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5

The Development of the Inflation

We have seen how the leading factors in the changing of reserves played their roles during the boom of the 1920s. Treasury currency played a considerable part in the early years, due to the silver purchase policy inherited from the Wilson Administration. Bills discounted were deliberately spurred throughout the period by the Federal Reserve's violation of central banking tradition in keeping rediscount rates below the market. Acceptances were subsidized outrageously, with the Federal Reserve deliberately keeping acceptance rates very low and buying all the acceptances offered at this cheap rate by the few leading acceptance houses. Open-market purchase of government securities began as a means of adding to the earning assets of the Federal Reserve Banks, but was quickly continued as a means of promoting monetary expansion. We may now turn from the anatomy of the inflation of the 1920s, to a genetic discussion of the actual course of the boom, including an investigation of some of the reasons for the inflationary policy.

Foreign Lending

The first inflationary spurt, in late 1921 and early 1922—the beginning of the boom—was led, as we can see in Table 7, by Federal Reserve purchases of government securities. Premeditated or not, the effect was welcome. Inflation was promoted by a desire to speed recovery from the 1920-1921 recession. In July, 1921, the Federal Reserve announced that it would extend further credits for harvesting and agricultural marketing, up to whatever amounts were legitimately required. Soon, Secretary Mellon was privately proposing that business be further stimulated by cheap money.[1]

Another motive for inflation was one we shall see recurring as a constant and crucial factor in the 1920s: a desire to help foreign governments and American exporters (particularly farmers). The process worked as follows: inflation and cheap credit in the United States stimulated the floating of foreign loans in the U.S. One of Benjamin Strong's major motives for open-market purchases in 1921-1922 was to stimulate foreign lending. Inflation also helped to check the inflow of gold from Europe and abroad, an inflow caused by the fiat money inflation policies of foreign countries, which drove away gold by raising prices and lowering interest rates. Artificial stimulation of foreign lending in the U.S. also helped increase or sustain foreign demand for American farm exports.

The first great boom in foreign borrowing therefore coincided with the Federal Reserve inflation of latter 1921 and early 1922. The fall in bond yields during this period stimulated a surge in foreign lending, U.S. government yields falling from 5.27 percent in June 1921 to 4.24 percent in June, 1922 (corporate bonds fell from 7.27 percent to 5.92 percent in the same period). Foreign bond flotations, about $100 million per quarter-year during 1920, doubled to about $200 million per quarter in the latter part of 1921. This boom was helped by "a deluge of statements from official, industrial, and banking sources setting forth the economic necessity to the United States of foreign lending."[2]

The 1921-1922 inflation, in sum, was promoted in order to relieve the recession, stimulate production and business activity, and aid the farmers and the foreign loan market.

In the spring of 1923, the Federal Reserve substituted credit restraint for its previous expansion, but the restraint was considerably weakened by an increase in Reserve discounts, spurred by the rediscount rate being set below the market. Nevertheless, a mild recession ensued, continuing until the middle of 1924. Bond yields rose slightly, and foreign lending slumped considerably, falling below a rate of one hundred million dollars per quarter during 1923. Particularly depressed were American agricultural exports to Europe. Certainly part of this slump was caused by the Fordney-McCumber Tariff of September 1922, which turned sharply away from the fairly low Democratic tariff and toward a steeply protectionist policy.[3] Increased protection against European manufactured goods delivered a blow to European industry, and also served to keep European demand for American exports below what it would have been without governmental interference.

To supply foreign countries with the dollars needed to purchase American exports, the United States government decided, not sensibly to lower tariffs, but instead to promote cheap money at home, thus stimulating foreign borrowing and checking the gold inflow from abroad. Consequently, the resumption of American inflation on a grand scale in 1924 set off a foreign lending boom, which reached a peak in mid-1928. It also established American trade, not on a solid foundation of reciprocal and productive exchange, but on a feverish promotion of loans later revealed to be unsound.[4] Foreign countries were hampered in trying to sell their goods to the United States, but were encouraged to borrow dollars. But afterward, they could not sell goods to repay; they could only try to borrow more at an accelerated pace to repay the loans. Thus, in an indirect but nonetheless clear manner, American protectionist policy must shoulder some of the responsibility for our inflationist policy of the 1920s.

Who benefitted, and who was injured, by the policy of protection cum inflation as against the rational alternative of free trade and hard money? Certainly, the bulk of the American population was injured, both as consumers of imports and as victims of inflation and poor foreign credit and later depression. Benefitted were the industries protected by the tariff, the export industries uneconomically subsidized by foreign loans, and the investment bankers who floated the foreign bonds at handsome commissions. Certainly, Professor F.W. Fetter's indictment of America's foreign economic policy in the 1920s was not overdrawn:

Producers in those lines in which foreigners were competing with us were "taken care of" by high tariffs, promises of still higher tariffs from the Tariff Commission if "needed," and those interested in foreign trade were told how the Department of Commerce was going to open up huge foreign markets. Foreign loans were glorified by the same political leaders who wanted bigger and better trade restrictions, entirely oblivious to the problems involved in the repayment of such loans. . . . A tremendous volume of foreign loans made possible exports far in excess of imports . . . and Secretary Mellon and other defenders of this tariff policy pointed the finger of ridicule at those who had prophesied that the Fordney-McCumber Act would have an injurious effect upon our foreign trade.[5]

