennsylvania financing much of its aid by a newly-imposed sales tax. All in all, total public relief in 120 of the nation's leading urban areas amounted to $33 million in 1929, $173 million in 1931, and $308 million in 1932.[22]

The Inflation Program

One thing Hoover was not reticent about: launching a huge inflationist program. First, the administration cleared the path for the program by passing the Glass-Steagall Act in February, which (a) greatly broadened the assets eligible for rediscounts with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial paper.[23] The way was now cleared for a huge program of inflating reserves and engineering cheap money once again. Furthermore, Eugene Meyer, Jr. was now Governor of the Federal Reserve Board, and Ogden Mills had replaced the more conservative Andrew Mellon as Secretary of the Treasury. At the end of February, 1932, total bank reserves had fallen to $1.85 billion. At that point, the FRS launched a gigantic program of purchasing U.S. government securities. By the end of 1932, total reserves had been raised to $2.51 billion. This enormous increase of $660 million in reserves in less than a year is unprecedented in the previous history of the System. If the banks had kept loaned-up, the money supply of the nation would have increased by approximately $8 billion. Instead, the money supply fell by $3.5 billion during 1932, from $68.25 to $64.72 billion at the end of the year, and with the bank deposit component falling by $3.2 billion.

The monetary history of the year is best broken up into two parts: end of February–end of July, and end of July–end of December. In the first period, total reserves rose by $213 million. The entire securities-buying program of the Federal Reserve took place during this first period, security holdings rising from $740 million at the end of February to $1,841 million at the end of July, an enormous $1,101 million rise in five months. Total controlled reserves rose by $1,000 million. This was offset by a $290 million reduction in bank indebtedness to the Fed, a sharp $380 million fall in the total gold stock, and a $122 million rise in money in circulation, in short, a $788 million reduction in uncontrolled reserves. For open-market purchases to be pursued precisely when the gold stock was falling was pure folly, and endangered public confidence in the government's ability to maintain the dollar on the gold standard. One reason for the inflationary policy was the huge Federal deficit of $3 billion during fiscal 1932. Since the Treasury was unwilling to borrow on long-term bonds from the public, it borrowed on short-term from the member banks, and the Federal Reserve was obliged to supply the banks with sufficient reserves.

Despite this great inflationary push, it was during this half year that the nation's bank deposits fell by $3.1 billion; from then on, they remained almost constant until the end of the year. Why this fall in money supply just when one would have expected it to rise? The answer is the emergence of the phenomenon of "excess reserves." Until the second quarter of 1932, the nation's banks had always remained loaned up, with only negligible excess reserves. Now the banks accumulated excess reserves, and Currie estimates that the proportion of excess to total bank reserves rose from 2.4 percent in the first quarter of 1932, to 10.7 percent in the second quarter.[24]

Why the emergence of excess reserves? In the first place, Fed purchase of government securities was a purely artificial attempt to dope the inflation horse. The drop in gold demanded a reduction in the money supply to maintain public confidence in the dollar and in the banking system; the increase of money in circulation out of season was an ominous sign that the public was losing confidence in the banks, and a severe bank contraction was the only way to regain that confidence. In the face of this requirement for deflation, the Fed embarked on its gigantic securities-buying program. Naturally, the banks, deeply worried by the bank failures that had been and were still taking place, were reluctant to expand their deposits further, and failed to do so. A common explanation is that the demand for loans by business fell off during the depression, because business could not see many profitable opportunities ahead. But this argument overlooks the fact that banks never have to be passive, that if they really wanted to, they could buy existing securities, and increase deposits that way. They do not have to depend upon business firms to request commercial loans, or to float new bond issues. The reason for excess reserves must be found, therefore, in the banks.

In a time of depression and financial crisis, banks will be reluctant to lend or invest, (a) to avoid endangering the confidence of their customers; and (b) to avoid the risk of lending to or investing in ventures that might default. The artificial cheap money policy in 1932 greatly lowered interest rates all-around, and therefore further discouraged the banks from making loans or investments. just when risk was increasing, the incentive to bear risk—the prospective interest-return—was being lowered by governmental manipulation. And, as we noted above, we must not overlook the frightening effect of the wave of bank failures on bank policies. During the 1920s, a typical year might find 700 banks failing, with deposits totaling $170 million. In 1930, 1350 banks failed, with deposits of $837 million; in 1931, 2,293 banks collapsed, with deposits of $1,690 million; and in 1932, 1,453 banks failed, having $706 million in deposits. This enormous increase in bank failures was enough to give any bank pause—particularly when the bankers knew in their hearts that no bank (outside of the nonexisting ideal 100 percent bank) can ever withstand a determined run. Consequently, the banks permitted their commercial loans to run down without increasing their investments.

