Morgan’s personal attorney. After Root refused the StateDepartment post, Coolidge was forced to settle for a lesser Mor-gan light, Minnesota attorney Frank B. Kellogg. Undersecretaryto Kellogg was Joseph C. Grew, who had family connectionswith the Morgans (J.P. Morgan, Jr., had married a Grew), while,in 1927, two highly placed Morgan men were asked to take overrelations with troubled Mexico and Nicaragua.6 The year 1924 indeed saw the House of Morgan at the pin-nacle of political power in the United States. President CalvinCoolidge, friend and protégé of Morgan partner Dwight Mor-row, was deeply admired by J.P. “Jack” Morgan, Jr. Jack Mor-gan saw the president, perhaps uniquely, as a rare blend ofdeep thinker and moralist. Morgan wrote a friend: “I havenever seen any president who gives me just the feeling of con-fidence in the country and its institutions, and the working outof our problems, that Mr. Coolidge does.”On the other hand, the House of Morgan faced the happydilemma in the 1924 presidential election that the Democraticcandidate was none other than John W. Davis, senior partner ofthe Wall Street firm of Davis, Polk and Wardwell, and chiefattorney for J.P. Morgan and Company. Davis, a protégé of thelegendary Morgan partner Harry Davison, was also a personalfriend and a backgammon and cribbage partner of Jack Mor-gan’s. It was an embarrassment of riches. Whoever won the1924 election, the Morgans could not lose, although theydecided to opt for Coolidge.76Morgan partner Dwight Morrow became ambassador to Mexico in1927, while Nicaraguan affairs came under the direction of Henry L.Stimson, Wall Street lawyer and longtime leading disciple of Elihu Root,and a partner in Root’s law firm. As for Frank Kellogg, in addition tobeing a director of the Merchants National Bank of St. Paul, he had beengeneral counsel for the Morgan-dominated United States Steel Companyfor the Minnesota region, and most importantly, the top lawyer for rail-road magnate James J. Hill, long closely allied with the Morgan interests.Burch, Elites, 2, pp. 277, 305.7Chernow, House of Morgan, pp. 254–55.
From Hoover to Roosevelt: 269The Federal Reserve and the Financial ElitesHowever, 1928, saw inevitable changes in Morgan domina-tion of monetary policy. Benjamin Strong, sickly all year, died inOctober, and was replaced by George L. Harrison, his hand-picked successor. While Harrison was a devoted “Morgan loy-alist,” he did not quite carry the clout of Benjamin Strong.8The Coolidge administration, too, was coming to an end.The Morgans, again facing an embarrassment of riches, weretorn three ways. Their prime goal was to induce their belovedpresident to break precedent and run for a third term. Notbeing able to persuade Coolidge, the Morgans next turned toVice President Charles G. Dawes, who had been connectedwith various Morgan railroads in Chicago. When Dawesdropped out of the race, the Morgans turned at last to HerbertClark Hoover, who had been a powerful secretary of com-merce during the two Republican administrations of the1920s. While Hoover had not been as intimately connectedwith the Morgans as had Calvin Coolidge, he had long beenclose to the Morgan interests. Particularly influential overHoover during his administration were two unofficial butpowerful advisers—both Morgan partners: Thomas W. Lam-ont, and Dwight Morrow, whom Hoover consulted regularlythree times a week.9Herbert Hoover’s Cabinet was also loaded with Morganpeople. As secretary of state, Hoover chose the longtime Mor-gan lawyer, and disciple and partner of Elihu Root, Henry L.Stimson. Andrew Mellon continued as Treasury secretary, andhis undersecretary, who was to replace Mellon in 1931 andwas close to Hoover, was Ogden L. Mills, a former congress-man and New York corporate lawyer whose father, Ogden L.Mills, Sr., had been a leader of such Morgan railroads as New8Ibid., p. 382.9Lamont was actually able to induce Hoover to conceal Lamont’sinfluence by faking entries in a diary left to historians. Ferguson, “FromNormalcy to New Deal,” p. 79. See also ibid., p. 77; and Burch, Elites, 2,p. 280.
York Central.10Hoover’s secretary of the Navy was CharlesFrancis Adams, III, from the famous Boston Brahmin familylong associated with the Morgans. This particular Adamsdaughter had been fortunate enough to marry Jack Morgan.Benjamin Strong’s monetary policy, throughout his reign,was essentially a Morgan policy. The Morgans, through theirsubsidiary, Morgan, Grenfell in London, had long been inti-mately associated with the British government and with theBank of England. Before World War I, the House of Morgan hadbeen named a fiscal agent of the British Treasury and of theBank of England. After the war began, the Morgans became thesole purchaser of all goods and supplies for the British andFrench war effort in the United States, as well as the monopolyunderwriter in the United States of all British and French bonds.The Morgans played a substantial role in bringing the UnitedStates into the war on Britain’s side, and, as head of the Fed,Benjamin Strong obligingly doubled the money supply tofinance America’s role in the war effort.11After the end of the war, Strong’s monetary policy was delib-erately guided by the prime objective of helping Great Britainestablish, and impose upon Europe, a new and disastrous gold-exchange standard. The idea was to restore “England”—whichreally meant the Morgans’ English associates and allies—to herold position of financial dominance by helping her establish aphony gold standard. Ostensibly this was a return to the prewar“classical” gold standard. But the return, in the spring of 1925,10Mills was a descendant of the highly aristocratic eighteenth-centuryLivingston family of New York, as well as related to the Reids, Morgan-oriented owners of the New York Herald-Tribune. Mills’s first wife was amember of the longtime Morgan-connected Vanderbilt family. SeeJordan A. Schwarz, The Interregnum of Despair: Hoover, Congress, and theDepression (Urbana: University of Illinois Press, 1970), p. 111.11On the Morgan role in pressuring the United States into enteringWorld War I, see the classic work by Charles Callan Tansill, America Goesto War (Boston: Little, Brown, 1938), pp. 67–133.
