The Great Depression
R.G. Hawtrey, the English economist, said, in the March, 1926 American Economic Review:
"When external investment outstrips the supply of general savings the investment market must
carry the excess with money borrowed from the banks. A remedy is control of credit by a rise in
The Federal Reserve Board applied this control of credit, but not in 1926, nor as a remedial measure. It was not applied until 1929, and then the rate was raised as a punitive measure, to freeze out everybody but the big trusts.
Professor Cassel, in the Quarterly Journal of Economics, August 1928, wrote that:
"The fact that a central bank fails to raise its bank rate in accordance with the actual situation of
the capital market very much increases the strength of the cyclical movement of trade, with all its
pernicious effects on social economy. A rational regulation of the bank rate lies in our hands, and
may be accomplished only if we perceive its importance and decide to go in for such a policy.
With a bank rate regulated on these lines the conditions for the development of trade cycles
would be radically altered, and indeed, our familiar trade cycles would be a thing of the past."
This is the most authoritative premise yet made relating that our business depressions are artificially precipitated. The occurrence of the Panic of 1907, the Agricultural Depression of 1920, and the Great Depression of 1929, all three in good crop years and in periods of national prosperity, suggests that premise is not guesswork. Lord Maynard Keynes pointed out that most theories of the business cycle failed to relate their analysis adequately to the money mechanism. Any survey or study of a depression which failed to list such factors as gold movements and pressures on foreign exchange would be worthless, yet American economists have always dodged this issue.
The League of Nations had achieved its goal of getting the nations of Europe back on the gold standard by 1928, but three-fourths of the world’s gold was in France and the United States. The problem was how to get that gold to countries which needed it as a basis for money and credit. The answer was action by the Federal Reserve System.
Following the secret meeting of the Federal Reserve Board and the heads of the foreign central banks in 1927, the Federal Reserve Banks in a few months doubled their holdings of Government securities and acceptances, which resulted in the exportation of five hundred million dollars in gold in that year. The System’s market activities forced the rates of call money down on the Stock Exchange, and forced gold out of the country. Foreigners also took this opportunity to purchase heavily in Government securities because of the low call money rate.
"The agreement between the Bank of England and the Washington Federal Reserve authorities
many months ago was that we would force the export of 725 million of gold by reducing the bank
rates here, thus helping the stabilization of France and Europe and putting France on a gold
basis."89 (April 20, 1928)
On February 6, 1929, Mr. Montagu Norman, Governor of the Bank of England, came to Washington and had a conference with Andrew Mellon, Secretary of the Treasury. Immediately after that mysterious visit, the Federal Reserve Board abruptly changed its policy and pursued a high discount rate policy, abandoning the cheap money policy which it had inaugurated in 1927 after Mr. Norman’s other visit. The stock market crash and the deflation of the American people’s financial structure was scheduled to take place in March. To get the ball rolling, Paul Warburg gave the official warning to the traders to get out of the market. In his annual report to the stockholders of his International Acceptance Bank, in March, 1929, Mr. Warburg said:
"If the orgies of unrestrained speculation are permitted to spread, the ultimate collapse is certain
not only to affect the speculators themselves, but to bring about a general depression involving
the entire country."
During three years of "unrestrained speculation", Mr. Warburg had not seen fit to make any remarks about the condition of the Stock Exchange. A friendly organ, The New York Times, not only gave the report two columns on its editorial page, but editorially commented on the wisdom and profundity of Mr. Warburg’s observations. Mr. Warburg’s concern was genuine, for the stock market bubble had gone much farther than it had been intended to go, and the bankers feared the consequences if the people realized what was going on. When this report in The New York Times started a sudden wave of selling on the Exchange, the bankers grew panicky, and it was decided to ease the market somewhat. Accordingly, Warburg’s National City Bank rushed twenty-five million dollars in cash to the call money market, and postponed the day of the crash.
The revelation of the Federal Reserve Board’s final decision to trigger the Crash of 1929 appears, amazingly enough, in The New York Times. On April 20, 1929, the Times headlined, "Federal Advisory Council Mystery
89 Clarence W. Barron, They Told Barron, Harpers, New York, 1930, p. 353
Meeting in Washington. Resolutions were adopted by the council and transmitted to the board, but their purpose was closely guarded. An atmosphere of deep mystery was thrown about the proceedings both by the board and the council. Every effort was made to guard the proceedings of this extraordinary session. Evasive replies were given to newspaper correspondents."
