Even before he was elected President, it was said that Franklin Roosevelt was given a clear choice by one of his closest advisors. George F. Warren was an economist who, like Irving Fisher, demanded a radical departure from tradition and orthodoxy in order to arrest the world’s slide into financial anarchy. No matter how dear and historically abetted, neither solvency nor even soundness might prevail in a world drowning in deflation.
What Warren told FDR was that if elected he must choose between “…a rise in prices or a rise in dictators.”
Even the casual observer of history will detect the contrariety in Warren’s binary; the rest of the thirties was perhaps best described by both of those things simultaneously. Only, maybe it had never been enough of the first such that what thorough reflation, as Fisher had termed this idea, might have been intended was never followed through to fruition.
Thus, the dictators.
Roosevelt had, interestingly enough, run his Presidential campaign on a pledge for a balanced budget. Hoover, he said, was the spendthrift putting the nation on the road to ruin. Quite famously, in October 1932, closing the deal on his election, in Pittsburgh FDR warned:
“If the Nation is living within its income, its credit is good. If, in some crisis, it lives beyond its income for a year or two, it can usually borrow temporarily at reasonable rates. But, my friends, if, like a spendthrift, it throws discretion to the winds, and is willing to make no sacrifice at all in spending; if it extends its taxing to the limit of the people’s power to pay and continues to pile up deficits, then it is on the road to bankruptcy.”
The pile up, though, that’s just what happened. The federal government had managed a several hundred-million-dollar surplus in its fiscal year 1930 due to tax rates and levies imposed upon pre-collapse incomes and levels of activity. By 1932, Hoover’s final year, with tax collections plummeting and contrary to later revisionism the administration spending wildly, the deficit leapt upwards of $2.7 billion despite, as FDR frequently pointed out, radically higher tax rates.
The fiscal imbalances merely worsened thereafter, hardly new stuff for this New Deal. The shortfall was $2.6 billion in ’33, $3.6 billion in ’34, followed by $2.8 billion and $4.3 billion during years ’35 and ’36, respectively. In just his first four years, the cumulative budget gap had been better than $13.6 billion, a bit more than Woodrow Wilson’s ’19 deficit drawn up in the thick of the Great War fighting.
When asked about it, the American people – at least American business people – were quite emphatic in their embrace of FDR’s pre-New Deal pledges. The Economy Plank of the Democrats' 1932 National Convention had even said:
“We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance, to accomplish a saving of not less than 25 per cent in the cost of federal government.”
In October 1936, the thick of re-election season, the National Industrial Conference Board (at the time a bigtime trade group) sent questionnaires to 12,076 newspaper editors across the country asking them to gauge the local views on several subjects, including the government’s fiscal woes. Some 5,050 mailed back their responses, a cohort representing a reported total daily circulation of 24,843,677 readers.
Asked, “Does public opinion in your community favor further increase in the national debt?”, a near-uniform 89.1% of the replies were, “No.” Furthermore, almost three-quarters would also state that what would do most to increase business confidence would be “decreasing government expenditures.”
Seeking a second term, Roosevelt again appeared in Pittsburgh in the same month as the NICB’s survey was being conducted. With constant government (over)borrowing a clear campaign theme, and a contentious one given how Republican candidate Alf Landon scarcely let a day go by without its mention, FDR tried to explain himself and this flip flop:
“To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first.”
The road to Hell paved by shrieks of “for your own good”, according to the doctrine indoctrinated within him by Warren and others (including John Maynard Keynes), Roosevelt would also claim to Pittsburgh his own as the world’s last and final hope. “We accepted the final responsibility of Government, after all else had failed, to spend money when no one else had money left to spend.”
In any hardcore technical sense, this wasn’t true; after abandoning the gold standard there was no money, no real money, gold, left anywhere for anyone. What followed was what Fisher, Keynes, and Warren had all wished – a government free to borrow as it saw fit, no longer constrained by the sacred “gold clause.”
Businesses and consumers from the Civil War onward had more readily accepted paper currency, and even a national one, so long as there was money behind it. Such was the unappreciated grace this had been written into all manner of private contracts, and not just complex financial arrangements such as industrial and railroad bonds which circulated only among the superrich, but also simple, everyday agreements, each ultimately discharged by the promise of dollars redeemable in 23.22 grains of gold.
Hoover had long alleged – with substantial evidence – that the last and final blow from the Great Collapse had been triggered by FDR’s refusal to support the dollar’s golden content from the earliest days of their contest. Several times the previous President had warned of the dangers, including one final shot on Lincoln Day 1933 just before handing over the keys to the White House:
“[Abandoning] the gold standard . . .leads to complete destruction.”
Warren’s like Fisher’s point was, we’re already there! By 1932, how much more complete might complete destruction get? This was the argument which ultimately swayed FDR’s view; what difference by then of any lower low than the low they had already fallen into.
Throughout the most heavily indebted parts of the New Deal, those years 1933 up to 1939, including the grossly mismanaged 1937 re-depression, the American public clearly abhorred the country’s fiscal situation but believed no other option available. In 1936, Roosevelt was given a second term in one of the most lopsided elections in our nation’s history.
Who cared about the soundness of gold money for the wealthy banker when so many millions, tens of millions remained out of work with no relief in sight. Even those tens of millions more fortunate enough to hold on to a job were never far in their minds away from joining those others on the breadlines. Prices were rising, and so was employment, neither anywhere near fast or far enough. Reflation but never recovery.
When FDR said government’s was the only money left to be spent, while it may not have been real money it was true there weren’t any other pockets eagerly courting outlay. Money, currency, liquidity, whatever you wish to call it, the country like the world was bone dry except for only the best quality borrowers. For all Uncle Sam’s profligate ways, and the warnings against them, he never did run afoul of potential creditors.