From Hoover to Roosevelt: 271The Federal Reserve and the Financial Eliteswas at the prewar par, a rate that hopelessly overvalued thepound sterling, which Britain had inflated and depreciated dur-ing the fiat money era after 1914. Britain insisted on returning togold at an overvalued par, a policy guaranteed to hobble Britishexports, and yet was determined to indulge in continued cheapmoney and inflation, instead of contracting its money supply tomake the prewar par viable. To help Britain get away with thispeculiar and contradictory policy, the United States helped topretend that the post-1925 standard in Europe—this gold bul-lion-pound standard—was really a genuine gold-coin standard.The United States inflated its money and credit in order to pre-vent inflationary Britain from losing gold to the United States, aloss which would endanger the new, jerry-built “gold stan-dard” structure. The result, however, was eventual collapse ofmoney and credit in the U.S. and abroad, and a worldwidedepression. Benjamin Strong was the Morgans’ architect of a dis-astrous policy of inflationary boom that led inevitably to bust. THE HOOVER FED: HARRISON AND YOUNGWhile secretary of commerce, Herbert Hoover had been asevere critic of Strong’s inflationary policies. Unfortunately,however, Hoover was in favor of a different form of easy moneyand cheap credit. When he became president, he tried, like KingCanute, to hold back the tides by continuing to generate cheapbank credit, and then using “moral suasion” to exhort banksand other lenders not to lend money for the purchase of stock.Hoover suffered from the fallacious view that industrial creditwas productive and “legitimate” while financial, stock marketcredit was “unproductive.” Moreover, he believed that valuablecapital funds somehow got lost, or “absorbed,” in the stockmarket and therefore became lost to productive credit. Hooveremployed methods of intimidation of business that had beenhoned when he was food czar in World War I and then secretaryof commerce, now trying to get banks to restrain stock marketloans and to induce the New York Stock Exchange to curb spec-ulation. Roy Young, Hoover’s new appointee as governor of the
Federal Reserve Board, suffered from the same fallacious view.Partly responsible for the Hoover administration’s adoptingthis policy was the wily manipulator Montagu Norman, head ofthe Bank of England, and close friend of the late BenjaminStrong, who had persuaded Strong to inflate credit in order tohelp England’s disastrous gold-exchange policy. Norman, itmight be added, was very close to the Morgan, Grenfell bank.By June 1929, it was clear that the absurd policy of moral sua-sion had failed. Seeing the handwriting on the wall, Normanswitched, and persuaded the Fed to resume its old policy ofinflating reserves through subsidizing the acceptance market bypurchasing all acceptances offered at a subsidized rate—a pol-icy the Fed had abandoned in the spring of 1928.13Despite this attempt to keep the boom going, however, themoney supply in the United States leveled off by the end of1928, and remained more or less constant from then on. Thisending of the massive credit expansion boom made a recessioninevitable, and sure enough, the American economy began toturn down in July 1929. Feverish attempts to keep the stockmarket boom going, however, managed to boost stock priceswhile the economic fundamentals were turning sour, leading tothe famous stock market crash of October 24.This crash was an event for which Herbert Hoover wasready. For a decade, Herbert Hoover had urged that the UnitedStates break its age-old policy of not intervening in cyclicalrecessions. During the postwar 1920–1921 recession, Hoover, assecretary of commerce, had unsuccessfully urged PresidentHarding to intervene massively in the recession, to “do some-thing” to cure the depression, in particular to expand credit and13See A. Wilfred May, “Inflation in Securities” in The Economics ofInflation, H. Parker Willis and John M. Chapman, eds. (New York:Columbia University Press, 1935), pp. 292–93; Benjamin H. Beckhart,“Federal Reserve Policy and the Money Market, 1923–1931,” in The NewYork Money Market (New York: Columbia University Press, 1931), 4, pp. 127,142ff.; and Murray N. Rothbard, America’s Great Depression, 4th ed. (NewYork: Richardson and Snyder, 1983), pp. 117–23, 142–43, 148, 151–52.
