United States History of Financial Policy
The world war has enormously accelerated the economic and above all industrial development of the United States and has radically reversed its financial position vis-à-vis Europe.
Foreign debtors in 1914, at the end of 1919 the United States had in fact exceeded 17 billion in credit (taking into account, in addition to the credits granted to allied countries, the values and foreign currencies purchased by the American government, the estimate of credits undocumented, pre-existing foreign investments and the reabsorption of previously exported American values). Nor could the enormous European demand, which had multiplied American exports during the war, could certainly stop with the cessation of hostilities. Too many economic and political obstacles prevented the rapid return to normal productive activity, and, on the other hand, the growing need for greater consumption added to the urgent need for reconstruction. While, however, during the conflict, gold standard in the rest of the world, only in the United States could it still find employment in monetary uses.
An influx of gold that soon must necessarily have begun to cause concern, given that, although the dollar had kept its value intact, a considerable inflationary process had already taken place. Inflation, partly gold, due to the gold mass of about 1 billion dollars that entered the coffers of American banks between ’14 and ’18, but above all credit. Of the 18 and a half billion subscribed to the four war loans it is estimated that at least 6 had been provided by the banks in the form of credit to the underwriters. It was therefore necessary to contract credit and increase savings in order to reduce circulation and prices. However, it was only after the launch of a final loan (Victory loan of May 1919) and the consequent wave of speculation that the Federal Reserve System was free to maneuver the discount without more restraints by the Treasury. On several occasions, during 1920 and 1921, official rates increased (from less than 4% to 7%), partially halting the expansion and ultimately resulting in an effective contraction in the number of federal bank notes in circulation (from 3.3 billion at the end of 1920 to 2.2 billion in the summer of 1922). The gold that flowed in from abroad in large quantities, starting from 1920, acting as a compensator, soon ended up canceling the credit restrictions attempted in this way and the official rates themselves had to adapt to the decline in private discount rates. The reduction in circulation and the increase in reserves, on the other hand, gave
Given the particular organization of the American banking system (see below), however, it was natural that the gold inflow would translate into an enormous expansion of credit, despite the fact that federal banks kept a large part of it in their coffers, and that it also allowed members banks to increasingly escape the control of the FRS The increase in deposits enabled them to reduce rediscount operations at federal banks. It is true that the latter tried to influence the market with strong sales of government bonds, but even this intervention was only a palliative and, after a slight contraction around the middle of 1923, deposits, both passive and reserve, and loans of the banks resumed their rise.
Meanwhile, a new direction was maturing in the policy of federal banks in connection with the need to help Europe out of the monetary chaos. Both to preserve an outlet for production in continuous development and to find a job for the exuberant savings, and for the fact of the enormous credits granted during the war, and also to stop the arrival of gold (it can be calculated that since 1925 the America owns about half of the world’s gold), the United States was in fact greatly interested in restoring the solvency and monetary stability of their debtors. New loans, so-called stabilization, and large credit openings were granted to European nations and attempts were still made to favor the placement of foreign loans on the American market and to keep the cost of money internally low in order to allow gold to go out. All this naturally led to a policy of increasing monetary easiness (official discount rates fluctuated between 3% and 3½% in 1925), which, together with the increased volume of savings and the continuous amortization of public debt, prevented credit activity to be affected by the reversal actually occurred, in 1925, in the direction of the flow of gold (gold imports tended, however, already in 1926 to exceed exports, and except for some periods of 1927, 1928 and 1931 they remained in excess until 1932).
Add to this that member banks had increasingly changed the proportion between short and long-term investments to the advantage of the latter, for which the percentage required in reserve is lower (from less than ⅓ of the demand deposits at the end of 1919, the time deposits were already at ⅔ at the end of 1927 and grew even more afterwards); which had allowed them both to reduce non-interest bearing deposits with federal banks and to further widen the possibility of loans and investments. Credit granted by member banks to their customers it had grown overall from 25.6 billion at 30 June 1920 to 35.7 at the end of 1928 and the same trend had been that of banks not affiliated with the FRS (from 16.4 to 22.6). This enormous mass of funds, only partially absorbed by the increase in commercial and industrial activity (especially since the development of production had led to a fall in prices of about 25%) and therefore returned largely to deposit at the banks themselves, in fact, had found employment above all in loans against securities. Already around 1925 the diminished relative importance of commercial loans and the corresponding increase in long-term investments began to be considered as a factor of potential weakness of the credit situation, as they diminished the liquidity of the assets of the banks, and, in the event of an urgent need for realization, they would have resulted in a sharp decline in securities and therefore in serious losses. But things did not improve and after 1926 the tendency of companies to finance themselves in the short term developed, no longer by resorting to credit from banks, but by issuing securities, which contributed to further varying the proportion between short and long-term bank investments..
