The Hoover Fed, Harrison and Young
While Secretary of Commerce, Herbert Hoover had been a severe critic of Strong's inflationary policies.
Unfortunately, however, Hoover was in favor of a different form of easy money and cheap credit.
When he became president, he tried, like King Canute, to hold back the tides by continuing to generate cheap bank credit,
and then using, quote, moral suasion to exhort banks and other lenders not to lend money for the purchase of stock.
Hoover suffered from the fallacious view that industrial credit was productive and, quote, legitimate,
while financial, stock market credit was, quote, unproductive.
Moreover, he believed that valuable capital funds somehow got lost or, quote, absorbed in the stock market
Roy Young, Hoover's new appointee as governor of the Federal Reserve Board, suffered from the same fallacious view.
Partly responsible for the Hoover-Bankers'
Partly responsible for the Hoover administration's adopting this policy was the wily manipulator
Montague Norman, head of the Bank of England and close friend of the late Benjamin Strong,
who had persuaded Strong to inflate credit in order to help England's disastrous gold
exchange policy.
Norman, it might be added, was very close to the Morgan-Grenfell Bank.
By June 1929, it was clear that the absurd policy of moral suasion had failed.
Seeing the handwriting on the wall, Norman switched and persuaded the Fed to resume its
old policy of inflating reserves through subsidizing the acceptance market by purchasing all acceptances
offered at a subsidized rate, a policy the Fed had abandoned in the spring of 1928.
Despite this attempt to keep the boom going, however, the money supply in the United States
This leveled off by the end of 1928 and remained more or less constant from then on.
This ending of the massive credit expansion boom made a recession inevitable and sure
enough the American economy began to turn down in July 1929.
Feverish attempts to keep the stock market boom going, however, managed to boost stock
prices while the economic fundamentals were turning sour, leading to the famous stock
Black Market Crash of October 24th.
This crash was an event for which Herbert Hoover was ready.
For a decade, Herbert Hoover had urged that the United States break its age-old policy
of not intervening in cyclical recessions.
During the post-war 1920 to 1921 recession, Hoover, as Secretary of Commerce, had unsuccessfully
urged President Harding to intervene massively in the recession, to quote, do something to
to Cure the Depression, in particular, to expand credit and to engage in a massive public
works program.
Although the United States got out of the recession on its own, without massive intervention,
Hoover vowed that next time it would be different.
In late 1928, after he was elected president, Hoover presented a public works scheme, the
Hoover Plan for Permanent Prosperity for a Pact to Outlaw Depression to the Conference of Governors
Hoover had adopted the scheme of the well-known inflationists Foster and Catchings for a mammoth $3 billion public works plan to stabilize business cycles.
William T. Foster was the theoretician and Waddell Catchings the financier of the duo.
Foster was installed as head of the Pollock Foundation for Economic Research by Catchings, Iron and Steel Magnet, and investment banker at the powerful Wall Street firm of Goldman Sachs.
When the stock market crash came in October 1929, therefore, President Hoover was ready for massive intervention to attempt to raise wage rates, expand credit, and embark on public works.
Hooks.
Hoover himself recalls that he was the very first president to consider himself responsible
for economic prosperity, quote, therefore we had to pioneer a new field, end quote.
Hoover's admiring biographers correctly state that quote, President Hoover was the first
president in our history to offer federal leadership in mobilizing the economic resources
of the people, end quote.
The major opponent of this new status dogma was Secretary of the Treasury Mellon, who,
though one of the leaders in pushing the boom, now at least saw the importance of liquidating
the malinvestments, inflated costs, prices, and wage rates of the inflationary boom.
Mellon, indeed, correctly cited the successful application of such laissez-faire policy in
in Previous Recessions and Crises.
But Hoover overrode Mellon with the support of Treasury Undersecretary Ogden Mills.
If Hoover stood ready to impose an expansionist and interventionist New Deal, Morgan man George
L. Harrison, head of the New York Fed and major power in the Federal Reserve, was all
the more ready to inflate.
During the week of the crash, the last week of October, the Fed doubled its holdings of
The idea was to prevent liquidation for the bloated stock market, and to permit the New York City banks to take over the loans to stockbrokers that the non-bank lenders were liquidating.
As a result, member banks of the Federal Reserve expanded their deposits by $1.8 billion, a phenomenal monetary expansion of nearly 10% in one week.
Of this increase, $1.6 billion were increased deposits of the New York City banks.
In addition, Harrison drove down interest rates, lowering its discount rates to banks from 6% to 4.5% in a few weeks.
Weeks.
Harrison conducted these actions with a will, overriding the objections of Federal Reserve
Board Governor Roy Young, proclaiming that, quote, the stock exchange should stay open
at all costs, end quote, and announcing, quote, gentlemen, I am ready to provide all the reserve
funds that may be needed, end quote.
By mid-November, the great stock break was over, and the market, artificially buoyed
and Stimulated by Expanding Credit began to move upward again.