The Republican administration, often wrongly considered to be a "laissez-faire" government, actually intervened actively in foreign lending throughout the 1920s. Foreign loans had been rare in the United States before the World War, and the United States government had no statutory peacetime authority to interfere with them in any way. And yet the government did intervene, though illegally. On May 25, 1921, President Harding and his cabinet held a conference with several American investment bankers, at the instigation of Secretary of Commerce Hoover, and Harding asked to be informed in advance of all public flotations of foreign bonds, so that the government "might express itself regarding them."[6] The bankers agreed. The state had been set for this meddling at a Cabinet meeting five days before, where:

The Cabinet discussed the problem of favoring exports and the desirability of the application of the proceeds of foreign loans made in our own financial markets for the purpose of exporting our commodities.[7]

In short, the Cabinet wished that banks floating foreign loans provide that part of the proceeds be spent in the United States. And Herbert Hoover was so enthusiastic about subsidizing foreign loans that he commented that even bad loans helped American exports and thus provided a cheap form of relief and employment—a "cheap" form that later brought expensive defaults and financial distress.[8]

In January, 1922, Secretary of Commerce Hoover prevailed on American investment bankers to agree that agents of the Department of Commerce would first investigate conditions in countries requesting foreign loans, whether the would-be borrowers were private or public. The applicant would also have to promise to purchase materials in the United States, and the fulfillment of this agreement would be inspected by an American commercial attach? in the borrowing country. Happily, little came of this agreement. In the meanwhile, the Harding request was repeatedly ignored, and consequently the State Department sent a circular letter to the investment bankers in March, 1922, repeating the Presidential request, admitting that it was legally unenforceable, but declaiming that "national interests" required that the State Department offer its objections to any bond issue. During April and May, Secretary Hoover protested the bankers' reluctance, and urged that banks be ordered to establish his desired rules for foreign loans, else Congress would assume control. Harding and Coolidge, however, contented themselves with a far milder form of informal intimidation.

Often the government, when challenged, denied any attempt at dictation over foreign loans. But the State Department admitted several times that it was exercising beneficial control, and admitted it had objected to a number of loans. The most noteworthy ban was on all loans to France, a punishment levied because France was still in debt to the American government. It was a ban which the bankers were often able to evade. Secretary of State Kellogg favored, but could not obtain, outright legal regulation of foreign lending.

Knowing that the State Department was intervening in foreign lending, the American public erroneously began to believe that every foreign loan had the Federal government's seal of approval and was therefore a good buy. This, of course, stimulated reckless foreign lending all the more.

The foreign lending of the 1920s was almost all private. In 1922, however, in a harbinger of much later developments, Secretary of State Hughes urged Congress to approve a direct governmental loan of five million dollars to Liberia, but the Senate failed to ratify it.

Helping Britain

The great expansion of 1924 was designed not only to stimulate loans to foreign countries but also to check their drains of gold to the United States.[9] The drains arose, primarily, from the inflationary policies of the foreign countries. Great Britain, in particular, faced a grave economic problem. It was preparing to return to the gold standard at the pre-war par (the pound sterling equaling approximately $4.87), but this meant going back to gold at an exchange rate higher than the current free-market rate. In short, Britain insisted on returning to gold at a valuation that was 10-20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business. But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic large-scale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts). As a result, Great Britain tended to lose gold. Instead of repealing unemployment insurance, contracting credit, and/or going back to gold at a more realistic parity, Great Britain inflated her money supply to offset the loss of gold and turned to the United States for help. For if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States. In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.[10]

The American government lost no time in rushing to the aid of Britain. The "isolationism" of U.S. foreign policy in the 1920s is almost wholly a myth, and nowhere is this more true than in economic and financial matters. The 1927 conference between the leading central bankers that led to the inflation of that year has become famous; less well known is the fact that close collaboration between Benjamin Strong, Governor of the Federal Reserve Bank of New York, and Montagu Norman, head of the Bank of England, began much earlier. On Norman's appointment as Governor during the War, Strong hastened to promise him his services. In 1920, Norman began taking annual trips to America to visit Strong, and Strong took periodic trips to visit Europe. All of these consultations were kept highly secret and were always camouflaged as "visiting with friends," "taking a vacation," and "courtesy visits." The Bank of England gave Strong a desk and a private secretary for these occasions, as did the Bank of France and the German Reichsbank. These consultations were not reported to the Federal Reserve Board in Washington.[11] Furthermore, the New York Bank and the Bank of England kept in close touch via weekly exchange of private cables.

As the eminent French economist Charles Rist, who represented the Bank of France at some of the important inter-Central Bank conferences, has declared:

The idea of cooperation among the central banks of different countries, to arrive at a common monetary policy, was born rather soon after the war. Before then, this cooperation had only been exceptional and sporadic.[12]

As early as 1916, Strong began private correspondent relations with the Bank of England, as well as with other European Central Banks. In the summer of 1919, Strong was already contemplating a secret conference of central bankers, and, moreover, was already worried about American interest rates being higher than the British, and thinking of arrangements with the Bank of England to remedy this condition, thus foreshadowing the later agreements to inflate in America in order to aid Britain.[13] In November, 1921 Strong offered Norman a dollar-stabilization scheme, in the course of which the Federal Reserve would lend dollars to Britain, Holland, Scandinavia, Japan, and Switzerland; but Norman turned the proposal down.[14]

In 1925, the year Britain returned to the gold standard, the United States helped greatly. As a direct measure, the New York Bank extended Britain a line of credit for gold of up to $200 million.[15] At the same time, J.P. Morgan and Company authorized a similar credit of $100 million to the British government, a loan that would have been subsidized (if it had ever been used) by the Federal Reserve. Both loans were arranged by Strong and Norman in early January, 1925, and were warmly approved by Secretary of Treasury Mellon, Governor Crissinaer, and unanimously by the Federal Reserve Board.[16] Similar lines of credit were extended to bolster the Central Banks of Belgium ($10 million in 1926), Poland ($5 million in 1927), and Italy ($15 million in 1927).