It is also necessary to keep in mind the particular position that the stock market has in the North American economy. Unlike what happens in Europe, the New York Stock Exchange – which in reality constitutes the money market of the entire republic – does not limit itself to acting as an intermediary between existing savings and the business world, but it itself engages the future savings that it is believed will be willing to finance businesses, without creating the conditions for its safe formation. Another characteristic element of the situation is the so-called bank loans to brokers or stockbrokers (which increased by about 80% between 1925 and 1928), who, on the one hand facilitated the placement of securities on the market, allowing them to be gradually absorbed, on the other, fueled speculation. And that the healthy measure was now outdated is demonstrated by the daily average of transactions on the stock exchange, which rose from 1 ½-2 million securities to 4 million from the end of 1927 to that of 1928, and the high rate of call money. which at times even exceeded 10% (figures that the crisis of October 1929 will then find doubled again). The banks, demanding more guarantees, at one point tried to curb this exaggerated development (albeit not with the necessary energy, given the large profit they made from stock market loans), but the FRS was no longer able to exercise control. effective on credit, since loans granted directly to brokers were increasingly developing outside the banking systemby individuals and companies, American and foreign; loans which, in order to be absolutely devoid of reserves and to be operated without unitary control, constituted a serious danger to the stability of the market. The banks themselves, on the other hand, helped to strengthen speculation with the creation of all those investment companies and financial institutions (investment trusts) which, originally created for the purpose of raising the funds of small savers and investing them globally in safe securities and well distributed by quality and quantity, in order to balance the risks, they then degenerated and undermined the market like individual speculators with the added threat of making their losses fall on the large mass of the American public.
As executives of holding companies and investment trusts, the bankers had also acquired the possibility of influencing the direction of the industries concentrated in their hands, and between lending banks and businesses they had come to forge ever closer ties, with the consequence of creating a confusion of functions and a degeneration of purposes that they could not fail to have deleterious effects. Nor did they fail to interfere in the business world with the concerns of the leaders of large political parties eager to show the masses of voters the possibility of ever greater material well-being. All this helped to create the growing wave of feverish activity that characterized the years of so-called American prosperity and which was to lead to the Wall Street collapse of October-November 1929. Over the course of two weeks, the stock market speculation, which in the last nine months had pushed the price of securities 80% higher than at the end of 1928, then suddenly subsided; the panic was frightening, the nominal value of the shares that had increased the most suffered enormous cuts (up to 65%), most of the capital engaged in speculation was reduced to zero.
There were certainly numerous occasional and concomitant causes that originated and accentuated the exceptional downward movement, but it would be absurd to trace the actual responsibility to factors unrelated to the pathological situation of the New York market. However, it would also be false to believe that the 1929 crisis was purely stock market, although the speculative element had an enormous influence on it. It had deep roots in the economic situation that had gradually matured both in the field of agriculture and in that of industry. American industrial production, as already mentioned, had drawn great impetus from European demand during the war and post-war years. The rationalization of work with the consequent reduction of costs, not accompanied by a correlative decrease in prices, it had also contributed to the realization of ever greater profits that had been largely destined to the expansion of the plants, when they had not directly or indirectly supplied the Wall Street market. The increasingly widespread use of credit purchases also contributed greatly to this expansion of production efficiency, beyond the limit of the natural increase in consumption, an extremely dangerous element in the event of a reduction in the purchasing power of the consuming mass. The threat of a slowdown in consumption thus loomed over the American economy; yet the industries favored by the low cost of money continued to increase their potential and businessmen compromised their solvency with an increasing effort of expansion. Since production was already greater than the possibilities of absorption of the internal market, more and more efforts were also made to locate the surplus of products abroad, by granting new loans to European countries. But the loans resulted largely in credit manipulation, due to the protectionism of Europe that hindered the flow of goods. Agriculture on the other hand, which before and during the war had seen an increase in the prices of its commodities and the value of the land, had been damaged by the decrease in European imports (due to the resumption of crops in Europe, as well as high American prices) and had also suffered from the tendency to overproduction and irrational methods of exploitation. Alongside the growing prosperity of industry, agriculture therefore saw its share of national income progressively reduce (from 15% in 1920 to 9% in 1928), and was less and less able to meet taxes and other fixed expenses (especially interest and amortization of debts incurred in prosperous years).
