America's Great Depression (32 page)

Newton D. Baker, Secretary of War under Wilson, and Professor James Harvey Rogers of Cornell were two of the early organizers.

Other prominent politicians and economists who played leading roles in the Stable Money League were Professor Jeremiah W.

Jenks, its first president; Henry A. Wallace, editor of
Wallace’s
Farmer
, and later Secretary of Agriculture; John G. Winant, later Governor of New Hampshire; Professor John R. Commons, its second President; George Eastman of the Eastman–Kodak family; Lyman J. Gage, formerly Secretary of the Treasury; Samuel Gompers, President of the American Federation of Labor; Senator Carter Glass of Virginia; Thomas R. Marshall, Vice-President of the United States under Wilson; Representative Oscar W. Underwood; Malcolm C. Rorty; and economists Arthur Twining Hadley,
Theory and Inflation: Economists and the Lure of a Stable Price Level
175

Leonard P. Ayres, William T. Foster, David Friday, Edwin W.

Kemmerer, Wesley C. Mitchell, Warren M. Persons, H. Parker Willis, Allyn A. Young, and Carl Snyder.

The ideal of a stable price level is relatively innocuous during a price rise when it can aid sound money advocates in trying to check the boom; but it is highly mischievous when prices are tending to sag, and the stabilizationists call for inflation. And yet, stabilization is always a more popular rallying cry when prices are falling. The Stable Money League was founded in 1920–1921, when prices were falling during a depression. Soon, prices began to rise, and some conservatives began to see in the stable money movement a useful check against extreme inflationists. As a result, the League changed its name to the National Monetary Association in 1923, and its officers continued as before, with Professor Commons as President. By 1925, the price level had reached its peak and begun to sag, and consequently the conservatives abandoned their support of the organization, which again changed its name to the Stable Money Association. Successive presidents of the new association were H. Parker Willis, John E. Rovensky, Executive Vice-President of the Bank of America, Professor Kemmerer, and

“Uncle” Frederic W. Delano. Other eminent leaders in the Stable Money Association were Professor Willford I. King; President Nicholas Murray Butler of Columbia University; John W. Davis, Democratic candidate for president in 1924; Charles G. Dawes, Director of the Bureau of the Budget under Harding, and Vice-President under Coolidge; William Green, President of the American Federation of Labor; Charles Evans Hughes, Secretary of State until 1925; Otto H. Kahn, investment banker; Frank O. Lowden, former Republican Governor of Illinois; Elihu Root, former Secretary of State and Senator; James H. Rand, Jr.; Norman Thomas, of the Socialist Party; Paul M. Warburg and Owen D. Young. Enlist-ing from abroad came Charles Rist of the Bank of France; Eduard Benes of Czechoslovakia, Max Lazard of France; Emile Moreau of the Bank of France; Louis Rothschild of Austria; and Sir Arthur Balfour, Sir Henry Strakosch, Lord Melchett, and Sir Josiah Stamp of Great Britain. Serving as honorary vice-presidents of the Association were the Presidents of the following organizations: the
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America’s Great Depression

American Association for Labor Legislation, American Bar Association, American Farm Bureau Federation, American Farm Economic Association, American Statistical Association, Brotherhood of Railroad Trainmen, National Association of Credit Men, National Consumers’ League, National Education Association, American Council on Education, United Mine Workers of America, the National Grange, the Chicago Association of Commerce, the Merchants’

Association of New York, and Bankers’ Associations in 43 states and the District of Columbia.

Executive director and operating head of the Association with such formidable backing was Norman Lombard, brought in by Fisher in 1926. The Association spread its gospel far and wide. It was helped by the publicity given to Thomas Edison and Henry Ford’s proposal for a “commodity dollar” in 1922 and 1923. Other prominent stabilizationists in this period were professors George F.

Warren and Frank Pearson of Cornell, Royal Meeker, Hudson B.

Hastings, Alvin Hansen, and Lionel D. Edie. In Europe, in addition to the above mentioned, advocates of stable money included: Professor Arthur C. Pigou, Ralph G. Hawtrey, J.R. Bellerby, R.A.

