The Great Depression lasted from the stock market crash in 1929 until World War 2. In the middle of this economic crisis, President Franklin Delano Roosevelt appointed Utahn Marriner Eccles to become the Fed Chair. Robert Reich has high praise for Eccles in his latest book Aftershock, even going so far as to rate both Paul Volcker and Alan Greenspan as “no Marriner Eccles.” Frankly, I was astonished at Reich’s praise for Eccles throughout the book. From chapter 1 to the end of the book, Reich repeatedly referred to Eccles. On page 11, Reich gives a bit of background on Eccles,
While Eccles is largely forgotten today, he offered critical insight into the great pendulum of American capitalism. His analysis of the underlying economic stresses of the Great Depression is extraordinary, even eerily, relevant to the Crash of 2008. It also offers, if not a blueprint for the future, at least a suggestion of what to expect in the coming years.
A small, slender man with dark eyes and a pale, sharp face, Eccles was born in Logan, Utah, in 1890. His father, David Eccles, a poor Mormon immigrant from Glasgow, Scotland, had come to Utah, married two women, became a businessman, and made a fortune. Young Marriner, one of David’s twenty-one children, trudged off to Scotland at the start of 1910 as a Mormon missionary but returned home two years later to become a bank president. By age twenty-four he was a millionaire; by forty he was a tycoon–director of railroad, hotel, and insurance companies; head of a bank holding company controlling twenty-six banks; and president of lumber, milk, sugar, and construction companies spanning the Rockies to the Sierra Nevadas.
In the Crash of 1929, his businesses were sufficiently diverse and his banks adequately capitalized that he stayed afloat financially. But he was deeply shaken when his assumptions that the economy would quickly return to normal was, as we know, proved incorrect. ‘Men I respected assured me that the economic crisis was only temporary,’ he wrote, ‘and that soon all the things that had pulled the country out of previous depressions would operate to that same end once again. But weeks turned to months. The months turned to a year or more. Instead of easing, the economic crisis worsened.’ He himself had come to realize by late 1930 that something was profoundly wrong,”
When Eccles’s anxious bank depositors began demanding their money, he called in loans and reduced credit in order to shore up the banks’ reserves. But the reduced lending caused further economic harm. Small businesses couldn’t get the loans they needed to stay alive. In spite of his actions, Eccles had nagging concerns that by tightening credit instead of easing it, he and other bankers were saving their banks at the expense of community–in “seeking individual salvation, we were contributing to collective ruin.”
Doesn’t this sound familiar to our current day? Reich notes that the reaction of the day by leading economists and business leaders (from page 13) was that,
government’s only responsibility was to balance the federal budget. Lower prices and interest rates, they said, would inevitably “lure ‘natural new investment’ by men who still had money and credit and whose revived activity would produce an upswing in the economy.” Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so severely disabled. Such investments, he reasoned “take place in a climate of high prosperity, when the purchasing power of the masses increases their demands for a higher standard of living and enables them to purchase more than their bare wants. In the America of the thirties what hope was there for developments on the technological frontier when millions of our people hadn’t enough purchasing power for even their barest needs?”
From page 14,
Eccles also saw that “men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules. After I had lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.” One of the country’s most powerful economic leaders concluded that the economic game was not being played on a level field. It was tilted in favor of those with the most wealth and power.
Eccles called for a change in the economy. Rather than catering to the whims of the richest, he said the economy needed to help all Americans. Balancing the budget was the wrong remedy, because it would help the rich at the expense of all Americans. Three years prior to famed economist John Maynard Kenyes, Eccles proposed (from page 14)
that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. Eccles went further. He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed to “bring about, by Government action, an increase in the purchasing power on the part of all people.”
From page 15,
His proposed program included relief for the unemployed, government spending on public works, government refinancing of mortgages, a federal minimum wage, federally supported old-age provisions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation. Not until these recommendations were implemented, Eccles warned, could the economy be fully restored.
It was a tough sell. Roosevelt had campaigned on balancing the budget. From page 16,
Roosevelt’s budget of 1934 contained many of Eccles’s ideas, violating the president’s previous promise to balance the budget. The president “swallowed the violation with considerable difficulty,” Eccles wrote.
The following summer, after the governor of the Federal Reserve Board unexpectedly resigned, Morgenthau recommended Eccles for the job. Eccles had not thought about the Fed as a vehicle for advancing his ideas. But a few weeks later, when the president summoned him to the White House to ask if he’d be interested, Eccles told Roosevelt he’d take the job if the Federal Reserve in Washington had more power over the supply of money, and the New York Fed (dominated by Wall Street bankers) less. Eccles knew that Wall Street wanted a tight money supply and correspondingly high interest rates, but the Main Streets in America–the real economy–needed a loose money supply and low rates. Roosevelt agreed to support new legislation that would tip the scales toward Main Street. Eccles took over the Fed.
For the next fourteen years, with great vigor and continuing vigilance for the welfare of average people, Eccles helped steer the economy through the remainder of the Depression and through World War II. He would also become one of the architects of the Great Prosperity that the nation and much of the rest of the world enjoyed after the war.
Eccles retired in Utah in 1950 to write his memoirs and reflect on what had caused the largest economic trauma ever to have gripped america, the Great Depression. Its major cause, he concluded, had nothing whatever to do with excessive spending during the 1920s. It was, rather, the vast accumulation of income in the hands of the wealthiest people in the nation, which siphoned purchasing power away from most of the rest.
Reich goes on to show 2 very important graphs outlining the problem. In Figure 1, (page 21) he shows an interesting phenomena. During the 2 greatest crashes in stock market history, 1929, and 2007, the richest 1% of the nation (those that make above $398,9000 in 2007), accounted for nearly 25% of the wealth of the nation. You can see this in the graph at the left because the 2 ends are at the highest points. The rich are becoming rich at the expense of the poor.
During the trough of this (roughly from 1938-1983), the U.S. economy was under what Reich calls “the Great Prosperity. Looking at a second graph, we see an interesting phenomenon. From 1947-1974, productivity and wages matched. After 1974, wages stagnated even though productivity increased. The gap in income for workers went to the richest 1% of Americans. If we want to fix the economy, this gap must close.
Reich has some very interesting, counter-intuitive proposals that I will discuss in a future post. His main idea is to quit squeezing the middle class. He says the rich are getting rich at the expense of the middle class. He says that the problem with America currently is not jobs, it is pay. If we can fix this disparity, the economy will be better for both the rich, the poor, and the middle class. What do you think about these ideas so far?