Thus when the sharp fall in the prices of agricultural commodities which occurred on the world market in the summer of 1929 (due to the increase in European production and the large inventories of the previous harvest) added to the bad American harvest of the same year, strongly affecting the power of purchase of the agricultural class, the situation worsened rapidly. And this precisely coinciding with the beginning of the downward trend of industry, which in the first part of the year had reached the peak of development, also supported by the fact that 1928 had been a particularly favorable year for farmers. In fact, three of the major industries, automotive, construction and textiles, had already entered a phase of regression; prices at wholesalers had begun a slow but sure decline, the overall net profits of 638 industrial companies, although still very strong, began to decline and unemployment had been increasing for months. The speculative fever, however, prevented us from grasping and evaluating these many symptoms of slowdown and thus opened an ever deeper chasm between the economic reality of the facts and their increasingly flourishing appearance. Therefore, when the collapse occurred, not only did an inevitable movement of wealth redistribution occur within the aforementioned speculative margin, but part of the wealth produced in the prosperous years suddenly became sterile because it was invested in unnecessary plants. Troubled banks hastened to demand repayments, credit contracted, paralyzing industry, trade declined,
Let us now take a brief look at the state of the federal finances. Quickly contracted in the financial years 1919-20, 1920-21 and 1921-22, the volume of expenditure – which had assumed an enormous growth (see table below) during the war period and the immediate post-war period – had then remained almost stationary at a a level always much higher than the pre-war one (140% in 1928 compared with 1913), even taking into account the increase in population and prices. In fact, the interest burden of the public debt and the amortization fund had greatly increased and new expenses for pensions and compensation for veterans had been added. The revenues, which during the years of greatest expenditure had naturally been lower than them, they had then managed to overcome them until 1919-20 and the progressive increase in national income during the period of prosperity had also made it possible to reduce taxes several times (overall by 1.6 billion). The public debt of 26.6 milliards in 1919, for subsequent repayments as at 30 June 1929 had been reduced to 16.6 milliards. The war debts had been largely settled and the total amount of US foreign credit exceeded $ 15 billion.
The situation was therefore good, nor could it immediately be affected by the onset of the economic crisis. On the other hand, an unconscious optimism soon returned to dominate the business world; explanations and false hopes were given and the feeling quickly spread that America’s actual prosperity, freed from the superstructure created by speculation, could last for a long time. No radical measures were adopted and the disease got worse. At the beginning of May 1930, a new sudden wave of stock market sales caused variable income securities to lose all the land they had slowly regained since November and had repercussions in a greater contraction in internal trade and therefore in the possibility of employment.
The new Grundy tariff then paralyzed foreign trade, voted after a long struggle in June 1930, which surrounded the American market with high customs barriers just when the economic structure of the world was faltering and the problem of how other nations could have paid their debts to the Uriite states. The payments of the debtor countries as well as their purchases of American goods had in fact until 1929 been facilitated by credits more or less abruptly granted by the same creditor and even the German reparations can be said to have been financed by America. With the American lending definitively ceased in 1929, Europe had only one way to pay its debts, especially political ones: exporting goods; and this too closed by high duties, it was necessary to resort to exporting gold. However, the drying up of its reserves had in turn to have repercussions on the monetary situation; the value of the dollar against other currencies increased, and the changes, together with European customs reprisals and the spread of the crisis, blocked a large part of American export outlets. Nor could the Hoover moratorium of June 1931 now have much influence on the situation. In 1932, American exports and imports reached just $ 1.6 and $ 1.3 billion, respectively, while in 1930 they were $ 3.8 and 3.0 billion.
Both due to the fall in the prices of its unsaleable commodities and to the increase in protected industrial products, the purchasing power of American agriculture contracted more and more to about half of that of the pre-war one. Once trade with foreign countries was suspended, however, industry too had to suffer more from the diminished possibilities of the internal market: unemployment, complete and partial, began to take on impressive aspects, especially since many exporting industries ended up emigrating, especially to Canada. (258 factories in 2 years).