Thus, the Hoover administration pursued a giant inflationary policy from March through July 1932, raising controlled reserves by $1 billion through Fed purchase of government securities. If all other factors had remained constant, and banks fully loaned up, the money supply would have risen abruptly and wildly by over $10 billion during that period. Instead, and fortunately, the inflationary policy was reversed and turned into a rout. What defeated it? Foreigners who lost confidence in the dollar, partly as a result of the program, and drew out gold; American citizens who lost confidence in the banks and changed their deposits into Federal Reserve notes; and finally, bankers who refused to endanger themselves any further, and either used the increased resources to repay debt to the Federal Reserve or allowed them to pile up in the vaults. And so, fortunately, inflation by the government was turned into deflation by the policies of the public and the banks, and the money supply dropped by $3.5 billion. As we shall see further below, the American economy reached the depths of depression during 1932 and 1933, and yet it had begun to turn upward by mid-1932. It is not far-fetched to believe that the considerable deflation of July 1931–July 1932, totaling $7.5 billion of currency and deposits, or 14 percent, was partly responsible for the mid-summer upturn.[25]

The major increase in bank reserves came in the latter half of 1932, when reserves rose from $2.05 to $2.51 billion, or by $457 million. Yet this rise was not caused by FRB security-buying, for the Hoover administration had by then ceased purchasing, apparently realizing that little or nothing was being accomplished. With the end of Hoover's inflation, the gold stock reversed itself, and money in circulation even declined, violating its normal seasonal pattern. In this second period, controlled reserves increased by $165 million; and uncontrolled reserves rose by $293 million: chiefly gold stock, which increased by $539 million. The money supply, however, remained practically constant, currency and bank deposits totaling $45.36 billion at the end of the year. In short, in the second half of 1932, gold swarmed into the United States, and money in circulation also fell.

The public was therefore no longer a help in fighting inflation. In the face of the huge and rapid increase in gold stock, the administration did nothing, whereas it should have sterilized the increase by tightening money and selling some of its swollen hoard of securities. In the face of the great increase in reserves, therefore, the bankers once again came to the nation's monetary rescue by piling up ever greater excess reserves, and also by reducing some indebtedness at the Fed. Currie estimates that by the fourth quarter of 1932, excess reserves had doubled, to equal 20.3 percent of total bank reserves.

Professor Seymour Harris, writing at the depth of the depression at a time when he was a cautious moderate, conceded that the failure of the inflationist policy of the Federal Reserve might have been due to the fact "that liquidation has not proceeded far enough." Furthermore, he added, the sound-money critics of the Administration might be right, and it may be that the heavy open-market purchases of securities from 1930 to 1932 "have retarded the process of liquidation and reduction of costs, and therefore have accentuated the depression."[26] Precisely.

If Hoover's inflationist plans were thwarted variously by foreigners, the public, and the banks, the President did not permit himself to remain idle in the face of these obstacles. About foreigners he could do little, except to induce Congress to pass the Glass-Steagall Act to permit more leeway for domestic expansion. Hoover was only a moderate inflationist relative to many others, and he did not wish to go off the gold standard. About the public, however, Hoover could do a great deal. Seeing money-in-circulation increase by $800 million in 1931, Hoover engineered a coordinated hue-and-cry against "traitorous hoarding." "Hoarding," of course, meant that individuals were choosing to redeem their own property, to ask banks to transform their deposits into the cash which the banks had promised to have on hand for redemption.

