caption id=”attachment_1455″ align=”alignright” width=”300″ caption=”Eccles, FDR, and James Roosevelt (FDR’s son)”]
[/caption]
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?
Mormon Heretic 
How do you fix pay when “Main Street”-type businesses don’t have the money to begin with? Lower intereste rates and encourage the banks to lend more? (Economic novice here.)
The problem with graphs is that they ALWAYS take data out of context to make a point.
Eve, I’m an economic novice too. I was hoping Bishop Rick might provide a little insight instead of playing curmudgeon. But suffice it to say, Reich believes that the richest 1% of Americans are saving money that they can’t possibly spend, and that is wrecking the economy. Poor people spend all the money they have by necessity. Even though rich people can spend extravagantly at times, they don’t spend all the money they have. They get rich at the expense of the poor, and that hurts the spending.
I think that figure 2 shows something we all know and economists have been saying for years. Wages are flat. I’m not sure how that graph is taking anything out of context here, because it sure seems to me to be common sense. The gap between the flat wages and production has been siphoned away by the Warren Buffets, Sam Waltons, and Bill Gates of the world. Rather than sharing in the prosperity, the rich have been hording the prosperity. I don’t see how that graph is taking things out of context either. Perhaps Bishop Rick can enlighten us.
So Eve, back to your question, while the Fed’s most visible job is to control interest rates, Marriner Eccles didn’t just control interest rates. Reich says that Eccles was the architect of the New Deal. (Reich even goes on to say that FDR never understood what Eccles was doing.) Just as Banks were “seeking individual salvation, we were contributing to collective ruin.”
Eccles wanted a freer money supply so that small businesses could get the loans they need to grow the economy, but that was just one thing Eccles proposed. He advocated higher taxes for the rich (who can’t possibly spend all the money they make), and giving it to the poor (who WILL spend all the money they make.) Increasing the purchasing power of the common worker will grow the economy–even for the rich. I’ll be posting about the “socialist” Henry Ford in my next post. He gave wages that were 3 times the national average to make his Model T Ford cars. Those workers bought the cars Ford made, making both Ford and his workers better off. It’s a win-win.
MH, the average wage in 1974 was just over $8,000. The average wage in 2009 was just over $40,000. That is not a flat wage. Of course the graph must be taking into consideration the cost of living increase. If that is the case then wages are keeping up with cost of living. Don’t see a problem there. Oh yea, productivity has gone up. That is due to technology, not because the worker is working harder. In fact, as a result of technology, work is much easier than it was in 1974. Not to mention that half the jobs in 1974 don’t even exist today so the comparison is impossible.
Look, people use statistics and graphs to support an argument already determined…not the other way around. They can do this because you can make data look like anything you want. That is what I’m saying.
Middle class wages are MUCH higher than they used to be. The graph avoids this fact.
I mentioned this in another thread. The Keynesian policies being used today (that “worked” during the depression) are not working now. There is no magic formula that always works. Technology has introduced a variable that did not exist in M Eccles’ day. I doubt he do the same thing today that he did 60 years ago.
Other factors introduced since depression include a global economy, the Euro, off-shoring. Take IBM as an example. Productivity for IBM has gone up during the recent recession and their stock price has followed suit. They are one of the few US companies not affected (at least as a company). They are also silently shifting their workforce from the US to China, Poland, India and other low-wage countries, where they can hire 4 people for the same wage of hiring 1 in the US. Does that graph take this into account? Of course not. It would be much harder to make a flawed point if it did.
Best of intentions aside, the only problem with Eccles’ recommended monetary policy is that it didn’t work then, certainly didn’t work during the 1970s, and isn’t working particularly well now. It is like giving amphetamines to a cancer patient – it causes all sorts of illusory activity for a while, and then the patient crashes again due to more fundamental problems, and is worse off than before.
Recessions rarely lasted more than a couple of years until Hoover and FDR bumbled into policies that effectively turned the economy into the walking dead. Some admirable and necessary of course, but others poison, economically speaking.
Reich is right on many things. The rich are not only getting richer than the rest of us, they are, thanks to the supreme court, much, much more powerful and can influence elections in ways that we cannot ever hope to do. We are, in short, on the fast road to becoming a giant banana republic. If the tea party activists will take on the big money interests, I will support them. But when I see the undue infuence of the Koch Brothers, billionaires both, on their activities, I have no hope of anything good coming from them.
Bishop Rick,
the graph must be taking into consideration the cost of living increase. If that is the case then wages are keeping up with cost of living. Don’t see a problem there.
No, it’s not a cost of living increase. As you can see, it is an index based on 1947 dollars. The index improved until 1974, and then has been flat ever since. From my econ classes, I always thought indexes were the way to properly control for inflation, cost of living, etc.
