The Fairy Tale of Monetary Control

By Jeffrey Snider
May 08, 2020

It can be an amazing thing to discover. While conducting primary research by going back into actual historical records, finding gems of this kind is a unique, sometimes satisfying digression. A small silver lining in an otherwise grim and often disheartening enterprise.

John William Elmer Thomas had first been a farmer. Born in Indiana in 1876, he had moved to Oklahoma as a young man. “General farm work was my lot, but not to my liking,” he’d say while heading off to college, taking his hands and head out of the dirt to eventually become a lawyer.

Working his way up through local politics, by 1926 he was elected US Senator for the state having never lost his affection for his original business. Witnessing up close the devastation of America’s first Great Depression, the one which struck in 1893, Thomas made it something of a personal mission to make sure something so harsh never struck the Heartland again.

As a twenty-year-old, he had campaigned on behalf of William Jennings Bryan. “I thought I was able to explain the free silver 16-1 issue…to small town audiences.” Farm prices and what he judged as the monetary restraint on them would remain at the center of Thomas’ rising career.

Horrifically, the 1893-96 experience was somehow outclassed by 1929-33. Standing for re-election in 1932, he said, “We've got a surplus of everything but money.” As it turned out, he wasn’t wrong.

By then, Elmer, as he was known, had become a powerful leader in the Senate. Figurehead for a growing faction of self-described inflation-ists, the former farmhand saw his chance to combine both pieces of his fervent worldview into one gigantic fix for the Great Depression.

On April 18, 1933, in FDR’s first hundred days of frenzy, the President “invited” Senator Thomas to advance an amendment to the Agricultural Adjustment Act of 1933, then and forever better known as the Farm Relief Bill. A month earlier, on March 23, the latter had introduced a bill (S.788) which the Congressional log for that day had titled A Controlled Expansion of the Currency.

Thus, my rediscovered gem on official record:

“Be it enacted, etc., That for the purposes of meeting the existing deficit of the Federal Treasury, and/or of meeting the expenses of the Federal Government, and/ or of financing a program of public improvements, and/or of financing a program of rentals to farmers and land owners in connection with agricultural relief, and/ or of meeting maturing Federal obligations and for increasing commodity, collateral, and property prices, the Secretary of the Treasury is hereby authorized and directed to issue Treasury notes to be known as ‘prosperity notes’ in such denominations and in such amounts as he shall, from time to time, require and demand in order to carry into effect the provisions of this act.”

The Oklahoma Senator even specified the way in which this new currency would have appeared, legally required to have printed “United States prosperity note” on its face; and it was the Treasury, not the Fed, to be engaged in printing it up.

And not just money printing, but money printing so as to specifically monetize the government’s ballooning deficits.

Normally such a thing wouldn’t be worth anyone’s time researching; all kinds of wild and crazy suggestions find their way into official records of all stripes. Elmer Thomas wasn’t the first money printing advocate in the Senate, nor was he the last (will the words “prosperity coin” appear on the $1 trillion denomination some speak seriously about today?)

However, unlike anyone who came before or since this Senator would see his vision become reality in what came to be known as the Thomas Inflation Amendment to the Farm Relief Bill (Title III of the Agricultural Adjustment Act).

The most revolutionary provision was that it required the Federal Reserve, at the discretion of President Roosevelt, to purchase $3 billion (an astronomical sum in those days) of US government bonds financed by the central bank issue of $3 billion in Federal Reserve paper notes (greenbacks). Not just money printing and monetization, but all done at the Executive’s whim.

While not quite the prosperity notes of March 1933, the April 1933 law was viewed the same way regardless. A controlled expansion of the national currency, something not done since the Civil War. In that earlier greenback era, however, money printing meant to finance the war effort and all in it; this time it was about the economy and a monetary “public good.”

In its report (S. Rep. No. 73-40 [1933]), Chairman Fletcher of the Senate Banking and Currency Committee advised the full chamber to pass the complete amendment - but not as one attached to the House farm bill (H.R. 3835). Believing this was too important, too momentous, the Committee urged the Upper House to approve the measure as a stand-alone law.

