Saturday, October 12, 2013

Rhyme of a Recent Marriner

            Marriner Stoddard Eccles was born in 1890, one of twenty-one children.  His father, David Eccles, was a Mormon immigrant from Scotland who settled in Utah, married two women, became a businessman, and made a fortune.
            At the age of twenty, Marriner went to Scotland as a missionary; but he returned to Utah two years later after his father’s death.  He became a bank president when he was twenty-four, and a multi-millionaire tycoon by the time he was forty.  He was a director of railroad, hotel, and insurance companies, head of a bank holding company with twenty-six banks, and president of four other companies when the stock market crashed in 1929.
            Thanks to his diversification, he survived the Great Crash, but the experience changed his mind.  Decades later, in his memoirs, he wrote:

            Men I respected assured me that the economic crisis was only temporary and that soon all the things that had pulled the country out of previous depressions would operate to that same end once again.  But weeks turned to months.  The months turned to a year or more.  Instead of easing, the economic crisis worsened.

            To preserve his banks, Eccles called in loans and reduced credit, but he began to suspect that by tightening their belts, banks were saving themselves at the expense of the larger society, that:

            in seeking individual salvation, we were contributing to collective ruin.

            Eccles was an economist from the general equilibrium school, yet he rejected the prevailing notion that the crisis was somehow the result of “natural economic laws.”  He saw it as the work of men:

            with great economic power [who] had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules.  After I lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.

            In 1933, he testified before a Senate committee investigating the crash.  He disputed the view that the downturn was the result of previous extravagant spending, pointing instead to leveraged debt:

            The debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth production as measured in buying power during our years of prosperity.  Too much of the product of labor was diverted into capital goods, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and abroad.  (Emphasis added.)

            With so much money flowing into financial products, there was not enough left among the middle and lower classes to sustain spending:

            This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world.  This naturally brought about a falling in prices and unemployment.  Unemployment further decreased the consumption of goods, which further increased unemployment, thus bringing about a continuing decline in prices.  Earnings began to disappear, requiring economies of all kinds — decreases in wages, salaries, and time of those employed.
            And thus the vicious cycle of deflation was continued until after nearly four years we find one-third of our entire working population unemployed, with prices of everything greatly reduced, raw products of all kinds selling at an unprecedentedly low level; our national income reduced by 50 per cent with the aggregate debt burden greater than ever before, not in dollars but measured by present values which represents the ability to pay; fixed charges, such as taxes, railroad and utility rates, insurance and interest charges close to the 1929 level and requiring such a portion of the national income to meet them that the amount left for consumption goods is not sufficient to support the population.

            Eccles understood that demand drives the real economy.  He argued that when business fails, it is the responsibility of government to protect the citizens by giving them the means to earn money.  Unemployment means money is not being circulated:

            Of course we are losing $2,000,000,000 per month in unemployment.  I can conceive of no greater waste than the waste of reducing our national income about half of what it was.  I can not conceive of any waste as great as that.  Labor, after all, is our only source of wealth.
            I repeat there is plenty of money today to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry…During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits in payment of interest, debts, insurance and dividends as well as in the transfer of balances by the larger corporations normally carried throughout the country.

            Eccles presented five main points to repair the economy — federal spending to assist the destitute and the unemployed, works projects, regulations on business, refinancing mortgages, and canceling the debts of our World War I allies.  Our allies could not buy our products if all their money went to debt service.  He also recommended federal bank insurance, tax reforms, a minimum wage, unemployment insurance, and regulation of the stock market: 

            Such measures as I have proposed may frighten those of our people who possess wealth.  However, they should feel reassured in reflecting upon the following quotation from one of our leading economists:

            It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving.  They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.  It is for the interests of the well to do — to protect them from the results of their own folly — that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.

            Eccles was nominated to chair the Federal Reserve in 1934, where he served for fourteen years.  After he retired, he wrote in his memoirs: 

            A policy of adequate governmental outlays at a time when private enterprise is curtailing its expenditures does not reflect a preference for an unbalanced budget.  It merely reflects a desire and the need to put idle men, money and material to work.  As they are put to work, and as private enterprise is stimulated to absorb the unemployed, the budget can and should be brought into balance, to offset the danger of a boom on the upswing, just as an unbalanced budget could help counteract a depression on a downswing.

            Eccles concluded that the Great Depression was not caused by excessive spending in the 1920s but by the great inequality of wealth distribution:

            As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery.  Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth.  This served them as capital accumulations.  But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants.  In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing.  When their credit ran out, the game stopped.

            The policies developed to cope with the Great Depression served us well for years, so of course they were opposed by the political right.  Claiming that government is the problem, not the solution, they fought successfully to eliminate the very regulations which had saved them decades before.  The Crash of 2008 was followed by the usual right-wing demand for government austerity to further cripple the economy.  They wanted to save the banks at the expense of the larger society, and they got their way.  Since then, they have opposed anything and everything that would actually help ordinary citizens.  It’s 1930 all over again.

            History, Mark Twain quipped, doesn’t repeat itself, but it does sometimes rhyme.  We’ve already had another crash, so we could use another Marriner Eccles — and sooner rather than later.

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