The contraction of foreign trade and the economic depression did not take long to have repercussions also on the revenues of the federal government: the revenue from duties and that of the income tax. they were reduced, while the Hoover moratorium halted the inflow into foreign credit accounts. The need to come to the aid of agriculture and to intensify government buildings to absorb part of the unemployed (which, from 5-7 million in early 1931, went up, according to estimates, to 13-17 million in March 1933) on the other hand, he increased his expenses and the budget became deficit despite the tax tightening and the economies adopted. Meanwhile, the Reconstruction Finance corporation (January 1932) was established to subsidize smaller banks and other financial entities, making their assets liquid. Amendments to the Federal Reserve Act of February 27, 1932 then extended to the smaller banks the right to obtain mortgages from the banks of the FRS and established that the government bonds could at the same time be used as a guarantee of circulation, thus freeing up a lot of gold. But all this was not enough to restore economic life.
Two problems were above all very serious and made it possible to look at the root of the evil: 1. the inequality between the purchasing power of agriculture and that of industry and in general between saving and consumption; 2. the great possibilities of speculation offered both by the structure of the American credit system and by the concentration of its industries in a limited number of consortiums (about 600 which control ⅔ of the industry – while 10 million small industrialists share the rest – and that have absorbed more than half of the country’s savings with their securities).
Two problems that FD Roosevelt had been pointing to public attention for months and which were resolutely addressed by him as soon as (March 4, 1933) he actually began to exercise his office. It would take too long to examine even briefly all the measures adopted by the new president. Let us therefore limit ourselves to summarizing the fundamental elements of the legislative program, known as the New Deal, with which he tried to stop the depression and at the same time lay the foundations of a new economic order that would allow a more equitable distribution of wealth and greater stability..
First in order of importance is the National Industrial Recomry Act (N. I. R. A.) Intended to increase the purchasing power of the working masses, by means of reduction of working hours and elevation of wage rates, and reduce and control competition has now become, due to the absence of any restraint, a cause of economic instability. Suspended laws Sherman and Clayton against the trusts, the N. I. R. A. it therefore forced the industrialists to stipulate codes of fair competition in the field of every industry, that is, mutually binding agreements containing provisions on working conditions and at the same time rules of sound activity relating to prices, production, methods of sale, accounting systems, etc. (during the slow preparation of the codes themselves almost all employers then signed the so-called “President’s Code”, which served as a general temporary contract). In the meantime, to alleviate the discomfort and stimulate the economic mechanism, he set up the Public Work Administration (which was then joined for a few months by the Civil Work Adm.) Destined to implement a vast program of public works (3 billion dollars).
To alleviate the difficulties for agriculture was provided instead by the ‘ Agricoltural adjustement Act (A. A. A.) – who sought to raise their food prices prompting farmers to reduce planted area and compensating for this with the proceeds of special processing taxes on the transformation of agricultural products – and through subsequent laws that reduced the burden of old debts and allowed new ones to be contracted cheaply, avoiding forced sales. Similar measures were also taken to protect the small urban property.
Monetary and banking policy aimed above all to facilitate and accelerate the effects of these measures, seeking to heal the situation and raise the level of prices, and it is from this point of view that it should be particularly understood. The bank moratorium was the first act of the new administration, since the succession of bankruptcies required to act vigorously to eliminate the most fragile organisms and restore trust (3000 institutions were eliminated). After a few weeks of intense healing deflation, however, the need for new inflation to push prices back up clearly emerged. In the fear that a wave of panic or speculative maneuvers could affect the gold reserve, in the meantime both the export of gold and its reserve on behalf of the abroad and at the same time, all the gold holdings of the country were centralized in the FRS bodies. For months the devaluation of the dollar was therefore favored by the government with progressive increases in the purchase rate of gold by the treasury and with a maneuvered circulation policy, until the dollar was fixed at 59.06. cents of its ancient golden value. With the same Gold Reserve Act of 30 January 1934, which authorized this official devaluation, the convertibility and effective circulation of gold were also suspended (the gold clause of the contracts had already been repealed on 5 June 1933 and this repeal was, after a long struggle, validated by the Supreme Court on February 18, 1935) and the government was entrusted with the custody and control of gold both as a reserve and as a means of settlement of international payments. A policy of revaluation of silver was also followed and through large purchases of this metal, circulation was also extended in this way (the Silver Purchase Act 19 June 1934 fixed the ratio of silver to gold as the normal constituent of the metal reserve at ¼).
