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MEETING OF THE
COMMITTEE ON THE HISTORY OF THE
FEDERAL RESERVE SYSTEM

SATURDAY, JANUARY 29, 1955

PRINCETON INN
PRINCETON

NEW JERSEY

PRESENT:
ALLAN SPROUL, Chairman
W. RANDOLPH BURGESS
WALTER W. STEWART
F. CYRIL JAMES
WINFIELD W. RIEFLER
JOSEPH H. WILLITS
ROBERT D. CALKINS

ADVISORY SUBCOMMITTEE:
KARL R. BOPP
LESTER V. CHANDLER
ELMER WOOD

STAFF:
MILDRED ADAMS, Research Director
ELLEN C. SINGER, Research Assistant

CHAIRMAN SPROUL:

Gentlemen, let us achieve such order as we can.

The schedule for today is before you.

We meet here with our consultants until

twelve, following which there will be a twenty-minute break while this meeting
room is converted into a dining room.

At one-thirty we are going to take

advantage of having most of our committee members together to hold a so-called
business meeting of the committee for about an hour in another room, and we
will reconvene here with the consultants at two-forty and plan to adjourn at
four-thirty.
A one-year progress report has been distributed by Miss Adams.

covers the first four months of preparatory work, January to May, 1954, and
six months of work under our five-year grant beginning July 1, 1954.

It is

largely a record of the accomplishments of our indefatigable research director,
and I think it is noteworthy in terms of what has been done and almost unlimited in terms of what suggestions remain to be made.

Unless Miss Adams

has something to say, I don't think that we need do more than call it to your
attention.
MISS ADAMS:

No, I thought this would save taking the time to

describe it here.
CHAIRMAN SPROUL:

To get on to our job and to get on to the main

problem of the history of the Federal Reserve System, we asked the aid and
counsel of three eminent workers in the field.

They met with us here

November 21st during the first day of our first three-day meeting.

They have

since been collaborating on an elaboration of the views developed at that
meeting, and they are meeting here again for three days to finish the job we
asked them to do.
a few days ago.

A memorandum outline of their suggestions was sent to you
It is intended to be provocative of further discussion, and

that is what we are here for.

I will ask Dr. Bopp and his colleagues to make whatever oral comments
they wish to make on the memorandum outline they have prepared, and then the
meeting will "be open for general discussion.
DR. BOPPi

I think I can make this very brief statement so we can get

to the hard core of the work.

Our assignment, as we saw it, was to prepare a

preliminary document which would serve first as a definition of what the committee means by a comprehensive history.

That is part A of the document.

Second, to prepare an outline for writing this history.

This outline

is not intended to restrict the historian, and it is not considered that he
will merely fill in the gaps to support the outline as we have presented it.
As a matter of fact, if you secured the writer and told him that, he wouldn't
accept the assignment under any condition.
What we hope would come out of the discussion today would be not a
revised outline --if that were the objective it seems to me that the historian
would feel it was much too formal and established -- but rather that there
would be comments on the outline, suggestions for additions to it, deletions
from it, modifications of it, and so on, so that the historian, in a sense,
would have two documents, the one which is before you and, second, the comments
of the group on it, which two documents would have in common, as we see it,
only the basic idea as to what the comprehensive history is to be like rather
than any detailed thing for him, and that there would be sufficient differences
in judgment as to emphasis, and so on, between the two documents, so that he
would feel perfectly free to go ahead.
In preparing part B, or the specific topics and events that might be
considered, if you have read this document, you may feel, and appropriately so,
that particularly in the period following 1929 we seem to have come up with a
lot of conclusions as to how this development actually took place, rather than

in asking questions, leaving it to the historian to actually develop the ideas.
I must confess that the reason for that is that this struck us as the quickest
way in which we could indicate clearly what we had in mind in the nature of a
history, and was easier in terms of time and effort than putting it in the form
of questions.

So we do not mean that this is the way ideas develop, but we do

feel that the development of ideas is the important thing in the documentary
history.
With that brief statement I think we might proceed then to the document you have before you directly, and I would propose that I go through this
one step at a time and then open it for such comments and discussion as the
committee members may wish to make.
First, as to the general nature of the history, is point A:
"Some of the major objectives of the Comprehensive History:
1. To gather and preserve all relevant information about the
Federal Reserve System that could possibly bear on the evolution of
the structure and functioning of the System.
2. To present a comprehensive analysis from an evolutionary
point of view, tracing the development of ideas and showing the
interrelationships of social attitudes, social and economic events,
pressure groups, and personalities on the structure and functioning
of the System."
We might stop at this point to consider 1 and 2 together.
DR. JAMES:

I was going to ask a technical question.

Is it envisaged

as part of this that either the New York bank or the Federal Reserve Board might
in fact establish an archives unit in their building?

There will be a terrific

amount of material that will be thoroughly studied in connection with this.
CHAIRMAN SPROUL:

I can only speak for the New York bank.

We have had

in mind for a number of years the desirability of development of archives as
distinguished from files and records, but nothing except scattered work has been
done about it, and it was hoped and expected in connection with this project of

the history of the Federal Reserve System that we would get the ideas and the
impetus to go forward with it.
Can you say anything about the Board, Win?
MR. RIEFLER:

I know nothing specific about this.

the idea would be received in a spirit friendly to research.

On the other hand,
I don't know

about space requirements.
MR. BURGESSi

Of course, you've got the Library of Congress and you've

got the regular governmental archives.

I suppose both of them have sections

which could include this thing, but much less effectively, I should think, than
the Federal Reserve Board.
DR. JAMES:

I was merely going to say that this committee might suggest

to the two institutions that they explore immediately the possibility of doing
this.

It would go forward pari passu with the study.
MISS ADAMS:

May I make one statement, Mr. Chairman.

A propos of the work which we have done thus far in going into what
there was in the way of archives, we are constantly running into the difficulties imposed by the so-called Destruction Schedule, and I have been making
efforts to come up with a suggestion which could reconcile the two.

There is

not basically any necessary contradiction between the Destruction Schedule and
the archives that are needed for this, but in the process of work they sometimes get mixed.

If a reconciliation in the form of a phrase or a directive,

or something of that short, could be arrived at, I think it would be very
helpful.
DRO STEWART:

Is this Destruction Schedule common for the two

institutions?
MISS ADAMS:

It is something which evolved from the Presidents'

Conference, and it is solely, as I understand it, a means of getting rid of

6
unnecessary materials.

It is only in the definitions of necessary and unneces-

sary that you "begin to trip
MR. BURGESS:

There is a United States Government schedule too, isn't

there?
CHAIRMAN SPROUL:

Yes, there is.

At least ours to a considerable ex-

tent is geared to the Treasury Destruction Schedule, and most of it relates to
records of various sorts which would not conflict with what we are trying to
do.

But on the other hand there might "be some overlap.
MISS ADAMS:

I have run across a couple of instances where correspond-

ence that seemed to "be important was just saved at the last moment, and it is
that that one fears.
MRO BURGESS:
Federal Reserve.
^

I suspect the Treasury has an even worse system than the

They don't even have the central filing system,

CHAIRMAN SPROUL:

We will take account of that suggestion.

Are there any comments with respect to No. 2?
DR. STEWART:

No. 2, I like very much the "breadth of that, from the

standpoint of an author.

It seems to "be a very large assignment.

Take the

American "background of this, while I think it is important, I would think it
perhaps separable.
CHAIRMAN SPROUL:

I had the same reaction to it, that it includes the

main history plus the peripheral monographs we discussed.

As a general state-

ment concerning the whole field to be covered, I think it would be fine, but
not to be included in the one comprehensive history.

p. 6
MR. KIEFLER:
^^eas.

I don't quite understand the stress on the phrase, development of

It would seem to me that the basic orientation of the history should be

on facts and situations.

What happened to the factual situation against which

these ideas have to impinge.

We have 15,000 banks being

P. 7
chartered just after the System started, and then coll±asing, there is the whole
postwar attempt in 1921 to get things on their feet again.

I thiriK it is on those

factual situations and the response to them that the history ought to focus.

MR. BURGESS:

I have the same thought, Win, in some ways that if you

get at the reality of the history, the System only to a moderate extent reflected the impact of the general thinking upon the System.
a curious chain of events, out of which ideas developed.

It was much more

Of course, the ideas

are still the important part.
I was struck with that phrase.

I think it is right that you have got

to have some center, and the center of what ideology it represents as you go
along.

But you will have to recognize that a lot of that was from accident,

from personalities, from the grinding of the wheels of operations.

Then you

try to find an idea in there.
DR. BOPP:

I think we may not "be too far apart.

to correction from Les* and Elmer*.

Our concern was this.

I will "be subject
If one looks at

what we term the facts, let us take a specific illustration, say the stock
market, this dramatic development in October of 1929 would tend to be the
focus - - i f one looks at the facts.

It seems to us, however, that in terms

of history, the focus should be on how the stock market became a matter of
concern for the System, so that it felt it has some responsibility with respect to it.
It is this development of ideas toward and reactions to these facts
that struck us as being the more important thing.

The facts tend to be dramatic,

and we felt that greater attention should be given to this gradual development,
from the germ of an idea to its fruition.

To identify see Appendix.

8
Was that it, Les?
DR. CHANDLER:

Yes.

And also it seems to me that there is a basic

philosophy which does get modified by events. But take the early twenties.

am sure there were some people in the System who were thinking purely in domestic terms,

There were others, however, who were internationalists at heart and

allowed their actions and their responsibilities to events to be very much influenced by their concern about what was going on abroad, which as a matter of
fact was somewhat out of the spirit that was being evidenced in the Government
at that time.
MR. BURGESS: Yes.
DRO CHANDLER:

The Federal Reserve policy was hardly in step with the

Government of the twenties.
DR. JAMES:

American banking and monetary history, down to the

Aldrich Committee, was very much dominated by the currency theory as it was
described in the early 19th century, and then you had this work of genius on
the part of Carter Glass and the committee and his advisers, which wrote the
Federal Reserve Act as I think the best legal document anywhere in the world
expressing banking theory in terms of automatic gold standard.

It was the

last definitive statement of policy in a world that was believed to be semiautomatic in its monetary system, and it was believed to be completely integrated into a world economy.
Those ideas I think are tremendously important.

Then you come at

the end to a situation in which the gold standard has completely disappeared,
where any idea of automaticity is completely lacking in the concept not only
of the United States but every other country, and in which the United States
has moved from an active peripheral point in the world economy to a nuclear
position.

The history of the Federal Reserve is the history of the most significant institution in terms of the whole economic concept, from one that was devised to function at the periphery of an automatic monetary system, the tune of
which was called from London, as Sir Henry Strakosch* put it, to the central
institution in the determination of very largely, one can say, the extent to
which the United States is at>le to call the tune in international affairs.
Now ideas in that sense, I think, have a very effective theme and
make this one of the most important studies. But it isn't ideas just in picking up William Jennings Bryan and a host of other people.

It is from a given

point, the end of the old world, to another point, the "beginning of the new
world.
There isn't any other institution which is more important to the
determination of the new pattern of ideas and theories in the political economy.
In that sense, I think the ideas are virtually important, and that is the string
or harp, if I can continue a musical simile, on which everyone of these little
pressures begins to shape the tune.

And I am firmly convinced that nobody

thought all these things out, that they simply resulted from spontaneous reaction of these various pressures and problems and personalities that arose.
MRO BURGESS:

Has somebody got all that down?

CHAIRMAN SPROUL:
wording?

Is there any real conflict here except perhaps in

If we thought solely in terms of ideas, perhaps we'd get an ideal

running account which was not in accord with the facts and the situations as
they developed.

On the other hand, if we dealt solely with facts and situa-

tions, we might lose track of these major themes and ideas.

To identify, see Appendix.

It seems to me if you put in facts and situations as well as ideas
in your general outline of things to be included, there is no

real difference

of opinion here.
DRO STEWART:
size of the canvas.
canvas.

There is not in the usage of words, but there is in the

As Dr. James has just said, there is a different size

I think this is worth keeping in mind, that the agreement doesn't go

so far but what there is a difference of emphasis between the two approaches.
CHAIRMAN SPROUL:
MRO BURGESS:

Yes, that's right.

Somebody should put up a little flag and say we not

only did not want complete abolition of automaticity, (Laughter) but we want
to make sure that some measure of it continues and that there is still room
for it in the operations of a semi-free market.
CHAIRMAN SPROUL:

Is there anything further to be said on these first

two general statements?
Go on, Karl.
DR. BOPP:

Then we go to points 3 and 4, things to be given special

consideration and things to be avoided.

To be given special consideration:

"a. One of the central interests of the entire study should
be the methods and terms on which money has been made available
to the banking system and the economy as a whole. This would include, of course, all major changes in the methods used, such as
discounting and open market operations. But it would also give
adequate attention to changes of policy represented by changes
in methods of administration even though there was no change in
the broad method of providing or extracting funds. (We had in
mind there, for example, the administration of discounting rules,
and so on o ) This would require adequate attention to the whole
question of location of control, the methods of administration,
and the development of ideas by those who make policy."
Things to be avoided:
"a. This should not in any sense be considered an official
history and the writer should feel perfectly free to criticize,
evaluate, and interpret.

"b. It should not "be financial history in the narrow sense
"but should be a social history, giving due emphasis to intellectual
and political, as well as the narrower economic and financial,
philosophies and events."
MR. BURGESS:
face all through this.

That 4a raises one question we are going to have to
You are quite right, I perfectly agree that the writer

of this ought to interpret and express opinion.

If it is to be usefully done,

that needs to be reviewed by some group of his peers, who give their reaction
on it, so that you have a judgment that isn't just an individual judgment, but
is a judgment measured against what some of his peers may say —
advisory group.

that is an

You had it in the National Bureau.*

CHAIRMAN SPROUL:

Perhaps Dr. Calkins could say something about the

general idea of procedure.
DR. CALKINS:

The ordinary procedure that we follow at Brookings is

to appoint an advisory committee of recognized scholars in the field, and our
own procedure with the Brookings publications is that that committee becomes
a consulting committee to the author in the progress of the work, and at the
end they become an advisory committee to me, where Brookings has the final
determination on publication.

That determination is in the hands of the

president, and the committee becomes an advisory committee to him, making
their recommendation as to whether the thing is a suitable study for
publication.
If that same procedure, which is a matter we have not really fully
settled here as the course we want to pursue, if that were pursued in this instance, I would assume that the procedure we would follow would be one of
setting up at the time this study gets organized an advisory committee chosen

To identify, see Appendix.

to consult with the author in the progress of his work, and probably use the
same committee as the advisory committee on publication at the end.
But in addition there is no reason why we could not use another procedure as we do at Brookings, and which is used by the National Bureau, I believe, C. E. D. and others, namely, to circulate manuscripts, either in outline
form or in first draft, or early draft, for criticisms of any group whose judgment and views they wish to get.
The one rule that we follow on that is that the author is not himself
obliged to take any of these criticisms or to make adjustments in accordance
with them, unless in his judgment they are warranted.

