inevitable consequences of its own inflationary policies.1
Prior to the Fed's reversal of policy, stock prices had actually declined by five per cent. Now, they went through the roof, rising twenty per cent from July to December. The boom had returned in spades.
Then, in February of 1929, a curious event occurred. Montagu Norman travelled to the United States once again to confer privately with the officers of the Federal Reserve. He also met with Andrew Mellon, Secretary of the Treasury. There is no detailed public record of what transpired at these closed meetings, but we can be certain of three things: it was important; it concerned the economies of America and Great Britain; and it was thought best not to tell the public what was going on. It is not unreasonable to surmise that the central bankers had come to the conclusion that the bubble—not only in America, but in Europe—was probably going to rupture very soon. Rather than fight it, as they had in the past, it was time to stand back and let it happen, clear out the speculators, and return the markets to reality. As Galbraith put it:
'How much better, as seen from the Federal Reserve, to let nature take its course and thus allow nature to take the blame.'2
Mellon was even more emphatic. Herbert Hoover described
Mellon's views as follows:
Mr. Mellon had only one formula: 'liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.' He insisted that, when the people get an inflation brainstorm, the only way to get it out 1- Rothbard,
2. Galbraith, p. 181.
496 THE CREATURE FROM JEKYLL ISLAND
of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.'1
If this had been the mindset between Mellon and Norman and the Federal Reserve Board, the purpose of their meetings would have been to make sure that, when the implosion happened, the central banks could coordinate their policies. Rather than be overwhelmed by it, they should direct it as best they can and turn it ultimately to their advantage. Perhaps we shall never know if that scenario is accurate, but the events that followed strongly support such a view.
ADVANCE WARNING FOR MEMBERS ONLY
Immediately after the meetings, the monetary scientists began to issue warnings to their colleagues in the financial fraternity to gel out of the market. On February 6, the Federal Reserve issued an advisory to its member banks to liquidate their holdings in the stock market. The following month, Paul Warburg gave the same advice in the annual report to the stockholders of his International Acceptance Bank. He explained the reason for that advice: If the orgies of unrestrained speculation are permitted to spread, the ultimate collapse is certain not only to affect the speculators themselves, but to bring about a general depression involving the entire country.2
Paul Warburg was a partner with Kuhn, Loeb & Co. which maintained a list of preferred customers. These were fellow bankers, wealthy industrialists, prominent politicians, and high officials in foreign governments. A similar list was maintained at J.I3-Morgan Co. It was customary to give these men advance notice on important stock issues and an opportunity to purchase them at two to fifteen points below their price to the public. That was one of the means by which investment bankers maintained influence over the 1. Quoted by Burton Hersh,
2. This advice was reprinted in the
THE GREAT DUCK DINNER
497
affairs of the world. The men on these lists were notified of the coming crash.
John D. Rockefeller, J.P. Morgan, Joseph P. Kennedy, Bernard Baruch, Henry Morganthau, Douglas Dillon—the biographies of all the Wall Street giants at that time boast that these men were 'wise'
enough to get out of the stock market just before the Crash. And it is true. Virtually all of the inner club was rescued. There is no record of any member of the interlocking directorate between the Federal Reserve, the major New York banks, and their prime customers having been caught by surprise. Wisdom, apparently, was greatly affected by whose list one was on.
A MESSAGE OF COMFORT TO THE PUBLIC
While the crew was abandoning ship, the passengers were told it was a lovely cruise. President Coolidge and Treasury Secretary Mellon had been vociferous in their public utterances that the economy was in better shape than ever. From his socialist perch in London, John Maynard Keynes exclaimed that the management of the dollar by the Federal Reserve Board was a 'triumph' of man over money. And, from the plush offices of his New York Federal Reserve Bank, Benjamin Strong boasted:
The very existence of the Federal Reserve System is a safeguard against anything like a calamity growing out of money rates.... In former days the psychology was different, because the facts of the banking situation were different. Mob panic, and consequently mob disaster, is less likely to arise.1
The public was comforted, and the balloon continued to
expand. It was now time to sharpen the pin. On April 19, the Fed held an emergency meeting under cloak of
