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NOTE 43. The Hoover Fed: Harrison and Young

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The Hoover Fed, Harrison and Young

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While Secretary of Commerce, Herbert Hoover had been a severe critic of Strong's inflationary policies.

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Unfortunately, however, Hoover was in favor of a different form of easy money and cheap credit.

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When he became president, he tried, like King Canute, to hold back the tides by continuing to generate cheap bank credit,

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and then using, quote, moral suasion to exhort banks and other lenders not to lend money for the purchase of stock.

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Hoover suffered from the fallacious view that industrial credit was productive and, quote, legitimate,

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while financial, stock market credit was, quote, unproductive.

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Moreover, he believed that valuable capital funds somehow got lost or, quote, absorbed in the stock market

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Roy Young, Hoover's new appointee as governor of the Federal Reserve Board, suffered from the same fallacious view.

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Partly responsible for the Hoover-Bankers'

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Partly responsible for the Hoover administration's adopting this policy was the wily manipulator

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Montague Norman, head of the Bank of England and close friend of the late Benjamin Strong,

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who had persuaded Strong to inflate credit in order to help England's disastrous gold

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exchange policy.

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Norman, it might be added, was very close to the Morgan-Grenfell Bank.

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By June 1929, it was clear that the absurd policy of moral suasion had failed.

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Seeing the handwriting on the wall, Norman switched and persuaded the Fed to resume its

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old policy of inflating reserves through subsidizing the acceptance market by purchasing all acceptances

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offered at a subsidized rate, a policy the Fed had abandoned in the spring of 1928.

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Despite this attempt to keep the boom going, however, the money supply in the United States

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This leveled off by the end of 1928 and remained more or less constant from then on.

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This ending of the massive credit expansion boom made a recession inevitable and sure

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enough the American economy began to turn down in July 1929.

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Feverish attempts to keep the stock market boom going, however, managed to boost stock

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prices while the economic fundamentals were turning sour, leading to the famous stock

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Black Market Crash of October 24th.

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This crash was an event for which Herbert Hoover was ready.

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For a decade, Herbert Hoover had urged that the United States break its age-old policy

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of not intervening in cyclical recessions.

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During the post-war 1920 to 1921 recession, Hoover, as Secretary of Commerce, had unsuccessfully

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urged President Harding to intervene massively in the recession, to quote, do something to

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to Cure the Depression, in particular, to expand credit and to engage in a massive public

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works program.

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Although the United States got out of the recession on its own, without massive intervention,

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Hoover vowed that next time it would be different.

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In late 1928, after he was elected president, Hoover presented a public works scheme, the

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Hoover Plan for Permanent Prosperity for a Pact to Outlaw Depression to the Conference of Governors

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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.

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William T. Foster was the theoretician and Waddell Catchings the financier of the duo.

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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.

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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.

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Hooks.

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Hoover himself recalls that he was the very first president to consider himself responsible

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for economic prosperity, quote, therefore we had to pioneer a new field, end quote.

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Hoover's admiring biographers correctly state that quote, President Hoover was the first

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president in our history to offer federal leadership in mobilizing the economic resources

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of the people, end quote.

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The major opponent of this new status dogma was Secretary of the Treasury Mellon, who,

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though one of the leaders in pushing the boom, now at least saw the importance of liquidating

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the malinvestments, inflated costs, prices, and wage rates of the inflationary boom.

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Mellon, indeed, correctly cited the successful application of such laissez-faire policy in

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in Previous Recessions and Crises.

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But Hoover overrode Mellon with the support of Treasury Undersecretary Ogden Mills.

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If Hoover stood ready to impose an expansionist and interventionist New Deal, Morgan man George

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L. Harrison, head of the New York Fed and major power in the Federal Reserve, was all

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the more ready to inflate.

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During the week of the crash, the last week of October, the Fed doubled its holdings of

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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.

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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.

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Of this increase, $1.6 billion were increased deposits of the New York City banks.

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In addition, Harrison drove down interest rates, lowering its discount rates to banks from 6% to 4.5% in a few weeks.

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Weeks.

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Harrison conducted these actions with a will, overriding the objections of Federal Reserve

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Board Governor Roy Young, proclaiming that, quote, the stock exchange should stay open

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at all costs, end quote, and announcing, quote, gentlemen, I am ready to provide all the reserve

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funds that may be needed, end quote.

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By mid-November, the great stock break was over, and the market, artificially buoyed

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and Stimulated by Expanding Credit began to move upward again.

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With the stock market emergency seemingly over, bank reserves were allowed to decline

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by the end of November by about $275 million to just about the level before the crash.

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By the end of the year, total bank reserves at $2.35 billion were almost exactly the same

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as they had been the day before the crash or at the end of November with total bank

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Bank deposits increasing slightly during this period.

