Rothbard On America's Great Depression Tuesday, September 08, 2009
I finished reading Murray Rothbard's America's Great Depression (pdf) and highlighted some passages that I found particularly noteworthy. I'm not going to sully this stuff with my unending wit and intelligence as I think it stands on its own. That being said, as you read, ask yourself if this is economic history Rothbard wrote or if it was instead prophetic predictions of the future (our present) with the names and numbers changed to protect the not-so-innocent. Draw parallels where you will, and must.On Hoover's Reconstruction Finance Corporation (pgs 296-298):
On all other aspects of the Hoover New Deal, the PresidentOn the futility of central banker attempts to create inflation, and the earnestness of bottom-callers in the midst of the depths of the recession (pg. 304):
blossomed rather than faltered. The most important plank in his
program—the RFC—was passed hurriedly in January by the Congress.
The RFC was provided with government capital totaling
$500 million, and was empowered to issue further debentures up
to $1.5 billion. Hoover asked none other than Bernard Baruch to
head the RFC, but Baruch declined. At that point, Hoover turned
to name as Chairman one of his most socialistic advisers, the one
who originally suggested the RFC to Hoover, Eugene Meyer, Jr.,
an old friend of Baruch’s. For the first five months of its life, the
lending activities of the RFC lay shrouded in secrecy, and only
determined action by the Democratic Congress finally forced the
agency to make periodic public reports, beginning at the end of
August. The bureaucratic excuse was that RFC loans should, like
bank loans or previous National Credit Corporation (NCC) loans,
remain confidential, lest public confidence in the aided bank or
business firm be weakened. But the point is that, since the RFC
was designed to lend money to unsound organizations about to
fail, they were weak and the public deserved to lose confidence, and
the sooner the better. Furthermore, since the taxpayers pay for
government and are supposed to be its “owners,” there is no excuse
for governmental representatives to keep secrets from their own
principals. In a democracy, secrecy is particularly culpable: for how
can the people possibly make intelligent decisions if the facts are
withheld from them by the government?
During the first five months of operation, from February to
June, the RFC made $1 billion worth of loans, of which 80 percent
was lent to banks and railroads, and about 60 percent to banks.
The Republican claim that the RFC loans were not at all political
rings pretty hollow in light of the facts. Thus, General Charles
Dawes resigned as President of the RFC on June 7. Less than three
weeks later, the Chicago bank which he headed, the Central
Republic Bank and Trust Company, received an RFC loan of $90
million even though the bank’s total deposits were only $95 million.
That General Dawes resigned and then promptly asked for
and received a huge loan for his own bank, certainly appears to be
mulcting of the taxpayers by political collusion. In addition, the
RFC granted a $14 million loan to the Union Trust Company of
Cleveland; chairman of the board of this bank was none other than
Joseph R. Nutt, treasurer of the Republican National Committee.
The successor to Dawes as head of the RFC was the Hon. Atlee
Pomerene, whose great contribution to economic wisdom was his
pronouncement that he would like to compel all merchants to
increase their purchases by 33 percent. There was the road to
recovery! Under Pomerene’s aegis, the FRC promptly authorized
a $12.3 million loan to the Guardian Trust Company, of Cleveland,
of which Pomerene was a director. Another loan of $7.4 million
was made to the Baltimore Trust Company, the vice-chairman
of which was the influential Republican Senator Phillips L. Goldsborough.
A loan of $13 million was granted to the Union
Guardian Trust Company of Detroit, a director of which was the
Secretary of Commerce, Roy D. Chapin.
Some $264 million were loaned to railroads during the five
months of secrecy. The theory was that railroad securities must be
protected, since many were held by savings banks and insurance
companies, alleged agents of the small investor. Of the $187 million
of loans that have been traced, $37 million were for the purpose
of making improvements, and $150 million to repay debts.
One of the first loans, for example, was a $5.75 million grant to the
Missouri Pacific to repay its debt to J.P. Morgan and Company. A
total of $11 million was loaned to the Van Sweringen railroads
(including the Missouri Pacific) to repay bank loans. $8 million
were loaned to the Baltimore and Ohio to repay a debt to Kuhn,
Loeb and Company. All in all, $44 million were granted to the railroads
by the RFC in order to repay bank loans. One of the main
enthusiasts for this policy was Eugene Meyer, on the grounds of
“promoting recovery,” and, frankly, “putting more money into the
banks.” But this “promotion of recovery” really meant that the taxpayers
were expropriated, and their money transferred by coercion
to a few banks, notably J.P. Morgan and Company, and Kuhn,
Loeb and Company. The extent of Meyer’s humanitarianism in
this affair may be gauged from the fact that his brother-in-law,
George Blumenthal, was a member of J.P. Morgan and Company,
and that Meyer had also served as a liaison officer between the
Morgan firm and the French government. In the case of the Missouri
Pacific, the RFC granted the loan despite an adverse warning
by a minority of the Interstate Commerce Commission, and, as
soon as the line had repaid its debt to Morgan, the Missouri Pacific
was gently allowed to go into bankruptcy.
And, as we noted above, we must not overlook theOn the fearful public's monetary response to rumors of radicalism in the White House, and the catch-22 of central bank firefighting efforts (pg. 324):
frightening effect of the wave of bank failures on bank policies.