More insidious and damaging was aiding Britain by inflating in the U.S. The 1924 expansion in America was much more than coincidence with preparation for Britain's return to gold. For the pound sterling had fallen to $4.44 in mid-1922, and by mid-1924 was in even worse shape at $4.34. At that point, matters took a decisive turn. American prices began to rise [due to the American inflation]. . . . In the foreign exchange markets a return to gold at the old parity was anticipated. The sterling-dollar exchange appreciated from $4.34 to $4.78. In the spring of 1925, therefore, it was thought that the adjustment between sterling and gold prices was sufficiently close to warrant a resumption of gold payments at the old parity.[17]

That this result was brought about deliberately through credit expansion in America, is clear from a letter from Strong to Mellon in the spring of 1924, outlining the necessity of raising American price levels relative to Great Britain's and of lowering American interest rates, to enable Britain to return to gold. For higher American price levels would divert foreign trade balances from the United States to England, while lower interest rates would similarly divert capital balances. Lower interest rates, being a more immediate outcome of credit expansion, received more attention. Strong concluded this letter as follows:

the burden of this readjustment must fall more largely upon us than upon them [Great Britain]. It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England . . . in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.[18]

It is clear that by late 1924, the foreign exchange market saw that the United States was inflating in order to help Britain, and, anticipating success, raised the pound nearly up to its prewar par—an appreciation caused by governmental action rather than by the fundamental economic realities. The Federal Reserve certainly kept its part of the rather one-sided bargain. Whereas throughout 1922 and 1923 the interest rate on bills in New York had been above the rate in London, the Federal Reserve managed to push these rates below those of London by mid-1924. As a result, the gold inflow into the United States, of which about 40 percent had been coming from Great Britain, was checked for a time.[19] As we have seen, U.S. lending abroad was also greatly stimulated, thus providing Europe with longer-term funds.

Inflationary measures to aid foreign governments also spurred farm exports, since foreign countries could now expand their purchases of American farm products. Farm prices rose in the latter half of 1924, and the value of farm exports increased by over 20 percent from 1923-1924 to 1924-1925. Yet, despite all the aid, we cannot say that the farmers particularly benefited from the foreign economic policies of the 1920s as a whole, since the protective tariff injured foreign demand for American products.

Instead of being grateful to the United States for its monetary policy, Europe carped continually during the 1920s because America wasn't inflating enough. Even in the intimate Norman-Strong partnership, it is clear that, in the early years especially, Norman was continually trying to prod Strong into a more inflationary stance. In the 1919-1920 era, before the joint inflationary policy had begun, Norman's Treasury colleague Basil Blackett urged Strong to let American prices "rise a little more"—and this in the middle of a postwar boom in America. Later, the British urged looser credit conditions in the U.S., but Strong was rather reluctant during this early period.

In February, 1922, Norman hailed the easy credit in America during the previous few months, and urged a further inflationary fall in interest rates to match the burgeoning credit expansion in Britain. At that time, Strong refused to inflate further, and Norman continued to pepper Strong during 1922 and 1923 with expressions of his displeasure at the American failure to expand credit. But in 1924, helped by the siren song of Britain's return to the "gold standard" and by a mild recession at home, Strong capitulated, so much so that by October Norman was jauntily telling Strong, "You must continue with easy money and foreign loans and we must hold on tight until we know . . . what the policy of this country is to be."[20] And yet, Norman was not fully satisfied with his American servitor. Privately, he joined the general European opinion in criticizing the United States for violating the alleged "rules of the gold standard game," by not inflating in multiple proportion to the gold flowing into its coffers.[21]

This standard argument, however, completely misconceives the role and function of the gold standard and governmental responsibility under it. The gold standard is not some sort of "game," to be played among several countries according to some mythical "rules." Gold is simply the monetary medium, and the duty of government is to leave the people free to do with the gold as they see fit. It is therefore its corollary duty not to inflate the money supply beyond the gold stock or to stimulate and encourage such inflation. If the money supply is already inflated, it is at least its responsibility not to inflate further. Whether money should be deflated back to the gold level is a more difficult question which we need not discuss here. If gold flows into a country, the government should welcome the opportunity to raise the gold deposit ratio, and thereby reduce the counterfeit proportion in the nation's supply of money. Countries "lose gold" (since the drain is voluntary it cannot be a true "loss") as a consequence of inflationary policies by their governments. These policies induce heavy domestic spending abroad (necessarily with gold) and discourage the nation's export trade. If European countries disliked losing gold to the United States, their governments should have contracted and not inflated their money supply. Certainly it is absurd, though convenient, to pin the blame for the consequences of a government's unsound policies upon the relatively sounder policies of another government.