Only the innermost council of "The London Connection" knew that it had been decided at this "mystery meeting" to bring down the curtain on the greatest speculative boom in American history. Those in the know began to sell off all speculative stocks and put their money in government bonds. Those who were not privy to this secret information, and they included some of the wealthiest men in America, continued to hold their speculative stocks and lost everything they had.
In FDR, My Exploited Father-in-Law, Col. Curtis B. Dall, who was a broker on Wall Street at that time, writes of the Crash, "Actually it was the calculated ‘shearing’ of the public by the World Money-Powers, triggered by the planned sudden shortage of the supply of call money in the New York money market."90 Overnight, the Federal Reserve System had raised the call rate to twenty percent. Unable to meet this rate, the speculators’ only alternative was to jump out of windows.
The New York Federal Reserve Bank rate, which dictated the national interest rate, went to six percent on November 1, 1929. After the investors had been bankrupted, it dropped to one and one-half percent on May 8, 1931. Congressman Wright Patman in "A Primer On Money", says that the money supply decreased by eight billion dollars from 1929 to 1933, causing 11,630 banks of the total of 26,401 in the United States to go bankrupt and close their doors.
The Federal Reserve Board had already warned the stockholders of the Federal Reserve Banks to get out of the Market, on February 6, 1929, but it had not bothered to say anything to the rest of the people. Nobody knew what was going on except the Wall Street bankers who were running the show. Gold movements were completely unreliable. The Quarterly Journal of Economics noted that:
"The question has been raised, not only in this country, but in several European
countries, as to whether customs statistics record with accuracy the movements of
precious metals, and, when investigation has been made, confidence in such
figures has been weakened rather than strengthened. Any movement between
France and England, for instance, should be recorded in each country, but such
comparison shows an average yearly discrepancy of fifty million francs for France
and eighty-five million francs for England. These enormous discrepancies are not
The Right Honorable Reginald McKenna stated that:
90 Col. Curtis B. Dall, F.D.R., My Exploited Father-in-Law, Liberty Lobby, Wash., D.C. 1970
"Study of the relations between changes in gold stock and movement in price levels shows what
should be very obvious, but is by no means recognized, that the gold standard is in no sense
automatic in operation. The gold standard can be, and is, usefully managed and controlled for the
benefit of a small group of international traders."
In August 1929, the Federal Reserve Board raised the rate to six percent. The Bank of England in the next month raised its rate from five and one-half percent to six and one-half percent. Dr. Friday in the September, 1929, issue of Review of Reviews, could find no reason for the Board’s action:
"The Federal Reserve statement for August 7, 1929, shows that signs of inadequacy for autumn
requirements do not exist. Gold resources are considerably more than the previous year, and gold
continues to move in, to the financial embarrassment of Germany and England. The reasons for
the Board’s action must be sought elsewhere. The public has been given only the hint that ‘This
problem has presented difficulties because of certain peculiar conditions’. Every reason which
Governor Young advanced for lowering the bank rate last year exists now. Increasing the rate
means that not only is there danger of drawing gold from abroad, but imports of the yellow metal
have been in progress for the last four months. To do anything to accentuate this is to take the
responsibility for bringing on a world-wide credit deflation."
Thus we find that not only was the Federal Reserve System responsible for the First World War, which it made possible by enabling the United States to finance the Allies, but its policies brought on the world-wide depression of 1929-31. Governor Adolph C. Miller stated at the Senate Investigation of the Federal Reserve Board in 1931 that:
"If we had had no Federal Reserve System, I do not think we would have had as bad a speculative
situation as we had, to begin with."
Carter Glass replied, "You have made it clear that the Federal Reserve Board provided a terrific credit expansion by these open market transactions."
Emmanuel Goldenweiser said, "In 1928-29 the Federal Board was engaged in an attempt to restrain the rapid increase in security loans and in stock market speculation. The continuity of this policy of restraint, however, was interrupted by reduction in bill rates in the autumn of 1928 and the summer of 1929."
