America’s Money Machine

THE EFFORTS OF THE HOOVER ADMINISTRATION to arrest the spreading business and social disintegration that followed the stock market collapse may be likened to the stand of the Spartans at Thermopylae. Though the issue was never clear-cut, the failure of these efforts marked in a sense the rout of individualism in American life, and the acceptance of the theories of statism, authoritarianism, government planning, group responsibility.

The significance of the event needs a word, for in fact the issue has never been clearly drawn—or clearly understood—in American politics. The Revolutionary War was fought against the encroachments of authoritarian government into what was conceived to be the proper domain of the individual or the community. Yet in the drafting of the Constitution, and in its early interpretation, the influence of those who believed in strong central government was pronounced, and those in opposition, like Jefferson, who put their faith in individual and community decisions, were frequently of mixed mind in the face of particular situations.

Advocates of the individualistic view, under the label of “laissez faire,” have too often been brought to confusion by their faith in the infallible goodness of humankind, and the certainty that the sum of individual actions will result in a general good.

The progress of economic philosophy, however, was to accept the freedom of mankind without the responsibilities which freedom entailed, and in “laissez faire” doctrine teach that the economic system would function best under the natural impulses of man—which were assumed to be good—and without authoritarian interference. Such philosophy ignored the meaning of “original sin” and was therefore defective, and its defects resulted in its ultimate rejection for a return to the pre-Christian and pre-Judaic view of the necessity of authoritarian controls.

This digression into what may be termed theology rather than economics has been necessary to present the dilemma in which President Hoover found himself in his efforts to restore order following the 1929 collapse.

Hoover was dedicated to individualism, though it is not apparent how defined and explicit his convictions were. He was also subject to the political and intellectual currents of his times, and these were already running strongly against individual solutions and in favor of increased governmental and authoritarian intervention. While Secretary of Commerce, Hoover had directed studies to be made to the extent to which the recurrent business cycle could be slowed or modified by countercyclical public work expenditures—hardly anticipating either the extent of the future depression or the magnitude of the adopted remedy.

On November 15, 1929, Hoover announced a conference of leaders of business, industry, and finance, on ways to spur business under private initiative, by expanding construction and maintaining employment and wage rates. He thus indicated where responsible leadership should lie, but at the same time he announced that the government at all levels would assist with building projects.

A preliminary conference of Eastern railway presidents issued a statement that they were “unanimous in their determination to cooperate in the maintenance of employment and business progress. . . . The railways would proceed with full programs of construction, and betterments.”

Among those attending the November 21 conference were such figures as Henry Ford and Alfred P. Sloan, Jr., heads of the automobile industry; Walter Teagle of Standard Oil, representing the petroleum industry; Owen D. Young of General Electric and the electrical utility industry; Walter Gifford, head of the Bell Telephone System; E. G. Grace and Myron Taylor, of the steel industry, and Julius H. Barnes, representing the U. S. Chamber of Commerce. The press statement that followed was reassuring: construction work would be expanded; the Bell system would spend in 1930 more than the $600 million spent in 1929; other utilities would do likewise. While the automobile representatives were less optimistic, Grace and Taylor promised for the steel industry that plant replacements would be made. Most significant was the commitment of these representatives in regard to wages—cautious, and non-committal: “The President was authorized by the employers who were present . . . to state on their individual behalf that they will not initiate any movement for wage reduction.”

Subsequently, the President met with a group of labor leaders headed by William Green, president of the American Federation of Labor, with a resultant statement to the effect that as employers had agreed not to initiate wage reductions labor would not seek wage increases. Henry Ford spectacularly announced that not only was he not reducing wages, but he was raising them.

These conferences were followed by a wire from the President to the governors and mayors urging their cooperation in a program of public works expansion. At the same time he announced a $2 billion program of federal public works.

The editorial of the New York Times on these conferences is a fair summary of the Hoover approach:

For some years, of course, an increasingly influential school of intellectuals had been urging the virtues of state planning, and authoritarian controls, and Hoover himself, as we have noted, had accepted the idea of public works expenditures as a counterbalance to cyclical dips. Now, leaders of the business world, long champions of “private enterprise,” individual effort and “laissez faire,” began to urge the importance of state intervention. Among these was William Randolph Hearst, who in 1931 threw the tremendous influence of his newspaper empire in favor of a $5 1/2 billion dollar public works program. The “progressive” Republican Senator Robert M. La Follette, Jr. of Wisconsin introduced a bill to provide $3,750 million for loans to state and other public bodies for public works, and early in 1932 Democratic Senator Robert F. Wagner (N. Y.), offered a bill providing $750 million as an emergency measure to “prevent starvation and distress in the present crisis.”

Hoover resisted all these efforts to involve the federal government, holding that the principal service the federal government could perform was to balance the budget. This position he held to, and it remained the core of the Administration’s policy until toward the end of 1931. However, the Administration did support certain actions in what had long been accepted as the proper field of government policy. The Federal Reserve attempted to stimulate business by a further lowering of the discount rate from 5 to 4 1/2 per cent and by the open market purchase of $500 million of securities. In December, 1929, Congress authorized, at Administration request, a reduction of 1 per cent in the income tax, and to cope with falling farm prices the Federal Farm Board advanced $500 million to marketing cooperatives.

Meanwhile, the domestic problem was complicated by the economic deterioration abroad, and when the Credit-Anstalt of Austria failed, there began a general crumbling of credit. In June, 1931, Hoover took the initiative in obtaining a one-year moratorium on German reparation payments but on September 21 the over-valued pound sterling became no longer supportable, and England went off the gold standard. Sweden, Norway, Denmark, Finland, Australia, India and Egypt followed in October.