It is characteristic of depressions that, because of the inherently fraudulent nature of the commercial banking system, any real attempt by the public to redeem its own property from the banks must cause panic among banks and government alike. And so, on February 3, Hoover organized an anti-hoarding drive, headed by a Citizens' Reconstruction Organization (CRO) under Colonel Frank Knox of Chicago. The hoarder is unpatriotic, ran the hue and cry; he restricts and destroys credit (i.e., he is exposing the unsound nature of the credit which was granted against his interests and in destruction of his property). A group of top-level Anti-Hoarding patriots met on February 6 to organize the drive: present were General Dawes, Eugene Meyer, Secretaries Lamont and Mills, A.F. Whitney, Alvanley Johnston, and industrialist Magnus Alexander. The CRO urged hoarders to invest in short-term Treasury securities, i.e., in unproductive rather than productive investments. On March 6, Hoover delivered a public address on the evils of hoarding: "the battle front today is against the hoarding of currency." Hoarding has lowered prices and incomes, and restricted credit; it strangles our daily life. "No one will deny that if the vast sums of money hoarded in the country today could be brought into active circulation there would be a great lift to the whole of our economic progress." Hoover then commended Colonel Knox for his "great battle against . . . the American people, and called on everyone to serve in protection of the American home." Perhaps Hoover is correct when he now gives credit to the Knox drive for the fact that "hoarding" never increased much during 1932: it reached a peak of $5.44 billion in July, and never rose above that until the bank crises in February, 1933. But if Hoover is correct, praise is not his appropriate reward. For it means that bank liquidation was postponed for another year and the final banking crisis intensified, and it also means that the public was not at last permitted to find out for itself the great truth of the nature of its banking system.

The banks also received their share of Hoover's ire for their unwillingness to expand in those troubled times. The New York Times reported on May 20 that Hoover was "disturbed at the apparent lack of cooperation of the commercial banks of the country in the credit expansion drive." In short, the "banks have not passed the benefits of these relief measures on to their customers." The anger of the inflationist authorities at the caution of the banks was typified by the arrogant statement of RFC chairman, Atlee Pomerene: "Now . . . and I measure my words, the bank that is 75 percent liquid or more and refuses to make loans when proper security is offered, under present circumstances, is a parasite on the community." And Hoover had certainly done his very best to spark the bank credit expansion. It was he who induced Congress to pass the Glass-Steagall Act, and he and Meyer who conducted the open-market purchases of $1 billion. After the Glass-Steagall and RFC Acts were passed, Hoover proclaimed that they would "so strengthen our whole credit structure and open the channels of credit as now to permit our banks more adequately to serve the needs" of the public. On May 19, Hoover tried to prod the banks by asking Secretary Mills to organize bankers and businessmen to use the surplus credit made available by the Federal Reserve purchases. A Committee was established in New York City for this purpose; on it were such men as Owen D. Young, chairman, Walter S. Gifford of AT&T, Charles E. Mitchell of the National City Bank, Alfred P. Sloan, Jr., of General Motors, and Walter C. Teagle of Standard Oil. The next day, May 20, Hoover issued a press release supporting this committee, and hoping for similar action throughout the nation. The Young Committee tried to organize a cartel to support bond prices, but the committee accomplished little, and the idea died.

The Inflation Agitation

It is thus with considerable justification that Herbert Hoover was to declare in later years: "after coming to the Presidency, almost the whole of Roosevelt's credit supports were built upon our measures." Despite his intervention and inflationism, however, Hoover considered himself sound next to some of the wildly inflationist schemes that were filling the air during 1932. The silver bloc, for one, stepped up its campaign for an international conference to raise and stabilize the price of silver. They now added proposals for bimetallic systems. Backing these efforts were Senators King, Smoot, and Borah from the Mountain states, the International Chamber of Commerce, and the American Federation of Labor. Senator Burton K. Wheeler (D., Mont.) introduced a bimetallism bill with the old battle-cry of 16:1, fittingly enough in collaboration with William Jennings Bryan, Jr. The Bimetallic Association was formed to back such a bill in February, and it was also defended by the left-wing National Farmers' Union. One of the articulate leaders of the silver-subsidy bloc was Ren? Leon, who became adviser to the House Ways and Means Committee, and induced the Committee to suggest the international conference. Neither of these proposals passed a house of Congress.

