The problems associated with the credit and banking system, international finance and the tariff, like those in the fiscal field, were deeply affected by the governmental philosophy of "normalcy." Believing in minimum interference with business, the administration made no significant attempt to strengthen the banking system or to make the control of the credit structure more effective. In the international field, there was no realization that the world at large, far from recovering its balance after World War I, was getting more dislocated every day and was preparing for an even greater calamity. Both the government and the people at large were indifferent to the concerns of the world, regarding them as separate from American interests. In a futile effort to return to the legend of economic isolation, the United States increased her tariff. Yet, at the same time American bankers were lending money in all the international money markets and American experts were tackling the knotty problem of German reparations. In brief, the twenties were characterized by a naïve belief that America could have its cake and eat it too.
The Treasury and the Money Market. Whether intended or not, every major decision by the government on expenditure, tax, or debt policy influenced the money market. Of the several fiscal agencies of the executive and legislative departments--the Treasury, the Bureau of the Budget, and the Congressional fiscal committees--the Treasury was most cognizant of the interrelationship between fiscal policy and the supply of capital funds, money rates, and the price level. In his annual report for 1925, Secretary Mellon wrote:
Whether [the repayment of public debt] has any effect upon savings and the short and long time interest rate depends in some measure upon how the taxes are collected and upon the type of securities retired. . . . If a large proportion of the taxes with which debt retirements are met is collected from persons who would normally save the amounts paid in taxes, the volume of investment funds will not be materially affected. . . . On the other hand, whenever tax collections result in a reduction of personal expenditures the result is a net increase in the supply of capital with a consequent reduction in general interest rates. . . . When the government pays off the short-term debt, . . . a large proportion of which is held by financial institutions, it releases bank credit for other uses, and money rates tend to decline.