America's Money Machine: the Story of the Federal Reserve

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America's Money Machine: the Story of the Federal Reserve AMERIC~S MONEY MACHINE BOOKS BY ELGIN GROSECLOSE Money: The Human Conflict (I934) The Persian Journey ofthe Reverend Ashley Wishard and His Servant Fathi (I937) Ararat (I939, I974, I977) The Firedrake (I942) Introduction to Iran (I947) The Carmelite (I955) The Scimitar ofSaladin (I956) Money and Man (I96I, I967, I976) Fifty Years ofManaged Money (I966) Post-War Near Eastern Monetary Standards (monograph, I944) The Decay ofMoney (monograph, I962) Money, Man and Morals (monograph, I963) Silver as Money (monograph, I965) The Silken Metal-Silver (monograph, I975) The Kiowa (I978) Olympia (I98o) AMERIC~S MONEY MACHINE The Story of the Federal Reserve Elgin Groseclose, Ph.D. Prepared under the sponsorship of the Institute for Monetary Research, Inc., Washington, D. C. Ellice McDonald, Jr., Chairman A Arlington House Publishers Westport, Connecticut An earlier version of this book was published in 1966 by Books, Inc., under the title Fifty Years of Managed Money Copyright © 1966 and 1980 by Elgin Groseclose All rights reserved. No portion of this book may be reproduced without written permission from the publisher except by a reviewer who may quote brief passages in connection with a review. Library of Congress Cataloging in Publication Data Groseclose, Elgin Earl, 1899­ America's money machine. Published in 1966 under title: Fifty years of managed money, by Books, inc. Bibliography: P. Includes index. 1. United States. Board of Governors of the Federal Reserve System-History. I. Title. HG2563·G73 1980 332.1'1'0973 80-17482 ISBN 0-87000-487-5 Manufactured in the United States of America P 10 9 8 7 6 5 4 3 2 1 For My Beloved Louise with especial appreciation for her editorial assistance and illuminating insights that gave substance to this work CONTENTS Preface lX PART I The Roots of Reform 1. The Quality of the Times 3 2. The First Shock Wave IO 3. The Lapping at the Dikes I6 4. The Rich Man's Panic 22 5. A Measure of Expediency 3 I 6. The Aldrich-Vreeland Bill 43 7. An Interlude for Debate 46 8. The Great Investigation 53 9. The Setting of the Current 6I 10. The Bill Considered 67 PART II The Great Reversal I 1. Advent of Storm 8I 12. The First Inundation 87 13. Collapse of a Theory 93 14. The Path of Retreat IOO 15. When to Reef Sail Io8 16. The Wounds of War II8 17. Wading in the Big Pond I27 18. The Lapping Waves of Crisis I35 19. The Fulcrum and the Lever I43 20. The Gushing Fountain I5I PART III Debacle of an Idea 2 1. The Crumbling of the Dikes I57 Vlll CONTENTS 22. The New Thermopylae I63 23. The Keynesian Influence I70 24. The Not So New New Deal I79 25. The New Deal and the Federal Reserve I85 26. New Bridles for Old I95 27. Where Two Tides Meet 205 28. The Reversals of War 2I2 29. Doubtful Victory 2I9 30. The Role of Atlas 227 31. The Not So Golden Years 235 32. The End of a Dream 240 33. The Chute 247 34. Into the Pit 252 35. Out of the Pit 259 Notes 267 Selected Bibliography 275 About the Author 279 Index 281 Preface N SEPTEMBER 30 , 19 1 3, at a moment when American attention O was focused· on the revolutionary monetary reform then under debate in Congress, the New York Times astounded and diverted its public by a bitter attack on a former president of the United States. The former president was Theodore Roosevelt who had, the year before, broken away from the Republican Party to run as the Progressive Party (Bull Moose) candidate for president. He had been defeated by Woodrow Wilson, but he had been a powerful candidate who had attracted the greater part ofRepublican Party votes, and his views on public questions still commanded a large following among the electorate. What had aroused the mortal apprehensions of the Times' editors was an article in the Century Magazine in which Roosevelt had outlined his proposals for a reorganization of government and society. The editorial attacked his blueprint as "super-socialism." Without going so far as to charge Roosevelt with being a Marxist-this was before the Russian Rev­ olution, but Marxism was even then anathema on these shores-it de­ clared that he would in effect bring a Marxian redistribution ofwealth in a "simpler and easier way." "He leaves," the editorial went on to say, "the mines, the factories, the railroads, the banks-all the instruments of production and exchange­ in the hands of their individual owners, but of the profits of their opera­ tions he takes whatever share the people at any given time may choose to appropriate to the common use. The people are going to say, We care not who owns and milks the cow, so long as we get our fill of the milk and cream. Marx left socialism in its infancy, a doctrine that stumbled and IX x PREFACE sprawled under the weight of its own