From Hoover to Roosevelt: 273The Federal Reserve and the Financial Elitesto engage in a massive public-works program. Although theUnited States got out of the recession on its own, without mas-sive intervention, Hoover vowed that next time it would be dif-ferent. In late 1928, after he was elected president, Hoover pre-sented a public works scheme, the “Hoover Plan” for“permanent prosperity,” for a pact to “outlaw depression,” tothe Conference of Governors. Hoover had adopted the schemeof the well-known inflationists Foster and Catchings, for amammoth $3 billion public-works plan to “stabilize” businesscycles. William T. Foster was the theoretician and WaddillCatchings the financier of the duo; Foster was installed as headof the Pollak Foundation for Economic Research by Catchings,iron and steel magnate and investment banker at the powerfulWall Street firm of Goldman, Sachs.14When the stock market crash came in October 1929, there-fore, President Hoover was ready for massive intervention toattempt to raise wage rates, expand credit, and embark on pub-lic works. Hoover himself recalls that he was the very first pres-ident to consider himself responsible for economic prosperity:“therefore, we had to pioneer a new field.” Hoover’s admiringbiographers correctly state that “President Hoover was the firstpresident in our history to offer federal leadership in mobilizingthe economic resources of the people.” Hoover recalls it was a“program unparalleled in the history of depressions.”15Themajor opponent of this new statist dogma was Secretary of theTreasury Mellon, who, though one of the leaders in pushing theboom, now at least saw the importance of liquidating the mal-investments, inflated costs, prices, and wage rates of the infla-tionary boom. Mellon, indeed, correctly cited the successfulapplication of such a laissez-faire policy in previous recessions14William T. Foster and Waddill Catchings, “Mr. Hoover’s Plan: WhatIt Is and What It Is Not—The New Attack on Poverty,” Review of Reviews(April 1929): 77–78. See also Foster and Catchings, The Road to Plenty(Boston: Houghton Mifflin, 1928); and Rothbard, America’s GreatDepression, pp. 167–78.15Rothbard, America’s Great Depression, p. 186.
and crises. But Hoover overrode Mellon, with the support ofTreasury Undersecretary Ogden Mills.If Hoover stood ready to impose an expansionist and inter-ventionist New Deal, Morgan man George L. Harrison, head ofthe New York Fed and major power in the Federal Reserve, wasall the more ready to inflate. During the week of the crash, thelast week of October, the Fed doubled its holdings of govern-ment securities, adding $150 million to bank reserves, as well asdiscounting $200 million more for member banks. The idea wasto prevent liquidation of the bloated stock market, and to permitthe New York City banks to take over the loans to stockbrokersthat the nonbank lenders were liquidating. As a result, memberbanks of the Federal Reserve expanded their deposits by $1.8billion—a phenomenal monetary expansion of nearly 10 per-cent in one week! Of this increase, $1.6 billion were increaseddeposits of the New York City banks. In addition, Harrisondrove down interest rates, lowering its discount rates to banksfrom 6 percent to 4.5 percent in a few weeks.Harrison conducted these actions with a will, overriding theobjections of Federal Reserve Board Governor Roy Young, pro-claiming that “the Stock Exchange should stay open at all costs,”and announcing, “Gentlemen, I am ready to provide all thereserve funds that may be needed.”16By mid-November, the great stock break was over, and themarket, artificially buoyed and stimulated by expanding credit,began to move upward again. With the stock market emergencyseemingly over, bank reserves were allowed to decline, by theend of November, by about $275 million, to just about the levelbefore the crash. By the end of the year, total bank reserves at$2.35 billion were almost exactly the same as they had been theday before the crash, or at the end of November, with total bankdeposits increasing slightly during this period. But while theaggregates of factors determining reserves were the same, theirdistribution was very different. Fed ownership of government16Chernow, House of Morgan, p. 319.
From Hoover to Roosevelt: 275The Federal Reserve and the Financial Elitessecurities had increased by $375 million during these twomonths, from the level of $136 million before the crash, but theexpansion had been offset by lower bank loans from the Fed, bygreater money in circulation, and by people drawing $100 mil-lion of gold out of the banking system. In short, the Fed tried itsbest to inflate a great deal more, but its expansionary policy waspartially thwarted by increasing caution and by withdrawal ofmoney from the banking system by the general public.Here we see, at the very beginning of the Hoover era, the spu-riousness of the monetarist legend that the Federal Reserve wasresponsible for the great contraction of money from 1929 to 1933.On the contrary, the Fed and the administration tried their bestto inflate, efforts foiled by the good sense, and by the increasingdistrust of the banking system, of the American people.At any rate, even though the Fed had not managed to inflatethe money supply further, President Hoover was proud of hisexperiment in cheap money, and of the Fed’s massive open mar-ket purchases. In a speech to a conference of industrial leadershe had called together in Washington on December 5, the presi-dent hailed the nation’s good fortune in possessing the splendidFederal Reserve System, which had succeeded in saving shakybanks, restoring confidence, and making capital more abundantby lowering interest rates. Hoover had personally done his partby urging banks to discount more at the Fed, while SecretaryMellon reverted to his old Pollyanna mode in assuring one andall that there was “plenty of credit available.” Hoover admirerWilliam Green, head of the American Federation of Labor, pro-claimed that the “Federal Reserve System is operating, servingas a barrier against financial demoralization. Within a fewmonths industrial conditions will become normal, confidenceand stabilization in industry and finance will be restored.”17By the end of 1929, Roy Young and other Fed officialsfavored pursuing a laissez-faire policy “to let the money market17Rothbard, America’s Great Depression, pp. 192–93.
