Thursday, August 7, 2014

Is the Fed REALLY out of bullets—Eccles and Depression history

One of the very few assertions of Heiner Flassbeck that I disagreed with was his idea that because the central banks have lowered interest rates to essentially zero, they have run out of ammunition they can use in case of another 2008-type financial meltdown.

Not so fast, Flassbeck.  There are in fact lots of things the Fed could do to fix the economy.  They could start by dropping the requirement that all economists who will be taken seriously by the Fed must FIRST be neoliberals.  Requiring that people believe utter bullshit as a requirement for employment is hardly the best way to attract deep thinkers.

Then they could make certain that everyone understands that while raising interest rates can most certainly cripple the real economy, merely lowering them cannot, by itself, repair the damage.  The public and its agencies must become the motors of fiscal stimulus and since everyone is hopelessly in debt, the first item on the agenda is debt restructuring.

Finally, the real economy must be rebuilt.  Pumping up the balance sheets of the speculators with electronic money might make a few people feel better about themselves, but even the super-rich must eventually understand that they cannot prosper if the real economy cannot cope with problems like climate change.

Once upon a time, there was a central banker in USA that understood such issues.  He was a Mormon from Utah who got to run the Fed for Roosevelt.  He knew there was more to central banking than tinkering with interest rates.  So of course, we do not see anyone like him anywhere.  The Fed isn't out of bullets—it's out of ideas because it doesn't remember its own history.  So here is a short history of Eccles as told by Utah's biggest paper in 2011.

How Marriner Eccles saved America


Seventy-eight years ago next month, a banker from Ogden, Utah, went to Washington. He was one of 48 experts summoned by the Senate Finance Committee to advise the Congress on the profound economic turmoil that came to be known as the Great Depression.

None of the 47 earlier witnesses could answer categorically what was wrong with the economy or how to fix it.

Marriner Stoddard Eccles, a slim man of small stature, began his testimony by stating his credentials: president and owner of 26 banks and one trust company, vice president of one of the largest sugar companies in the country, president of a multistate dairy concern, president of the largest Intermountain construction company and one of the builders of the Boulder Dam, among many other enterprises.

In 38 pages of testimony, he shocked the senators by not only precisely listing the failures of the economy, but laying out a five-point plan for fixing it.

He began, "In the mad confusion and fear brought about by our present disordered economy, we need bold and courageous leadership more than at any time in our history for the reason that our industrial revolution has made necessary a new economic philosophy, a new business point of view and a fundamental change in our social system."

He went on to say that "the operation of our money world … has failed to be our servant … and instead is our tyrant and master."

Eccles got right to the point: "We must correct the causes of the depression rather than deal with the effects of it!"

He proceeded to demonstrate that the key problem in the economy was the reduced "velocity" of money. The economy didn't have enough money circulating to raise the economy out of the doldrums.

Now on the edge of their seats, the senators were further jolted when Eccles began outlining his bold plan for mending the economy: First, unemployment relief by direct aid to the states and a program of federally financed public works projects to provide economic stimulus. Second, a bank deposit guarantee program. Third, agriculture subsidies and an allotment program. Fourth, a federally guaranteed farm mortgage program.

His final point was probably the most sensational for the time, as it would be even today: Cancel the World War I allies' war debt, close the gold desk of the Federal Reserve, provide for a more equitable distribution of wealth, enact a high income and inheritance tax, provide a national child labor law, minimum wage, unemployment insurance and old age pension laws. Establish a national economic planning board.

All this from a successful capitalist? A banker/industrialist? A Mormon? A Republican? Not many senators dozed through his testimony.

Eccles must have made his points, though, as several months later he was invited to join the Roosevelt administration as an assistant Treasury secretary. Within months, President Franklin Delano Roosevelt asked Eccles to become a governor of the Federal Reserve Board, to which he replied, "I would Not! … unless fundamental changes are made in the (Fed)."

With FDR's blessing, Eccles rewrote the 1935 Federal Reserve Act, created the Fed as we know it today, and became the first chairman of the reorganized Federal Reserve Board.

His New Deal policies were radical for the time. He was espousing Keynesian economics before Keynes. He was for a balanced budget, but it had to include a balanced economy.

To Eccles, this meant that you built surpluses during the good times to pay for deficit spending in the bad times.

What would today's Great Recession be without the policies put in place some 70 years ago by New Dealers like Marriner Eccles, including Social Security, unemployment insurance, the FDIC, Fed monetary policies, etc.?

We doubt we would be calling it a recession. More likely the Great Depression II.

Laraine Blackham teaches history, civics, and English at Woods Cross High School. Steve Blackham is a retired home builder and history buff. more
And for those who need further examples for why the Fed is a LONG way from being out of ammunition to stave of economic catastrophe, these are excellent.

History of the Greenback

Ben Franklin and the birth of paper money


  1. Great post . It takes me almost half an hour to read the whole post. Definitely this one of the informative and useful post to me. Thanks for this. Plz visit my page. depression self help books We are offering service like anxiety self help, anxiety disorder self help, social anxiety self help and many more thing.

  2. Eccles also convinced those who needed convincing that we were not "broke" and we could "afford" to spend the money on ships, planes, tanks, soldiers, munitions, supplies etc. in order to win the war. How many people know he had a lot to do with winning the war. You, me, the lamppost and maybe a few others. As Billl Mitchell noted provocatively a while back "If we can have full employment killing Germans then we can have full employment with, say, improving the infrastructure?"

  3. And here's J. D. Alt expanding on Bill Mitchell's comment:-

    1. Thanks for the heads-up

      Truly amazing what can be accomplished when folks actually think clearly about the nature of money. I have been trying to tell this story for most of my adult life and usually the reaction is somewhere between disbelief and the hostile look of someone who has decided I have gone insane and am dangerous.

      When Jimmy Carter claimed during one of the oil crises in the 1970s that what we faced was the moral equivalent of war, I assumed he meant we were going to mobilize our nation's resources to fight the problem like we had in the 1940s. Well, that didn't happen—mostly because people did not remember how WW II had been financed.