The Agricultural Depression
When Paul Warburg resigned from the Federal Reserve Board of Governors in 1918, his place was taken by Albert Strauss, partner in the international banking house of J & W Seligman. This banking house had large interests in Cuba and South America, and played a prominent part in financing the many revolutions in those countries. Its most notorious publicity came during the Senate Finance Committee’s investigation in 1933, when it was brought out that J & W Seligman had given a $415,000 bribe to Juan Leguia, son of the President of Peru, in order to get that nation to accept a loan.
A partial list of Albert Strauss’ directorships, according to "Who’s Who", shows that he was: Chairman of the Board of the Cuba Cane Sugar Corporation; director, Brooklyn Manhattan Transit Co., Coney Island Brooklyn RR, New York Rapid Transit, Pierce-Arrow, Cuba Tobacco Corporation, and the Eastern Cuba Sugar Corporation.
Governor Delano resigned in August, 1918, to be commissioned a Colonel in the Army. The war ended on November 11, 1918.
William McAdoo was replaced in 1918 by Carter Glass as Secretary of the Treasury. Both Strauss and Glass were present during the secret meeting of the Federal Reserve Board on May 18, 1920, when the Agricultural Depression of 1920-21 was made possible.
One of the main lies about the Federal Reserve Act when it was being ballyhooed in 1913 was its promise to take care of the farmer. Actually, it has never taken care of anybody but a few big bankers. Prof. O.M.W. Sprague, Harvard economist, writing in the Quarterly Journal of Economics of February, 1914, said:
"The primary purpose of the Federal Reserve Act is to make sure that there will always be an
available supply of money and credit in this country to meet unusual banking requirements."
There is nothing in that wording to help the farmer.
The First World War had introduced into this country a general prosperity, as revealed by the stocks of heavy industry on the New York Exchange in 1917-1918, by the increase in the amount of money circulated, and by the enormous bank clearings during the whole of 1918. It was the assigned duty of the Federal Reserve System to get back the vast amount
of money and credit which had escaped their control during this time of prosperity. This was done by the Agricultural Depression of 1920-21.
The operations of the Federal Reserve Open Market Committee in 1917-18, while Paul Warburg was still Chairman, show a tremendous increase in purchases of bankers’ and trade acceptances. There was also a great increase in the purchase of United States Government securities, under the leadership of the able Eugene Meyer, Jr. A large part of the stock market speculation in 1919, at the end of the War when the market was very unsettled, was financed with funds borrowed from Federal Reserve Banks with Government securities as collateral. Thus the Federal Reserve System set up the Depression, first by causing inflation, and then raising the discount rate and making money dear.
In 1914, Federal Reserve Bank rates had dropped from six percent to four percent, had gone to a further low of three percent in 1916, and had stayed at that level until 1920. The reason for the low interest rate was the necessity for floating the billion dollar Liberty Loans. At the beginning of each Liberty Loan Drive, the Federal Reserve Board put a hundred million dollars into the New York money market through its open market operations, in order to provide a cash impetus for the drive. The most important role of the Liberty Bonds was to soak up the increase in circulation of the medium of exchange (integer of account) brought about by the large amount of currency and credit put out during the war. Laborers were paid high wages, and farmers received the highest prices for their produce they had ever known. These two groups accumulated millions of dollars in cash which they did not put into Liberty Bonds. That money was effectively out of the hands of the Wall Street group which controlled the money and credit of the United States. They wanted it back, and that is why we had the Agricultural Depression of 1920-21.
Much of the money was deposited in small country banks in the Middle West and West which had refused to have any part of the Federal Reserve System, the farmers and ranchers of those regions seeing no good reason why they should give a group of international financiers control of their money. The main job of the Federal Reserve System was to break these small country banks and get back the money which had been paid out to the farmers during the war, in effect, ruin them, and this it proceeded to do.
First of all, a Federal Farm Loan Board was set up which encouraged the farmers to invest their accrued money in land on long term loans, which the farmers were eager to do. Then inflation was allowed to take its course in this country and in Europe in 1919 and 1920. The purpose of the inflation in Europe was to cancel out a large portion of the war debts owed by the Allies to the American people, and its purpose in this country was to draw in the excess moneys which had been distributed to
the working people in the form of higher wages and bonuses for production. As prices went higher and higher, the money which the workers had accumulated became worth less and less, inflicting upon them an unfair drain, while the propertied classes were enriched by the inflation because of the enormous increase in the value of land and manufactured goods. The workers were thus effectively impoverished, but the farmers, who were as a class more thrifty, and who were more self-sufficient, had to be handled more harshly.
G.W. Norris, in "Collier’s Magazine" of March 20, 1920, said:
"Rumor has it that two members of the Federal Reserve Board had a plain talk with some New
York bankers and financiers in December, 1919. Immediately afterwards, there was a notable
decline in transactions on the stock market and a cessation of company promotions. It is
understood that action in the same general direction has already been taken in other sections of the country, as evidence of the abuse of the Federal Reserve System to promote speculation in land and commodities appeared."