Oh yea, productivity has gone up. That is due to technology, not because the worker is working harder. In fact, as a result of technology, work is much easier than it was in 1974. Not to mention that half the jobs in 1974 don’t even exist today so the comparison is impossible.
Reich talks about globalization, technology, etc. Yes technology has improved. Yes, we’re shipping work to India and China. But rather than help the U.S. worker, we have helped the owners, creating a massive imbalance here, and that is destabilizing the economy as Wall street takes massive risks, and taxpayers bail them out because they’re “too big to fail.” Reich lambasts the bank bailout as helping Wall Street over Main Street. The banks are making huge profits again, but the economy is floundering. In the words of Eccles, “in “seeking individual salvation, [banks] were contributing to collective ruin.”
Mark, by the 1970s, Eccles had been out of office for 20 years–I don’t see how you can blame the 70s on Eccles. Don, I agree completely.
“I always thought indexes were the way to properly control for inflation, cost of living, etc.”
MH, we are saying the same thing here. Perhaps I was not clear.
“Reich talks about globalization, technology, etc. Yes technology has improved. Yes, we’re shipping work to India and China. But rather than help the U.S. worker, we have helped the owners, creating a massive imbalance here, and that is destabilizing the economy”
I haven’t read the book. I only have what you posted to go by. Reich might be talking about technology and the new global economy, but he is using a canned graph that doesn’t take this into account. He is taking a symptom (productivity gap) and calling it a problem. If he were a doctor, he would be called a quack for doing this.
“Wall street takes massive risks, and taxpayers bail them out because they’re “too big to fail.” Reich lambasts the bank bailout as helping Wall Street over Main Street.”
This is a key component of Keynesian economics that is failing. This is one area where I agree with Reich.
The problem is not a productivity gap. You can’t make any informed decision on IF or why the productivity gap exists based on that graph.
IBM is a $100B US company. 2/3 of their workforce is overseas. 50% of their revenue is generated overseas. Is that graph using $100B or $50B when factoring in Productivity. Wall Street is using $100B which is a misrepresentation of true US productivity.
“Mark, by the 1970s, Eccles had been out of office for 20 years–I don’t see how you can blame the 70s on Eccles.”
Mark was referring to Eccles depression policies which were being used in the 70s.
I agree Its not fair to blame Eccles for policies he may or may not have implemented in the 70s, but I don’t think that was the point Mark was making.
In the midst of these heavy observations and speculation as to what the long dead would do in today’s crisis, I will point out the inconsequential fact that the aide on FDR’s left is his son, James.
This was very interesting post and makes a good case of how Eccles chose a seemingly unconventional path to address the stagnant monetary supply, considering his banking antecedents.
Guillaume, thank you! I was wondering who the other person was, and I have updated the photo caption.
Bishop Rick, I will have to blog about the chapters these graphs come from in more detail. I was so impressed with Reich’s graphs and reasons that I pulled them into to this post. Reich dealt with those issues in the context. Like I said, I HIGHLY recommend the book.
I also wish to point out that the man in the background is Bob.
According to two UCLA economists, FDR’s New Deal policies are responsible for prolonging the Great Depression. It was the reversal of some of these policies in the late 1930’s, as well as WWII that helped bring the country out of the depression. The recovery would have been very rapid had the government not interfered.
Unemployment remained in double digits during the entire New Deal era. It wasn’t until 1 year after the end of the New Deal that unemployment went below 4%, and this in spite of the huge return of soldiers from the war. There was a chance under Truman to enact another New Deal, but Congress— both chambers with Democratic majorities— responded by just saying “no.” No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits. You would think that if the New Deal was such a huge success under FDR, that legislators would want to continue with those kinds of policies. Instead, Congress reduced taxes. “By the late 1940s, a revived economy was generating more annual federal revenue than the U.S. had received during the war years, when tax rates were higher. Price controls from the war were also eliminated by the end of 1946. The U.S. began running budget surpluses.” (reference link above)
Even Henry Morgenthau Jr. (FDR’s close friend, secretary of the Treasury, and key architect of the New Deal) recognized the failures of the New Deal. He said, “we have tried spending money. We are spending more than we have ever spent before and it does not work…We have never made good on our promises…I say after eight years of this Administration we have just as much unemployment as when we started…and an enormous debt to boot!”
Maybe none of this information is enough to change your mind, but go back to 1920, when we had double-digit inflation and high interest rates coming after WWI. Harding took power amidst 15% unemployment and GDP falling off a cliff worse than we saw in 2008. Harding’s Commerce Secretary, Herbert Hoover, encouraged the president to use government intervention and spending. Harding wisely ignored him, cut taxes, cut spending, tightened money, and ended his Great Recession in ten months. Hence, the Roaring Twenties.
