Jumping the Abyss: Marriner S. Eccles and the New Deal, 1933-1940

By Mark Nelson

We capitalists have got to decide how much we are going to pay for capitalism.[1]

Marriner S. Eccles: New York Times, May 1935

This is the crowd that wants power rather than recovery- the crowd that for 12 years was in power, that tried the very policies which ended in the greatest smash in our economic history; the crowd that willed this administration a debt of 20 billions and a demoralized, prostrate country; yet they have the sublime audacity to propose that we go back to the very policies which wrecked the country. They have been proved false profits on their own record.[2]

Marriner S. Eccles: memo to FDR, December 1935

This work presents the first compressive and independent analysis of the contributions of one of the most important public officials in American history.  As a graduate student more than a decade ago, I began to investigate the role that Marriner S. Eccles played during the 1930s, as both a special assistant to the secretary of the Treasury and as the chairman of the Federal Reserve Board of Governors. I was intrigued that Eccles, as a Republican businessman from Utah—and yes a Mormon—became the New Deal’s most forceful advocate of Keynesian policy.  Since that time I have come to learn far more about his participation in those years, and, indeed, a good deal more about the vexed political and economic milieu in which his career as a public servant unfolded.  Although this work is clearly intended to amplify the contributions that Eccles made in important policy areas, it also seeks to correct some inaccuracies that have frequently been conveyed about the details of his participation. Moreover, his fiscal and monetary interests were so extensive that it would not be too far afield to view what follows as a history of the New Deal with Eccles as the focal point.

There is a far more salient reason that substantiates the value of a fuller exploration of Marriner Eccles’s career. I can recall reading in 2001 the 1935 observation of Eccles’s most avid antagonist, Senator Carter Glass, that the Federal Reserve was an institution “which has never had a magician in its membership, and does not have one now.”  Concomitant with my discovery of the Carter Glass assessment of the Federal Reserve’s leadership, however, was a book atop the nation’s best-seller lists written by journalist Bob Woodward, that appeared to intimate the monetary wizardry of its then-chairman, Alan Greenspan. With the fervent title Maestro and the inferential subtitle Greenspan’s Fed and The American Boom, it conveyed the radiant economic temper that many Americans then associated with his tenure at the helm of the Fed.  Indeed, Woodward states in his book’s preface that the next president “assumes the presidency in a Greenspan era,” while adding that “the inherited economic conditions for everyone—from the next president to any citizen—are in many respects the Greenspan dividend.”[3]

This reverential perspective on the reigning chairman of the Federal Reserve was reflective of a wider sensibility in the country at the time that Alan Greenspan embodied. As early as 1980, economist Alan Blinder observed that it “was hard to find an American economist under the age of forty who professed to be a Keynesian.”  Albeit hyperbolic, this statement came a mere fifteen years after Time magazine posthumously deemed Lord Keynes the “Man of the Year” and less than a decade after president Nixon announced his intention to spend the nation out of a recession, while famously acknowledging: “I am now a Keynesian in economics.”[4] By the time Maestro arrived in the bookstores, however, the country seemed to have long before answered the clarion call for a “Capitalist Manifesto” by conservative journalist William Safire: “Laissez-fairies of the world unite! You have nothing to lose but your Keynes.”  Helped along by what Keynes biographer Robert Skidelsky sees as “a wave of Keynesian hubris” in the 1960s, the stagflation of the late 1970s, and the captivating rhetoric of the “Reagan Revolution” in the 1980s, faith in the beneficence of free markets had largely become the countermark of sound economic thought, not merely among a great number of academic economists, but in the popular mind.  Illustrative of the extent of this sentiment, the magazine Human Events, which by 2005 appealed to mainstream conservative readers (and had long counted Ronald Reagan as a faithful subscriber), included Keynes’s General Theory in its top ten list of the most dangerous books ever written. The 1936 work was adjudged slightly less perilous than The Communist Manifesto, Mein Kampf and Mao’s Little Red Book.  This was, of course, a fantastical appraisal of a work that expressly states that “individualism” remains “the best safeguard of personal liberty” and that apart from “an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialize economic life than there was before.”  Although it is clear, therefore, that most who felt endangered by the book failed to read a word of it, or make any attempt to comprehend it, the General Theory and Keynesianism became the bogeyman of all who feared “state socialism.” Overall—despite there being Keynesian economists still at large—it signified an important shift in the macroeconomic perceptions of the nation. [5]

Alas, Americans had largely forgotten Marriner Eccles by 2001.  In the minds of most historians he was considered—when he was considered at all—as something of a curiosity, a homespun Keynesian who, as a Republican banker from Utah, advocated deficit financing and played an important role in refocusing the power of the Federal Reserve from New York to Washington.  To those economic historians who were disposed to consider the New Deal favorably, Eccles was deemed a noble figure who made an ultimately fruitless effort to persuade President Franklin Roosevelt to increase spending in the prewar years, but who also failed to realize the monetary possibilities available to him as the head of a central bank. To such “Neo-Keynesians,” the abandonment of the gold standard and the tremendous growth of the money supply—developments with which Eccles had no connection—brought the impressive increases in the Gross National Product from 1933 to 1937 (a growth that averaged approximately 9 percent a year). For the growing number of academic economists who championed free market capitalism and viewed the New Deal as an impediment to economic revival—and claimed to have the mathematical models to prove it—Eccles was dismissed as the embodiment of all the inimical fallacies of the Keynesian age.[6]  Writing in 1987, Robert Lucas, the highly acclaimed champion of the “rational expectations revolution” in economic thought, stated dismissively that “what we now call macroeconomics” was centered on a series of controversies that had simply been outgrown: “the liquidity trap, operation twist, the loanable funds doctrine, and all the other macroeconomic issues that seemed so important as they were occurring and are so hard to remember now.”  Keynes, he stated, and those who followed his lead “were obliged to rely on Marshallian ingenuity to tease some useful dynamism out of purely static theory,” while “the modern theorist is much better equipped,” observed Lucas, “to state exactly the problem he wants to study and then study it.” Hence, the very debates that had engaged public policy makers for more than half a century were deemed somewhat antediluvian.[7]