Expedience required that it remain attached.

It was the first concrete step toward dollar default, the desperate, all-out monetary assault on currency deflation. Inflation or bust!  FDR, having moved the country in that direction anyway, with an enormous assist from farmer Elmer, he would just revalue the dollar in 1934. Once the door was open there was given a path to go all the way.

The idea behind “public good” in economic life had been introduced all the way back in 1877. Not coincidentally, the original issue had been American farms and prices.

Under political pressure exerted by the National Grange, a powerful national association of farmers, the legislature in Illinois in 1871 had created a law which placed a ceiling on prices private companies could charge for moving and storing agriculture and produce. Productive deflation (due to innovation and capital investment rather than a monetary shortage) had for years pressed small family-owned farms.

A warehouse operator in Chicago, Munn and Scott, was charged with violating the law and had been found guilty. Munn appealed the conviction on the grounds that Illinois was violating his due process to property rights under the 14th amendment.

The case wound up in the US Supreme Court (Munn v. Illinois) in 1877 when the justices voted 7 to 2 to uphold the original verdict. Chief Justice Morrison Remick Waite wrote for the majority, declaring that the states had jurisdiction to regulate any good which might impact the “public interest”; a touchstone case what shortly became this perpetual tug-of-war between messy free market capitalism and the progressive ideal to bring it all to heel.

The Great Depression was the absolute extreme.

In 1923, John Maynard Keynes wrote his essay Social Consequences where he argued that, essentially, calamity shouldn’t be necessary in order to justify what he said was a better way of doing things.

“For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which the distinguishing characteristics are possessed in different degrees by the weather, the birth-rate, and the Constitution—matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a Revolution to change them.”

Under the care of more enlightened experts, top-down, the messiness of the past could be properly handled by the technocracy of the future. The Great Contraction of 1929-33 seemed to have proved his point – the first part of it, perhaps.

It was hard to argue in the early thirties that the State didn’t have a very clear “public interest” in the regulation of pretty much every economic sphere, including markets and money itself. As such, with unlimited authority, it was claimed as the responsibility of the government to engineer the correct course back to prosperity. The Thomas Inflation Amendment was one major horse (contemporaneously called the “third horse” of the farm bill) in that course correction; the inflationary one.

There were howls of protest, of course, The Economist writing in May 1933, “the country has exchanged a President with little effective power for a ‘currency dictator.’” And that was before devaluation!

There was nothing, it seemed, the government under FDR wouldn’t do to combat the Depression. No lengths it wouldn’t go to, no norms it wouldn’t gleefully smash, a true revolution that Keynes had lamented as unnecessary in 1923 unleashed by backlash just ten years thereafter.

Whatever anyone may think of the New Deal and its ultimate impact on the economy, good and bad, one truth remains. There was no inflation.

Not only did it fail to materialize, so did the recovery itself remain absent. Fearing all that “money printing” and government effort, by 1935 the Fed and the same government sought to squash an inflationary monster that didn’t exist thereby breathing new life into the deflationary disaster that still did.

Among the very few who counseled caution before unleashing the 1937 depression-within-a-depression was Governor of the Fed’s St. Louis branch William McChesney Martin. In December 1935, he wrote the FOMC:

“It is true that the System having an excess of $3,000,000,000 afford the possibility of a run-away condition, but we should not be fooled by considering a possibility as a probability…Conditions at present do not offer signs of an immediate probability. In any action taken at the present time there is too great danger of discouraging efforts toward recovery.”

Martin would go on to lead the Federal Reserve as its Chairman for nearly two decades beginning in 1951. Ironically, his long tenure would end in another monetary disaster, the Great Inflation.

Only this time, flipping the script, the Fed would try everything in its power to desist runaway consumer price appreciation it didn’t want. The central bank was joined by the federal government here, too: LBJ’s tax hikes and capital controls, a two-tiered gold price and benign neglect; Nixon’s unconscionable wage and price limits, the setting up of pay and price boards the likes of which were more at home in Soviet Russia and Communist China.