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But while the aggregates of factors determining reserves were the same, their distribution

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was very different.

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Fed ownership of government securities had increased by $375 million during these two

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months from the level of $136 million before the crash.

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But the expansion had been offset by lower bank loans from the Fed, by greater money

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Money in Circulation, and by people drawing $100 million of gold out of the banking system.

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In short, the Fed tried its best to inflate a great deal more, but its expansionary policy

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was partially thwarted by increasing caution and by withdrawal of money from the banking

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system by the general public.

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Here we see, at the very beginning of the Hoover era, the spuriousness of the monetarist

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It's legend that the Federal Reserve was responsible for the great contraction of money

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from 1929 to 1933.

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On the contrary, the Fed and the administration tried their best to inflate, efforts foiled

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by the good sense and by the increasing distrust of the banking system, of the American people.

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At any rate, even though the Fed had not managed to inflate the money supply further, President

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Hoover was proud of his experiment in cheap money and of the Fed's massive open market

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Purchases.

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In a speech to a conference of industrial leaders he had called together in Washington

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on December 5th, the president hailed the nation's good fortune in possessing the

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splendid Federal Reserve system, which had succeeded in saving shaky banks, restoring

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confidence, and making capital more abundant by lowering interest rates.

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Hoover had personally done his part by urging banks to discount more at the Fed, while Secretary

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Murray Mellon reverted to his old Pollyanna mode in assuring one and all that there was

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quote, plenty of credit available.

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Hoover admirer William Green, head of the American Federation of Labor, proclaimed

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that the quote, Federal Reserve system is operating, serving as a barrier against financial

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demoralization.

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Within a few months, industrial conditions will become normal, confidence and stabilization

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and Industry and Finance will be restored."

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By the end of 1929, Roy Young and other Fed officials favored pursuing a laissez-faire

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policy to let the money market sweat it out and reach monetary ease by the wholesome process

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of liquidation.

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Once again, however, Harrison and the New York Fed overruled Washington and instituted

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a massive easy money program.

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Inflation rates of the New York Fed fell from 4.5% in February to 2% at the end of 1930.

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Other short-term interest rates fell similarly.

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Once again, the New York Fed led the inflationist parade by purchasing $218 million of government

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securities during the year.

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The resulting increase of $116 million in bank reserves, however, was offset by bank

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failures in the latter part of the year, and by enforced contraction on the part of the

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The Shaky Banks Remaining in Business

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As a result, total money supply remained constant throughout 1930.

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Expansion was also cut short by the fact that the stock market boom-lit early in the year

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had collapsed by the spring.

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During the year, however, Montague Norman was able to achieve part of his long-standing

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wish for formal collaboration between the world's major central banks.

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German pushed through a new Central Banker's Bank, the Bank for International Settlements,

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or BIS, to meet regularly at Basel and to provide regular facilities for cooperation.

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While the suspicious Congress forbade the Fed from joining the BIS formally, the New

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York Fed and its allied Morgan interests were able to work closely with the new bank.

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The BIS indeed treated the New York Fed as if it were the central bank of the United

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States.

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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.

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Unsurprisingly, J.P. Morgan and company supplied much of the capital for the new BIS.

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New BIS.

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And even though there was no legislative sanction for U.S. participation in the bank, New York

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Fed Governor George Harrison made a quote, regular business trip abroad in the fall to

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confer with the other central bankers.

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And the New York Fed extended loans to the BIS during 1931.

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Late 1930 was perhaps the last stand of the laissez-faire, sound money liquidationists.

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Professor H. Parker Willis, a tireless critic of the Fed's inflationism and credit expansion,

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attacked the current easy money policy of the Fed in an editorial in the New York Journal

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of Commerce.

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Willis pointed out that the Fed's easy money policy was actually bringing about the

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rash of bank failures because of the bank's, quote, inability to liquidate their unsound

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loans and assets.

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Douglas noted that the country was suffering from frozen, wasteful malinvestments in plants,

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buildings and other capital and maintained that the Depression could only be cured when

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these unsound credit positions were allowed to liquidate.

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Similarly, Albert Wiggin, head of the Chase National Bank, clearly reflecting the courageous

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and uncompromising views of the Chase Bank's chief economist, Dr. Benjamin M. Anderson,

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announced the Hoover policy of propping up wage rates and prices in depressions and of

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pursuing inflationary cheap money saying, quote, our depression has been prolonged and

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not alleviated by delay in making necessary readjustments, end quote.

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On the other hand, Business Week, then as now a spokesman for quote enlightened business

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In August 1930, however, President Hoover took another decisive step in favor of inflationism

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by replacing Roy Young as Chairman of the Federal Reserve Board by the veteran speculator

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and Government Official, Eugene Meyer, Jr.