How to End the Crisis

September 17th, 2012
in Op Ed

by Marriner S. Eccles, New Economic Perspectives
(via e-mail from Thorvald Grung, Central Bank of Norway)

marriner-eccles-with-captionSMALLMarriner Eccles was Chairman of the Federal Reserve under President Franklin D. Roosevelt. This note consists of excerpts from an address he gave to the US Senate’s Committee on Finance in 1933 before he was called to Washington for public service by FDR. The original address contained in the Congressional Records has been reduced from over thirty pages (including questions and answers) to only three pages here that contain his essential message. The address has been edited by Thorvald Grung Moe, Visiting Scholar at Levy Economics Institute. Some parts have been slightly modified to fit the current time and crisis. Additions or alteration to the text has been marked by square brackets. All original figures used by Eccles in the address have been inflated by a factor of 16.4 according to the official US CPI index.

Follow up:

Excerpts from the Eccles address by Thorvald Grung Moe:

In the mad confusion and fear brought about by our present disordered economies, we need bold and courageous leadership more than at any other time in our history. The orthodox capitalistic system of uncontrolled individualism, with its free competition, will no longer serve our purpose. We can only survive and function under a modified capitalistic system controlled and regulated from the top by government.

The proposals I offer are all intended to bring about, by Government action, an increase of purchasing power on the part of all the people, resulting in an immediate and increasing volume in all lines of business with consequent diminution of unemployment and distress and gradual restoration of our national income. When this is accomplished, and not before, can the Government hope to balance its budget and our people regain their standard of living

Unless we adopt the necessary corrective measures, we can only expect to sink deeper in distress, with possible revolution, with social disintegration, with the world in ruins, the network of its financial obligations in shreds, with the very basis of law and order shattered. Under such a condition nothing but a primitive society is possible. Why risk such a catastrophe when it can be averted by aggressive measures in the right direction on the part of the Government?

The current excessive debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth during our years of prosperity. Too much of the product of labor was diverted into [unproductive] investments, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and abroad. When the crisis finally hit, debtors were forced to curtail their consumption in order to reduce their debts. This naturally has led to falling prices and increased unemployment. And unemployment further decreases the consumption of goods, which further increase unemployment. And thus the vicious cycle of deflation has continued to the point where we now find almost [one-fifth] of the entire working population unemployed in many countries, with prices of everything greatly reduced, our national income [below the level achieved before the crisis], and our debt burden greater than ever before.

The debt structure, in spite of the great amount of liquidation during the past years, is rapidly becoming unsupportable, with the result that foreclosures, receiverships and bankruptcies are increasing in every field; delinquent taxes are mounting and forcing the closing of schools, thus breaking down our educational system, and moratoriums of all kinds are being resorted to – all this resulting in a steady and gradual breaking down of our entire credit structure, which can only bring additional distress, fear, rebellion, and chaos.

Individuals, corporations, cities, and States cannot, of themselves, do anything except play according to the rules of the present money system and make their [expenses] balance their income, or ultimately “go broke.” However, Government controls the gold reserve [and the printing press], and has the power to issue money and credit, thus largely regulating the price structure. Through its power of taxation it can control the accumulation and distribution of wealth production. It can mobilize the resources of the nation for the benefit of its people.

To bring about the restoration of business [to the level before the crisis] I suggest [four] points as first-aid measures designed to bring about recovery. Action with reference to these measures should be taken immediately. They are as follows:

First, make available to all states [eight billion dollars] on a per capita basis to be used for the destitute and unemployed, pending a revival in the economy which should result from this program.

The present condition is not the fault of the unemployed, but that of our business, financial, and political leadership. It is incomprehensible that the people of this country should very much longer stupidly continue to suffer the waste and the despair, and be forced to die, steal, or accept a miserable pittance in the form of charity which they resent, and properly resent. We shall either adopt a plan which will meet this situation under capitalism, or a plan will be adopted for us which will operate without capitalism.

Second, increase the amount of Government funds to [forty billion] dollars, and more if necessary, for self-liquidating projects and loans to cities, counties, and States for public works on a liberal basis at a low rate of interest.

Today we are losing [billions] per month of national income due to unemployment, resulting in the inability of our people to purchase the goods necessary to sustain our production. Is there any program of our Government as important as to stop this great loss and all the attendant human suffering, devastation, and destruction? I believe that an essential part of the program to end the cycle of deflation is by the Government supplying the credit for self-liquidating projects and loans to the State for public works.

Loans should be made on a very liberal basis as to terms of payment and security. The interest rate should not exceed the amount which the Government is required to pay for its own funds. This program can be financed in one of two ways—either through a Government bond issue or through the issuance of currency by the Treasury which will go into circulation through the Federal Reserve banks in payment of the projects proposed.

Third, refinancing of [mortgages] on an immense scale and on a long term basis at a low rate of interest.

The scope and size of refinancing should be in the order of [eighty billion] dollar; this amount could be increased if conditions warrant. The present mortgages held by banks should be refunded on an amortized basis over a period of forty years and guaranteed by the Government. All delinquent interest should be waived and all delinquent taxes and delinquent principal payments should be included in the principal amount of the refunded mortgage.