Lehfeldt, G.M. Lewis, Sir Arthur Salter, Knut Wicksell, Gustav Cassel, Arthur Kitson, Sir Frederick Soddy, F.W. Pethick-Lawrence, Reginald McKenna, Sir Basil Blackett, and John Maynard Keynes. Keynes was particularly influential in his propaganda for a “managed currency” and a stabilized price level, as set forth in his
A Tract on Monetary Reform
, published in 1923.

Ralph Hawtrey proved to be one of the evil geniuses of the 1920s. An influential economist in a land where economists have shaped policy far more influentially than in the United States, Hawtrey, Director of Financial Studies at the British Treasury, advocated international credit control by Central Banks to achieve a stable price level as early as 1913. In 1919, Hawtrey was one of the first to call for the adoption of a gold-exchange standard by European countries, tying it in with international Central Bank cooperation. Hawtrey was one of the prime European trumpeters of the prowess of Governor Benjamin Strong. Writing in 1932, at a time when Robertson had come to realize the evils of stabilization, Hawtrey declared: “The American experiment in stabilization
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177

from 1922 to 1928 showed that an early treatment could check a tendency either to inflation or to depression. . . . The American experiment was a great advance upon the practice of the nineteenth century,” when the trade cycle was accepted passively.11

When Governor Strong died, Hawtrey called the event “a disaster for the world.”12 Finally, Hawtrey was the main inspiration for the stabilization resolutions of the Genoa Conference of 1922.

It was inevitable that this host of fashionable opinion should be translated into legislative pressure, if not legislative action. Rep.

T. Alan Goldsborough of Maryland introduced a bill to “Stabilize the Purchasing Power of Money” in May, 1922, essentially Professor Fisher’s proposal, fed to Goldsborough by former Vice-President Marshall. Witnesses for the bill were Professors Fisher, Rogers, King, and Kemmerer, but the bill was not reported out of committee. In early 1924, Goldsborough tried again, and Rep.

O.B. Burtness of North Dakota introduced another stabilization bill. Neither was reported out of committee. The next major effort was a bill by Rep. James G. Strong of Kansas, introduced in January, 1926, under the urging of veteran stabilizationist George H.

Shibley, who had been promoting the cause of stable prices since 1896. Rather than the earlier Fisher proposal for a “compensated dollar” to manipulate the price level, the Strong Bill would have compelled the Federal Reserve System to act directly to stabilize the price level. Hearings were held from March 1926 until February 1927. Testifying for the bill were Shibley, Fisher, Lombard, Dr.

William T. Foster, Rogers, Bellerby, and Commons. Commons, Rep.

Strong, and Governor Strong then rewrote the bill, as indicated 11Ralph O. Hawtrey,
The Art of Central Banking
(London: Longmans, Green, 1932), p. 300.

12Leading stabilizationist Norman Lombard also hailed Strong’s alleged achievement: “By applying the principles expounded in this book . . . he [Strong]

maintained in the United States a fairly stable price level and a consequent condition of widespread economic well-being from 1922 to 1928.” Norman Lombard,
Monetary Statesmanship
(New York: Harpers, 1934), p. 32n. On the influence of stable price ideas on Federal Reserve policy, see also David A.

Friedman, “Study of Price Theories Behind Federal Reserve Credit Policy, 1921–29” (unpublished M.A. thesis, Columbia University, 1938).

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above, and hearings were held on the second Strong Bill in the spring of 1928.

The high point of testimony for the second Strong Bill was that of Sweden’s Professor Gustav Cassel, whose eminence packed the Congressional hearing room. Cassel had been promoting stabilization since 1903. The advice of this sage was that the government employ neither qualitative nor quantitative measures to check the boom, since these would lower the general price level. In a series of American lectures, Cassel also urged lower Fed reserve ratios, as well as world-wide central bank cooperation to stabilize the price level.

The Strong Bill met the fate of its predecessors, and never left the committee. But the pressure exerted at the various hearings for these bills, as well as the weight of opinion and the views of Governor Strong, served to push the Federal Reserve authorities into trying to manipulate credit for purposes of price stabilization.