The nobility of the American aim to help Europe return to the gold standard becomes even more questionable when we realize that Europe never did return to a full gold standard. Instead, it adopted a "gold bullion" standard, which prohibited gold coinage, thus restricting gold convertibility to heavy bars suitable only for large international transactions. Often it chose a "gold exchange" standard, under which a nation keeps its reserves not in gold but in a "hard" currency like dollars. It then redeems its units only in the other country's harder currency. Clearly, this system permits an international "pyramiding" of inflation on the world's given stock of gold. In both the gold bullion and the gold exchange standards, the currency is virtually fiat, since the people are de facto prohibited from using gold as their medium of exchange. The use of the term "gold standard" by foreign governments in the 1920s, then, was more of a deception than anything else. It was an attempt to draw to the government the prestige of being on the gold standard, while actually failing to abide by the limitations and requirements of that standard. Great Britain, in the late 1920s, was on a gold bullion standard, and most other "gold standard countries" were on the gold exchange standard, keeping their titles to gold in London or New York. The British position, in turn, depended on American resources and lines of credit, since only America was on a true gold standard.

Thus, the close international Central Bank collaboration of the 1920s created a false era of seemingly sound prosperity, masking a dangerous worldwide inflation. As Dr. Palyi has declared, "The gold standard of the New Era was managed enough to permit the artificial lengthening and bolstering of the boom, but it was also automatic enough to make inevitable the eventual failure."[22] The pre-war standard, Palyi points out, had been autonomous; the new gold standard was based on the political cooperation of central banks, which "impatiently fostered a volume of credit flow without regard to its economic results." And Dr. Hardy justly concluded, "International cooperation to support the gold standard . . . is the maintenance of a cheap money policy without suffering the loss of gold."[23]

The fountainhead and inspiration of the financial world of the 1920s was Great Britain. It was the British government that conceived the system of inter-central bank cooperation, and that persuaded the United States to follow its lead. Britain originated the policy as a means of (temporarily) evading its own economic dilemmas, yet proclaimed it in the name of "humanitarian reconstruction." England, like the United States, also used cheap credit to lend widely to Continental Europe and thus promote its own flagging export market, hobbled by high costs imposed by excessive union wage rates.

In addition, Great Britain persuaded other European countries to adopt the gold exchange standard instead of the full gold standard, in order to promote its own "economic imperialism," i.e., to spur British exports to the Continent by inducing other countries to return to gold at overvalued exchange rates. If other countries overvalued their currencies vis-à-vis sterling, then British exports would be bolstered. (Britain showed little concern that exports from the Continent would be correspondingly hampered.) The abortive and inflationary gold exchange standard permitted countries to return to gold (at least nominally) earlier and at a higher exchange rate than they otherwise would have essayed.[24] Other countries were pressured by Great Britain to remain on the gold bullion standard, as she was, rather than proceed onward to restore a full gold-coin standard. To cooperate in international inflation, it was necessary to keep gold from domestic circulation, and to hoard it instead in Central Bank vaults. As Dr. Brown wrote:

In some countries the reluctance to adopt the gold bullion standard was so great that some outside pressure was needed to overcome it . . . i.e., strong representations on the part of the Bank of England that such action would be a contribution to the general success of the stabilization effort as a whole. Without the informal pressure . . . several efforts to return in one step to the full gold standard would undoubtedly have been made.[25]

One important example of such pressure, joined in force by Benjamin Strong, occurred in the spring of 1926, when Norman induced Strong to support him in fiercely opposing a plan of Sir Basil Blackett's to establish a full gold-coin standard in India. Strong went to the length of traveling to England to testify against the measure, and was backed up by Andrew Mellon and aided by economists Professor Oliver M.W. Sprague of Harvard, Jacob Hollander of Johns Hopkins, and W. Randolph Burgess and Robert Warren of the New York Reserve Bank. The American experts warned that the ensuing gold drain to India would cause deflation in other countries (i.e., reveal their existing over-inflation), and suggested instead a gold exchange standard and domestic "economizing" of gold (i.e., economizing for credit expansion). In addition, they urged wider banking and central banking facilities in India (i.e., more Indian inflation), and advocated continued use of a silver standard in India so as not to disrupt American silver interests by going off silver and thus lowering the world silver price.[26]

Norman was grateful to his friend Strong for helping defeat the Blackett Plan for a full Indian gold standard. To the objections of some Federal Reserve Board members to Strong's meddling in purely foreign affairs, the formidable Secretary Mellon ended the argument by saying that he had personally asked Strong to go to England and testify.

To his great credit, Dr. Hjalmar Schacht, in addition to opposing our profligate loans to local German governments, also sharply criticized the new-model gold standard. Schacht vainly called for a return to the true gold standard of old, with capital exports financed by genuine voluntary savings, and not by fiat bank credit.[27]

A caustic but trenchant view of the financial imperialism of Great Britain in the 1920s was expressed in the following entry in the diary of Emile Moreau, Governor of the Bank of France:

England having been the first European country to reestablish a stable and secure money has used that advantage to establish a basis for putting Europe under a veritable financial domination. The Financial Committee [of the League of Nations] at Geneva has been the instrument of that policy. The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control. The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England, and the deposit of a part of the reserve of the central bank at the Bank of England, which serves both to support the pound and to fortify British influence. To guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York. Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantage of these operations.

