The Fruits of Graft: Great Depressions Then and Now

by Wayne Jett

If turned aside or defeated, mercantilists are rarely punished and almost never destroyed, so they fight again another day.

“The whole of this mercantilist outlook provides one reason for the commercial wars, carried on almost without interruption from the end of the 17th Century down to 1815.

Financial mercantilists do not exert labor and ingenuity to create capital. That is for the middle class.

“Numbers of Men, Industry, advantageous Situation, good Ports, Skill in Maritime Affairs, with a good annual Income from the Earth … are true and lasting Riches to a Country; But to put a Value upon all this, and to put Life and Motion to the whole, there must be a quick Stock running among the people; and always where that Stock increases, the Nation grows Strong and Powerful.”22

U.S. economic policy departed from Hornigk’s “fourth rule” between 1933 and 1940 even as mercantilists dominated America’s political agenda. At the expense of its people’s standard of living, the U.S. government accumulated gold in historically unprecedented quantities, but prevented its use for increasing the money stock. This U.S. brand of mercantilism was more destructive, anti-social and internationally troublesome than anything recorded in Heckscher’s history of mercantilism.

“Jealousy of Trade” (1752) concluded: “I shall therefore venture to acknowledge, that not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself. I am at least certain, that Great Britain, and all those nations, would flourish more, did their sovereigns and ministers adopt such enlarged and benevolent sentiments towards each other.”

Mercantilism catalyzed war between nations, as was widely acknowledged even while mercantilist policies continued to guide trade relations.

mercantilists viewed their own positions as enhanced when the middle class was fighting wars instead of enjoying prosperity and rising political influence.

Typical of 17th Century trade relations were English provisions of 1678 which prohibited “all importation of French wine, vinegar, brandy, linen, cloth, silk, salt, and paper, and also of all manufactures containing French silk, thread, wool, hair, gold, silver, or leather, and provided that the French goods were to be destroyed and not allowed to enter, even if they had been captured by English war-ships or privateers.”35 All liquid goods were to be “staved, spilt, and destroyed” or poured into the sea, and all cloths and other solid goods were to be publicly burned.

mercantilism claimed the mantle of “liberty” as its hallmark. This was difficult to reconcile with favoritism of government charters, grants, licenses and monopolies.

In matters of politics and culture, “mercantilists always aligned themselves with the reformers; conscious conservatism was foreign to them.”44

Mercantilist alignment with reform elements was likely to avoid being seen as governmental favorites; to co-opt reformist movements that might disrupt their influential relationship with government; and, to deliver more “value” to government allies by gaining political support.

The weight of Hume’s and Smith’s arguments gradually wore away mercantilist influence on public policy.

Classical economic theory and free trade dominated academic thought until John Maynard Keynes’ precipitous turn to mercantilism in 1936.

Creation of the Federal Reserve System as a central bank owned and controlled by U.S. and European bankers signaled important mercantilist influence, even as tariff rates were slashed in 1913.

Roosevelt’s rhetoric was anti-mercantilist, but his actions would be clearly identifiable as serving mercantilist objectives. Those actions would produce social, economic and military apocalypses rivaling and surpassing anything Heckscher found in the Dark Ages through the 19th Century.

Mercantilism in America 1600-1900

In his first year as president, however, Wilson abandoned principles chiseled into the cornerstone of the Democratic Party by its founder Andrew Jackson, who battled and terminated the U.S. central bank. Wilson promptly signed laws creating the Federal Reserve System as the new central bank and levying a federal tax on earned income at a top rate of five percent.

“[T]he powers of financial capitalism had [a] far-reaching aim … to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.”186

Federal Reserve critics generally see the institution as conducting monetary policy poorly or, at worst, serving selfish banking interests against consumers and workers. Far more horrific and detestable is a U.S. central bank acting as functionary in a global elitist scheme to suppress political rights and economic progress.

The U.S. dollar became the only currency in the world convertible to gold in 1919.

the years between 1921 and 1929 were a model of monetary stability, exhibiting neither inflation nor deflation.