This plan will very effectively and immediately make liquid billions of dollars of assets for which there is no market today, while at the same time it will bring about a reduction of at least one-third of the average annual payments on the mortgage debt now required to be made by debtors who are underwater without requiring any financing or [immediate] loss by the Federal Government.

Fourth, a permanent settlement of [sovereign] debts on a sound economic basis, cancellation being preferable.

There is a great demand on the part of the public and most of the press that these debts should be paid in full. It seems to me that our political leaders have lacked the courage to face this problem in a realistic manner. This has greatly contributed to prolonging the depression. The public, generally speaking, is not fully informed as to the impossibility of our foreign debtors complying with these demands, which can only be complied with at the expense of our own people.

It is elementary that debts between nations can ultimately be paid only in goods, gold, or services, or a combination of the three. Debtor countries will thus try to meet their obligations by producing and selling more than they buy from us, thus enabling them to have a favorable balance of trade necessary to meet their obligations. [However, if we develop a large trade deficit this would hurt our tradable sectors and lead to depressed economic conditions at home.] To mitigate this negative effect at home, we should lift the burden of debt from our foreign debtors, thus allowing our economy, as well as theirs, to prosper.

We must either choose between accepting sufficient foreign goods to pay the foreign debts owing to this country, or cancel their debts. This is not a moral problem, but a mathematical one. A cancellation of these [sovereign] debts owed to us would greatly benefit our economies and help reduce unemployment both in the debtor and creditor nations. A comparatively small portion of our population would make up this loss to the Treasury through the payment of income and inheritance tax which would be made productive by the revival of business.

The program which I have proposed is largely of an emergency nature designed to bring rapid economic recovery. We need urgently to address this debt and unemployment problem or we are going to get a collapse of our whole credit structure, which means a collapse of our capitalist system, and we will then have to start all over again. We simply have got to take care of the unemployed or we will have revolution in this country.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.


  1. Frank Li (Member) Email says :

    It was WWII that finally got America out of the Great Depression, although Keynesians like to credit the massive government spending, which was the biggest lie of the 20th century. In other words, America did win WWII. But more significantly, America’s competitors either destroyed themselves through the war (e.g. Germany and Japan) or screwed themselves up badly by adopting a bad system called “communism” after the war (e.g. China and the Soviet Union). As a result, America was left as the only game in town, making and inventing virtually everything and naming its own prices. This not only got America out of the Great Depression finally, but also created prosperity in America for the ensuing five decades.

  2. Derryl Hermanutz, Correspondent (Member) Email says :

    But Frank, war is the most massive government spending of them all. In world war the government essentially takes over the economy and commands each industry to make its contribution to the war effort. "Capitalism" is suspended and replace with a total "command economy". Hitler did it first to restore the German economy to full production, and to compete with the enormous productive efficiency of Germany's command economy the rest of the world had to abandon free enterprise and command their economies too. Command economies may not be "financially efficient" in that wartime economies are investing in destruction, not production, and you can't earn profits by investing in production that is designed to blow itself to smithereens. But when you own your own money system as sovereign governments can do, then money is just accounting numbers and governments can offer as much money as they want in order to command their economy to produce war materials.

    But because governments do not exercise their money issuing power (a power that Eccles mentioned in the article) the government pays for this with massive deficit spending, i.e. by borrowing and spending money. The government spending during war is the exact opposite of "productive investment" in the Austrian sense. The deficit spending wartime government is hiring the economy to build stuff that blows up and destroys other stuff. The whole purpose of wartime investment is toward destruction, not production. All those trillions (in today's dollars) of money that the government borrows and spends into its economy become "income" in the pockets of the national economy that is fully employed in the war effort. But because they are all producing war material for destruction, there is only minimal production for consumption, so the people are unable to spend their incomes. So they save. And one form of saving is buying War Bonds. And the government uses the nation's borrowed income money to pay the nation to keep making more weapons, none of which will are for sale to recover the investment capital and to earn a return. The "public sector" government war investments are DESIGNED to blow up and produce ZERO return in the "financial" sense.

    Paying millions of people incomes while rationing consumer goods and generally suppressing consumer spending puts incomes in people's pockets that they can use to save or to repay their Depression-era debts. This is "how" WWII pulled the world out of the Depression. As soon as the war was over and the wartime government deficit spending ended, the US economy immediately collapsed back toward Depression, until the government took a number of initiatives to sustain the economy. Private automobiles, whose manufacture, use and maintenance is FAR more labor and economically intensive than public transit, were given (by Eisenhower and General Motors) favorable tax treatment so that the US abandoned their inexpensive streetcars and became an expensive private car society. "Expensive" simply means that the same travel from point A to point B now employs much more economic resources than hopping on a public bus, which keeps the economy "employed" and "producing" even if you are not actually gaining any economic value because even at greater cost you are still only moving Joe Sixpack from point A to point B.