The public’s interest, of course.

Yet, like the thirties, nothing authorities did or tried could counteract the involuntary monetary forces stacked up against them. The inflation would continue to spiral. Uncontrolled expansion of the currency.

Pushed in front of Congress in 1969, Chairman Martin told the politicians “[A] credibility gap has developed over our capacity and willingness to maintain restraint.” The monetary breakout and disturbance had begun in 1965 and would last until the dawn of 1983, another modern economic wasteland subsumed much for the inability of 1933’s self-appointed “enlightened” stewards to accomplish any stewarding.

All the king’s horses and all the king’s men…

In the thirties, the government and central bank together took square aim at creating inflation so as to prevent further widespread deflationary economic damage. They never achieved it, nor did they measure a proper recovery.

In the sixties, they took square aim at creating tightening so as to prevent further widespread inflationary economic damage. They never achieved that one, either, nor did they properly measure the monetary system for all its “missing money.” That would have to wait for August 2007 to become the central issue.

What was so striking, to me, in seeing A Controlled Expansion of the Currency in the Senate record is the fairy tale of control, how long it has been around and how it can be taken right to the extreme. It lingers in human imagination because we all want to believe, at times desperately, that it’s within our collective grasp to tame wild forces we don’t necessarily understand and mostly don’t appreciate.

For many, the very ideal of technocracy and therefore the possibility of utopia is more than a dream.

Why on Earth anyone today would associate those with a central bank, particularly our central bank, defies everything logical and rational.

Most people are totally unaware of that time in between the Great Depression and the Great Inflation; how Economists, in particular, vowed to make themselves into proper scientists (Positive Economics) so as to never repeat those brutal monetary mistakes. The image of the dispassionate expert was planted while the science stayed deficient.

In the moment of taking on this transformation, the Great Inflation was unleashed in many ways due to it: the Samuelson-Solow idea of an exploitable Phillips Curve which seeded the nonsensical intellectual foundation leading into the runaway inflation they didn’t want, and their further interminable inability to rescue the system from it.

From one disaster came the next.

Public interest or no, the “experts’” record on the monetary and economic system is decidedly terrible.

Yet, there are now only really two mainstream sides to the current predicament; first, that the government and the Fed are going to push too far and unleash the inflationary monster because, well, they can and they want to. The central bank urgently wishes to avoid repeating the deflationary mess of 2008 (too late) while the federal government wants to get on with “paying back” its massive borrowing with inflated currency.

Controlled, of course.

On the other side are those who think officials will thread the needle perfectly, and that the current 1932-style contraction we’ll easily transit because of the finely crafted, expertly executed policies of those who don’t mind telling you they learned everything they know from studying the Great Depression. But did they study the relevant parts, or merely fixate on that one fairy tale word?

Given how it all actually turned out – and I’m not just talking about the thirties and seventies, but how about the 2010’s? – by what basis should anyone take either of those positions seriously?

When the government does everything in its legitimate power, and a great deal that isn’t, to create inflation so as to get out of deflation, the deflation wins. When the government does everything in its legitimate power, and a great deal that isn’t, to defeat inflation it didn’t see coming, the inflation wins.

What the thirties, the seventies, and the 2010’s all show is that during times of serious imbalance authority is extremely limited; what authorities want is immaterial next to what little they can do. The forces gathered just beyond the horizon of awareness (shadow money, in our case) too powerful. Competence is a major part always lacking.

Senator Elmer Thomas, like Keynes, may have been right about the disease, but that didn’t mean either offered a cure. In theory, sounds awesome. In practice, always in the public interest, control over what, exactly?

The technocracy, to say nothing of its methods (statistical models), has always been a total sham.  If such a style means control over society by an elite of technical experts, the word “expert” has to mean what it says. It almost never does. In the realm of economy, finance, and the money behind them, never once in history.

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