In 1921, Mellon’s proposal was met by calls for his resignation by Senator Robert M. LaFollette Sr. LaFollette was a “progressive” Republican, as Theodore Roosevelt had been, meaning he favored activist government which served mercantilist objectives.

Beginning at the recession low of 1921, the New York Times index of industrial stocks quadrupled to its high in September, 1929. Worker productivity increased by two-thirds, from 44.6 to 74.3 on the index during the period, as the Federal Reserve index of industrial production rose from 12 to 23.198 The U.S. economy during 1921-1929 enjoyed strong real growth on a foundation of stable monetary policy and cuts in marginal tax rates on income of individuals and business.

President Coolidge showed little regard for Hoover, calling him “wonder boy” and describing him as “a man who has given me six years of unsolicited advice, all of it bad.” Hoover instinctively moved aggressively to “do something” when he perceived a problem. Mellon’s instinct was to wait and see whether a problem would be solved by markets and private action, finally addressing the issue through government only as a last resort.

When World War I began, Kennedy passed the presidency of Columbia Trust to his father and took a job for Bethlehem Steel as assistant manager of a ship-building facility.

As the war ended, Kennedy was 30 and the father of three children, but “a long way from being a millionaire.”207 He accepted a job offer to manage the Boston office of Hayden, Stone & Co., though it paid only $10,000, so he could learn “the ins and outs of the stock market and the ways to manipulate it.”208 He did more than learn. He mastered the manipulative techniques of insider trading, of “pump and dump” trading to drive up public interest and investment in a stock while holding options before selling out at the top, and “wash sales.”

Kennedy was quoted at the time as telling a friend: “It’s easy to make money in this market. We’d better get in before they pass a law against

While still at Hayden Stone, Kennedy invested in firms in the motion picture industry. In 1926, with backing from several other investors including his father-in-law, he bought Film Booking Offices (FBO) from its distressed London parent for about $1 million, although it was trumpeted to the press as a $10 million deal. His objective was to apply banking sense to the movie business, meaning to make money by making cheap movies.

He brought business sense and marketing acumen, but also philandering and an abundance of financial sharp dealing. Joe Kennedy immediately became a mover and shaker in the industry. He sold a large block of FBO to RCA in late 1927, linking the movie industry with sound technology.

RKO was simply another link in a long chain of transactions by Joe Kennedy involving a common element: “suckers.”

He saw his role as corporate executive to be personal enrichment—not advancing or safeguarding the interests of shareholders.217 In the relative anonymity of trading on stock exchanges, Kennedy certainly gave no quarter to the “little people.” By 1929, his executive duties in Hollywood were mostly behind him, and his attention returned to Wall Street.

To do so, they would reduce economic output so as to weaken and impoverish the middle class, particularly the upper-middle class.

To the contrary, Americans viewed Hoover as attuned to their interests and possibly the best prepared, most capable man in history to serve as president. Hoover believed he was completely up to the task, and he entered the presidency anticipating great accomplishments with the reins of leadership in his hands.

Hoover announced two days later, on Sunday, that he would sign the bill, saying he liked the flexibility it would give him to reduce tariffs by 50% without going to Congress. Again he cited the desirability of “scientific” adjustment of tariff rates, which could quell foreign protests, and said he was honoring the Republican Party platform by signing the

As predicted, the Smoot-Hawley Tariff Act proved devastating to world trade. U.S. exports and imports dropped more than two-thirds by the end of 1931.

Joseph P. Kennedy and Bernard Baruch professed to have sold out their positions in the market before the Great Crash. Kennedy later told the “fanciful story” that he sold out after realizing a boy shining his shoes knew as much about stocks and the market as he (Kennedy) knew. Much more likely is that Kennedy, Baruch and others were members of a Wall Street wolf-pack of manipulators which shared information, instincts and tactics.

