Chapter 1: Eccles’s Insight:
An excerpt from Aftershock by Robert B. Reich
The Federal Reserve Board, arguably the most powerful group
of economic decision-makers in the world, is housed in the Eccles Building on
Constitution Avenue in Washington, D.C. A long, white, mausoleum-like
structure, the building is named after Marriner Eccles, who chaired the Board
from November 1934 until April 1948. These were crucial years in the history of
the American economy, and the world’s.
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 extraordinarily, 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 assumption 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, not just with
the economy but with his own understanding of it. “I awoke to find myself at
the bottom of a pit without any known means of scaling its sheer sides.… I
saw for the first time that though I’d been active in the world of finance and
production for seventeen years and knew its techniques, I knew less than
nothing about its economic and social effects.” Everyone who relied on
him—family, friends, business associates, the communities that depended on the
businesses he ran—expected him to find a way out of the pit. “Yet all I could
find within myself was despair.”
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.”
Economists
and the leaders of business and Wall Street—including financier Bernard Baruch;
W. W. Atterbury, president of the Pennsylvania Railroad; and Myron Taylor,
chairman of the United States Steel Corporation—sought to reassure the country
that the market would correct itself automatically, and that the government’s
only responsibility was to balance the federal budget. Lower prices and interest
rates, they said, would inevitably “lure ‘natural new investments’ 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?”
There was a more elaborate and purportedly “ethical”
argument offered by those who said nothing could be done. Many of those
business leaders and economists of the day believed “a depression was the
scientific operation of economic laws that were God-given and not man-made.
They could not be interfered with.” They said depressions were phenomena like
the one described in the biblical story of Joseph and the seven kine, in which
Pharaoh dreamed of seven bountiful years followed by seven years of famine, and
that America was now experiencing the lean years that inevitably followed the
full ones. Eccles wrote, “They further explained that we were in the lean years
because we had been spendthrifts and wastrels in the roaring twenties. We had
wasted what we earned instead of saving it. We had enormously inflated values.
But in time we would sober up and the economy would right itself through the
action of men who had been prudent and thrifty all along, who had saved their
money and at the right time would reinvest it in new production. Then the
famine would end.”
Eccles thought this was nonsense. A devout Mormon, he saw
that what passed for the God-given operation of economics “was nothing more
than a determination of this or that interest, specially favored by the status
quo, to resist any new rules that might be to their disadvantage.” He wrote,
“It became apparent to me, as a capitalist, that if I lent myself to this sort
of action and resisted any change designed to benefit all the people, I could be
consumed by the poisons of social lag I had helped create.” 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 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 made his national public debut before the Senate
Finance Committee in February 1933, just weeks before Franklin D. Roosevelt was
sworn in as president. The committee was holding hearings on what, if anything,
should be done to deal with the ongoing economic crisis. Others had advised
reducing the national debt and balancing the federal budget, but Eccles had
different advice. Anticipating
what British economist John Maynard Keynes would counsel three years later in
his famous General Theory of Employment, Interest and Money, Eccles told the
senators 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 of purchasing power on the part of all the
people.”
Eccles arrived at these ideas not by any temperamental or
cultural affinity—he was, after all, a banker and of Scottish descent—but by
logic and experience. He understood the economy from the ground up. He saw how
average people responded to economic downturns, and how his customers reacted
to the deep crisis at hand. He merely connected the dots. 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
pensions, 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.
Eccles then returned to Utah, from where he watched
Roosevelt hatch the first hundred days of his presidency. To Eccles, the new
president’s initiatives seemed barely distinguishable from what his
predecessor, Herbert Hoover, had offered—a hodgepodge of ideas cooked up by
Wall Street to keep it afloat but do little for anyone else. “New York, as
usual, seems to be in the saddle, dominating fiscal and monetary policy,” he
wrote to his friend George Dern, the former governor of Utah who had become
Roosevelt’s secretary of war.
In mid-December 1933, Eccles received a telegram from
Roosevelt’s Treasury secretary, Henry Morgenthau, Jr., asking him to return to
Washington at the earliest possible date to “talk about monetary matters.”
Eccles was perplexed. The new administration had shown no interest in his
ideas. He had never met Morgenthau, who was a strong advocate for balancing the
federal budget. After their meeting, the mystery only deepened. Morgenthau
asked Eccles to write a report on monetary policy, which Eccles could as easily
have written in Utah. A few days later Morgenthau invited Eccles to his home,
where he asked about Eccles’s business connections, his personal finances, and
the condition of his businesses, namely whether any had gone bankrupt. Finally,
Morgenthau took Eccles into his confidence. “You’ve been recommended as someone
I should get to help me in the Treasury Department,” Morgenthau said. Eccles
was taken aback, and asked for a few days to think about it.
“ ‘Here you are, Marriner, full of talk about what the
government should and shouldn’t do,’ ” Eccles told himself, as he later
recounted in his memoirs. “ ‘You ought to put up or shut up.… You’re
afraid your theory won’t work. You’re afraid you’ll be a damned fool. You want
to stick it out in Utah and wear the hair shirt of a prophet crying in the
wilderness. You can feel noble that way, and you run no risks. [But] if you
don’t come here you’ll probably regret it for the rest of your life.’ ”
Eccles talked himself into the job.
For many months thereafter, Eccles steeped himself in the
work of the Treasury and the Roosevelt administration, pushing his case for why
the government needed to go deeper into debt to prop up the economy, and what
it needed to do for average people. Apparently he made progress. Roosevelt’s
budget of 1934 contained many of Eccles’s ideas, violating the president’s
previous promise to balance the federal 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 Wall Street wanted a
tight money supply and correspondingly high interest rates, but the Main
Streets of 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 to 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. This was Eccles’s biggest and most important insight.
It has direct bearing on the Great Recession that started at the end of 2007.
In Eccles’s words:
As mass production has to be
accompanied by mass consumption, mass consumption, in turn, implies a
distribution of wealth—not of existing wealth, but of wealth as it is currently
produced—to provide men with buying power equal to the amount of goods and
services offered by the nation’s economic machinery. Instead of achieving that
kind of distribution, a giant suction pump had by 1929–1930 drawn into a few
hands an increasing portion of currently produced wealth. This served them as
capital accumulations. But by taking purchasing power out of the hands of mass
consumers, the savers denied to themselves the kind of effective demand for
their products that would justify a reinvestment of their capital accumulations
in new plants. In consequence, as in a poker game where the chips were
concentrated in fewer and fewer hands, the other fellows could stay in the game
only by borrowing. When their credit ran out, the game stopped.
The borrowing had taken the form of mortgage debt on homes
and commercial buildings, consumer installment debt, and foreign debt. Eccles
understood that this debt bubble was bound to burst. And when it did, consumer
spending would shrink.
And so it did. When there were no more poker chips to be loaned
on credit, debtors were forced to curtail their consumption. This naturally
reduced the demand for goods of all kinds and brought on higher unemployment.
Unemployment further decreased the consumption of goods, which further
increased unemployment.
For Eccles, widening inequality was the main culprit.
For Eccles, widening inequality was the main culprit.
Reich, Robert B. (2010-09-21). Aftershock (Vintage) (Kindle Locations 153-160). Random House, Inc.. Kindle Edition.