England is thus completely or partially entrenched in Austria, Hungary, Belgium, Norway, and Italy. She is in the process of entrenching herself in Greece and Portugal. . . . The currencies [of Europe] will be divided into two classes. Those of the first class, the dollar and the pound sterling, based on gold, and those of the second class based on the pound and dollar—with a part of their gold reserves being held by the Bank of England and the Federal Reserve Bank of New York, the latter moneys will have lost their independence.[28]

The motives for the American inflation of 1924, then, were to aid Great Britain, the farmers, and, in passing, the investment bankers, and finally, to help reelect the Administration in the 1924 elections. President Coolidge's famous assurance to the country about low discount rates typified the political end in view. And certainly the inflation was spurred by the existence of a mild recession in 1923-1924, during which time the economy was trying to adjust to the previous inflation of 1922. At first, the 1924 expansion accomplished what it had intended—gold inflow into the United States was replaced by a gold drain, American prices rose, foreign lending was stimulated, interest rates were lowered, and President Coolidge was triumphantly reelected. Soon, however, with the exception of the last-named, the effects of the expansion dissipated, and prices in America began to fall once more, gold flowed in heavily again, etc. American farm product prices, which had risen from an index of 100 in 1924 to 110 the year later, dropped back again to 100 in 1926. Exports for farm and food products, which had reached a peak during 1925, also fell sharply in the following year. In sum, the American economy entered into another mild recession in the fall of 1926, continuing on into 1927. Britain was in particularly bad straits, addicted to cheap credit, yet suffering chronic unemployment and continual drains of gold. But Great Britain insisted on continuing its policy of cheap money and credit expansion—an insistence of the British government rather than its private bankers.[29]

Britain's immediate problem stemmed directly from her insistence on continuing cheap money. The Bank of England had lowered its discount rate from 5 percent to 4? percent in April, 1927, in a vain attempt to stimulate British industry.[30] This further weakened the pound sterling, and Britain lost $11 million in gold during the next two months, and the Bank of France, in a strong creditor position, tried to redeem its sterling in gold.[31] Instead of tightening credit and raising interest rates sharply to meet this gold drain, as canons of sound monetary policy dictated, Great Britain turned to its old partner in inflation, the Federal Reserve System. The stage was clearly set once more, according to the logic of the American and British money managers, for another great dose of credit expansion in the United States.

Accordingly, Governor Montagu Norman, the Mephistopheles of the inflation of the 1920s, conferred with Strong and Moreau, of the Bank of France, in Paris. He tried a variety of pressures during 1927 to dissuade the Bank of France from selling its sterling balances for gold-balances which, after all, were of little use to the French.[32] Norman also tried to induce the French to do some inflating themselves, but Moreau was not a Benjamin Strong. Instead, he not only remained adamant, but urged Norman to allow Britain's loss of gold to tighten credit and raise interest rates in London (thus checking British purchase of francs). But Norman was committed to a cheap money policy.

Strong, on the contrary, leaped to Britain's aid. Trying to bolster sterling, he used American gold to ease the gold premium in Britain and also purchased some sterling bills to aid his ally. And, furthermore, Strong and Norman organized the famous inter-central bank conference at New York, in July, 1927. The conference was held in camera, and included Norman, Strong, and representatives from the Bank of France and the German Reichsbank: Deputy Governor Charles Rist, and Dr. Schacht respectively. Strong ran the American side with an iron hand, and even refused to permit Mr. Gates McGarrah, Chairman of the Board of the Federal Reserve Bank of New York, to attend the meeting. The Federal Reserve Board in Washington was left in the dark, and was allowed only a brief courtesy call from the distinguished guests. The conference was held at the Long Island estates of Undersecretary of the Treasury Ogden Mills and of Mrs. Ruth Pratt of the wealthy Standard Oil family.

Norman and Strong tried mightily to induce Rist and Schacht to go along with a general four-country inflation, but the latter two vigorously declined. Schacht continued his determined opposition to inflation and artificially cheap money, and expressed his alarm at the inflationary trend. Rist demurred also, and both Rist and Schacht left for home. Rist agreed, however, to buy gold from New York instead of London, thus easing the pressure on England to redeem its obligations. The New York Reserve Bank, in turn, agreed to supply France with gold at a subsidized rate: as cheap as the cost of buying it from England, despite the higher transport costs.

Remaining to weld their inflationary pact, Norman and Strong agreed to embark on a mighty inflationary push in the United States, lowering interest rates and expanding credit—an agreement which Rist maintains was concluded before the four-power conference had even begun. Strong had gaily told Rist that he was going to give "a little coup de whiskey to the stock market."[33] Strong also agreed to buy $60 million more of sterling from the Bank of England.

The British press was delighted with this fruit of the fast Norman-Strong friendship, and flattered Strong fulsomely. As early as mid-1926, the influential London journal, The Banker, had said of Strong that "no better friend of England" existed, had praised the "energy and skillfullness that he has given to the service of England," and had exulted that "his name should be associated with that of Mr. [Walter Hines] Page as a friend of England in her greatest need."[34]

In response to the agreement, the Federal Reserve promptly launched a great burst of inflation and cheap credit in the latter half of 1927. Table 8 shows that the rate of increase of bank reserves was the greatest of the 1920s, largely because of open-market purchases of government securities and of bankers' acceptances. Rediscount rates were also lowered. The Federal Reserve Bank of Chicago, not under the domination of the Bank of England, balked vigorously at lowering its rate, but was forced to do so in September by the Federal Reserve Board. The Chicago Tribune called angrily for Strong's resignation, and charged that discount rates were being lowered in the interests of Great Britain. The regional Reserve Banks were told by Strong that the new burst of cheap money was designed to help the farmers rather than England, and this was the reason proclaimed by the first bank to lower its discount rate—not New York but Kansas City. The Kansas City Bank had been picked by Strong as the "stalking-horse" of the new policy, in order to give as "American" a flavor as possible to the entire proceeding. Governor Bailey of the Kansas City Bank had no inkling of the aid-to-Britain motive behind the new policy, and Strong took no pains to enlighten him.[35]

