The Morgan Men Take Control

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Throughout the 1920’s the Morgan group generally had control of the Federal Reserve including Benjamin Strong who is considered to have been the most influential and powerful Federal Reserve banker of the time. Strong was also a close personal friend of Montagu Norman, head of the Bank of England. Harding was an Ohio Republican and was closest to the Rockefeller’s and Secretary of State Charles Evans Hughes was also associated with the Rockefeller family which made the Harding administration a low point in terms of Morgan control (5 p. 269) (6 pp. 380-82) . When Harding died suddenly and Coolidge was elevated to president the level of Morgan control of the government and the Fed increased dramatically. Coolidge was from a prominent Boston banking family that also was linked to the Morgan-affiliate United Fruit Company. He was also mentored by W. Murray Crane, who was head of the Massachusetts Republican Party and was director of three Morgan institutions[1], and Morgan partner Dwight Morrow who was a classmate at Amherst and was an early political supporter of Coolidge (5 p. 268) (6 pp. 254-5). The Secretary of the Treasury through all three Republican administrations was Andrew Mellon, whose financial empire included Mellon National Bank of Pittsburg, Gulf Oil, Koppers Company, and Aluminum Corporation of America, was also loosely aligned with the Morgan group. 1924 saw the House of Morgan at the pinnacle of political power in the United States.

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The Morgan’s had long been deeply tied to the British government through their subsidiary Morgan, Greenfield of London. The House of Morgan had been named an official agent of the British Treasury and the Bank of England during WWI and was the sole purchaser of all supplies for the British and French militaries from the US (5). They were also the underwriter of all British and French bonds.  The Morgan’s played a significant role in the US entry into WWI in support of the British and, through Benjamin Strong, in expanding the money supply (doubling) to finance America’s role in the war (5 p. 270) (7 pp. 67-133). After the war, the Fed’s monetary policies implemented by Strong were intended to help Great Britain impose a new gold exchange standard on Europe that was to restore the financial dominance of England and the House of Morgan. The objective was to return to the prewar par value in 1925 despite being wildly overvalued due to Britain inflating and depreciating the currency between 1914 and 1925. This would, in turn, crush their exports while at the same time continuing cheap money inflationary policies (5 p. 271). In summary, the US inflated their money and credit in order to prevent Britain from losing gold to the U.S. and in so doing this, eventually led to the collapse of the U.S. economy followed by the world economy.

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As the Coolidge administration wound to an end the Morgan’s assessed their options for the next president.  Their first choice was to induce Coolidge to break with tradition and run for a third term which he rejected. Their second choice was Vice President Charles Dawes who dropped out of the race.  The third choice was Herbert Hoover who was eventually elected. Hoover had been Secretary of Commerce but had only loose connections to the Morgan’s. He did, however, depend heavily on two advisors, Thomas Lamont and Dwight Morrow, who were both Morgan partners.  The cabinet he assembled was comprised largely of people deeply tied to the House of Morgan. (5 p. 269)

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At this point it would be appropriate to look at how this would have played out without the Fed.  Capitalism’s greatest limitation is that capital growth is based on compound interest which no economy can grow fast enough to support for long and eventually this will lead to more marginal investments until there is a contraction that clears the mal-investment.  When a central bank is introduced a new option is made available which is to expand the money supply which can prop up mal-investment and pass the cost on to the public in the form of the hidden tax of inflation. In the case of the depression of 1920 the Fed was still cautious enough not to do this which would have led to a rapid recovery and vigorous growth in the 1920’s even if currency had not been inflated. Eventually monetary expansion would have led to another boom and bust cycle which then would have corrected itself yet again. If the Fed took an activist approach in terms of stopping the natural process and supporting capital the process would take longer to run its course and eventually the fall would be larger.  In this case, however, the process of aggressive Fed intervention wasn’t initially driven by the American economy in the later phases of an expansion cycle but by the British economy which supercharged the cycle.  Instead of reducing economic volatility it was causing it and not for all for the benefit of a foreign power that had extremely deep ties to the American political elite.