It was amid this political and intellectual climate that I first came to consider the New Deal contributions of Marriner Eccles. Needless to say, the advent of the Great Recession has gone a long way in encouraging a fresh look at aspects of the New Deal years that had lost a good deal of their luster as worthy objects of scholarly attention.  Although he had long before relinquished his wand, Alan Greenspan provided what future historians will surely see as a seminal moment in U.S. history when the former Fed chairman acknowledged before a congressional committee in October 2008 that the financial meltdown had left him in “shocked disbelief.”  His utter faith in free markets, he stated, had been misplaced. “The whole intellectual edifice,” he conceded, “collapsed in the summer of last year.”

Nobel Prize-winning economist Paul Krugman wrote shortly thereafter: “What we are going to have to do, clearly, is to relearn the lessons our grandfathers were taught by the Great Depression.” [8]  This would have seemed beyond improbable only a short time before. Who would have imagined while the country was enjoying the “Greenspan dividend” that Krugman would soon be authoring a book with the improbable title End This Depression Now.[9] Indeed, as this is being written (fall 2012) the country is making a very weak recovery from its most severe economic downturn since the cataclysmic decline of the early 1930s.  Previously, the worst recession since the Great Depression occurred in 1981-82, when real GDP fell by 2 percent.  In the slump of 2007-09, the decline in real GDP has been in the vicinity of 5 percent!  Not since the 1930s has unemployment exceeded 8 percent four years after the beginning of a decline.  Not since the 1930s has the financial sector witnessed such a near catastrophic collapse. Not since the 1930s have massive numbers of American families lost their homes to foreclosure.[10]

Here in the fall of 2012 it is not entirely certain that the economy will not fall back into another recession, as it did in the summer of 1937.  This time, however, the policy transgressions that will enable it to happen will be far, far less forgivable. Even if such a tragedy is averted, a prolonged period of high unemployment—a tragedy in its own right—is unnecessarily in its fifth year. In November 2012, the unemployment rate registers 7.9 percent. The economic growth for the first quarter of 2012 has recently been assessed by the Commerce Department at 1.5 percent and the expectation is that growth will remain sluggish through the close of 2014.  In Europe, where the admonishments of the 1930s are being even more thoroughly slighted, the “austarians”   are subjecting the continent to a fifth autumn of economic misery. Eurostat, the European Union’s statistics agency, has just reported that the economies of the twenty-seven- country EU shrank by 0.2 percent in the second quarter of 2012.  Most certainly then, the lessons learned in the bitter baptism of the Great Depression have been thoroughly forgotten, if not by a preponderance of chastened economists, at least by those entrusted with directing public policy, both here and in Europe.[11]

There can be little doubt that Marriner Eccles was at the very center of the New Deal disputations over the efficacy of fiscal policy measures.  While reflecting upon the early years of the so-called Keynesian Revolution, no less an authority on America’s economic history than Milton Friedman would assert that it was not John Maynard Keynes, but rather Eccles who played the most active role in the widespread dissemination of “Keynesian policies” throughout the land.[12]  One might be hard-pressed to find many matters upon which Milton Friedman and his fellow economist John Kenneth Galbraith agreed. Although Galbraith in large measure embraced Keynesianism—inclined though he was to fear that it had traveled down a “one-way street”—Friedman viewed it as a rather lamentable development. On the pivotal contribution played by Eccles in advancing its precepts, however, they were entirely of one mind.  “Yours is the only revolution on record,” Galbraith once wrote to Eccles, “that entered government by way of a central bank.”[13]

Eccles was possessed of what Galbraith liked to term “the primitive instincts of a businessman”; so primitive, in fact, it appears he failed to obtain a high school degree.[14]  Eccles emerged as a figure in national life, not from the charmed surroundings of Bloomsbury, but from the Mormon Zion in the great American basin.  He came to his unorthodox economic views, not while a professor at Oxford, but as a rough and tumble participant upon the American business scene. From the mid-1930s on, Eccles was something of a household name. He was the ubiquitous advocate of deficit spending; quoted in countless newspaper and journal articles; seen on newsreels, at business conventions, and union halls; heard frequently on radio; and pictured on the cover of Time magazine.  Large numbers of pre-World War II Americans, who had little familiarity with the name John Maynard Keynes, knew of this irascible Mormon from Utah.

As previously noted, however, some economic historians, including Christina and David Romer give Eccles a rather poor grade for his comprehension of the efficacy of the Fed’s monetary mechanisms.[15] Such pronouncements appear a tad uncharitable, however, when one considers that the 1935 restructuring of the Federal Reserve—an alteration that significantly heightened the degree to which these mechanisms are effective—can be attributed more to him than any other individual.  Fittingly then, as the present chairman, Ben S. Bernanke, arrives at work each morning to apply the tools of monetary policy, he enters the Marriner S. Eccles Building.

