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16

Depression and Rally of 1924—The Beginning of the New Deal

There came a very sharp reaction in business in early 1924. The Federal Reserve Index of Industrial Production (1923-25 base), which had stood above 100 in the early part of the year, dropped rapidly to 85 by the middle of the summer. Security prices dipped only moderately, and there was no real loss of financial confidence because high hopes were entertained of the outcome of the work of the Dawes Committee. It was recognized in financial circles that the industrial difficulties were due in large degree to the foreign situation, and very specially to the unsatisfactory export trade for agricultural commodities.

There was a sharp dip in the prices of farm products, both an absolute drop and a drop in relation to the prices of other goods. Agriculture was under very great pressure. It needed a good export market at satisfactory prices for over twenty percent of its wheat, for fifty-five percent of its cotton, for forty percent of its tobacco and lard, and so on. With continental Europe slipping financially and, above all, with Germany utterly demoralized, this market was greatly impaired and gravely imperiled. With the high protective tariffs on manufactured goods, moreover, which prevented European manufactures from coming in in adequate volume to obtain the dollars needed for buying farm products, it was difficult for the farmers to see much hope.

Many of the leaders of agriculture, including important senators and congressmen from the farm states, were turning in their bewilderment to new and strange legislative devices. Preponderantly Republican, the agricultural West had accepted with some enthusiasm the tariff on farm products passed in 1921. But very speedily the West had learned that this did no good. The American wheat producer did, to be sure, keep the Canadian wheat grower out of Chicago, but he continued to meet him in Liverpool. The protective tariff did no good to a commodity where an export surplus existed. And agriculture was an export industry.

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Even in the case of those agriculture activities like dairying, where exports and imports were in approximate balance,¹ the inability of agricultural producers in export lines to get a satisfactory export market made for reactionary tendencies. Unable to get good prices for wheat and hogs and cotton, a good many farmers who had produced wheat and hogs and corn and cotton were crowding into the dairy industry. All agriculture felt the pressure that came from weakened export trade.

Agriculture itself was so important in the total of our economic life that if it were depressed the rest of the industrial situation was pulled down. For the year 1919, agriculture, mining, and manufacturing may be compared as follows:

Net value of all agricultural products	40%
Net value of all mineral products	7%
Value added by all manufactures	53%2

The importance of agriculture was declining in American economic life, partly through the decline in agricultural prices as compared with other prices, and partly through the shift of population from country to city which was under way. But agriculture remained in 1924 a factor of such great importance that definitely reactionary agricultural tendencies operated to pull down the general situation.

That the high protective tariff on manufactured goods was in large measure responsible for this situation was recognized by farm leaders and their congressional representatives in the McNary-Haugen bill, which attracted a great deal of attention in early 1924—a bill designed as a counterweight to the tariff. This measure proposed an elaborate and complex machinery for giving the farmer a protected market on that part of his production which was consumed domestically. This was coupled with provisions for dumping abroad of the export surplus at whatever prices it might bring, and with high tariffs which would prevent the reimport of the surplus exported and sold at low prices abroad. The bill also contained provisions for taxing the farmers on the part sold at high prices at home to make good the losses incurred on the part sold abroad.³

Spokesmen for the farmers urged that everybody in the country was protected except the farmers. Manufacturers were protected by tariffs, laborers were protected by the immigration law and the Adamson bill, and the farmers “wanted theirs.” Some of the advocates of the measure suggested that they would be perfectly willing to dispense with it if they

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could have the tariffs on manufactured goods reduced, so that our tariff legislation would not be weighting the balance against the farmer.

The McNary-Haugen bill is significant and interesting as constituting one of the first of the many ingenious devices for spoiling markets and perverting the price mechanism in the interest of special classes, which we have later come to know as the New Deal.

This particular New Deal measure was not adopted, but the New Deal, as a conscious and deliberate thing in governmental policy, did begin in 1924 in an immense artificial manipulation of the money market, to which we shall give extended attention in what follows.

Three things combined to turn the tide in the summer of 1924, and, above all, to swing agricultural prices radically higher both absolutely and in relation to other prices. The marked improvement in the position of agriculture quickened industry in all lines and we started off on a period of “prosperity” which had no real interruption until the stock market crash in 1929. But, as we shall see, the seeds of death were in it from the beginning.

The three things which turned the tide were:

1. The acceptance of the Dawes Plan, which restored confidence among American financiers and American investors in the German situation and consequently in the general European situation, and made them willing to take German and other European bonds in large volume.

2. The purchase of approximately $500 million worth of government securities by the Federal Reserve banks. Part of this was used by the member banks in paying down rediscounts, which dropped very sharply in 1924. But the net outcome of the increase in Federal Reserve bank open market purchases of government securities, the decline in rediscounts, and the incoming gold (neglecting various minor factors) was to increase the reserves of the member banks of the Federal Reserve System from $1,900,000,000 on December 31, 1923, to $2,228,000,000 on December 31, 1924, an increase of over $300 million, or 17 percent, in a single year. The further result of this great increase in reserves was an expansion of member bank credit by over $4 billion, from $34,690,000,000 on March 31, 1924, to $38,946,000,000 on June 30, 1925, as measured by total assets or total liabilities—a multiple expansion based on excess reserves. The member banks of the Federal Reserve System had about 73 percent of the total banking assets of the country, and the total bank expansion in this period was consequently greater than $4 billion. The total deposits of the member banks increased from $28,270,000,000 on March 31, 1924, to $32,457,000,000 on June 30, 1925, an increase of over $4 billion, and the increase of deposits outside the system was again very substantial.