Both J.P. Morgan and Kuhn, Loeb Co. had "preferred lists" of men to whom they sent advance announcements of profitable stocks. The men on these preferred lists were allowed to purchase these stocks at cost, that is, anywhere from 2 to 15 points a share less than they were sold to the public. The men on these lists were fellow bankers, prominent industrialists, powerful city politicians, national Committeemen of the Republican and Democratic Parties, and rulers of foreign countries. The men on these lists were notified of the coming crash, and sold all but so-called gilt-edged stocks, General Motors, Dupont, etc. The prices on these stocks also sank to record lows, but they came up soon afterwards. How the big bankers operated in
1929 is revealed by a Newsweek story on May 30, 1936, when a Roosevelt appointee, Ralph W. Morrison, resigned from the Federal Reserve Board:
"The consensus of opinion is that the Federal Reserve Board has lost an able man. He sold his
Texas utilities stock to Insull for ten million dollars, and in 1929 called a meeting and ordered
his banks to close out all security loans by September 1. As a result, they rode through the
depression with flying colors."
Predictably enough, all of the big bankers rode through the depression "with flying colors." The people who suffered were the workers and farmers who had invested their money in get-rich stocks, after the President of the United States, Calvin Coolidge, and the Secretary of the Treasury, Andrew Mellon, had persuaded them to do it.
There had been some warnings of the approaching crash in England, which American newspapers never saw. The London Statist on May 25, 1929 said:
"The banking authorities in the United States apparently want a business panic to curb
The London Economist on May 11, 1929, said:
"The events of the past year have seen the beginnings of a new technique, which, if maintained
and developed, may succeed in ‘rationing the speculator without injuring the trader.’"
Governor Charles S. Hamlin quoted this statement at the Senate hearings in 1931 and said, in corroboration of it:
"That was the feeling of certain members of the Board, to remove Federal Reserve credit from the
speculator without injuring the trader."
Governor Hamlin did not bother to point out that the "speculators" he was out to break were the school-teachers and small town merchants who had put their savings into the stock market, or that the "traders" he was trying to protect were the big Wall Street operators, Bernard Baruch and Paul Warburg.
When the Federal Reserve Bank of New York raised its rate to six percent on August 9, 1929, market conditions began which culminated in tremendous selling orders from October 24 into November, which wiped out a hundred and sixty billion dollars worth of security values. That was a hundred and sixty billions which the American citizens had one month and did not have the next. Some idea of the calamity may be had if we remember that our enormous outlay of money and goods in the Second World War amounted to not much more than two hundred billions of dollars, and a great deal of that remained as negotiable securities in the national debt. The stock market crash is the greatest misfortune which the United States has ever suffered.
The Academy of Political Science of Columbia University in its annual meeting in January, 1930, held a post-mortem on the Crash of 1929. Vice-
President Paul Warburg was to have presided, and Director Ogden Mills was to have played an important part in the discussion. However, these two gentlemen did not show up. Professor Oliver M.W. Sprague of Harvard University remarked of the crash:
"We have here a beautiful laboratory case of the stock market’s dropping apparently from its own
It was pointed out that there was no exhaustion of credit, as in 1893, nor any currency famine, as in the Panic of 1907, when clearing-house certificates were resorted to, nor a collapse of commodity prices, as in 1920. What then, had caused the crash? The people had purchased stocks at high prices and expected the prices to continue to rise. The prices had to come down, and they did. It was obvious to the economists and bankers gathered over their brandy and cigars at the Hotel Astor that the people were at fault. Certainly the people had made a mistake in buying over-priced securities, but they had been talked into it by every leading citizen from the President of the United States on down. Every magazine of national circulation, every big newspaper, and every prominent banker, economist, and politician, had joined in the big confidence game of urging people to buy those over-priced securities. When the Federal Reserve Bank of New York raised its rate to six percent, in August 1929, people began to get out of the market, and it turned into a panic which drove the prices of securities down far below their natural levels. As in previous panics, this enabled both Wall Street and foreign operators in the know to pick up "blue-chip" and gilt-edged" securities for a fraction of their real value.
The Crash of 1929 also saw the formation of giant holding companies which picked up these cheap bonds and securities, such as the Marine Midland Corporation, the Lehman Corporation, and the Equity Corporation. In 1929 J.P. Morgan Company organized the giant food trust, Standard Brands. There was an unequaled opportunity for trust operators to enlarge and consolidate their holdings.
