Marriner Eccles and the American Economy

Updated: Jun 30

One name that is ubiquitous in Utah is Eccles. The charitable foundations of the family have made a big positive impact on the state, and the name is on buildings all over Utah. Given this, it is remarkable how little Utahns understand about the impact that Marriner Eccles, the co-founder of First Security Corporation with brother George, has had on the American economy since the onset of the Great Depression. Modern Nobel-winning economists look to this son of a polygamous Scottish Mormon immigrant with no formal university education as one of the most influential economic minds of the 20th Century. I discovered his story for the first time in the 2010 book by former Labor Secretary and Berkeley professor Robert Reich. I was fortunate enough to find, check out and read an autographed copy of his autobiography, “Beckoning Frontiers”, in his hometown library in Ogden (see above). He was one of the architects of Roosevelt’s New Deal, and as chair of the Federal Reserve during the Roosevelt and Truman administrations, helped to create the institution as we know it today. The Federal Reserve building in Washington DC is named in his honor.

It was at the height of his success as a businessman that the 1929 stock market crash sent the nation into the Great Depression. With great skill and perseverance, Marriner Eccles saved First Security and several other Utah banks from succumbing to the bank panics of the early 1930’s; no First Security depositor lost a cent.

Like other businessmen of his era, he was a firm believer in laissez-faire economics; that America would prosper if the market was given free rein to regulate things, with government staying out of the way. Like his father before him, he was a disciple of certain selective excerpts of fellow Scotsman Adam Smith’s teachings in “The Wealth of Nations” which were often quoted by conservative businessmen of that era (and ours). It was only later in life that he became familiar with other passages in Adam Smith’s work that warned against the dangers and limitations of free markets and the need for government involvement to protect the public interest.

Also like other businessmen of the era, he believed in the beginning that the downturn that started in 1929 was a normal, cyclical economic event that would quickly be over. No one at the time felt there were any deep, structural problems. In fact, many businessmen quoted the Biblical story of the dream of Pharaoh, interpreted by Joseph, indicating it was simply part of God’s plan that there should be a mixture of good times and bad.

But the months stretched into years and things continued to get worse instead of better. Those who looked up to him and trusted him started to come to him for answers. Marriner Eccles began to re-think his economic belief system. Could it be that something had changed in the world? Could it be that the ethic taught to him by his father, that thrift and hard work would allow any man to succeed and thrive in America, and which had proven so successful to both him and his father, may no longer be true?

He started to listen to the opinions of those claiming to know the answer of what had happened to send the economy into such a serious tailspin. He would take each theory and ponder it to see if he could logically connect the dots.

His first insight was that many of the actions he and other bankers were taking to gain liquidity and save their institutions were actually negative for the overall economy. By adopting “a rough and distasteful credit and collection policy” they were helping to save the bank but creating more deflationary pressure in the overall economy. In his own words, “Seeking individual salvation, we were contributing to collective ruin”.

The most prevalent theory from business and financial leaders was that deflation created a self-correcting force. The cycle of falling prices and financial failures would eventually come to a halt, in the process cleaning out the wasteful and unproductive elements in the system. Then, those with money would come forward and invest in “natural new investments” which would bring prosperity back. These “new investments” included opening up new geographical frontiers and pushing forward a great technological frontier. Such had indeed happened in previous economic depressions.

But did that make sense? He decided it did not. He realized that one thing that had changed was that the geographic frontier had essentially been conquered. The great settlement and subjugation of the American West, built on cheap unlimited land, and which had consumed significant investment, was now history. The days when someone like his father David Eccles could pick up an axe, stride into the forests of Oregon, and with his own sweat and effort turn logs into cash were over. The more modern society succeeded in using capital to mechanize and automate to increase productivity, the more individuals were dependent on capitalism to provide employment. The need for re-supply of consumer goods after World War I had only postponed the inevitable economic readjustments.

He also reasoned that investments in new technological frontiers would only happen during times of prosperity. In the early days of the Great Depression, when people didn’t even have enough for basic necessities, it seemed illogical that there would be any market for new technology until the economy recovered. Investments in new technology couldn’t be relied upon to spur economic activity in the depths of a depression. If the current market couldn’t absorb the existing capacity of the nation’s farms, mines and factories, what need was there for further capital investment?

Another popular theory at the time was the previously mentioned analogy to Pharaoh’s dream. It was claimed that the nation was being punished for its spendthrift ways during the Roaring Twenties. The nation had wasted what it had earned instead of saving it. We had violated the economic laws God had established. But thanks to the depression, we would sober up and “the economy would right itself through the action of men who had been prudent and thrifty all along, who had saved their money and at the right time would re-invest it in new production. Then the famine would end.”

Marriner Eccles decided such talk was naïve. “Economics is merely the production and distribution of wealth brought about by the application of labor to raw materials. It is all man-made and has developed by the application of human intellect to problems that presented themselves.” Since human intellect had created the rules of economics, human intellect could change the rules.

Was it true that America had been profligate in the twenties? He realized that those who were pushing this theory “were the very same men who in the twenties announced on all sides that there could never be another depression. And they were the same men who in the twenties fed the public with the sort of economic ideas they later called ‘profligate’.” It dawned on him that what certain men were calling God-given principles were elements of the status quo that favored those making the claims.

Looking at the evidence, he also concluded that the only area in which America had been profligate in the twenties was in financial speculation. Because of excessive capital in the system, the stock market and real estate had been pushed into bubble territory, which finally burst. But when looking at the actual consumption of goods and services by consumers, the economy of the twenties was “in aggregate, if anything, too thrifty”. In other words, the imbalance was such that there was excessive capacity; too much capital in the system without sufficient demand to consume all that productive capacity.

This led to the great epiphany. “I began to see that we had reached a stage where further advances in the national income and in our standard of living, even the maintenance of the existing standard, depended on finding an adequate outlet for the nation’s savings. For while savings that are invested in new enterprises are beneficial not only to savers but also to the entire economy, savings that find no outlet and accumulate as idle or hoarded funds interrupt the flow of national income and result in a depression.

And now, for the quote that summarizes his thinking, and which continues to inspire modern day economists:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. (italics in the original). Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

From these insights, Eccles created a model for regulating modern capitalistic economies that formed the theoretical underpinnings of the New Deal and which has stood the test of time. Although his insights resemble Keynesian economics, the principles are simpler, and Eccles went public with his recommendations several years before Keynes published his masterwork “The General Theory of Employment, Interest and Money”.

Ponder the above story for a moment as we reflect on the Republican’s cherished economic theory: Supply-side economics. As a review, this states that if we push wealth toward capital creation (in other words, redistribute wealth to rich people), the ‘pie will grow’, the resulting economic growth will ‘trickle down’ to the middle class and the poor, and most magical of all, massive tax cuts geared toward the rich would ‘pay for themselves’. Under Republican leadership, we have run the supply-side experiment three times: during the early Reagan years, George W. Bush’s first term, and most recently the Trump tax cut. The result: Massive income inequality (no trickle), stagnating national productivity growth (due to insufficient demand for goods and services), and massive national debt (didn’t pay for itself).

You’ve all heard the old saw “Insanity is defined as repeating the same thing over and over again and expecting different results”. Too bad we didn’t listen to Marriner Eccles. He could have saved us a lot of trouble. Let’s hope it’s not too late to listen to his modern disciples and create a capitalist system that shares the fruits of economic growth equally. Marriner Eccles could have told us it’s not only the right thing. It’s the best thing for the overall economy.



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