    The encouragement of private autos, along with a massive expansion of credit for working class residential mortgages and car loans, and of course encouragement of the Baby Boom with child-friendly tax policy, also made possible America's move from cities to suburbia. The construction of suburbia to accommodate the Baby Boom is the single factor that allowed the US economy to replace the War era public debt with the post-War era private debt, the new trillions (in today's dollar) of mortgage debt that Americans took on, and that they have NEVER paid off.

    Look at a chart of private debt growth from the end of WWII until 2008. It is a classic exponential curve. Total debt grew at an increasing rate almost the entire period 1947-2008. When debt stopped growing the financial system and the economy collapsed. In our bank-debt money system this is arithmetically inevitable. Money supply must grow or your economic growth stalls, and if economic growth stalls or reverses into outright recession, people cannot pay their debts and they cannot maintain their consumption so you get the deflationary spiral that ends in Depression. UNLESS the government adds income money into the equation to bail out the economy, as it did massively during the 1940s war economy.

    You're right, Frank, that because the US economy was the only major industrial economy that was not blown up in WWI, the post-war era was a special era of American prosperity. But Eccles recognized that maldistribution of income and wealth is a cause of financial-cum-economic collapse, and that government taxation is the cure to prevent excessive individual accumulations of wealth. You will see on a chart of US income and wealth distributions that the postwar era up to the early 1970s is the flattest, the most even, where workers got richer and the rich didn't get poorer but they also didn't become billionaire plutocrats. Plutocracy really got going during the 1980s Reagan era of "globalization". Reagan took the US from the world's largest creditor to the world's largest debtor in 8 short years, and ALL of that change in wealth went into the pockets of "globalizing" corporatist plutocrats. And all of the "debt" from that wealth transfer was piled on the backs of the poor middle class taxpayer.

    And that's where the debt remains today, while the plutocrats rule the world as the new dictators and tyrants, where they use their monopoly of money power to rule. Just because they are not the typical historical tyrants who wielded political and military power to rule, does not mean the new world government by money does not very directly "rule" the world. "Capitalism", as Marx correctly observed, tends inevitably to monopoly. Eccles makes the same observation in the article, that unregulated free competition has collapsed the world economy and the only solution, other than accepting a return to feudalism where the world is overtly owned and operated by a power elite, is for democratic government to get back into the game of "governing"; in the interests of the people and the nation, NOT in the interest of billionaire plutocrats. I can't remember who said, "You can have a nation of extreme wealth disparity, or you can have democracy, but you cannot have both." But it's true.

    As long as private bankers maintain their monopoly of money issuance the world can never have real democracy or real free markets. Ownership and control over the issuance of a nation's money is "government" of that nation's every economic breath. Government by a few extremely rich CEO bankers and the industrial corporate oligarchs that they support is called "plutocracy". Reagan introduced the era of plutocracy, which was celebrated by the deluded as the age of "free markets", freed from government control. Yes, freed directly into the hands of plutocrat control, and plutocrats own and operate the United States of America today because they own the banking system that issues and controls the money and they own the now globalized industrial system that produces and distributes all of the economic necessities of life.

    There can be no such thing as "free markets" when a few megabillion dollar corporate behemoths own the world. Remember that Adam Smith wrote The Wealth of Nations as an indictment AGAINST the form of corporate-government collusion called "mercantilism", and Smith advocated for a market populated not by legally constructed creatures of the state called "corporations", but a market that was free for individual human beings, competing mano a mano. A CEO of a global corporation is not a "market participant" competing in a "free market" with every other Tom, Dick and Harriet who are producing the same product. The CEO is an employee of an oligopolistic giant and he is paid $100 million per year to manage the company.

    The first rule of corporatism is to swallow up all your competitors and gain a monopoly or oligopoly where you NEVER have to compete on price, so that every corporation in the industry can charge the same high prices to support the same high executive compensation. Managers manage in their personal interest, not in the company's interest, so they are totally unlike Smith's free market actors whose personal compensation is identical with their business profitability. Managers are paid their obscene ripoff corporate salaries, bonuses and benefits even while they are driving the company into bankruptcy, and when the company fails they walk away rich, not broke, That's the difference between corporatism and free enterprise.

    And governments who are outgunned and outfinanced by these anti-market corporatist plutocrats allow these predators to hollow out their national economy and offshore production for short term profit gains that support manager millions while those managers are almost treasonously destroying their national economy. Thomas Jefferson knew very well what kind of corporatist tyranny results when private bankers wrest monopoly control of national money issuance from the governments to whom that power rightly belongs, so I will let Jefferson make my closing argument,

    "If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless.... The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions (having the issuing power of money) are more dangerous to liberty than standing armies. My zeal against these institutions was so warm and open at the establishment of the Bank of the United States (Hamilton's foreign system), that I was derided as a maniac by the tribe of bank mongers who were seeking to filch from the public."

  3. Frank Li (Member) Email says :

    But Derryl, spending is fine if there is a chance to pay it back. Yes, the U.S. government spent massively during WWII. But far more importantly than that, WWII destroyed everybody but the U.S.. leaving the U.S. as the only economic monopoly in the world, with unlimited ability to pay anything and everything back.

    It's totally different today! We are in trouble because BRICS is coming up as competitors. Government spending will not solve the problem, but only worsen it!!!



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved