Roosevelt, the Great Depression, and the Economics of Recovery

Elliot A. Rosen

• Publisher: University of Virginia Press
• Year: 2012
• Print ISBN: 9780813923680
• eBook ISBN: 9780813934273
• Topic: History
• Subtopic: North American History
• Index: History

Historians have often speculated on the alternative paths the United Stages might have taken during the Great Depression: What if Franklin D. Roosevelt had been killed by one of Giuseppe Zangara's bullets in Miami on February 17, 1933? Would there have been a New Deal under an administration led by Herbert Hoover had he been reelected in 1932? To what degree were Roosevelt's own ideas and inclinations, as opposed to those of his contemporaries, essential to the formulation of New Deal policies?

In Roosevelt, the Great Depression, and the Economics of Recovery, the eminent historian Elliot A. Rosen examines these and other questions, exploring the causes of the Great Depression and America's recovery from it in relation to the policies and policy alternatives that were in play during the New Deal era. Evaluating policies in economic terms, and disentangling economic claims from political ideology, Rosen argues that while planning efforts and full-employment policies were essential for coping with the emergency of the depression, from an economic standpoint it is in fact fortunate that they did not become permanent elements of our political economy. By insisting that the economic bases of proposals be accurately represented in debating their merits, Rosen reveals that the productivity gains, which accelerated in the years following the 1929 stock market crash, were more responsible for long-term economic recovery than were governmental policies.

Based on broad and extensive archival research, Roosevelt, the Great Depression, and the Economics of Recovery is at once an erudite and authoritative history of New Deal economic policy and timely background reading for current debates on domestic and global economic policy.

1 | FINANCIAL CRISIS

CONFRONTED BY DEFLATIONARY pressures, a massive decline in corporate income and investment, evaporated farm incomes, and widespread unemployment, Herbert Hoover attributed the Great Depression principally to international events beyond his control. As he put it in his Memoirs, “The great center of the storm was Europe. That storm moved slowly until the spring of 1931, when it burst into a financial hurricane.”¹

While such an analysis provided Hoover with a rationale for limited intrusion into the domestic arena, the impact on the U.S. economy by external events was not inconsiderable. These included the demand for remission of the debts and reparations settlements reached after the First World War; Great Britain's abandonment of gold, a policy which Hoover unwisely sought to reverse; and creation of the sterling trading bloc to the disadvantage of U.S. farm exports, which exacerbated the domestic agricultural crisis. Insistence by Hoover on maintenance of the dollar on the gold standard, a deflationary policy supported by the Federal Reserve Bank of New York and urged on Franklin D. Roosevelt, precipitated the massive price decline that ensued.

British prime minister Ramsay MacDonald opened the debts-reparations issue with the U.S. chargé d'affaires, Ray Atherton, in June 1931. The exchange occurred under conditions of accelerated economic warfare occasioned by gold transfer problems and imminent collapse of the international credit system based in part on the willingness of New York banks to renew short-term loans to Germany's local and state governments.

In previous talks with MacDonald, Chancellor Heinrich Brüning, pressed at home by both Left and Right, warned of the possibility of a government headed by the Communists or the Hitlerites. To placate the right-wing nationalists, the Brüning government demanded a revision of the Versailles Treaty that would allow the creation of a customs union with Austria, military parity with France, and a substantial abatement of reparations. Potentially most troublesome for Anglo-American relations was MacDonald's attempt to tie reparations relief to debts rescission. Great Britain, he insisted, served simply as a conduit for German payments made to it as reparations, then transmitted to the United States as war debts repayment, a position long since rejected by the Congress.²

MacDonald's message arrived in Washington at a critical juncture. With millions of farmers in distress, unemployment on the increase, country banks shuttered by the thousands, and federal revenues in decline, Hoover required the appearance of action as his earlier hortatory approach to these problems proved unsuccessful. Promises by business to maintain investment and employment, conferences in Washington that outlined voluntary action along these lines, establishment of a Federal Farm Loan Board to encourage farm cooperative marketing, would no longer suffice.

It is quite evident that by 1931 Hoover required a rationale for the internal collapse. There were two options: substantial federal intervention into the domestic economy, a course he would not take, or ascribing the depression to external causes beyond his control. The reparations-debts-international banking crisis of 1931 provided an opportunity for action in the international arena. Even with the MacDonald approach to Washington at hand, however, Hoover proved cautious: the so-called Hoover Moratorium on intergovernmental debts resulted from pressures that emanated from J. P. Morgan & Co.

At a June 5 luncheon meeting of the Morgan partners, Russell C. Leffingwell won unanimous endorsement of a memorandum on “Debts Suspension” initiated by General Electric's Owen D. Young, author of the 1929 Young Plan for reparations revision and a member of the board of directors of the Federal Reserve Bank of New York. In international banking circles it was feared that reparations repudiation under the guise of Germany's incapacity to pay, which was questioned, could well lead to repudiation of private debts as well. American investment in Germany had shored up both the private and public sectors for a decade in the form of short-term loans estimated at some $2 billion, half residing in commercial banks. A German default could well bring down some of the major New York financial institutions, the Chase and Guaranty Trust among them. While he sniffed at a “bankers’ panic”—it should be noted that the Morgan firm was not directly involved in this system—Hoover went along. The resulting moratorium on intergovernmental obligations of June 1931 and arrangement of standstill agreements for the short-term private debts afforded a year's reprise for negotiating solutions to the mushrooming international economic crisis.³

With France facing a German reparations default, Hoover and Premier Pierre Laval met in Washington. The conversations of October 22–25, 1931, illustrate the disharmonious efforts at international cooperation opened up by MacDonald; too, they proved a prologue to the unsuccessful Lausanne Conference of 1932 and the disastrous World Monetary and Economic Conference of 1933. Despite a ranging agenda that included discussion of the gold standard, central bank cooperation in the stabilization of currencies, possible monetization of silver (a sop to U.S. mining and agricultural interests), disarmament, tariff reduction, revision of the Versailles Treaty, and France's requirement for political guarantees vis-à-vis Germany, not one of these issues could be resolved in the next few years. Whereas Hoover and Laval agreed on the desirability of an international monetary conference, which would secure maintenance of the gold standard and stabilization of the exchanges, MacDonald, who was in process of organizing a National government that went off gold and depreciated the pound, indicated a lack of interest in a monetary conference “at the moment.” When the National government proved ready to stabilize a depreciated pound in 1933, Roosevelt, beneficiary of a rapidly depreciating dollar, proved unready. Such was the course of international economic affairs in these years.⁴

Efforts at debts-reparations rapprochement proved impossible and increasingly an obstacle to any sort of agreement on more important issues. The U.S. economic position was hammered out at an all-day meeting held at the offices of the Federal Reserve Bank of New York on October 19, 1931. In attendance were the Fed's principals, Eugene Meyer, governor of the Federal Reserve Board, and George Harrison, governor of the Federal Reserve Bank of New York; Assistant Secretary William Rogers and economic adviser Herbert Feis, representing the State Department; Acting Secretary of the Treasury Ogden Mills; and Walter Stewart of Case Pomeroy & Co. and S. Parker Gilbert of J. P. Morgan, spokesmen for the Wall Street banking community. The Wall Street conference arrived at a procedure which led to the Lausanne Agreement of 1932 and to the request for parallel concessions on the debts that descended upon the State Department as Hoover's term in office drew to a close. Germany should take the initiative and request its creditors to reconsider the reparations settlement. Germany's creditors meantime would be reassured by a Franco-American statement suggesting U.S. reconsideration of the postwar debt settlements through a reconstituted Debt Funding Commission.⁵

In his exchanges with Pierre Laval, Hoover refused to join in a general conference on debts, reparations, and monetary policy, a position accepted by MacDonald, or to call for a new Debt Funding Commission. He suggested to Laval, instead, willingness to review the debts with individual debtors by direct negotiation. Did this mean a quid pro quo conditioned on formal separation of debts from other financial issues? Had there been a wink of the eye, a nod that promised substantial debt relief to be afforded by the United States following a lowering of reparations?⁶

Hoover left for future scholars a memorandum, addressed to Secretary of State Henry L. Stimson (dated “October, 1931?”) purporting to show that no commitments had been made beyond American willingness to consider capacity to pay. Contemporaneous evidence suggests otherwise. The memorandum, to begin with, was written in late 1932, not 1931, apparently to deflect charges made on the floor of the U.S. Senate that he had offered a debts-reparations quid pro quo. It is doubtful that Laval, in light of French feelings on the subject, would have suggested to German ambassador Herr Friedrich W. von Prittwitz und Gaffron that his government request a commission of inquiry on reparations without some understanding of equivalent concessions on debts. Such an interpretation is supported by the diary of Stimson, who was present at the Hoover-Laval exchanges: “The president…. brought forward the Mills suggestion the other day of invoking a conference under the Young Plan to determine Germany's ability to pay reparations during the time of the depression; to be followed by a reexamination of the debts. Laval didn't dispute this. I think he was a little surprised at the president making it.”

The following day, as discussants considered a communiqué for public consumption, Stimson noted in his diary that the president conceded “if Germany was helped in their reparations, we would have to help our debtors on debts.” This evidently was Laval's understanding. En route home, via London, he explained to Sir Frederick Leith-Ross at Treasury that “he had been led to understand that after the reparations question had been settled among the European powers, the American government would be willing to cooperate in a revision of other intergovernmental obligations.”⁷

For a moment it seemed that the machinery had been set in motion for substantial relief from the debts-reparations albatross. The terse joint communiqué, issued in Washington on October 25, promised an effort toward an agreement on intergovernmental obligations “covering the period of business depression, as to the terms and conditions of which the two governments make all reservations.” This last clause proved critical, for Laval needed to persuade the Chamber of Deputies and Hoover the Congress. Yet it soon became evident that the president refused to press for a permanent settlement of the wartime debts incurred by the Allies to the United States.⁸

In a cautious message to Congress in December, Hoover proposed repayment of debts due the United States during the moratorium year over a period of ten years beginning July 1, 1933. He suggested the need to make further temporary adjustments and to this end “re-creation of the World War Foreign Debt Funding Commission with authority to examine such problems that may arise in connection with these debts during the present economic emergency.” In the congressional debate that ensued, leading to the joint House-Senate resolution of December 22, 1931, notice was served that debts would neither be canceled nor reduced in any circumstance. Suggestive of the isolationist attitudes of the decade, “Let any nation default that desires to do so,” Senator Hiram Johnson of California challenged, almost hopefully, as a lesson to the interventionists of 1917. Fingers to the wind, Republican stalwarts joined in the display of nationalism. Even Hoover intimate David A. Reed of Pennsylvania wondered if debts reduction had been confected by Wall Street banks and bond houses that had made huge private loans to Europe in the 1920s. “We have cancelled all we are going to cancel.”⁹

With Congress having “rapped my knuckles,” in Hoover's words, leadership on the issue passed to France and Britain. During the course of the debate on the House-Senate resolution, Prime Minister MacDonald, an internationalist and a believer in Anglo-American amity, sent Secretary Stimson a blunt warning of events to come. “Reports have been made that Congress, in ratifying the one year moratorium, may attempt to impose conditions precluding further remission on the debts.” The result, he predicted, would be an impasse. As conditions worsened in Europe, there seemed no prospect of reparations payments to England, leaving it unable to meet debts payments to the United States. “We hope,” and MacDonald now mentioned the unmentionable, “that some means may be devised which will enable us to avoid anything which might be represented as repudiation.”¹⁰

Two distinct conferences met in Lausanne in June 1932. One dealt with intergovernmental obligations, the other with the broad economic and financial issues triggered by Britain's abandonment of gold in September 1931, the discard of its historic policy of free trade, and the devaluation of the pound. The latter agenda, more difficult, involved the United States and would be taken up at the World Economic Conference, held at London. As for the debts, France and Great Britain moved toward compromise in the belief that the United States would not press its wartime allies into default for fear of its impact on international finance. The two European powers concluded that Germany could not or, in any event, would not resume reparations payments. Hopeful of U.S. reciprocity and convinced of linkage between debts and reparations, Edouard Herriot, Laval's successor, and MacDonald acceded to German demands. German commitments to its former opponents were scaled down some 90 percent contingent upon a commensurate forgiveness of war debts owed the United States.¹¹

The Hoover administration found itself divided, with the president resentful of the agreement he had encouraged. In a series of exchanges in mid-July, he and Stimson argued bitterly, the nationalistic Mills siding with Hoover. At a tense luncheon Stimson counseled that the Lausanne arrangements would prove helpful; Hoover countered that he and Stimson “really had no common ground; that he thought that the debts to us could be paid and ought to be paid; and that the European nations were all in an iniquitous combine against us.” Stimson suggested that he ought not to be Hoover's adviser, arguing that the New York Federal Reserve's George Harrison, among others, perceived the Lausanne meeting as a precursor of a genuine recovery. Most telling and correct in this series of engagements was Stimson's claim that Ramsay MacDonald had made a “gallant fight to do what he thought we wanted done.” While the imbroglio cooled, Stimson remained unhappy, convinced that Hoover and Mills, ardent nationalists, acted “from the standpoint of our domestic politics [the 1932 political campaign].”¹²

While the war debts issue confirmed U.S. wariness of involvement in Europe, considerably more destabilizing was Britain's abandonment of gold in September 1931 followed by an equalization fund managed for the purpose of a pound devaluated at the expense of the gold standard currencies. Creation of a sterling trading zone protected by tariffs on agricultural and other imports and an imperial preference system in 1932 severely limited U.S. agricultural exports to its principal outlet. From the perspective of London, the island nation could no longer afford the luxury of maintaining international liquidity and free trade, a critical component of economic growth in the century preceding the Great War. From that of the Hoover administration, abandonment of gold represented a departure from contractual and social norms and added to domestic political and economic pressures for an inflationary policy based on relinquishment of the dollar's tie to gold. War debts, it was hoped, could be traded for London's return to the gold standard.

Before the Great War the City of London functioned as the world's banker and as a force for stability in international money markets, with the Bank of England ready to exchange pounds for gold or for other currencies in relation to gold. With the bulk of world trade denominated in sterling, this system also has been described as an “international exchange-stabilizing sterling standard,” sustained by Britain's investment of capital surplus abroad and willingness to take commodities instead of gold from its debtors. Britain profited not only from investment returns but also from the tendency for banking, shipping, and allied services to flow through London as the center of an international nexus of credit, trade, and insurance. The system worked well as long as there was minimal pressure on London's gold reserves, also as long as all major central banks took requisite, deflationary measures to defend gold reserves when necessary, even at the cost of local employment.¹³

The World War shattered the gold-sterling system. Its monumental cost enervated Great Britain as a financial power, compelled as it was to liquidate much of its foreign investments and borrow on a massive scale in the New York market. Subsequently, overseas earnings declined, and exports never recovered their prewar levels—much of that trade decline occurring in the dollar area—impairing the United Kingdom's financial capacity. Loss of dollar assets and earnings was compounded by the war debts owed the United States and a shift of financial services from London to New York.

The United Kingdom returned to gold at a prewar parity of $4.86 on April 28, 1925, leaving the pound overvalued by 10 percent. Gold advocates believed that a return to prewar parity would stimulate British trade and employment and forestall, in the words of Montagu Norman, head of the Bank of England, “nostrums and expedients other than the gold standard,” meaning government experiments with paper money.

While a low interest rate strategy of the New York Federal Reserve Bank protected England's gold reserve for several years, in mid-1931 sterling came under pressure when the Macmillan Report revealed the extent of sterling balances convertible to gold and the May Report claimed that government deficits were a product of Labour's budgetary extravagance. Britain's international position had been further weakened by failure to attain a substantial postwar recovery as well as by sterling bloc trade deficits. More immediately, international loan funds, usually available from New York, Paris, and Berlin, dried up.¹⁴

On September 21, 1931, Great Britain abandoned gold, and the pound plummeted. Great Britain made no effort to cushion the impact on other nations, with MacDonald making it clear that stabilization of the pound was purely a British problem to be determined by business conditions. The effect proved catastrophic for exchange stability, for without gold and sterling as the common denominators of monetary values worldwide, the central banks of the principal nations would need to cooperate in maintaining agreed-upon currency parities in order to stabilize the marketplace, an impossibility in the depression environment.¹⁵

As national treasuries and central banks hoarded gold to protect their solvency, international economic warfare set in, ruthless and brutal. Twenty-one nations either abandoned the gold standard or prohibited gold exports, with the United Kingdom leading the way. Twenty-eight countries, including Germany and Italy, instituted foreign exchange controls, and eleven, principally smaller nations, imposed moratoriums on external governmental and commercial credit. Forty-four, among them the United States, France, Great Britain, Canada, Germany, and Italy, utilized general tariff increases or special tariff impositions as a further measure of self-preservation. Twenty-six made use of import quotas and embargoed certain exports to protect currency and gold reserves as well as the local market for domestic producers.¹⁶

The Hoover administration faced more difficulties. While Ramsay MacDonald, a Labourite, was anxious for joint effort with the United States, the National government formed in the wake of the October 1931 election was dominated by empire-oriented Tories, led by Chancellor of the Exchequer Neville Chamberlain, who framed its economic policies. (Though the National government was theoretically a coalition of Conservatives, Labourites, and Liberals, the bulk of the Labour Party went into opposition.) In 1932 Chamberlain and the Treasury put forward a program designed to brake the United Kingdom's unemployment problem and its declining export trade, also to stabilize the pound at a level capable of maintaining London as the leading international center of trade and finance. At the same time Chamberlain proposed to protect key industries, often in de...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgments
• Abbreviations
• Introduction
• 1. Financial Crisis
• 2. Nationalizing the Economy
• 3. Dollar Devaluation and the Monetary Group
• 4. Monetary Policy and the Hoover-Strawn Group
• 5. Fiscal Policy and Regional Diversity
• 6. The Myth of a Corporate State
• 7. The Limits of Planning
• 8. Trade Reciprocity or the Land Used as Concealed Dole
• 9. Relief, Public Works, and Social Insurance
• 10. The New Economics
• 11. The National Resources Planning Board
• 12. Mature Capitalism and Developmental Economics
• 13. The Economics of Recovery
• Notes
• Index