The 1982 building dedication notwithstanding, Eccles’s role in the Depression years rarely receives sufficient historical exploration.  This study attempts to address this oversight by elaborating upon the rather unique perspective he brought to the Roosevelt administration in the years before the onset of the Second World War.  Eccles would most certainly be intrigued—and no doubt saddened—by the predicament in which the country has found itself in recent times, how it got there, the policies it has employed to extract itself, and the opprobrium that even a relatively modest effort at fiscal repair has elicited in many quarters.   Although there can be slight doubt that he would appreciate the numerous distinctive features of our present circumstances, he would also, I think it could be confidently stated, marvel at how the sights and sounds of the Great Recession reverberate with the ring of familiarity. Herein then resides the primary purpose of this work: the issues that the nation faced in the 1930s and the manner in which they were confronted by the president, the Congress, the Federal Reserve, and the American people at large, are as endowed with relevancy for today’s developments as most history ever gets.  And what we often discover when we take stock of many of the public policy issues of 2012, are the footmarks of Marriner Eccles.

Consider that Eccles’s first contact with New Dealers coincided with an investigation by the Senate Banking and Currency Committee, which revealed that American investment bankers had in the late 1920s knowingly floated billions of dollars of worthless foreign securities. They failed, among other things, to adequately check, or blatantly ignored, the validity of the information provided by the foreign sellers. This practice, the committee investigators reported, violated “elementary principles of business ethics.”  It amounted, they added, to “one of the most scandalous chapters in the history of American investment banking.” As Eccles joined the administration, many on Wall Street were downplaying the entire incident. “The whole subject matter lay far in the past,” stated one leading investment banker who insisted that the unsavory affair “dealt with an era that had definitely ended.”  Not quite. August 15, 2012 finds an Associated Press report that Wells Fargo & Company has agreed to pay a $6.58 million settlement for selling securities in 2007 that it knew to be deficient.  A spokesman for the firm, which is considerably larger today having acquired Wachovia Corporation in a 2008 merger, stated that the Wells Fargo has been “completely revamped” and added, “We are pleased to put this matter behind us.”[16]

Yet another matter that can hardly be labeled a relic of the nation’s past engaged Eccles in one of his first efforts as a member of the Treasury Department in the early months of 1934.   He assisted the administration in turning back Wall Street’s zealous efforts to weaken the securities and stock market control bill then before Congress. What is absolutely striking about this 1934 assault upon the securities bill is how closely the “Chicken Little” claims of the financial community resemble those made against the Dodd-Frank Wall Street Reform Act in 2010 (although the latter seems far from being the best crafted of laws).[17]

Consider that it was a subcommittee on housing that Eccles headed when he was at the Treasury that altered the home mortgage structure in the United States, created the Federal Housing Administration, and led to the formation of the Federal National Mortgage Association, known soon thereafter as Fannie Mae.  It was an arrangement that benefited countless Americans for well over half a century before its structure was fundamentally impaired.  The material presented here supports Eccles’s contention that housing construction was far and away the most essential element of a full economic recovery. The mechanism for putting vast numbers of construction workers back on the job was set in place with the formation of the Federal Housing Administration that Eccles championed.  The story of how the opportunity to end high unemployment in the 1930s through housing construction was left unrealized might legitimately be called tragic. Nonetheless, the emergence of a modernized construction industry that followed in the wake of the Federal Housing Act that Eccles advocated, managed to produce, marred as it was by the racial injustice of American society, a volume and quality of moderate housing by the post World War II years that, as historian Gail Radford has acknowledged, “seemed impossible at a mass level” as late as the 1920s. Moreover, the financing, planning and land use improvements that the FHA fostered allowed housing to play a crucial role in economic stability, and may, suggests economic historian Alexander Field, “have contributed to the postwar moderation of the business cycle as much as did the much-vaunted role of fiscal and monetary policy.”[18]

It was Eccles, however, who cautioned that easy mortgage terms under relaxed economic conditions could also pose the potential for abuse. Although the prerequisites of the infamous subprime mortgage—and the government’s relinquishment of its duty to oversee the securitization of these instruments, leaving this function to the “regulation of the free market”—would almost certainly be beyond his imagining.

Nonetheless, Eccles was deeply troubled by the FHA’s lack of initiative and boldness. The failure to foster the building of a sufficient number of homes was in his estimation the greatest single failing of the New Deal.  Consider the lamentable sense of déjà vu that he would surely experience upon reading news accounts from October 2011—which display an uncanny similarity to memos from his 1930s files—that overly restrictive rules have prevented all but 8.4 percent of the nation’s 25,000 common-interest developments from obtaining FHA eligibility for their applications.[19] Similarly, news reports in the summer of 2012 that described the “hyper-strict underwriting rules” that Fannie Mae and the FHA insist on maintaining closely replicate the reports that came across Eccles’s desk in the 1930s and prompted him to issue constant private and public complaints that the key to economic recovery was being senselessly frustrated.[20]

It is doubtful that Eccles would be in the least surprised, however, that a number of the regulatory matters at play in his day still remain at issue.  When Senator Christopher J. Dodd, until January of 2011 the chairman of the Senate Banking Committee, offered his support for a single bank regulator as he commenced the committee’s hearings on oversight reform, he did so in words that amounted to a nearly a verbatim restatement of Eccles’s comments from the 1930s.  “We must eliminate the overlap, redundancies, and additional red tape created by the current alphabet soup of regulators,” advised the Connecticut senator.  “I have heard from many who have argued that I should not push for a single bank regulator,” stated Dodd, some seven decades after Eccles’s exhortations. “The most common argument is not that it’s a bad idea,” he continued, “it’s that consolidation is too politically difficult.”  Dodd (who had his own problems with what many felt was a far too cozy relationship with large financial concerns) gave up on this aspect of banking reform rather early in his committee’s deliberations.[21]

