America's Great Depression (37 page)

Hoover acted quickly and decisively. His most important act was to call a series of White House conferences with the leading financiers and industrialists of the country, to induce them to maintain wage rates and expand their investments. Such artificially induced expansion could only bring losses to business and thereby aggravate the depression. Hoover phrased the general aim of these conferences as “the coordination of business and governmental agencies in concerted action.” The first conference was on November 18, with the presidents of the nation’s major railroads.

Attending for the government were Hoover, Mellon, and Lamont, and also participating was William Butterworth, President of the United States Chamber of Commerce. The railroad presidents promised Hoover that they would expand their construction and maintenance programs, and publicly announced this promise on November 19. Later, the railroad executives met in Chicago to establish a formal organization to carry this program into effect.

The most important White House conference was held on November 21. All the great industrial leaders of the country were there, including such men as Henry Ford, Julius Rosenwald,
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Walter Teagle of Standard Oil, Matthew Sloan, Owen D. Young, Edward Grace, Alfred P. Sloan, Jr., Pierre DuPont, and William Butterworth. The businessmen asked Hoover to stimulate the cooperation of government and industry. Hoover pointed out to them that unemployment had already reached two to three million, that a long depression might ensue, and that wages must be kept up! Hoover

explained that immediate “liquidation” of labor had been the industrial policy of previous depressions; that his every instinct was opposed to both the term and the policy, for labor was not a commodity: it represented human homes. . . . Moreover, from an economic viewpoint such action would deepen the depression by suddenly reducing purchasing power.

Hoover insisted that if wage rates were to be reduced eventually, they must be reduced “no more and no faster than the cost of living had previously fallen, (so that) the burden would not fall primarily on labor.” In short, real wage rates must be prevented from failing. Hoover was insistent that the first shock of the depression must fall on profits and not on wages—precisely the reverse of sound policy, since profits provide the motive power for business activity. At present, then, wage rates should not be reduced at all, and industry should maintain its construction work. Industry should try to keep everyone employed, and any necessary reductions in work should be spread over all employees by reducing the work-week. (Reducing the work-week can only spread unemployment, and prevent that pressure of the unemployed upon wage rates which alone could have restored genuine full employment and equilibrium to the labor market.) If industry followed this course, “great hardship and economic and social difficulties would be avoided.” The industrialists all agreed to carry out the Hoover program, and further organized cooperative efforts on its behalf in a conference in Washington on December 5.

The agreement was also announced publicly, and, in addition, the telephone industry, steel industry, and automobile industry pledged to expand their construction programs. The industrialists at the conference pledged not to cut wages, and recommended that
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all employers in the nation do the same. Henry Ford, in fact, bravely announced a wage
increase
. Nor was industrial cooperation left on a haphazard basis. Representatives of business were appointed to a temporary advisory committee, along with Secretary of Commerce Lamont. The group, along with representatives of various trade associations, then merged into an Executive Committee headed by Mr. Julius Barnes, chairman of the United States Chamber of Commerce, to coordinate industry collaboration on the Hoover program.

On November 22, Hoover called a conference at the White House of leading representatives of the building and construction industries, and they also pledged to maintain wage rates and expand their activity. On November 27, the President called a similar conference of the leading public utility executives, and they unanimously pledged to maintain wage rates and expand construction. The latter included representatives of the American Gas Association, the National Electric Light Association, and the Electric Railways and American Railways Associations.

In a burst of naïveté, Hoover recalls that the nation’s leading labor leaders, called to a White House conference on November 21, also agreed to cooperate in the program and not press for further wage increases, this gesture being presumably a sign of their basic

“patriotism.” These leaders included William Green, Matthew Woll, John L. Lewis, William Hutcheson, A.F. Whitney, and Alvanley Johnston. The agreement put very little strain upon their patriotism, however, since the Hoover program was tailor-made to fit the very doctrine that union leaders had been long proclaiming.

There was no chance of wage
increases
in an unhampered market.

The point is that unions did not have the power to enforce wage
floors
throughout industry (unions in this era being weak, constituting only about 7 percent of the labor force, and concentrated in a few industries), and so the federal government was proposing to do it for them.

But even in an agreement so favorable to unions, the labor leaders were ready to scrap their part of the bargain at the first opportunity. William Green wrote the affiliated unions on November 27,
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emphasizing that the agreement concluded with Hoover was not binding, and assuring his colleagues that they were free to press for higher wage rates in their negotiations.2

In his annual message to Congress on December 3, Hoover pointed out that depressions had always been marked by retrench-ment of construction activity and reduction of wage rates, but now things were different:

I have instituted . . . systematic . . . cooperation with business . . . that wages and therefore earning power shall not be reduced and that a special effort shall be made to expand construction . . . a very large degree of individual suffering and unemployment has been prevented.

On December 5, Hoover called together a larger conference of industrial leaders in Washington, to adopt the Hoover program.

