secured by United States obligations or by other bonds and stocks and are sometimes called “commercial” loans. These figures include rediscounts at Federal Reserve banks.
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“The Gold and Rediscount Policy of the Federal Reserve Banks,”1 which maintained that rediscount rates should always be held above the market, meaning by the “market” the rate which great city banks make to those prime borrowing customers who have accounts with several banks. The Chase Economic Bulletin of March 27, 1923, protested against the artificially generated expansion of bank credit as masking the underlying shortage of real capital which four years of war and four more years of disorganization after the war had brought about, and urged that higher interest rates be called for, both to increase the volume of savings and to make sure that the capital that was created would be used for the most important purposes. The tendency to substitute bank credit for real capital was looked upon as a very ominous tendency. The years 1924-29, as we shall later see, abundantly justified these apprehensions. The Federal Reserve System itself took alarm in late 1922, and reversed its policy in early 1923, the New York Federal Reserve Bank raising its rediscount rate from 4 percent to 4.5 percent, and the system selling substantial blocks of government securities.
In retrospect one may hold that this first dose of strychnine did little harm and some good, and may recognize it as one of the factors, although not the dominating factor, in the strong business revival of 1921 to 1923. Great harm came from the strychnine administered in 1924, and above all, from the renewal of the dose in 1927. There is no racetrack which has a code of ethics which permits doping the same horse three times.
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The whole of the year 1923 was one of strong industrial activity in the United States. The Federal Reserve Index of Industrial Production,1 based on physical volume shows 1923 standing high above 1922 and high above 1924. A sharply declining tendency showed itself in the early part of 1924, and the summer of 1924 revealed a real slump. We had reached the end of the time when we could make strong progress with the world outside slipping downward, and we had reached the end of the time when city industry alone could move forward with agriculture depressed by its bad export market.
Trade Balances, Tariffs, and Export Trade. From the end of the war it had been clear to economists and to bankers in the great financial centers that the United States, having changed from a prewar debtor position to a postwar creditor position, must maintain a liberal foreign trade policy or else suffer a great loss in export trade. Before the war we had sent out a surplus of exports over imports because we were in debt. Countries which before the war had an export surplus or a so-called favorable balance of trade were the United States, Brazil, British India, Haiti, and Guatemala—debtor countries, which like an individual debtor, could not afford to consume all that they produced and had to turn over a part of what they produced to their creditors. Countries which had the so-called unfavorable balance of trade, or import surplus, were Great Britain, France, Germany, Switzerland, the Netherlands—capitalist countries, creditor countries, which like an individual capitalist could afford to consume more than they produced with their own labor—and liked it. In prewar days Great Britain regularly sent out about $2 billion worth of exports and received about $3
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billion worth of imports—an import surplus of a billion dollars. This did not diminish the ability of the British people to buy their own products. The excess goods were sold in the British market, but the money was turned over in the form of interest and dividend payments to Britishers, increasing the national income by the same amount as the surplus goods which came in, and leaving their buying power for British goods undiminished. The import surplus represented a net addition to the welfare of the British Isles.
If, in the United States, we tried to prevent our foreign debtors from sending us goods with which to pay interest and amortization on their debts, by raising our tariffs to keep out their goods, then we necessarily ruined our export trade. They could pay their debts and continue to buy goods in our market only if they sent us a larger volume of goods than they had sent us in prewar days.
The Abortive Reeducation of the Republican Leaders. There was a pretty clear understanding of these points in 1920, both in financial circles and in Washington. The old Republican leaders understood it. Senator Boies Penrose of Pennsylvania understood it, and decided that it was necessary to have a reversal of Republican policy on the tariff.2
A report was made to the Republican National Convention in 1920 by an advisory committee on policies and platform (of which Ogden L. Mills was chairman of the Executive Committee, Samuel McCune Lindsay, staff director, and Jacob H. Hollander, associate staff director) which contained an important section on international trade and credits produced by a subcommittee, of which Frank A. Vanderlip was chairman. This report will be found in the Republican Campaign Textbook of 1920 (pp. 379-97), which discusses in a realistic way the shift of the United States from a debtor position to a creditor position, and the significance of that shift for our future trade balances. The able men of the Republican Party were really studying economics before the Republican National Convention met. It was clear that they knew that the Republican Party must reverse its position regarding tariffs if we were to continue to have a satisfactory export trade.
So well was this understood that there appeared in the Republican platform of 1920 a remarkable and unprecedented plank—the substance of which was that in view of “the uncertain and unsettled condition of international balances” the Republican Party could not say what it would do about the tariff a year hence—a cautious plank, a compromise designed to avoid unnecessary friction in the convention. The plank even included a reaffirmation of the Republican Party’s belief in protective tariffs. Neither
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the plank nor the committee report definitely drew the conclusion that the tariffs must not be raised above the rates of the Underwood Tariff of 1913—which rates, incidentally, included a great deal of protection. But both the committee report and the tariff plank were definitely designed to foreshadow a radical change in Republican attitude toward the tariff and were intended to serve notice that the tariffs were not to be raised.3
This plank traced especially to the work of four extraordinarily able and enlightened men: Ogden L. Mills, William Allen White, Professor Samuel McCune Lindsay of Columbia University, and Professor Jacob Hollander of Johns Hopkins University.4
Well-laid plans, however, are not always successful. The election of 1920 was a great landslide which brought into Congress a great many new and untried and inexperienced Republicans from the West and from the South. Penrose died and the old leadership lost its control. The election also brought into the White House a man little trained in economics, who looked at economic issues from the standpoint of political tradition and emotion, Warren G. Harding.
Following the election the four men named above, who were especially responsible for the tariff plank of the Republican platform in 1920, visited President Harding to urge upon him that the plank be respected and that the tariffs not be raised. One of the four remembered that President Harding said that he had always had an affection for the protective tariff as a political issue, and all four of them remembered that President Harding said, “But what would the Home Market Club of Boston say?”
The Tariffs of 1921 and 1922. And so the tariffs were raised, first by an agricultural tariff bill in 1921, which had relatively little significance because agriculture was an export industry, and, second, by the Fordney bill of 1922, which raised rates sharply on a wide range of manufactured goods, the kind of goods we ought to have been importing from Europe.
Even the agricultural tariff law made immediate trouble. At the Minnesota Bankers Convention of 1921 there was great complaint that Canadian wheat, which had formerly come to the Minneapolis mills to be ground, was being diverted to England,