Eccles would have appreciated the difficulty.  In his effort to remodel bank supervision he became the driving force behind the Uniform Agreement on Bank Supervision in 1938 that abandoned mark-to-market accounting practices for nearly seven decades. (How Eccles would feel about that accounting practice in today’s banking world is hard to say. His feelings about mark-to-market accounting in the 1930s are discussed in a following chapter.) That development he viewed as far less important than convincing the Congress and President Roosevelt of the desirability of what he termed “bank unification.” To win this battle to center supervision in a sole agency, Eccles believed, would have constituted the most significant achievement of all his years in government service.  Needless to say, when Eccles spoke about a single bank supervisory agency he had in mind the Federal Reserve. In addition to providing simplification, unification would allow the Fed to transform credit risk standards from a pro-cyclical force to a countercyclical tool.  The economy would derive great benefit, he believed, if loan standards could be softened in recessions and tightened during periods of “irrational exuberance,” to use a now-famous Greenspanian locution.  Only the Fed, Eccles insisted, would possess the expertise to apply such a policy.  Appreciating the value of this kind of an adjustment, Moody’s Analytics, which advises risk management professionals, suggested at a conference in June of 2010 that consumer credit scores could automatically be increased in poor economies and lowered in booms. In large measure it is an Eccles design from 1935 that many today might find new and innovative.[22]

In Eccles’s view, however, the principal reason to adopt unification of supervision follows along the reasoning that Mark Twain once espoused: “Put all your eggs in one basket-and watch that basket.”  A single bank regulator would narrow the focus of the public, and both strengthen and center responsibility. If anything went wrong in terms of regulatory competence there would be but one direction in which to point an accusatory finger.  “Political forces will increasingly dominate activities in the field of money, credit, and banking,” he prophesied, “as separate and weak government agencies are forced to bow before the political pressures of the moment.”[23]  Convinced of the direction in which such an arrangement would lead, he titled the chapter in his memoir that chronicled his failed effort at unification “Competition in Laxity.”

This expostulation is sadly vindicated in the report of the Inquiry Commission, assigned by Congress and President Obama to investigate the causes of the financial and economic crises of 2008-10.  Published in 2011, the commission’s report faulted the government for permitting “financial firms to pick their preferred regulators in what became a race to the weakest supervisor.” Interestingly, or perhaps astonishingly, Fed Chairman Alan Greenspan, in testifying against consolidated bank supervision in 1994, touted this ability of banks to shift their regulators as an effective way for these institutions to elude “the excessively rigid posture of any one regulator.”[24]  A “competition in laxity” indeed!

Eccles might be pleased to know, however, that at least his insistence upon the efficacy of adjusting regulatory standards to accommodate changing economic conditions has become a topic of much discussion since the banking crisis.  The Geneva Reports on the World Economy, a collection of economists who specialize in the areas of banking and finance, issued a 2009 paper that makes the case for what it terms “macro-prudential regulation.” They call for “countercyclical” regulatory standards that would, for example, alter the minimum capital or liquidity ratios “to ensure that in a boom, when risk measures are suggesting banks can safely leverage or lend more, banks are putting aside an increasing amount of capital which can then be released when the boom ends and asset prices fall back.” Charles Calomiris, a professor of finance at Columbia Business School, has written—in another area of agreement with Eccles—that these regulatory changes would be far more targeted and effective than adjustments to the fed funds rate in dampening credit-driven asset bubbles before they pose a serious threat to overall economic health.  As Calomiris points out, most discussants now agree that there should be higher regulatory standards for “large, complex financial institutions.” He further identifies, however, a growing trend in almost all developed countries to separate monetary from regulatory authority.  So rather than the Fed acquiring additional powers the mandate for “macro prudential supervision and regulation” might be given to a newly created “council of regulators” who would coordinate a uniform tightening or loosening of standards with representatives from all the various agencies that presently act as regulators. We are left to guess how Eccles would respond to a plan that to some extent fulfilled his call for single regulator implementing countercyclical measures, but eliminated the Fed from that authority.[25]

“Making credit accessible to sound small businesses is crucial to our economic recovery,” stated Fed chairman Ben Bernanke at a July 2010 conference on the need for credit expansion.  In yet another uncanny, near verbatim, restatement of a problem emphasized repeatedly by Eccles, Bernanke lamented the fact that banks had relaxed credit standards for large corporations, which, in a reprise of 1936, were reporting large earnings, while denying loans to small firms that employed a very high percentage of the American workforce. Bernanke acknowledged that the Fed was “applying pressure to get more credit flowing.”[26] Chairman Eccles, while identifying the very same predicament, was slightly more impolitic when he addressed a convention of thousands of American bankers in 1935 and characterized their refusal to lend to smaller businesses as essentially a case of professional malfeasance.[27]

Of all the au courant associations with the chairman’s New Deal years, the one from which he might possibly have derived the utmost in self-satisfaction is the ubiquitous return of the maxim “You can’t push a string.” Although it is more often than not credited to Eccles, the slogan was coined in Eccles’s presence by his congressional ally, T. Alan Goldsborough of Maryland, and it reflected their shared conviction that while monetary policies were crucial to recovery—one could imagine Eccles pointing with great criticism, for example, to the fact that Japan, in its “lost decade,” waited until the seventh year of its recession to capitalize its banks—such monetary mechanisms play an adjunctive role to fiscal policy in the course of a severe economic downturn. [28] Currently, despite a stunning infusion of money into the economy by the Fed since 2008, driving interest rates to historic lows, the economy remains in the doldrums and, as noted, a significant improvement in the jobs situation to anything remotely close to full employment appears not to be in the near offing. (Meanwhile, the present yield on a two- year Treasury note is 0.27 percent.)  You can lead the economic horse to water….