Perhaps the sharpest critic of the inflationary policies within the Coolidge administration was Secretary Hoover, who privately did his best to check the inflation from 1924 on, even going so far as to denounce Strong as a "mental annex to Europe." Hoover was overruled by Strong, Coolidge, and Mellon, with Mellon denouncing Hoover's "alarmism" and interference. Mellon was Strong's staunchest supporter in the administration throughout the entire period. Unfortunately for later events, Hoover—like most of Strong's academic critics—attacked only stock-market credit expansion rather than expansion per se.

The reasons for Strong's devious and secret methods, as well as the motives for his inflationary policies, have been no better described than in a private memorandum by one of Strong's staff. In the spring of 1928, Strong firmly rejected the idea of an open, formal conference of world central banks, and, in the words of his assistant:

He [Strong] was obliged to consider the viewpoint of the American public, which had decided to keep the country out of the League of Nations to avoid interferences by other nations in its domestic affairs, and which would be just as opposed to having the heads of its central banking system attend some conference or organization of the world banks of issue. . . . To illustrate how dangerous the position might become in the future as a result of the decisions reached at the present time and how inflamed public or political opinion might easily become when the results of past decisions become evident, Governor Strong cited the outcry against the speculative excesses now being indulged in on the New York market. . . . He said that very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis.[36]

In short, in our supposed democracy, if the people were allowed to know what had been transacted in their name and what penalties they were subsequently being forced to pay, they would rise up in their wrath. Better to keep the people in ignorance. This, of course, is the familiar attitude of the bureaucrat in power. But what of the fundamental question it raises for democracy itself: how can the people decide upon issues or judge their presumed representatives, if the latter insist on keeping vital information from them?

Strong himself, furthermore, did not realize how heavy a penalty the American public would be forced to pay in 1929. He died before the crisis came. If the public had at last been let in on the truth of Strong's actions and their consequences, perhaps, during the depression, they would have become "inflamed" against inflationary government intervention rather than against the capitalist system.

After generating the 1927 inflation, the New York Federal Reserve Bank, for the next two years, bought heavily in prime commercial bills of foreign countries, bills endorsed by foreign central banks. The purpose was to bolster foreign currencies, and to prevent an inflow of gold to the United States. The New York Bank frankly described its policy as follows:

We sought to support exchanges by our purchases and thereby not only prevent the withdrawal of further amounts of gold from Europe but also, by improving the position of the foreign exchanges, to enhance or stabilize Europe's power to buy our exports.

Those decisions were taken by the New York Reserve Bank alone, and the foreign bills were then distributed pro rata to the other Reserve Banks.[37]

While the New York Reserve Bank was the main generator of inflation and cheap credit, the Treasury also did its part. As early as March 1927, Secretary Mellon assured everyone that "an abundant supply of easy money" was available—and in January 1928, the Treasury announced that it would refund a 4? percent Liberty Bond issue, falling due in September, into 3? percent notes.[38]

Again, the inflationary policy was temporarily successful in achieving its goals. Sterling was strengthened, the American gold inflow was sharply reversed and gold flowed outward. Farm product prices rose from 99 in 1927 to 106 the following year. Farm and food exports spurted upward, and foreign loans were stimulated to new heights, reaching a peak in mid-1928.[39] But by the summer of 1928, the pound sterling was sagging again. American farm prices fell slightly in 1929, and the value of agricultural exports also fell in the same year. Foreign lending slumped badly as both domestic and foreign funds poured into the booming American stock market. The higher interest rates caused by the boom could no longer be lower than in Europe, unless the FRS was prepared to continue inflating, perhaps at an accelerated rate. Instead, as we shall see below, it tried to curb the boom. As a result, funds were attracted to the United States, and by mid-1928, gold began to flow in again from abroad. And, by this time, England was back in its familiar mess, but now more aggravated than before.

The Crisis Approaches

By now, the final phase of the great American boom was under way, led by the stock market. While a stock market loan is no more inflationary than any other type of business loan, it is equally inflationary, and therefore credit expansion in the stock market deserves censure in precisely the same way, and to the same extent, as any other quantity of inflated credit. Hence, the mischievous inflationary effect of the 1927 statements by Coolidge and Mellon who functioned as the "capeadores" of the bull market. We have also seen that the Federal Reserve Bank of New York effectively set the call rates for loans to the stock market, in cooperation with the money committee of the New York Stock Exchange, its policy being to furnish any funds necessary to enable the banks to lend readily to the market. The Bank, in short, used Wall Street banks to pour funds into the stock market. The call rate, as we have noted, stayed very far below its prewar levels and peaks.