‘sweat it out’ and reach monetary ease by the wholesomeprocess of liquidation.”18Once again, however, Harrison and theNew York Fed overruled Washington, and instituted a massiveeasy-money program. Discount rates of the New York Fed fellfrom 4.5 percent in February to 2 percent at the end of 1930.Other short-term interest rates fell similarly. Once again, theNew York Fed led the inflationist parade by purchasing $218million of government securities during the year; the resultingincrease of $116 million in bank reserves, however, was offset bybank failures in the latter part of the year, and by enforced con-traction on the part of the shaky banks remaining in business. Asa result, total money supply remained constant throughout 1930.Expansion was also cut short by the fact that the stock marketboomlet early in the year had collapsed by the spring.During the year, however, Montagu Norman was able toachieve part of his long-standing wish for formal collaborationbetween the world’s major central banks. Norman pushedthrough a new central bankers’ bank, the Bank for InternationalSettlements (BIS), to meet regularly at Basle, and to provide reg-ular facilities for cooperation. While the suspicious Congressforbade the Fed from joining the BIS formally, the New York Fedand its allied Morgan interests were able to work closely withthe new bank. The BIS, indeed, treated the New York Fed as if itwere the central bank of the United States. Gates W. McGarrahresigned as chairman of the board of the New York Fed in Feb-ruary to assume the position of president of the BIS, while Jack-son E. Reynolds, a director of the New York Fed particularlyclose to the Morgan interests, became chairman of the BIS’sorganizing committee.19Unsurprisingly, J.P. Morgan and Com-pany supplied much of the capital for the new BIS. And eventhough there was no legislative sanction for U.S. participation in18Benjamin M. Anderson, Jr., Economics and the Public Welfare (NewYork: D. Van Nostrand, 1949), pp. 222–23.19Reynolds was affiliated with the First National Bank of New York,long a flagship of the Morgan interests.
From Hoover to Roosevelt: 277The Federal Reserve and the Financial Elitesthe bank, New York Fed Governor George Harrison made a“regular business trip” abroad in the fall to confer with the othercentral bankers, and the New York Fed extended loans to theBIS during 1931.20Late 1930 was perhaps the last stand of the laissez-faire,sound-money liquidationists. Professor H. Parker Willis, a tire-less critic of the Fed’s inflationism and credit expansion,attacked the current easy money policy of the Fed in an editorialin the New York Journal of Commerce.21Willis pointed out that theFed’s easy-money policy was actually bringing about the rash ofbank failures, because of the banks’ “inability to liquidate” theirunsound loans and assets. Willis noted that the country was suf-fering from frozen wasteful malinvestments in plants, buildings,and other capital, and maintained that the depression could onlybe cured when these unsound credit positions were allowed toliquidate. Similarly, Albert Wiggin, head of Chase NationalBank, clearly reflecting the courageous and uncompromisingviews of the Chase bank’s chief economist, Dr. Benjamin M.Anderson, denounced the Hoover policy of propping up wage20Rothbard, America’s Great Depression, p. 332.21Willis, professor of banking at Columbia University and editor ofthe Journal of Commerce, had been a student of the great hard-money econ-omist J. Laurence Laughlin at the University of Chicago. Laughlin andWillis were leading proponents of the “real bills” doctrine, the erroneousview that fractional reserve banking is sound and never inflationary, pro-vided that banks confine their lending to short-term business credit thatwould be “self-liquidating” because loaned for inventory (“real goods”)that would be sold shortly. Laughlin and Willis played an influential rolein drafting, and then agitating for, the Federal Reserve System, whichthey expected would be strictly confined to rediscounting short-term“real bills” held by the banks. Willis was a longtime assistant to, and the-oretician for, the powerful Democratic Senator Carter Glass of Virginia,ruling figure on the Senate Banking and Currency Committee.Upon seeing the Fed stray far from his expected policies, H. ParkerWillis, in the 1920s and 1930s, was a tireless and perceptive critic of the infla-tionary policies of the Fed, whether in boom or depression. The criticismwas particularly intense to the extent that the Fed engaged in open market
rates and prices in depressions, and of pursuing inflationarycheap money, saying, “Our depression has been prolonged andnot alleviated by delay in making necessary readjustments.”22On the other hand, Business Week, then as now a spokesmanfor “enlightened” business opinion, thundered in late October1930 that the “deflationists” were “in the saddle.”23In August 1930, however, President Hoover took anotherdecisive step in favor of inflationism by replacing Roy Young aschairman of the Federal Reserve Board by the veteran specula-tor and government official Eugene Meyer, Jr.THE ADVENT OF EUGENE MEYER, JR.Eugene Meyer, Jr., differed from Strong and Harrison in notbeing totally in the Morgan camp. Meyer’s father, an immigrantfrom France, had spent all his life in the employ of the Frenchinternational banking house of Lazard Frères, finally rising tothe post of partner of Lazard’s New York branch. Eugene, Jr.,early broke out from Lazard on his on and became a successfuloperations on government securities, or discounted bank loans to corporatesecurities. On Willis, see Rothbard, America’s Great Depression.After resigning as editor of the Journal of Commerce in May 1931, Williscontinued to slam the inflationist policies of the Fed in the pages of theCommercial and Financial Chronicle during 1931 and 1932. A Willis articlein a French publication in January 1932 upset George Harrison so muchthat he went so far as to plead with Senator Carter Glass to help put anend to “Willis’s rather steady flow of disturbing and alarming articlesabout the American position.” Harrison to Glass, January 16, 1932, citedin Milton Friedman and Anna J. Schwartz, A Monetary History of theUnited States (Princeton, N.J.: National Bureau of Economic Research,1963), pp. 408–09, n. 162.22Commercial and Financial Chronicle 131 (August 2, 1930): 690–91;Commercial and Financial Chronicle 132 (January 17, 1931): 428–29. Eventhough the Chase Bank was still in Morgan control at the time, BenjaminAnderson had always pursued an independent course.23Business Week (October 22, 1930). Rothbard, America’s Great Depression,p. 213.