Eccles would have been quite familiar, therefore, with the contours of this conundrum. As economic historian Allan Meltzer has written, Eccles’s focus on the notion of a “liquidity trap” predates Keynes’s exploration of this predicament. In fact, Meltzer suggests that Keynes may have “acquired the idea from bankers.” [29] Of course, while he castigated banks in late 1935 for not lending, Eccles defended them in the early years of the Depression by citing the sheer impossibility of finding borrowers in a tremendously sluggish economy. “Bank loan officers must feel like Marriner Eccles,” wrote a writer in the pages of Forbes in March 2010, referencing his “can’t push a string” perspective on monetary policy.  The author was taking issue with the allegations by economist Joseph Stiglitz and many others that banks were unwilling to lend. While acknowledging that loans outstanding were indeed declining as commercial deposits were rapidly increasing, the article insists that this predicament was the result not of an unwillingness to loan but rather a consequence of the fact that “demand from borrowers remains weak.” Either way it would appear that Eccles’s point was confirmed: in what was then the twenty-seventh month after the onset of the Great Recession, money was not sufficiently getting out of the banks.[30]

If the Great Recession seems to have highlighted the limitations of monetary measures it has also given rise anew to yet another dilemma that Eccles confronted in the 1930s.  In October of 2010, a front page story in the New York Times reported that many of the nation’s largest corporations were taking advantage of the Federal Reserve’s prolonged period of near zero interest rates to stockpile cash by selling bonds at interest rates often lower than 1 percent, rather than to use the easy money conditions to invest and create jobs.  Ostensibly this situation is caused, some would argue—as was similarly asserted in the 30s—by “uncertainty” about the economy’s future.   (Uncertainty about the economic future, Eccles liked to say, is not the cause of an economic slump, but rather a consequence of one. A widget maker becomes confident about the future when someone somewhere begins to buy widgets.)  As many financial analysts have predicted, however, a good deal of today’s borrowing is intended to finance mergers and acquisitions.[31]  This is precisely the charge Eccles made seventy-five years before.  By the mid-1930s, he was citing the hoarding of enormous “liquid cash positions” by many large corporations as a significant hindrance to recovery. The “excuse,” he said, “was that no one knew how long the depression would last.” This presumably did not reflect the attitude of many small and medium size businesses that, as a 1935 Commerce Department study revealed, were clamoring for loans they could not get. When “you pierced the veil of this sophistry,” wrote Eccles, the better reason—the buying up of competing concerns—“could be readily seen.”[32]

The expansive monetary measures taken by the Fed have left Chairman Bernanke caught, as was Eccles, between those who fear inflation and those who welcome it. Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, has cautioned repeatedly since 2008 of inflationary consequences that may result from the Fed’s open market and quantitative easing policies. At the Federal Reserve of Chicago, meanwhile, president Charles Evans leads a growing chorus of economists who, far from being worried about future inflation, think that Chairman Bernanke needs to pursue an even more active monetary expansion. These believers in nominal GDP (NGDP) level targeting have faith that emerging inflation would encourage those holding cash to either spend or invest it.   They have thus furnished a new name for an old passion, one that would have been familiar indeed to American Populists and one that Eccles fought strenuously against. Both “sound moneymen” like Senator Harry Byrd and “inflationists” like Texas representative Wright Patman—both constant thorns in Eccles’s side—distracted attention, he said, away from the only thing that he thought was of any importance: “increasing the purchasing power of the nation.”[33]

Let it be stated yet again that Marriner Eccles would clearly be mystified that governments seem insensible to the fundamental monitions about aggregate demand that in his estimation were left plainly in evidence by the developments of the 1930s and the Second World War.  Fiscal tentativeness in the face of severe economic decline, he argued repeatedly, is a recipe for failure. Japan’s much discussed “lost decade” that commenced in 1991, and resulted in the accumulation of massive government debt, would elicit no concession on his part regarding the efficacy of fiscal policy.  “Fighting a depression is like jumping an abyss,” he once asserted, “If the cleft is ten feet wide, even a nine foot jump is worse than no effort at all.”[34]  He assiduously cautioned FDR to eschew a course of action that many economists have suggested Japan dolefully followed in the 1990s.[35] “If we spend some every year, but not sufficient to give the required stimulus to private expenditures,” Eccles wrote in a prophetic memo in early 1935, “we can build up a large debt and still not be out of the depression.”  In this regard, he urged the president: “The safest policy is the boldest policy.”[36]

