Free People, Free Markets. George Melloan
knows, hopes, believes, anticipates.”
In 1926, Hogate had recruited a former United Press reporter from Ohio, William Henry Grimes, to take over the Washington bureau from the aging and alcoholic John Boyle. In 1929, Hogate hired a bright young man from his alma mater, DePauw University, named Bernard “Barney” Kilgore into the New York office. Grimes and Kilgore would prove to be inspired choices, both playing key roles in the future development of Dow Jones. Also in 1929, Hogate and Bancroft pursued the Journal’s claim of being a “national” newspaper by opening a West Coast Wall Street Journal in San Francisco. The timing wasn’t propitious. It was eight days before the stock market crash.
The Journal had warned, after a setback in the market in 1928, that stock buying with “call” money borrowed from banks at 12% interest rates (marginal borrowing) plus the huge inflow of buying orders from abroad was of concern. But it didn’t shout it from the rooftops.
In May 1929, Journal editors weighed into what proved to be a historic dispute between the New York Federal Reserve Bank, supported by its private member banks, and members of the Federal Reserve Board Washington, political appointees of the president. The New York reserve bank, presiding over the nation’s banking center, had dominated monetary policy through the 1920s with excellent results under the leadership of Benjamin Strong. But Strong had died in 1928, and that had touched off a power struggle between the New York Fed, with its focus on sound banking, and the more politically minded board in Washington.
Concerned about the speculative fervor in the New York markets fueled in part by the easy availability of margin loans, the New York Fed wanted to raise the “discount” rate it charged on loans to banks to 6% from 5%, this being the Fed’s traditional way of damping down credit excesses. But the governors in Washington were resisting.
“Why will not the board follow the advice of practical men of affairs?” demanded the Journal. Washington finally gave in and raised the discount rate to 6% in August, but not before it had established that the politically selected board in Washington, not the New York Fed, was now in charge of monetary policy. The results for the next few years would not be pretty, as the Fed failed to adequately respond to the 1929 market crash through the traditional means that had worked well after the 1920 crash, seeing to it that the banking system had sufficient liquidity. It thus bore heavy blame for bank failures and damaging deflation. Economist Milton Friedman in his 1980 book “Free to Choose” would call this one of the major causes of the Great Depression.
Herbert Hoover in his memoirs described the board of that time as “a body of startling incompetence.” Clarence Barron had been quite right in conditioning his optimism for the Fed on his hope that it would exercise “wise management.” That, unfortunately, was not to be once the system came under the domination of political appointees rather than what the Journal chose to call “men of affairs.”
Having endorsed Herbert Hoover, the Journal’s editorials were rather muted in offering criticisms of his performance, a timidity that vindicated Charles Dow’s warning that a good newspaper should never tie itself to a politician of either party. The Journal went out of its way to praise some of the measures of the president, such as the creation of the Reconstruction Finance Corp., essentially a government bank.
But the editors couldn’t help noticing that the hyperactive Hoover was making some colossal mistakes. For one thing, he and the Republican Congress raised income taxes to “balance the budget,” not a particularly wise measure during a time when the relatively well-to-do Americans, the only people who at that time paid income taxes, had just been shocked by the crash and were uncertain about economic recovery and thus wary of new investments.
The Journal’s free-market principles were violated when Hoover bowed to heavy lobbying by farmers and industry and signed the notorious Hawley-Smoot Tariff Act, one of the greatest protective tariff increases in American history. When the nation’s trading partners retaliated in kind, Hawley-Smoot brought about a virtual shutdown in world trade, hitting American farmers, who accounted for a large share of American exports, hardest of all. That, along with the hapless Fed’s inability to arrest deflation, worsened the Depression. A petition signed by 1,028 leading economists urged Hoover to veto the measure, to no avail. Under heavy political pressure from protectionists, he ignored their advice.
Republicans were excessively committed to their efforts to “help” the farmer. An editorial on April 15, 1930, probably written by Korsmeyer and titled “A Tariff Banquo,” attacked a proposed export subsidy for farmers that William Edgar Borah (Rep., Idaho) wanted included in the Hawley-Smoot bill. The editorial likened the provision to Banquo’s ghost in that it popped up repeatedly in Congress and was hard to banish. The editorial calculated that for cotton alone, the provision would cost the Treasury $80 million a year, and the subsidy would also defeat efforts by the government to curb crop acreage to support prices of farm products. Farmers would respond by increasing their production with the “certainty of a future collapse making their condition worse than ever.”
As for the tariff bill generally, the Journal said on April 1, 1930, that the “pending tariff bill has been constructed on the good old theory that this country can make its own living standards and let the rest of the world roll by.” The editorial challenged the popular idea (still existent today but more dangerous then) that an export surplus, enforced by high tariffs, is a good thing for the economy. It cited a book titled “America Looks Abroad” by banker-economist Paul Mazur about the fundamental inconsistency of that view.
Said the editorial: “America looks abroad, wrote Mazur, because she can’t help herself. She seeks an answer to the not altogether new question how she may continue to collect $1,000,000,000 of annual interest on foreign loans and still preserve a merchandise export balance of nearly as much. With due conditions and qualifications, Mr. Mazur’s conclusion is that it cannot be done.”
This editorial was not the first and would not be the last time that the Journal would have to point out that the flip side of an export surplus is a foreign investment deficit. Americans in the 1930s frequently grumbled over the failure of our European Allies to pay their World War I debts. Mazur and the Journal were pointing out that high tariffs made it difficult for the Europeans to earn the dollars to make those payments, even with the best of intentions.
The damage from Hawley-Smoot wasn’t long in coming. A Journal editorial on December 30, 1930, noted that exports of autos and parts for the 10 months ending in October had dropped to $249 million from the $488 million in the like period a year earlier. “This is not an isolated instance but is only one of many of our export trade. When there is a great falling off of foreign demand for the products of labor, whether cotton or machinery, there must be a falling off in employment that reacts upon all industry and trade,” said the Journal.
On January 28, 1930, the Journal examined a proposal by Irving T. Bush, founder of the Bush Terminal Co. in Brooklyn, that, to prevent future financial crises, bankers should be licensed. Mr. Bush had written that the public accepts as a matter of course that doctors and lawyers be licensed, but when it comes to financial well-being, “we place our affairs without reservation in the hands of any person who chooses to open an office and call himself a banker.”
Replied the Journal: “‘We do nothing of the sort. Some of us do, to our sorrow. The majority of us do not even trust the storage or forwarding of goods or their passage through the customs to any person who chooses to open an office and call himself a forwarding agent. We turn, rather, to expert and reliable organizations like the Bush Terminal Co. . . .”
The Journal pointed out that banking is a business and that each party to a banking transaction asserts the right to act on his own judgment; “if what Mr. Bush calls ‘the guiding hand of greed’ too often controls the seller, the same motive actuates the buyer even more frequently.”
A Journal editorial on December 31, 1930, marked the “End of a Trying Year.” Trying to put the best face on things, the writer struck a hopeful note by offering that “there are good reasons to believe that such impedimenta as 1930 leaves behind can be disposed of more easily and quickly than could that which remained at the close of 1929. The country is now in a realistic frame of mind. It has rid itself of the last of its illusions and is both willing