When I look at some of the policies that came out of the New Deal. I just have to shake my head at not just the idiocy, but the sheer immorality of it. Take the example of Wickard v. Filburn. Filburn maintained a herd of dairy cattle, raised poultry, and sold milk, poultry, and eggs in the open market. He planted a small acreage of winter wheat that he fed to his chickens and cattle, ground into flour for his family’s consumption, and saved for the following year’s seed. Filburn did not sell a single bushel of wheat in the open market. In 1941, Filburn sowed twelve acres of wheat more than he was permitted by Second Agricultural Adjustment Act’s regulations. This unauthorized planting yielded 239 bushels of wheat, on which the federal government imposed a penalty of 49 cents a bushel. If it weren’t for FDR’s court stacking, this would’ve surely been overturned as unconstitutional.
Not only this, but there was actually a program in place to burn crops and kill livestock in order to increase the price of food. No, the food was not harvested and then given to the poor. It was just burned or otherwise destroyed. Now, tell me how this could conceivably help the economy?
Which is worse, destroying crops and livestock or paying farmers not to farm?
Look, you’re not going to see me defend farm subsidies, or destroying crops. Certainly this was wrong. But I think Tara is focusing on a symptom rather than the much larger problem of wealth concentration.
I just created a new post from chapter 3 of Reich’s book, and I’d like to see if you have anything to argue about with Reich, who explains a much bigger problem than farm subsidies. He also explains how the roaring 20’s mimic the roaring 2000s. Please tell me where Reich is wrong in his analysis of the stock market collapses and dept problems of these 2 decades in particular.
Wow MH. You seem to have a pre-conceived notion that I will automatically disagree with Reich after reading your new post. I have already agreed with him on some issues.
Is this an all or nothing proposition?
I will comment on the next post after reading it.
From my understadning of history thier were 3 causes of the great depression. 1 wall street speculation. 2 Over production of goods by America and 3 the gold standard.
2 things caused the depression:
1. Lack of regulation – which led to the second
2. Corruption
The Gold Standard did not cause the depression, it limited the Fed’s ability to react. This is no longer a limiting factor today.
@Mormon Heretic
What symptoms am I focusing on? What I’ve tried to do was to highlight wrong-headed tactics to deal with the problem. How do you consider them merely symptoms?
@Bishop Rick
I’m not sure I would agree that lack of regulation caused the depression. If anything, regulation may have exacerbated things. Look at Smoot-Hawley. It may not have caused the depression, but it certainly made things worse.
I’ve read that possibly the biggest cause behind the Great Depression was Hoover’s labor policies, accounting for close to two-thirds of the drop in the nation’s GDP. Here is a quote from the a study:
Here is a link to another related article and a quote from it relating to what we experience today from OPEC:
Reality is, you can’t place the blame of something so big on just a few things. It was a perfect storm. I don’t think their is any argument that lack of regulation led to the stock market crash. This may not have been the economic death nell, but it was certainly what got the ball rolling…with a lot of momentum. All the corruption of wall street came about because they could essentially do whatever they wanted due to the lack of regulation. Regulations like Glass-Steagall Act that prohibited banks from being both commercial and financial institutions. This part of the act was repealed in 1999 BTW by the Gramm-Leach-Bliley Act.
What the lack of this particular regulation does is give the Bank the ability to do things like approve unfit loans, based on selling mortgage-backed securities, on speculation. This is a definite conflict of interest.
Bishop Rick, I agree that “you can’t place the blame of something so big on just a few things.” I guess the problem I feel in this conversation is that I read the whole book, and I feel like Reich addresses all of these issues. But when it comes to a post, I’m trying to keep it short enough to be readable. Therefore, with my snippets of the book, it is easy to poke holes with the short amount I am quoting.
It is apparent to me that certain banking regulations, such as those repealed in 1999 by Phil Gramm and others, has led to the speculative bubble of the stock market and real estate that we are currently experiencing. FDR and co set up these regulations for a reason, and repealing them has led to a disaster. While many federal regulations are onerous, I’m afraid that this one is essential to a stable economy. Repealing it was a REALLY bad idea, unless you’re a banker who got bailed out. Then it’s business as usual, because you’ve convinced the public that you’re too big to fail. Such recklessness is a MAJOR problem with the economy. Until it is rectified, we will continue to experience wild swings in the economy. And I’m not optimistic that these swings will be solved by our current congress. It may take another depression before congress finds a will to solve the problem, because bankers have flooded politicians with money.
Agree 100%
@Bishop Rick
You both may be right about not being able to blame something so big on just a few things, and I’m not trying to argue otherwise.
I may have to disagree about the Gramm-Leach-Bliley Act being responsible for the situation we are in. From what I understand, if it were, we might have expected the crisis to originate in Europe where they never had any Glass-Steagall requirements to begin with. We would’ve also seen commercial banks, rather than investment banks, in trouble. As it is, the most diversified banks are the ones who have survived, whereas the least diversified banks, like Lehman Brothers, failed.