“When the market went down for the third time on October 29, 1929, Kennedy was sitting on top of the world. It has often been asserted that in the crucial hours of the panic, he sold short to the tune of 15 million dollars…. In the months that followed, Joe Kennedy was in the thick of some of the most unsavory trading in the history of American business. He unquestionably did considerable short-selling—in Paramount Pictures stock, possibly in Anaconda Copper, and no doubt in other issues—thus helping to aggravate and further depress the market, the American economy, and the psychological well-being of the nation. He showed a steely disregard for the consequences of his actions to anyone but himself; he was making money and that’s what counted. Years later he would brag about this least praiseworthy period of his life. (Emphasis added.)”

A common technique of such manipulators as Kennedy was to sell short and cover before delivery was required.

At the time of the Great Crash, Joe Kennedy owned the Merchandise Mart in Chicago, the largest office building in the world at the time, and was one of the richest men in America. When he died in 1969, his estate was estimated to be $500 million, the equivalent of $17 billion in 2009 relative to gold. The $17 billion estimate adjusts only for monetary devaluation. Adding only modest return on investment through business opportunities, Kennedy would remain near the top of America’s richest. Whether the estimate of $500 million is another politically motivated understatement is unclear, but likely. Even if the estimated estate of $500 million in 1969 was accurate, Kennedy’s net worth was almost certainly more than $20 million during the Thirties.

He was one among numerous operators who reigned on Wall Street. Kennedy, Baruch, Rockefeller, Roosevelt and others like them were well positioned with contacts among the mercantilist elite.

No wonder Joe Kennedy sat on top of the world at the end of October, 1929. He had achieved his lifelong quest for really big money and, even better, he had it at a time when most others in America and the world were broke.

Beyond doubt, the force pushing enactment of Smoot-Hawley was American mercantilism.

damaging feature of Smoot-Hawley was its specification of tariffs at fixed rather than ad valorem rates. For example, a tariff of $1.125 per ton of pig iron became a larger portion of total price as price declined. The result was tariffs averaging between 40 percent and 60 percent during the period of 1930 to 1937. 250

After observing its disastrous effects on production and employment, Hoover and Mellon should have pressed for cuts in all tariff rates by half and called for repeal of the high tariffs. Instead, they yielded to reality that Smoot-Hawley was law, which meant taking the next step in the mercantilist design: liquidating production capacity and conveying ownership of assets to consolidators who remained liquid and willing to buy. Smoot-Hawley significantly blemishes Mellon’s record of public service, as is certainly true of Hoover’s.

Hoover and Mellon each knew beyond doubt that tariffs were bad—not merely “bad” on a superficial level, but “bad” all the way down to terribly tragic economic implications for all Americans and the world.

With access to foreign markets closed in retaliation to Smoot-Hawley tariffs, prices for American farm crops and factory-made products dropped as inventories grew. While U.S. exports and imports declined more than two-thirds 18 months after Hoover signed Smoot-Hawley, producers cut output and unemployment soared to 25 percent.

Running for re-election on this platform of fiscal responsibility through higher tax rates, Hoover lost badly to Franklin D. Roosevelt. The Democratic Party platform supported low tariffs and Roosevelt at least intimated in his campaign an intention to negotiate reductions of protectionist tariffs on international trade, if not an across-the-board roll-back in rates. The entire campaign was conducted in an atmosphere of economic distress, layoffs, production liquidations and talk of dollar devaluation in some circles. Producers who were able to salvage some of their capital bought gold to shelter their purchasing power until conditions favorable to production returned.

The rush of Americans to their banks to meet the March 15, 1933, income tax deadline coincided with what historians termed a “run” on the banks. As his first official act, Roosevelt declared a “bank holiday” lasting about a week, allowing cash reserves of banks to be replenished, and harried Americans continued to pay their tax bills.261 Nonetheless, this massive extraction of deposits from the nation’s private banks for payments to the federal Treasury contributed to failures of many institutions already weakened by defaulted loans to debtors no longer able to pay their obligations. Moreover, the drastic increase in federal taxes drained capital out of the private economy where it was sorely needed to support decent living standards and to energize the domestic economy, even if international trade had been largely shut down.

The president embraced higher taxes as a hallmark of New Deal economic policy. Roosevelt set about taxing everybody and everything.