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The Hoover Administration and the Great Depression

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When Hoover came to office he had been a heavy critic of Strong’s inflationary policies but he had also been in favor of a different form of inflationary policies, cheap credit. He tried to constrain the use of cheap credit by using his political influence to influence banks not to lend money for the purpose of purchasing stock which he held to be unproductive use of capital (5 p. 271). Benjamin Strong died in 1929 and Hoover selected Ray Young as the new head of the Federal Reserve who embraced these policies. By June of 1929 it was clear that the policy of selective persuasion had failed. Montagu Norman then switched and managed to persuade the Fed to revert back to their old policy of inflating reserves by subsidizing the acceptance market. This policy had previously been abandoned in the spring of 1928. In spite of this the money supply in the U.S leveled off by the end of 1928. The credit boom was over and the American economy started to contract by July of 1929. Further expansionary monetary policies managed to keep the stock market boom going while other data was strongly negative until the actual market crash on October 24th of 1929. (5 p. 272)

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When the collapse hit, the Hoover administration along with key members of the Federal Reserve were ready with plans for aggressive intervention going against historical policy of not intervening in cyclical recessions.  George L. Harrison, head of the New York Fed and major influencer of Federal Reserve policy, led aggressive action immediately following the crash. In the last week of October the Fed doubled their holding of government securities. This added $150 million to bank reserves and discounted $200 for member banks. Along with supporting stock prices a secondary objective was New York City banks to take over loans to stockholders that were being liquidated. All this led to member bank’s assets expanding $1.8 billion or 10% in just one week(5 p. 274). Interest rates were also driven down from 6% to 4.5%.  Harrison did all this over the objections of Fed Governor Roy Young stating, “The Stock Exchange should stay open at all costs” and “Gentlemen, I am ready to provide all the reserve funds that may be needed.”(6 p. 219)  By mid-November the stock market had stabilized and started to move up again. Fed ownership of securities had increased to $375 million from $136 million before the October crash. This was offset by lower bank loans, increased money in circulation, and a drawdown of $100 million in gold from the banking system (5 p. 275).  While the Fed continued to try to inflate, the general public being aware of the risk was removing funds from the banking system. For the moment at least, these policies were viewed as a success.

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By the end of 1929, Roy Young and other Fed officials who favored allowing market factors to force the losses associated with mal-investment to be realized, were pushing for a return to non-interventionist policies.  Harrison, however, effectively overruled them and drove discount rates down and continued to expand the purchase of government securities which was offset by expanding bank failures.  This function caused money supply to remain relatively constant throughout the 1930’s. In 1930 Montagu Norman realized his long standing goal of establishing a collaboration between central banks in the form of the Bank of International Settlements (BIS) (5 p. 276).  This was a key milestone in the establishment of modern western globalism.  Congress forbade the Fed from joining the BIS but they effectively did it anyway by working through the New York Fed. Members of the New York Fed who also had very deep ties to the House of Morgan occupied key managing positions with the BIS and J.P. Morgan and Company supplied the capital. Hoover replaced Roy Young as chairman of the Federal Reserve Board with financial speculator Eugene Meyer, Jr who fully supported inflationary easy-money policies. 1930 brought about the effective end of laissez-faire economics which was summarized by Murray Rothbard as follows:

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                Late 1930 was perhaps the last stand of laissez-faire, sound-money liquidationalists.  Professor H. Parker Willis, a tireless critic of the Fed’s inflationism and credit expansion, attacked the current easy-money policy of the Fed in an editorial in the New York Journal of Commerce.  Willis pointed out that the Fed’s easy –money policy was actually bringing about the rash of bank failures, because of the banks’ “inability to liquidate” their unsound loans and assets…”(5 p. 277)

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The Song "Happy Days are Here Again" was not a celebration of the end of the depression but came out when the Fed was still trying to re-inflate the economy through stimulus and became a Roosevelt theme during his campaign.