The following account of The Great Depression appears on page 25 of Douglas’ Brief for the Prosecution first published in 1945. It speaks for itself.
In October, 1929, a year after the (British) Bank Notes and Currency Act had placed the British currency and credit system under the control of a non-governmental, and, so far as is publicly known, possibly-foreign-controlled, institution, the Bank “of England,” the nine years’ period of almost fantastic commercial and industrial prosperity in the United States—a period in which shiploads of millionaires found time to visit Europe, including “Britain,” for the purpose of acquiring the assets of our bankruptcies—came to a sudden end. In a month, stocks and shares became almost unsaleable; workmen were discharged in millions, to be, followed at a short interval by black-coated staffs and technicians. The United States and the world in general, had entered on the greatest economic depression in history. The late Sir Henry Strakosch was ready with an explanation. Primary prices had fallen. Notice the natural phenomenon. No-one to blame.
It is probable that complex theories of Trade Cycles and the effect of sunspots on industrial activity are already in preparation in the London School of Economics and Columbia University, in order that historians may have the material to explain the economic blizzard. But, meanwhile and in fact, its cause is beyond dispute.
Under more normal conditions, industry in the United States is preponderatingly financed by bank loans or overdrafts. In consequence the manufacturer and farmer are under the complete control of the banker, who can, and often does liquidate them almost without notice. The system constitutes the most comprehensive control of policy of which it is possible to conceive, extending to the ability to penalise opinion by economic ruin.
During the decade of abnormal industrial activity, much of which consisted in the manufacture of goods for the reconstruction of Russia and Germany, the American manufacturer accumulated large sums, and bank balances, which, towards the latter quarter of the period, he found it difficult to employ in industry. As a result, he not only made less use of bank money, but actually entered into competition with financial circles for the provision of funds to borrowers not only in the U.S.A. but abroad. Not only were the profits of moneylending threatened, but the industrial subservience to the bookkeeper was endangered to an extent which called for immediate action. It was taken. Notwithstanding the immense prosperity of American industry even towards the end of the boom, much of the day-to-day money was as usual provided by current accounts normally fluctuating from large overdrafts for wages, etc., to small credits as these overdrafts were repaid. These were all “call money,” i.e., were subject to the fiat of the banker. The industrialists were not organised to lend “call money” and their funds were placed on fixed terms of three months, or more.
At the end of October, 1929, the New York banks, without notice, called in practically every overdraft, and advanced the rate for “call money” from a normal 3 per cent, to 30 per cent, or more. The effect was instantaneous. Borrowers, for the most part in possession of large blocks of securities both American and European (Germany repossessed herself of her own borrowings at bargain prices), threw them on the market in order to obtain cash, either to meet calls or wages account. But there were no buyers for cash, since there was no cash. The banks had it all, although the country at large had the securities representing much of the funded wealth of the prosperous years.
For about twelve months, American business staggered down the slope. Any slight improvement in the stock markets (there was none in commodity markets) was greeted by an avalanche of selling orders. Where salaried workers were retained, they were presented with ultimatums requiring immediate acceptance of drastic salary reductions. Living standards, and consequent consumers’ buying, tell even faster than wage and salary reductions, as a consequence of widespread lack of confidence in the future—misgivings which were more than justified.
It is probably not without significance that the President, elected by the Republican Party, was by profession an engineer with a natural tendency to favour the producer rather than the financier and the trader. As an instance of the attitude assumed by the Money Power in relation to the Administration, it may be recalled that Mr. Hoover dictated an official memorandum to Eugene Meyer, Chairman of the Federal Reserve Board, drawing his attention to the disastrous consequences of the Board’s policy, and requesting reconsideration of it. Mr. Meyer acknowledged the receipt of it and took no action. Eugene Meyer was appointed Chairman of the Reconstruction Finance Corporation by Mr. Hoover’s successor.
The Governor of the Bank “of England,” Mr. Montagu Norman, adopted much the same attitude, remarking to the “MacMillan” Commission on the working of the Gold Standard, “If the Government will inform us of their policy, we will co-operate as though we were under statutory obligation to do so.” This attitude, which agrees with the extra-territorial status of the various Central Banks, founded, together with the Bank of International Settlements, during the Armistice years, is a clear cut assertion of super-nationality. It is quite in accordance with this position that Mr. Norman and other Central Bank Governors remain co-directors of the Bank of International Settlements with those nominally belonging to enemy states.
Under normal conditions, the paralysis of a trade competitor would have reacted to the advantage of British industry. The grip of the Bank Notes and Currency Act (1928) upon trade conditions was so comprehensive, however, that the “depression” while not so spectacular in Great Britain as in the United States (almost entirely because compulsory unemployment insurance, miscalled the dole, masked the widespread misery and despair) was at least as disastrous. Certain areas such as South Wales, Tyneside and the Clyde were in so desperate a condition that they were first earmarked for treatment under the title of Distressed Areas, but later distinguished as Special, an adjective as descriptive as the treatment they received was abominable. It is the essence of the history of the period that in the face of disastrous unemployment the armed forces were depleted both of men and equipment, and every effort was made to re-equip Germany.
The effect of continuous trade depression on business organisations is uniform. First profits decrease by competition in a decreasing market causing a fall, but not necessarily a heavy fall, in prices. There is no evidence to support the statement sedulously propagated, that the depression was caused by a fall in prices. Before the panic of October, 1929, American prices were still at a profitable level.
Such fall as did in fact take place was equivalent to a rise in purchasing power and in all probability increased for some time the volume of goods bought, and delayed the next stage — the disappearance of profits, the liquidation of reserves, and the separation of business undertakings into two classes: those which were to be supported by bank overdrafts and carried on as bank-controlled organisations; and those which were to be closed down.
In fact it can be seen both by the depression itself, and by the means which were inaugurated to end it when the process was considered to have gone far enough, that elimination of competition was its primary objective.