From Hoover to Roosevelt: 279The Federal Reserve and the Financial Elitesspeculator, investor and financier, an associate of the Morgans,and even more closely an associate of Bernard Baruch andBaruch’s patrons, the powerful Guggenheim family, in virtualcontrol of the American copper industry. It is true, however,that Meyer’s brother-in-law, George Blumenthal, had left thispost at Lazard to be a high official in J.P. Morgan and Company,and that Meyer himself had once acted as a liaison between theMorgans and the French government.24By the 1920s, Meyer’smajor financial base was his control of the mighty integratedchemical firm, Allied Chemical and Dye Corporation.25Before World War I, Meyer’s major financial involvementhad been with the Guggenheims and the copper industry. By1910, he was so prominent in the copper industry that he wasable to arrange a cartel agreement between his old patrons, theGuggenheims, and Anaconda Copper, each agreeing to cut itsproduction by 7.5 percent. In the same year, Meyer discoveredin London a highly productive and profitable new process formining copper, and was quickly able to become its franchiser inthe United States.2624It is also true that Meyer was never particularly close to Blumenthal.Merlo J. Pusey, Eugene Meyer (New York: Alfred A. Knopf, 1974).25The advent of World War I cut the American textile industry off fromthe dyes of the German dye cartel, which had supplied 90 percent of itsdyes. Meyer was astute enough to discover and finance a new dye-mak-ing process invented by a struggling chemist and German dye salesman,Dr. William Beckers, and Meyer quickly set up the Beckers Aniline andChemical Works to sell dyes to the woolen industry. In 1916, Meyerbrought about a merger with another new dye firm selling to the cottonindustry, and with the supplier of aniline oil to both companies, formingthe National Aniline and Chemical Company. Meyer eventually seizedcontrol of National Aniline and Chemical, which made heavy profits dur-ing the war selling blue dyes to the Navy. After the war, Meyer engi-neered the merger of National Aniline with companies making acids,alkalis, coke ovens, chemical by-products, and coal-tars, to form the pow-erful and highly profitable Allied Chemical and Dye Corporation onJanuary 1, 1921. Pusey, Eugene Meyer, pp. 117–25.26Ibid., pp. 82–88.
It should not be surprising, then, that, under the regime ofWorld War I collectivism, Meyer began, first, in early 1917, ashead of the nonferrous metals unit of Bernard Baruch’s RawMaterials Committee under the Advisory Commission of theCouncil of National Defense. The nonferrous metals unitincluded copper, lead, zinc, antimony, aluminum, nickel, andsilver. When the War Industries Board took over the task of col-lectivist planning of industry in August 1917, Meyer assumedthe same task there—and was also to become the virtual “czar”of the copper industry.27More important for his eventual role in the Hoover adminis-tration was Meyer’s crucial part in the War Finance Corporation(WFC). The WFC had been set up by Secretary of the TreasuryMcAdoo in May 1918, ostensibly to finance industries essentialto the war effort. Meyer was named the WFC’s managing direc-tor. The WFC massively subsidized American industry. Duringthe war, it had two basic functions. One was acting as agent ofthe Treasury to prop up the market for U.S. government bonds.During the last six months of the war, Meyer spent $378 millionto keep government bonds from falling by more than one-quar-ter point a day, and later resold the bonds to the Treasury at thecost of purchase.The second and dominant function of the WFC was to subsi-dize and bail out firms and industries in trouble, allegedly“essential” to the war effort. The WFC began with an author-ized capital of $500 million supplied by the Treasury, and withthe power to borrow up to $3 billion through the issue of bonds.Its major focus was on utilities, railroads, and the banks thathad financed them. Banks were also under strain because manyof their savings deposits had been drawn down to help finance27On the Council of National Defense and the War Industries Board,see Murray N. Rothbard, “War Collectivism in World War I,” in ANewHistory of Leviathan: Essays on the Rise of the American State, Ronald Radoshand Murray N. Rothbard, eds. (New York: E.P. Dutton, 1972), pp. 70–83.On Meyer’s role, see Pusey, Eugene Meyer, pp. 137–49.
From Hoover to Roosevelt: 281The Federal Reserve and the Financial Elitesthe federal deficit. All in all, during the war, the WFC madeloans of $71 million, in addition to its bond-price operations.It was clear that the essential mission of the WFC acted as acamouflage for a government subsidy operation. As Meyer’sapproving biographer writes: “The WFC had been created as arescue mission for essential war-disrupted industries, andMeyer had shaped it into a powerful instrument of public pol-icy.”28If the WFC, and for that matter the rest of the apparatus ofwar collectivism, had been strictly war-related, they all wouldhave been dropped swiftly as soon as the Armistice was signedon November 11, 1918. But on the contrary, Baruch, Meyer, theWar Industries Board, and most business leaders were anxiousto continue the benefits of collectivism indefinitely after the warwas over. The goals were twofold: price controls to keep pricesup during the expected postwar recession; and a permanentpeacetime cartelization of American industry enforced by thefederal government. Permanent cartelization was endorsed bythe U.S. Chamber of Commerce and by the National Associa-tion of Manufacturers. President Wilson, however, prompted bySecretary of War Newton D. Baker, insisted on scuttling the WIBby the end of 1918. Other aspects of wartime government inter-ventionism continued on, however, not the least of which wasthe War Finance Corporation.29The War Finance Corporation was a striking example of awartime government agency that refused to die. After thewar, the investment bankers were worried that Europeans,shorn of American aid, would no longer be able to keep up28Pusey, Eugene Meyer, p. 163.29Rothbard, “War Collectivism,” pp. 100–05. On an abortive attemptto continue collectivist planning through the Industrial Board of theDepartment of Commerce, see ibid., pp. 105–08; and Robert F.Himmelberg, “Business, Antitrust Policy, and the Industrial Board of theDepartment of Commerce, 1919,” Business History Review (Spring 1968):1–23.