Eccles would almost certainly have furnished identical advice in 2009.  That President Obama that year settled upon a course of fiscal action  that proved far less potent than what economic conditions warranted, might bear a substantive, if possibly indistinct, connection to New Deal historiography and what economic historian Bradford DeLong has identified as “counterfactual pessimism”—the conviction among a large number of scholars of the Great Depression that there were such powerful political and economic encumbrances at play in those years that the implementation of many effective public policies were either short-circuited or never even seriously considered.  In weighing the implications of such a perspective—that not much could really have been done—DeLong suggests that its acceptance “has quite possibly led economic historians further away from a balanced view of the Great Depression and from indicating to noneconomic historians how the Great Depression might provide useful analogies for thinking about the economic problems of today.”   Indeed there is a clear resemblance between the dire consequences that both President Roosevelt and President Obama were cautioned about even as they constrained their fiscal objectives.  (Interestingly, the deficit during President Roosevelt’s first fiscal year—July1933 through June 1934—reached the same level of GDP as President Obama’s first year: 9 percent.[37])  The financial markets would panic, both leaders were informed, and business confidence would be shaken, leading to skyrocketing costs of government borrowing and another recession. As U.S. sovereign debt grew, in both the Roosevelt and Obama administrations, however, the “bond vigilantes” not only stuck with their Treasury investments, but were more than willing to accept constantly declining interest rates.  Eccles relished pointing this out, and enjoyed observing that paper, ink, labor, and distribution costs rendered the borrowing of money at such low interest rates actually cheaper than putting the presses to work to print it.  Moreover, the fiscal actions in both periods—specifically 1934 and 2009—demonstrated positive economic benefits until they were allowed to dissipate. Both administrations implemented budgets that contained the highest deficits in U.S. history outside of war, a crucial distinction. Eccles informed the president that it was “totally inadequate.”   And, as we shall see, he sought to persuade anyone in the administration who could bear to listen that the president would not be expending political capital, nor would his congressional supporters, in creating greater federal debt, if it brought about full employment and sustained economic growth.  Both were necessary, he argued, not merely to silence the “calamity howlers,” who decried government deficits as the end of Western Civilization, but to provide the economic sustenance to pay down the debt in future years.  A government that forswears stimulus prematurely, however, will come to grief; this, he believed was the great admonishment of the 1937 “Roosevelt recession,” when the federal government and the Fed took their foot off the gas pedal and brought truly disastrous consequences.[38]

One of the more recent examples of “counterfactual pessimism” might be found in George Akerlof and Robert Shiller’s 2009 book, Animal Spirits, on the psychological forces that drive economic life.  After noting that New Deal spending was “orders of magnitude short,” they sound this oft heard explanation that FDR lacked both the “inclination” and the “political legitimacy to go far enough.”[39] This work challenges the latter of those assumptions by examining the stunning, if exceedingly brief, life of the Civil Works Administration. Created by executive order in 1933, the CWA was a public works project that was intended to help the nation survive the winter of 1933-34. Placed in the hands of the remarkable Harry Hopkins, the program demonstrated the remunerative power of well-compensated labor upon both aggregate demand and the human spirit. Born on November 9, 1933, the CWA put some 4 million Americans to work by Christmas and nearly 4.3 million by mid-January of 1934.  It may be one of the most underappreciated accomplishments in U.S. history.  Often viewed as a precursor of the Works Progress Administration (WPA) created in 1935, the CWA was no such thing.  There are, in fact, dramatic distinctions between the two programs. Although budgeted for $400 million taken from the Public Works Administration, the program quickly surpassed that amount and was spending money, said one disapproving observer, “like a drunken sailor.” Despite garnering an extraordinary level of public support and demonstrating discernible economic benefit that could have sustained the agency’s political viability, FDR ordered its disbandment in the spring of 1934.  At the time, Marriner Eccles headed the CWA in Utah and made an effort to keep it in existence. (Although he trumpeted the program at the time, he included only one positive but rather parenthetical reference to the CWA in his memoir, and failed to make any mention of his direct association with it.  It is worthy of the brief speculation I offer below about why this may have been so.)

Although it would have been more difficult, many believe that President Obama could have achieved—or at least made the case for—a much larger fiscal stimulus.  He certainly enjoyed support from unexpected quarters, much the way FDR did in 1934.  “It’s not an inappropriate thing in a recession,” commented Robert Lucas about the Obama stimulus, “to push money out there and trying to keep spending from falling too much.”  ( Lucas would, of course, return to a more critical view of fiscal stimulus in 2010.)  “In these unusual times,” stated Martin Regalia, the chief economist for the US Chamber of Commerce near the close of 2008, “a significant [my emphasis] stimulus package is necessary to get the economy moving quickly and, as such, will swell the deficit in the short run.”  A month earlier, conservative Harvard economist Martin Feldstein had conceded that “The only way [my emphasis] to prevent a deepening recession will be a temporary program of increased government spending.” He then cautioned that the “stimulus” must be sufficiently large.  The editors of The Economist responded to this exhortation, which Feldstein seemed to proffer with some degree of discomfort, with a salutation that Eccles believed was ultimately applicable to all of his generation: “Welcome to the club, Mr. Feldstein.”[40]

The point will be made—one that has clear significance for the Great Recession—that both Eccles and his chief economic advisor, Lauchlin Currie, would come to avoid the term “pump priming” because it conveyed the unsound notion that a one-time spurt of spending could restart the flow of economic prosperity. This it seems is precisely what the Obama administration settled on in terms of fiscal stimulus in 2009.  Although the recession technically ended in June of that year and though the economy came close to growing at 4 percent in the second quarter of the following year, clear indicators that this truncated stimulus was beginning its work, unemployment remained high and the calamity howlers were not silenced.  Indeed, a wide array of congressional Republicans continues to render platitudinous pronouncements about fiscal prudence and balanced budgets that are stunningly reminiscent of Andrew Mellon’s grim remedial offerings to a struggling nation eight decades ago. Eccles would doubtlessly be thunderstruck to witness large numbers of elected officials legitimizing the Austrian business cycle theory that is willing to countenance untold human suffering as a necessary corrective to severe economic downturns, downturns that he was convinced his generation had successfully demonstrated how to prevent in the first place.