Meanwhile, more and more economists and politicians were advocating credit expansion, some as a means of "reflating" the price level back to pre-depression levels. Curiously enough, the price-level stabilizationists, headed by Irving Fisher, whom we have discussed above, no longer wanted mere stabilization: they, too, wanted to reflate the price level back to pre-depression standards, and only then to stabilize. There is no better proof that these economists were always inflationists first, and stabilizationists second. Norman Lombard and the Stable Money Association continued to call for stabilization; before it closed down, it helped to start and was superseded by the powerful Committee for the Nation, dedicated frankly to reflation, and highly influential in finally getting the country off the gold standard in 1933-34. The Committee for the Nation was founded by veteran stabilizationist Frank A. Vanderlip, former President of the National City Bank of New York, and by James H. Rand, Jr., President of Remington Rand Company. Others cooperating in founding the Committee in late 1932 were Vincent Bendix, General Robert E. Wood of Sears-Roebuck, Magnus W. Alexander of the National Industrial Conference Board, Fred H. Sexauer, a farm leader, E.L. Cord, and Frederic H. Frazier, Chairman of the General Baking Company. When the Committee for the Nation organized formally in January, 1933, its executive secretary was Edward A. Rumely, and another of its leaders was Lessing J. Rosenwald.

Inflationist efforts in Congress during these years included: Representative Wright Patman's bill for a soldiers' bonus with fiat money (see above); Senator Walsh's plan for fiat money; Representative Burtness' (N. Dak.) plan to "stabilize the buying power of money," and another bill to "raise the commodity price level to the debt-incurring stage and to stabilize it thereafter." Burtness's bill was introduced in December, 1931, and, in the same month, Rep. Christian Ramseyer of Iowa introduced a bill to "restore and maintain the level of wholesale prices," directing the Federal Reserve to inflate prices back to 1926 levels. A similar bill was presented by Rep. Kent Keller of Illinois.

The most important inflationist bill came before the House Banking and Currency Committee in March, 1932. The Goldsborough Bill charged the Federal Reserve System with the duty of reflating to pre-depression price-levels and then stabilizing; also, the Fed was to be given power to raise or lower the gold weight of the dollar when it deemed necessary, a harking back to Irving Fisher's old scheme of the "compensated dollar." Supporting the Goldsborough Bill in the hearings were: Edward A. O'Neal, President of the Farm Bureau Federation, which had established a Committee on Stabilization of the Unit of Value, for reflating the price level; Louis J. Taber of the National Grange; and John A. Simpson of the National Farmers' Union, all of whom doubted that the bill went far enough; Henry A. Wallace; ex-Senator Robert L. Owen; Professor Willford I. King, who also wanted the bill to go further; Alvin T. Simonds, President of the Simonds Saw and Steel Company; Colonel Malcolm C. Rorty; W.C. Hushing of the American Federation of Labor; Professor Irving Fisher; and George H. Shibley. The House frightened the administration and conservative opinion by passing the Goldsborough Bill on May 2 by the overwhelming margin of 289 to 60. The stabilizationists had reached their high water mark. The New York Merchants' Association strongly attacked the bill, and the Commercial and Financial Chronicle-throughout the 1920s a bellwether of sound money-attacked both the Goldsborough Bill and the opposing Federal Reserve authorities in its issue of May 7:

It seems useless to argue against follies such as those embodied in the Goldsborough Bill, when our legislators have lost all sense and reason, and the only hope is that the movement can be held under definite control before it is carried too far. We grieve to have to say that the Federal Reserve authorities are chargeable with a portion at least of the blame in inculcating the unsound doctrines which are finding such wide acceptance today through the Reserve policy of the largescale purchases of United States Government Securities.

The Federal Reserve authorities strongly opposed the Goldsborough Bill (now Fletcher Bill) in the Senate. The best of these antagonists was Dr. Adolph C. Miller, who cogently charged that a reflation attempt could only aggravate the depression. Miller asserted that if the Federal Reserve had been operating under this bill during the late 1920s, the depression would now be even worse than it is. The Bill was stopped in committee by the efforts of Secretary Mills and Senator Glass.

Also agitating for inflation were Professors Commons, Edie, Friday, Kemmerer, Persons, and Rogers, Colonel Leonard P. Ayres, Father Charles Coughlin, broker Robert M. Harriss, and Dr. Ivan Wright. Donald Richberg urged emergency loans to the unemployed. Undoubtedly the wildest of all the monetary schemes were those that envisioned Federal support for some sort of separate barter system among the unemployed. Here, at last, the absurd schemes of statists and inflationists reached an apogee: a virtually conscious withdrawal from the civilized monetary economy, and a step toward return to the primitive realm of barter.