On matters in dispute,

he may want to get the views of his advisory committee as well as his own
judgment.
DR. WTT.T.TTB; How about footnotes of dissent?
DR. CALKINS:

We do not employ them at Brookings.

whereby they may be employed.
in recent years.

We have provisions

The procedure at Brookings has shifted a little

Some years ago we provided that the advisory committee was

listed in the foreword to the study, indicating who they were, and this tended
to place them in a position of personal responsibility, and as long as their
names were listed, we gave them freedom to write footnotes of dissent if they
wished and these were published in the study.

Actually I think there are very,

very few footnotes of dissent in our publications.

There have been really very

few in C. E. D., though some. More recently we have not published the names of
the advisory committee members.
record their own dissents.

Consequently they have not felt obliged to

But there again it is a procedure which we need to

work out and agree upon for this series of studies.
DRO WILLITS:

Thinking perhaps chiefly of the Bureau, I always re-

spected very much the means of escape from a false intellectual unity that the

13
absence of footnotes connoted.

When they come in, when there are issues of

real difference, and when people who are entitled to authority, as are the
members of this committee or an advisory committee, feel there are important
differences they want to express, I think there is a lot of sense in letting
them come out.

That doesn't interfere at all with the freedom of the author.

He is completely free.

He writes what he accepted responsibility for0

But

the fact that a flag was up here or there, I always thought was a very good
thing.
DRO CALKINS:

I do too.

As a matter of fact I was one of the people

who urged this in the establishment of the C. E. D.
there, as in the Bureau.
DR. WHiLITS:

I think it worked very well

It has in our own case.

Particularly in an area such as this, where you have a

straight history, you have the documentation, put it in order, and find there
are a number of issues that are going to be moot.

If you assume that there is

only one point of view, the point of view of the author, to me it seems to be
an injustice.
CHAIRMAN SPROUL:

I think you can be sure, having raised the question,

that the Committee on the History will have that in mind as one of the things
to be decided by that committee, an^some procedure devised.
p 13.
MR RIEFLER:

Is it really implicit rather than explicit in these words under

special attention; how money was made available.

Mot how much was made available;

not how the Federal Reserve actually reacted to a series of economic and financial

developments, but simply the methods. And under things to be avoided, it says this
shouldn't be a financial history.
facts and developments?

When you finish, where is the stress on the actual

It seems to be the outline lacks a concept of history.

It m a y be implicit in the thinking of the outline, but at some place in the

p. U
in the outline there should be an explicit recognition that we are writing a
^istory, and not an interpretation of ideas. I don't see any place here for such
a fundamental fact as the change of the United States from a debtor to a
creditor nation.

DR. CHANDLER
MR. RIEFLER:

CA^-O^^^^
There was a terrific impact arising out of financial developments.

It is the job of a historian to build that whole picture.

CHAIRMAN SPROUL:

I had a somewhat similar question, not just how

the money was made available, but why it was made available in terms of the
economy and the relations of the banking system in general, and the Federal
Reserve System in particular to the economy, and its development at that time.
DR. JAMES:

And whether it was too much or too little in the judgment

of the authoro
DRO CHANDLER:

I think we were probably guilty of just taking for

granted these things.
MR. RIEFLER:

Yes.

CHAIRMAN SPROUL:

I think it is implicit.

Is there anything more on 3 and 4?

Go ahead, Karl.
DR. BOPP:

Then we come to the substance of the history itself in

terms of history, and here I think you should feel free to suggest deletions
and additions and amendments.

First the background of the System, which really

means the period prior to the establishment of the System itself.

"a. This should include a detailed analysis of all the
conditions and thinking that led to the movement for financial
reform and that influenced the form of the legislation finally
enacted. This would include not only the legislative history
and the conflicts in the Government accompanying the consideration of the legislation "but should also include a consideration
of the existing international monetary and financial relationships, the nature and structure of our own economy, the conflicts
over broad economic policies, the structure and functioning of
our "banking system, the economic theories underlying the various
proposals, and the personalities that were involved in the whole
movement."
Cyril, on your point about the role of the United States, Beckhart*
told me on Tuesday that in 1914, if an American ship or a U. S. Naval vessel
were to call, let us say, at a South American port, and payday for the sailors
came while they were in port, that they would be paid in sterling banknotes,
Bank of England notes, not in U. S. dollars.

It is just a dramatic little in-

cident that gives reality to the changing role.
DR. JAMES:

This whole section I agree with, because as I said a few

minutes ago, I think this really is the picture of the world before all these
revolutionary changes.

This is where the difference between the Aldrich Plan

and the Federal Reserve System fits into it. Actually, I don't know that anybody in any history of the United States, financial or otherwise, has really
written that yet.

This book breaks entirely new ground.

CHAIRMAN SPROUL:

It does, I think, raise again the question which was

mentioned in the beginning and may be implicit all the way through, as to how
much of a particular subject and era, time period, can be gotten into the comprehensive history, in what detail, and how much will have to be in a separate
study or monograph.
DR. JAMES:

I do feel, Mr. Chairman, that this is the thing that has

to get into the comprehensive history.

To identify, see Appendix.

I feel fairly strongly about that,

because in my judgment, very, very few people are going to read deeply in all
of the technical points that come up.
audience.

There will be a small limited interested

But from the beginning I have looked on the comprehensive history

here as, if it is effectively done, one of the most important books dealing
with the history of the world in the last thirty years, and putting into focus
all these technical things, but writing about them as factors that are influencing the stream, and writing about them in a fashion that will make them
clear to people that didn't know about them before.

I grant you this is an

extraordinarily difficult job, but I think it is one that can be done.
I would raise one point there that I am sure was in Karl Bopp's mind.
The creation of the gold pool chiefly under the influence of the bankers in
Chicago in August of 1914, and in the sending of it up to Ottawa, as you all
know, is a magnificant demonstration, exactly like the payments in pound notes
as he mentioned awhile ago.

In fact the thinking as of that moment was still

entirely along the lines of an earlier philosophy.
CHAIRMAN SPROUL:

I am not sure but that if they had any gold in

Chicago now they wouldn't send it to Ottawa again.
(Laughter)
DR. CHANDLER:

There is another incident in history that has never

been written out, and that is the gold pool that the Chicago bankers threatened
to accumulate out of the System in March, 1933 •

I a^1 ncrt sure that is generally

known.
DRO JAMES:

On that particular point, there is a very dramatic letter

that old James Forgan* wrote to his brother,, because on Saturday, August 1, 1914,
he received a telegram from Mr. McAdoo, Secretary of the Treasury, asking that a

To identify, see Appendix.

IT
committee of the Chicago Clearing House meet with him in Washington the following Monday.

Mr. Forgan promptly arranged to go to New York the next day and

some bankers in the president's clearing house went with him.
station a few minutes "before train time.

They met at the

They got on the train and carried on

their discussions, and "by the time they reached Englewood, which as you know
isn't a very long journey, they all got off the train and went back to Chicago,
because they felt they would get very much farther by forming their own gold
pool and going on this basis than going down to New York.

An extraordinarily

interesting letter that almost marks a crisis in Chicago banking.
DR. CHANDLER:

It begins to sound as though we ought to have two

histories, one of the Federal Reserve System and one of Chicago.
MR. BURGESS:

I don't know how many of you people knew that on the

Friday night when the banks were closing, as they were closing, the New York
Reserve Bank had reserves of about nineteen per cent against its note deposit
liabilities because the outflow of money from Chicago had been very heavy.

attempted to get Chicago, as had been customary, to take its share of Government
securities in the pool so that the reserves would be leveled out for the System
and we would all close with a gold reserve above the legal minimum. The Chicago
bankers said that if any attempt were made to do that, they would next morning
withdraw their reserves from the Chicago Bank in gold.

So the System closed

with the New York reserve ratio of seventeen or nineteen, and Chicago's fifty
or sixty.

Had you heard that?
DR. JAMES:

No.

MR. BURGESS:
some of the negotiating.

I happened to be one of the fellows that tried to do
We tried to get the Board to order the Chicago Federal

to discount, which the Board refused to do.

DR. WILLITS:

This is very distressing to an outsider, who always

assumed that everything went on in the Federal Reserve System from the point
of view of high and farseeing statesmanship.
CHAIRMAN SPROUL:

Maybe you shouldn't "be on this committee.

(Laughter)
DR. STEWART:

I think it is one of the functions of all history to

prove that what you are talking about is not monolithic.
DR. WILLITS:

That may become harder and harder to do0

DR. CHANDLER:
MR. RIEFLER:
here.

I suspect this ought to "be interred with their "bones.
That is the kind of thing I think we ought to have in

I think that is what this history ie„
DR. WILLITS:
DR. CHANDLER:
DR. JAMES:

You are not limiting your historian with that, are you?
Wo. We leave that to him.

I think it should go in, "because the very significant

thing in any history, and in this one, is how the impact of individual human
beings, and individual motives, as of this 24 hours, do shape the whole
development.
DRO CHANDLER:

Some of those individual reactions in that period of

about two weeks made extraordinary history.

The group of bankers that went

down after the bank closing, and the terms of the reopening, in my judgment,
were tragic.
CHAIRMAN SPROUL:

The next point.

DR. BOPP: "b. A similar study relating to the organization
of the Federal Reserve Districts, of the Federal Reserve Board,
and of the Federal Reserve Banks before the banks were actually
opened for business."
There was a Congressional Committee on the question of the number of
districts.

19
CHAIRMAN SPROUL:
DR. CALKINS;

Any questions or comments on "ID"?

The only one I have is that it seems this presents one

of the problems that we will encounter from time to time of trying to cover the
12 districts.

This thing fans out in space so much that you face a very serious

problem of selection; or possibly you ought to make a summary treatment of this
thing here in the main volume and then let this kind of treatment go into a
special monographic study, where you can do it greater justice than you can
with the space that will be available in the main study.
DR. CHANDLER:

I think that what we had in mind here, Bob, was not

necessarily a detailed study of each of the 12 Federal Reserve Districts, but
rather a description of the political process, and the decision-making process,
even after the bill got through Congress and was signed by the President, when
you had this tremendous controversy, not only in the original organization committee, but then in the Federal Reserve Board, as to whether the Board had
power to change the number of districts, and so on, and whether it would be a
good idea even if they did have power.

It was quite a period of controversy,

and had a tremendous effect.
DR. JAMES:
volumes?

Isn't that covered very largely in Paul Warburg's two

I think one thing we have to remember in writing this is that we

shouldn't duplicate something that has already been done.
MR. BURGESS:

That whole period has very well been covered, more so

than afterwards.
DR. CHANDLER:

I think that's right, Cyril, but so much of those

early volume were special pleading volumes, so that the emphasis needs to be
changed in some of them.
DR. JAMES:

Yes, but I was simply emphasizing the fact that I don't

think it all ought to go in in detail.

p. 20
m.

SFROUL:

There is perhaps one thread in one of the underlying themes, and

-hat is the regional system and the relation of the New York District and the
New York Bank to the rest of the country, to the Middle West, the Far West, the
attempts to bring down the New York district to the smallest possible size,
beginning with the financial district, going up to Canal Street, and stopping
there, and then to the City, and then to the State, and then finally what it is
now.
what it is now.
But I think that has lost significance in terms of the general development of the System, and of banking and banking thinking in this country, just
the contest about the size of the New York District.
DRO CHANDLER:
in its place.

No doubt Carter Glass thought he was putting New York

He thought he was going to do away with this business of huge

bank balances in New York, and the financial power that that represented.
CHAIRMAN SPROUL:

Of course some aspects of that conflict persist and

exist right down to the present day.

We are in conflict, that is, the System,

with the Reserve City bankers on a variety of questions because of their feeling
that the System is still trying to take over the functions of the correspondent

p. 20
MR. RIEFLER:

What place is there here for that area?

I always find myself

in a fog about it. What is the role of the Reserve City Bankers Association?
You do run into its impingement on the System all the time.

It would seem to

me it ought to be treated somewhere in this history.

the correspondent system.

He thought he had done it effectively, and I think

the persistence of the correspondent system is really one of important problems.
MR. BURGESS:
the Act of 1934.

That is the emotional impetus, in large measure, back of

DR. CHANDLER:

I thought this ought to be a theme that would have to

run through all the periods, Win.

For example, in the discussion of the struc-

ture and function of the System, pre-Federal Reserve, this would be a very important aspect.

And the whole question of the composition of Reserve banks in

the original Federal Reserve Act, and the fighting over the changing of those
in 19l6, 1917 > and then the attempt to revert to something like the original
scheme in about 1921 or '22. Then the check clearing controversy was involved
too.

I should think it would be a theme that would have to be developed in

various stages.
MR. RIEFLER:

Yes.

It might have a separate monograph also.

DR. STEWART:

I think there is a myth and a reality about this which,

when you watch just the operations, tends to obscure the myth.
of course, are New York.

The operations,

But there is the political reality of the amount of

protection and insulation that it has given the System.

I think there have

been several occasions when it would have been a question whether the System
could survive if it had been centered in New York.

So I am inclined to con-

sider it as more than an illusion, like all myths.

It has great value.

CHAIRMAN SPROUL:

It is a myth that has an effect on the economy of

this country, not only on the Federal Reserve System.
DRO STEWART:

This country just doesn't like concentration of power,

whether it is New York, Washington or somewhere else.
DR. CHANDLER:

And you also have the nice paradox, Walter, the more

you try to sectionalize, the more you may concentrate.
CHAIRMAN SPROUL:
DR. BOPP:

Go ahead with No. 2.

The next is the period of organization, from the opening of

the banks, until the entry of the United States in the First World War.

"a. The whole process of determining the structure and
organization of the Federal Reserve Banks, the selection of personnel for the Federal Reserve Banks, the division of control
between the Federal Reserve Board and the Federal Reserve Banks,
the location of control within the Federal Reserve Banks, the
process of arriving at decisions as to the appropriate objectives
of the Federal Reserve Banks for the longer run and for the
existing situation, and the relationship between Federal Reserve
operations and American foreign policy. Worthy of special consideration are not only longer term growth considerations, such
as building of the prestige of the System, but the desirability
of makingsearnings in order both to build prestige and to attract
members,"
DR. JAMES: May I ask another question of fact there, Mr0 Chairman?
Have we received from the various Federal Reserve Banks any undertaking that
the author of this will be able to use the directors' minute books?

If you

don't have that, then it will be extraordinarily difficult to deal with this
^22
j fat. RIEFLER:

The authorization, from what I put up to the Board, was that there

would be pretty frank disclosure of developments before 1933, and that it should
stop there.

I think the final letter we wrote was that we would have to judge

on an ad hoc basis what was to be made available.

MR. RIEFLER:

It is a friendly disposition to make things available,

but there is no commitment.
DR. JAMES:

But that friendly disposition does cover all the banks?