inconsistencies. Mr. Roosevelt's doctrine is of no such complexity. It has all the simplicity of theft and much of its impudence. The means employed are admirably adapted to the end sought, and if the system can be made to work at all, it will go on forever." The means by which Roosevelt would achieve these ends, the Times explained, drawing from the Century article, would be by a monolithic one-party political system, along with an indefinite expansion of govern­ ment· powers and functions. ("It will be necessary," the Times quoted Roosevelt as saying, "to invoke the use of governmental power to a degree hitherto unknown in this country, and, in the interest of democ­ racy, to apply principles which the purely individualistic democracy of a century ago would not have recognized as democratic.'') Roosevelt would also abolish competition. ("The business world must change from a com­ petitive to a cooperative basis.") He would remove the restraints of an independent judiciary. ("The people themselves should ... decide for themselves ... what laws are to be placed upon the statute books, and what construction is to be placed upon the Constitution....") He would confiscate the great fortunes (by a "heavily progressive inheritance tax" and a "heavily graded income tax.") This was the Roosevelt who had been the idol ofthe Republican Party, then as now regarded as the citadel of plutocracy and special interest. This was the Roosevelt whose portrait, despite his 1912 defection from orthodoxy, still adorns the walls of the Union League Club and other Republican strongholds. And this is the New York Times which became the loyal supporter ofFranklin D. Roosevelt, his New Deal, and the successor Fair Deal, New Frontier and Great Society administrations that have out-Roosevelted Roosevelt. The Theodore Roosevelt article and the Times' editorial are significant in disclosing how far the political economy of the country was even then being borne on the currents of authoritarian dogma. What Roosevelt failed to see was that these immense changes which he proposed were even then in course ofexecution. They were brought about by means far more subtle and invisible than those he proposed, and without the neces­ sity "to invoke the use of government power to a degree hitherto un­ known in this country," without abolishing competition, or the indepen­ dence ofthejudiciary, without quite confiscating the great fortunes. The succeeding years witnessed the extension of a system whereby govern­ ment became the senior partner in most businesses, in which it deter­ mined what expenses should be incurred; at what prices the product Preface Xl should be sold; how much employees, from the lowest to the highest, should be paid, and how long they should work; how much ofthe income of the business should be retained and how much distributed; and what share should go to the senior partner. At the same time the government would undertake to create or modify the climate in which business was conducted; it would influence, if not determine, the general level of prices; it would determine the optimum rate of business activity, either to stimulate or retard as in its wisdom appeared most desirable; it would conclude what forms of business activity should be favored and devel­ oped, what forms should be discouraged; it would determine the costs of capital to those who would embark in enterprise, according to its judg­ ment; and it would make such capital available or not available, and set the rate of interest to be paid. It would even, for a season, reach down into the household and decide the important questions of household finance: is an electric washing machine a capital investment or a conven­ ience of luxury? The means by which these ends would be accomplished without the strong arm ofthe state police were then in process offormation through two legislative enactments of the year in which Roosevelt penned his Century article. The first of these was the income tax; the other was the Federal Reserve Act. Our concern here is with the latter, and for that purpose a thumbnail sketch of the monetary system as conceived by the founding fathers and as developed through the first one hundred and twenty years of our history is necessary. The word money, derived from the Latin moneta, and its equivalents in European tongues, have always meant coinage, as has the term specie in the U. S. The framers ofthe Constitution, having before them the experience ofthe Continental paper currency, were ofone mind that the only author­ ized currency should be coinage; a proposal in the Convention for the issuance ofpaper currency ("to emit bills") was rejected without a record vote, and there was added a further provision that no state might issue paper currency or declare anything to be legal tender except gold and silver coin.
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