the bountiful wartime level of American exports. Hence, theMorgans urged their friends in the Treasury Department to usethe WFC to provide credits to finance American exports, specif-ically to pay American exporters and then collect the moneyfrom foreign importers. While the Wilson administration didnot want a permanent government loan program, it persuadedCongress to extend the WFC in March 1919 and to authorize itto lend up to $1 billion over five years to American exportersand to American banks that made export loans.30Particularlyardent in pressuring Congress was WFC head Eugene Meyer,who had been gravely disappointed when the Wilson adminis-tration scuttled the War Industries Board.31Meyer happily plunged into making and encouragingexport loans and, while in Europe for the peace conference, hetried unsuccessfully to pressure British banks into issuing $600million in loans to finance British imports, and to keep theovervalued pound from falling to its market levels. To counterthe dangerously inflationary postwar boom, President Wilsonshifted David F. Houston from the post of agriculture secretaryto Treasury secretary, and Houston boldly set about shiftingAmerica to a more laissez-faire and deflationary course. Meyerworked feverishly to keep the inflationary boom going, theWFC approving loans totaling $150 million to finance theexports of cotton, tobacco, copper, coal, and steel. But TreasurySecretary Houston refused to give Meyer his required approval.30Thomas W. Lamont, Morgan partner, made the proposal to AssistantSecretary of the Treasury Russell Leffingwell, and Secretary of theTreasury McAdoo pushed the measure through Congress. Not only wasMcAdoo solidly in the Morgan ambit, as we have seen, but Leffingwell,after he left the Treasury, became a leading partner of the Morgan bank.Burton I. Kaufman, Efficiency and Expansion: Foreign Trade Organization inthe Wilson Administration, 1913–1921 (Westport, Conn.: Greenwood Press,1974), pp. 231–32; and Carl P. Parrini, Heir to Empire: United StatesEconomic Diplomacy, 1916–1923 (Pittsburgh: University of PittsburghPress, 1969), pp. 54–55.31Pusey, Eugene Meyer, p. 164.
From Hoover to Roosevelt: 283The Federal Reserve and the Financial ElitesHouston declared, in fact, that he was proposing ending theWFC, in order to complete the government’s withdrawal fromall its wartime activities of government intervention in theeconomy. Houston pointed out that exports had alreadyattained an unprecedented volume in 1919, and that it wasimportant to bring down inflation. Meyer tried every device topersuade Houston, but he couldn’t go over his head to thepresident because of Wilson’s illness. Finally, Meyer threw inthe towel and resigned his post in May 1920.32Unfortunately, however, Eugene Meyer was soon back in thesaddle. Recession always follows an inflationary boom. A reces-sion hit in the fall of 1921, and the newly burgeoning farm blocbegan its long-term drive to get the government to bring thefarmer back to the unprecedented good times he had enjoyedfrom the artificial export boom created by World War I. Duringthe presidential campaign of 1920, Secretary of Treasury Hous-ton bravely resisted the farm bloc, maintaining that the federalgovernment should do nothing to interfere with the inevitablepostwar recession. Eugene Meyer, working for the Hardingticket, put himself at the head of the interventionist forces bat-tling his old laissez-faire enemy. When Houston addressed theannual meeting of the American Bankers Association (ABA) inWashington, he refused to speak if the ABA succumbed to pres-sure by a group of Memphis bankers and businessmen to haveMeyer address the group at the same meeting. When Houston’sploy was successful, the Memphis group of inflationist andinterventionist bankers organized a rump meeting nearby fea-turing the address by Meyer, who led a fervent campaign forrestoration of the WFC, this time stressing government financ-ing of agricultural exports.32Houston was a respected academic, who had been a political scientistand college president in Texas, and then served as chancellor ofWashington University of St. Louis. It is refreshing to see a person of lais-sez-faire principle in this critical post. Ibid., pp. 169–70; and Burch, Elites, 2,pp. 210–11.
