A History of Money and Banking in the United States: The Colonial Era to World War II (40 page)

A History of Money and Banking in the United States:
The Colonial Era to World War II

rates and prices in depressions, and of pursuing inflationary cheap money, saying, “Our depression has been prolonged and not alleviated by delay in making necessary readjustments.”22

On the other hand,
Business Week,
then as now a spokesman for “enlightened” business opinion, thundered in late October 1930 that the “deflationists” were “in the saddle.”23

In August 1930, however, President Hoover took another decisive step in favor of inflationism by replacing Roy Young as chairman of the Federal Reserve Board by the veteran speculator and government official Eugene Meyer, Jr.

THE ADVENT OF EUGENE MEYER, JR.

Eugene Meyer, Jr., differed from Strong and Harrison in not being totally in the Morgan camp. Meyer’s father, an immigrant from France, had spent all his life in the employ of the French international banking house of Lazard Frères, finally rising to the post of partner of Lazard’s New York branch. Eugene, Jr., early broke out from Lazard on his on and became a successful operations on government securities, or discounted bank loans to corporate securities. On Willis, see Rothbard,
America’s Great Depression.

After resigning as editor of the
Journal of Commerce
in May 1931, Willis continued to slam the inflationist policies of the Fed in the pages of the
Commercial and Financial Chronicle
during 1931 and 1932. A Willis article in a French publication in January 1932 upset George Harrison so much that he went so far as to plead with Senator Carter Glass to help put an end to “Willis’s rather steady flow of disturbing and alarming articles about the American position.” Harrison to Glass, January 16, 1932, cited in Milton Friedman and Anna J. Schwartz,
A Monetary History of the
United States
(Princeton, N.J.: National Bureau of Economic Research, 1963), pp. 408–09, n. 162.

22
Commercial and Financial Chronicle
131 (August 2, 1930): 690–91;
Commercial and Financial Chronicle
132 (January 17, 1931): 428–29. Even though the Chase Bank was still in Morgan control at the time, Benjamin Anderson had always pursued an independent course.

23
Business Week
(October 22, 1930). Rothbard,
America’s Great Depression
, p. 213.

From Hoover to Roosevelt:

279

The Federal Reserve and the Financial Elites
speculator, investor and financier, an associate of the Morgans, and even more closely an associate of Bernard Baruch and Baruch’s patrons, the powerful Guggenheim family, in virtual control of the American copper industry. It is true, however, that Meyer’s brother-in-law, George Blumenthal, had left this post at Lazard to be a high official in J.P. Morgan and Company, and that Meyer himself had once acted as a liaison between the Morgans and the French government.24 By the 1920s, Meyer’s major financial base was his control of the mighty integrated chemical firm, Allied Chemical and Dye Corporation.25

Before World War I, Meyer’s major financial involvement had been with the Guggenheims and the copper industry. By 1910, he was so prominent in the copper industry that he was able to arrange a cartel agreement between his old patrons, the Guggenheims, and Anaconda Copper, each agreeing to cut its production by 7.5 percent. In the same year, Meyer discovered in London a highly productive and profitable new process for mining copper, and was quickly able to become its franchiser in the United States.26

24It is also true that Meyer was never particularly close to Blumenthal.

Merlo J. Pusey,
Eugene Meyer
(New York: Alfred A. Knopf, 1974).

25The advent of World War I cut the American textile industry off from the dyes of the German dye cartel, which had supplied 90 percent of its dyes. Meyer was astute enough to discover and finance a new dye-making process invented by a struggling chemist and German dye salesman, Dr. William Beckers, and Meyer quickly set up the Beckers Aniline and Chemical Works to sell dyes to the woolen industry. In 1916, Meyer brought about a merger with another new dye firm selling to the cotton industry, and with the supplier of aniline oil to both companies, forming the National Aniline and Chemical Company. Meyer eventually seized control of National Aniline and Chemical, which made heavy profits during the war selling blue dyes to the Navy. After the war, Meyer engineered the merger of National Aniline with companies making acids, alkalis, coke ovens, chemical by-products, and coal-tars, to form the powerful and highly profitable Allied Chemical and Dye Corporation on January 1, 1921. Pusey,
Eugene Meyer
, pp. 117–25.

