America's Great Depression by Murray Rothbard

Author:Murray Rothbard [Rothbard, Murray]
Language: eng
Format: epub, pdf
Published: 2011-08-17T05:00:00+00:00

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America’s Great Depression

before it was adopted, and Federal Reserve Board member Charles S.

Hamlin persuaded Representative Dickinson of Iowa to introduce a bill to graduate bank reserve requirements in proportion to the speculative stock loans in the banks’ portfolios. Senator Glass proposed a 5 percent tax on sales of stock held less than 60 days—

which, contrary to Glass’s expectations, would have driven stock prices upward by discouraging stockholders from selling until two months had elapsed.47 As it was, the federal tax law, since 1921, had imposed a specially high tax rate on capital gains from those stocks and bonds held less than two years. This induced buyers to hold on to their stocks and not sell them after purchase since the tax was on realized, rather than accrued, capital gains. The tax was a factor in driving up stock prices further during the boom.48

Why did the Federal Reserve adopt the “moral suasion” policy when it had not been used for years preceding 1929? One of the principal reasons was the death of Governor Strong toward the end of 1928. Strong’s disciples at the New York Bank, recognizing the crucial importance of the quantity of money, fought for a higher discount rate during 1929. The Federal Reserve Board in Washington, and also President Hoover, on the other hand, considered credit rather in qualitative than in quantitative terms. But Professor Beckhart adds another possible point: that the “moral suasion” policy—which managed to stave off a tighter credit policy—was adopted under the influence of none other than Montagu Norman.49 Finally, by June, moral suasion was abandoned, but discount rates were not raised, and as a result the stock market boom continued to rage, even as the economy generally was quietly but inexorably turning downward. Secretary Mellon trumpeted once again about our “unbroken and unbreakable prosperity.” In 47See Joseph Stagg Lawrence, Wall Street and Washington (Princeton, N.J.: Princeton University Press, 1929), pp. 7ff., and passim.

48See Irving Fisher, The Stock Market Crash—And After (New York: Macmillan, 1930), pp. 37ff.

49“The policy of ‘moral suasion’ was inaugurated following a visit to this country of Mr. Montagu Norman.” Beckhart, “Federal Reserve Policy and the Money Market,” p. 127.

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