With the stock market emergency seemingly over, bank reserves were allowed to decline
by the end of November by about $275 million to just about the level before the crash.
By the end of the year, total bank reserves at $2.35 billion were almost exactly the same
as they had been the day before the crash or at the end of November with total bank
Bank deposits increasing slightly during this period.
But while the aggregates of factors determining reserves were the same, their distribution
was very different.
Fed ownership of government securities had increased by $375 million during these two
months from the level of $136 million before the crash.
But the expansion had been offset by lower bank loans from the Fed, by greater money
Money in Circulation, and by people drawing $100 million of gold out of the banking system.
In short, the Fed tried its best to inflate a great deal more, but its expansionary policy
was partially thwarted by increasing caution and by withdrawal of money from the banking
system by the general public.
Here we see, at the very beginning of the Hoover era, the spuriousness of the monetarist
It's legend that the Federal Reserve was responsible for the great contraction of money
from 1929 to 1933.
On the contrary, the Fed and the administration tried their best to inflate, efforts foiled
by the good sense and by the increasing distrust of the banking system, of the American people.
At any rate, even though the Fed had not managed to inflate the money supply further, President
Hoover was proud of his experiment in cheap money and of the Fed's massive open market
Purchases.
In a speech to a conference of industrial leaders he had called together in Washington
on December 5th, the president hailed the nation's good fortune in possessing the
splendid Federal Reserve system, which had succeeded in saving shaky banks, restoring
confidence, and making capital more abundant by lowering interest rates.
Hoover had personally done his part by urging banks to discount more at the Fed, while Secretary
Murray Mellon reverted to his old Pollyanna mode in assuring one and all that there was
quote, plenty of credit available.
Hoover admirer William Green, head of the American Federation of Labor, proclaimed
that the quote, Federal Reserve system is operating, serving as a barrier against financial
demoralization.
Within a few months, industrial conditions will become normal, confidence and stabilization
and Industry and Finance will be restored."
By the end of 1929, Roy Young and other Fed officials favored pursuing a laissez-faire
policy to let the money market sweat it out and reach monetary ease by the wholesome process
of liquidation.
Once again, however, Harrison and the New York Fed overruled Washington and instituted
a massive easy money program.
Inflation rates of the New York Fed fell from 4.5% in February to 2% at the end of 1930.
Other short-term interest rates fell similarly.
Once again, the New York Fed led the inflationist parade by purchasing $218 million of government
securities during the year.
The resulting increase of $116 million in bank reserves, however, was offset by bank
failures in the latter part of the year, and by enforced contraction on the part of the
The Shaky Banks Remaining in Business
As a result, total money supply remained constant throughout 1930.
Expansion was also cut short by the fact that the stock market boom-lit early in the year
had collapsed by the spring.
During the year, however, Montague Norman was able to achieve part of his long-standing
wish for formal collaboration between the world's major central banks.
German pushed through a new Central Banker's Bank, the Bank for International Settlements,
or BIS, to meet regularly at Basel and to provide regular facilities for cooperation.
While the suspicious Congress forbade the Fed from joining the BIS formally, the New
York Fed and its allied Morgan interests were able to work closely with the new bank.
The BIS indeed treated the New York Fed as if it were the central bank of the United
States.
Gates W. McGarra resigned as chairman of the board of the New York Fed in February to assume the position of president of the BIS, while Jackson E. Reynolds, a director of the New York Fed particularly close to the Morgan interests, became chairman of the BIS's organizing committee.
Unsurprisingly, J.P. Morgan and company supplied much of the capital for the new BIS.
New BIS.
And even though there was no legislative sanction for U.S. participation in the bank, New York
Fed Governor George Harrison made a quote, regular business trip abroad in the fall to
confer with the other central bankers.
And the New York Fed extended loans to the BIS during 1931.
Late 1930 was perhaps the last stand of the laissez-faire, sound money liquidationists.
Professor H. Parker Willis, a tireless critic of the Fed's inflationism and credit expansion,
attacked the current easy money policy of the Fed in an editorial in the New York Journal
of Commerce.
Willis pointed out that the Fed's easy money policy was actually bringing about the
rash of bank failures because of the bank's, quote, inability to liquidate their unsound
loans and assets.
Douglas noted that the country was suffering from frozen, wasteful malinvestments in plants,
buildings and other capital and maintained that the Depression could only be cured when
these unsound credit positions were allowed to liquidate.
Similarly, Albert Wiggin, head of the Chase National Bank, clearly reflecting the courageous
and uncompromising views of the Chase Bank's chief economist, Dr. Benjamin M. Anderson,
announced the Hoover policy of propping up wage rates and prices in depressions and of
pursuing inflationary cheap money saying, quote, our depression has been prolonged and
not alleviated by delay in making necessary readjustments, end quote.
On the other hand, Business Week, then as now a spokesman for quote enlightened business
In August 1930, however, President Hoover took another decisive step in favor of inflationism
by replacing Roy Young as Chairman of the Federal Reserve Board by the veteran speculator
and Government Official, Eugene Meyer, Jr.