CHAIRMAN SPROUL:

It covers the Board and the New York Bank, and it

hasn't been put up to the other banks in that way, although it had been put to
the other banks to make available what they had in their records and files,
but not going to the minute books.
DR. JAMES:

You can't make this hard and fast, but I do think it is

tremendously important to choose your person, someone who has discretion, and

23
you dorrt bring out current personalities.

But I don't think really you can

write this sort of a thing unless the individual is going to have that access.
MR. BURGESS:

I don't believe your minute books are going to reveal

this particular thing as much as one might think.
what goes into the minutes.
Committee.

They are pretty cautious of

I am thinking of the records of the Open Market

I remember very distinctly in the middle twenties arguments in the

Committee about the necessity for buying Government securities to keep up earnings.

They didn't get into the minutes of the Open Market Committee.

didn't get into any of the records.

They

The final thing was authorization to buy

or sell, or something or other.
DR. STEWART:

Chicago again too.

MR. BURGESS:

Now, if you had the memoranda that McDougal* brought

to those meetings, they would be very revealing.

But they said, "To hell with

all this fancy stuff that Strong is talking about. We have got to earn a
living„"

You get some in the correspondence between Parker Gilbert* and the

Board at that time, when the Treasury practically ordered the Federal to sell
their Government securities.
DR. WILLITS:

Perhaps you can guarantee access to this historian to

the things that were carefully deleted from the minutes.
MR. BURGESS:

We never even thought of putting them in.

DR. WILLITS:

It would be well if the Board and the banks would go

just as far as they could toward complete accessibility, because, "Yes, we will
be sympathetic provided you don't go too far," is after all an extremely important limitation.

I don't know the nuances and customs and the things that

determine, but it seems to me that if this is going to be a history, you pick a

To identify, see Appendix.

man whom you trust, and a man whom you trust is entitled to access to a very
high degree.

On that, I can't judge the considerations that limit that access,

CHAIRMAN SPROUL:

I think if it were put up formally to the Federal

Reserve Banks, at least at this stage, to make their minute "books available to
the Committee or the historian selected by the Committee, we would cool off the
sympathetic attitude toward access to all other available information, in terms
of memoranda, comments and discussions outside of the minutes.

It may be that

as we go along we will find some things that have to be gotten from the minutes

p. 2U
MR. RIEFLER:

I think the attitude is extremely sympathetic, but a guarantee just

can1t be made.

DR. BOPP:

Minutes of the Governors7 Conferences, though, would be

more revealing.
MR. BURGESS: Yes.
DR. BOPP:

At one time they had stenographic minutes in the early

twenties.
CHAIRMAN SPROUL:
MR. BURGESS:

The Chairmen's Conference?

The Chairmen's Conference doesn't appear until a good

many years later than that.
CHAIRMAN SPROUL:

In the twenties they had conferences and steno-

graphic transcripts.
DR. BOPP:

At one time they had conferences of the members of the

Board, the Governors of the banks, and the chairmen,,

This famous May 1920 con-

ference, which became a Government document, that is complete.

Then No. 3, War and inflation:
"a. A comprehensive analysis of the entire war financing
program and of ideas relating to it and the relationship of the
Federal Reserve to the whole process. The effect of the prevailing economic theory on the types of assistance given "by the
Federal Reserve to "both public and private financing.
Ir

bo In addition, adequate attention should "be paid to such
things as the effect of the war period on membership in the
Federal Reserve System, the prestige of the Federal Reserve System,
the relationship between the Treasury and the Federal Reserve, the
tendency to concentrate power in the Federal Reserve Bank of New
York, the subordination of the Federal Reserve Board in dealing
with monetary problems, the growth of relations with foreign
central banks and governments, the impact of this experience on
the earlier philosophy of the Federal Reserve Act and of Federal
Reserve policy, and contemporary ideas as to later developments."
DR. JAMES:

I think there it is important to mention the position of

J. P. Morgan and Company in that whole picture.

They were the fiscal agent of

the United Kingdom Government, playing a part that seems completely incredible
•^

in terms of the Second World War.
MR. RIEFLER:

1917-1919.

The periods seem to be wrong here.

1918-1920

had a special character.
MR. BURGESS:

RIEFLER:

dWn

. t it?

The inflation broke in the m j ^ l e of '20.

The probl- of the shift to fighting inflation started in 19*9,

The shift fro- war financing to fighting the inflation really occurred

during 1919

DR.
MR .

RIEFLER:

I would think the break would corce somewhere in the first half of
^v.

DR. CHANDLER:

xcaxiy

nave a separate period, 1918 and 1920.

This could well be, 1917-18, and then another period,

November 1918 to the break of the inflation in 1920.
better to split it up.

It might have been much

MR. BURGESS:

In terms of economic swing, you can swing it through

DRO STEWART:

I have always felt that the freeing of sterling was

to '20.

greatly underestimated.
domestic events.

As a force, it has been obscured by the magnitude of

In looking back now, I don't think many people realized then

p. 26
MR. RIEFLER:

The content here is correctly done.

The content of No. 3 relates to

the structure and organization of the Federal Reserve System in relation to
financing the war and the huge war debt that resulted.

From the end of 1918, on,

we began to face an economic problem.
DR. STEWART:
DR. JAMES:

I think that's right, shift of emphasis.

During this period too, to take the terrific increase in

bond portfolio of the Reserve System, which was one of the basic policies that
made possible the open market development.
DR. CHANDLER:

As I look back on this, Karl, I think we left out one

very important series of things, and that is the whole change in the structure
of debt, and of bank portfolios, and the financial positions of the public,
of the banks and the Federal Reserve banks.
MR. RIEFLER:
DRO BOPP:

Yes.

I personally inferred that in the entire war financing pro-

gram and ideas relating to it, as contrasted with the Second World War where
the financing was public financing.

The First World War was private financing.

But it could be spelled out.
MR. BURGESS:

In "b", I think if one were revising this, the wording

"the tendency to concentrate power in the New York Federal" sounds as though
people were trying to concentrate.
against resistance.

It was a growth in power, which was done

27
MR. RIEFLER:

Its scope, its prestige.

CHAIRMAN SPROUL:
MRO BURGESS:
New York.

Influence.

The growth of influence of the Federal Reserve Bank of

Then it isn't the subordination of the Federal Reserve.

Nobody said

"we will subordinate the Federal Reserve".
DR. STEWART:

Nobody?

(Laughter)
MR. BURGESS:

I don't think they ever said that.

They did it.

But

the choice of language suggests something a little different from what happened,
DR. CHANDLER:

It makes it sound too conscious and deliberate.

MRO BURGESS: Yes.
DR. BOPP:

This grew out of the circumstances.

New York was the area

in which the funds were raised, and with which the Secretary had the direct
dealings.
DR. CHANDLER:

I had never realized until I went back to this period

the extent to which it was difficult to separate the role of say the Governor
of the Federal Reserve Bank of New York as manager of monetary policy on the
one hand, and as fiscal agent on the other.

He just didn't know when he was

acting as fiscal agent and when he was acting as Governor.
p. 27

agency function?
Board, the New York Bank worked so closely with the Treasury day by day, thai
it built that up.
sat there.

The Board functioned in approving the discount rates and

If they had had any ideas about what should be done, they might have

been a little more forceful.

But it was a thing that grew out of the situation

28
rather than anything deliberate.

The New York Bank I think went ahead and did

things and pushed ahead and didn't want to be bothered.
DR. JAMES:

I don't know the date at which J. P. Morgan ceased to be

the fiscal agent of England and France, and their actions were taken up directly
with the New York Bank.
DRO STEWART:

Have they ever ceased?

MR, BURGESS2

They still are the fiscal agents.

ever was any date.

I don't think there

But when they ceased doing their financing, the fiscal agency

didn't mean so much, when it came to the handling of assets in World War II.
DR. JAMES:

I was thinking rather of the change between 1918, for in-

stance, and the period of 1923-24, when Norman and Strong were just shortcircuiting Morgan entirely, and the fiscal agency had become a formal trust
company business.
CHAIRMAN SPROUL:
MRO BURGESS:

I don't think they short circuited them entirely.

No, the kind of activity changed.

CHAIRMAN SPROUL:

Change in emphasis of arrangements, "but no date when

one was cut off and the other took over.
DR. STEWART:

I "believe the real crevice between past and present

practice -- the real break -- comes when the United States Treasury established
direct contact with the British Treasury.

Both in practice and tradition, the

two Treasuries had had very little contact.

The Federal Reserve Bank of New

York and the Bank of England dealt directly with each other, and the British
Treasury used Morgan's as its fiscal agent in the United States.

During New

Deal days, however, the House of Morgan ceased to be welcome in Washington, and
the Federal Reserve Board increasingly took over from the New York Bank its
foreign activities.

After the arrival of war, the activities of the United

States Treasury in monetary and credit matters reached such a magnitude that the
Treasury became a center of decisions, and the Federal Reserve merely part of an

29
operating mechanism.

Soon the relations "between the two Treasuries became so

continuous and unquestioned that our Secretary of the Treasury hardly knew that
any other System had ever existed.
MR. BURGESS:

The Banking Act of 1933 had to do with that.

I think

when the Treasury walked in and took the gold from the New York Bank, that was
kind of a punctuation of ito

That is a very interesting little incident that

could be described in very dramatic terms, when the Assistant Secretary of the
Treasury, a long-haired foreigner, came in and told us what was going to be done.
DRO CHANDLER:
Bank.

I would like a record of what was said at the Chicago

(Laughter)
CHAIRMAN SPROUL:

You don't want whatever comes out of the final work

of the consultants to give a vicious slant to the New York Bank!s assumption of
power and influence?
MR. BURGESS:

(Laughter)
No, it wasn't just that.

This was really going back to

Win's point, that nobody, and I say literally nobody, looked all over there and
decided, "Now we are going to do this this way."
DR. STEWART:
of emphasis.

The things happened step by step,

I think I should comment on that.

There is a difference

I think Ben Strong deliberately built himself a political machine,

consisting in part of the Governors of all the banks.

He was perfectly aware of

what the issues between the banking system and the Board were.
ceeded with intent to do this.
CHAIRMAN SPROUL:
DR. STEWART:

I think he believed it was the right way to do it.

He was the man to do it.

So I don't know how much a

matter of the conscious you want this whole thing to be.
CHAIRMAN SPROUL:
there.

(Laughter)

He spent a good deal of time in Washington, living

He had living quarters there.
DR. STEWART:

And made a great point of cultivating Mr. Mellon, and not

cultivating Mr. Crissinger.

I think he pro-

DR. CHANDLER:

I think also to go back to a point that Cyril James

made earlier, there were at least some instances in which these things were
planned out deliberately far in advance, and where the decisions weren't just
sort of forced on by events.

For example, on many of these things Strong was

looking years and years into the future, and taking step after step to achieve
this objective, such as, for example, the one of getting the rest of the world
in debt to New York so that they could then run their monetary policy by regulating the inflow and outflow of short term credit to New York.
by any means unplanned, as far as he was concerned.

This wasn't

It didn't occur as rapidly

as he wanted.
CHAIRMAN SPROUL:

We are still working on it.

(Laughter)
DR. BOPP:

The next period is the Federal Reserve and deflation.

"Analysis of events during the period and of Federal Reserve
policies. A satisfactory treatment would include not only actual
Federal Reserve actions but a close scrutiny of the changing role
of Treasury financing, of basic philosophy and theory of the public
at that time, and of the Federal Reserve officials. It would also
include a detailed analysis of the process of decision-making and
of the theories and objectives, explicit and implicit, of those
who engage in the process."
CHAIRMAN SPROUL:
MR. RIEFLER:

Any comments or questions on that?

That ought to be pretty broad.

That could include the

War Finance Corporation.
CHAIRMAN SPROUL;

That whole Congressional inquiry?

p. 30
MR. RIEFLER:

„

t t

Yes.

That I*
e eXP6rienCe that

about twice a year.
CHAIRMAN SPROUL:

And he

was

always right

° « « * ~ e — over to ten me

DR. BOPP:

Then No. 5:

"The search for appropriate peacetime organizations and
policies - 1921 to 1929. This period will have a number of themes
and subthemes which are sometimes woven together and sometimes not.
Among the major problems were the following:
"a. The struggle toward a basic philosophy of central banking: the conflict between the old commercial loan theory which
would have prescribed a passive approach and the theory of positive
control which would often require actions directly in conflict with
those appropriate to the commercial loan theory.
"b. Changes in the methods of" business financing and their
impact upon the character of commercial-bank earning assets and
upon the volume of brokers' loans. The need for secondary reserve
assets as a factor in the growth of loans from non-banking lenders
to the market.
"c. The role of gold in the System: the continued allegiance
to the international gold standard as an ultimate ideal, coupled
with actions that were, at least in the short run, in direct violation of the rules of the gold standard game but sometimes with the
intent to reestablish the gold standard internationally.
Tl
d. The frequent conflict of more immediate guides or objectives: the objective of reestablishing an international gold
standard and of promoting recovery abroad, the accommodation of
commerce, industry and agriculture at reasonable interest rates,
a positive policy of stabilizing business conditions, price stabilization, the development of New York as an international
financial center, the control of speculation on the stock exchange."

DR. STEWART:
the outline is here.

I am not quite certain that I know what the function of

I recognize the peg on which this is hung:

guidance to the

Committee and thinking about the nature of the history, I take it, more than
guidance to the author.

And therefore the things listed are not intended to be

inclusive of everything, but suggestive of the range of things.
DR. BOPP: Yes.
p. 31
MR. RIEFLER:

The heading, "Searth for appropriate peacetime organizations,"

I d b ' t think that is really

quite

the true emphasis.

I think what really happened

that period was the discovery of effective operating techniques on the
basis of actual experience..

n ft

P./32.
te role of open market in relation to discount operations,was worked out. We found
At in this period relationships we hadn't known existed during the war.
DR. JAMES: It isn't really peacetime organizations and practices, it
is the assumption of the responsibility for conducting the entire national monetary orchestra.

Really the impact in this period partly resulted in changing

domestic finance, but it is continuously to be comprehended by the fact that
the Federal Reserve System finds itself suddenly, partly from Strong's desire,
and partly from deterministic forces, at the center of the whole international
pattern.
DR. STEWART:

That ideologically is true, and in terms of operating

technique it is true for I should think part of the period.

But you see it is "

that period that you break more or less in the middle, before you get England's
return to the gold standard, and you don't deal with the French until later.
And while discussion was taking place, and preparations perhaps being made in
that sense, the actual operating function of the System as an international
monetary machine was only something envisaged.
DRO JAMES:

It was not in operation.

I am thinking rather of short term balances before the --

DR. STEWART:

Short term balances in London.

MR. BURGESS:

There was a lot said about the acceptance market, a lot

of boloney, and a strong effort to develop that.

