How to fight a Depression – not a drop at a time


In recent months, it has become almost a reflex for Republicans to dismiss President Franklin D. Roosevelt’s New Deal as a dismal failure of the Democrats — a “jihad against private enterprise” as Fox News’ Britt Hume put it recently.

But Roosevelt’s spending plan, unlike President Obama’s, had widespread Republican support. In fact, he was criticized in some quarters for not spending more. And one of his chief critics was a prominent Republican.

On March 6, 1935, the head of the Federal Reserve, Marriner Eccles, issued a stern warning to Roosevelt: Given the “totally inadequate” amount of money that the administration was prepared to spend to jump-start the economy, there was no reason “to expect any substantial improvement.”

Eccles, a self-described “child of the Republican Party,” then sounded a prophetic note: “If we spend some every year, but not sufficient to give the required stimulus to private expenditures, we can build up a large debt and still not be out of the Depression.”

Thus, Eccles suggested, “the safest policy is the boldest policy.”

Those words came to mind in February when not a single Republican member of the House of Representatives and only three Republicans in the Senate voted for the stimulus package pushed by Obama.

FDR named Eccles to the Fed in 1934 and designated him as the central bank’s first chairman in its newly reconstituted form in 1935. Eccles personally drafted the bill that brought this about.

Eccles — a successful Mormon businessman from Utah, a self-described “tame millionaire” and capitalist — had a knack for issuing economic pronouncements that appeared to possess the ring of old-fashioned horse sense. He was that rarest of animals — a New Dealer who could meet a payroll.

Eccles derived the bulk of his intellectual sustenance, he would insist, not from the progressive theorists of his age but from that patron saint of free-market enthusiasts, Adam Smith. By titling his seminal work The Wealth of Nations, Smith “asserted the paramount standard of the national welfare, and not the wealth of men, as the one by which all economic activity was to be judged,” Eccles said.

Eccles entered the national spotlight in early 1933, when he testified before the Senate Finance Committee as a private citizen. There, he deemed it “incomprehensible” that Americans continued to suffer from an economic collapse that the federal government surely could end. Still, a reporter from the New York Times observed that the only time the intense banker smiled was when he announced, “I am a capitalist.”

Indeed, it was Eccles’ credentials as a rough-and-tumble member of the American business scene that furnished his confidence while confronting his favorite audience: hostile Republicans.

In the spring of 1935, Eccles addressed the American Bankers Association and castigated the bankers’ hesitancy to loan. The Reconstruction Finance Corp. had purchased preferred stock in half the U.S. banks. If they wanted the government to get out of business and banking, Eccles told his audience, they must themselves get in.

Eccles was difficult to categorize. A Fortune magazine article in April 1934 described him accurately as a “Utah banker with a special point of view.” But in the end, his credo for government’s proper role in an economic downturn was quite simple: “generating a maximum degree of private spending through a minimum of public spending.”

He was aware, of course, that this “minimum” amount could well necessitate massive government deficits.

Indeed, within months of his arrival in Washington, Eccles, then working for the Treasury Department, oversaw the creation of a program that might possibly be considered the most successful example of this principle in all of American history: the National Housing Act.

Eccles estimated that nearly 30 percent of the nation’s unemployed were directly engaged in construction activities. He recognized that renewed housing construction would have an enormous ripple effect on related industries — everything from lumberyards to drapery manufacturers stood to benefit.

The National Housing Act set the stage for this possibility by revolutionizing the home financing structure. By the close of the 1930s, a low-interest, 30-year mortgage with a 10 percent down payment — terms that were virtually unheard of previously — was becoming commonplace.

Throughout the decade, however, the reluctance of the Federal Housing Administration to even remotely approach the act’s full potential was a source of unending frustration to Eccles. Before an assembly of Ohio businessmen in the late 1930s, he publicly took the government to task by noting that had U.S. residential construction kept pace with Britain’s, some 3.5 million homes would have been built instead of 700,000. Had this been achieved, and had the Works Projects Administration paid its work force considerably more than subsistence wages, Eccles was convinced, full employment could have been achieved years before the onset of World War II.

The Depression, he would lament in his memoir, was fought “a drop at a time” when what was needed was “a tidal wave.”

One suspects that Eccles would be disheartened that far too many Republicans have seen fit to meet today’s economic crisis with some of the same shopworn shibboleths that resounded throughout his day (witness Louisiana Gov. Bobby Jindal’s response on behalf of the Republican Party to Obama’s address to Congress and the nation).

Eccles would remind them, no doubt, that “fighting a depression is like jumping an abyss.”

“If the cleft is 10 feet wide,” Eccles pointed out, “even a 9-foot jump is worse than no effort at all.”

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