26Ibid., pp. 82–88.

280

A History of Money and Banking in the United States:
The Colonial Era to World War II

It should not be surprising, then, that, under the regime of World War I collectivism, Meyer began, first, in early 1917, as head of the nonferrous metals unit of Bernard Baruch’s Raw Materials Committee under the Advisory Commission of the Council of National Defense. The nonferrous metals unit included copper, lead, zinc, antimony, aluminum, nickel, and silver. When the War Industries Board took over the task of collectivist planning of industry in August 1917, Meyer assumed the same task there—and was also to become the virtual “czar” of the copper industry.27

More important for his eventual role in the Hoover administration was Meyer’s crucial part in the War Finance Corporation (WFC). The WFC had been set up by Secretary of the Treasury McAdoo in May 1918, ostensibly to finance industries essential to the war effort. Meyer was named the WFC’s managing director. The WFC massively subsidized American industry. During the war, it had two basic functions. One was acting as agent of the Treasury to prop up the market for U.S. government bonds.

During the last six months of the war, Meyer spent $378 million to keep government bonds from falling by more than one-quarter point a day, and later resold the bonds to the Treasury at the cost of purchase.

The second and dominant function of the WFC was to subsidize and bail out firms and industries in trouble, allegedly

“essential” to the war effort. The WFC began with an authorized capital of $500 million supplied by the Treasury, and with the power to borrow up to $3 billion through the issue of bonds.

Its major focus was on utilities, railroads, and the banks that had financed them. Banks were also under strain because many of their savings deposits had been drawn down to help finance 27On the Council of National Defense and the War Industries Board, see Murray N. Rothbard, “War Collectivism in World War I,” in
A New
History of Leviathan: Essays on the Rise of the American State
, Ronald Radosh and Murray N. Rothbard, eds. (New York: E.P. Dutton, 1972), pp. 70–83.

On Meyer’s role, see Pusey,
Eugene Meyer
, pp. 137–49.

From Hoover to Roosevelt:

281

The Federal Reserve and the Financial Elites
the federal deficit. All in all, during the war, the WFC made loans of $71 million, in addition to its bond-price operations.

It was clear that the essential mission of the WFC acted as a camouflage for a government subsidy operation. As Meyer’s approving biographer writes: “The WFC had been created as a rescue mission for essential war-disrupted industries, and Meyer had shaped it into a powerful instrument of public policy.”28

If the WFC, and for that matter the rest of the apparatus of war collectivism, had been strictly war-related, they all would have been dropped swiftly as soon as the Armistice was signed on November 11, 1918. But on the contrary, Baruch, Meyer, the War Industries Board, and most business leaders were anxious to continue the benefits of collectivism indefinitely after the war was over. The goals were twofold: price controls to keep prices up during the expected postwar recession; and a permanent peacetime cartelization of American industry enforced by the federal government. Permanent cartelization was endorsed by the U.S. Chamber of Commerce and by the National Association of Manufacturers. President Wilson, however, prompted by Secretary of War Newton D. Baker, insisted on scuttling the WIB

by the end of 1918. Other aspects of wartime government interventionism continued on, however, not the least of which was the War Finance Corporation.29

The War Finance Corporation was a striking example of a wartime government agency that refused to die. After the war, the investment bankers were worried that Europeans, shorn of American aid, would no longer be able to keep up 28Pusey,
Eugene Meyer
, p. 163.

29Rothbard, “War Collectivism,” pp. 100–05. On an abortive attempt to continue collectivist planning through the Industrial Board of the Department of Commerce, see ibid., pp. 105–08; and Robert F.

Himmelberg, “Business, Antitrust Policy, and the Industrial Board of the Department of Commerce, 1919,”
Business History Review
(Spring 1968): 1–23.