Hoover addressed the conference to hail their agreement, as an advance in the whole conception of the relationship of businesses to public welfare. You represent the business of the United States, undertaking through your own voluntary action to contribute something very definite to the advancement of stability and progress in our economic life. This is a far cry from the arbitrary and dog-eat-dog attitude of the business world of some thirty or forty years ago.

With all the leading industrialists thus pledged to maintain wage rates, expand construction, and share any reduced work, it was no wonder that the American Federation of Labor hailed the new development. Its journal, the
American Federationist
, editorialized on January 1, 1930:

The President’s conference has given industrial leaders a new sense of their responsibilities. . . . Never before have they been called upon to act together . . . in earlier 2Irving Bernstein,
The Lean Years: A History of the American Worker, 1920–1933

(Boston: Houghton Mifflin, 1960), p. 253.

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recessions they have acted individually to protect their own interests and . . . have intensified depressions.3

By the following March, the A.F. of L. was hailing the new attitude toward wages, with employers now realizing—in contrast to the 1921 depression—that it is poor business to destroy consumer purchasing power, and it greeted the fact that not one of the big corporations had thought of lowering wages as a means of reducing unit costs. The A.F. of L. proclaimed that business was now adopting the purchasing-power gospel of W.T. Foster, and stated that the United States will “go down in history as the creator of [an] . . .

epoch in the march of civilization—high wages.”4

INFLATING CREDIT

If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200

million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state. This enormous expansion was generated to prevent liquidation on the stock market and to permit the New York City banks to take over the brokers’ loans that the “other,” non-bank, lenders were liquidating. The great bulk of the increased reserves—all “controlled”—were pumped into New York. As a result, the weekly reporting member banks expanded their deposits during the fateful last week of October by 3In addition to the above sources on the Hoover conferences, see Robert P.

Lamont, “The White House Conferences,”
The Journal of Business
(July, 1930): 269.

4
The American Federationist
37 (March, 1930): 344.

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$1.8 billion (a monetary expansion of nearly 10 percent
in one
week
), of which $1.6 billion were increased deposits in New York City banks, and only $0.2 billion were in banks outside of New York. The Federal Reserve also promptly and sharply lowered its rediscount rate, from 6 percent at the beginning of the crash to 42

percent by mid-November. Acceptance rates were also reduced considerably.

By mid-November, the great stock break was over, and the market, falsely stimulated by artificial credit, began to move upward again.
Standard and Poor’s
stock price monthly averages, which had climbed from 56 in mid-1921 to 238 in September 1929—more than quadrupling—fell to 160 in November, a one-third drop in the course of two months. By the end of the year, stock prices had risen by several points. The stock market emergency over, bank reserves declined to their pre-crash levels. In two weeks—from November 13, when stock prices hit bottom, to November 27—

member bank reserves declined by about $275 millions, or to almost exactly the level existing just before the crash. The decline did not come in securities, which
increased
in the Federal Reserve portfolio from $293 million on October 30 to $326 million a month later—a rise of $33 million. Discounts fell by about $80

million, and acceptances by another $80 million, while money in circulation embarked on its seasonal increase, rising by $70 million. Thus, from the end of October to the end of November,
controlled reserves
were reduced by $111 million (including miscella-neous factors not itemized here); uncontrolled reserves, which were more important, fell by $165 million.

By the end of 1929, total reserves at $2.36 billion were only a little over $20 million below the level of October 23 or November 27

($2.38 billion on each date), but the distribution of factors was considerably different. Thus, while total reserves were almost the same on October 23 and December 31, security holdings had increased by $375 million, more than tripling Reserve holdings of U.S. governments. Total discounts were about $165 million less, acceptances slightly larger, money in circulation higher by over $100 million, and the gold stock down by $100 million. Of the $23

million fall in reserves from October 23 to December 31,
controlled
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reserves increased by $359 million (with government securities the overriding factor), while
uncontrolled
reserves fell by $381 million.

It is evident, therefore, that the failure to inflate reserves over the last quarter of 1929 was no credit of the Federal Reserve, which did its best to increase reserves, but was foiled by the decline in uncontrolled factors. The total money supply, as gauged by member bank demand deposits adjusted and time deposits, increased slightly—by about $300 million—during the final quarter of 1929.

President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates. Hoover had done his part to spur the expansion by personally urging the banks to rediscount more extensively at the Federal Reserve Banks. Secretary Mellon issued one of his by now traditionally optimistic pronouncements that there was “plenty of credit available.” And William Green issued a series of optimistic statements, commending the Federal Reserve’s success in ending the depression. On November 22, Green said: All the factors which make for a quick and speedy industrial and economic recovery are present and evident.

The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored.

PUBLIC WORKS

With Hoover’s views, we would not expect him to delay in sponsoring public works and unemployment relief as aids in curing depressions. On November 23, Hoover sent a telegram to all the governors, urging cooperative expansion of all state public works programs. The governors, including Franklin D. Roosevelt of New York, heartily pledged their cooperation, and on November 24 the Department of Commerce established a definite organization to
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