US federal government bonds continued to be the, pardon the insult, gold standard of credit for the next two decades and well beyond. Roosevelt’s administration found only political trouble for financing these massive deficits; interest rates on the bonds sold to do the financing only went lower, meaning prices higher.
This had been a central blindness in understanding the Great Depression, its origins, and its unusually long historical reach. From its very beginning, “our” monetary stewards at the Federal Reserve had misread market/bank signals as if monetary policy (currency as well as gold reserves) was justified and effective. Even as the whirlwind ripped through and ripped apart first asset markets and then the entire banking system, Fed officials pointed to low interest rates as if this was some proof of their job well done.
Not only that, the same and other officials continued to claim well afterward persistently low interest rates (as well as gold inflows following FDR’s gold confiscation) were solid evidence of effective reflation and recovery policies.
Utter bunk, said Milton Friedman later on in 1963. Hogwash. Writing along with Anna Schwartz in A Monetary History, the pair shredded this nonsense:
“The Federal Reserve System repeatedly referred to its policy as one of ‘monetary ease’ and was inclined to take credit – and, even more, was given it – for the concurrent decline in interest rates, both long and short…With respect to discount policy, the Federal Reserve was misled by the tendency, present recurrently throughout its history before and since, to put major emphasis on the absolute level of the discount rate rather than on its relation to other market rates.”
To put this into Roosevelt’s terms, the Fed had screwed up the monetary response so badly this was what had left money only in the hands of first Hoover before FDR. In other words, money grew so tight in the markets and real economy, this condition was expressed in the destruction of the banking system as well as the immense increase in liquidity preferences of that same system favoring the specific characteristics of those specific instruments.
Private credit transformed into a non-issue, an impossibility leaving only the federal government the ability to borrow and spend and the economy durably if not permanently disfigured for it. Low rates are a sign of tight money because this indicates nothing less.
To the point it had subsumed or overwhelmed (or both) every traditional notion about ruinous government deficits; especially warned about were those arising from peacetime rather than wartime circumstances (bond vigilantes were actually very understanding and patriotic about declared conflicts), the true sign of out-of-control.
Even as prices rose in reflation, along with government expenditures, bond yields never did thus indicating the original monetary seed of economic destruction still bearing poisonous disinflationary fruit and spreading it throughout the unseen, deserted vastness of the once-great economy.
It was none other than George F. Warren who would realize - also in October 1936 - that:
“A society based on individual enterprise is so efficient in production that it brings enormous advances in the well-being of the common man. Recent world experience has shown that the worst enemy of such a society is instability in the value of money. We have learned by hard experience that failure to control the value of money leads to innumerable foolish efforts to control everything else, and often culminates in dictatorships.”
An ironic statement given his own role in the policies of the earlier years, and even more so in what it really represented. The most obvious lesson here, as in our own time, is not to fall into deflation in the first place. Complacency as well as unchallenged incompetence (and not just the Federal Reserve, though that is, contrary to current popular belief, its true longstanding traditional condition), but also disbelief and what we would today call recency bias.
This was Warren’s later point – to an extent. Know the monetary stuff first before thinking about anything of the rest.
However, FDR’s point, what happens if this happens too late? Hoover could complain all he wanted about dumping gold, the worst case had already engulfed him anyway (which is what the criticism of Hoover’s tenure should focus upon; not that he did “nothing”, but that he had no true sense of what was taking place before ever contemplating what might be done to combat the monetary disease ravaging the entire global marketplace).
But, as the rest of the thirties had shown, the answer to being monetarily incompetent in allowing deflation cannot be more monetary incompetence so as to get out of it. In a way the Japanese would borrow and repeat six decades later, you simply cannot fail to figure out why it seems the government (or only large corporations flush with cash anyway) is left as the only outfit able “to spend money when no one else had money left to spend.”
If – when - Uncle Sam is the only game left in town, that’s all you really need to know.
And so here we are all over again. Thirteen almost fourteen years after first modern (deflationary) contact, government deficits have surged and today only threaten to explode that much more. Ruinous, maybe; bankruptcy on the horizon, no sir, not even close. Government bonds only trade more as if they were as good as gold.
The more things changed, the more they have stayed the same, including our own version of, “The Federal Reserve System repeatedly referred to its policy as one of ‘monetary ease’ and was inclined to take credit – and, even more, was given it – for the concurrent decline in interest rates, both long and short.” Repeated every day in the financial media.
Even now, after an “historic” selloff in the bond market in the first few months of 2021 and with GDP in America rising at what’s claimed to be awesome and strong rates, money is not letting prices rise (enough) anytime soon. The Fed still says it is being “accommodative”, and the market instead buys out Uncle Sam at almost any price.
Top-down is not the same thing as stability. On the contrary, it is merely another form or symptom of the same underlying sickness – and, contrary to current imagination, this is not an inflationary disease. When government bond prices rise and stay up in a way that consumer prices are not able, no matter what insanity overtakes the government, a clear sign of being on this other wrong track.
Either prices rise, or dictators will. Not every dictator is some foreign potentate threatening to overrun only distant peoples, either; many reside much closer to home than we should be comfortable tolerating in the continuation of all the same useless measures and policies, in the depths of the same economic ignorance.
What modern prospects for these tyrants? Looking at where things are now compared to where they’d been in 2007 (ahem, China) and the direction the world had back then come to take for granted (globalization), maybe not so trivial. Give the guy some credit, George Warren proved right about the second half of his quip.