Senator Robert L. Owen, Chairman of the Senate Banking and Currency Committee, testified at the Senate Silver Hearings in 1939 that:
"In the early part of 1920, the farmers were exceedingly prosperous. They were paying off the
mortgages and buying a lot of new land, at the instance of the Government--had borrowed money
to do it--and then they were bankrupted by a sudden contraction of credit and currency which
took place in 1920. What took place in 1920 was just the reverse of what should have been taking
place. Instead of liquidating the excess of credits created by the war through a period of years, the
Federal Reserve Board met in a meeting which was not disclosed to the public. They met on the
18th of May, 1920, and it was a secret meeting. They spent all day conferring; the minutes made
sixty printed pages, and they appear in Senate Document 310 of February 19, 1923. The Class A
Directors, the Federal Reserve Advisory Council, were present, but the Class B Directors, who
represented business, commerce, and agriculture, were not present. The Class C Directors,
representing the people of the United States, were not present and were not invited to be present.
Only the big bankers were there, and their work of that day resulted in a contraction of credit
which had the effect the next year of reducing the national income fifteen billion dollars,
throwing millions of people out of employment, and reducing the value of lands and ranches by
twenty billion dollars."
Carter Glass, member of the Board in 1920 as Secretary of the Treasury, wrote in his autobiography, Adventure in Constructive Finance published in 1928; "Reporters were not present, of course, as they should not have been and as they never are at any bank board meeting in the world."85
85 Carter Glass, Adventure in Constructive Finance, Doubleday, N.Y. 1928
It was Carter Glass who had complained that, if a suggested amendment by Senator LaFollette were passed, on the Federal Reserve Act of 1913, to the effect that no member of the Federal Reserve Board should be an official or director or stockholder of any bank, trust company, or insurance company, we would end up by having mechanics and farm laborers on the Board. Certainly mechanics and farm laborers could have caused no more damage to the country than did Glass, Strauss, and Warburg at the secret meeting of the Federal Reserve Board.
Senator Brookhart of Iowa testified that at that secret meeting Paul Warburg, also President of the Federal Advisory Council, had a resolution passed to send a committee of five to the Interstate Commerce Commission and ask for an increase in railroad rates. As head of Kuhn, Loeb Co. which owned most of the railway mileage in the United States, he was already missing the huge profits which the United States Government had paid during the war, and he wanted to inflict new price raises on the American people.
Senator Brookhart also testified that:
"I went into Myron T. Herrick’s office in Paris, and told him that I came there to study
cooperative banking. He said to me, ‘as you go over the countries of Europe, you will find that
the United States is the only civilized country in the world that by law is prohibiting its people
from organizing a cooperative system.’ I went up to New York and talked to about two hundred people. After talking cooperation and standing around waiting for my train--I did not specifically mention cooperative banking, it was cooperation in general--a man called me off to one side and said, ‘I think Paul Warburg is the greatest financier we have ever produced. He believes a lot more of your cooperative ideas than you think he does, and if you want to consult anybody about the business of cooperation, he is the man to consult, because he believes in you, and you can rely on him.’ A few minutes later I was steered up against Mr. Warburg himself, and he said to me, ‘You are absolutely right about this cooperative idea. I want to let you know that the big bankers are with you. I want to let you know that now, so that you will not start anything on cooperative
banking and turn them against you.’ I said, ‘Mr. Warburg, I have already prepared and tomorrow
I am going to offer an amendment to the Lant Bill authorizing the establishment of cooperative
national banks.’ That was the intermediate credit act which was then pending to authorize the
establishment of cooperative national banks. That was the extent of my conversation with Mr.
Warburg, and we have not had any since."
Mr. Wingo testified that in April, May, June and July of 1920, the manufacturers and merchants were allowed a very large increase in credits. This was to tide them through the contraction of credit which was intended to ruin the American farmers, who, during this period, were denied all credit.
At the Senate Hearings in 1923, Eugene Meyer, Jr. put his finger on a primary reason for the Federal Reserve Board’s action in raising the interest rate to 7% on agricultural and livestock paper:
"I believe," he said, "that a great deal of trouble would have been avoided if a larger number of
the eligible non-member banks had been members of the Federal Reserve System."
Meyer was correct in pointing this out. The purpose of the Board’s action was to break those state and joint land stock banks which had steadfastly refused to surrender their freedom to the banker’s dictatorship set up by the System. Kemmerer in the ABC of the Federal Reserve System had written in 1919 that:
"The tendency will be toward unification and simplicity which will be brought about by the state
institutions, in increasing numbers, becoming stockholders and depositors in the reserve banks."
However, the state banks had not responded.
The Senate Hearings of 1923 investigating the causes of the Agricultural Depression of 1920-21 had been demanded by the American people. The complete record of the secret meeting of the Federal Reserve Board on May 18, 1920 had been printed in the "Manufacturers’ Record" of Baltimore, Maryland, a magazine devoted to the interests of small Southern manufacturers.
Benjamin Strong, Governor of the Federal Reserve Bank of New York, and close friend of Montagu Norman, the Governor of the Bank of England, claimed at these Hearings:
"The Federal Reserve System has done more for the farmer than he has yet begun to realize."
Emmanuel Goldenweiser, Director of Research for the Board of Governors, claimed that the discount rate was raised purely as an anti-inflationary measure, but he failed to explain why it was a raise aimed solely at farmers and workers, while at the same time the System protected the manufacturers and merchants by assuring them increased credits.
The final statement on the Federal Reserve Board’s causing the Agricultural Depression of 1920-21 was made by William Jennings Bryan. In "Hearst’s Magazine" of November, 1923, he wrote:
"The Federal Reserve Bank that should have been the farmer’s greatest protection has become his
greatest foe. The deflation of the farmer was a crime deliberately committed."