There was certainly beginning

in !23 or '24, I think '24 really, a desire to lean to easy money here to
facilitate the recovery abroad.

But aside from those, the major determinants

were the discovery that open market operations didn't directly raise or lower
the total volume of credit but affected the discounts.
development of domestic monetary policy.

This is a whole mass of

MR. RIEFLER:

Doesn't it take in tvro or three things?

First, this would be the coming

of age of the Federal Reserve. There is one theme that runs through, namely the
appropriate role 6f the Federal Reserve in relation to domestic stabilization.
jthere is the theme of promoting the reconstruction of the world economy.
•Reserve was a key participant in that.

Then

The Federal

It is comparable to the role of the Marshall

Plan in the postwar world this time.
DR. JAMES:
MR. RIEELER:

It is hard to get all the threads together.

It has always seemed to

me that one of the developments that happened during that period, the obsolescence of
intellectual respect for the commercial loan theory, was a deterioration of the
quality of bank assets.

The surprising or shocking event of 1930 was to find that as

small a contraction in the economy as was experienced by 1930 was accompanied by a sharp
.se in bank failures all over the country.

Something happened to bank assets in that

time that ought to be noted if you are going to lay any base for understanding the
troubles of the thirties.

the thirties.
DR. STEWART:

I think that may be the key.

The nature of the think-

ing that was taking place, in contrast with the events that were occurring, was
developing a gapo

The thinking officially about the acceptance money.

There

was an isolationist attitude politically, but actually New York, from the
standpoint of its financial activity, was about as far from being isolationist
as you can think of:

the advent of the Dawes Plan, the Young Plan, the partners

of Morgan being represented in it, and then the Federal Reserve not being able
to take membership in the institution that was created.

So that underneath some

kind of thinking, and therefore somewhat obscure, was the great major fact of

the capitalization of the corporate securities at higher levels and larger
amounts of credit.
So that the very thought of stabilization of "business was itself a
deterrent for exercising control over the securities market.

There were two or

three years there where people said, "Oh, My God, you mustn't do this because
you will hurt business."

Somewhere in there lies an extremely interesting set

of conflicting intellectual ideological notions and ideas.
DR. CHANDLER:

Right along with that too, as you develop the stabiliza-

tion practices in the Federal Reserve System, and they were thinking more and
more in terms of national control, there was still this hope, at least on the
part of some people, that before long you would get back to an international
gold standard where you could rely on automatic factors.

So there is definitely

a conflict there.
DR. STEWART:
DR. BOPP:

A wonderful period.

Meanwhile, that led into such activities as paying off gold

certificates in order to reduce the reserve rates so the public wouldn't press
too hard for inflation.
CHAIRMAN SPROUL:

I think this discussion has indicated that in the

main heading under 5, the search should be about the development, not the development for appropriate peacetime organizations and policies, but taking into account
these broader questions of domestic and international import.
DR, CHANDLER:

I think the reason that we put that word "search" in

there was because we had a feeling that although much was accomplished, that they
were still searching in 1929 for some sort of an ultimate method of operation.

CHAIRMAN SPROUL:
(Laughter)

Still are.

p. 35
MR. RIEFLER:

When you take this up in relation to the broader setting of inter-

n^ional stabilization, the broad idea, as I understand it, was that central banks
and investment bankers like Morgan and Comapny could get finance in shape (l) by
getting budgets balanced, and (^) by getting the Treasuries out of the central banks
by refinancing their loans, at the central banks in the market, both at home and in
N.I.

The3e maneuvers could get the currency stable, and eliminate part of the chaos in

the international economy.
Then the other part of the program was —

I think it was the general concensus—

that with financial stability, the government could move, parijpassu, toward
reduction of trade barriers, reduction of tariffs. That was the ideology back of
that whole program.
Just from memory, I remember how sick I felt in 1927, when Norman gave out a
statement about it being the time to drop tariffs, and Coolidge immediately went out
and met the press and said, "The United States is not going to touch the tariff."
I think you have to get those threads into this to paint the whole }icture.
That is a much broader concept than just the concept of the restoration of a gold
standard.

It is a much more basic concept.
CHAIRMAN SPROUL:

As between search and development, it had always

seemed to me that there was a signal post in the development of ideas in the
1923 annual report of the Federal Reserve Board, which went "beyond search and
was development.
MR. RIEFLER:
DR. JAMES:

Yes.
In fact there wasn't too much searching, because in each

stage through this there was a confidence that it had been found.

(Laughter)
DR. STEWART:

A perfect rationalization.

CHAIRMAN SPROUL:

Do you want to take up "e" and "f" Karl?

36
DRO BOPP: "e. The evolution of instruments of Federal
Reserve policy: changes in both the techniques and relative
importance of instruments such as the discount rate, moral
suasion of various types, open market operations, international
stabilization credits, development of the "factor analysis" of
the money market - member bank reserves and related items.
This investigation will necessarily involve the procedures for
arriving at decisions and the location of control
"f. The process of decision-making and the location of
control: this analysis will highlight the fact that the original
theory of the Act - that there would be at least the possibility
of separate credit policies for the various regions -- came under
closer scrutiny and was accompanied by many conflicts between
the Federal Reserve Board and the regional Banks, but also the
question as to whether and to what extent a centralized control
should be exercised by the Federal Reserve Board or by centralized associations formed by the regional Banks. The weakening of the influence of the Federal Reserve Bank of New York and
the increase of the influence of the Federal Reserve Board following the death of Strong."
CHAIRMAN SPROUL:

Any comments or questions on that?

Go ahead with 6, Karl.
DRO BOPP:

It is from here on that some of this may seem more in the

form of conclusions than in the form of questions.
"Federal Reserve actions in a period of deflation and
breakdown - 1929 to 1933.
"In analyzing this period the following important things
should be stressed and interrelated;
"a. The prevailing philosophy of the public at large,
the Government, and Federal Reserve officials as to the responsibility of the central bank and of the Government in
dealing with conditions in such a period.
"b. 'Sound money' beliefs carried over from the pre-1914
days that 'currency manipulation' should not be used in an
attempt to bring about revival, overlooking the fact that a
currency must necessarily be managed with respect to some
criteria of stability when it is no longer managed with respect to the gold reserves.
"c. Lack of grasp of America's place in the world financial structure. Belief that the United States must adjust to
world monetary conditions and could do little to determine
them.

37
"d. The persistence of the belief that the United States
could take no positive action to halt deflation even after the
international gold standard had ceased to exist and most countries of the world had adopted national currency policies.
International developments such as the cessation of foreign
loans, international financial panics, "breakdown of gold standards, wide changes in exchange rates, etc.
"e. Business cycle indoctrination which stressed the idea
that the forces of depression were fundamentally non-monetary
and that monetary measures could play little part in "bringing
about recovery.
"f. On the other hand, there was a latent tradition, sometimes referred to as Bryanism, that monetary action was vital
in restoring prosperity. But the monetary procedure contemplated was not primarily central "banking procedure.
"g. The tradition of "business cycle theory that depression was healing and "beneficent and not degenerative and leading
to crack-up. This tradition regarded deliberate monetary expansion to shorten the 'recuperative: period as harmful,
"h. But with the deepening of the depression, the growing
popularity of the belief that there were inherent forces in a
capitalistic society making for stagnation and blocking the
technical possibilities for much higher living standards. This
point of view looked toward fundamental changes in the rules in
the economic organization for the most part rather than monetary
procedures.
"i. The decline in availability of bankable assets as the
depression deepened, indicating the vulnerability to contraction
of a monetary system that issues money against debts. The vicious
circle of monetary contraction and the decline in the safety of
debts and the willingness to go into debt except by distress
borrowers, proneness of American banking structure to failure,
role of restrictive legislation, such as the collateral requirements behind Federal Reserve notes and restrictions of eligibility of paper for discount. The resulting lack of responsiveness
of the economy to central banking measures for expansion.
11

j. The diminishing tolerance of the economy for severe
liquidation."
DR. STEWART:

It would like to say for my part I think that is less

satisfactory than the preceding sections.
you have stated them as conclusions.
attach datelines.

I don't believe it is just because

I find it difficult in some of these to

They seem to be true, but I don't see why they should fall

38
particularly in this period.

There are so many things in '29, '30 and '31,

even "before you get to "h", deep in the depression, which seem to me not to be
things" that were learned, observed, experienced, that we felt the impact of,
which I don't see described in "a" to "g".

"a" to "g", I agree with, I don't

quite see the timing factor in it.

•

JfL

p. 38
MR. RIEFLER:

"B-l" is much moreappropriate in reference to 1921. That is just

what Strong expeessed in Congress
MR. BURGESS:
MR. RIEFLER:

Letter "c", I think Mr. Hoower had something to do with that. It

wasn't at all prevalent within the System.
that.

It wasn't within the System.
DR. STEWART:

I think there needs to be more sense of struggle there.

I think inside the System there wasn't this lack of recognition of these problems.

It was a constant struggle to try to perfect them.
DR. JAMES:

Isn't the watershed of '33 really as you say, within the

System, and to a certain extent within the White House?

Up to 1933, there was

a real struggle to meet this deepening depression by traditional central banking means, and after ? 33, the balance swung over to meeting it by political
means.
MRO RIEFLER:

Well, the Reconstruction Finance Corporation was or-

ganized in October, '31, and it was put up to Hoover long before then.
MR. BURGESS:

I think the failure of the R. F. C. to appreciate the

of the job had its impact.
P. 38

HBIM^^^MM*^
.3 ^-u^11+ -hhat: I remember going over

RIEFLER:

I v a s ,wfS,,.
mS awf
ully excited about that- T

p. 39
Senator Couaens* Mediately said, "you don't propose to lend on bad assets, do you,
• S Meyer?"

He responded, "Of course not, everything has to be sound."

rpember registering it.

And I

It ca-e to me through a remark that Walter once made that

jLitments made at Committee hearings seriously impair effective action later. I had
a sneaking feeling at the tiae that he couldn't take that commitment, but he had to
get that bill through.

Certainly one basic reason for the inability of the R. F. C.

subsequently was the fact that they were sucking the sound assets out of the banks
and leaving the remaining deposits with no sound assets back of them.

That came

right out of those hearings.
DR. STEWART:

I don't believe we have anywhere a proper appraisal of

this period in terms of the effort or the growth of ideas.

That is why it is

so important to grow something up out of this, so that you have a sense of its
coming right up.
DR. JAMES:

I have always had a feeling too that by the summer of

1932 the effort had very largely succeeded, and if it hadn't been for the
admixture of political things in the election campaign at the end of that year,
the result might have been different.
-^^^^^^^^^M^^fca-.
p. 39
MR. RIEFLER:

You have got to trace the development of ideas running parallel *itb those

of the Federal Reserve with respect to its monetary policies, ideal as to the
role of the examination system and to its procedures.

The theory at the time

was that the examiners examined banks, and if they were in difficulty, ffl/ closed
them to protect depositors before the capital was eroded.

MR. BURGESS:....(
MR. RIEFLER:

And what happened was that that very fixed and rigid procedure kept

clumping the money market to pieces. You should trace the evolution of the idea
at the proper procedure was to keep the ban* open and in being, not to close it
and sell it

41
MRO BURGESS: Who wrote it?
DR. CHANDLER:

I don't know who wrote it, but it was signed by the

Governor of the bank and sent to the Board.
DRO BOPP:

Then there was an attempt during this period to in a sense

keep the Federal Reserve pure and clean. For example, the early Hoover proposals which were to organize other institutions to take over sound assets of
banks, etc., but not have them eligible for collateral loans at the Federal
Reserve Banks, and so on. The suggestion of some slight modification in
eligibility requirements.

\\A.Vo\\/e<$

MR. RIEFLER : No, that isn't the right interpretation. I remember that theory
quite well.

It was that if your problem involved losses in bailing out risk

actuations, then those losses should fall on the treasury with its taxing power and
not on the central bank. And so the R. F. C. was orga&ized and operated in coordination
with the central bank. It is a1 qnite different theory.
.

was tiiei'b! lib I a general idea in the financial and business

world at that time that you didn't deal with a depression by tinkering with the
currency by monetary expansion?
MR. BURGESS:

I don't think so. There was a strong feeling that the

budget should be balanced, the argument that even at the bottom you should try
to balance your budget.
MR. RIEFLER:

Yes, but they took the R. F. C

CHAIRMAN SPROUL:

out of the budget.

I think there was some idea in business and banking

circles of the healthy characteristic of a depression, but I don't think that
should be pinned on the Federal Reserve System as an idea to which it had
adhered in considering its responsibilities during that period.

p. 4.0
\9 either by putting in money through the F. R. C. loans, or through purchases
of preferred stock or something else. Thetauthorities had to think through, crucially,
a new idea.
•

LIKO

wuuui—i am Tne one who wrote a gooa aeai or xnis nere.

thinking broadly that we did have a liquidity of crisis in '32 and

i was

33. Some

of these sound money beliefs; for instance, A. C. Miller's* testimony that you
shouldn't use open market operations when you had declining business. I think
there was quite a little evidence given that to expand credit, or we might
call it now, to cause the creation of money, in an unsound business situation
might simply make an unsound situation more unsound.

I think you had quite a

revolution of ideas down to '33 and then after '33.
MR. BURGESS:

Of course, Miller at that time was fighting his old

battle against the New York Bank, because the New York Bank was partly in the
lead in getting the new legislation in February, 1932, to change the status
of the Government securities as collateral.

That opened the way for the buying

of a billion dollars of Government securities from March to June, a very vigorous
operation.
sense.

Miller didn't like that because it was done over his protest, in a

But the System was solidly behind the use of open market operations to

meet a crisis of that sort.
DR. CHANDLER:

Only last week I saw a memorandum written in the New

York Bank in early 1930 to the effect that the System ought to engage in the
purchase of approximately $50,000,000 worth of Government securities every week
until all the banks were out of debt and even had some excess reserves. And it
was approximately two years later that the policy was adopted.

So that I think

this kind of thing would be a useful addition to the outline, indicating that
there was differences of opinion in the System and some were moving in that
direction more rapidly than others.

To identify, see Appendix.

P . 42
P.IEFLER:

There was the idea that the central bank needed utmost public confidence

in the soundness of its assets, and that the Treasury should carry the risks.

Government securities and the Treasury taking risk.
MR. BURGESS:

Of course that whole question came up after the opening

of the banks in March, '33* as to how you filled that capital gap, and the
mechanism of doing it.

The battle was to get that done. Finally it was the

R. F. C. with its capital notes and so on.

The Federal Reserve after all at

p. A2
MR. RIEFLER:

I remember very well in 1931 when the Anschluss cane, and Luther was

flying around Europe to borrow $500,000,000. This was a much bigger credit than the
capital of the Federal Reserve Banks, and there was the idea that therefore it was
proper for the reserve banks to underwrite the credit.