The banking legislation following the Emergency Banking Act of 9 March 1933 (in August all healthy banks had resumed normal operation and only 5% of deposits were still frozen) aimed on the other hand to correct some of the fundamental flaws of the system, while the laws on stock exchanges and securities were intended to reduce the possibility of speculation and to allow investors to inform themselves more securely.
Budgetary policy was naturally linked to this vast government program and, having renounced the balance, it was limited to trying to ensure, through new taxes and economies, the satisfaction of permanent needs with traditional revenues, using credit for the implementation of the plan. economic restoration and the fight against unemployment (part of the emergency costs, however, is made up of investments which, more or less soon, may perhaps be recovered).
These are the fundamental features of the New Deal, which has sparked many discussions and which is believed to have cost more than $ 12 billion so far. However, the evaluation of its results is very complex and difficult. That the United States, like the rest of the other nations of the world, took a few steps in overcoming the depression in 1933 and ’34 is clearly proven by the increase in production and wholesale prices. However, it is not certain that this improvement is entirely due to government policy or is not at least in part the effect of concomitant spontaneous forces of recovery. As regards the National Recovery Administration (NRA) in particular, there is no doubt that by inducing employers to do together what they feared to do in isolation, it has effectively contributed to the decrease in unemployment and the rise in wages. On the other hand, it has not been equally successful in its reconstruction tasks, i.e. in rebalancing the relationship between the costs and prices of individual industries and between the wages of the various industries, and in modifying the relationships between profits and wages and between skilled labor and not qualified. In this sense above all it can be said that the NRA did not satisfy either the employers, the workers or the consumers, which was predictable, given its nature of compromise between conflicting interests and its essentially empirical character. Viva was above all the opposition of the large industrialists (especially of steel, coal, oil and the automobile) hostile to any intervention by the state, and of the workers, who had hoped for greater recognition of their requests. The result was a violent sharpening of the class struggle, centered on the interpretation of the famous clause 7 of the N. The. R. A. relating to the collective agreement and trade union associations. Many complaints then arose in the field of littlemen, who accused the codes of favoring the formation of monopolies and therefore the oppression of small traders and industrialists by large companies, and in that of consumers harmed by the increase in prices. After a long struggle, the NRA, already partially reformed at the end of ’34, was condemned by the Supreme Court on May 27, 1935 with a sentence of unconstitutionality which automatically marked the end of the mandatory codes (in many industries, however, they were kept in force voluntarily ); in September of the same year the bill Wagner was then voted, which represents considerable progress in the face of Article 7, prohibiting employers from interfering in the unionization of workers and from rejecting the collective agreement.
Even in the field of agriculture, the many criticisms raised by the new measures resulted in a Supreme Court judgment which invalidated the direct control of production by the government. Through the agrarian law, passed in March 1936 in place of ‘ A. A. TO. 1933, however, the government found a way to intervene still largely in aid of farmers and to regulate production without resorting to new specific taxes, in order not to run into a second judgment of unconstitutionality. Neither monetary and fiscal policy have escaped attacks from both advanced groups and conservatives. Both for the very approach of its politics, which took the path of socialism and direct economy without wanting to compromise the foundations of capitalism, and for the frequent opportunistic fluctuations that characterized its action, the New Deal had to necessarily end up by create discontent in every field, despite the
The symptoms of recovery, which manifested themselves in the first period of the Roosevelt administration and then immediately faded, in the meantime returned to surface in 1935; however, unemployment remains very high (in March 1936, it is estimated that 24 million people, including women, old people and children, lived on public assistance), the annual budget deficit, although slightly contracted in the face of the maximum reached in 1933-34, it is still serious and the public debt continues to increase, as the large recourse to internal loans to achieve the balance of the treasury remains among the cornerstones of the Roosevelt financial plan.
An element of temporary stability and a boost to the resumption of international exchanges can hopefully derive from the monetary agreements that took place on 25 September 1936 between the French, British and American treasuries. Although the individual governments have reserved full freedom of action, the feared further devaluation competition between the dollar and the pound is to be believed for now to be contained.