Alarmed at the burgeoning boom, and at the stock prices that rose about 20 percent in the latter half of 1927, the Fed reversed its policy in the spring of 1928, and tried to halt the boom. From the end of December 1927, to the end of July 1928, the Reserve reduced total reserves by $261 million. Through the end of June, total demand deposits of all banks fell by $471 million. However, the banks managed to shift to time deposits and even to overcompensate, raising time deposits by $1.15 billion. As a result, the money supply still rose by $1.51 billion in the first half of 1928, but this was a relatively moderate rise. (This was a rise of 4.4 percent per annum, compared to an increase of 8.1 percent per annum in the last half of 1927, when the money supply rose by $2.70 billion.) A more stringent contraction by the Federal Reserve—one enforced, for example, by a "penalty" discount rate on Reserve loans to banks—would have ended the boom and led to a far milder depression than the one we finally attained. In fact, only in May did the contraction of reserves take hold, for until then the reduction in Federal Reserve credit was only barely sufficient to overcome the seasonal return of money from circulation. Thus, Federal Reserve restrictions only curtailed the boom from May through July.

Yet, even so, the vigorous open market sales of securities and drawing down of acceptances hobbled the inflation. Stock prices rose only about 10 percent from January to July.[40] By mid-1928, the gold drain was reversed and a mild inflow resumed. If the Federal Reserve had merely done nothing in the last half of 1928, reserves would have moderately contracted, due to the normal seasonal increase in money in circulation.

At this point, true tragedy struck. On the point of conquering the boom, the FRS found itself hoisted by its own acceptance policy. Knowing that the Fed had pledged itself to buy all acceptances offered, the market increased its output of acceptances, and the Fed bought over $300 million of acceptances in the last half of 1928, thus feeding the boom once more. Reserves increased by $122 million, and the money supply increased by almost $1.9 billion to reach its virtual peak at the end of December 1928. At this time, total money supply had reached $73 billion, higher than at any time since the inflation had begun. Stock prices, which had actually declined by 5 percent from May to July, now really began to skyrocket, increasing by 20 percent from July to December. In the face of this appalling development, the Federal Reserve did nothing to neutralize its acceptance purchases. Whereas it had boldly raised rediscount rates from 3? percent at the beginning of 1928 to 5 percent in July, it stubbornly refused to raise the rediscount rate any further, and the rate remained constant until the end of the boom. As a result, discounts to banks increased slightly rather than declined. Furthermore, the Federal Reserve did not sell any of its more than $200 million stock of government securities; instead it bought a little on net balance in the latter half of 1928.

Why was Federal Reserve policy so supine in the latter part of 1928? One reason was that Europe, as we have noted, had found the benefits from the 1927 inflation dissipated, and European opinion now clamored against any tighter money in the U.S.[41] The easing in late 1928 prevented gold inflows into the U.S. from getting very large. Great Britain was again losing gold and sterling was weak once more. The United States bowed once again to its overriding wish to see Europe avoid the inevitable consequences of its own inflationary policies. Governor Strong, ill since early 1928, had lost control of Federal Reserve policy. But while some disciples of Strong have maintained that he would have fought for tighter measures in the latter half of the year, recent researches indicate that he felt even the modest restrictive measures pursued in 1928 to be too severe. This finding, of course, is far more consistent with Strong's previous record.[42]

Another reason for the weak Federal Reserve policy was political pressure for easy money. Inflation is always politically more popular than recession, and this, let us not forget, was a presidential election year. Furthermore, the Federal Reserve had already begun to adopt the dangerously fallacious qualitativist view that stock credit could be curbed at the same time that acceptance credit was being stimulated.[43]

The inflation of the 1920s was actually over by the end of 1928. The total money supply on December 31, 1928 was $73 billion. On June 29, 1929, it was $73.26 billion, a rise of only 0.7 percent per annum. Thus, the monetary inflation was virtually completed by the end of 1928. From that time onward, the money supply remained level, rising only negligibly. And therefore, from that time onward, a depression to adjust the economy was inevitable. Since few Americans were familiar with the "Austrian" theory of the trade cycle, few realized what was going to happen.

A great economy does not react instantaneously to change. Time, therefore, had to elapse before the end of inflation could reveal the widespread malinvestments in the economy, before the capital goods industries showed themselves to be overextended, etc. The turning point occurred about July, and it was in July that the great depression began.

The stock market had been the most buoyant of all the markets—this in conformity with the theory that the boom generates particular overexpansion in the capital goods industries. For the stock market is the market in the prices of titles to capital.[44] Riding on the wave of optimism generated by the boom and credit expansion, the stock market took several months after July to awaken to the realities of the downturn in business activity. But the awakening was inevitable, and in October the stock market crash made everyone realize that depression had truly arrived.

The proper monetary policy, even after a depression is underway, is to deflate or at the least to refrain from further inflation. Since the stock market continued to boom until October, the proper moderating policy would have been positive deflation. But President Coolidge continued to perform his "capeadore" role until the very end. A few days before leaving office in March he called American prosperity "absolutely sound" and stocks "cheap at current prices."[45] The new President Hoover was unfortunately one of the staunch supporters of the sudden try at "moral suasion" in the first half of 1929, which failed inevitably and disastrously. Both Hoover and Governor Roy Young of the Federal Reserve Board wanted to deny bank credit to the stock market while yet keeping it abundant to "legitimate" commerce and industry. As soon as Hoover assumed office, he began the methods of informal intimidation of private business which he had tried to pursue as Secretary of Commerce.[46] He called a meeting of leading editors and publishers to warn them about high stock prices; he sent Henry M. Robinson, a Los Angeles banker, as emissary to try to restrain the stock loans of New York banks; he tried to induce Richard Whitney, President of the New York Stock Exchange, to curb speculation. Since these methods did not attack the root of the problem, they were bound to be ineffective.