Emmanuel Goldenweiser, director of research for the Federal Reserve System, said, in 1947:
"It is clear in retrospect that the Board should have ignored the speculative expansion and
allowed it to collapse of its own weight."
This admission of error eighteen years after the event was small comfort to the people who lost their savings in the Crash.
The Wall Street Crash of 1929 was the beginning of a world-wide credit deflation which lasted through 1932, and from which the Western democracies did not recover until they began to rearm for the Second World War. During this depression, the trust operators achieved further control by their backing of three international swindlers, The Van Sweringen brothers, Samuel Insull, and Ivar Kreuger. These men pyramided billions of dollars worth of securities to fantastic heights. The bankers who promoted
them and floated their stock issue could have stopped them at any time, by calling loans of less than a million dollars, but they let these men go on until they had incorporated many industrial and financial properties into holding companies, which the banks then took over for nothing. Insull piled up public utility holdings throughout the Middle West, which the banks got for a fraction of their worth. Ivar Kreuger was backed by Lee Higginson Company, supposedly one of the nation’s most reputable banking houses. The Saturday Evening Post called him "more than a financial titan", and the English review Fortnightly said, in an article written December 1931, under the title, "A Chapter in Constructive Finance": "It is as a financial irrigator that Kreuger has become of such vital importance to Europe."*
"Financial irrigator" we may remember, was the title bestowed upon Jacob Schiff by Newsweek Magazine, when it described how Schiff had bought up American railroads with Rothschild’s money.
The New Republic remarked on January 25th, 1933, when it commented on the fact that Lee Higginson Company had handled Kreuger and Toll Securities on the American market:
"Three-quarters of a billion dollars was made away with. Who was able to dictate to the French
police to keep secret the news of this extremely important suicide for some hours, during which
somebody sold Kreuger securities in large amounts, thus getting out of the market before the
The Federal Reserve Board could have checked the enormous credit expansion of Insull and Kreuger by investigating the security on which their loans were being made, but the Governors never made any examination of the activities of these men.
The modern bank with the credit facilities it affords, gives an opportunity which had not previously existed for such operators as Kreuger to make an appearance of abundant capital by the aid of borrowed capital. This enables the speculator to buy securities with securities. The only limit to the amount he can corner is the amount to which the banks will back him, and, if a speculator is being promoted by a reputable banking house, as Kreuger was promoted by Lee Higginson Company, the only way he could be stopped would be by an investigation of his actual financial resources, which in Kreuger’s case would have proved to be nil.
The leader of the American people during the Crash of 1929 and the subsequent depression was Herbert Hoover. After the first break of the
* NOTE: Ivar Kreuger, we may recall, was occasionally the personal guest of his old friend, President Herbert Hoover, at the White House. Hoover seems to have maintained a cordial relationship with many of the most prominent swindlers of the twentieth century, including his partner, Emile Francqui. The receivership of the billion dollar Kreuger Fraud was handled by Samuel Untermeyer, former counsel for Pujo Committee hearings.
market (the five billion dollars in security values which disappeared on October 24, 1929) President Hoover said:
"The fundamental business of the country, that is, production and distribution of commodities, is
on a sound and prosperous basis."
His Secretary of the Treasury, Andrew Mellon, stated on December 25, 1929, that:
"The Government’s business is in sound condition."
His own business, the Aluminum Company of America, apparently was not doing so well, for he had reduced the wages of all employees by ten percent.
The New York Times reported on April 7, 1931, "Montagu Norman, Governor of the Bank of England, conferred with the Federal Reserve Board here today. Mellon, Meyer, and George L. Harrison, Governor of the Federal Reserve Bank of New York, were present."
The London Connection had sent Norman over this time to ensure that the Great Depression was proceeding according to schedule. Congressman Louis McFadden had complained, as reported in The New York Times, July 4, 1930, "Commodity prices are being reduced to 1913 levels. Wages are being reduced by the labor surplus of four million unemployed. The Morgan control of the Federal Reserve System is exercised through control of the Federal Reserve Bank of New York, the mediocre representation and acquiescence of the Federal Reserve Board in Washington." As the depression deepened, the trust’s lock on the American economy strengthened, but no finger was pointed at the parties who were controlling the system.