In the face of such conservative opposition to federal expenditures, advocates of aggregate demand stimulus have turned to what have been described as innovative alternatives. In recent years a suggestion has been put forth to establish a federally sponsored infrastructure bank that would market bonds and back loan guarantees to leverage private investment to rebuild the nation’s crumbling roads and bridges. A strategically useful suggestion perhaps but hardly innovative, that ground was trod sixty years ago by Eccles attempting to counter similar intransigence with that very concept.  (The idea, of course, amounts to essentially the adoption of a capital budget by the federal government.)  Today’s sponsors have resorted to introducing the enacting legislation with the felicitous title: “The Rebuild America Jobs Act.”  In this regard as well, Eccles used a kindred approach in dealing with the rather conservative Congress elected in 1938 by officially introducing the law as “The Self-Liquidating Projects Act of 1939.”  At this point it looks like present efforts to achieve infrastructure spending in this fashion will be no more persuasive with fiscal conservatives than in 1939.[41]

In a similarly tactical vein, Robert Shiller wrote in The New Republic in the summer of 2011, that with the right mixture of taxes and expenditures “stimulus can easily take a balanced budget form.”  This approach, he states, might allow demand to be bolstered without alienating the budget balancers. He traced this advocacy back to the 1940s and the economists Walter Salant and Paul Samuelson, and noted that it is a concept that has been taught in econ 101 classes ever since.  In fact, such a fiscal policy was an important facet of Lauchlin Currie’s 1935 “net federal contribution” series that Eccles frequently touted.  It was conceivable that the right kind of fiscal surplus could enhance aggregate demand more than the wrong kind of fiscal deficit.  Shiller has discovered, of course, as did Eccles when he argued the proposal’s merits, that the progressive taxation essential to rendering it efficacious is unalterably opposed by “fiscal conservatives,” most of who are desirous of low taxation not balanced budgets.[42]

Eccles would most certainly disapprove of the nation’s retreat from its commitment to tax progressivity.  The Great Recession has witnessed a rash of commentary on the injurious nature of income inequality in the United States.  Most accounts take note of the fact that such disparities have reached levels commensurate with the onset of the Great Depression.[43]  Some have taken to calling it “The Great Divergence.”  Here again, Eccles would find it lamentable that such unwholesome economic conditions were allowed a recrudescence. “Our problem now,” he informed Congress in 1935, “is one of distribution of income.”[44] Indeed he was convinced that unbalanced wealth, not only hampered recovery but was an essential cause of the Depression to begin with.  In their famous exposition of “The Great Compression,” which dramatically diminished the gap between America’s rich and poor, economic historians Claudia Goldin and Robert Margo trace its onset to 1933.  As they point out, this was an economic trend that did not gather significant steam until World War II.  In the 1930s, however, Eccles led the charge for tax progressivity—he deplored the payroll tax as the preferred funding source for Social Security—and was greatly dissatisfied with the New Deal’s progress on this front, and, as we shall see, had little hesitancy in stating so publicly. The key to achieving this, Eccles insisted, was to sufficiently tax what historian Mark Leff terms the “subplutocrats.”  This was something FDR was reluctant to do until the war.

This willingness to enter the political fray on nearly every front makes for a sharp contrast with the current chairman, Ben Bernanke. In testimony before the House Budget Committee in June of 2010, for example, Chairman Bernanke was quick to defend the “exceptional increase” in the national debt as a necessary antidote for the economic downturn and to suggest—albeit somewhat gingerly—that another stimulus might be advisable.  Mr. Bernanke carefully avoided, however, any mention of specific spending cuts, tax increases, or any policy issues beyond the broadest macroeconomic pronouncements. Even when prodded by a congressman who implored, “But we need your expertise,” the chairman demurred and insisted he would “avoid taking sides.” Eccles, on the other hand, was more than eager to share his views on relatively arcane aspects of public policy and, indeed, the hesitancy to do so on vital policy matters he perceived as a near dereliction of duty.  Hence he was not in the least discomforted when publicly stating that the time had come for a national health program, and felt quite at liberty in sending off a memo to the president suggesting that such a health bill take the form of grants in-aid to the states.  Such things he reasoned were inexorably connected to the health of the economy. It was all part of the job.[45]

Eccles anticipated that his outspokenness might at some point imperil his chances of being reappointed to both the chairmanship and to the Fed board itself.  In fact, he was convinced that his public battle with Bank of America’s A.P. Giannini brought exactly that result when President Truman denied him reappointment to the chairmanship in 1948.  In view of present concerns over the influence of financial institutions in American life, Eccles’s perspective on this growing corporate power holds some significance.  Besides Eccles, the “Giant of the West” was one of the few prominent bankers that gave support to many New Deal initiatives and was an important financial contributor to the Democratic Party. Although Eccles himself pioneered the use of a holding company to achieve de facto interstate banking before the onset of the Depression, he came to believe by the late 1930s that Giannini’s holding company, Transamerica Corporation, was becoming vastly too large and powerful. Eccles, to his dismay, found himself the Dr. Frankenstein of a business prototype that he characterized before a congressional committee as “evil.” Giannini in turn accused the Fed chairman of attempting to rein in Transamerica to benefit his own First Security holding company.  The confrontation between these two, who shared a good deal in common and had an amiable relationship at one point, became quite public and vitriolic, and would, in Eccles v. Peoples’Bank, play out before the Supreme Court of the United States. Although Eccles actually won this particular legal battle, the eventual winner of this struggle to curb the power of Transamerica and limit the growth of such institutions is hardly a mystery.  “There was no way on earth,” Eccles would later concede, “to prevent the Bank of America from expanding.”  Nonetheless, what reaction might he have upon learning that today the ten largest US commercial banks command in excess of 55 percent of that sector’s assets and that financial sector profits amount to nearly one-third of all corporate profits in the nation? [46]