During the 1920s, a typical year might find 700 banks failing, with
deposits totaling $170 million. In 1930, 1350 banks failed, with
deposits of $837 million; in 1931, 2,293 banks collapsed, with
deposits of $1,690 million; and in 1932, 1,453 banks failed, having
$706 million in deposits. This enormous increase in bank failures
was enough to give any bank pause—particularly when the bankers
knew in their hearts that no bank (outside of the nonexisting ideal
100 percent bank) can ever withstand a determined run. Consequently,
the banks permitted their commercial loans to run down
without increasing their investments.
Thus, the Hoover administration pursued a giant inflationary
policy from March through July 1932, raising controlled reserves
by $1 billion through Fed purchase of government securities. If all
other factors had remained constant, and banks fully loaned up,
the money supply would have risen abruptly and wildly by over
$10 billion during that period. Instead, and fortunately, the inflationary
policy was reversed and turned into a rout. What defeated
it? Foreigners who lost confidence in the dollar, partly as a result
of the program, and drew out gold; American citizens who lost
confidence in the banks and changed their deposits into Federal
Reserve notes; and finally, bankers who refused to endanger themselves
any further, and either used the increased resources to repay
debt to the Federal Reserve or allowed them to pile up in the
vaults. And so, fortunately, inflation by the government was turned
into deflation by the policies of the public and the banks, and the
money supply dropped by $3.5 billion. As we shall see further
below, the American economy reached the depths of depression
during 1932 and 1933, and yet it had begun to turn upward by
mid-1932.
Most important of the attacks on creditors’ property occurredOn deflation of fiduciary media (money-substitutes) and bank runs (pg. 326):
during the currency crisis that marked the end of the Hoover term.
After the election, as the new Presidential term approached, people
grew more and more apprehensive, and properly so, of the
monetary policies of the incoming president. Dark rumors circulated
about the radicalism of Roosevelt’s advisers, and of their willingness
to go off the gold standard. Consequently, not only did
gold “hoarding” by foreigners develop momentum, but even gold
hoarding by domestic citizens. For the first time in the depression,
American citizens were beginning to lose confidence in the dollar
itself. The loss of confidence reached its apogee in February, 1933,
the month before the Roosevelt inaugural. In that one month, the
monetary gold stock fell by $173 million, and money in circulation
increased by the phenomenal amount of $900 million, the reflection
of domestic loss of confidence. Money in circulation totaled
$5.4 billion at the end of January, and $6.3 billion by the end of
February. $700 million of this increase was in Federal Reserve
notes, and $140 million in gold coin and gold certificates.
The Federal Reserve did its best to combat this deflationary
pull on bank reserves, but its inflationary measures only served to
diminish confidence in the dollar still further. Thus, in the month
of February alone, Uncontrolled Reserves fell by $1,089 million.
The FRS greatly inflated its Controlled Reserves: bills discounted
more than doubled to increase by $308 million, bills bought multiplied
tenfold to increase by $305 million, $103 million of U.S.
governments were purchased. All in all, controlled reserves
increased by $785 million during this month; net reserves fell by
$305 million.
It is at times like these that the speciousness of apologists for ourOn central authorities turning to withdrawal moritoria and bank holidays to avert bank collapse, and the moral hazard of such policies which punishes conservative banks for their adherence to sound-banking principles (pgs. 326-328):
banking system hailing fractional reserves as being as sound as the
building of bridges—on estimate that only some inhabitants of the
area will cross it at any one time—becomes patently evident. For
no one has a legal property ownership in the bridge, as they do in
their bank deposits. At times like these, also, it becomes clear that
bank deposits are not really money—even on a paper, let alone a
gold standard—but mere money-substitutes, which serve as money
ordinarily, but reveal their true identity when nationwide confidence
begins to collapse.
On the request of bankers for government to save them fromAnd finally, on the inevitability of depression history repeating itself (pg. 337):
the consequences of their own mistakes, state after state, beginning
with Indiana, declared moratoria and bank holidays. Governor
Ritchie of Maryland declared a three-day bank holiday on February
24. On February 27, the member banks of the Cleveland
Clearing House Association decided arbitrarily to limit withdrawals
from all their branches, and no state officials acted to stop
this blatant infringement of property right. They were promptly
followed by Akron and Indianapolis banks. On February 27, the
Ohio, Pennsylvania, and Delaware legislatures authorized the state
banking officials to restrict the right of withdrawal of deposits.
The states adopted this procedure quickly and virtually without
debate, the laws being rammed through on the old political excuse
that the taxpaying and voting public must be kept in ignorance of
the situation in order to prevent panic.6 In such a manner do the
“people’s representatives” characteristically treat their supposed
principals.
One of the ironic aspects of this situation was the fact that many
national banks, which had worked hard to keep themselves in an at
least relatively sound position, did not want to avail themselves of
the special privilege of bank holiday, and had to be coerced into
doing so. As Willis puts it:
[i]n many cases, the national banks . . . had no wish to
join in the holiday provisions of the localities in which
they were situated. They had, in such cases, kept themselves
in position to meet all claims to which they might
be subject, and they desired naturally to demonstrate to
depositors and customers their ability to meet and overcome
the obstacles of the time, both as a service to such
customers and as an evidence of their own trustworthiness.
There followed what was deemed . . . the necessity
or desirability of coercing . . . the sound banks of the
community into acceptation of the standard thought
essential for the less liquid and less well-managed institutions.
7
The guilt for the Great DepressionBold emphasis mine.
must, at long last, be lifted from the shoulders of the free-market
economy, and placed where it properly belongs: at the doors of
politicians, bureaucrats, and the mass of “enlightened” economists.
And in any other depression, past or future, the story will be the
same.
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