This additional bank credit was not needed by commerce and it went preponderantly into securities: in part into direct bond purchases by the banks and in part into stock and bond collateral loans. It went also into real

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estate mortgages purchased by banks and in part into installment finance paper.

This immense expansion of bank credit, added to the ordinary sources of capital, created the illusion of unlimited capital and made it easy for our markets to absorb gigantic quantities of foreign securities as well as a greatly increased volume of American security issues. The combination of the Dawes Plan, restoring confidence in the quality of European credit, and the cheap money policy of the Federal Reserve banks creating a vast quantity of available funds, enabled us to purchase in 1924 approximately $1 billion of foreign securities (refunding excluded). Our tariffs would not allow the Europeans to earn dollars here in adequate amounts to buy our farm products and to meet service on the past debts, so we proceeded to lend them the dollars they needed for these purposes! But we did not consider how they would ever repay the sums we were lending them if they could not sell goods here. We would take care of that by new loans next year! There was an immense quickening of European demand for American exports and, above all, for farms products at rapidly rising prices.

3. An accidental circumstance that lifted farm prices in the second half of 1924. There was a very poor Canadian wheat crop and our harvests were good. This, of course, was a factor that could be expected to iron itself out in the next year. But the policy of cheap money and excessive foreign loans was to continue long enough to keep American agriculture prosperous and to keep the country prosperous over five years, and to pile up an accumulation of uncollectible foreign debts which shook the country and the world to their foundations when the day of reckoning came.

Strong and Crissinger. Federal Reserve policy from early 1924 to late 1927 was dominated by an able but ill-equipped man, Benjamin Strong, governor of the Federal Reserve Bank of New York, assisted and supported by an untrained and inexperienced man in Washington, Daniel Richard Crissinger, governor of the Federal Reserve Board. Crissinger was a personal appointee of President Warren G. Harding.

The Federal Reserve Board had had a fine sense of responsibility from its inception down to the time of Crissinger’s appointment. The Wilson appointees were in general high-minded and able men. The notion that the Federal Reserve Board should be an independent body, comparable with the Supreme Court of the United States in its independence and in its freedom from political considerations, was generally accepted. In W. P. G. Harding, who was governor of the Federal Reserve Board from August 10, 1916, to August 9, 1922, the system had the leadership of a man of great courage and high character. Governor Harding had come to the Federal Reserve Board from an Alabama bank, and had modestly recognized that the difference between the problems of central banking and the problems of Alabama banking were very great. He had consulted other members of the board, and especially the best informed economist on the board, as to what

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he ought to read to equip himself for the proper discharge of his duties. He had studied the theory of central banking conscientiously and thoroughly. Having done this he had asserted himself, and in his capacity of governor of the Federal Reserve Board he had become almost an autocrat, knowing what should be done and determined to do it properly. He enjoyed the confidence and respect of the financial community.

But Warren G. Harding, the President of the United States, wanted no such man as head of the Federal Reserve Board. Over the protest of the financial community and over the protest of the secretary of the Treasury, Warren Harding named Crissinger and displaced W. P. G. Harding. Crissinger had come from Warren Harding’s home town and was Harding’s personal friend, and had no other qualification for the office. Warren Harding is reported to have said, in reply to Secretary Mellon’s protest, “This appointment is very dear to my heart.” This appointment broke the heart and the courage of the Federal Reserve Board.

Leadership in the Federal Reserve System had never been clearly defined. One central bank with branches would have been far better than twelve Federal Reserve banks loosely linked together and loosely coordinated by the Federal Reserve Board. It was difficult to place legal or even moral responsibility upon any one individual or one bank or the board for policy decisions. With the dropping out of W. P. G. Harding and the coming in of Crissinger, leadership in the Federal Reserve System passed from the board to the governor of the New York Federal Reserve Bank, Benjamin Strong.

Crissinger had no grasp of Federal Reserve policy. His purposes were political. Those things were right which would help to reelect Warren G. Harding. Those things were wrong which would interfere with the reelection of Warren G. Harding. Sound Federal Reserve policy might be desirable, but not unless it were politically popular. It was easy for Governor Strong to dominate such a man and, through him, the board.

Governor Strong had no fundamental grasp of the problems of central banking. His statements in private discussion regarding his policies indicated that they were short-run policies and, at times, contradictory. But he had great personal charm. He had a dominating personality and he had a great deal of vivacity. Despite a tubercular weakness, he seemed physically vigorous and he seemed to have great social energy. His exact training was as a trust officer dealing with mortgage indentures. The head of one great New York bank said of him: “He has the best indenture mind in the city of New York.” The head of another great New York bank, after listening to a long monologue from Strong regarding Bank of England policy—Strong had just returned from his first visit to the Bank of England, where he had been received with great courtesy and enthusiasm and where he had been told many things—said, “The governor has learned many interesting things, and some day he will put them together right.” But he never did.

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Strong dominated men when he could. All too frequently he could. But when he could not, he bore no malice and he kept pleasant personal relations with his critics.

Those who see history only from the outside easily convince themselves that impersonal social forces are overwhelming and that individual men in strategic places make little difference. But this is not true. The handling of Federal Reserve policy by Strong and Crissinger in the years 1924-27 led to ghastly consequences from which we have not yet recovered. Competent and courageous men occupying their positions would have avoided the mistakes which these men made.