Hoover now responded to the pressure for more decisive government intervention, but again pretty much on his own terms and in line with his views of the limited functions of government. He announced on October 6, 1931, that he would recommend the creation of an agency similar to the War Finance Corporation with “available funds sufficient for any legitimate call in support of credit.”

On January 22, 1932, Congress authorized the Reconstruction Finance Corporation with a limited life of two years (that stretched out for a quarter century and longer) with a revolving lending fund of $2 billion. It could lend to bank and other credit institutions and to railroads, but not to new enterprises.

At the same time, Hoover opposed measures that brought the government in contact with the problems of individuals. He resisted the demand for immediate payment of the veterans’ bonus, which was not due for another fifteen years, and vetoed a bill to lend them half the sums due. He opposed direct unemployment relief, holding this was a state and local responsibility. In July, 1932, however, Hoover did agree to the Emergency Relief and Construction Act which authorized $300 million in loans to states and territories for relief and work relief, and $1 1/2 billion for loans or contracts for various kinds of works projects. The funds were made available through the Reconstruction Finance Corporation and could be lent to states and subdivisions, to regulated housing corporations for slum clearance and for housing low-income groups, and to private corporations for a wide variety of construction projects devoted to public use. The act also authorized some $322 million for emergency construction of certain authorized public works. Finally, it amended Section 13 of the Federal Reserve Act to permit Federal Reserve banks in emergency directly to discount certain classes of eligible paper that formerly came to them through member banks.

By the middle of 1931, the voluntary movement to hold wage levels had broken down, and in September the U. S. Steel Corporation began wage cuts, a policy which soon became general. In harmony with his philosophy, Hoover opposed the rising demand for government unemployment insurance schemes.

At the same time that Hoover, at the cost of his political career, op-posed the spreading demand for government intervention, he approved an amendment to the Federal Reserve Act that laid the foundation for the greatest invasion of government into the economy in American history. Probably he could no longer withstand the rising demand for inflationary measures, particularly in the House of Representatives, which came under Democratic Party control in the 1930 elections.

The existing Federal Reserve statute, as we have noted earlier, required Federal Reserve notes to be backed by 40 per cent gold and 60 per cent eligible short-term commercial paper. This was in accordance with the theory that the circulation should respond to the ebb and flow of commercial transactions requiring cash.

It was now asserted that the note issue power was being restricted by reason of the scarcity of eligible paper. Meantime, federal revenues had fallen drastically, from $4,177 million in 1930 to less than half that in 1932, and there was an urgent need for cash to meet the federal deficit, which amounted to $2.8 billion for the fiscal year 1931 (ending June 30).

The Administration-sponsored Glass-Steagall Act of February 27, 1932, allowed government bonds as a substitute collateral for commercial paper in the note reserve. The act also loosened the eligibility requirement for discount by allowing the Federal Reserve banks to make advances to member banks on their promissory notes secured by any assets satisfactory to the Federal Reserve bank. While this act was a temporary measure, limited to one year, its effects persisted, for it broke the shell of accepted central banking theory that the note issue should be based upon commercial paper. Like many “temporary” and emergency measures, it was repeatedly extended, and eventually made a permanent part of the Federal Reserve System.1

In May, the House passed the Goldsborough Price Stabilization Bill, which would have directed the Federal Reserve authorities to use their power over money and credit to restore and to maintain the pre-depression price level. However, the bill met opposition in the Senate both from Republicans and from conservative Democrats like Carter Glass, now a Senator, and to forestall it, an amendment to the Home Loan Bank bill, known as the Borah-Glass National Bank Note Expansion Amendment, was offered as a substitute. This made eligible as security for national bank notes for a period of 3 years all U. S. Government bonds bearing interest of 3 3/8 per cent or less—totalling then about $3 billion. This permitted, on the basis of the bank capital outstanding, an expansion of about $920 million in the currency.

At the November, 1932, election, the electorate gave a vote of no-confidence in the Hoover Administration and the Hoover policy; and shortly thereafter, by runs on the banks throughout the country, signalled an equal distrust of the incoming administration. Franklin D. Roosevelt stepped forward in the Capitol plaza to take the oath of office in a land in which every bank and credit institution in the country was in default and no check was cashable, no promissory note valid, no government bond or paper redeemable.

Roosevelt, however, held in his hand the power to reopen the banks, to make money again almost as freely available as water. He had the power, through the Federal Reserve System, to manipulate and manage the money system.

Individualism, as a system of philosophy, was about to disappear from American life under the influence of a new exponent of statism—the English economist John Maynard Keynes.

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2It was extended for another year before Hoover left office, subsequently for another year with authority to the President to extend it for an additional two years, and became permanent in the Act of June 12, 1945.

• 1*It was extended for another year before Hoover left office, subsequently for another year with authority to the President to extend it for an additional two years, and became permanent in the Act of June 12, 1945.
• 2The Administration-sponsored Glass-Steagall Act of February 27, 1932, allowed government bonds as a substitute collateral for commercial paper in the note reserve. The act also loosened the eligibility requirement for discount by allowing the Federal Reserve banks to make advances to member banks on their promissory notes secured by any assets satisfactory to the Federal Reserve bank. While this act was a temporary measure, limited to one year, its effects persisted, for it broke the shell of accepted central banking theory that the note issue should be based upon commercial paper. Like many “temporary” and emergency measures, it was repeatedly extended, and eventually made a permanent part of the Federal Reserve System.*