Eccles on How to End the Crisis

Marriner 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 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. 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.

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.