I think it was an

erroneous idee but there was that kind of an idea with respect to the

capital

structure of the reserve banks.
c m n g we maite unt: s~roc.K. innrKBT, break

sound as if it were the persistent fact.

The main characteristic of the period

is that we were always behind the event.

The event was moving faster than men

were able to move, and that in part was because they underrated the basic illness of the community.

They thought it was the stock market break, and there-

fore it ought to be able to readjust itself, and the over-extensions had worked
their way down much more seriously.
MRO BURGESS:

So the tragedy is the '31 to '33 period.

The one interesting point to hinge that on was the in-

crease in discount rate at the end of September, 1931 j where the debate was,
now should we at this stage of terrific deflation and loss of gold take the
traditional action of raising the discount rate, or should we discount freely
*

To identify, see Appendix.

and pour out money and offset it?

The limiting factor there was the fact that

you couldn't "buy government securities because you were right up against the
security of the margin of collateral of the Federal Reserve notes. But the
decision as to whether to raise that discount rate had to be made and the
dominating idea there was, well, England went off the gold standard with a discount rate of 2 per cent.

Now should we be forced off here, with a low dis-

count rate, when tradition calls for a higher rate?
DR. STEWART:

With the French taking gold.

„__

p. 43
MR. EIEFLER:: I have always thought that if the authorities had known how to handle
the failure of the Bank of Kentuck and the Bank of the United States, there would
have been s. turning point in the fall of 1930. I wouldn't pat it in '32. The
failure to handle those two situations set the pattern of the credit liquidation that
it on subsequently and eventually brought down everything.
York Banking community that it would be a very helpful thing if these two banks
could be liquidated out and 'draw a circle around them and save the soundness of
the structure" a thing that many of us fought as hard as we could.
Now that isn't an instance of the theory about money.

That was that

these banks were bad banks and this is an opportunity to cut them out of the
structure.

And they were bad banks.

DR. CHANDLER:

Maybe the language here isn't exactly appropriate, but

when I tried to imagine what we would do today if we had a repetition of 1929 >
1930 and '31, the contrast between what was done then and what we would do
today makes it seem like another age completely.
MR. BURGESS:
DR. CHANDLER:
and policy.

That's right.
Something has happened that has revolutionized ideas

DR. STEWART:

We could handle 1929 and '31 most effectively today.

I am not sure we could handle 1956 as effectively.
DR. JAMES:
ing about.

You have put your finger on the point I have been think-

1931 is a stronger division of these two periods than 1929.

That

is really the time, as Walter said, when events started racing ahead as we
never quite caught up.
MRO BURGESS:

Remember that Herbert Hoover got together the utility

companies in 1930 and urged upon them a big expansion program, which they to
some degree adopted.
DRO JAMES:

I would go along with '30, but it isn't '29.

DR. STEWART:

This is more important than the period we spoke of, of

the Federal Reserve coming of age.
DRO CHANDLER:

This we need to know.

In a list of incidents and controversies and that kind

of thine in this nfvriod that might be dealt witho

p. 44MR. RIEFLEfi: Exactly what were the incidents, what were the propositions made?

Meyer*

tells the story about how he went to Hoover in 1930 and said, "You have got to cancel
the Allied war debts." And Hoover refused.

Then he went bakk and put a motion

that if the if the proposal came later to bail them out, he would refuse. He tells
that story.
i*in.

the people, "There is a hell of a storm coming, you'd better get liquid."
(Laughter)
I know a specific instance of that. We got in the bank and said,
"By God, there is a storm coming and you better get yourself liquid."
DR0 CHANDLER:

That indicates that there was at least one man who

might be tagged with the attitudes described here.

(Laughter)

P. 45
,

th>

thit

to adjust the debts.

^
MR. BURGESS:

Of course, the

nria

"mi

be the character of the approach of the R. F. C. to its problem.

You find a

memorandum that says the R. F. C= should practically draw a line, we are not
going to let the R. F. C. go beyond thiso

At the time they were lending a

dollar for every two dollars of assets.

j
p. A5
MR. RIEFLER:

That was the commitment to Couzens* I mentioned earlier.

That is where

they got committed to that conservative banking committee.

PE.^HANDLER:.. .(A»~*MR. RIEFLER:

^^JL^KJUUOL^)

It is full of them if you would study that period, and really cull it

> factual history.

Miller* attempted to change the R. F. C. procedure from a

lending operation on sound assets to a preferred stock subscription operation, but
Qgden jdills*turned it down.

That seems to me one of the crucial wrong decisions*

DR. CHANDLER;

As I look at this period, it seems to me there was

also a failure to see that assistance to banks was: really assistance to the
whole economy too.

Today I think there would be an attitude that we don't

save banks as banks, but you save them because the whole economy will go to
pieces if you don't,
p. 45
MR RIEFLER:

There wasn't a failure to see that.

The problem was a moral problem, bow

Mich do you bail out stockholders and take losses for bad loans they should not have
m ade.

That was the moral problem that the authorities were trying to see their way

through.

And that is why Traylor* and ttiller*_came up with the idea that
*

To identify, see Appendix.

p . 4-6
the R.F.C. subscribed to preferred stock in a weak bank, it would keep the bank
in operation as a going concern, keep the mon ey supply available to the economy,
still
from bad lending^
andXLet the losses* whatever they were, fall on the stockholders who were really responsible.
MRO BURGESS:

Then there was a terrific argument just after the bank

closing in connection with the bank opening, of the formula to be used in opening, whether you open them all, or 50 per cent, immediately have deposits to
work on, and then determine as you go along how much of the deposits have good
assets back of them, or whether you open up just the good banks.
thought was, we will just open the good banks„

That meant three or four thou-

sand banks closed; the effect on the community was terrific.
that much volume of credit.

And the

You just cut off

I don't know what it was, whether it was 15 or

20 per cent of the country's total volume of available credit.

That accounted,

in my mind, for the slowness of the recovery.
DR. CHANDLER:

It is this kind of thing that I have in mind, because

my guess is that faced with the same kind of thing today, there would be a
tendency to open all the banks, not because of consideration for the bankers,
but because of consideration for the public as a whole.
p. 46
MR. RIEFLER:

It was really the absence of a technique, it was not a gap in the thinking.

Take the situation in October, 1930, when the Bank of Kentucky and the c ank of the United
States began to go under.

They were rotten banks, rife with dirt, indulging in security

manipulations and real estate manipulations.
reaction:

In those situations there was a direct moral

that we ought not to bail out all those lousy stockholders; that they ought to bear

the losses.

which persists somewhat to the present day, that if a bank becomes insolvent
^v

on the basis of quotations on various boards and markets, you close it.

47
It seems to me two thoughts or ideas have come out of this discussion
of this particular section from this group.

One is that the period ought to be

divided into one that would take account more clearly of the development of
events.

And second that "both were periods of struggle of ideas as between old

methods, orthodox methods, and new methods of dealing with inflation and depression, and that it was not all what might be implied here, what Major Angas*
referred to as paralysis in a blizzard.
MR. RIEFLER:

You certainly want to know the whole history of the war

debt controversies, and who putywhat propositionsmp)
CHAIRMAN SPROUL:

That is the conflict of ideas of various things.

It wasn't all one way.
MR. RIEFLER:

Don't you need a detailed search for facts?

The credit

Anstalt, and the Anschluss, and the Luther story.
DR. STEWART:

I was wondering whether this period might not lend

itself to commissions and studies which would be of help to the author, because
it is so inadequately studied that it would be conceivable that somebody could
lay out maybe half a dozen studies here, where under some editorial guidance,
it could deal with this period.

A single man taking on this, and then having

to work with the basic job, would have a large assignment.
MR. RIEFLER:

There can be a number of participants, mm

someone

becoming the key participant.
DR. STEWART:

One of the preliminaries of the development of a scandal

nearly always is the ominous character of the scandal, something that is first
heard of, then is quiet for awhile, then grows.
that happens at the end.
not part of the story.

It is a common mistake to treat these as if they were
I think they are perfectly genuine parts.

To identify, see Appendix.

The other is a political change

If you find a major scandal in the field of finance, you ought to "be
put on notice that maybe underneath this there are a lot of other things that
you ought to give attention to.
CHAIRMAN SPROUL:

Then you von't ride off on a moral high horse.

Maybe like the crash in silk in Japan in 1920 and

the Credit Anstalt in Austria?
DR. STEWART:

Yes.

The financial crisis in London.

DRO WHiLITS:

Walter, I have no right to speak on a subject about

which I am not only behind the events but the events are so far beyond me, outside of my sphere.

But sitting here, the sense of your statement that it would

be almost an impossible task for one individual, especially if he be an individual who hasn't lived through it, to try to grasp it all, is just beyond
question.

He can't do it.

I remember sitting with Henry Clay just about a

year ago.

He had the diary of Montagu Norman, and Henry would turn over a

page, during this same period, 1929-33, and he would give me a lecture on all
the things back of it, all based on a little note in Norman's handwriting.
Henry knew it all.
necessary.

But

To do it all with that kind of intimacy and knowledge is

It seems to me it has to be broken down somewhere, at least look-

ing at it as an outsider, and then that breakdown needs to be reviewed by the
kind of awareness of events and the meaning of things that is here in this
Committee.
That is purely an outside reaction, and a uninformed reaction.
CHAIRMAN SPROUL:

I think you will have to quit taking cover under

that "outside and uninformed."
DR. WILLITS:

You are inside and informed.

Pretty soon you will call me a banker.

I think I need

a little more input before I engage in any more output.
^m^

CHAIRMAN SPROUL:

I think this is a convenient point to break up

while they rearrange this room for luncheon.

(Luncheon recess at 12:00 noon.)
(Afternoon sesssion to commence at 2:40 P.M.)

AFTERNOON SESSION

CHAIRMAN SPROUL:

Resuming our discussion with our consultants,

I think we had gotten down to 7, on page 5, Karln
DR. BOPP:

That's correct.

I might say that although we were in a

sense a bit apologetic about No. 6, I think in retrospect I wouldn't apologize
at all,
CHAIRMAN SPROUL:

Did it take you two hours to think up that rebuttal?

(Laughter)
DR. BOPP:

I am rather hopeful that we will be able to continue in

that fashion on No. 7, which concerns Federal Reserve policy from the banking
crisis of '33-to our entry into World War II.
"Federal Reserve policy from the banking crisis of 1933 to
our entry into World War II - 1933 to 1941.
"The treatment of this period should trace the disillusion
of the public and the despair that existing thinking and institutions could provide an adequate solution. It would combine a
discussion of actual Federal Reserve policies with a description
and analysis of the very important changes in the legislation
relating to the Federal Reserve System. It would try to trace
out all the lines of development that culminated in actual or
proposed changes in the basic law and in the actual structure
and operation of the System.
"Early Recovery Period"
"a. Belief that monetary measures must be mainly outside
central banking procedures„ (Preparation for the issue of script
an extreme instance of blindness to central banking possibilities.)
Due partly to lack of understanding of central banking; partly to
the loss of prestige of the Federal Reserve during the crisis; and
to the historical traditions regarding money or leading groups
sponsoring monetary expansion. (For instance, looking back to
bimetallism and to greenbacks in the Thomas Amendment.) Establishment of new institutions and procedures, such as deposit insurance,
R. F. C , and so on.

/ —v

"b. The loss of confidence in business leaders which came
with the collapse resulted in greater receptiveness to reform
legislation. The popular attitude that greed and dishonesty were
in great part responsible for the collapse emphasized the necessity of "driving the money changers from the temples" and diverted
attention from the monetary aspects of the collapse.

"co Closely related was the idea that the failure to curb
speculation by denying credit to speculators specifically was
an important cause of the collapse. This belief led not only
to reform legislation, but to the search for selective monetary
controls; and it made central banking policy very sensitive to
a rise of stock prices down to the present day.
"d. The continued misunderstanding of the place of the
United States in the world financial structure was evidenced
by some attempt at competitive devaluation. The problem of
providing dollars was complicated by the protectionism of
strong pressure groups."
CHAIRMAN SPROUL:

Any comments, suggestions or questions?

We have the

word of our consultants that we are a very stimulating group, and we all expect
some more stimulation.
MR. BURGESS:

I wonder how much of this was really due to this change

in public thinking, and how much of it was politics, which rationalized itself
by the first of the very important changes in the Reserve System.
they were as important as they seemed.

I wonder if

The big change, it seems to me, was one

of thinking; that is, the Banking Acts of '33 ancl '35 actually made less difference in the operation of the System than they are given credit for.

It already

had changed in 1932, which freed open market operations by limitations of
collateral on notes, which made Lombards* possible.

There was, of course, the

F. D. I. C , and the Securities and Exchange Act, and the control of margin
requirements.

Politics exaggerated all those things.

DR. JAMES:

Isn't this really a period in which the old idea of

economics and business was something separate from government, and about to
give place to the modern world where the government is completely intermingled
with business?

So there is really a change in philosophy, which as you say

is partially politics.

To identify, see Appendix-

51
P

MR. RIEFLER: Actually we are making a t e r r i b l e mistake, to put the main stress on the early re
covery period in terms of ideas.

I t was a period of milling action.

to open, you had to get things in shape.

You had a l l the banks

You had to get those deposits in the closed banks

freed again so that they could perform their money function.

I would think that that period

ought to be dealt with in terms of feverish a c t i v i t y , not in terms of shifts of ideas about
the Government staying out, or the Government getting i n ; that i s almost peripheral.
was a busy period, people working a l l over the place.

There wasn't any question ebout the

Government giCGQffigXIiqpC being i n , i t was in to the h i l t .

I t was the problem of deciding what

was going to be done.
CHAIRMAN SPROUL:

We have to remember we are talking here primarily

about a history of the Federal Reserve System, then think of treating some of
the other things as collateral.
MR. RIEFLER:

Getting the banks opened, getting the deposits freed.

CHAIRMAN SPROUL:

Getting the banking system to working again.

Eitr^ You had that weird period of changing the price of gold.
DRO JAMES:

Yes, and you had the gold block coming out of^ the L.onaon

Economic Conference.
CHAIRMAN SPROUL:

The most important underlying theme here is the

growing acceptance of the idea of Government participation in the economic
sphere, and I think that ties in quite closely with, any history of the Federal
Reserve System, because I look on it as a successful example of Government and
private collaboration in a primarily Government function, with the Government
having the dominant voice, but with some private influence and interest being
heard and giving counsel and making their contribution.

I think the underly-

ing idea is the acceptance of Government as the prime mover in economic
affairs.

52
DR. JAMES:

And isn't this the period when a lot of emphasis shifts

back from the banks to the Board?
CHAIRMAN SPROUL:

I think both growing out of legislation and changes

in personalities, there was a shift of influence from the banks to the Board.
There was also a shift of influence from the banks and the Board beginning then
with the Federal Open Market Committee.
MR. RIEFLER:

And also the Treasury.