The defeat of the Democrats in November was a referendumon World War I, its aftermath, and the inflation and rationing ofwartime, rather than against Houston, but Meyer used the vic-tory to step up attacks on Secretary Houston. Organizing anationwide campaign of demagogy, stressing especially theplight of the cotton farmer, Meyer personalized his assault onHouston’s stalwart laissez-faire views. Combining hyperbolewith alliteration, Meyer roasted Houston before the Joint Agri-cultural Committee of Congress. Meyer thundered,History records no precedent . . . for the wholesale sacrificesimposed upon the civilized world by the Secretary’s [Hous-ton’s] present policies for the purpose of maintaining thepetty platitudes of the outworn political economy which heprofesses.33Congress duly passed the measure to revive the export lend-ing of the WFC. When Wilson followed Houston’s advice toveto the measure, asking Houston himself to write the vetomessage in December, Congress easily overrode the veto.During the interregnum, Meyer and his friends angled fortop jobs for him with the new Harding administration, but withTreasury and commerce closed off, Meyer turned down the postof assistant secretary of commerce under Herbert Hoover, cor-rectly expecting Congress to re-enact the WFC. The new presi-dent duly reappointed Meyer to be head of the revived WFC,refurbished as an agricultural export aid bureau. In fact, exportswere largely forgotten as the WFC was transformed into a sim-ple agricultural relief agency. Under Meyer’s aegis, and sup-ported by Harding, Congress passed the Agricultural Credits Actof 1921, which increased the maximum authorized credits by theWar Finance Corporation to $1 billion, and permitted it to lenddirectly to farmers’ cooperatives and foreign importers, as wellas exporters.Meyer plunged in with a will, heavily financing farm co-ops, enabling them to buy and store crops, thereby raising33Pusey, Eugene Meyer, p. 174.
From Hoover to Roosevelt: 285The Federal Reserve and the Financial Elitesfarm prices, and presaging the more directly governmentalfarm price support policies of the Hoover and Rooseveltadministrations. The WFC’s first loan was to Aaron Sapiro’sStaple Cotton Cooperative Association. Sapiro was a high-priced young attorney for several California farm co-ops whoconcocted grandiose plans for voluntary price-raising cartelsin cotton, wheat, tobacco, and other crops, all of which turnedout to be failures.34By the summer of 1923, the WFC hadloaned $172 million to farm co-ops and another $182 million torural banks, which in turn loaned money to farmers. TheWFC, working closely with farm bloc leaders, appointed aCorn Belt Advisory Committee of farm leaders to pressureMidwestern rural bankers into lending more heavily to farm-ers in that region.With banks providing a steady flow of short-term farmloans, and a vast Federal Farm Loan system, established inJuly 1916, supplying plentiful mortgage loans, the farm blocstill felt a gap in unsubsidized intermediate-term credit.Meyer and the co-op interests duly introduced a bill intoCongress calling for a system of privately capitalized agri-cultural credit corporations, with the Federal Reserveempowered to extend credits and support these corpora-tions. But the farm bloc, supported by Secretary of Com-merce Hoover and Secretary of Agriculture Henry C. Wal-lace, went further, backing a competing bill establishing alarge governmentally capitalized system of Federal Interme-diate Credit Banks, patterned after the Federal Reserve Sys-tem and governed by the Federal Farm Loan Board (FFLB),which had already been established to run the Farm LoanSystem. Congress passed both bills in one Agricultural Cred-its Act of 1923 in the summer of that year, but the Meyer sys-tem was in effect a dead letter; how could a privatelyfinanced albeit subsidized credit system compete with onefinanced by the U.S. Treasury?34Rothbard, America’s Great Depression, pp. 199–200.
With WFC duties now assumed by the new Federal Inter-mediate Credit system, Eugene Meyer allowed the WarFinance Corporation’s authority to make loans expire at theend of 1924. The WFC lingered on with no duties for fiveyears, until Congress finally liquidated it in 1929. Meyer wascheerful about its demise, however, because he was able to usethe virtually defunct post to meddle in, and eventually takeover, the now-powerful Federal Farm Loan Board (FFLB).Meyer assumed control of the FFLB in March 1927, and con-tinued to run it until the advent of the Hoover administrationtwo years later.35His lengthy record in charge of inflationarygovernment lending, in addition to his service in helpingswing the New York Republican delegation to Hoover at theRepublican convention of 1928, made Eugene Meyer emi-nently qualified to be Hoover’s new governor of the FederalReserve Board in the autumn of 1930.MEYER IN THE HOOVER ADMINISTRATIONIn the midst of a German and the American bank crises, anda growing depression, Eugene Meyer battled the totally Mor-gan-run New York Fed for dominance over the FederalReserve System. The Morgans were even more interested thanMeyer in bailing out the European banking systems. In lateJune 1931, the New York Fed agreed to participate with theBank of England, the Bank of France, and the Bank for Inter-national Settlements in a $100 million loan to try to bail out theGerman Reichsbank. Soon the Germans were asking for $500million more to save their banking system. While Harrisonwas sympathetic, Meyer and the other bankers felt this wastoo much of a long-term commitment. The German govern-ment then asked the Fed, not only for the extra loan, but also35Pusey, Eugene Meyer, pp. 183–92; Rothbard, America’s Great Depression,pp. 196–98; and James Stuart Olson, Herbert Hoover and the ReconstructionFinance Corporation, 1931–1933 (Ames: Iowa State University Press, 1977),p. 12.
