Myth #10. The Legendary Tirade of Louis T. McFadden
Louis T. McFadden was a member of the House of Representatives in the twenties and thirties and is one of the heroes of the Federal Reserve conspiracy theorists. A Republican from Canton, Pennsylvania, he was the chair of the House Banking and Currency Committee during the twenties, but was merely a Committee member by 1932. He used his position in Congress occasionally to crusade against the Federal Reserve, a stance Gary Kah implies may have cost McFadden his life.
On June 10, 1932 the House was debating a bill which would would expand the types of securities the Federal Reserve could trade when conducting monetary policy. McFadden used this opportunity to launch a twenty-five minute tirade against the Federal Reserve, and in so doing became a legendary champion amongst conspiracy theorists. However, just because a claim appears in the Congressional Record does not necessarily mean it is true. McFadden began…
Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal reserve banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal reserve banks acting together have cost this country enough money to pay the national debt several times over. This evil institution has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government. It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board and through the corrupt practices of the moneyed vultures who control it.1
Once the hyperbole and histrionics are deducted, there is little remaining of substance in the above quotation. McFadden makes the claim that the Federal Reserve had cost the federal government enough money to “pay the national debt several times over.” Is he correct?
Disbursements of Federal Reserve Net Income, 1914-1931 (in millions)Total Revenues $970.7 Net Expenses 363.3 ——- Net Income 607.4
Distribution of Net Income: Paid as dividends 102.0 Payments to Treasury 147.1 Retained by Fed 358.3
Source: Annual Report, 1995, Board of Governors, p. 358.
In this table we see that from 1914 to 1931 the Federal Reserve system collectively earned profits totaling $607 million. About $102 million was distributed to member banks as dividends, and about $147 million was paid to the Treasury as a “franchise tax.” The Federal Reserve banks kept the remaining $359 million. The national debt in 1932 was $19.5 billion, so even if the Federal Reserve had been paying all its profits to the government during this time, it would have been enough to pay only 3 percent of the national debt — a far cry from McFadden’s “several times over.”4 Moreover, the Federal Reserve’s total revenues for the period were $971 million, so if the entirety of the System’s revenues had gone straight to the Treasury, it still would not have been sufficient to make McFadden’s claim even remotely accurate.
McFadden then covered a wide variety of topics related to the Federal Reserve Board. He accused it of assisting Trotsky’s efforts during the Russian Revolution, of being controlled by international bankers, of debasing the currency, and of many other fascinating transgressions. He also invoked the testimony of Father Charles E. Coughlin, the Catholic priest who would later become famous for his radio broadcasts in support of Hitler’s National Socialist agenda.
We can study the accuracy of these claims, as well. The first one is new to me, and I have not the slightest idea whether it is true, although given that McFadden had trouble with a claim which could be easily verified, it seems wise to invoke skepticism on his more fantastic accusations. Generally, this accusation is consistent with the “Protocols of the Learned Elders of Zion,” originally published in 1903 in czarist Russia. It is supposed to be an “internal” document proving the alleged international Jewish conspiracy, but it is now known to have been a hoax.2 Henry Ford popularized translations of it into English in the 1920s and this may have been McFadden’s source. The second claim is false, as I show in my article, Do Foreigners Own the Fed? The claim that the Fed debased the currency is also false. To “debase” a currency means to reduce its purchasing power, which happens when the general level of prices rises over time. This is usually caused by excessive growth of the money supply, yet in 1932 the price level was lower than it was in 1914, indicating that the opposite of a debasement had occurred.
McFadden also made some important and accurate arguments. During his speech on the House floor, he stated,
From the Atlantic to the Pacific our country has been ravaged and laid waste by the evil practices of the Federal Reserve Board and the Federal reserve banks and the interests which control them … This is an era of economic misery and for the conditions that caused that misery, the Federal Reserve Board and the Federal Reserve banks are fully liable.1
What did McFadden mean by “economic misery?” They year he spoke, 1932, was the very worst time of the Great Depression. The unemployment rate was approaching 25 percent of the labor force, which to this day stands as record for the U.S. economy. Homelessness, deprivation, and starvation, usually reserved for the ultra-poor in this country, were now stalking millions of former members of the middle class. “Economic misery” was an understatement.Most economic historians would agree with McFadden that the policies of the Fed during this period were the primary cause of the Depression. A mild recession in the summer of 1929 turned into a banking panic after the stock market crash in October of that year. Banks, which owned stocks and made loans to customers for the purpose of acquiring stocks, suddenly found a large portion of their assets nearly worthless as a result of the crash. Many of them began to fail, taking with them the deposits of millions of families (at the time there was no deposit insurance).
This sort of thing had happened many times before, but the Federal Reserve was created in 1913 in part to mitigate its effects as the banking system’s “lender of last resort.” In the midst of the first severe wave of bank failures in 1930, the Fed was deadlocked on what to do, eventually deciding to do nothing. Several more waves of bank failures followed and the Depression was well underway. Thus, the crisis can reasonably be blamed on the erroneous policies of the Federal Reserve Board (The classic book, A Monetary History of the United States by Milton Friedman and Anna Schwartz, provides a detailed accounting of the Fed’s internal policy debates during this critical time).
In my view, however, McFadden goes too far in terming the Fed’s policies as “evil” or its consequences deliberate. As Friedman and Schwartz showed, the Fed essentially made an honest error in judgment. There is absolutely no evidence that the Federal Reserve intended to create the Great Depression. Such a motive would have made no sense from the Fed’s point of view. The Depression created a highly unstable economic and political environment. Why would it have intentionally created the sort of conditions that would have seriously endangered its own existence?
Finally, after McFadden’s twenty-five minutes of ranting had expired, Senator Benjamin Strong of Kansas commented on the oratory he had just heard:
There is a disease that afflicts mankind which is very vicious. It warps the judgment, it narrows the vision, it even causes men to see red, to make mountains out of mole hills. This disease has sometimes been referred to as B.A. Ladies may refer to it as “tummy” ache, but out in the wide-open spaces men call it the “belly” ache, and I know of no man of my acquaintance that has this disease in so violent a form as the gentleman from Pennsylvania, Mr. McFadden.I have not the time to refer to the many charges he makes against the Federal Reserve system, but I call attention to the fact that for 12 years he has been the chairman of the Banking and Currency Committee of this House and did not see fit during that time to remedy any of the evils of which he now complains. It seems to me entirely out of place to wait until he is retired as chairman of that great committee and then assault all of the institutions of which it has control.
Strong’s statement suggested that McFadden’s rant was little more than political bluster. If McFadden had really been the anti-Fed crusader some people today make him out to have been, then why did he not do anything about the Fed when he had the chance? More likely, he was making political points with his constituents by placing blame for the Great Depression at the door of the Federal Reserve. While this may have been justifiable, he went too far by implying the Fed intended to wreck the economy.
4. Office of the Public Debt, U.S. Treasury Department.