It is particularly astounding that many famous economists, un- doubtedly nonplussed by the depression, lent their names to barter schemes. Professor Frank D. Graham, of Princeton University, concocted an elaborate plan for an Emergency Employment Corporation (EEC), to be established by the federal government, for putting the unemployed to work in producing consumer goods, in return for scrip, based apparently on labor-hours, issued by the EEC.[27] Similar plans were suggested by Professor Willford I. King of New York University, and Howard O. Eaton of the University of Oklahoma. And finally, a whole battery of economists, headed by Professor J. Douglas Brown, director of the industrial relations section of Princeton University, and former member of the President's Emergency Committee for Employment, signed a petition for federal and state aid for establishing barter systems, where the unemployed would produce for their own consumption, outside of the civilized market economy.[28]

It is a sobering lesson on how the country was being governed, that of the signers, Mallery, Willits, and Wolman were members of the Hoover Emergency Committee for Employment; Willits was an adviser to the Pennsylvania state unemployment committee; Leiserson was chairman of the Ohio State Commission on Unemployment Insurance; Douglas had been technical adviser to the New York State Unemployment Relief Committee; and Graham had been an adviser of the Federal Farm Board.[29]

In the month of January, 1932, two important groups of econ- omists gave their blessings to an expanded inflation program- though not going as far as barter or scrip. Dr. Warren M. Per- sons, formerly of Harvard University, organized a statement asserting that there was fairly "general agreement" in the economics profession on two steps-credit expansion by the Federal Reserve in collaboration with commercial banks, and passage of the pending RFC. Among the signers of the Persons statement: Thomas Nixon Carver, John Maurice Clark, John R. Commons, Paul H. Douglas, Irving Fisher, David Friday, Jacob Hollander, Virgil Jordan, Edwin W. Kemmerer, Father John A. Ryan, Edwin R.A. Seligman, Frank W. Taussig, and Henry A. Wallace.[30]

One of the most important expressions of monetary and fiscal thought by economists in the depression was a conference of some of the nation's leading economists in January, 1932, at the University of Chicago, under the aegis of the Institute on Gold and Monetary Stabilization.[31] The Chicago meeting received wide notice, as well it might. Twenty-four economists there recommended the following to President Hoover: (1) what later became the Glass-Steagall Act; (2) a systematic campaign of FRB open-market purchases of securities; (3) RFC aid to banks with ineligible assets; (4) maintaining a public-works program; (5) Federal unemployment relief; and (6) lowering tariffs. With the exception of the last plank, President Hoover, as we have seen, adopted every one of these inflationary and interventionist proposals. Part of the responsibility for the Hoover program and its aggravation of the depression must therefore rest on these eminent advisers who steered him so incorrectly.[32]

Unfortunately, these distinguished economists did not heed the words of two of the lecturers at the conference, who most emphatically did not sign the statement. One was Professor H. Parker Willis, who again proved prophetic in attacking the Federal Reserve's past and projected future inflationary policy during the depression. Willis pointed out that the cheap money policy in late 1929 and in 1931 caused a dangerous outflow of gold, and led therefore to loss of confidence in the dollar and to bank failures, which accentuated the loss of confidence. He warned that any securities-buying program might indeed raise prices but:

any such step at the present time would simply mean an aggravation of existing difficulties, due to the fact that we are already overburdened with construction work and fixed capital that are not likely soon to be employed.

In short, wasteful malinvestments would only be aggravated. The gold standard would also be gravely endangered. In short, inflation and cheap money retard "progress toward the reestablishment of a solid . . . system of prices and values." Willis called courageously for a hands-off policy by the Federal Reserve.[33]