DRO STEWART:

The period that Bob Warren*used to refer to as the time

when there were no involuntary muscles.
(Laughter)
The sense of emergency was so dominant, something had to be done
always -- action.

It does fall on action, emergency.

This was the period when

the Treasury took over foreign exchange, isn't it?
CHAIRMAN SPROUL:
MR. RIEFLER:

This is when they began to, yes.

I would think that with the jigglings of the price of

gold -CHAIRMAN SPROUL:

Beginning in '33.

MRO RIEFLER:

The Treasury moved in.

MR. BURGESS:

The Government moving in, in an area that had been more

private, and acting without too much thought, seizing the gold thing, one thing
after another.

It wasn't a change in public thinking so much as an emergency

rushing in, taking over the gold from the Federal Reserve.

I think the amazing

thing really is that we were able to survive that period in the System with as
modest changes in the structure as there were,

It could well have been a com-

plete change in the Reserve System, or a taking over of private banking.
^^

number of changes made in the banking system were pretty modest.
few actual changes made.
*

There were

There was tremendous sound and fury about bringing

To identify, see Appendix.

The

53
to the bar of justice, and we are fortunate that there were as few structural
changes as there were.

But the specific things that were done, again I agree,

were a good deal a matter of seizing on the immediate things that turned up.
Some pressure group gets hold of an idea.
DR. JAMES:

You really need to divide the period at about '36. This

terrific rush to '36, then it begins to settle down.
MR. BURGESS:

Yes. Of course, there is the episode in which

President Roosevelt threatened the Reserve System that if they didn't buy in
the open market in '33 he would use the power of the Thomas Amendment to dissolve them.

That was symptomatic,

They regarded it, of course, as revolu-

tionary change.
DR. STEWART:
_^

I saw something of the Treasury during those days, and

I became convinced that they were literally frightened of the banks„
wasn't something they were working up.
was, has it any connection with Morgan?

This

The first question they always asked
And I thought it was exclusively

politics.
I think it is going to be hard to write this and give a proper allowance for Treasury view, or for Federal Reserve history.
MR. RIEFLER:

Jack Viner* would be able to cover that.

DR. STEWART:

Yes, indeed.

And certainly there is the Treasury and

the Federal Reserve in that period, I think, rather than primarily the New York
Bank and the Board.
- 1 4 - " T ai-m<~>Q+ ^ntirelv Treasury;

IMR. RIEFLER: The tri-partite activity vas aOaost entirely Treasury; Merle Cochran* can t e l l
about those operations.
^•^

To identify, see Appendix.

DR. STEWART:

Merle is someone who would have some correspondence and

notes on thiso
MRO RIEFLER:

.<,„.. the avalanche of gold.

DR. STEWARTs

When was the avalanche of gold?

When does the big

movement set in?
MRn RIEFLER:

'36.

DR. STEWART:

And it runs all through?

MR. RIEFLER:

Then you have the Treasury starting to sterilize.

CHAIRMAN SPROULs
Treasury.

I think you are right about your timing on the

I think you are quite right, Mr. Stewart, about it being as much

personalities as politics, and it being the Treasury versus the System rather
than versus the New York Bank or the Board separately.

An attempt was made to

establish relationships with the new Secretary of the Treasury, Mr. Morgenthau,
up in New York, which he interpreted as holding a gun to his head to try to
subordinate the Treasury to the System in general, and the New York Bank in
particular, and he never forgot it and referred to it from time to time, and
always had questions in his mind about anything connected with banks.
MRa BURGESS:

The symbol of this moving in of Treasury on the Federal

was the taking over of the gold by the Treasury.
MR. RIEFLER:

But the jiggling of the price of gold was much earlier

without notification to the System.
CHAIRMAN SPROUL:

But just notification, that was all.

p. 5A
MR. RIEFLER:

I remember Gene Black,* and others, saying what can we do to stop them?

I came

\up with the idea to try to divert it by concentrating on getting the deposits in closed banks
freed.

' •"—

Everybody had been neglecting that, so we thought....

To laenmy, see Appendix.

p. 55
U

- was a fine idea. We got Mort Buckner* down and organized the operation.

Wen

When it was

tot the President for aPProva*,he said in effect, that's fine, but ve are still going to

jiggle the price of gold.
(Laughter)
CHAIRMAN SPR0UL0.

We have had perhaps three general ideas with re-

spect to this section 1, that an earlier section might be split between 1923-26;
second, 1931, the merging of the Government and business in economic terms; and
third, most important from the standpoint of our specific subject, this shift of
responsibility and authority as between the System and the Treasury, and the
emphasis on actions which resulted in some of these developments.
DR. BOPP:

Then the later recovery period:

"a. Abandonment by the Administration of monetary action as
an important means of increasing general demand, and greater emphasis
upon fiscal policy, increase of farm income, and upon raising wages
and other labor income by nonmonetary means."

^^^^

P. 55
'MR. RIEFLER:

What does that mean, abandonment of monetary action?

I t wasn't abandoned,

kasy money didn't take hold partly because of lack of confidence.
DR. WOOD: I put that in, Mr. Metier,

and I vas thinking of a conversation I had vith Harvey

Rogers,* I can't remember the precise year, but i t was along in there, Just after the middle
of the t h i r t i e s .

He told me that the administration was not thinking of recovery in monetary

terms*
. RIEFLER:

If you have excess reserves equal to required reserves, you can't call that

andonment of monetary action.
e

The monetary action i s there in super-abundant quantity,

was a set of circumstances which required that other fonas be brought into play.

had in mind, say in getting the Thomas Amendment through, I would think.

To identify, see Appendix.

56
CHAIRMAN SPROUL:
conscious policy.

The piling up of those reserves was not an act of

It was a result of the gold inflow which the Government and

+>io rtirnip+.srvfl.nt.hnr1 t,ies accented "but didn't do anything to control or effect.
p. 56
fiMR. RIEFLER:

But if they were going to use monetary action, what they would do would be to

jcreate excess reserves.
CHAIRMAN SPRQUL2 It was there.

-MR
MR.

RIEFLER:

They were there. So it seems to me there wasn't a theory of abandonment. There

s a loss of faith in the effectiveness of excess reserves because such reserves were present

in a very high degree? and they weren't doing the job.
if "c" came first, and the word "abandonment" under "a" had substituted for it
" supp lement at ion" ?
MRO RIEFLER:
DRO BOPP:

Supplementation, that's the point.

I might read "c".

"c. Drop in interest rates to low level as the result of
historical accident rather than deliberate action. The drop in
long-term rates welcomed by the Federal Reserve, But the large
excess reserves, which were mainly responsible for the drop, regarded as a potential danger of inflation. This fear of inflation in the midst of semidepression characterized the attitude
of .the Federal Reserve until Pearl Harbor."
MR. RIEFLER:

Well, the drop in interest rate from 1929 to 1930 was

deliberate.
DR. BOPP:

This was the later recovery period.

MRO RIEFLER: Yes.
MRO BURGESS:

I don't know about that last sentence. They thought

that having all those reserves kicking around was going to get undesirable
usage -- I guess six billion dollars of excess reserves and the money rate down
^^

to one tenth of one per cent.

57
DRO BOPP:

Then this drop in rates at that time was a significant

drop, but in terms of more recent experience -- well,

that height is a

relative matter.
MR. BURGESS:

I think you would say that the focus of administration

recovery instruments was on other policies than monetary, partly because the
monetary thing wasn't working.
it didn't go to work.

You could throw any amount of money out, and

Partly because the bank credit had been destroyed by

the method of reopening the banks, in which billions of dollars of deposits
had been destroyed, and partially because there were so many other aspects of
the economy which were prostrate that had to be dealt with directly -- the
housing, the farm situation, the Federal Farm Mortgage job.

The emphasis had

to be elsewhere because the situation wasn't in that balance where the monetary

policy proved stimulating.
j
'^^^^^^^^^^
RIEFLER: The only effectiveness,it seems to me, was creating a market for u. S.

isecurities which made it easier to finance the deficit.

Those deficit expenditures were

Jstimulating,

_,_jrcu. o uj.

oiiau was u.ut; oo bnt; i;uiTTT^rn.±L liU± J! p U - L l u x e s , t h e

combination of reform and recovery.

They rushed in and scared every business-

man so that he didn't want to go to work on anything, and put these regulations
on the security market and the stock market.

All these reform measures com-

bined to hold back recovery, along with extinguishment of bank credit.
But I think that wasn't a deliberate policy; it was events again, a
whole vave of events.
DRO JAMES:

Isn't it probably the influx of Keynes: theory too, which

at the time was a lot talked about, that once you got easy money conditions, then
you begin using your money in these various policies?

I don't mean in the sense

of spending it, but your wage policy, price policy, was an attempt to get it in
circulation.

DR. BOPP: You have to put in active money in a sense.
DR. JAMES:

Yes.

It was activating the fund which was there.

MR. BURGESS: But it was true that the things which the right hand
was doing were checkmated by the things which the left hand was doing. Business confidence was thoroughly destroyed, so that no matter how easy you made
money, business didn:t pick up.

It had been destroyed by nature, but they

helped nature by giving it another blow under the jaw.
DR. JAMES:

I think psychologically you could almost believe in that

period that you didn't need business confidence.

Government would just press

the button and business would respond.
MR. BURGESS:

And it was a favorite sport to make fun of businessmen.

CHAIRMAN SPROUL:

By increasing consumer purchasing power by govern-

mental action, business would soon get confidence because they would have markets.
DRO STEWART:

I think the trick here was to keep the Federal Reserve

from going into cold storage.

There was this large reserve. The Treasury

moves in, and yet it can't really be said to take over the functions of central
banking, and it looks a little to me as if Federal Reserve functions were not
very active in the period.

Just how does one, then, tell the story from Federal

Reserve activity to a period in which Treasury is so dominant and influential,
and sketch in the outline of a business period?

The whole relation of credit

and banking in that period is not self-evident.
p. 58
MR. RIEFLER:

" """" ™

~"'~~ "'

If you are going into this on the basis of a history of ideas, it would seem to

. me the most important idea was the general loss of feeling that interest rates mattered.
was the big thing.

That

The community gradually got to the point wnere it felt that interest

~" tes didn't matter. I talked to Les about that in f 48. It was just baffling. <iood people
would get up and even if they didn't want to peg rates, they always would say that interest X
rates didn't matter.

59
MR. BURGESS:

The discount rates ceased to "be of value.

DR. WILLITS:

I remember in '35, a group of large retailers, sparked

"by Beardsley Ruml, came to the "Social Science Research Council" and "wanted to
have financed a commission that "was to inquire into the then incipient recovery,
and really to pronounce on the fact that a new system of going out of depressions had now been proven.

Later, in '37, I net with the chief person and asked

him, wouldn't it be nice to have the record come out just at this point?
(Laughter)
DR. BOPP: "do The shift in influence over monetary policy
toward the Treasury„ In part this was due to the new powers of the
Treasury over reserves directly, but mainly it was due to the influence acquired by the Administration during the-crisis and to the
loss of prestige by the Federal Reserve during the depression and
crisis.
"e. The policy of maintaining ;orderly markets1 in government
securities materialized during the restriction of 1937. Though
this did not imply pegging of rates, it marked a definite change
from the ideas of the twenties, when short rates were supposed to
be varied with respect to business conditions. After 1937 "the
Federal Reserve realized they would allow rates to drift within
wide limits and would intervene only to prevent sudden changes.
The Federal Reserve seemed by many to have become merely a check
collection agency. This policy of drift was partly the consequence
of the unfortunate events following the experiment in tightening in

1936-37.
"f. Pegging the Market: The policy of maintaining 'orderly
markets', though not at all contemplating the pegging of rates,
prepared the way psychologically and developed a procedure for
pegging. (The market became accustomed to the Federal Reserve's
interventions for the purpose of affecting security prices as
such.) The Treasury had decided on pegging many months before
Pearl Harbor. The Federal Reserve did not object to the 2 l/2 per
cent ceiling on the long-term rate, but objected to the rigidity
of the pattern. The Federal Reserve Bank of New York would have
preferred a higher long-term rate, but did not advocate raising
the ceiling in the situation existing when the rate was pegged."
MR. BURGESS:
serves?

What do you mean by new powers of the Treasury over re-

The Thomas Amendment, and the Agricultural Bill?
MR. RIEFLER:

The gold devaluation.

MR. BURGESS:
DR. WOOD:

The changing of the price of gold?

For instance, I "believe that after some of those meetings

where credit policy was affected, they had public announcement that this was
made "by the Treasury and the Federal Reserve together at a joint meeting.

think there were two such occasions.
CHAIRMAN SPROUL:

It was a question of sterilization of gold, and

desterilization of gold.
DR. CHANDLER:

They had the Thomas Amendment powers, sterilization

and desterilization, and then the operations of the exchange stabilization fund.
DR. B0PP°.

Was it earlier where the President was given authority, on

recommendation of the Treasury, to change reserve requirements?
MR. RIEFLER:
^.^^

That was the first Thomas Amendment.

DR. CHANDLER:

May I ask about this last point here?

I must have been

guilty of writing of the pegging of rates during the war as just a sort of
evolutionary result of the policy from 1937* on, but I am not at all sure of
that interpretation.

The next question is, would you have had probably a

pegging of rates during the war, inflexibly, even if you hadn't had this background of 1937 to

41 orderly markets?

CHAIRMAN SPROUL:

I think we might have had and probably would have

had without the background, although the background eased us into it.
DR. BOPP:

Of course the basic issue was, are you going to finance

it on rising rates as in the First World War?
CHAIRMAN SPROUL:

I remember a conversation with the Secretary in

which I used the phrase, "We can't finance this war by throwing dice with the
market as to what the interest rate is going to be."
"^

It can't be financed

with rising rates of interest in the market, which is continuously assuming

that the next issue will be at a higher rate so we will subscribe to this,
sell out when we can, and wait for the next one.
MR. BURGESS:
war.

That really happened just after the outbreak of the

That is, there had been plenty of manipulating the market, but not a peg.
CHAIRMAN SPROUL:

No, that had not been, and the range of support was

determined in large part by the existing rates at the time they went into the
war.

The short rate was brought up a little from zero, or one-tenth of one per

cent, to three-eighths of one per cent, and the latest issue, the last previous
issue of relatively long-term bonds, had been at two-and-a-half per cent.
MR. BURGESS:

I wonder if you should say that after '37 the Federal

Reserve realized that they would allow rates to drift within wide limits?
seemed to me we were in there.

There was a fluctuation of rates at the out-

break of war abroad in '39, in which they held back from intervening.

Finally,

I was at the Treasury then, the Federal Reserve Board went in to peg rates
before the Treasury was prepared to do it.

It was a curious twist. But I don't

think the Federal ever said they were going to allow them to drift within wide
limits.
DR. BOPP:

I think these discussions at the time of the 1937 opera-

tions were that the System does not undertake to determine what the level of
rates should be, but that the movement should not be disorderly, to get from
one general level to another level.