In a matter that is clearly relevant for citizens in 2012, Eccles sought to achieve what he believed to be “a change of great significance” by having the Fed specifically charged by law with counteracting “unstabilizing fluctuations” in both price levels and employment. Although he failed to get such a directive included in the Banking Act of 1935, he campaigned successfully to have it proclaimed a national goal by the Employment Act of 1946.  In 1978, however, Congress did officially direct the Federal Reserve to pursue policies that engender price stability and maximum employment.  This “dual mandate,” as it is commonly referred to today, has been under constant assault by conservatives in Congress since the advent of the Great Recession.  Leading the charge for them has been Wisconsin Rep. Paul Ryan who introduced a bill in 2008 that would demand that the Fed merely concern itself with price stability.  The congressman continues to cite the danger of inflation as his chief concern with the dual mandate.   This is a fear that he and his fellow Republicans have been expressing for four years, despite extremely low levels of price increases. The Bureau of Labor Statistics reported in mid- August of 2012 that the rate of inflation for all items (including food and fuel) from July of 2011 to July of 2012 registered 1.4 percent.  How very familiar it would all sound to Eccles who was constantly compelled to contest what he called the “inflation bugaboo” throughout the 1930s. (And, as we will discover, at one unfortunate period succumbed to its fears.)   At the time, the British economist Ralph Hawtrey analogized this concern with calling “Fire! Fire! In Noah’s flood.” [47]

That the federal government was willing to accept high unemployment throughout the entirety of the 1930s was, in Marriner Eccles’s words, simply “incomprehensible” and a “national disgrace.” As he argued during the 1930s, and for the remainder of his life, he took seriously the administration’s frequent analogues about the Depression being equivalent to war, and was convinced that this was an “enemy” that could have been fiscally vanquished. [48]  In the spring of 1940, when the “phony war” in Europe turned stunningly real—illustrated by the front page photograph of a delighted Adolf Hitler posing for the world before the Eiffel Tower—and American unemployment fell to slightly more than 9 percent as the United States accelerated its production of the implements of war, Eccles emphatically rejected what he sensed was a pervasive complacency by both the president and Congress. “As a democracy,” he lectured the Economic Club of New York that May, “we can’t afford to take the position that because conditions are satisfactory for many of us, others who are less fortunate can be shunted aside…until economic revival develops at some unpredictable future time.” Aside from humane considerations, he argued, “it is not good government, good democracy, or good economics to lose the productivity of millions of workers.” He suggested to his listeners that “fine phrases” about American institutions “are a meaningless mockery to a man who could not find a job.”[49]

On the other hand, Eccles came to discard, at least by the 1940s, the not uncommon view among New Dealers that due to structural changes in the economy and the advance of new technology the country would likely never experience true full employment ever again.  “Intelligent people,” Harry Hopkins asserted at the close of 1935, “had long since left behind them” the confidence that such an intrinsic economic transformation would allow, even “under the fullest recovery,” the elimination of unemployment. This would necessitate, in his view, a continuation of government works programs even through periods of general prosperity.[50]  When full employment did return in the war years many of Eccles’s fellow Keynesians, anticipating that the war’s conclusion would bring the return of massive unemployment, cautioned that the federal government must be prepared to once again activate public employment. Eccles, however, while acknowledging that firms might need assistance in transitioning to private sector production predicted accurately, of course, that large scale unemployment in the postwar years would prove unlikely to be a major concern.[51]

During the war years, while Eccles was demonstrating that he could be every bit as avid a crusader against inflation as he had been against high unemployment, with fiscal policy once again the weapon of choice—he then favored the payroll tax and argued it be significantly increased—he could not resist sending off a letter to Senator Harry Byrd of Virginia.  In the course of their very public debate over the merits of deficit financing during the Depression, the conservative Democrat had often made the point that John Maynard Keynes’s “fantastic fallacies of spending, borrowing, and lending” were rejected by his own country, and that in England he was “a prophet without honor.”  Eccles, motivated, he claimed, “by no mean spirit,” wanted to make sure that Byrd had not missed the fact that Keynes had recently been elaborately celebrated by the king of England for his many contributions to the nation and that he was now “Lord John Maynard Keynes.”  Eccles then conveyed to Byrd his confidence that when peace once again returned to the world, the United States would enjoy full employment without the need to resort to “continued deficits and growth of the public sector.”  Nonetheless, the day would no doubt arrive when he would be aligned with “this now honored prophet” in calling for stimulative fiscal policies that the good senator would oppose, and they could then return to being“friendly enemies.” As for the English economist, Eccles concluded: “Time has a curious habit of justifying this man Keynes.”

In relating the details of this letter in his 1976 biography of the Fed chairman, Sidney Hyman wrote that the “curious habit” of time would likely be “justifying” Marriner S. Eccles as well.[52]

So it would seem.

Mark W.Nelson a member of the adjunct history faculty at Pepperdine University. He has just completed his Ph.D. dissertation at Claremont Graduate University on the role that Marriner Eccles played in the New Deal. Some of the research from that dissertation is included in this essay.