Observations on Devaluation, Depression and President Coolidge

While Mr. Kirby’s piece has brought much in the way of restoring a fair and honest appraisal of President Coolidge’s handling of economic circumstances in the 1920s, he has accepted a false premise. This is not in regard to Coolidge. It relates to the misdiagnosis of recovery by devaluation of the currency thanks to the “Thomas Amendment” of the Agricultural Adjustment Act of 1933. The implication made by the scholars he cites is that when money is “freed” from the anchor of intrinsic value — devaluation — the problem of unemployment is resolved. By first taking America off the gold standard ($20.67 per ounce), suspending private ownership (through executive order the following month) and setting new rates of exchange, relief from the depths of Depression came quicker than without this devaluation, they aver. This means of “creating value” helped people then to find jobs and access more money (despite the smaller purchasing power) and it can help alleviate the suffering now. Or so these scholars seem to say. This is despite the fact that unemployment never fell below 14% for the rest of the decade and stood at 24% the year of the Ag Adjustment Act. These were trends for the worse in spite of all the legislation passed to correct it.

Nations had been experimenting with devaluation of their currencies for some time by 1933. Some had come back to gold only to leave it again when it suited. Like today, most sought the immediate “fix” to the problem without actually resolving on a long-term solution. The problem was not only the limits that gold naturally imposes on governments to adhere to strict economy but when no consistency exists on a standard of value, it is no wonder international finances collapsed. The problem was not helped by lowering the standard to attribute value where there was none before, as devaluation did. It only added to the already artificial climate constructed by policy makers. Devaluation shocked the country and even once the lower values allowed for more spending, it further skewed the appearance of recovery. Losses continued unabated, debt continued to grow but by constructing a politically expedient alternate reality, thanks to a currency that was now worth less, it was harder to perceive how bad it was (Shlaes, “The Forgotten Man” New York: HarperCollins, 2007, p.158-9). Besides, what were all the superficial values going to cost in the future for the next generation? Six years would pass before Roosevelt’s “New Deal” was assessed as a failure by his own secretary of the treasury, Henry Morgenthau:

     “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot!” (Folsom, “New Deal or Raw Deal?” New York: Threshold, 2008, p.2).

So much for recovery by currency devaluation. A greater case could be made that the Bretton Woods Agreement of 1944 contributed far more to real recovery than devaluation ever did (see especially Joint Statement IV of the Agreement, http://fraser.stlouisfed.org/docs/publications/books/1948_state_bwood_v1.pdf). Even at a time when the value of the dollar was down, making more to spend was not the answer, as Mr. Coolidge urged, “We…need some more old-fashioned governmental economy. Certainly it is a time to save all public money consistent with a policy of giving employment” (November 19, 1930). The solution was not to create more money that would “paper over” the short supply of value. Prosperity is not obtained by spending greater and greater amounts from the public treasury. President Coolidge understood this obvious truth when he wrote, “It would seem perfectly clear that business will not be improved by spending tax money. Taxes are already too high…Nothing would so encourage business as a reduction of this local and national burden. In 1921 it was particularly the drastic cut in Federal expenses and taxes that brought economic revival. While relief must be provided, those who now advocate higher taxes may be meeting the Treasury requirements but are postponing prosperity. Those who seek to improve our economic position by spending more tax money are going in the wrong direction. Rigid governmental economy would finally solve both problems” (December 9, 1930).