As I recall, there was no notion of any

limit to the level of change.
MR. BURGESS:
done for some months.
DR. JAMES:
/—V

I think that was an interpretation of what had been
I don't think there was a change in '37.
Isn't the theme of this period realty developing out of

what Walter Stewart said a minute ago, that Government having decided to dominate
monetary policy, using the Treasury, threatening these various things that this

is the period in which monetary policy is temporarily lost to the System and in
which the System gradually becomes the instrument for working it out again in
collaboration with Government, instead of seeming to be fighting with Government.
CHAIRMAN SPROUL:

I like Walter Stewart's phrase.

This was the period

when the System had to fight to stay out of cold storage. Monetary policy had
been put in abeyance, not only through the emerging Treasury, but by the fact
that the gold inflow had created the monetary policy for the period.
was.

There it

Nobody had to do anything about it.
DR. JAMES:

But the Treasury decided how much of that gold was going

to be monetized.
CHAIRMAN SPROUL:

There they did it very gingerly, and in consultation,

until the '36- '37 period when Morganthau said, "You will support Government
securities, or else."
DR. BOPP:
once said.

During this period, I remember something Marriner Eccles*

He said, "They consider me a controversial figure.

I am the only

person who is able to keep the Federal Reserve System's name in the newspapers."
CHAIRMAN SPROUL:

I think carrying out this idea that has just been

mentioned, that your key should be continued shift of influence toward monetary
policy of the Treasury, then bringing out this idea of the System's struggle to
stay in the picture at all.
DR. STEWART:

I think a new theme is beginning to be reflected before

you enter the war period.

The question Les asked about whether there would have

been experience with the governments pegging of rates if you had not had this
preliminary is part of it. But quite apart from that, the focus of attention
begins to be the government market.

So the Federal Reserve is beginning to

address itself to that question, and this continues until it reaches full drama
and then it continues to grow.
*

To identify, see Appendix.

So that you want to catch it in transition, to

63
catch that as early as you can.

Then it lasts a good, long time, and is, I

think, evidence that it is the relation "between the Treasury and the bank and
the Government, and the whole growth of this Government market.
MR. RTEFLER:

Starting with the Thomas Amendment and going through

p. 63
MR. RIEFLER:

Starting with the Thomas Amendment and going through the Accord, there vasX a

gradual acceptance everywhere that raising reserve requirements was a way to stop inflation.
DR. STEWART:

That's right.

MR. RIEFLER:

In »48 and '49, when I came back, everybody was talking about reserve require-

ments as a way of escaping from inflation.
CHAIRMAN SPROUL:

Wot everybody,

(laughter;
MR. RIEFLER:

I mean it was general throughout the country, and in the international
1QQ

DR. BOPP:

P ^ °ent reserves,had^eblggest inflation of all.

I was just going to say that one of the most interesting

aspects was the academicians, the people in academic life, who failed to see
this.
DRO WOOD:

I wonder if anyone would help me here again, by establish-

ing a little closer the date when the Treasury made up its mind, to what extent
the Treasury made up its mind, independently, that two-and-a-half per cent would
be the maximum for the duration.
duration.

My first point would be the maximum for the

My first point would be the summer of '41, so far as I would know,

but it seemed to have been already decided by that time, I don't know how long
before.
MR. BURGESS:
/—s

I think it came very close on Pearl Harbor.

think it had been decided before Pearl Harbor.
that time.

I don't

I remember a conversation about

64
DR. BOPP:

Hadn't there been earlier consideration of possible

announcements in the event of America's entry into the war?
MR. BURGESS:

No, I don't think we talked about that in '39.

MR. RIEFLER:

I don't remember it at all in '39.

DR. STEWART:

Isn't there a memory of Governments at par?

that is the date.

I think

I don't think it is the two-and-a-half per cent.

MR. RIEFLER:

He is merely saying why didn't they go lower.

CHAIRMAN SPROUL:

Governments at par was the two-and-a-half per cent

rate,
DR. STEWART:

I think that is what seta the period.

p. 64
MR. RIEFLER:

Can't you date it from the time of the discussion with the insurance companies,

vhen they said that they needed a living rate?

Wasn't it about that time that the idea of

tailoring securities became prevalent?
MR. BURGESS: The first 67-72's, the first loan drive was May, '42,
wasn't it?

Didn't they try to make it 2 3/4's?

MR. RIEFLER:

I think I remember a discussion earlier than that of

paying a higher rate than necessary, because you had to allow the insurance

Sonae
companies a living rate.
DR. CHANDLER:

Wasn't there ^fc-discussion along that line?
Probably another element that should be put into this

period as a continuation from the earlier one is the rise of various kinds of
Government credit institutions, which would act as retailers of credit or insurers of credit.
MR. BURGESS:

Of course, you had in the immediate post-depression

period the Home Loan Banks, the Federal Farm Mortgage Banks, Commodity Credit
Corporation, the R. F. C. and F. H. A. developed further, that whole battery
/—v

of things that goes into the immediate post-depression period.

I think this

period first is the revolution which In effect takes over the Reserve System

65
and everything else under Government direction.

Then there is the gradual

recovery "by the System of some of its functions. First it "begins to operate
again with reserve requirements, and with open market operations, and so forth.
Then it gets frozen in position, but nevertheless it is a great service institution by the Government, in which it only emerges at the conclusion of the
war.

But it is a gradual regaining of an operating position.
CHAIRMAN SPROUL:

You have also that theme with the great growth in

the Government debt, the great growth in the Government securities market, the
Government securities market coming to be the market through which all elements
of the short money market make their judgments, and the Federal Reserve System
moving from orderly markets to war finance, and pegging, and then back out of
pegging, to the final course. You have those two things going on together
really conditioning the whole experience of the Federal Reserve System during
that period.
Anything more on 7?
Will you take up 8, Karl.
DR. BOPP:
1941 to 1945.

"Federal Reserve policy during World War II -

"a. A thorough description and analysis of the role of the
Federal Reserve in World War II finance should stress the contrast
with World War I. The contrast should include differences in
basic philosophies as to the function of the Federal Reserve,
differing techniques of supplying necessary money, differing
philosophies as to the proper behavior of interest rates, differing reliances on monetary policy, fiscal policy, and direct controls, and differing estimates as to the nature of the problems
which would have to be faced after the culmination of war.
"b. Some important changes arising out of this period:
the tremendous increase in the national debt, the practice of
pegging the price of Government securities, the shift of policymaking to the Treasury, the proof that a central bank can control
interest rates, changes in the law to facilitate Treasury
financing.

66
"c. The Federal Reserve position was that credit expansion
was inevitable during the War and that it was inflationary, but
that raising rates would do little to prevent the expansion."
DR. JAMES:

There should be emphasis there also on the difference in

financing Allies and Associated Powers, which is very significant.
DR. BOPP:

That is quite right, particularly in view of the war debt.

MR. BURGESS:

I think also you ought to point out the influence of

the Federal Reserve in trying to get the financing done, as far as possible,
outside the banks, in as little as inflationary manner as possible. War loan
drives included these long-term bonds, and the tremendous effort to sell bonds
outside of banks.
DR. JAMES:

I think even the pay-as-you-earn income tax changes is

significant in this.
MR. BURGESS:

I think the shift in policy making of the Treasury

happened before that, and the Federal Reserve in this period was regaining
gradually some of its individuality, largely because of its extreme utility as
a service organization in the whole war effort.

It had demonstrated its capacity

for doing a lot of things that had to be done, like exchange controls, and handling the inter-war loan drives, and so on.
CHAIRMAN SPROUL:

We had a nice row about that too.

(Laughter)
I missed in here the continuance of the theme of the Treasury's becoming more and more dominant in international affairs.

This was the period when

that was institutionalized in the form of the International Monetary Fund, and
the World Bank, with the Treasury having the final say, and representatives
abroad.
/•"N

The inter-war idea of central bank cooperation was out the window, and

these new international institutions were now set up as institutions with the
treasuries dominant in them.

67
DR. BOPP:

In a sense the discussion of the differing reliances on

monetary policy, fiscal policy, and direct controls, World War I versus World
War II, summarize how almost complete the shift was.
MR. BURGESS:
a chance.

Of course the war lasted longer this time and gave you

You take the actual timing.

Wouldn't you find the direct controls

in terms of months come in as soon in World War I as in World War II?
had them in 1918.

They

It took a little while to do it in this war.

MR. RIEFLER:

My feeling about this war is that in this country we

never did come to the theory of direct control.
in the end did not.

England did.

We accepted inflation instead.

allocation of manpower, and control of production.

But this country

We had not started with
We had those machineries

going along, but they weren't in control.
MR. BURGESS:
did in World War I.

We financed a larger percentage through taxes than we

Second, we did make a tremendous effort to do our war

financing in as non-inflationary a way as possible.
cooperated in a very great drive to do that.

The banks and everybody

The Federal Reserve was leading

the way in that, which certainly has a very important place here.

But we did

tie the rates down as we didn't in World War I, and we did finance by direct
purchases of Government securities, and this is an important point, rather than
by borrowing.
automatic.

Unwinding it afterwards was much more arduous, and much less

Maybe that is one of the reasons why we had a sharper deflation

after World War I.

It wound up with the banks holding three billion dollars

in the Federal Reserve which they proceeded to repay.

This time there was no

such mechanism, and we went on to inflate after the war.
Of course as to foreign aid, the major factor in there was that after
/—s

World War I we cut off foreign aid within about six months, and this time we
kept on in one way or another.

68
CHAIRMAN SPROUL:

Before we go on, I might say perhaps we ought to

get it decided just how far in terms of periods we will be able to carry these
studies in detail, but I think for purposes of your work and your advice and
counsel to us, we might as well go right on through.
DR. BOPP:

This is very short, as you notice, in No. 9.

"The search for appropriate peacetime organizations and
policies - 1945 to 1954.
"This should include a contrast between the search which grew
out of depression and the search which grew out of inflation. Very
important background materials for a consideration of this period
would include the continued fear of depression in the midst of inflation, the general demand that all the powers of Government be
employed to prevent the recurrence of serious depression, the
emerging popularity of fiscal policy as an instrument of economic
stabilization, the widespread disillusionment as to the power of
monetary policy to deal with unemployment and inflation, the
greater tolerance of the public for direct controls as a means of
obtaining objectives and its equal willingness to see their
abolition at the earliest possible moment, a search for extension
of powers to reconcile expanding money supply with control of inflation, support of the securities market with control of inflation, development of the concepts of rigidly controlled markets,
•
free markets, and flexibly controlled markets."
y >
•!-"•./•'
p. 68
MR, RIEFLER:

It seems to me this raises again the problem of shifting prestige. By the time

of the Accord, the System was taking a very strong position on one side, while the "White

\ House was taking opposing positions, partly through the Treasury, and partly through the
Council of Economic Advisers.

The Council of Economic Advisers advocated a complete theory

of pegged rates, plus a bureaucrat sitting in each bank governing every loan at the loan
windov.

The Treasury rejected that but insisted on a pegged rate. In each case, the Administra-

I tion was insisting on giving up monetary policy.
CHAIRMAN SPROUL:

There was one stage there where I was afraid that

the Council of Economic Advisers was going to take over both from the Treasury
and the Federal Reserve System, which I thought was about the worst possible
thing that could happen.

Of course that was a different Council.

69
DR. JAMES:

Isn't there one significant thing left out of this aim,

and that is the effort to establish an international economy?

First the inter-

national institutions and the whole policy of supplying credits abroad.
CHAIRMAN SPROUL:

Yes, I think so.

Then I think there is also left

out, which would come in certainly in 1953 and 1954, the international reemergence of monetary policy.
MR. BURGESS:

The whole period '45-'54 was a gradual regaining of

the freedom and dignity of the central banking system.

It started right in in

'45, in an effort to get a little more freedom of rates in the market gradually.
The first thing was the bill rate.

It was pegged at three-eighths until it

worked up to seven-eighths, and so on.
inch after inch.

Then a little more freedom was gained

All the time the Council of Economic Advisers battling on the

one side, and the Federal Reserve on the other, and all those episodes, with
the President trying to intervene, and the Douglas Sub-Committee.

I think

that is a great chapter.
Paralleling that is the international effort to re-establishment of
monetary sanity, and as Allan said, the monetary policy was amazingly successful after that.
DRO STEWART:

Two terms used in this paragraph which recur in other

places in the document, that is, fiscal policy and its increasing popularity and
monetary policy and disillusionment with it.

I would like those to be very

carefully inspected as terms before they get widely used.

I take it fiscal

policy means deficit financing, and monetary policy means credit controls, and
excess reserves and so on.

I am extremely doubtful whether these are separable

as logical intimates. You can have a Treasury pursuing a fiscal policy which
is dependent upon either the collaboration or the domination over central banking, but it doesn't cease to be monetary policy, it doesn't cease to be a credit

70
factor.
tions.

Even if it is known as fiscal financing, it has to have credit condiI think that because there were differences of approach emotionally

between those people who felt that the way you dealt with a depression was to
have a budgetary deficit, and those who believed that you should have monetary
controls.

We have made it appear that the two are separate to a greater ex-

tent than they are through experience.

So I am not persuaded that history can

make as much of a separation as logic is inclined to suggest.
DR. BOPP:

Would it be fair to say that in a sense fiscal policy grew

out of an attempt to extend open market operations to, in a sense, put active
money into the market, and so on, so that the dividing line becomes really very
thin.
MR. BURGESS:

Isn't there a distinction here between what the econo-

mists were debating about in their meetings, in which the contrast between
fiscal and monetary policy was prominent, that the discount rate no longer
mattered, and you can't have monetary policy, and so, and what the Council of
Economic Advisers was talking about.

But as far as Treasury and Federal Reserve

and actual action, I don't believe this was a real issue.
Snyder*was just as eager to get the budget balanced.

The Treasury under

The fiscal policy was

never really used by any administration in this country as an instrument of
policy.

I say that with a little hesitation, but I don't think it really was.

But this issue as stated here is what economists were talking about in their
annual meetings and not what was really happening in the country.
DR. CHANDLER:

I think you could be made formally right, when you

include Keyserling as an adviser, "but certainly Keyserling made a distinction.
DR. STEWART:

He believed that the Federal Reserve had no influence

of any kind anyway.

To identify, see Appendix.

71
MR. RIEFLER:

Marrinerj certainly was explicit in those things.

MR, BURGESS:

Nevertheless, at the same time he was talking about it,

he was trying to get the bill rate up.

He was trying to make monetary policy

work in a limited way.
DR. JAMES:

Isn:t it a matter of semantics, with fiscal policy by the

Treasury and monetary by the Federal Reserve?
DR. CHANDLER:

I seem to remember Mr. Snyder, while saying that a rise

of interest rates would do no good in fighting inflation, said that we will take
care of this by taxation,
MR. RIEFLER:

Yes, all the time.