The other notable contribution to the conference was delivered by Professor Gottfried von Haberler, at that time a follower of Ludwig von Mises. Haberler here presented for perhaps the first time in America the Misesian theory of the business cycle.[34] He pointed out that the traditional monetary theory of the trade cycle emphasized stability of the price level, with an attack on falling prices as the remedy for depression. Such were the doctrines of Fisher, Cassel, and Hawtrey. The price level, however, is a misleading guide, since credit expansion also has a fundamental influence on the structure of production. Furthermore, the price-level theories err by not distinguishing between a fall of price due to a contraction of money, and that due to a lowering of costs from increases in productivity. In 1924-1929, Haberler continued, there was a great growth in production, but wholesale commodity prices remained stable, because the volume of money increased.[35] This inflation brought on the succeeding depression. First it lengthened the period of production, because interest was lowered artificially as credit expanded. The subsequent depression, Haberler continued, is the necessary adjustment and abandonment of these longer processes, and the restoration of the old consumption-investment proportions. Consequently, shifts of capital and labor must occur before recovery can be won. The "quacks . . . preaching inflationary measures," charged Haberler, disregard the real dislocation of productive resources. Further inflation would make things worse by creating a greater artificial disproportion of consumers' and producers' goods. The worst step would be "a one-sided strengthening of the purchasing power of the consumer, because it was precisely this disproportional increase of demand for consumers' goods which precipitated the crisis."[36]

Mr. Hoover's War on the Stock Market

During 1932, President Hoover greatly stepped up his one-man war on the stock market, particularly on shortsellers, whom he na?vely and absurdly persisted in blaming for the fall in stock prices. Hoover forgot that bulls and bears always exist, and that for every bear bet there must be an offsetting bull, and also forgot that speculation smooths fluctuations and facilitates movement toward equilibrium. On February 16, Hoover called in the leaders of the New York Stock Exchange and threatened governmental coercion unless it took firm action against the "bears," the shortsellers. The Exchange tried to comply, but not aggressively enough for Hoover, who declared himself unsatisfied.

Having warned the Exchange of a Congressional investigation, Hoover induced the Senate to investigate the Stock Exchange, even though he admitted that the Federal Government had no constitutional jurisdiction over a purely New York institution. The President used continual pressure to launch the investigation of what he termed "sinister" "systematic bear raids," "vicious pools . . . pounding down" security prices, "deliberately making a profit from the losses of other people." Beside such demagogic rhetoric, constitutional limitations seemed pale indeed. Secretary of Commerce Lamont protested against the investigation, as did many New York bankers, but Hoover was not to be dissuaded. In answering the New York bankers, Hoover used some unknown crystal ball to assert that present prices of securities did not represent "true values." The stock market viciously persisted in judging stocks according to their earnings, a useful criterion that Hoover seemed to find vaguely traitorous:

the pounding of prices to a basis of earnings by obvious manipulation of the market and propaganda that values should be based on earnings at the bottom of a depression is an injury to the country and to the investing public.

Instead, the public should be "willing to invest on the basis of the future of the United States."

Hoover's persistent calumniation of the "rottenness" of the stock market finally bore fruit in the Senate investigation which led to the resignation of Albert Wiggin of the Chase National Bank, and blackmailed the stock-exchange generally-with clearcut, negative effects on business confidence. The stock exchange was bullied into restricting short-selling, and Hoover went on to propose further controls of the stock market, in anticipation of the later Securities and Exchange Commission (SEC); including compulsory stock prospectuses, increased liability of promoters, and Congressional rules for security exchanges. It is no wonder that Hoover later had a decidedly benign attitude toward the New Deal's SEC.

The Home Loan Bank System

President Hoover, we remember, had wanted to establish a grandiose mortgage discount bank system to include all financial institutions, but the rejection of the scheme by insurance companies forced him to limit compulsory coverage to the building-and-loan associations. The Federal Home Loan Bank Act was passed in July, 1932, establishing 12 district banks ruled by a Federal Home Loan Bank Board in a manner similar to the Federal Reserve System. $125 million capital was subscribed by the Treasury, and this was subsequently shifted to the RFC. Hoover complained that Congress hamstrung his program by limiting discounted mortgages to 50 percent of value, whereas Hoover had wanted mortgages to be discounted up to 80 percent of value. In August, Hoover set up national business and industrial committees to aid small business and to spur use of the new system. Addressing a conference of these committees on August 26, the President proclaimed the necessity of coordinating individual action with governmental activity to aid recovery, and "to give you the opportunity to organize for action."