Other prominent critics of the stock market during 1928 and 1929 were Dr. Adolph C. Miller, of the Federal Reserve Board, Senator Carter Glass (D., Va.), and several of the "progressive" Republican senators. Thus, in January, 1928, Senator LaFollette attacked evil Wall Street speculation and the increase in brokers' loans. Senator Norbeck counseled a moral suasion policy a year before it was adopted, and Federal Reserve Board member Charles S. Hamlin persuaded Representative Dickinson of Iowa to introduce a bill to graduate bank reserve requirements in proportion to the speculative stock loans in the banks' portfolios. Senator Glass proposed a 5 percent tax on sales of stock held less than 60 days—which, contrary to Glass's expectations, would have driven stock prices upward by discouraging stockholders from selling until two months had elapsed.[47] As it was, the federal tax law, since 1921, had imposed a specially high tax rate on capital gains from those stocks and bonds held less than two years. This induced buyers to hold on to their stocks and not sell them after purchase since the tax was on realized, rather than accrued, capital gains. The tax was a factor in driving up stock prices further during the boom.[48]

Why did the Federal Reserve adopt the "moral suasion" policy when it had not been used for years preceding 1929? One of the principal reasons was the death of Governor Strong toward the end of 1928. Strong's disciples at the New York Bank, recognizing the crucial importance of the quantity of money, fought for a higher discount rate during 1929. The Federal Reserve Board in Washington, and also President Hoover, on the other hand, considered credit rather in qualitative than in quantitative terms. But Professor Beckhart adds another possible point: that the "moral suasion" policy—which managed to stave off a tighter credit policy—was adopted under the influence of none other than Montagu Norman.[49] Finally, by June, moral suasion was abandoned, but discount rates were not raised, and as a result the stock market boom continued to rage, even as the economy generally was quietly but inexorably turning downward. Secretary Mellon trumpeted once again about our "unbroken and unbreakable prosperity." In August, the Federal Reserve Board finally consented to raise the rediscount rate to 6 percent, but any tightening effect was more than offset by a simultaneous lowering of the acceptance rate, thus stimulating the acceptance market yet once more. The Federal Reserve had previously ended the acceptance menace in March by raising its acceptance buying rate above its discount rate for the first time since 1920. The net effect of this unprecedented "straddle" was to stimulate the bull market to even greater heights. The lowering of the Federal Reserve buying rate for acceptances from 5? percent to 5? percent, the level of the open market, stimulated market sales of acceptances to the Federal Reserve. If not for the acceptance purchases, total reserves would have fallen from the end of June to October 23 (the day before the stock market crash) by $267 million. But the Federal Reserve purchased $297 million of acceptances during this period, raising total reserves by $21 million. Table 9 tells the story of this period.

What was the reason for this peculiarly inflationary policy favoring the acceptance market? It fitted the qualitative bias of the administration, and it was ostensibly advanced as a stup to help the American farmer. Yet, it appears that the aid-to-farmers argument was used again as a domestic smokescreen for inflationary policies. In the first place, the increase in acceptance holdings, as compared with the same season the year before, was far more heavily concentrated in purely foreign acceptances and less in acceptances based on American exports. Second, the farmers had already concluded their seasonal borrowing before August, so that they did not benefit one iota from the lower acceptance rates. In fact, as Beckhart points out, the inflationary acceptance policy was reinstituted following "closely upon another visit of Governor Norman."[50] Thus, once again, the cloven hoof of Montagu Norman exerted its baleful influence upon the American scene, and for the last time Norman was able to give an added impetus to the boom of the 1920s. Great Britain was also entering upon a depression, and yet its inflationary policies had resulted in a serious outflow of gold in June and July. Norman was then able to get a line of credit of $250 million

from a New York banking consortium, but the outflow continued through September, much of it to the United States. Continuing to help England, the New York Federal Reserve Bank bought heavily in sterling bills, from August through October. The new subsidization of the acceptance market, then, permitted further aid to Britain through purchase of sterling bills. Federal Reserve policy during the last half of 1928 and 1929 was, in brief, marked by a desire to keep credit abundant in favored markets, such as acceptances, and to tighten credit in other fields, such as the stock market (e.g., by "moral suasion"). We have seen that such a policy can only fail, and an excellent epitaph on these efforts has been penned by A. Wilfred May:

Once the credit system had become infected with cheap money, it was impossible to cut down particular outlets of this credit without cutting down all credit, because it is impossible to keep different kinds of money separated in water-tight compartments. It was impossible to make money scarce for stock-market purposes, while simultaneously keeping it cheap for commercial use. . . . When Reserve credit was created, there was no possible way that its employment could be directed into specific uses, once it had flowed through the commercial banks into the general credit stream.[51]

And so ended the great inflationary boom of the 1920s. It should be clear that the responsibility for the inflation rests upon the federal government—upon the Federal Reserve authorities primarily, and upon the Treasury and the Administration—secondarily.[52] The United States government had sowed the wind and the American people reaped the whirlwind: the great depression.


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

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

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

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

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

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

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

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

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

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

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

  12. Charles Rist, "Notice Biographique," Revue d'?conomie Politique (November- December, 1955): 1005. (Translation mine.)

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

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

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

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

  17. Robbins, The Great Depression, p. 80.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  33. Rist, "Notice Biographique," pp. 1006ff.

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

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

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

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

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

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

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

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

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

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

  43. See Review of Economic Statistics, p. 13.

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

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

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

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

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

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

  50. Ibid., pp. 142ff.

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

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