MR. BURGESS:

I think it would be hard to find a clean-cut statement.

It is fair to say that they did, on the outbreak of Korea, go out for a heavy
tax program.
DR. STEWART:

Well, a taxing program is an attempt to recover back

into the Treasury a liquidity that has been created by monetary means.
think they are as inseparable as we like to make them appear.

I don't

Anyway, all I

am doing is to give a warning that words don't always convey the full meaning.
DR. CHANDLER:

I think generally speaking, the comments that have

been made here about the academic economists being the ones that use those
distinctions are quite right.

For example, many of the so-called fiscal

theorists would simply talk about the income effects of taxation and expenditures by the Government, losing sight completely of the liquidity effects.
MR. BURGESS:

We have had built up a whole religion, a whole theology,

by the economists of fiscal policy, so-called, which was far, far away from any
active practice.

bill.

It was not practicable.

Congress would have had to pass a

DR. BOPP:

And even when it was, when we ran with very large cash

surpluses, inflation went merrily on its way, because we simply shifted from
an increase in public debt to an increase in private debt.

Certainly the re-

discovery of monetary policy in its various aspects, and the inadequacies of
fiscal policy alone should be developed.
CHAIRMAN SPROUL:

Remembering Walter's warning that you can't separate

the two.
Now we have completed the section of the outline memorandum prepared
by our consultants. What do we now wish them to do?

In the light of this dis-

cussion, if they are willing, to prepare a new revised draft of their outlined
memoranda and their discussion memoranda, which will be for our use and the
use of whoever is selected as the historian in terms of carrying out this
project?
DR. JAMES:

I think that would be very useful, to bring together all

the things that have been said here.
DR. WOOD0.

Karl made a suggestion earlier that we might take the

transcript of comments that were made today and that would give the future
historian a pretty good picture of the Committee's ideas.
DR. BOPP:
of this.

I think there is an important danger in having a revision

The danger is that the historian would feel more constrained by a docu-

ment that had been developed as that revision would be.
impression of being official and definitive.
just for discussion.

It would carry the

Whereas this clearly is something

The transcript would show that there are differences of

opinion.
MR. RIEFLER:
y-v

You don't see much sense in trying to winnow the dis-

cussion down and incorporating it?

DR. BOPP: ,No.

73
DR. CHANDLER:

I think if I were the person who might "be considering

writing the comprehensive history I would find the most valuable combination
would be the document from which the discussion started, plus the verbatim
transcript of the comments that have been made about it.

Even a condensation

of the comments made today might in a sense be misleading, because they wouldn't
show the richness of the suggestions that have been made, in fact, the fairly
wide difference of opinions among some of the commentators.
MR. BURGESS:
this.

I think it is probably unfair to ask people to re-write

I think it has been enormously useful and helpful and very interesting.
DR. JAMES:

I think it might be useful if we could all get a copy of

the transcript to stir our thinking.
DR. STEWART:

I think that would help a lot.

One rather odd thing about this strikes me.

If you look

at the periods that have been set up, they look like relatively short periods.
Nearly every time we have discussed it, we have said every period ought to be
broken down.

This is undoubtedly true, but the question is, could they also be

combined into larger periods, which would be the other question.

I haven't

any doubt that analysis does require the breaking of it down, but are there
any segments of larger experience overlaying the whole thing, which would make
combinations, perhaps not of these datelines, but of other datelines?

I would

rather like to see the history contemplated as a longer sequence of time, with
things moving in a slower arc, and not each one a series of separate experiences.

I don't know what would happen, but it is conceivable, don't you think?
DR. CHANDLER:

A fascinating way to do this would be to write say the

description of the Federal Reserve System, thinking, and operations, in 1915,
and then jump to 1954, and say how did we get there.
^^

DR. STEWART:

I am so poor a historian that I know no other way in

my thinking except to think backwards.

William James once said that all

philosophies beg the question at some point.
feel that way about history.

I beg it at the beginning.

The things that interest me are the things of

the going present, and I would therefore like to back into the past, instead
of starting with this very early period, and sources, and so on.
You might take some of these things and say, what is the long arc
that reaches from some past into some present?

That makes it all relative and

interesting and probably as ultimate as we can get.
MR. BURGESS:

There is one very interesting cross-section that could

be taken here, after doing this whole thing and going back.

Say let's compare

the domestic recovery after World War I and after World War II, and then the
international situation and how that was dealt with after World War I, and this
period, and contrast it.

In a sense that is doing what you are saying.

You

take the present and say, now let's reach into the past.
DR. JAMES:

The only thing that you miss if you do that is all the

things which were very seriously tried and which didn't dominate men's minds
at a certain point.
DR. WILLITS:

Mr. Chairman, may I express a reflection on this task

in which you are engaged?

I don't know whether I stated when I was here at

your last meeting an incident that I often used.

I just mentioned it to Walter

a bit ago.
Fred Keppe2*was conducting a session in the early stages of the last
war at the American Philosophical Society on the American Future, and
Alfred Kidder?, an archaeologist of the Carnegie Institution, was discussing
the question of, as he looked back, a grave digger by profession, as he called
himself, trying to find some common key on some simpler basis than Mr. Toynbee.
He said, "I find it in this.

To identify, see Appendix.

Whenever a culture, whatever degree of culture it

75
acquires, has reached a point where it has grown too complex for itself to
comprehend, guide and control, it devolves out of the laws of its own inner
being, and it winds up in a ditch."
He was in a sense describing our present culture. Your statements
do not diminish that thought when you talk about the fact that events are far
ahead of the human mind.

Of course, that is true not merely in the field in

which you are concerned, it is true in so many fields. The thing that this
drives home to me more and more is the degree to which it is impossible within
Government to perform any adequate and systematic appraisal, or digesting of
experience, and what an immensely difficult 'and complicated task it is o

seems to me that in this attempt to go back and to re-apparise what was done,
and learn from that experience, you aren't merely doing it in this field, you
are giving a demonstration of what might be done, and how it might be done far
outside, in many other places, to the very great advantage of understanding
ourselves and our problems.
This would make me incline at this moment toward this conclusion,
that you aren't making a five-year study, you are initiating a process that
ought to go on, and to continue to go on, perhaps.
The other point that bears on the meaningfulness of what you are doing
is what this means to all the people who are teaching economics, not merely
central banking theory and international economics, but all the rest, and how
impossible their task is, and how difficult it is to get their reality in the
compass of their experience, and how much a thing like this assists the process.
You might even be influencing Seymour Harris.*
(Laughter)
/-"v

But I think those two things make the venture enormously important
and significant.
*

To identify, see Appendix.

76
CHAIRMAN SPROTJL:
to what you said, Walter.

At our last meeting there was something relating
It was the consensus that in the choice of the two

ways to squeeze what is relevant out of the historical data, the Committee
proposes to use both a chronological approach geared carefully to time and a
problem approach which demands exploration of topic and problems through time.
That might also relate to the division of responsibility between the historian
and the separate monographs relating to separate periods and times.
DR. STEWART:

That is exactly what I mean.

CHAIRMAN SPROUL:

Is it the general agreement of the Committee here

that we discharge our group of consultants with many thanks for their labor in
our behalf, and in behalf of this great undertaking which Mr. Willits has put
in its proper frame, and use this document, plus the transcript, as the basis
for our further consideration?
MR. BURGESS:

May I amend by putting in the words, for the time being.

(Laughter)
CHAIRMAN SPROUL:
MR. BURGESS:

We always may call them back.

I think they have done some extraordinarily useful work,

and I think that we ought to in some way and at some time reassociate them with
this project.
DR. STEWART:

I think the Committee ought to write the next outline

and invite the consultants to come and criticize it.
CHAIRMAN SPROUL:
MR. BURGESS:

A sadistic proposal.

I never knew there was as much in this topic until they

got into it and laid it out.
DR. BOPP:

May I say, Mr. Chairman, on behalf of the three of us that

it has been a terrifically stimulating experience for us. We have enjoyed every

77
minute we have put in on it.

This is a grand session today, and it makes us

feel good to see that you tore into it, as we fully intended that you should.
CHAIRMAN SPROUL:

Is there anything else that anyone wants to "bring

up today?

We will adjourn a little ahead of schedule.
(Adjournment at 4:00 P. M.)

APPENDIX

ANGAS, Lawrence Lee Bazley (p. 47) - Investment economist. Born in Australia
in 1893. Author: THE COMING AMERICAN BOOM (1934); THE PROBLEMS OF FOREIGN
EXCHANGES (1935); INVESTMENT FOR APPRECIATION (1936). Radio speaker and
lecturer.
BECKHART, B. Haggott (po 15) - Professor of Banking, Columbia University.
in Colorado in 1897. Author: BANKING SYSTEMS (1954); and numerous
articles and "books on "banking.

Born

BLACK, Eugene R. (p. 54) - Banker. Born in Georgia. Governor, Federal Reserve
Bank of Atlanta, January 13, 1938 to May 19, 1933. Governor, Federal
Reserve Board, 1933 "to August 15, 1934. Reappointed Governor of Atlanta
Federal Reserve Bank until death. Died 1934.
BUCKNER, Mortimer N. (p. 55) - President, New York Trust Company, 1916 to 1921;
Chairman of the Board, 1921 to death. Died 1942.
CHANDLER, Lester V. (p. 7) - Consultant to this Committee.
CdCHRAN, H. Merle (p. 53) - Deputy Managing Director, International Monetary Fund.
Born in Indiana in I892.
COUZENS, James (pp. 39, 45) - Republican Senator from Michigan. Born in Ontario,
Canada in 1872. On Senate Banking and Currency Committee, 1932-36. Died
1936 while in office.
ECCLES, Marriner (p. 62) - Chairman, Board of Governors of the Federal Reserve
System, November 15, 1938 to January 31, 1948; Vice Chairman, January 31,
1948 to July 14, 1951. Born in Utah in 1890.
FORGAN, James B. (p. 16) - President, First National Bank of Chicago, 1900 to
1916; Chairman of the Board, 19l6 to 1924. President, Federal Advisory
Council, Federal Reserve Board, 1914 to 1920, Born in Scotland in 1852.
Died 1924.
GIT .BERT, Seymour Parker (p. 23) - Assistant Secretary of the Treasury, in charge
of fiscal affairs, June 1920 to June 1921. Under Secretary of the Treasury,
in charge of fiscal affairs, July 1921 to November 1923- Born in New Jersey,
1892. Died 1938.
HARRIS, Seymour E. (p. 75) - Professor of Economics, Harvard. Born in New York
in 1897. Author: ECONOMICS OF MOBILIZATION AND INFLATION (1951); ECONOMICS
OF NEW ENGLAND (1952); and others.
KEPPEL, Frederick (po 74) - Senior member of Frederick Keppel & Company, dealers
in and importers of pictures. Born in Ireland in 1845. Lecturer on art
subjects, Yale, Columbia, Johns Hopkins, Died 1912.

<—v

KEYNES, John Maynard (p. 57) - Economist. Born in Cambridge, England in I883.
Author: THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY (1936);
MONETARY REFORM (1924); and others. Died April 21, 1946.
KIDDER, ALfred V. (p. 74) - Archeologist.
Peabody Museum, Harvard.

Born in Michigan in 1885.

On faculty,

LOMBARDS (p. 50) - Loans on Government securities.
LUTHER, Hans (p. 42) - Minister of Finance, Chancellor of Reich. Later succeeded
Dr. Schacht as Governor of Reichsbank, resigned in March, 1933. German
ambassador to Washington, 1933 "to 1937.
McDOUGAL, James Barton (p0 23) - Governor, Federal Reserve Bank of Chicago, 19141934. Born in Illinois in 1866. Organized department of examination of
Chicago Clearing House and was its official head until 1914. Died c. 1935.
MELLON, Andrew W. (p. 38) - Secretary of the United States Treasury, 1931 to 1932,
Born in Pittsburgh in 1855. Died 1937.
MEIER, Eugene (p. 30) - Governor, Federal Reserve Board, September l6, 1930 to
May 10, 1933. Born in California, 1875. Chairman of the Board,
The Washington Post.
MILLER, Adolph Caspar (pp. 40, 45) - Member, Federal Reserve Board, August 10,
1914 to February 3> 1936. Born in California in 1866. Author of papers on
finance and banking published in economic and financial journals. Died 1953•
MILLS, Ogden (p. 45) - Secretary of the Treasury and Chairman of the Federal
Reserve Board, 1932 to 1935. Born in California in 1856. Died 1929.
NATIONAL BUREAU OF ECONOMIC RESEARCH, INC. (p. 11) - 26l Madison Avenue,
New York l6, New York.
ROGERS, James Harvey (p. 55) - Professor of Economics, University of Missouri, 1923
to 1930; Yale, 1930 to death. Born in South Carolina in 1886. Authors STOCK
SPECULATION AND THE MONEY MARKET (1927); THE PROCESS OF INFLATION IN FRANCE,
1914 - 1927 (1929). Died 1939.
SNYDER, John Wesley (p. 70) - Secretary of the United States Treasury, 1946 - 1953.
Born in Arkansas in 1895.
STRAKOSCH, Sir Henry (p. 9) - Born 1871. Author: ROAD TO RECOVERY; WITH SPECIAL
REFERENCE TO THE PROBLEM OF EXCHANGE STABILITY AND THE RESTORATION OF THE
INTERNATIONAL GOLD STANDARD (1935).
TRAYLOR, Melvin Alvah (p. 45) - Member and Vice President, Federal Advisory
Council, September 1930 to 1933; Member, 1933 to 1934. Born in Kentucky in
I878. President, First Trust and Savings Bank, Chicago, 1919 to 1925.
President, First National Bank, Chicago, 1925 to death. Died 1934.
VINER, Jacob (p. 53) - Professor of Economics, Princeton. Born in Montreal in
1892. Special assistant to the Secretary of the Treasury, parts of 1934,
1939, 1942. Consultant to U. S- Treasury, 1935 - 1939. Consultant, U. S.
Department of State, 1943-52. Author:. TRADE RELATIONS BETWEEN FREE MARKET
AND CONTROLLED ECONOMIES (1943); and others.
WARREN, Robert Beach (p. 52) - Professor of Economics, Institute for Advanced
Study, Princeton, 1939 - death. Born in New York in 1891. Economist,
Division of Research, Federal Reserve Board, Washington, Do C , 1922 - 1926.
Economist, Foreign Department, Federal Reserve Bank of New York, 1926 - 1927*
Author: THE STATE IN SOCIETY (with Henry Clay of U. K. and Leo WolLnan,
1939); THE SEARCH FOR FINANCIAL SECURITY (1940). Died c. 1951.
WOOD, Elmer (p. 7) - Consultant to this Committee.

Full text of Committee on the History of the Federal Reserve System : Committee Meeting [Transcript of Proceedings] : Second Meeting with Three Consultants [Master Copy] (January 29, 1955), Entry 164, Box 2, Folder 1

FRASER