The new Home Loan Bank System took a while to get started, opening formally on October 15, and not lending at all until December. At the beginning of 1933, total loans were only $838 thousand outstanding, but by March all the district banks were operating, and the total reached almost $94 million by the end of the year.[37]

The Bankruptcy Law

Another part of the Hoover New Deal message of 1932 that finally bore fruit was amendment of the Federal bankruptcy law to weaken the property rights of creditors. If there is to be a bankruptcy law at all, with the debtor summarily freed from much of his self-incurred obligation (which in itself is highly dubious, unless creditor and debtor had contracted for such forgiveness beforehand), then certainly minimum justice to the creditor would permit him to take over the debtor's assets. But President Hoover thought even this excessive, and in his annual messages of 1932 and 1933 urged amendments weakening the rights of the creditor. These important innovations were debated in Congress, and only approved for individuals on March 1, 1933, and signed by Hoover in one of his last acts as President. Congress did not approve similar changes for corporations until the advent of the Roosevelt New Deal.

The amendments now permitted a majority of creditors, in amount and in number, to accept deals preferred by the insolvent debtor for extending the time for payment without parting with "his" assets. As a result, a minority of creditors who would want instant redemption of their own rightful property were now robbed of their proper claims. If there must be majority-rule voting among creditors at all (and this seems odd since the individual creditors had no say originally on how much credit was to be borrowed or from whom), then surely the only proper course is to go immediately into bankruptcy, with each creditor quickly obtaining his proper individual share of the debtor's assets. Otherwise, the minority creditor has been despoiled, and now owns virtually nothing.

Debtor sentiment was typified by the Cleveland Trust Company's Business Bulletin, which called for a bill to "prevent dissenting members from successfully opposing" "orderly reorganization" of corporations. President Hoover's 1933 message called for the measure as "a matter of the most vital importance." It was necessary, apparently, to crush "the obstruction of minority creditors who oppose such settlements in the hope that fear of ruinous liquidation will induce the immediate settlement of their claims"—apparently a vaguely traitorous position to hold.[38]The bankruptcy changes were opposed vigorously by the nation's bankruptcy lawyers, who particularly attacked the creation of a large bureaucracy of bankruptcy administrators and examiners in the Department of Justice, as well as the unwarranted governmental interference in the relations of debtors and creditors.[39]

The Fight Against Immigration

Undaunted by his failure of the year before, Hoover again pressed for legal suspension of immigration in the 1932 session, and the 90 percent reduction bill was introduced again. This time the reduction was to be permanent, not just temporary; the chief argument was economic. The A.F. of L., the American Legion, and various patriotic societies supported the bill, but Representative Dickstein (D., N.Y.) managed to bottle up the bill in the House Committee. On the other hand, bills by Dickstein to admit more relatives than the administration was allowing, underwent attack by the State Department, and no action was taken in Congress, one Dickstein bill passing the House but failing in the Senate.

Thus, Hoover failed to get suspension of immigration into law, but he accomplished practically the same end by administrative fiat, and, in his fall campaign for reelection, he pointed with pride to his achievement, and prepared to continue his anti-immigration policy until the depression was over.[40]


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

  2. See 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.

  3. Congressional 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.

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

  5. It 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.

  6. See 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.

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

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

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

  10. 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

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

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

  13. See Vladimir D. Kazak?vich, "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.

  14. Dr. 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.

  15. Senator 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.

  16. See 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.

  17. The 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.

  18. Flynn, 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.

  19. J. Franklin Ebersole, "One Year of the Reconstruction Finance Corporation," Quarterly Journal of Economics (May, 1933): 464-87.

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

  21. Costigan 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.

  22. Particularly 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.

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

  24. The 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.

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

  26. To 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.

  27. Seymour 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.

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

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

  30. 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

  31. New 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.

  32. Ibid., pp. 675-76.

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

  34. The group of economists included:

  35. 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

  36. H. Parker Willis, "Federal Reserve Policy in Depression," in Wright, ed., Gold and Monetary Stabilization, pp. 77-108.

  37. Gottfried von Haberler, "Money and the Business Cycle," in ibid., pp. 43-74.

  38. Speaking 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.

  39. Another 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).

  40. See J.E. McDonough, "The Federal Home Loan Bank System," American Economic Review (December, 1934): 668-85.

  41. The 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.

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

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