From Hoover to Roosevelt: 287The Federal Reserve and the Financial Elitesfor a reassuring statement—clearly mendacious—hailing the“fundamental soundness” of the German economy. Happen-ing to be in New York in the midst of this German crisis on theweekend of July 12, Meyer found out by accident of a secretmeeting at the New York Fed on the crisis with the top Mor-gan people in the administration, including Morgan partnersRussell Leffingwell and S. Parker Gilbert; Albert Wiggin, headof the Morgan-run Chase National Bank; Acting Treasury Sec-retary Ogden Mills; Owen D. Young, chairman of the Morgan-run General Electric, and from the New York Fed, GovernorGeorge Harrison and Deputy Governor W. Randolph Burgess.The meeting had already persuaded President Hoover to issuea statement of sympathy for the German situation. Meyer, atthis point, went ballistic, insisting that the president’s state-ment, backed by a meeting of top banking worthies, would betaken by the Germans as well as everyone else as a “moralcommitment to help the Germans,” which would either leadto a disastrous blank-check support for German finance, orwould make matters worse when that support was repudi-ated. Meyer also insisted that only the Federal Reserve Boardin Washington could legally commit the Fed to such action. Byhis last-minute intervention, Meyer was fortunately able toblock the Morgan cabal from getting Hoover to make the pub-lic endorsement. The following week, Hoover, aided by vet-eran Morgan-oriented lawyer and Secretary of State Henry L.Stimson, agitated again for direct loans to Germany, butMeyer was able to confine Hoover to engineering a Meyer-approved big power “standstill agreement” by which banksthroughout the major countries of the world would continueto hold German and other Central European short-term debtswithout trying to get out of German marks and other shakycurrencies of that region.Generally, Meyer was able to overrule Harrison. Thus, whengold flowed out of U.S. banks after Britain’s disastrous aban-donment of the gold standard in late September, Meyer wasable to force Harrison—wedded to cheap money—to raise theNew York Fed’s discount rate from 1.5 percent to 3.5 percent in
October, thereby reversing the gold drain by raising marketconfidence in the dollar.36By early September 1931, even before Britain’s abandonmentof the gold standard, President Hoover, Eugene Meyer, and thenation’s financial establishment all agreed that Americarequired a massive infusion of more money and credit, underthe direction of the federal government. There was one differ-ence: whereas Meyer and the bankers wanted a revival of theWar Finance Corporation for government to pour in the newmoney directly, Hoover first wanted to try a dab of his charac-teristic government-business partnership to encourage privatebankers to contribute the necessary hundreds of millions of dol-lars to a federal agency. Hoover set up his National Credit Cor-poration (NCC) to attract $500 million from the banks in orderto shore up shaky individual banks. But when the NationalCredit Corporation was only able to raise $150 million,Hoover quickly and cheerfully threw in the towel, and by theend of November, agreed to introduce a bill into Congress torevive the old WFC and expand it for peacetime uses into anew Reconstruction Finance Corporation (RFC).37The RFC bill, which sailed through Congress by late January1932, provided for the Treasury to pour $500 million of capitalinto the Reconstruction Finance Corporation, which wasempowered to issue securities up to an additional $1.5 billion.The RFC could make loans to banks and financial institutions ofall types. The theory was that, ensured of freedom from failing,36Pusey, Eugene Meyer, pp. 209–15.37Gerald D. Nash’s story of a Hoover bitterly resisting theReconstruction Finance Corporation until the last moment has nowbeen replaced by a more accurate portrayal provided by James Olson:willing to give “voluntarism” a brief play, but then cheerfully fallingback on pure statism. Gerald D. Nash, “Herbert Hoover and the Originsof the Reconstruction Finance Corporation,” in Mississippi ValleyHistorical Review 46 (December 1959): 455–68; and James Olson, HerbertHoover, pp. 24–29.
From Hoover to Roosevelt: 289The Federal Reserve and the Financial Elitesthe timid banks would be emboldened to lend massively to busi-ness and industry, the money supply would dramatically rise,and prosperity would return. This was the doctrine trumpeted byPresident Hoover, Meyer, Mills, and Undersecretary of the Trea-sury Arthur A. Ballantine, a partner of the law firm headed bylongtime Morgan attorney Elihu Root. Unsurprisingly, the repre-sentatives of groups expecting a massive infusion of federalmoney—commercial banks, savings banks, life insurance com-panies, and building and loan (in later years, savings andloan) associations—testifying before Congress “all praised the[RFC] bill in glowing terms, claiming that it was essential tothe survival of the money market.” In addition, the RFC wasempowered to lend money to railroads, in order to relieve theirindebtedness and revivify the railroad bond market. The rail-road representatives were also delighted with the bill.Hoover’s original bill was even more sweeping, alsoallowing the RFC to make business loans to “bona fide insti-tutions,” but the Senate Democrats, suspicious of excessiveexecutive power over business, killed this proposal. The Sen-ate Democrats also reportedly extracted a promise fromHoover to make the beloved Eugene Meyer chairman of thenew RFC. Meyer, doing double duty as governor of the Fed-eral Reserve Board and head of the RFC, was now the mostpowerful single economic and financial force in the federalgovernment.The RFC, at the Democrats’ insistence, was to have a boardof directors consisting of four Republicans and three Democ-rats. Three of the Republicans were the ex officio heads of theFederal Reserve Board (Chairman Meyer), the secretary of theTreasury (Ogden Mills, who had replaced Mellon in January),and of the Federal Farm Loan Board (Paul Bestor, Meyer’s pro-tégé and successor). The fourth Republican appointee was for-mer Vice President Charles G. Dawes, a Chicago railroad manin the Morgan ambit.The RFC was not only patterned after the old War FinanceCorporation in philosophy, but also aped its organizational