Two schools of thought quickly developed within our administration discussions:
First was the “leave it alone liquidationists” headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. 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 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 more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” He often used the expression, “There is a mighty lot of real estate lying around the United States which does not know who owns it,” referring to excessive mortgages.
At great length Mr. Mellon recounted to me his recollection of the great depression of the seventies which followed the Civil War. (He started in his father's bank a few years after that time.) He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received word that the orders for steel were pouring toward the closed furnaces; by the time he got back, confidence was growing on every hand; suddenly the panic had ended, and within twelve months the whole system was again working at full speed.
I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago, when we were 75 per cent an agricultural people contrasted with 30 per cent now; that unemployment during the earlier crisis had been mitigated by the return of large numbers of the unemployed to relatives on the farms; and that farm economy itself had been largely self-contained. But he shook his head with the observation that human nature had not changed in sixty years.
Secretary Mellon was not hard-hearted. In fact he was generous and sympathetic with all suffering. He felt that there would be less suffering if his course were pursued. The real trouble with him was that he insisted that this was just an ordinary boom-slump and would not take the European situation seriously. And he, like the rest of us, underestimated the weakness in our banking system.
But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would almost certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.
The record will show that we went into action within ten days and were steadily organizing each week and month thereafter to meet the changing tides—mostly for the worse. In this earlier stage we determined that the Federal government should use all of its powers:
While fearful, we could not know at this early stage to what extent the European situation might affect us.
1. From The Memoirs of Herbert Hoover