International pressure strengthened the drive for a stable price level. Official action began with the Genoa Conference, in the spring of 1922. This Conference was called by the League of Nations, at the initiative of Premier Lloyd George, who in turn was inspired by the dominant figure of Montagu Norman. The Financial Commission of the Conference adopted a set of resolutions which, as Fisher puts it, “have for years served as the potent armory for the advocates of stable money all over the world.”13

The resolutions urged international central bank collaboration to stabilize the world price level, and also suggested a gold -exchange standard. On the Financial Commission were such stabilizationist stalwarts as Sir Basil Blackett, Professor Cassel, Dr. Vissering, and Sir Henry Strakosch.14 The League of Nations, indeed, was quickly taken over by the stabilizationists. The Financial Committee of the League was largely inspired and run by Governor Montagu Norman, working through two close associates, Sir Otto 13Fisher,
Stabilised Money,
p. 282. Our account of the growth of the stable money movement rests heavily upon Fisher’s work.

14While Hawtrey was the main inspiration for the resolutions, he criticized them for not going far enough.

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179

Niemeyer and Sir Henry Strakosch. Sir Henry was, as we have indicated, a prominent stabilizationist.15 Furthermore, Norman’s chief adviser in international affairs, Sir Charles S. Addis, was also an ardent stablizationist.16

In 1921, a Joint Committee on Economic Crises was formed by the General Labour Conference, the International Labour Office (I.L.O.) of the League of Nations, and the Financial Committee of the League. On this Joint Committee were three leading stabilizationists: Albert Thomas, Henri Fuss, and Major J.R. Bellerby. In 1923, Thomas’s report warned that a fall in the price level “almost invariably” causes unemployment. Henri Fuss of the I.L.O. prop-agandized for stable price levels in the
International Labour Review
in 1926. The Joint Committee met in June, 1925, to affirm the principles of the Genoa Conference. In the meanwhile, two private international organizations, the International Association for Labour Legislation and the International Association on Unemployment, held a joint International Congress on Social Policy, at Prague, in October, 1924. The Congress called for the general adoption of the principles of the Genoa Conference, by stabilizing the general price level. The International Association for Social Progress adopted a report at its Vienna meeting in September, 1928, prepared by stabilizationist Max Lazard of the investment banking house of Lazard Frères in Paris, calling for price level stability. The I.L.O. followed suit in June, 1929, terming falling prices a cause of unemployment. And, finally, the Economic Consultative Committee of the League endorsed the Genoa principles in the summer of 1928.

Just as Professors Cassel and Commons wanted no credit restraint at all in 1928 and 1929, so Representative Louis T.

McFadden, powerful chairman of the House Banking and Currency Committee, exerted a similar though more powerful brand of pressure on the Federal Reserve authorities. On February 7, 1929, the day after the Federal Reserve Board’s letter to the Federal 15See Paul Einzig,
Montagu Norman
(London: Kegan Paul, 1932), pp. 67, 78.

16Sir Henry Clay,
Lord Norman
(London: Macmillan, 1957), p. 138.

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Reserve Banks warning about stock market speculation, Representative McFadden himself warned the House against an adverse business reaction from this move. He pointed out that there had been no rise in the commodity price level, so how could there be any danger of inflation? The Fed, he warned skittishly, should not concern itself with the stock market or security loans, lest it produce a general slump. Tighter money would make capital financing difficult, and, coupled with the resulting loss of confidence, would precipitate a depression. In fact, McFadden declared that the Fed should be prepared to ease money rates as soon as any fall in prices or employment might appear.17 Other influential voices raised against any credit restriction were those of W.T. Foster and Waddill Catchings, leading stabilizationists and well known for their underconsumptionist theories. Catchings was a prominent investment banker (of Goldman, Sachs and Co.), and iron and steel magnate, and both men were close to the Hoover Administration.

(As we shall see, their “plan” for curing unemployment was adopted, at one time, by Hoover.) In April, 1929, Foster and Catchings warned that any credit restriction would lower the price level and hurt business. The bull market, they assured the public—

along with Fisher, Commons, and the rest—was grounded on a sure foundation of American confidence and growth.18 And the bull speculators, of course, echoed the cry that everyone should

“invest in America.” Anyone who criticized the boom was considered to be unpatriotic and “selling America short.” Cassel was typical of European opinion in insisting on even greater inflationary moves by the Federal Reserve System. Sir Ralph Hawtrey, visiting at Harvard during 1928–1929, spread the gospel of price-level stabilization to his American audience.19