282

A History of Money and Banking in the United States:
The Colonial Era to World War II

the bountiful wartime level of American exports. Hence, the Morgans urged their friends in the Treasury Department to use the WFC to provide credits to finance American exports, specifically to pay American exporters and then collect the money from foreign importers. While the Wilson administration did not want a permanent government loan program, it persuaded Congress to extend the WFC in March 1919 and to authorize it to lend up to $1 billion over five years to American exporters and to American banks that made export loans.30 Particularly ardent in pressuring Congress was WFC head Eugene Meyer, who had been gravely disappointed when the Wilson administration scuttled the War Industries Board.31

Meyer happily plunged into making and encouraging export loans and, while in Europe for the peace conference, he tried unsuccessfully to pressure British banks into issuing $600

million in loans to finance British imports, and to keep the overvalued pound from falling to its market levels. To counter the dangerously inflationary postwar boom, President Wilson shifted David F. Houston from the post of agriculture secretary to Treasury secretary, and Houston boldly set about shifting America to a more laissez-faire and deflationary course. Meyer worked feverishly to keep the inflationary boom going, the WFC approving loans totaling $150 million to finance the exports of cotton, tobacco, copper, coal, and steel. But Treasury Secretary Houston refused to give Meyer his required approval.

30Thomas W. Lamont, Morgan partner, made the proposal to Assistant Secretary of the Treasury Russell Leffingwell, and Secretary of the Treasury McAdoo pushed the measure through Congress. Not only was McAdoo solidly in the Morgan ambit, as we have seen, but Leffingwell, after he left the Treasury, became a leading partner of the Morgan bank.

Burton I. Kaufman,
Efficiency and Expansion: Foreign Trade Organization in
the Wilson Administration, 1913–1921
(Westport, Conn.: Greenwood Press, 1974), pp. 231–32; and Carl P. Parrini,
Heir to Empire: United States
Economic Diplomacy, 1916–1923
(Pittsburgh: University of Pittsburgh Press, 1969), pp. 54–55.

31Pusey,
Eugene Meyer
, p. 164.

From Hoover to Roosevelt:

283

The Federal Reserve and the Financial Elites
Houston declared, in fact, that he was proposing ending the WFC, in order to complete the government’s withdrawal from all its wartime activities of government intervention in the economy. Houston pointed out that exports had already attained an unprecedented volume in 1919, and that it was important to bring down inflation. Meyer tried every device to persuade Houston, but he couldn’t go over his head to the president because of Wilson’s illness. Finally, Meyer threw in the towel and resigned his post in May 1920.32

Unfortunately, however, Eugene Meyer was soon back in the saddle. Recession always follows an inflationary boom. A recession hit in the fall of 1921, and the newly burgeoning farm bloc began its long-term drive to get the government to bring the farmer back to the unprecedented good times he had enjoyed from the artificial export boom created by World War I. During the presidential campaign of 1920, Secretary of Treasury Houston bravely resisted the farm bloc, maintaining that the federal government should do nothing to interfere with the inevitable postwar recession. Eugene Meyer, working for the Harding ticket, put himself at the head of the interventionist forces battling his old laissez-faire enemy. When Houston addressed the annual meeting of the American Bankers Association (ABA) in Washington, he refused to speak if the ABA succumbed to pressure by a group of Memphis bankers and businessmen to have Meyer address the group at the same meeting. When Houston’s ploy was successful, the Memphis group of inflationist and interventionist bankers organized a rump meeting nearby featuring the address by Meyer, who led a fervent campaign for restoration of the WFC, this time stressing government financing of agricultural exports.

32Houston was a respected academic, who had been a political scientist and college president in Texas, and then served as chancellor of Washington University of St. Louis. It is refreshing to see a person of laissez-faire principle in this critical post. Ibid., pp. 169–70; and Burch,
Elites, 2
, pp. 210–11.

284

A History of Money and Banking in the United States:
The Colonial Era to World War II

The defeat of the Democrats in November was a referendum on World War I, its aftermath, and the inflation and rationing of wartime, rather than against Houston, but Meyer used the victory to step up attacks on Secretary Houston. Organizing a nationwide campaign of demagogy, stressing especially the plight of the cotton farmer, Meyer personalized his assault on Houston’s stalwart laissez-faire views. Combining hyperbole with alliteration, Meyer roasted Houston before the Joint Agricultural Committee of Congress. Meyer thundered, History records no precedent . . . for the wholesale sacrifices imposed upon the civilized world by the Secretary’s [Houston’s] present policies for the purpose of maintaining the petty platitudes of the outworn political economy which he professes.33